USA: American, Southwest In Price-fixing Lawsuit Worth $60M

An ongoing nationwide litigation by passengers who claim that the four largest U.S. carriers – American Airlines, Delta, Southwest, and United the Defendants, conspired along with US Airways and Continental Airlines to increase fares by limiting capacity on domestic flights, has reached a turning point.

Southwest and American Airlines the Settling Defendants, have agreed to pay a total sum of $60 million to settle the litigation.

If you bought a domestic airline ticket on American, Delta, Southwest, United, Continental, or US Airways between July 1, 2011 and June 14, 2018 your rights could be affected, opens the official website for the Domestic Airline Travel Antitrust Litigation Settlements.

According to the website, a class action lawsuit has been filed against the four largest U.S. carriers, claiming the Defendants agreed to limit capacity on domestic flights. The lawsuit alleges that ticket purchasers may have paid artificially inflated prices as a result.

The affected include persons and entities who purchased tickets for flights within the U.S. and its territories and the District of Columbia from American Airlines, Delta, Southwest, United, Continental, or US Airways at any time between July 1, 2011, and December 20, 2017, for the Southwest settlement and between July 1, 2011, and June 14, 2018, for the American Airlines settlement.

As of October 19, 2018, two settlements have been reached: Southwest has agreed to pay $15 million and American Airlines has agreed to pay $45 million, settlement documents indicate.

The Settling Defendants also agreed to provide certain cooperation against the remaining carriers in the ongoing litigation the Non-Settling Defendants.

Both Southwest and American deny that they did anything wrong and have asserted defenses to the Plaintiffs’ claims.

American has settled a lawsuit that claimed passengers were harmed by an alleged agreement among airlines to restrict domestic capacity growth.

The settlement does not include any admission of wrongdoing, and we continue to deny, without qualification, that American participated in any such agreement, the company’s October 23, 2018, email to AeroTime reads.

According to American, the facts are that the carrier dramatically increased domestic capacity during the period in question, while also taking delivery of hundreds of new aircraft.

The airline stated that investments made in its network were beneficial to customers, as reflected in the increase of domestic passenger traffic, which actually led to fares dropping to near all-time lows.

The carrier identifies the cost of the litigation as the key reason behind its decision to settle, maintaining that it is up to each individual airline company to decide when and where to add routes or flights.

Despite our firm conviction in the appropriateness of our actions, costs to defend against antitrust litigation often run into the tens of millions of dollars.

So while it is difficult to agree to a settlement when we believe we’re right on the law and the facts, settling this case is a prudent decision for American, the company stated.

Southwest confirmed it had agreed to settle at a payment of $15 million, pointing to the substantial burden and distraction an antitrust class action such as this would impose on the company in the long term.

Southwest was confident that it would have ultimately prevailed in this litigation, spokeswoman for Southwest, Michelle Agnew, said in an October 24, 2018, letter.

However, after careful consideration of the considerable expense and inconvenience that would have been entailed in this continued litigation, the company decided to enter into settlement.

The lawsuit goes several years back when on October 13, 2015, the United States Judicial Panel on Multidistrict Litigation consolidated 23 actions pending in seven districts and handed over the consolidated class action to the court of the District of Columbia.

Case documents show that the Defendants moved to dismiss the consolidated complaint, but the motion was denied in October 2016. At that time, the total number of cases consolidated in this class action rose to 105.

According to information released by Keller Rohrback LLP, the current case status is that litigation is proceeding to discovery, including discovery of both defendants and many third parties. Discovery will continue into 2019, the law office states.

The Antitrust Litigation website informs that the settlements reached with Southwest and American do not impact claims in the lawsuit against the Non-Settling Defendants – Delta and United.

The lawsuit, claiming the remaining carriers fixed prices for domestic airline tickets by keeping capacity artificially low, is ongoing against them.

Spokeswoman for United, Erin Benson Scharra, said - We will continue to defend ourselves against these claims, which we have always maintained are without merit.

It seems American and Southwest have played it safe, while remaining completely defiant. Let us see if United and Delta will be the next to give in and if so, at what price.

As for the other two carriers mentioned in the claims, both had merged with their parent companies years ago: US Airways merged with American Airlines back in 2015 and the two now operate under a single certificate; Continental Airlines was brought under United’s wings in a 2012 merger.


Tourism Observer

USA: Southwest Airlines Engine Explodes Mid-air, One Passenger Dead

Southwest Airlines Boeing 737-700 with 149 people aboard performed an emergency landing at Philadelphia International Airport on April 17 after an engine exploded and broke apart in mid-air causing one fatality.

Southwest flight 1380 took off from New York’s LaGuardia Airport at around 10:27 a.m. and was diverted to Philadelphia just under an hour later.

This took place after crew members reported damage to an engine, the fuselage and at least one window, the Federal Aviation Administration said.

Chairman of the National Transportation Safety Board (NTSB), Robert Sumwalt, said at the Philadelphia airport that a preliminary investigation found an engine fan blade missing.

This having apparently broken off, and that there was metal fatigue at the point where it normally attached.

The Southwest Airlines Boeing 737-700 was powered by CFM56-7B engines.

In the statement regarding the accident, CFM reported that CFM team of technical representatives has been sent to assist the NTSB in its investigation.

Sumwalt said that the investigation could take 12 to 15 months to complete.

The CFM56-7B engine powering this aircraft has compiled an outstanding safety and reliability record since entering revenues service in 1997 while powering more than 6,700 aircraft worldwide.

The engine has accumulated more than 350 million flight hours as one of the most reliable and popular jet engine in airline history.

Notably, the death of 43-year-old Jennifer Riordan on Flight 1380 was the first in a U.S. commercial aviation accident since 2009, according to National Transportation Safety Board (NTSB) statistics.

The passengers of the flight said the woman was pulled out of the plane up to her waist, her blood splattering other windows.

This is a very sad day, and on behalf of the entire Southwest family I want to extend deepest sympathies for the family and loved ones of the deceased customer, Southwest Chief Executive Officer Gary Kelly said speaking in an auditorium called Freedom Hall at Southwest’s headquarters in Dallas.

They are our immediate priority and concern. We will do all we can to support them during this very difficult time and in the difficult days ahead.


Tourism Observer

USA: Air Travel Market War Is In Dallas

The Dallas-Fort Worth air travel market has now surpassed that of Denver (DIA) as the most heated battleground for U.S. airlines. For nearly a decade, DIA was home to the most brutal airline competitive landscape in the country.

Hometown low-cost carrier Frontier Airlines (now transformed into an ultra low cost carrier) and full service network carrier United Airlines had been battling for dominant market share in Denver.

Those were the only contenders surviving in Denver after Continental shuttered its hub at Denver’s old Stapleton airport right after the move to DIA.

In 2006, Southwest Airlines decided to add service in Denver after pulling its service at Denver Stapleton back in 1985, and it quickly built up a massive hub there (now its fourth largest).

There are certainly parallels in the Dallas market, as once again a legacy carrier (American), an LCC (Southwest) and an ultra-low cost carrier (ULCC – Spirit) are duking it out for supremacy in a highly competitive market with a massive origin and destination (O&D) traffic base.

The script obviously has a few differing notes—in this case, both Southwest and American are the hometown carriers, one being low-cost while the other is the world’s largest airline, and Spirit is the newest entrant.

Additionally, the market consists of two airports: Dallas Fort Worth International (DFW), with five terminals and seven runways, and Dallas Love Field (DAL), gate-restricted to 20 jetways in a singular terminal.

The biggest shift in the Dallas market in the last three decades occurred in October 2014, when a 2006 deal to sunset the famed Wright Amendment took effect, allowing Southwest to instantaneously build a massive hub at Love Field nearly overnight.

Flights at Love Field had been restricted to destinations within Texas and to certain neighboring states for decades following the opening of DFW airport in 1974. But two years of lobbying efforts culminated in a 2006 deal that would eliminate Wright’s restrictions while capping Love Field’s capacity at 20 gates.

The restrictions were lifted in October 2014, and Southwest immediately capitalized, as it controlled 18 out of the 20 gates at DAL (16 of its own and 2 leased from United).

Southwest surged to 180 daily departures, redistributing capacity to new destinations outside the previous limits, while Delta Air Lines also grew its capacity on its flights to Atlanta, up-gauging from regional jets to mainline aircraft.

The third new entrant into the DAL market was low cost carrier (LCC) Virgin America, who quickly built up a focus city at DAL. That focus city initially included high-frequency nonstop service to nearby Austin, but today has retrenched to focus on point to point (p2p) flights nationwide, encompassing 16 daily departures to Las Vegas (2), San Francisco (3), Los Angeles (4), New York La Guardia (4), and Washington Reagan (3).

Both Virgin’s gates and the slots to serve LaGuardia and Reagan are the result of the American – U.S. Airways merger and the required divestitures.

Even as capacity exploded at Love Field thanks to the new legal structure, the macro-economy also contributed to traffic growth in the Metroplex.

Starting in late 2014 and continuing into the present, the price of oil plummeted from over $100/barrel to its present level of $40/barrel, dipping as low as $25/barrel during the course of 2015.

Predictably, this has helped to drive down fares and stimulate O&D traffic growth. In fact American CEO Doug Parker has noted that between the added competition (from both Southwest and Spirit) and the drop in fuel prices, American expects no meaningful changes in pricing or capacity for the Dallas market in 2016.

DFW captured a slice of that growth, with 2015 traffic increasing 1.0% year-over-year (YOY) to 64,174,163 from 63,523,489 in 2014.

But the real winner was DAL, which saw passenger traffic explode from 9,413,636 in 2014 to 14,497,498 in 2015, spectacular growth of 54.0% YOY. That growth came on the heels of 11.1% growth between 2013 and 2014, driven entirely by the fourth quarter of that year (when Southwest added its first tranche of service post Wright Amendment expiration).

When considered on an overall market basis, 2015 passenger traffic was up 14.2% from 68.91 million to 78.67 million, nestling Dallas comfortably inside the Top 15 city airport systems in the world (behind #12 Bangkok at 83.21 million and ahead of #14 Miami at 77.56 million).

In order to get a sense of how Southwest’s growth (and lowered fuel prices) have affected the Dallas/Ft. Worth pricing environment city market, we used US Department of Transportation (DOT) data to assess how air fares and O&D traffic changed between Q3 2014 and Q3 2015. The analysis was conducted for 32 city pairs (offered via 35 airports served by Southwest) that Southwest flew nonstop from DAL in Q3 2015 but did not serve in Q3 2014 during the pre-Wright Amendment era. The study also excludes markets that Southwest served at DAL prior to 2014 (in-state and neighboring state markets such as Austin, St. Louis, and Houston Hobby). The results of this analysis are summarized in the table above.

As the table indicates, Southwest’s entrance into these markets has had a substantial impact, both in terms of stimulating O&D traffic growth and in terms of bringing down average fares. Among the 32 US city pairs evaluated from Dallas, average fares are down approximately 15.8%. Average O&D traffic overall is up in the 32 markets by 22.6%.

The specific outlier markets are interesting to consider. Among the positive gains, Atlanta, Miami (Fort Lauderdale), Nashville, and Milwaukee are Southwest strongholds (creating market power for Southwest on both sides to boost demand). Washington D.C. (Reagan), New York City (La Guardia), and Charlotte were previously dominated by American (and in the case of the first two markets, are slot restricted) yet accordingly saw major gains thanks to Southwest.

The negative outliers are also interesting. San Francisco’s numbers are probably driven by the strength of the local economy there and the relative pricing power enjoyed by airlines in that market. Boston is a similar story in terms of the economic and demographic fundamentals with the added note that much of the stimulation had already been captured by Spirit.

Philadelphia is the oddest case—the market itself is mostly stagnant and Southwest’s influence there has been declining for years. At the same time, with lower fuel prices and added competition you would expect prices to go down, not up (the only market in the sample where this occurred.) Philadelphia is a outlier to the broader trend.

As a ULCC, Spirit predictably does not operate any true hubs (Fort Lauderdale comes closest thanks to flight connections to its Latin American network at the airport). But DFW is one of its largest stations, , with 24 peak day departures to 20 different destinations, as per the March 14, 2016 timetable. Spirit’s schedule at DFW basically mirrors its focus cities at the other major US airports (such as Las Vegas, Chicago O’Hare, and Houston Bush), with more or less daily nonstop service to several large O&D markets.

Despite the strength of the operation, Spirit has struggled to sustain more than daily service in most of its DFW markets (a common theme across its network) despite bottom of the barrel fares and little LCC competition.

Today it faces head to head competition from a revitalized Southwest and pricing power thanks to fuel prices. More worryingly, it will have to contend from pricing innovation by American, who has unveiled a new fare class to compete head to head with Spirit and has immediately found success.

American’s management team (by way of US Airways) has had success fending off attacks from ULCCs and LCCs in the past, and it would not be surprising to see them find similar success against Spirit in DFW.

Spirit’s focus city isn’t in danger of collapsing (it doesn’t quite have Frontier’s record for pulling out of markets), but there are some chinks in the armor.

CUBA: 9 Million Tourists, But Is Cuba Ready?

A year after restoring diplomatic relations, the U.S. and Cuba are on the verge of an agreement to resume regularly scheduled commercial flights between the two nations.

U.S airlines say they are ready.But is Cuba?

More than 100,000 U.S. visitors have been to Cuba in the year since the Obama administration announced it was restoring diplomatic ties with the island nation – all of them still on charters. Commercial airline service might be imminent but the amount of U.S. tourists it will bring to Cuba could overwhelm an infrastructure that might not be ready for an increase in numbers.

From an airline standpoint, American, United, Southwest and JetBlue have all said they are not only interested in starting service to Cuba, but ready to go. Fortunately, this is the one place where Cuba is the strongest.

Because Cuba has been off the radar – almost literally – of people in the United States for two generations, the general tourist thinks of Havana and Jose Marti International Airport as the only place to fly into. But Cuba actually has 10 airports scattered throughout the country servicing flights from 32 airlines including such major carriers as Air France, Air Canada, Aeromexico, and Virgin Atlantic.

The facilities are older, but certainly not decrepit, having served some of the world’s biggest carriers for decades.

Hotels could be an issue in the near-term, although it is likely American companies will become more involved once the trade embargo with Cuba is lifted. For the moment, however, it is less about quality than quantity. According to Cuban officials, there are 63,000 hotel rooms in Cuba, almost 70 percent of which are four- and five-star properties. By some estimates, capacity will increase to 85,000 rooms by 2020.

Will it be enough for an expected increase to 9 million tourists by then from the current 3 million or so tourists annually? That remains to be seen. By comparison’s sake, Las Vegas has 124,000 hotels rooms and draws 41 million tourists a year. Yet travel experts say there are big differences between Havana and Las Vegas.

“It’s a big problem,” Omar Everleny, an economist at the Centre for the Study of the Cuban Economy, told the Toronto Globe and Mail. “Havana is 100 percent full.”

Cruise ships already regularly visit Cuba … but there are issues. Havana’s docks cannot handle the 3,000- and 4,000-passenger superships. Investments will need to be made there.

There’s also the question of currency. It has been less than a month since the first U.S. debit card was approved for use when MasterCard and Fort Lauderdale-based Stonegate Bank announced an agreement. MasterCard can be used now at more than 10,000 locations in Cuba; Stonegate guarantees the payment.

But few other U.S.-based companies are willing to make the same commitment until the Obama administration lifts the economic trade embargo with Cuba.

Why Airline Shares Aren't Soaring As Oil Falls

Yes, both West Texas Intermediate and Brent crude prices continued their recent slide Tuesday in response to OPEC’s surprising decision to keep oil production rate up despite low prices. WTI stabilized at $37.59, while Brent fell to $40.59. But U.S. airline shares did not shoot up dramatically, as one would have expected.

To be sure, there were airline stock buyers yesterday, but they were more of the bargain hunter variety, buying as prices tumbled. The parent companies of the Big Three – American Airlines, Delta Air Lines and United Continental, saw their shares shed around 3% of their value Tuesday. American closed at $44.55, down 2.7%. Delta fell almost 3% to $50.97. United Continental holdings slipped more than 3% to $58.65. Southwest took the biggest beating, losing $4.48 a share (more than 9% of its value) to close at $45.03.

Share price drops that large are not pleasant, but normally they’re regarded as no big deal. But yesterday’s airline shares decline was triggered by something that spooked savvy stock traders.

Southwest had returned over the last few years to the kind of high single-digit and even low double-digit capacity growth rates that it had maintained throughout much of its 44-year history – until it reined in its growth in 2007. But in May the carrier began tweaking its renewed growth plans to account for some previously unexpected softness in demand. Southwest adjusted its plan for nearly 8% capacity growth this year, and 7% in 2016 downward to just 6%-7% this year and 5%-6% next year

Then the Dallas-based airline shocked analysts Tuesday with a warning that a key metric – the average amount of money it gets for flying one passenger one mile – will be flat to down about 1% in this year’s fourth quarter vs. the same period in 2014.

They might as well have announced that they’re launching service to Tehran. That’s how stunned airline investors were by Southwest’s disclosure that they’re now having to discount seats more than anyone previously realized in order to fill a high percentage of them.

In October in this space I asked, “Do Declining Unit Revenues At Airlines Warn Us Of A Coming Downturn?” Historically, declining airline unit revenues were viewed as really bad news. Only this year the declining airline unit revenues have been mostly ignored. Why? Because the fall of oil prices from around $100 a barrel in the summer of 2014 to the $45-$50 range most of this year served to mask the problem. U.S. airlines have been reporting record or near-record quarterly profits this year, so no one much worried about the key data buried in the weeds in their quarterly reports.

In October I wrote that “U.S. airlines are getting noticeably less money per available seat mile than they were a year ago. Not only does that mean their average fare prices are down sharply (nearly 20% from their peak in May 2014 according to a Bloomberg analysis). It means all that extra dough that they generate from charging for checking your bags and letting you select your seats, dinging you for other extra services, and hitting you hard for changing your itinerary still is not enough to offset the drop in fare prices.”

Southwest’s warning Tuesday morning drove home that message in dramatic fashion.

Both it and the industry have evolved significantly from the days when it was a plucky upstart discounter that invaded the big carriers’ markets with lots and lots of flights and low-priced seats. But Southwest is still the industry’s pricing bellwether in terms of domestic fare prices.

Other carriers always cut their prices to remain competitive with it, but Southwest never cuts its prices to remain competitive with them. In fact, historically there have been only three scenarios in which Southwest has cut prices: when it enters a new market and is seeking to grab market share; during the low travel demand periods of deep winter and mid-Autumn; and when the overall economy sagged.

Today Southwest is the largest U.S. airline in domestic passengers carried and domestic passenger miles flown. So it no longer needs to steal market share from anyone. And its fall/winter prices were set based on its already-lowered analysis of expected travel demand.

That it had to cut its fourth quarter fares even lower – which is what yesterday’s unit revenue warning really means – tells us that air travel demand is even weaker than expected. Did Southwest’s leaders badly misjudge the growth of demand – something they rarely do? Or is there a change taking place in the economy that’s impacting air travel demand more than anyone anticipated?

It’s still hard to know for sure, but yesterday’s drop in airline share prices even as oil prices cratered further indicates that there might be a problem growing in the larger economy. Oil is the lifeblood of any airline. At $100 a barrel it was their largest cost item. At $50 it became their second-largest cost item behind only their labor costs and most of the savings went to carriers’ bottom lines.

So it stands to reason that at $37 even less of the airlines’ cash will go to oil purchases and more will fall to the profit line. Thus, any drop in the price of oil should push airline share prices up.

Furthermore, since consumers will be spending less on gasoline and the goods trucked to them in vehicles that burn refined oil products, it stands to reason that some of their extra free cash likely would go toward more air travel, further increasing airline revenue in the months ahead.

So, for those clear and simple reasons airline shares should have jumped nicely yesterday.

That they went the other way instead tells us something – perhaps something very important.