Recent events in the USA have highlighted the risks of breaching competition laws when executives make public announcements about capacity in their industry - risks from which executives in Australia are not immune. Below we discuss those risks and recommend that Australian executives take heed of the warnings posed by recent airline capacity comments.
Airline capacity comments in the USA
In early June 2014, airline leaders from around the world attended IATA's Annual General meeting in Miami. Attendees included representatives of American Airlines, Delta Airlines, Southwest Airlines and United Airlines, which together control more than 80% of domestic air travel in the US. At the summit, the CEO of American Airlines, Douglas Parker, spoke about the need for capacity 'discipline'.
These public comments, and those of other airlines executives to analysts on Wall Street over the years about keeping capacity 'in check', have spurred the Department of Justice (DOJ) into investigating the four major airlines for signalling business decisions to each other. A few days after the DOJ announced its investigation, consumer class actions were lodged in several American states, alleging the airlines have colluded to fix the price of domestic airline tickets by limiting seat capacity. These allegations come after a series of airline mergers in a America which has created a highly concentrated market for domestic air travel.
Could it happen in Australia?
A similar story of executive comments concerning future capacity plans has played out in Australia. In 2013 consumers benefitted from a capacity war between Virgin and Qantas, who together with their low cost carriers Jetstar and Tigerair, control the Australian domestic air travel market. In March 2013, Qantas' domestic Chief Executive Lyell Strambi was quoted as publically saying "We've made it clear we'll be sensible in terms of capacity. But if a competitor puts one [plane] in, we'll put two in as a group". This was followed up six months later with Qantas' CEO Allan Joyce stating at a media conference that if Virgin reduced its capacity to zero, "I'd be quite happy to make sure that Qantas adds zero percent into the market because we are focused on maximising our 65 per cent capacity position". This sparked an ACCC investigation but Rod Sims was powerless to act as the Australian price-signalling laws apply only to the banking sector. The Harper Report's recommendations, if taken up, could change this because although it recommends doing away with the banking specific price-signalling laws, it proposes to introduce an industry-wide prohibition on concerted practices.
Why are capacity comments a problem?
The key issue is that comments about restricting or matching a competitor's capacity plans can lead to increased prices for consumers. Aviation fuel costs have plummeted more than 40% in the last year but at the same time American domestic airline prices have risen 2.5% and Australian domestic air ticket prices have also been trending upwards. Fuel is an airline's largest expense.
The inconsistency between plummeting fuel costs but barely budging fuel surcharges did not go unnoticed in Australia. In early 2015, the ACCC opened an investigation into whether the airlines' fuel surcharges were misleading customers as they did not reflect the lower cost of fuel. Qantas and Virgin, as well as other international airlines servicing the Australian market, responded to the pressure by announcing they would either reduce the separate fuel surcharge component of the ticket price or absorb the surcharge into the base fare. The airlines' fuel hedging contracts are part of the reason why ticket did not fall immediately in line with the plunging fuel costs.
Executive comment on capacity 'discipline' in highly concentrated markets has taken centre stage even more recently in March 2015 when Andrew Forrest, Chairman of Fortescue Metals Group stated at a dinner attended by the media that he was "absolutely happy to cap my [iron ore] production right now" and at the same time encouraging his competitors to do the same. He followed this with "I'm happy to put the challenge out there, let's cap our production right here and start acting like grown-ups." Statements like this may amount to an attempt to enter into a cartel arrangement in breach of the law. Unsurprisingly, Forrest was subsequently investigated by the ACCC but it decided to take no further action, with a firm warning that "public statements calling for competitors to agree to limit production or to raise prices may constitute a serious cartel offence".
The key take out from these events is that company executives, especially those in highly concentrated markets, need to be extremely cautious about discussing their views and future intentions concerning capacity. The DOJ's investigation into the airlines also sends a strong message that, even when authorities have sanctioned mergers or authorised alliances, companies and their directors must continue to comply with their obligations under competition law. This obligation only becomes more onerous as your competitors become fewer.