Free Home Delivery!
FOTH Archives

5\13 Lunchtime News
5\12 Evening News
5\12 Fool On The Hill

Related Items

News Main Page
Breakfast News
Lunchtime News
Evening News
Fool On The Hill Conference Calls

Fool On The Hill

Thursday, May 13, 1999

An Investment Opinion
by Yi-Hsin Chang


Adding more coals to its fire, the Department of Justice (DOJ) today filed an antitrust lawsuit against the nation's second-largest airline, AMR Corp.'s (NYSE: AMR) American Airlines, for "monopolizing and attempting to monopolize airline passenger service to and from Dallas/Fort Worth International Airport." The DOJ charges that American repeatedly tried to drive small, start-up competitors out of its headquarter hub by adding flights and cutting fares, only to jack up prices and reduce service after driving out the new competitors.

The government's complaint centers around American's response to the entry of three low-cost carriers: Vanguard Airlines, Sun Jet, and Western Pacific. Essentially, the Justice Department argues that American employed "predatory tactics" when it added flights and lowered fares because it was operating at a loss. DOJ wants to prohibit American from adding "non-compensatory" flights in response to new competition.

In typical DOJ Antitrust Division "logic," it wants to increase competition by keeping certain parties from actually competing. As consumers, we definitely want an environment in which low-cost carriers can enter the market and thrive. But we also want the traditional major carriers to be able to match or beat those lower fares. That's what we call real competition. To prevent large airlines like American from slashing fares is certainly not in the best interest of consumers. In fact, that's what we call over-regulation. Instead of a free market, we end up with a fixed market.

American Airlines quickly responded to the DOJ's allegations with a separate new website ( dedicated to the issue. It said that the antitrust charges are "unwarranted and go against the very essence of free market competition." The airline plans to mount an "aggressive defense" and "is confident that its actions in Dallas/Fort Worth will prove to be nothing more than those of any tough competitor in a highly competitive industry."

Tough competition is hardly new to the airline industry, and price wars have been very common. Many upstart airlines have entered the game aggressively only to go out of business, but several large airlines, including Pan-Am and Eastern, have also fallen victim to the intense competition. While new entrants are typically depicted as the underdogs, they also usually aren't faced with such challenges as high costs and powerful pilots unions. Plus, they can cherry-pick the large airlines' most profitable routes as the ones to compete against. And with the addition of online reservations and special "e-fares," competition is alive and well.

American says that its defense against DOJ's allegations is that it merely matched a competitor's price and met demand for the product at that price. It maintains that its revenues on the routes in question covered its variable costs and that it never "flooded" the market with excess flights.

Interestingly, while the DOJ charges that American "dominates" Dallas/Fort Worth, flying more than 70% of all non-stop passengers, American actually faces intense competition at its hub. Out of the top 50 markets the airport serves in terms of destinations, 44 have more than one carrier. Twenty other airlines besides American, including all the other majors, operate out of Dallas/Fort Worth. In addition, six low-fare airlines compete with American on all top 30 destinations with either non-stop or connecting service.

What the DOJ proposes doing is to tie American's arms behind its back so that upstart competitors can establish themselves. This is not capitalism. New players to the game must play by the same rules as everyone else. Some new airlines will survive and even succeed while others will fail miserably. That's the way it should be, and barring Mafia tactics, the market works out for itself which businesses will thrive and which will be eaten alive.

I couldn't help but think of Guy Kawasaki's 1995 bestseller How to Drive Your Competition Crazy. The book essentially explains why hard-edged, guerilla tactics are a positive force and how to go about ruining your competition's day. The maxim "It's not how you play the game, but whether you win or lose" accurately describes a free market at work.

It's interesting that the DOJ defines "predatory tactics" as losing money -- that is, not making enough revenue to cover your costs. Does that mean that (Nasdaq: AMZN) is a predator among online businesses (not to mention other money-losing Internet companies)? I think not. This just illustrates the DOJ's misunderstanding of how businesses work in a competitive world.

Ultimately, instead of encouraging competition, the DOJ's attack on American Airlines is just another example of the government's strong-arm regulation tactics that do more to hurt competition than to foster it.

Would you work for a bunch of Fools?

 Recent Fool on the Hill Headlines
Fool on the Hill Archives »