Former American Airlines CEO Explains How Carriers Use Wall Street Analysts To Pressure Rivals To Stop Growing

Doug Parker says airline executives don’t collude by signaling to competitors. However, the former American Airlines CEO explains how executives use Wall Street analysts to pressure other airlines over decisions they don’t like or to back off from competition. On this week’s Airlines Confidential, Parker rejects suggestions of signaling: it “absolutely, positively does not happen.” Yet earlier, describing how airlines enlist analysts, he says they’ll put it to an analyst: “ask them why they’re doing this.” Airlines don’t need a secret meeting where everyone agrees to raise fares. They have fare filings that competitors watch, earnings calls that competitors listen to, and analysts who cover several airlines and can make life uncomfortable for the one that’s adding seats. Whether it violates antitrust law depends on the particulars, but executives certainly do try to send signals to other airlines. American Paid $45 Million To Settle A Capacity Collusion Case While Parker was CEO, American agreed in 2018 to pay $45 million to settle a private antitrust class action. Passengers alleged that major airlines coordinated capacity restraint to increase fares. American also agreed to cooperate with plaintiffs pursuing the remaining defendants. American denied wrongdoing, but paid a very real amount to resolve exactly the sort of allegation he suggests is almost unimaginable. Parker Even Emailed Delta’s CEO Directly To Collude The Justice Department’s 2013 complaint challenging the American–US Airways merger described a 2010 email exchange about a Delta’s aggressive promotion and expansion. Parker, then running US Airways, complained internally about the effect on everyone’s profitability, portrayed Delta as foolish to Wall Street, and forwarded the chain to CEO Richard Anderson. Anderson sent it on to his general counsel. I’ve written about this before. It’s particularly striking because the old email chain and the new podcast describe the same intermediary: Wall Street. Airlines Can Send A Message Without Sending An Email Airlines publish fares through the Airline Tariff Publishing Company. That lets travel sellers distribute prices, and lets competing airlines see and respond to them. Matching a competitor’s fare isn’t, by itself, evidence of an agreement. But pricing departments know how to use the system to get each other’s attention. Fare basis codes. These combinations of letters and numbers identify fares and their rules. I’ve covered the less subtle examples, including discount fares in a competitor’s home market with codes ending in “FU.” That isn’t information a passenger needs to choose a ticket. Economist Severin Borenstein’s account of the government’s earlier fare-filing case explains how codes and footnotes could connect retaliatory fares across markets. Retaliation somewhere else. In the American–JetBlue litigation, the government’s trial filing described JetBlue responding to an American $139 Boston–Los Angeles fare with $139 fares on five routes involving American hubs. The matching amount helped make the connection obvious. Flash fares. The same filing, citing testimony and internal records, described JetBlue planning to flash American over $44 Boston–Philadelphia pricing in February 2020. A fare filing could be used to draw the other airline’s attention to a pricing dispute. Scott Kirby Has Been Doing This In Chicago I laid out the strategy in January when United CEO Scott Kirby used his earnings call to promise a response to American’s growth at Chicago O’Hare. He wanted analysts asking American why it would expand into a fight that United was promising to make expensive. The intended pressure has two audiences. American hears that United will respond. Analysts hear that American’s investment may produce losses, and can press management to stop. If that deters American, United protects its position without having to operate all the additional flights it threatened. An analyst can legitimately believe American is making a bad investment. But American also has to consider the value of a competitive Chicago network to corporate customers, connecting traffic and AAdvantage credit card spending. United’s preferred accounting of the market isn’t necessarily the right one for American or its customers. Bob Crandall Was Less Subtle American’s former chief Bob Crandall famously called Braniff’s Howard Putnam in 1982 and proposed: Raise your goddamn fares twenty percent. I’ll raise mine the next morning. Putnam recorded the conversation and gave it to the government. He didn’t accept the proposal. The Fifth Circuit nevertheless reinstated the government’s attempted-monopolization case, rejecting the idea that an agreement had to be completed for that claim to proceed. Parker’s underlying point about hubs is sensible. An airline with connecting traffic, corporate contracts and loyal local customers has advantages a new entrant doesn’t. You don’t need a secret agreement to explain why a competing hub is hard to build. But natural advantages and efforts to discourage competition can both be true at the same time (and even true without running afoul of the law). That’s why Parker’s narrative about using analysts to send messages is useful. The executive who wants a rival to stop growing doesn’t have to call up directly and ask. It can be enough to make that the next question on its earnings call. Topics on this page