The US Justice department's landmark predatory pricing suit against American Airlines and its parent AMR Corp will not get its day in court: a federal judge dismissed the two-year-old antitrust case.

Hearings on the case, the first alleging predatory pricing by an airline since deregulation, had been set to start 22 May. Brought by the Clinton Administration trustbusters who brought the Microsoft case, it charged that American incurred significant short-term loses in the late 1990s so that it could keep three low-cost challengers out of its Dallas/Fort Worth (DFW) hub. Of the three - Sun Jet International, Vanguard Airlines and Western Pacific Airlines - only Vanguard is still in business.

American, said the government, had cut prices and added flights after Vanguard's September 1996 announcement that it would add services in the DFW market. When Vanguard abandoned its plans, American raised prices and trimmed capacity, cutting capacity on some routes by 30% and raising fares by up to 50%.

But US District Judge Thomas Marten, sitting in Wichita, Kansas, ruled that American had not engaged in predatory below-cost pricing. The government's claim failed "since the evidence establishes that American's conduct - meeting the competition's prices - is precisely the sort of activity the antitrust laws are intended to encourage."

The government built much of its case on the claim that American deterred these three carriers and other potential competitors with its reputation for aggressive pricing If accepted, that reasoning, held the judge, would have led to "self-serving complaints about reputation by a defendant's competitors".

The government's "theory of liability by reputation is not the law and should not be," Marten said. The theory, if adopted, would chill the very competition that antitrust law seeks to encourage. American stressed that while it talked tough, that was vastly different from unfair practices.

George Washington University antitrust expert Bill Kovacic said that if the government had prevailed on the reputation theory, it would have created a novel antitrust doctrine, "one that presents real conceptual difficulty".

The government also said that American staff were sent to count the number of passengers boarding flights of low-cost competitors such as Western Pacific. But the judge noted such ramp counts are a common airline industry way to monitor and meet competition.

The government charge "that an established competitor should not and indeed cannot deviate from its existing market strategy in the face of aggressive price-cutting by a new entrant, represents a whole new mid-game spin on time-honoured rules," Judge Marten concluded.

If the case had gone to trial, Kovacic says, the result is likely to have been the same, given the difficulty in proving below-cost pricing.

The government has until at least the end of June to appeal against Judge Marten's decision. A Justice Department spokeswoman said no decision had been made.

The American Antitrust Institute's Bert Foer, a critic of airline policy, says that the suit represented another attempt by the government to pry loose the control of dominant carriers over the hubs. "Something will have to be done, perhaps legislatively," said Foer.

Source: Airline Business