Question

Between 1995 and 1997, American Airlines competed with several other low-cost carriers at Dallas / Fort Worth Airport. In response to these low-cost carriers, American Airlines has reduced fares and increased services on some routes. As a result, one of the low-cost carriers has stopped operating and urged American Airlines to raise prices. Why do you think the proceedings were filed against American Airlines? Why do you think American Airlines won in the process?

Short answer

In its appeal, the Department of Justice asked the court to consider more than just the price of an extra ticket and take into account the money that American Airlines would have lost by diverting its plane from another market or airport in order to utilize it to provide low-cost service in Dallas.

Step-by-step solution

Defining AA’s strategy:

One of the most well-known antitrust cases in the US involved American Airlines and a few small low-cost carriers operating at the Dallas/Fort Worth airport. American Airlines' strategy in this case was to lower ticket prices below its marginal costs and provide customers with a wider range of routes and connections, which discouraged and led these small companies to leave the market.

Defining the lawsuit imposed against American Airlines:

Due to the fact that American Airlines' predatory pricing approach merely attempted to destroy competition, the firm was charged with a lawsuit. This is because as soon as the small company left the market, AA management raised rates once more to the prior level used in the strategy. The Department of Justice, which is responsible for enforcing and regulating antitrust laws, claimed that AA had used its market power and advantage to advertise low prices and new routes before raising them once they had removed the competition.

Finding the federal court judgement:

Nevertheless, the federal court judge overseeing the case dismissed the claim against American Airlines because it was difficult to demonstrate production costs in the airline industry, where the costs for each additional passenger are very high, despite the fact that competition in the United States can be difficult, fierce, and even brutal.

Finding AA’s strategy:

Despite this, and according to the New York Times, the Department of Justice appealed and asked the court to consider more of the price of an extra seat and take into account the revenue lost by American Airlines as a result of using its plane to provide low-fare service in Dallas and diverting it from another market or airport. Despite this information, the judge upheld AA's argument that predatory pricing was present as there was insufficient proof that the airline could recoup the losses caused by the price cut.