Purdue Arrow
Topic Author
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Joined: Tue May 25, 1999 1:49 pm

American Wins Summary Judgement

Sun Apr 29, 2001 5:17 am

I can't believe this hasn't been posted yet...

Yesterday, federal judge J. Thomas Martin granted an American Airlines request for summary judgement in the case of USA v. AMR, relating to predatory pricing out of DFW. The lawsuit, files in 1999 by the US DOJ, claimed that American engaged in predatory pricing on several DFW routes, driving low fare competition out of the market. Since that time, American has steadfastly maintained that, while they did compete vigorously, they did not behave in a predatory manner and did not violate the Sherman Anti-Trust act. Judge Martin's order vindicates American, establishing that the there is nothing inherently wrong with price matching, so long as you don't sell seats below cost to drive a competitor out. The trial in this case was scheduled to begin in a few weeks, but will not be going forth. The opinion (very long) can be read at http://www.ksd.uscourts.gov/. Choose "Judges", then "Judge J Martin Thomas", then "Opinions", then Document 519, USA v. AMR. It's a big day for free-market competition!
 
DCA-ROCguy
Posts: 3890
Joined: Fri Apr 21, 2000 5:03 am

RE: American Wins Summary Judgement

Tue May 01, 2001 2:25 am

I've held off on commenting on the AMR judgment because I wanted to find the ruling and at least skim it, and read major sections, first. I also avoided the thread called "AMR beats the loser airlines" because it was clear that the poster simply wanted to mouth off because he didn't "like" low-fare carriers.

In short, the ruling appears sound. DOJ simply did not demonstrate that American violated the Sherman Antitrust Act's standards for predatory behavior. DOJ's case is appallingly sloppy in places--they attempted to create a new doctrine of "reputation" where a major could be shown to be guilty of predatory behavior simply because they carried over 60 percent of the traffic on the route!

The ruling is extremely thorough, and I plan to read it in detail. Aviation Week has a link to it; go to the commercial aviation section, go to "more comm av stories" and get "the AMR wins summary judgment" story. The link is there. The ruling in USA v. AMR offers detailed history on low-fare competition in the DFW market, and the sections I've read are just plain fascinating, on their face.

The bottom line seems to be that the carriers which entered the DFW market simply did not have good business plans for the routes in question. AA did not undercut fares *at any time* on the routes in question (DFW to COS, MCT, ICT and TPA/ LDB) and only incurred losses according to the average variable cost standard (AVC) which covers 98 percent of the company's costs.

AMR did dump capacity, though, as the ruling indicates. There does need to be development on the law in that area; the existing standards make capacity dumping nearly impossible to demonstrate. Judge Marten cites case law that says that dominant companies can't be prevented from adding capacity to meet increased demand, because that would tend to freeze their prices at high levels.

This is true to some extent, but it seems to me that there needs to be some kind of standard developed for capacity dumping. Predatory pricing and capacity dumping go hand in glove, and both need objective, emprically verifiable standards of measurement. Marten holds, and I'll need to read more before agreeing for sure, that gov't experts Berry and Hovenkamp did not demonstrate them.

The main implication of Marten's ruling, it seems to me, is that antitrust scholars are going to need to do very careful research on how to demonstrate predatory pricing and capacity dumping in court. Even on a skim-and-examine reading, it seemed to me that DOJ failed badly to demonstrate predatory pricing on the four routes in question. And the whole notion of "predatory repuation" by market share (which DOJ alleged in 48 additional markets from DFW!) is outright frightening. That's market engineering out of a Chinese Five-Year Plan.

Summary judgment was appropriate in this case. But there's no question that many medium-and-small cities pay unjustly high airfares, caused by Big Air's anticompetitive cost structures and excessively high profit expectations. The medium and small cities of America deserve much better from DOJ than to make sloppy cases that overreach. And they need more well-managed low-fare carriers with sound business plans who can hold their own against the Big 6/ Oligopoly.

Jim
Need a new airline paint scheme? Better call Saul! (Bass that is)
 
DCA-ROCguy
Posts: 3890
Joined: Fri Apr 21, 2000 5:03 am

RE: American Wins Summary Judgement

Tue May 01, 2001 2:56 pm

Some further thoughts.....

The ruling will not open the gates to a flood of predatory behavior against new low-fare carriers, at least not this year. The ruling strongly affirms that predatory pricing exists and can be proven. But there's still a gap regarding capacity dumping. Congress should take up the question of capacity dumping, and reconsider the "inferential basis" guidelines defeated after the big-bucks Big Air media snow job in 1999.

Something to the effect of, a dominant carrier cannot add capacity equal to more than the amount added by the new entrant. Or, the dominant carrier cannot add capacity equal to more than half the amount added by the new entrant. Competitive response in some form needs to be allowed, the law simply needs to have a reasonable standard as to what's predatory.

One notable lacuna in the DOJ's case was that they did not examine the business plans of the low-fare carriers in question. Antitrust law was not intended, and cannot, serve as a shelter for bad business practices. A single MCI-ICT-DFW route with a 732, without an FF program, is not a recipe for success with Godzilla American on the route. Hub traffic is needed, prob through the Vanguard hub at MCI. That way, ICT would get all the benefits of a low-fare hub, and Vanguard would get better load factors.

Judge Marten noted that Southwest is unlikely to start service on DAL-ICT. As long as the DOT's longstanding interpretation of the Wrong Amendment requires that the plane land in OKC, the pax all get off, claim their bags, recheck them, reticket, and get aboard another plane, that will probably remain the case.

Jim



Need a new airline paint scheme? Better call Saul! (Bass that is)
 
Bove
Posts: 248
Joined: Sun Apr 15, 2001 10:32 am

RE: American Wins Summary Judgement

Tue May 01, 2001 3:16 pm

Jim,

Thanks for your well-thought out summary of the mountain of legal documents in this case. It is much appreciated. Didn't realize you were a lawyer on the side.  Big grin

Ultimately, PacWest's demise had little to do with AA and Vanguard is today plying the MCI-DFW routes (how they make money despite load factors in the basement is beyond me though!) which brings up the issue of effective remedy should the case have gone the other way.

It will be increasing difficult to take on the Big 6 (getting bigger by the day) but the success of Frontier at DEN and JetBlue at JFK really underscores the necessity of both a sound business plan and a lot of investment capital to any startup.

Interesting times ahead as always in this industry.
 
Bove
Posts: 248
Joined: Sun Apr 15, 2001 10:32 am

RE: American Wins Summary Judgement

Tue May 01, 2001 3:45 pm

I just realized I wrote PacWest instead of WestPac.

IMHO, anti-dumping provisions wont be seriously considered by Congress, even as the government actively mulls Super 301 trade sanctions on Brazil, Canada, and India for doing just that.

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