Here’s Justice’s case in a nutshell: when three small rivals started flying into American’s hub in Dallas-Ft. Worth in the mid-1990s, American flooded the routes with cheap seats to scare them away, then raised fares. It’s called predatory pricing, and even though smaller airlines have been complaining about it for years, this is the first time the government has brought such a case against an airline since deregulation. Predatory pricing has also come up in the government’s case against Microsoft, which often gives away software to build market share.
This case resonates with consumers, for whom the airlines have become what Ma Bell used to be–the kind of company they love to hate. Airlines figured out several years ago that it was stupid to beat each other up with fare wars, and they retreated to their fortress hubs. Start-up airlines like ValuJet emerged as a threat to their newfound profitability. But after the ValuJet crash in the Everglades in 1996, nobody wanted to fly on, or invest in, start-ups. The airlines started making hay. People felt gouged at the same time service deteriorated, creating a sense of frustration that came to a head in Northwest’s snowstorm fiasco in Detroit. More competition is seen as a solution, but a lot of airline entrepreneurs have looked around the country and seen no trespassing signs. Kevin Mitchell, who runs the Business Travel Coalition, made up of big companies lobbying for lower fares and more airline competition, was thrilled about the Justice case: “I see this as a major cannonball across the industry’s bow.”
The big airlines say they are simply engaging in healthy competition, and that airline economics are too complicated to prove that they are pricing below cost. And some economists argue that predatory pricing is hogwash, because if any business is making extraordinary profits, it will always attract new competition. But airlines are well equipped to stomp on upstarts because, unlike, say, steel mills, their factories (jets) are movable. Major airlines also say that start-ups have trouble because of poor strategy. Alfred E. Kahn, a Cornell professor who is considered the father of airline deregulation, doesn’t buy it: “It’s not an adequate defense of murder to say that some of them would probably have died anyway.”
The complaint against American is strengthened by documents showing the airline’s intent to drive out interlopers. American, whose former CEO Bob Crandall was the toughest talker in the business, said that there’s no law against tough boardroom talk. Maybe not. But this case makes it clear that Justice, whose investigation has included other carriers such as Delta, Northwest and United, wants the established airlines to play nice. Many travelers, eating their peanuts and knees in coach class, would no doubt second that motion.
