CHICAGO & NEW YORK--(BUSINESS WIRE)--Initial details regarding the US Department of Justice (DOJ) investigation of anticompetitive behavior among the North American airlines are limited, but Fitch views the industry as inherently competitive and we believe that behavior by the airlines is a rational response to market conditions. Fitch does not expect the investigation to have an impact on airline credit ratings at this time.
News reports indicate that the investigation is centered on 'capacity discipline' within the industry and whether the airlines illegally signaled to each another how quickly they would grow. We believe heavy competition between airlines in various markets, announcements of strategic capacity expansion by certain airlines, and the still relatively thin operating margins generated by the industry as a whole continue to point to a competitive environment.
Antitrust cases can carry substantial fines and any actual evidence of collusion unearthed by the DOJ investigation would represent an industry concern. However, we note that the financial improvement experienced by the industry over the past several years has left the airlines much better equipped to weather potential penalties than they would have been even a few years ago.
While overall industry capacity growth has been modest in recent years, the North American airline industry remains competitive. Recent examples of heavy competition between major North American carriers include Southwest's build-up in Dallas, Delta's growth in Seattle and the ongoing fight for transcontinental markets. Recent data from Airlines for America shows that on average, US airlines will grow capacity by an average of over 5% in the third quarter of this year, notably above US GPD growth, all of which seems to indicate a healthy level of competition in the industry. In addition, average operating margins that remain relatively thin despite significant improvements in recent years. Fitch calculates the average EBIT margin in 2014 (which was a stand-out year) for the four largest US carriers at 11.2%. This is in contrast to many other industries where profits are routinely higher. The rail industry, for example, maintains EBIT margins above 30%.
Fitch views relatively low levels of capacity growth over the last few years to be at least partially investor-driven, as analysts and investors have been quick to react against the stocks of airlines seen as growing too rapidly. Some capacity constraint is also a natural result of the consolidation in the industry during the past decade. Additionally, most airlines are still rated below investment grade, meaning that the restrained growth in recent years has been a rational means of shoring up previously weak balance sheets ahead of the inevitable next market downturn.
Fitch also notes that the presence and rapid growth of smaller competing airlines in this country would seem to limit the benefit of possible collusion among the big four (American (AAL), United (UAL), Delta (DAL) and Southwest (LUV)). Carriers like Spirit, Allegiant, JetBlue, and Virgin America are growing rapidly and have been quick to enter markets they view as not being adequately served by the legacy carriers. Attempts by the big four to keep capacity artificially low would likely invite competition from low-cost competitors that are eager to expand.
The large percentage of total traffic controlled by the four largest airlines has been pointed out as contributing to anticompetitive behavior. However, we note that the industry has exhibited restrained levels of capacity growth for years, even pre-dating the most recent round of airline mergers. Data from the Department of Transportation shows that growth in available seat miles has remained at or below levels or revenue passenger mile growth every year for more than a decade, leading to steadily rising load factors.
DOJ concerns aside, some measure of capacity discipline among airlines was a rational and inevitable result in a consolidated industry where underlying growth in demand for passenger travel is modest. Prior periods of heavy capacity growth led to overspending on aircraft, heavy debt burdens, and ultimately to many airline bankruptcies. Airline restraint in recent years is a natural reaction to prior financial troubles.
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