U.S. antitrust officials investigating whether the nation’s four largest airlines colluded on pricing are looking at executives’ communications — not only with each other, but also with their biggest shareholders.

The Justice Department’s antitrust division has asked the carriers — American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co.– for details about meetings with their major shareholders in which “industry capacity” was discussed, according to an official information request reviewed by Bloomberg News.

The requests come as antitrust officials examine arguments that consumers pay more when the same large investors hold shares in the biggest airlines. These officials have examined at least two academic papers arguing that consumers suffer when there is such overlapping ownership, according to people familiar with the matter. One of the studies shows that airfares are on average as much as 11 percent higher than they’d be otherwise due to common ownership.

The antitrust officials’ information demand and their interest in the academic studies provide a clearer view on their current focus as they examine the airlines after years of approving industry mergers. The officials are looking into allegedly unlawful coordination to control seat capacity, which helps drive ticket prices.

Information Demand

The antitrust department’s civil investigative demand — a formal request for information similar to a subpoena — doesn’t call out any investors or individuals by name or accuse anyone of wrongdoing. It requests information on meetings at which industry capacity was discussed with investors whose stakes in the airlines exceed 2 percent, a category that includes some of the biggest U.S. money managers.

BlackRock Inc. is among the five biggest holders at each of the four largest U.S. airlines, according to data compiled by Bloomberg. State Street Corp., JPMorgan Chase & Co., Primecap and Capital Group Cos., which runs the American Funds group, also fall into that category, with stakes in two or more of the carriers.

Spokesmen for the companies declined to comment or didn’t respond when asked whether the firms had received information demands. Peter Carr, a Justice Department spokesman, declined to comment.

‘Fair Competition’

“While we can’t comment on the DOJ’s investigation of the airline industry, we expect fair and ethical competition between the companies we invest in on behalf of our clients,” said BlackRock spokesman Ed Sweeney, who added that most of the asset manager’s equity investments are in index and exchange-traded funds that aren’t actively managed.

American, United, Delta and Southwest confirmed in July, when the broad investigation was disclosed, that they were cooperating with the government’s requests.

United declined to comment on the request for information about shareholders. Spokesmen for American, Delta and Southwest said they were cooperating. Southwest has made capacity decisions in its own best interests, “without any coordination or collusion with any other airlines,” said spokesman Brad Hawkins.

Research Study

The government is also seeking documents about meetings airlines had with analysts, without specifying further, according to the information demand.

One possible blueprint for the Justice Department’s inquiry is laid out in a recent research study that links shared ownership in carriers to higher airfares. Martin Schmalz, a University of Michigan professor, said he presented the study to antitrust officials a year ago with his co-authors, economists Jose Azar and Isabel Tecu at consulting firm Charles River Associates.

Ticket prices are 3 percent to 11 percent higher when airlines are commonly owned by similar sets of investors, according to the study, which examined the correlation between fares and ownership changes of airlines competing on given routes over time.

Coordinate Moves

There are two possible explanations, Schmalz said.

The first is that airline executives may hold back from aggressive competition — expanding capacity, for example, or lowering prices — because they know it’s not in the interests of their biggest shareholders, which also own stakes in their competitors, he said.

A second possibility: Executives could in theory coordinate moves on pricing or capacity by communicating strategy through discussions with large investors, Schmalz said.

The authors found no evidence of collusion, Schmalz said, and don’t point to wrongdoing by specific companies. The authors said they didn’t receive outside funding for the study. Nancy Rose, a deputy assistant attorney general at the antitrust division in charge of economic analysis, was among a group of economists who contributed suggestions to the paper.

The inquiry is a natural extension of the Justice Department’s view that the airline industry is ripe for coordinated behavior that harms consumers, said Maurice Stucke, a law professor at the University of Tennessee and a former lawyer with the department’s antitrust division. If investors are knowingly at the center of what’s known as a hub-and-spoke conspiracy that allows the airlines to coordinate, that would be an antitrust case the government should bring against both the carriers and those investors, according to Stucke.

“If the DOJ has evidence that a few institutional investors either actively or unwittingly are helping airlines raise prices and reduce services, then that’s precisely the issue one would expect the DOJ to investigate,” he said.

The department’s airline inquiry surprised the industry because ticket prices have been falling this year. With discount carriers including Spirit Airlines Inc. piling on seats, average U.S. domestic coach fares are plunging, reaching the lowest since 2010 last month.

Executives have talked about capacity discipline for years as a way to ensure their ability to raise prices, and it’s a frequent discussion topic among analysts and investors. Airlines try to match their available seating to travel demand, and when the two are out of balance, they scale back.

In 2009, with average domestic fares tumbling 14 percent amid the recession, airlines made the largest cut in available seats since World War II. Industry consolidation has accelerated since then, with mergers shrinking the ranks of U.S. airlines with global routes to just three, plus discounter Southwest.

U.S. airlines have depended on mergers, management of seat capacity and, more recently, lower oil prices to sustain profits after $58 billion in losses over the nine years ended in 2009. Since 2010, U.S. airlines have reported a combined net profit of $26.6 billion.

Harvard Paper

Another paper on the topic is also getting a close read at the Justice Department, according to a person familiar with the matter. That paper, by Harvard Law School professor Einer Elhauge, argues that investor ownership of competitors across an industry can be challenged as anticompetitive even if overt coordination isn’t involved.

“The line is extremely subtle” between having an investor convey its interest in having a company compete less aggressively with others in the investor’s portfolio, and having the investor help the firms coordinate strategies, said Schmalz at the University of Michigan.

Beneficial Ownership

Ownership of companies by asset managers is often seen as beneficial to investors because the big shareholders have leverage to hold management accountable. Institutional investors with large stakes in companies often hold discussions with management.

Schmalz and his co-authors wrote that a former legal counsel of an asset management firm told them that the firm pushed companies in which it held stakes to focus on exercising market power to increase margins, rather than focusing on gaining market share. According to the paper, the former counsel said “‘antitrust considerations are generally not on the radar’” in such talks.

If the Justice Department finds a violation, the government could seek to restrict investors’ communications with airlines or to unwind some of their stock ownership in the companies, according to Stucke, the law professor.

Schmalz said that even without collusion, asset managers’ acquisition of shares in competing airlines could still be an antitrust violation because it leads to higher prices, he said.

“We can’t rule out that the airlines colluded, but we also don’t have evidence for it,” Schmalz said. “What we do show is that prices are higher because of common ownership.”

–With assistance from Michael Sasso in Atlanta.

This article was written by David McLaughlin and Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network.

Photo Credit: How Southwest prices these seats and what its rivals know about it are the target of a Federal probe. Southwest Airlines