Tuesday, 15 February 2011

An Introduction to Price signalling


Recently there has been considerable debate about the introduction of proposed price signalling legislation in relation to the banking sector, as part of the Competitive and Sustainable Banking package. Most of the commentators, ranging from journalists to lawyers, have been highly critical of the proposed laws which would make price signalling in the banking sector illegal under the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974).

The short article will discuss a recent US Federal court decision in relation to a price signalling allegation involving Delta Air and Air Tran. A consideration of this recent decision may go some way to better understanding the types of conduct which may be targeted by the proposed price signalling legislation in Australia.


The central allegation In re Delta/AirTran Baggage Fees, No. 10-md-2089 (N.D. Ga. Aug 2, 2010) was that Delta Air and Air Tran had attempted to engage in cartel activity through price signalling.

The plaintiffs in the case alleged that Delta and Air Tran agreed to increase prices for flights to and from Atlanta by introducing a surcharge on baggage. The plaintiffs based their allegations on a number of earning calls and industry meetings at which executives of Delta Air and Air Trans disclosed information about their pricing plans in public meetings.

For example, in one of the earnings calls, AirTran Chief Executive Officer Robert Fornaro was asked by an analyst if AirTran would impose a surcharge of $US15 on passengers’ first checked baggage. He allegedly responded that AirTran preferred to be a follower on the baggage-fee issue and would introduce such a surcharge if Delta introduced such a surcharge first.

In November 2008, Delta did in fact announce that it was going to introduce a surcharge of $US15 on the passengers’ first checked baggage. This was then followed by a similar announcement by AirTran about a week later – namely, that it would be introducing the same type of fee on the same day as the Delta surcharge was scheduled to take effect.

At the relevant time, Delta Air and AirTran together accounted for 92% of all air traffic out of the Hartsfield-Jackson Atlanta International Airport.

District Court decision

The central issue in the District Court case before District Court Judge Timothy C. Batten was whether the allegations should proceed or whether they should be dismissed on the grounds that they were unlikely to succeed at trial.

Judge Batten decided that the allegations of price signalling should be allowed to proceed. In deciding to allow the price signalling case to proceed, Judge Batten observed that Delta Air and AirTran are clearly each other’s closest competitors in the relevant market. He also stated that it was undisputed that the two companies closely monitored each other's earning calls.

Judge Batten concluded that “because the allegations in the plaintiff’s complaint contained sufficient factual specificity to establish unlawful conspiracy, dismissal would be improper.”

However, he stated that there may be a legitimate and lawful business justification for the introduction of the surcharge by Delta Air, given that it was acquired by Northwest in October 2008, and at that time, Northwest already imposed a similar surcharge on its passengers’ baggage. Therefore, there may be an argument that the introduction of surcharge was simply a standardisation of charges of across the merged group, and not the response to the price signal received from AirTran.

Judge Batten also dismissed two other claims that Delta Air and AirTran had attempted to monopolise certain markets through their alleged collusion in relation to baggage fees.


The Delta AirTran case demonstrates that a plaintiff or anti-trust regulator will need a significant amount of factual specificity in order to succeed in establishing a price signalling case.

Not only will the plaintiff or regulator have to establish that a business had made a clear public statement about its future pricing plans, but there will also need to be evidence that the businesses’ competitors were aware of these public statements and that certain actions occurred after the making of these public statements.

However, one issue is abundantly clear from the Delta AirTran case - it is a very bad idea for the CEO of a large corporation to state publicly that they would only introduce a new fee if their major competitor did so before them and then proceed to do exactly that.

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