American's equally emphatic response is that it is the DoJ and not the airline that has overstepped the mark. "The company is confident that the court will see the Government's action as an ill-considered attempt to fashion new law - to pick winners and losers in the marketplace," says an indignant American. "As improbable as it may be, a government victory could dramatically upset the basic rules of the marketplace, chilling competition and sowing uncertainty in every industry."
War of words
So the war of words has begun - a prerequisite to any high-profile US lawsuit, where it is likely to be the emotionally charged one-liners that stick in the mind of the jury, rather than the laborious legalese. It was no coincidence that the DoJ chose to file this lawsuit in the district court of Kansas, one of the rural states so often quoted as lacking in low-price air fares and an apparent "victim" of the hub-and-spoke system.
The emotional leverage that each side has available is already clear. The DoJ historically has steered clear of such lawsuits against airlines, despite repeated complaints from start-ups that they were being unfairly targeted by the majors, The line between tough competition and predatory behaviour is a thin one and the case difficult to prove. But the department's two-year probe into airline pricing tactics has taken place against a background of struggling start-ups (since the demise of ValuJet in 1996), rising business fares and a strengthening of the hub-and-spoke system that has made the majors look increasingly formidable. From certain perspectives, they have begun to look and feel to the customer like the big, bad bullies that the start-ups have long accused them of being. Industry-wide claustrophobic load factors, stripped down cabin service and the attitude of staff have nothing to do with the rights and wrongs of this particular lawsuit, but it provides a helpful setting for the DoJ's case. Timing, in this particular case, may well prove to be everything.
American, meanwhile, understands the US public's natural suspicion of government interference. Hence, its warnings that "the government is unwisely seeking to make new law; indeed, to turn existing law on its head, to punish legitimate competition." In court, American's lawyers will probably pursue the theme that this action is unwarranted government interference which could, if allowed to succeed, seep into every industry. American will want to prove that it is not the start-ups that are being picked upon, but reputable airlines that have done nothing wrong except act like responsible businesses that provide the most competitive and efficient service.
These are the emotional starting points, assuming there is not an out-of-court settlement - a seemingly unlikely option given the DoJ's assertion that it was unable to persuade American to sign a consent decree and that talks between the two sides were clearly thorny.
Legal opinion divides
But what of the nuts-and-bolts of the lawsuit? Here, expert opinion is divided. Lawyers are all too familiar with the dismal record of antitrust cases in the USA. While many such cases have been upheld in the lower courts, almost all in the past 15 years have subsequently been overturned by the Supreme Court. In a 1986 decision, and with echoes of the words American selected to illustrate the dangers of this particular lawsuit, the Supreme Court ruled that: "Cutting prices to increase business often is the very essence of competition." Mistaken conclusions of predatory pricing, the Court went on to say, "can be costly because they chill the very conduct that antitrust laws are designed to protect."
Consequently, some argue that the DoJ's examples of American lowering fares to match those of rival low-cost carriers were not about predatory behaviour, but just shrewd business sense - and that it will be hard to prove otherwise.
Others are not so certain. Why would attorney general Janet Reno and assistant attorney general in charge of antitrust Joel Klein put their names behind such a high profile case if they were uncertain of the outcome? Some lawyers looking at the details of the complaint say the DoJ has done its homework. Price matching, they point out, is not the issue with predatory behaviour. The real issue is whether a company's tactics were designed to put its new competitor out of business. The acid test there is whether an incumbent's price strategy makes no sense other than as a way to drive away the new entrant - and the DoJ has some detailed examples of where it believes American pursued such strategies.
The three cases cited by the DoJ involve three start-ups: Sun Jet, Vanguard Airlines and Western Pacific. In each case, there is detailed information not only about American's actual response to the arrival of an "LCC" - low-cost carrier - but also reference to documentation recording American's thinking at the time. For instance, when Vanguard began non-stop service from DFW to Kansas City, Missouri, three times a day, American matched Vanguard's fares - a reduction from an average $108 for a one-way ticket to $80 - and also increased its daily frequency from eight to 14 services. A few months later, after Vanguard withdrew its nonstop DFW-Kansas City service, American began reducing its frequencies and pushing up fares, eventually taking them to as much as 80% higher than in the previous year when Vanguard was operating the route. The kicker, however, comes in a snippet from American's own documentation. The DoJ points out that American's own documents indicate that it intended its additional flights "to drive [Vanguard] from the market".
There are numerous other examples that the DoJ draws upon which could prove useful in the courtroom. By 1995, the DoJ points out, American believed it had another low-cost carrier - Western Pacific - "pretty much in check" because the smaller carrier's load factors were down to 30%. The DoJ, however, goes on to say that "American's senior management nonetheless decided at its February 1996 DFW LCC strategy meeting to step up the pressure. American concluded that it should 'get [Western Pacific] out before they are encouraged to put [the second] frequency back in Colorado Springs-DFW'."
According to the DoJ, American identified the LCC threat to its "monopoly power" in 1993 and determined that $3.6 billion in American revenue was at risk annually because of LCCs. The growth and financial success of ValuJet, at Delta Air Line's Atlanta hub, "confirmed American's worst fears", says the DoJ. According to the DoJ, American estimated the impact on Delta of ValuJet's success to be $232 million in annual lost revenue, and management concluded that "clearly we don't want that to happen at DFW". This was the point, according to the DoJ, at which American drew up its DFW LCC strategy in which it would "deliberately disregard" its usual standard for evaluating route performance. "Both the purpose and the effect of American's DFW LCC strategy were to drive LCCs out of DFW markets so that American could subsequently recoup its 'investment' and preserve its monopoly fares," says the DoJ. "This recoupment strategy was at the heart of American's response to LCCs. As its then chairman and chief executive said: 'If you are not going to get them out, then no point to diminish profit.'"
It is this attention to detail and use of American's documentation that has impressed some lawyers. "This is not a shotgun approach by the DoJ," says Mark Hough, an antitrust lawyer at Seattle-based Reed McClure. "It is very specific. I can only assume they have done their homework here." Hough points out that, during the DoJ's two-year civil investigative demand, a lot of people at a lot of airlines would have been interviewed. "My guess is that they picked this one because it was the best of the bunch," he says. "I think they will get to a jury and I think they will have a pretty sure shot at that jury. The appeal case, however, is not as good."
Hough agrees that the stakes are high in this case, however. "This would be a terrible defeat for the government," he says. "It's a bit like playing poker - you either have to be a gut player or get out of the game." With neither side so far showing any willingness to back down, lawyers will scramble to put together their most watertight cases. The DoJ will concentrate on the detail it has garnered as well as the inflammatory statements it has collected from American's documents. American will fiercely defend its statement that, in every instance cited by the DoJ, its prices were above its variable costs and that its prices could not be predatory by law. It will emphasise the consumer benefits of the hub-and-spoke system and the highly competitive nature of the US airline industry.
In major US carrier boardrooms, there is likely to be some discrete checking of past memos and recordings of meetings. "You would be almost derelict in your duties if you were not making sure you have no trail," says Hough. "If you think you are close to the line on something, now is the time you might want to re-evaluate what you are doing."
Source: Airline Business