Bank Of America: How To Play Airlines Following 'Unexpected' DOJ Probe

In a report released on Thursday from Bank of America, analyst Andrew Didora assesses how the Department of Justice’s recent antitrust investigation against U.S. airline carriers could impact the airline sector. The purpose of the DoJ’s probe is to determine whether airline carriers engaged in indirect price fixing through illegal communication of flight capacity.

Unlikely Timing

In the report, Didora comments that the timing of the investigation is unexpected, given that the DoJ performed a thorough review of the airline industry only 18 months ago prior to the American Airlines Group Inc AAL/U.S. Airways merger. This review should have included regional capacity information from the major airlines (American, Delta Airlines, Inc. DAL, United Continental Holdings Inc UAL and Southwest Airlines Co LUV since January 2010.

Related Link: JP Morgan Remains Overweight Delta, Calls DOJ Collusion Investigation 'Humorous'

Currently, airline capacity is up 5 percent for July-October, with average fares down 0.4 percent year-to-date.

Scope Of The Investigation

According to the report, the DoJ’s probe appears to be centered primarily on the four major airline carriers. Small carrier JetBlue Airways Corporation JBLU confirmed that it had received no letter from the DoJ. As of now, the timeframe for the investigation is uncertain and could last anywhere from a few months to a few years.

Implications For The Industry

Since the announcement of the investigation, the market caps of American, Delta, and United have fallen by more that $500 million each, while Southwest's market cap has dropped by $300 million. In previous cases, the maximum fine imposed by the DoJ for price fixing was $500 million.

Analyst Recommendations

While Didora states that the investigation is unlikely to affect airline companies’ future decisions regarding pricing and capacity, the manner in which airlines communicate their capacity is subject to change. With the probe focusing on major carriers as opposed to smaller airlines, the report recommends the stocks of JetBlue, Allegiant Travel Company ALGT,  and Spirit Airlines Incorporated SAVE.