The Obama Administration Is Helping Raise Your Airfares

Last week American Airlines took two extraordinary actions that confirm that the airline industry has become an entrenched oligopoly.  First, American Airlines began a bizarre new advertising campaign. Its message: be a good flyer by showing consideration to your seatmates and maintain equanimity in the air. This advertisement makes little sense in a competitive industry. It does not tout low prices or any distinctive amenities of American that might help it gain market share.   An industry that implicitly coordinates on price and amenities, however, might benefit from the such an advertisement, if it got more people to fly generally.

Second, American Airlines gave a $13 million severance payment to its President even though he was joining a rival, United Airlines.  And the severance was not a matter of legal obligation but at its discretion. It is wholly against usual business practices to give gifts to a high level executive who goes to work for a rival. The more frequent reaction is to sue the official for endangering trade secrets. But again this course of action makes sense if American, United and other airlines are engaging in the implicit coordination made possible by oligopoly.  The President of American would then still working for a common cause. Why not maintain goodwill in those circumstances?

To be clear: I am not saying that either of these actions are illegal, just that they provide strong evidence of oligopoly. And I am not blaming American Airlines.  Its executives may be maximizing profits without making the kind of agreements that run afoul of the antitrust law.

It is the Obama administration that is accountable.  Two years ago, they permitted the merger of American Airlines and US Airways, two of the biggest airlines.  I generally favor a relatively relaxed merger policy, because new entry can keep even large companies from restricting output and raising prices. But it is very difficult to enter the airline industry, because the take off and landing slots are limited at airports. And zoning and environmental regulations make expanding existing airports or building new ones almost impossible If you see persistent prices above the competitive level, search for the government regulation that causes them.

But antitrust authorities need to recognize when regulation impedes new entry and count such a regulatory structure against permitting such mergers. My suspicion is that the Obama administration did not do this sufficiently, because the powerful unions in the industry stood to benefit from a more oligopolistic structure.  If airlines become few enough to coordinate on price, individual airlines would face less pressure to cut labor costs.  If a merger is permitted when the economics suggests it should not, search for the powerful interest groups.