With Its Antitrust Suit Against American, the DOJ Says Enough Is Enough

The major airlines have long sought to drive out smaller rivals. This time, the Justice Department steps in.
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As we had thought it would probably do, the

Department of Justice

yesterday slapped

AMR's

(AMR)

American Airlines

with an antitrust suit accusing the airline of engaging in monopolistic practices. Specifically the suit cites actions that the airline took on four routes out of

Dallas-Fort Worth International Airport

that hurt three smaller carriers:

Western Pacific

(which is now bankrupt),

SunJet International

(which has also since declared bankruptcy and reorganized under a new name) and

Vanguard Airlines

(VNGD)

.

According to comments by Department of Justice antitrust head Joel Klein at a press briefing, "American crossed a fundamental line." That line, according to the Department of Justice, separates fair competition and predation.

The DOJ contends that American repeatedly sought to drive out the smaller operators by saturating their routes with additional flights and low fares, only to then reduce service and reimpose high fares once the new airlines were gone.

As much as Wing Tips would like to jump on the bandwagon on this one (especially since I live and fly out of the aforementioned Dallas-Fort Worth hub), I can't. Looking at the information released so far, there does not appear to be much more involved in this case than in numerous incidents involving most of the major airlines -- and certainly all the hub carriers.

The technique that American used against the smaller carriers in question is one that the airlines, and especially the hub carriers, use frequently when they want to drive out a new competitor. Rightly or wrongly, the process has been repeated in many different cities with many different players for years.

The rules of the ritual are fairly easy to grasp. Major airlines will routinely add capacity and lower fares when a new entrant enters a market, in an effort to make the new entrants' attempt that much more difficult.

When you have a major carrier up against a smaller carrier, usually the smaller airline cannot afford to go toe to toe against a major airline in a market that suddenly sees the profit potential fall through the floor. The smaller airline, which thought it could quietly offer reduced fares on a particular route and still be profitable, suddenly sees itself up against the incumbent hub airline, which basically swamps the route or routes in question with both seats and cheap fares.

Consequently, the smaller airline can no longer make a profit on the route, and usually leaves the market as a result.

The major airline will then remove the capacity that was added. In addition, the airline will frequently not just raise fares back to their original level (before the new entrant came to town), but raise fares higher than they were previously. It's an attempt to recoup some of the money that was lost while trying to drive out the smaller airline.

I can give you many examples of this type of pricing behavior in the industry. In fact, the attorney general of Minnesota has already asked the

Department of Transportation

to investigate the actions that

Northwest Airlines

(NWAC)

has taken over the last month in regard to the expanded regularly scheduled service announced in April by

Sun Country Airlines

out of Minneapolis. Northwest is actively and aggressively matching routes, fares and schedules, and adding capacity to routes where the airlines compete.

So, the issue in this case is not just that American is guilty of this type of behavior. I suspect the DOJ is sending a message and attempting to tell the industry, "We know it has been going on, and we don't like it. So stop it."

As we had written about

previously, the DOJ had been looking into this particular situation involving American for more than two years. The DOJ is also investigating incidents involving other hub carriers, including Northwest,

UAL's

(UAL) - Get Report

United Airlines

and

Delta Air Lines

(DAL) - Get Report

.

American, which had been in settlement talks with the DOJ over this issue, apparently declined to sign a consent decree, prompting the suit being filed. American says it will fight the suit.

I don't see the suit itself as such a big deal to American. The larger issue here is whether the DOJ can successfully define where the "line" between fair competition and predatory practices lies. That is what this suit is all about and will be the overriding issue to watch in terms of ramifications for the rest of the industry.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in stocks discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.