Airline Accused of Driving Out Rival Carriers

In the first lawsuit of its kind since the airline industry was deregulated two decades ago, the federal government on Thursday accused American Airlines of illegally monopolizing its Dallas hub by driving out small, start-up carriers and then jacking up fares.

The practice has generated sudden and severe fare hikes in the last few years for travelers in Long Beach and three other cities connected to American’s Dallas hub, the Justice Department alleged in its lawsuit.

With other airlines also being investigated, the Justice Department’s suit is seen as the agency’s first salvo against what it considers “predatory pricing” by the major carriers.

The lawsuit comes amid a government and consumer backlash against major airlines that has been brewing for two years. Irked by rising fares, crowded airplanes and carriers’ domination of big-city airports, U.S. lawmakers and regulators are taking steps to curb the industry’s power and control fares. Several bills in Congress would reform the industry and provide a passenger “bill of rights.”

It will be difficult to prove in court, however, that the nation’s second-biggest carrier essentially engaged in an illegal price war, experts said, and executives at American vowed to mount an aggressive defense.

American said it is confident that its practices “will prove to be nothing more than those of any tough competitor,” and that the Justice Department’s suit runs counter to free-market competition.

“We’re not here to make life easy on our competitors, and everything we did in the marketplace is clearly within the boundaries of the law,” said American Airlines spokesman Chris Chiames in Dallas.

Industry experts were split over the effect of the government’s aggressive new campaign. Some predicted the lawsuit could ultimately hurt competition--and consumers. But Alfred Kahn, the economist who became known as the father of airline deregulation during the Carter administration, said the flying public should welcome the move.

“We’ve got to start exploring how far the antitrust laws can and should reach to stop the practice of incumbent airlines responding to competitive entry with violent, sharp reductions in fares” and a big jump in flights merely to “drive out competitors,” Kahn said.

The lawsuit seeks to block American from allegedly flooding its Dallas-based routes with money-losing fares in order to drive out small competitors who threaten its domination of the country’s third-biggest airport.

Under a strategy adopted by American in the mid-1990s, the airline did just that in Long Beach, Colorado Springs, Kansas City and Wichita, Kan., raising fares drastically once its small competitors were forced to abandon the markets, the Justice Department charged. Fares in other markets, including Cincinnati and Phoenix, also were allegedly affected.

“Today’s lawsuit seeks to put a stop to this kind of anti-competitive conduct because it is the public who loses out when major airline carriers succeed in driving low-cost competitors away,” Atty. Gen. Janet Reno said at a news conference announcing the lawsuit.

Kansas City offers one of the most dramatic examples of how aggressively American has protected its turf at Dallas-Fort Worth International Airport, where it flies 70% of all the nonstop passengers, Justice officials said.

In early 1995, a start-up company called Vanguard Airlines began offering three low-cost, nonstop flights a day between Kansas City and Dallas.

In response, the Justice Department said in its complaint, American quickly slashed its prices to match Vanguard’s $80 one-way fares. And in a move that, according to company documents, was designed “to drive [Vanguard] from the market,” it added six round-trips a day to its previously scheduled eight flights.

The strategy worked. In December, 1995, Vanguard ended its Kansas City-Dallas service, and American immediately began cutting back its own service from 14 flights to 11. Meanwhile, its average one-way fares increased from $112 to $147 over the next six months, as much as 80% above the rate charged when Vanguard was in business, the Justice Department said.

Vanguard applauded the lawsuit Thursday, saying it vindicated its assertions that American’s practices were illegal.

“This is a move that will help preserve open competition throughout the industry and help consumers and new entrants alike,” Vanguard said.

The situation in Long Beach fits the same general pattern--but under somewhat different circumstances, Justice Department officials said.

There, American sought to regain a foothold in a market it had already abandoned after a start-up company moved in, the lawsuit alleges.

American stopped flying its Dallas-Long Beach route in 1994 because it considered it unprofitable, the lawsuit says. But after a regional carrier called SunJet began offering three flights a day on that route in late 1996, American changed its position. It began offering four flights a day and largely matched SunJet’s low fares.

The lawsuit says that in the short run, American lost money on the new flights, which cut into the airline’s profit on its flights to other Los Angeles-area airports. But in the long run, the move paid off, officials said. SunJet could not compete, and the Georgia-based carrier pulled out of the market in January 1998. American then raised fares on the route by more than 30% within two months.

“We were just unable to compete with American,” SunJet executive Jim Lunsford said in an interview. Long Beach is now served by American, America West and a small start-up carrier called WinAir Airlines.

American spokesman Chiames said the company merely responded aggressively to market challenges and that it never saturated any markets with money-losing flights in violation of antitrust laws, as alleged.

“The notion that we have monopolized [the Dallas airport] just doesn’t pass the giggle test here. There’s lots of competition,” he said.

Lowering prices to match rivals is “the essence of competition,” Chiames said. If businesses in any industry feel they can no longer do that, he said, “it would have a chilling effect on the marketplace.”

Industry analyst Darryl Jenkins said he considered the Justice Department case “one of the most baseless suits that I could ever imagine.”

Jenkins, who heads George Washington University’s Aviation Institute here, wrote a study last year contending that when new airlines fail, it is mostly because of their own management mistakes, not because of anti-competitive moves by other carriers. The Justice Department lawsuit, he said, should be seen as a threat to the marketplace.

“This is piling on now” by federal officials, he said. “Politicians have learned that bashing an airline is good for their futures, and this concerns me greatly. What Justice is trying to do is build a class of protected businesses,” that is, new airlines.

That view was shared by Michael Boyd, president of the Boyd Group aviation consulting firm in Evergreen, Colo., who attacked the lawsuit as “stupid and all political.”

The suit, he said, reflects a misguided attempt by the government to answer travelers’ complaints about crowded, late airplanes and rising business fares.

“Consumers are angry. But what [the Justice Department] is trying to do is anti-consumer. It wants American to agree that it won’t match the low fares of new entrants. That’s anti-consumer,” Boyd said.

The Justice Department, which has reportedly been reviewing the predatory-pricing issue for the last two years, said it has had constructive recent discussions with American about the issue but decided to sue after the two parties could not reach an agreeable settlement.

The department also sued American in 1983, and later reached a settlement, over allegations that the airline’s then-chairman tried to fix prices with another airline. But this is the first time the government has sued any airline over the “predatory pricing” concept.