Sen. Chuck Schumer (D-N.Y.) wants the Department of Justice to open an investigation into the nation’s airliners over rising ticket prices, but according to a government watchdog the problem is less about competition and more about corporatism.
“At a time when the cost of fuel is plummeting and profits are rising, it is curious and confounding that ticket prices are sky-high and defying economic gravity,” Sen. Schumer said in a press release on Monday.
At $55.91 a barrel, oil is at its lowest price since 2009. The cost of a ticket to fly, however, is up ten percent over the same time. The divergence has Sen. Schumer worried there’s some corporate misbehavior going on behind the scenes.
“The industry often raises prices in a flash when oil prices spike, yet they appear not to be adjusting for the historic decline in the cost of fuel; ticket prices should not shoot up like a rocket and come down like a feather,” he noted. “That is why I urge the DOJ and DOT to immediately investigate why airline profits are not more efficiently being passed down to consumers.”
The Senator’s office said he wants the investigation to focus on “whether recent mergers and less competition have played a role in today’s high airfares.”
After a series of high-profile buyouts beginning in 2008, companies like Northwest, Continental, and AirTran proverbially fell from the skies. What was left behind, American, Delta, Southwest, and United – the top four airlines in the nation – flew roughly 85% of passengers in the US in 2013.
But when the Government Accountability Office looked into this issue back in June, they found that competition in the airline industry had changed little in recent years. On many routes, customers actually had more choice of airliners to fly.
Instead, the GAO discovered, companies are simply offering fewer seats in the face of rising demand, hoarding more cash, and enriching their shareholders – none of which bode well for consumers.
“Unlike after other industry downturns, network airlines have not responded to rising demand for air travel in the last few years by increasing capacity,” said the GAO. As demand has ticked up, available seats remained flat between 2009-2012. “Capacity restraint has resulted in higher airfares.”
The average price of a one-way domestic ticket has increased by 9% since 2009, despite significant operating cost reductions. One cost reduction is labor. The GAO noted that recent bankruptcies by Delta and American allowed the airliners to break union contracts and exact concessions from their workers. Lower costs and higher ticket prices means airliners are more profitable than ever before. Global net profit this year for the industry is expected to be $19.9 billion, according to [WHOM]. Last year, it was roughly $11 billion. Next year it’s expected to be $25 billion.
Rather than reinvesting that money into additional seats or routes for consumers, the airliners are doling out large checks to shareholders. “Recent efforts by certain airlines to return profits to shareholders are another indication of the industry’s improved financial health,” the GAO said. In 2013, Delta announced plans to hand out $1 billion in dividends to shareholders over the next few years, and industry analysts told the GAO that “other network airlines would likely follow Delta and introduce dividends in the near term.”
Another reason airliners aren’t thinking about consumers is they’re afraid of the next economic downturn, and are hoarding cash to prepare for it. “US airlines as a whole have increased their cash reserves from approximately $8 billion in 2007 to approximately $13 billion in 2012,” the GAO found. The office noted “liquidity levels are especially important in the airline industry because cash balances help the airlines withstand potential industry shocks.”
The Department of Justice has not responded to Sen. Schumer’s request for an investigation. The airline industry is set to grow even more consolidated once the merger between American Airlines and US Airways is finalized next year. While the GAO found little evidence industry structure had changed significantly, the office conceded that “since the structure of the airline industry is evolving, the full competitive effects of industry consolidation are unknown.”
In the meantime, reformers have called on the Department of Justice to study airliners after they’ve merged to determine whether or not promises of efficiency and lower prices come to fruition. Others have called for amending the 1978 Airline Deregulation Act to allow states’ Attorneys General to sue airlines in the interest of consumers. The GAO suggested deregulation itself might be part of the problem.
“The financial performance of the deregulated airline industry has been characterized by extremely volatile earnings,” the office said.
