American Airlines (AA) issued a press release today stating that it and US Airways were withdrawing their fares from Orbitz and Orbitz-affiliated websites effective immediately. Orbitz’s shares were immediately down 5 percent. AA stated that it “ha[s] worked tirelessly with Orbitz to reach a deal with the economics that allow us to keep costs low and compete with low-cost carriers.” AA went on to say that “[w]hile [its] fares are no longer on Orbitz, there are a multitude of other options available for . . . consumers, including brick and mortar agencies, online travel agencies, and [its] own website.”
Unilateral refusals to deal are generally not illegal under the Sherman Act. A company is usually free to deal with whom it wishes. An exception may lie for a company with market power that engages in a profitable, long term course of dealing with a competitor, then abruptly terminates the relationship without reasonable justification. These so-called Aspen Skiing cases are not usually successful. Concerted refusals to deal can be per se illegal: an agreement between competitors not to deal with another competitor can violate the antitrust laws irrespective of the rationale. Parallel behavior, without an agreement, is not a per se violation of the Sherman Act, however.
In this case, AA appears to be refusing to deal with a particular entity within a particular channel for the distribution of its fares. Orbitz presumably charges its participants for the ability to sell tickets on their site. One could surmise that AA asked for a steep discount; Orbitz refused; and AA left. AA appears to be worried about the added cost of selling fares through Orbitz because it needed to compete with “low cost carriers.” AA also signaled, in its well-crafted press release, that it thinks consumers have a plethora of choices on how to acquire fares: not only AA’s own website, but other online travel agencies and bricks-and-mortar agencies. So nothing to be concerned about here, fair consumer. You have plenty of options.
But Orbitz may offer a unique service that only a few online providers offer. Orbitz presents access to multiple fares from multiple carriers at prices chosen by the carriers for any given route. Consumers can immediately and efficiently compare prices between AA and its competitors simply by entering a few search parameters. And then consumers can sort this data for best fares, quickest flight, or other characteristics that appeal to them. It’s not clear how aggregators or firms like Priceline compete here either. Priceline seems to offer “last seat on the plane” type fares that may not be particularly useful to business consumers, for example. Aggregators like take data from other sites, like aa.com and Travelocity.
Moreover, this process is fast and efficient on a service like Orbitz and completely visible to the consumer. Travel agents may be able to see these fares and offer insight into best options, but that interaction is not qualitatively the same as being able to see and process different flights immediately oneself. AA’s own website is hardly a substitute either. Consumers would have to go to multiple sites in order to perform the same comparisons that Orbitz and its online competitors offer with just a couple clicks of a mouse.
It is also unclear to what extent AA competes with true discount airlines like Southwest. Southwest offers few of the business travel perks that the major carriers offer, for example. Moreover, Southwest services different routes and has a much more streamlined cost structure than AA.
It may very well be that for a price sensitive major route business traveler, AA is a major competitor, and that the inability to compare prices on Orbitz represents a significant loss of visibility into the already-murky air travel market. While there are other sites like Travelocity, the loss of Orbitz means that consumers will find it more difficult to check to see if they are getting meaningfully competitive prices from AA. Indeed, if Travelocity is the only other site where the price sensitive major route business traveler can go for competitive fares, AA might then have the incentive to raise prices on Travelocity by some amount and on its own site by some bit more. A consumer on Travelocity would check the price there, and go to AA’s site to compare. The higher price on aa.com could very well convince the consumer that it’s getting a deal at Travelocity. In that instance, the only constraint on price would be the other major-route carriers. If the business air travel market were in fact concentrated, the other major carriers would simply raise prices similarly. The ability of consumers to purchase from AA’s own site is also a bit of a red herring. Consumers who go to aa.com do not care to see comparable fares. They almost necessarily have some price insensitivity.
It is also hard to believe saving a few dollars on the Orbitz fee can materially affect the price of a fare, particularly when one looks at the higher cost structure of the incumbent airlines. And it’s a bit shocking that AA could pull out of Orbitz. If prices were competitive across platforms, as AA suggests when it claims consumers can turn to all sorts of competitors, the loss of Orbitz should mean that at least the Orbitz consumers would be switching on that service to other airlines because the competition for fares would be sufficiently robust. But apparently the loss of that business isn’t so significant that it renders dropping Orbitz unprofitable. Why that’s the case is the interesting antitrust question.
It will also be interesting to see if any other carriers drop Orbitz. If they do, there should be sufficient evidence for the Justice Department to investigate the industry. While parallel behavior is not actionable, if there were any discussions between the airlines to refuse to deal with Orbitz, it could represent a significant case. If the decision were purely unilateral, at most you could say is that it establishes that AA has market power. That market power could have always been there, or it could have accrued with the acquisition of US Airways.
At the end of the day, though, absent concerted behavior, it’s hard to see what remedy Justice could secure. Should they force AA to deal with Orbitz? At what price? Justice could seek to unwind the AA / US Airways deal, but proving causality would be nearly impossible. If another carrier drops Orbitz, expect subpoenas. Otherwise, wait until the next major airline merger for this action to come up again.