[Senate Hearing 107-220]
[From the U.S. Government Publishing Office]
S. Hrg. 107-220
AIRLINE CONSOLIDATION: HAS IT GONE TOO FAR?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 7, 2001
__________
Serial No. J-107-4
__________
Printed for the use of the Committee on the Judiciary
_______
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky RICHARD J. DURBIN, Illinois
MARIA CANTWELL, Washington
Sharon Prost, Chief Counsel
Makan Delrahim, Staff Director
Bruce Cohen, Minority Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas..... 105
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois....................................................... 116
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 25
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 60
Hatch, Hon. Orrin, a U.S. Senator from the State of Utah......... 5
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 19
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 20
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 24
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 62
Thurmond, Hon. Strom, a U.S. Senator from the State of South
Carolina....................................................... 100
WITNESSES
Bethune, Gordon, Chairman and Chief Executive Officer,
Continental Airlines, Houston, TX, statement................... 27
Bond, Hon. Christopher, a U.S. Senator from the State of
Missouri, statement............................................ 1
Carty, Don, Chairman and Chief Executive Officer, American
Airlines, Fort Worth, TX, statement............................ 77
Compton, William F., President and Chief Executive Officer, Trans
World Airlines, St. Louis, MO, statement....................... 87
Franke, William A., President and Chief Executive Officer,
America West, Phoenix, AZ, statement........................... 40
Goodwin, James E., Chairman and Chief Executive Officer, United
Airlines, Chicago, IL, statement............................... 82
Johnson, Robert L., Chairman and Chief Executive Officer, DC Air,
Washington, DC, statement...................................... 91
Kahn, Alfred, Emeritus Professor of Political Economy, Cornell
University, Ithaca, New York, statement........................ 63
Leonard, Joe, Chairman and Chief Executive Officer, AirTran
Airways, Orlando, FL, statement................................ 46
Levine, Michael E., Adjunct Professor of Law, Harvard Law School,
Cambridge, MA, statement....................................... 50
Meeks, Hon. Gregory W., a Representative in Congress from the
State of New York, statement................................... 15
Mullin, Leo F., Chairman and Chief Executive Officer, Delta Air
Lines, Atlanta, GA, statement.................................. 35
Myrick, Hon. Sue, a Representative in Congress from the State of
North Carolina, statement...................................... 10
Reid, Hon. Harry, a U.S. Senator from the State of Nevada,
statement...................................................... 7
Warner, Hon. John, a U.S. Senator from the State of Virginia,
statement...................................................... 13
Wolf, Stephen M., Chairman, US Airways Group, Inc., Arlington,
VA, statement.................................................. 96
SUBMISSIONS FOR THE RECORD
American Society of Travel Agents, Richard M. Copeland, President
and Chief Executive Officer, Alexandria, VA, letter and
attachment..................................................... 113
Carnahan, Hon. Jean, a U.S. Senator from the State of Missouri,
statement...................................................... 8
Davis, Hon. Tom, a Representative in Congress from the State of
Virginia, statement............................................ 115
Griggs, Leonard L., Jr., Director of Airports, City of St. Louis,
MO, statement.................................................. 117
LaFalce, Hon. John J., a Representative in Congress from the
State of New York, statement................................... 118
Lenosky, Lynn, US Airways Master Executive Council President,
Association of Flight Attendants, AFL-CIO, Washington, DC,
statement...................................................... 119
Pilkington, Roberta Quinn, United Airlines Master Executive
Council Secretary/Treasurer, Association of Flight Attendants,
AFL-CIO, Washington, DC, statement............................. 121
Santorum, Hon. Rick, a U.S. Senator from the State of
Pennsylvania, statement........................................ 39
Tettelbach, Betsy, Eastern Region Master Executive Council Vice
President, Association of Flight Attendants, AFL-CIO,
Washington, DC, statement...................................... 122
AIRLINE CONSOLIDATION: HAS IT GONE TOO FAR?
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WEDNESDAY, FEBRUARY 7, 2001
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 9:35 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
presiding.
Present: Senators DeWine, Hatch, Grassley, Leahy, Kohl, and
Schumer.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. Good morning. Let me welcome all of you to
the Judiciary Committee hearing on aviation consolidation. A
number of the other Senators, including Chairman Hatch, Ranking
Member Leahy, and Senator Kohl, the Ranking Member on our
subcommittee, will be arriving at 10 a.m. We are going to
start, however, with our Member panel. We are going to take
their testimony, and then we will begin with the Judiciary
Committee opening statements at ten o'clock. So, that is the
schedule.
We have a very full schedule. We have several panels, very
full panels of testimony, so we anticipate that we are going to
be at this for some time. So I think it is important that we go
ahead and start, and also because we have several colleagues
who are here and we want to accommodate them as well.
Senator Bond, good morning.
Senator Bond. Good morning, Mr. Chairman.
Senator DeWine. We appreciate you being here and we will
start with you.
STATEMENT OF HON. CHRISTOPHER BOND, A U.S. SENATOR FROM THE
STATE OF MISSOURI
Senator Bond. Mr. Chairman, I would like to submit my full
statement for the record.
I am terribly disappointed I will miss the opening
statements of the members of the committee.
Senator DeWine. We will send them to you, Senator.
Senator Bond. I look forward to reading them very
carefully.
I want to give you an overview of the importance of the
particular transaction, the American Airlines asset acquisition
of TWA. TWA began Western Air back in 1925, Western Air
Express. Then Transcontinental Air Transport in 1929,
headquartered in Kansas City, started the first coast-to-coast
air and rail route.
Since 1930, when the Federal Government decided that
airlines ought to be carrying passengers, TWA has been the
centerpiece of the economy and the transportation system of the
State of Missouri. It has fallen on difficult times. It had a
number of owners who ransacked it and pillaged it. Howard
Hughes did it and cut it free, and in 1985 and 1986, in the
private sector, I was called on by the employees to try to help
purchase the airline, to keep it out of the hands of several
other people who might not have had the long-term interests of
the flying public as their top priority. They were not
successful.
Carl Icahn bought the airline, sold off routes, sold off
assets, imposed heavy financial burdens on it. And since that
time, we see the headlines. In December 1974: ``TWA Unveils
Plan to Halve Its Debts''; ``TWA Bail-out Ten Times Bigger than
Announced,'' March 1995; ``For TWA, It's Chapter 11 Again,''
June 1995; ``Auditors Gloomy on TWA Prospects,'' March 1997;
``TWA Juggles Top Executives after Treading in Red Ink for the
Tenth Straight Year,'' March 1999. This shows the difficulties
it has been through.
I should mention, in 1992, I made a major effort to get the
Pension Benefit Guarantee Corporation to review the charges it
would impose on TWA to permit it to come out of bankruptcy. So
it has been in and out of bankruptcy.
Let me tell you, I fly the airline all the time. It is J.D.
Power's best airline around in terms of on-time performance,
great service. The financial burdens imposed on it by its
previous owners, combined with the cost of fuel, have literally
put TWA out of business. It would have been out of business
January 10 had they not been rescued by American Airlines
debtor in possession financing.
Now, I confess here in public, I used to be a lawyer doing
antitrust, and we all have things like that in our background.
Senator DeWine. We all have our past, right?
Senator Bond. I am a recovering lawyer now.
Since this is the Judiciary Committee and we are talking
about antitrust, I decided to go back and read the failing
company doctrine case International Shoe v. FTC, 280 U.S. 291.
In it, at pages 301 to 303, in relevant part they said, ``The
evidence states the case of a corporation in failing
circumstances, the recovery of which to a normal condition was
to say the least in gravest doubt.'' If that isn't TWA, I don't
know what is.
They go on to point out that, ``In light of the case, a
corporation with resources as depleted and the prospect of
rehabilitation so remote that it faced a grave probability of a
business failure, we hold that the purchase of its capital
stock by a competitor, there being no other prospective
purchaser . . . is not, in contemplation of the law,
prejudicial to the public and does not substantially lessen
competition or restrain commerce.'' Frankly, that is the
failing company doctrine and TWA is there.
TWA shopped around its assets. There are people here who
want to buy pieces of it. Sure, they want to pick its bones.
There is nothing like a fresh carcass to bring out birds of
prey to pick little pieces off of it. What American Airlines
proposes to do for TWA, for the 20,000 employees worldwide, the
9,000 in St. Louis and 3,000 in Kansas City, is to buy the
assets and keep it operating to provide the service that we
need in the State of Missouri for our economic well-being and
that I think air transportation needs in this country to make
sure there is not a tremendous void left.
I was in Kansas City when first Eastern and then Braniff
went bankrupt and folded up, and I will tell you that the
disruption to airline travel, the disruption to economy and
transportation was significant. We cannot let that happen to
TWA.
I would love to see TWA continue. I want to see the Rams
bring another Super Bowl trophy back to the TWA Dome. It is not
going to be as TWA, but the Rams will be back, and I want to
make sure that we have airline service that keeps the jobs,
provides the economic benefits, and provides advantages to the
traveling public.
This is fundamentally different from other transactions you
will be hearing about today which are potential combinations,
mergers, acquisitions between competitive, profitable
companies. There is nothing wrong with a profit motive. There
is nothing wrong with seeking, if it is within the law, to get
a better slice of the market.
This one is an estate sale, and I urge and I beg my
colleagues not to mess this one up. We are asking for prompt
review in the Department of Justice and all other entities so
that when the bankruptcy court acts early in March they will be
able to conclude this sale. We look forward to continuing that
airline service, but it can only go forward if nothing happens
to prevent American Airlines from acquiring TWA's assets.
Thank you very much.
Senator DeWine. Senator, thank you very much for a very
compelling and very good statement.
[The prepared statement of Senator Bond follows:]
Statement of Hon. Christopher S. Bond, a U.S. Senator from the State of
Missouri
Good morning, Mr. Chairman and fellow colleagues. I thank the
Chairman and the subcommittee for holding this hearing, and am pleased
to appear before you to discuss the potential acquisition of Trans
World Airlines or TWA. For years TWA was associated with the big names,
big planes, and great service. It is sad to see those days come to an
end.
History of TWA
Let me start by providing some brief history of one of the most
famous names in aviation and the longest-flying carrier in American
commercial aviation, Trans World Airlines or TWA. for years TWA was
associated with the big names, big planes, and great service. It is sad
to see those days come to an end.
TWA's beginnings go back to 1925 when it was known as Western Air
Express. It quickly evolved into Transcontinental Air Trans World
Airlines or TWA. For years TWA was associated with the big names, big
planes, and great service, It is sad to see those days come to an end.
A year later, in 1930, the federal government decided that airlines
could and should carry more people than mail and the transcontinental
lines emerged with what would become United, American, TWA, and
Eastern. TWA had the central route through St. Louis, Missouri and TWA
has had a major airline presence in St. Louis, Missouri ever since.
Another interesting airline fact, and one that I like, is that St.
Louis is the birthplace of one of today's leading airlines. It is not
TWA, but American Airlines, whose earliest predecessor company--
Robertson Aircraft Corporation--launched its first airmail flight from
St. Louis to Chicago on April 15, 1926.
TWA Has Been a Survivor
Throughout the history of TWA, the airline has had its major ups
and downs. A TWA plane crash in Kirksville, Missouri in 1935 killed
U.S. Senator Bronson Cutting of New Mexico which served as the catalyst
for the creation of the Civil Aeronautics Board. Howard Hughes was
brought in the late thirties to help address the growing financial
needs. By 1940, Hughes owned the company which lasted until 1965. Even
though Hughes increased the name recognition of TWA, throughout his
years of ownership he created a fair amount of difficulties that led to
a financial drain on TWA. TWA was able to weather that storm and storm
often led the airline industry in profits in the 1960s.
In the 1970s, along came deregulation and TWA was not prepared. The
good `ole days of TWA disappeared. The Constant struggle of survival
began.
Mr. Chairman, I have been through the struggles of Twa for many
years now. As a Governor, a lawyer, and here in the United States
Senate, I have answered TWA's calls for assistance, I was involved
during the Which left TWA gasping for breath. I have been through two
previous bankruptcies questioning day to day whether or not TWA would
be in the air. We all listened in horror about the TWA flight 800
crash.
The newspaper headlines over the years give an example of the tense
situation TWA was under.
``TWA Unveils Plan to Halve Its Debt''--December, 1994
``TWA Bailout 10 Times Bigger Than Announced''--March 1995
``For Trans World Airlines, It's Chapter 11 Again''--June,
1995
``Auditors Gloomy on TWA's Prospects''--March, 1997
``TWA Juggles Top Executives After Treading in Read Ink for a
10th Straight Year''--March 1999
Time after time, TWA pulled it through. Time after time, TWA was a
survivor.
Those days are no longer. Unfortunately, despite the heroic efforts
of TWA's employees and current management team, it is now clear that
the airline can no longer survive.
TWA's Importance to Missouri
Mr. Chairman, IF I could have my way, TWA would continue to be a
survivor and once again be on top leading the way for other airlines to
follow. Unfortunately, as is the case to often, I am not getting my
way. The loss of the TWA name in the airline industry is disappointing,
but more specifically, the loss of TWA and its operations to my home
state of Missouri, would be huge.
TWA has approximately 20,000 employees today. Approximately 9,000
of those employees live and work in the St. Louis, Missouri
metropolitan area making TWA and seventh largest employer in the St.
Louis area. At St. Louis Lambert International Airport, TWA operates
almost 1000 flights (departures and arrivals) per day.
In Kansas City, Missouri, TWA offers 10 daily flights to St. Louis.
TWA employees 3,500 people in Kansas City, including 2,500 at the
Kansas City overhaul base.
TWA's headquarters are in St. Louis, Missouri. TWA's support in the
community has been apparent by the financial assistance provided
locally. Having TWA's St. Louis hub has proven to be a tremendous
economic benefit for the St. Louis metropolitan area and the entire
State of Missouri.
American Airlines Acquisition
I am not going to deny it. Almost everyone involved with TWA looks
at the acquisition of TWA by American Airlines as the knight in shining
armor riding in on his white horse rescuing the damsel in distress. For
TWA, for TWA employees, for St. Louis for Kansas City, for the entire
State of Missouri, and for the traveling public--this is the only
option for us.
American Airlines is offering TWA, the TWA employees, Missouri, and
the traveling public a ``global'' solution. American Airlines has an
acquisition plan that will keep TWA flying in the short-term, protect
almost all of the 20,000 jobs, maintains the St. Louis hub, maintains
the Kansas City overhaul base, and maintains a competitive airline
presence in St. Louis into the future. Obviously, this is good news for
us--the State of Missouri simply has too much at stake to lose those
economic engines.
American Airlines, in my view, has presented the best possible
option. In fact, had American not provided immediate financing to TWA
in early January, the carrier would have had to shut down,
precipitating an economic crisis in Missouri. Likewise, air service
from St. Louis to small and mid-sized cities throughout the Midwest
would have been disrupted. Indeed, the loss of the St. Louis hub would
in the long run, I believe, do significant harm to the airline industry
and the hundreds of thousands of air travelers who depend on St. Louis
Lambert as their connecting airport.
American Airlines wants the whole pie, not just a slice. That is
imperative for TWA, TWA employees, Missouri, and the traveling public.
The Final Chapter
Let's be honest. There are some other airlines who are not happy
with this American acquisition of TWA. Almost all of those airlines
have considered at one time or another, the purchase of TWA, including
US Airways, Northwest, Continental, and Delta. They all passed the
opportunity by. At one time, acquiring TWA would have only been a
liability. This is not the case today. Captain Bill Campton and his
team, including the 20,000 employees, have led the turnaround of TWA,
from an airline that nobody wanted to one that they now want to
squabble over.
In the past four years the employees of TWA have built their
airline into an industry-leading operator--going from last in on-time
performance to first, winning numerous customer service awards. In
addition, TWA undertook an ambitious program of fleet renewal leaving
behind one of the newest fleets in the industry.
Unfortunately, despite the sterling success of the operational
turnaround, continuing financial problems have overwhelmed TWA. Let me
be clear. TWA is not crying wolf! Because of the inability to overcome
the financial woes which were further burdened by high fuel costs, TWA
would have ceased operations mid-January. This is where the knight on
the white horse came in.
Antitrust and Competition Implications
Mr. Chairman, I understand and share many of the concerns of my
colleagues with regard to increased consolidation in the airline
industry. The proposed deals between United, US Airways, American, and
DC Air raise significant questions in the regard and should be very
carefully scrutinized. However, I urge my colleagues not to mix those
larger, more complex deals with the American transaction with TWA. To
do so will only cause delay and put thousands of jobs at risk in the
State of Missouri.
One point I should make about the proposed arrangement between
American Airlines and TWA is its effect on competition, or more
particularly the antitrust laws. I confess to having been an antitrust
lawyer in my private life; it was the practice of the law that drove me
into politics. I do recall, however, some of the main principles of
antitrust law, and I am particularly drawn in this situation to the
failing company doctrine. This is not an instance where competition is
going to be decreased by the transaction between American Airlines and
TWA; it is one which will enable the service provided by TWA to
continue. Mr. Chairman, this is a glorified estate sale. It is my view
that this estate-sale of assets of a failing company is absolutely
essential to maintaining airline service, competition, economic
opportunities, and the jobs provided by TWA.
Indeed, the on-going bankruptcy proceeding as well as TWA's
relatively small size (only 3.9 percent market share) make the
American/TWA transaction fundamentally different from the larger deals.
It must be resolved swiftly through the bankruptcy court and cleared by
the Justice Department to ensure the continued, long-term employment of
the thousands of TWA employees in my State of Missouri and those
elsewhere in the country.
I hope and trust that the reviewing authorities will not inhibit
this transaction from going forward, and I would strongly urge my
colleagues not to take any steps that might interfere with this effort
to save the service and the jobs of TWA.
Thank you for the opportunity to be here today. I look forward to
working with you on this and many other issues.
Senator DeWine. Let me at this point turn it over to the
Chairman of the full Judiciary Committee, Senator Hatch.
STATEMENT OF HON. ORRIN HATCH, A U.S. SENATOR FROM THE STATE OF
UTAH
Chairman Hatch. Well, I will be very short. I have other
conflicts, but we welcome all of you here and are very
interested in your comments about these matters.
I am pleased that the Senate Judiciary Committee is holding
these hearings on the present state of airline mergers and
consolidation of the consumer aviation market. I commend the
past and likely future Chairman and the Ranking Member of the
Antitrust Subcommittee for their leadership and efforts in
organizing and holding these hearings.
This is an issue that affects all of us and our
constituents. A robust airline industry helps get us from point
to point across the country and around the world cheaper and
faster. However, recent reports have indicated that
increasingly accessible airline travel creates problems such as
overbooked or delayed flights. Therefore, I think it is
important at every stage of the antitrust inquiry to question
the nature of the total effect of the competitive market on
consumers.
As many scholars have pointed out, including Robert Bork
and Frank Easterbrook, consumer welfare is the touchstone of
proper antitrust inquiry and enforcement. Because airline
travel is an integral part of people's lives, we should be
particularly mindful of the effect mergers and consolidation in
the market could have on consumers.
So I believe that it is wholly appropriate for us as
representatives of consumers to ask probing questions when
mergers of this magnitude are contemplated and when a chain
reaction of other mergers may follow, magnifying consolidation
in the market.
I think it is fair to ask how mergers of this magnitude
impact the parity in the marketplace with respect to other
market participants. Will other carriers feel compelled to seek
out partners in order to compete or even survive? Will such a
domino effect create anticompetitive consolidation? These are
issues that are important for antitrust enforcers to consider
and for us as policymakers to examine.
We should be mindful of the full effect of these actions on
consumers, notably whether this is the first in a series of new
mergers and whether the market will be one of robust
competition that will get airline passengers to their
destinations more quickly, cheaper, and more safely.
We need to ask the questions now, how much real competition
will there be in large hubs after these mergers and how much
real choice in airline service will be available to smaller
cities. As I have said many times before, effective antitrust
enforcement today will prevent the need for stifling
regulations tomorrow.
I believe these hearings are a helpful step in working
toward an equitable marketplace for the aviation industry and
better service to consumers as a whole. Again, I want to thank
Senators DeWine and Kohl for their leadership in examining
these issues within the Judiciary Committee, and I look forward
to reading the testimony today and being on top of what these
leaders in the field have to say about this matter. I have an
open mind and I am certainly interested in what happens in this
hearing today. I really appreciate your leadership in this
hearing.
Senator DeWine. Mr. Chairman, thank you very much.
Senator Reid, it is my understanding you need to open the
Senate at ten. Is that correct?
Senator Reid. I would like to, yes.
Senator DeWine. If the other panel members don't mind, we
will proceed with Senator Reid.
STATEMENT OF HON. HARRY REID, A U.S. SENATOR FROM THE STATE OF
NEVADA
Senator Reid. Thank you very much, Mr. Chairman. I
appreciate very much Senator Hatch's statement, and I
appreciate the work that you have done on this and other
issues, Senator DeWine. I have introduced two pieces of
legislation that deal specifically with the American air
traveller.
I would ask unanimous consent, Mr. Chairman, that my
statement as prepared be made part of the record.
Senator DeWine. Without objection, it will be made part of
the record.
[The prepared statement of Senator Reid follows:]
Statement of Hon. Harry Reid, a U.S. Senator from the State of Nevada
Thank you Chairman DeWine and Ranking Member Kohl for allowing me
to speak today on an issue that is very important to me. As you may
know, I have introduced two pieces of legislation specifically to
protect the American air traveler. I look forward to work with the
committee so that we may give the consumers a choice of an airline and
decent airfares.
I am here today because I deeply concerned with the increase in
airline merger proposals. Many have predicted that if the mergers
continue, we will soon have an industry dominated by three, two and
essentially one carrier.
Since deregulation, more than fifty airlines have been acquired or
merged. For instance, in my own state of Nevada, the Reno-Tahoe
International Airport lost fights when Reno Air was purchased by
another airline. Flights were then reduced significantly and now it is
harder for people to fly in and out of the Reno and Lake Tahoe areas.
If this merger frenzy continues, we could end up with only three
airlines in America. That could drive prices ``sky high'' and cut the
number of available flights, to the detriment of the American consumer.
The purpose of deregulation was to ENCOURAGE competition. Evidence
seems to suggest a reduction in competition.
On January 29th I introduced the ``Airline Competition Preservation
Act ``(S. 199) to address airline consolidation and the ``Air Travelers
Fair Treatment Act' (S. 200) to address the common problems of air
travel such as flight delays, right to exit aircraft, right to in-
flight medical care. We must protect the American air Traveler by
safeguarding an competitive airline industry. We should take our time
and look into these airline deals thoroughly, and determine their long
term impact. We must maintain as much competition as possible in the
airline industry.
Mr. Chairman, my bill will take effect and give the transportation
secretary authority to step in if a consolidation or merger occurs
between two or more of the top seven airline carriers, or if three or
fewer of those air carriers control more than 70% if domestic revenue
passenger miles.
Highlights of my Airline Competition Preservation bill are as
follows:
Protects agains unreasonably high airfares.
Prevents unfair practices against new entrants.
Encourages increased competition at hubs.
We are at a critical juncture for the future of a competitive
airline industry. The inescapable lesson of 22 years of deregulation is
that mergers and a reduction in competition often lead to higher fares
for the American traveling public. We cannot stand idly by and allow
the benefits of deregulation to be derailed by a ware of mergers.
No one wants the federal government to micro manage private
industry. But our airways are not just a private industry--they are a
public trust. People need to be able to fly across our vast nation--to
do business, to see family members, and to enjoy their lives. If these
mergers proceed without the competitive protections I am proposing,
then the ultimate irony of deregulation will be that we will have
traded government concern for the public interest, for private monopoly
control in the interests of the industry.
Senator DeWine. We also have a statement submitted by
Senator Carnahan which will be made part of the record as well.
[The prepared statement of Senator Carnahan follows:]
Statement of Hon. Jean Carnahan, a U.S. Senator from the State of
Missouri
Mr. Chairman, thank you for convening these hearings today.
Like many of you, I have very serious concerns about the
potentially adverse impact that consolidation in the airline industry,
may have on consumers. Reduced competition may lead to fewer travel
options, higher fares and lower levels of service. As such, I think
that the recently proposed mergers warrant careful examination for
potential antitrust implications.
I also believe, however, while we may be initially inclined to view
all of the current airline mergers in the same light, we must recognize
a fundamental difference between the American/TWA transaction and the
other airline mergers that are currently under consideration. The
primary difference with the American/TWA deal is that TWA is a
financially distressed firm and cannot be saved or revived without
intervention like that proposed by American Airlines.
American Airlines' acquisition of TWA ought to be considered
independently of the other proposed mergers. Absent an offer to
purchase substantially all of TWA's assets--as American has proposed--
the airline would be forced to enter into a piecemeal sale of its
assets. Such a scenario would almost certainly result in the loss of
more than 20,000 jobs--over 12,000 of them in Missouri
And let me be clear: to me, this is about saving the jobs of over
12,000 Missourians.
I have met with officials of American Airlines and they have
assured me that their proposal would mean continued employment
opportunities for virtually all of TWA's employees--including those
employed at TWA's Kansas City based maintenance facility. American has
also committed to continuing to provide retirement benefits to
currently retired TWA employees--including travel benefits. Moreover,
American has said that they plan to continue operating a hub in St.
Louis--that hub is critical to maintaining the economic vitality of the
region.
TWA remains in a precarious economic situation, in fact, were it
not for the $200 million of debtor-in-possession financing that
American provided, TWA would not even be operating today. The
potentially adverse impact that the loss of jobs and hub service would
have on the region underscores the immediacy of the situation. IT is
critical that this transaction be dealt with swiftly.
Mr. Chairman, as I have said, American Airlines' proposed
acquisition of TWA is wholly separate and unique from the other mergers
that are pending. The difference lies in the impact on real people.
Many TWA employees are extremely concerned they will lose their jobs if
this deal is ultimately disapproved. I will continue to work to promote
a solution to TWA's financial difficulties that will protect the 20,000
employees and their families. At this time, American's proposal
represents the best way to achieve this goal.
I urge the members of this committee to consider these
circumstances when evaluating. the more general problem of airline
consolidation.
Senator Reid. Mr. Chairman, I am not here to pre-judge what
should happen with American/TWA. I don't know. The situation
has certainly been outlined very well by my colleague who
represents that State. I do want to say, however, that I think
there couldn't be a matter of commerce more important that this
Congress is involved in than what is happening with American
Airlines generally.
We have seen over the last 15 years airline after airline
go out of business. I believe in the free enterprise system, I
believe in competition. But if we carry competition and the
free enterprise system to its end, we wind up with one of
everything, and I think the time has come where this
Subcommittee and this full Committee must look at what is
happening in the airline industry.
We have situations; there are many of them, but take, for
example, what happened recently in Nevada. An acquisition took
place. Promises were made that with the purchase of Reno Air
the routes would be maintained and the schedule would be
maintained. They are gone, and Reno is really suffering as a
result of that.
If this merger frenzy continues, we could end up with
three, two, maybe only one airline. I think we have a
tremendous obligation to the American public to make travel
more pleasant. I am convinced that one of the things that is
happening in commerce generally is deregulation has come to a
point where it is not working very well.
I have worked on a lot of legislation in my years in
Congress. The Chairman of this Committee and I came to Congress
together, but there is nothing that I have worked on that
wherever you go people say do something about it. This
legislation that I have introduced, while it may not be
perfect--and I met with a number of Senators yesterday saying
rather than going off in a number of different directions, let
us work together, let us come up with something that we can
join together on.
I think we have had enough press releases, enough press
conferences. We need some work to be done by this Congress. I
say, Mr. Chairman, that the issue is one where everyone who
travels a lot like we do, you almost become depressed thinking
you have to take another airplane ride. It is not a question
whether something is going to go wrong; it is just a question
of what is going to go wrong. Are you going to be stuck at the
gate after you get on the airplane?
You come and you look up and you see your flight is on
time. You get there and the ticket agents say, well, it is
going to be a little bit late. What is wrong? Well, we can't
tell you. Then you finally get on the airplane and you don't go
anyplace. Then you are so relieved. The plane pulls away from
the gate and then you go out and wait on the tarmac. Then you
land on a connecting flight. Mr. Chairman, I waited more than 3
hours one night after landing in Dallas for a gate. This was
after we flew from Washington to Dallas.
We are at a critical juncture for the future of a
competitive airline industry. An escapable lesson of 22 years
of deregulation is that mergers and a reduction of competition
often lead to higher fares for the American traveling public.
We cannot stand idly by and allow the benefits of deregulation
to be derailed by a wave of mergers.
Again, Mr. Chairman, I say I understand the plight of TWA,
and we all have great admiration for TWA and I hope that
something can work out there. I am not directing my comments to
botch up this deal. No one wants the Federal Government to
micromanage private industry, but our airways are not just a
private industry; they are a public trust. People need to be
able to fly across our vast Nation to do business, see family
members, and enjoy their lives generally.
If these mergers proceed without competitive protections
that I am proposing and others are proposing, then the ultimate
irony of deregulation will be that we will have traded
Government concern for the public interest for private monopoly
control and the interests of the industry.
Thank you very much, Mr. Chairman.
Senator DeWine. Senator Reid, thank you very much.
Senator Reid. Could I be excused? Senator Warner has agreed
to answer all my questions.
Senator DeWine. You certainly can hand your proxy off to
Senator Warner.
Representative Myrick, you have been very patient. Thank
you very much for joining us. We appreciate it, if you would
like to proceed.
STATEMENT OF HON. SUE MYRICK, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF NORTH CAROLINA
Representative Myrick. Well, thank you for this opportunity
to testify today. I do appreciate it.
I have watched closely in recent weeks as the public debate
has focused on the American and TWA merger, and I have listened
to the Senator this morning as he has explained some of the
difficulties that have come from that. Others have spoken of
the white knight role of American as it swoops in late in the
eleventh hour to save a failing TWA, their hub in St. Louis,
the jobs, the 20,000 employees, and serviced over 100
communities. All of this is to be commended.
However, the fact that American wants to acquire the
remaining pieces of TWA through the bankruptcy court does not
turn back the clock on the pain and anguish that has been faced
by the entire TWA family over these years. All who are
associated with TWA have confronted cuts in service and
reductions in employment, a future that was very uncertain from
day to day.
In evaluating the proposed merger of United Airlines and US
Airways, experts have focused on the structural weaknesses of
US Airways. They have pondered whether the future is the same
as TWA and Eastern and Pan Am and Braniff. We know those
stories. You know other mid-sized pre-deregulation airlines
that were confronted by a cost structure and a competitive
environment which eventually, and I must say inevitably drove
them from the competitive playing field.
Today, the Senator made the case on behalf of TWA, and it
would be unacceptable if in the near future the Members of
Congress like myself who represent US Airways communities
throughout the country had to come before you and plead the
same case for our local airlines.
US Airways is vital to our community. It is a huge hub for
us. It is also an airline that faces, in my opinion, a
desperate future without this proposed merger with United. I
think we have got to be sure that we don't lose sight of that
crucial fact in everything we are looking at here today.
TWA's situation is very sad, but it is very illustrative of
what happens to jobs and service and competition. If the US
Airways merger is not approved, we see the same thing. I know
they have gone through a lot of financial uncertainty
throughout Missouri, and the communities and the employees.
They have been in and out of bankruptcy, and we just cannot
allow that to happen to another carrier because there is too
much at stake for the American public.
Make no mistake about it, US Airways is already on the
perilous path that has already been taken by TWA, Eastern, Pan
Am and Braniff before it. As a stand-alone carrier, it has
suffered devastating financial losses, a staggering $269
million this last year. It is trying to cope with unworkable
costs and a limited route network, which is a big problem. It
puts it at a severe disadvantage against low-fare competition.
In my considered judgment, it is not a question just of
financial instability. US Airways is now in serious trouble.
This would be devastating for our constituents, our
communities, the dedicated US Air employees, their families,
their dependents, and the economic well-being of all the
communities that US Airways serves. It is in this context today
in which I hope the Committee will review the United/US Airways
merger.
Some scholars have theorized that the solution to US
Airways' unique and untenable position in the industry is to
restructure its labor contracts by demanding huge wage and
benefit concessions. They have already done that before over
and over again. In other words, again ask the US Airways
employees to sacrifice pay cuts, lose their benefits, shrink
the company's service, just like TWA has done over the past
decade. It doesn't work. For evidence, look at what the years
of self-sacrifice has done for TWA employees and their
families.
I cannot and I will not allow this to happen to US Airways
employees and to the greater Charlotte community, which has
become one of the country's leading economic and banking
centers over these last few years. And that is a direct result
of US Airways' hub and their commitment to provide extensive
service throughout the region.
There is an alternative to job losses, service reductions
and hardship. The merger of US Airways with United provides a
bright future for its employees, the communities it serves, and
the economy of North Carolina. The terms of the agreement will
guarantee not only the 10,500 US Airways jobs in North
Carolina, but those of all of the 45,000 employees. Further,
there will be no communities cut from the service network.
Indeed, service is going to be added, and particularly in
Charlotte we benefit from that.
So you contrast that with the uncertainty and the distress
experienced by TWA employees, their passengers, and the
communities over the last decade as all those cuts took place.
The merger with United will avoid that same painful scenario
for US Airways, its employees and the communities, and it will
guarantee air service and employment for those who have come to
depend on US Airways.
That is the end of my oral remarks, but I hope you will be
kind enough to allow me to submit some further remarks on the
competitive nature of it for the record.
Senator DeWine. We would be more than happy to receive
those and they will made part of the record.
Representative Myrick. Thank you.
Senator DeWine. Thank you very much.
[The prepared statement of Representative Myrick follows:]
Statement of Hon. Sue Myrick, a Representative in Congress from the
State of North Carolina
Good morning. Chairman Hatch, Senator Leahy, and Members of the
Committee, I want to thank you for the opportunity to testify before
this distinguished Committee today regarding the proposed mergers
within the airline industry.
The Judiciary Committee has a long-standing, solid track record of
taking steps to protect and enhance the competitive marketplace. By
holding these hearings, and closely reviewing these agreements, this
Committee is living up to its tradition of protecting the American
consumer and fostering innovation and economic growth.
I have watched closely in recent weeks as the public debate has
focused on the proposed acquisition of TWA by American Airlines. I have
listened intently this morning as members from the Missouri delegation
have spoken of the difficult times faced by the employees of TWA and
the communities served by the company. Many have spoken of the ``white
knight'' role of American as it swoops in, late in the eleventh hour,
to save a failing TWA--their hub in St. Louis, the jobs of its 20,000
employees and service to over a hundred communities. All of this is to
be commended.
However, the fact that American wants to acquire to remaining
pieces of TWA through the bankruptcy court does not turn back the clock
on the pain and anguish that has been faced by the entire TWA family
over recent years. All who are associated with TWA have confronted cuts
in service, reductions in employment and a future that was virtually
uncertain from day to day.
In evaluating the proposed merger of United Airlines and US
Airways, experts have focused on the structural weakness of US Airways.
They have pondered whether its future is the same as TWA, as well as
Eastern, Pan Am and Braniff--other mid-sized, pre-deregulation airlines
which were confronted by a cost structure and competitive environment
which eventually--and inevitably--drove them from the competitive
playing field.
Today, the Missouri delegation made the case on behalf of a
desperate TWA. It would be unacceptable if, in the near future, members
of Congress who represent US Airways' communities and its 45,000
employees needed to return to this Committee to plead this same case
for our local carrier. US Airways is vital to the community I
represent--it is also an airline that in my judgment faces a desperate
future without this proposed merger with United. It would be
unconscionable to lose sight of this crucial fact.
TWA's situation is a sad but illustrative example of what will
happen to jobs, service, and competition if the US Airways' merger is
not approved. TWA's employees, the people of St. Louis and communities
throughout Missouri have faced financial uncertainty for more than a
decade as TWA has been in and out of bankruptcy. We cannot allow this
to happen to another carrier. There is too much at stake!
Make no mistake about it, US Airways in now on the perilous path
already taken by TWA, Eastern, Pan AM and Braniff before it. As a
stand-alone carrier, it has suffered devastating financial losses--a
staggering $269 million last year--and is trying to cope with
unworkable costs and a limited route network that puts it at a severe
disadvantage against low-fare competition. In my considered judgment,
this is not just a question of financial instability. US Airways is now
in serious trouble.
This devastating for my constituents, thousands of dedicated US
Airways employees, their families and dependents, and the economic well
being of the communities they serve. This is the context in which this
Committee must review the United/US Airways merger.
Some scholars have theorized that the solution to US Airways'
unique and untenable position in this industry is to restructure its
labor contracts by demanding huge and benefit concessions. In other
words, ask U.S. Airways' employees to sacrifice pay cuts, lose their
benefits and shrink the company's service--just like TWA has done over
the past decade. This does not work! For evidence, just look what years
of such sacrifices have done the TWA's employees and their families.
I cannot--and will not--allow this to happen to US Airways'
employees and to the greater Charlotte community, which has become one
of the country's leading economic and banking centers as a direct
result of US Airways' commitment to provide extensive air service to
the region.
There is an alternative to job losses, service reductions, and
hardship. US Airways' merger with United provides a bright future for
its employees, the communities it serves, and the economy of North
Carolina. The terms of the agreement will guarantee not only the 10,500
US Airways jobs in North Carolina, but those of all its 45,000
employees. Further, there will be no communities cut from the service
network--indeed, several will be added.
Contrast this with the uncertainly an distress experienced by the
TWA employees and passengers over the past decade as the company cut--
and cut--and cut some more. This merger with United will avoid that
same painful scenario for US Airways, its employees and the communities
it serves. Instead, it will guarantee air service and employment for
those who have come to depend on US Airways.
On a positive not, let me focus on the competitive benefits of this
proposed merger and the real effect this merger will have on the people
most directly affected by it--something few commentators have
addressed. I am convinced that this merger is essential for Charlotte,
essential for the Carolinas and essential for the nation.
For you to fully understand my conclusion, let me begin by
describing in further detail the current role of US Airways in my
community. This company is literally part of the economic and cultural
fabric of the Carolinas. US Airways is the fourth largest private
employer in Charlotte with about 8500 employees. In my state, US
Airways pays annual salaries of over $700 million and has annual
overall expenditures of nearly double that amount.
As you are all aware, US Airways is the most important carrier out
of Charlotte and in the last year alone, the Company has launched its
new service from Charlotte to London, Charlotte to Pairs and Charlotte
to Frankfurt. In addition, US Airways recently opened a new airport
club and invested $12.7 million to expand and crew training facility.
And yet, with all of this wonderful news, there are real and
practical limits to the growth and expansion of US Airways in
Charlotte. US Airways has basically a domestic north-south route
structure with less reach to the Midwest, the Rockies and the west
coast. And, while the efforts by US Airways to expand to Europe through
Charlotte are greatly appreciated, this is about as far as the Company
is in a position to expand for the foreseeable future. And yet, we are
all aware that is this global economy, the demands to remain
competitive go past Europe, to Asia, South America and beyond.
This is one of the reasons that a merger of US Airways with United
has so excited may constituents. Fundamentally, the impending marriage
of US Airways north-south network with United's complementary east-west
routes and its substantial global network, will be a tremendous boon to
the citizens of my state. by connecting Charlotte to a larger national
and international network, the United-US Airways combination will mean
more commerce, more jobs and more economic development. The result:
substantial growth for the entire region.
MR. Chairman, as a result of this merger, US Airways' hubs are
going to have new opportunities to compete as alternatives to other
existing hubs and gateways. Just think about what this means to
competition up and down the east coast. The union of United with US
Airways, as well as the emergence of start up DC Air teaming with
American Airlines dramatically enhances the competitive environment on
the entire east coast where Delta and Continental are already
significant players. Overlay this with the growth and success of low
cost carriers Southwest, Jet Blue and Airtran and it is hard to imagine
a more beneficial picture emerging for consumers.
I'm sure we can all agree that consumers are the beneficiaries of
increased competition in the airline industry. Inasmuch as the proposed
merger between United and US Airways enhances the competitive aviation
marketplace, I am encouraged about the future of the airline industry.
Thank you.
Senator DeWine. Senator Warner, thank you very much for
joining us.
STATEMENT OF HON. JOHN WARNER, A U.S. SENATOR FROM THE STATE OF
VIRGINIA
Senator Warner. Thank you, Mr. Chairman. I listened with
interest to my colleagues talk about their situations. I am
here this morning to assure you, Mr. Chairman, and other
members of this committee, and indeed the Senate as a whole
that I am going to work very diligently, as I have over almost
2 years now, on behalf of the United and US Air merger.
Mr. Chairman, I have been in the Senate 23 years and it is
rare that I get into these antitrust situations. There are so
many diverse parties and the clarity of these issues is not
always right on the surface. But I have spent enough time on
this one, particularly in private consultations jointly with
the two CEOs and singularly with the two CEOs, and with
representatives of communities throughout Virginia,
representatives of the employees of these two airlines, and I
am absolutely convinced that there is really no alternative but
to let this go through. And I am going to diligently watch it
as the role of Congress with regard to this merger to see that
that happens.
Behind me are the chiefs of these organizations,
particularly Chairman Wolf, and I urge the Committee to listen
carefully as he shows you some charts which were the final
convincing bit of evidence to induce me to enter this fray and
to represent these two airlines to see that it is done.
When I say represent the airlines, we have a large
constituency of customers in the area that I represent,
Virginia, and in the District of Columbia that are very
dependent on the services now provided by US Air. I am
concerned about their employees, and these CEOs have given me
certain assurances about the job situation, the price of the
tickets in and out of my State, and the service to some of the
small communities.
So after a lot of careful consideration, Mr. Chairman, I
appear before this Committee today solidly in favor of this
merger. I hope the Committee will call on me if, in the weeks
and months to come, the Committee desires to get into this
further and there is any question. Also, this particular merger
will allow a new airline to evolve, hopefully, named DC Air,
and that has a future to serve this community.
So all factors being considered, I decided to come in here
today and to indicate my strong approval and commit to this
Committee and to all the constituents involved here--the
customers, the employees, the stockholders and others--that I
will work hard to see this is done.
I will submit for the record a more complete statement.
Senator DeWine. That certainly will be made a part of the
record, and we appreciate your very strong testimony, Senator,
very much.
[The prepared statement of Senator Warner follows:]
Statement of Hon. John Warner, a U.S. Senator from the State of
Virginia
Thank you Mr. Chairman and Members of the Committee.
I appreciate the opportunity to testify regarding the pending
merger between US Airways and United Airlines.
As you know, US Airways is based in my state of Virginia. I am very
concerned that absent this merger, the customers now served by US
Airways may lose this fine service and thousands of US Airways jobs
will be lost. I am also enthusiastic about DC Air, a new airline
created by the merger that will serve many of the areas currently
served by US Airways and compete with United Airlines.
In my years, I have seen Pan Am, Eastern, Braniff, TWA and others
all file for bankruptcy. I am concerned that without this merger with
United Airlines, US Airways may suffer the same fate. Last year, I am
told US Airways reported a loss of $269 million.
In today's air travel network, there seems to be less and less room
for mid-size carriers such as US Airways. Mid-sized airlines face
increasingly stiff competition from the larger, better-financed
carriers and from the smaller, low-cost carriers. US Airways does not
have the resources to compete with the large carriers and its fixed
costs are too high to compete with the newer airlines.
Several Virginia communities such as Charlottesville, Roanoke and
Lynchburg have expressed their concern to me about the merger. In
response to these concerns, I have personally met with Steve Wolf,
Chairman of US Airways and Jim Goodwin, Chairman of United. They have
assured me that all Virginia cities currently served by United or US
Airways will continue to be served after the merger.
In addition to guaranteeing continued service on all existing
routes, Mr. Wolf and Mr. Goodwin assured me ticket prices will be
frozen for two years and that all US Airways and United jobs are
guaranteed for at least two years.
Additionally, I have arranged for two meetings between several
concerned Virginia airports and US Airways and United Airlines. My
intent was to provide the airports with an opportunity to raise their
concerns directly with the airlines. It is my sincere hope that these
meetings were productive and I intend to sponsor another round of
meetings if the merger is approved.
While I take the concerns about the merger very seriously, it is my
firm belief this merger will serve Virginia and as best any carrier
can.
I urge members of the committee to consider this merger within the
context of saving jobs and preserving service to the communities
currently served by US Airways.
Thank you Mr. Chairman.
Senator DeWine. Representative Meeks, thank you very much
for joining us. You may proceed.
STATEMENT OF HON. GREGORY W. MEEKS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Representative Meeks. Thank you, Mr. Chairman, for the
opportunity to testify today. I am here because of the
tremendous impact aviation has on my district's current and
future economic welfare, as well as the significant role
aviation has in our country's economic and national security
infrastructure.
For the record, I understand and share some of the concerns
expressed regarding consolidation in the airline industry.
Since I was elected to Congress 3 years ago, I have fought
vigorously for service to smaller communities and increased
competition. Despite much opposition from local elected
officials in New York City, as well as civic organizations in
my district, I and Senator Chuck Schumer successfully brokered
a compromise in the historic AIR 21 legislation that increased
service opportunities to upstate New York and other underserved
destinations around the country from both of New York's
airports.
Furthermore, I worked tirelessly with former Secretary of
Transportation Rodney Slater and Senator Schumer to get JetBlue
Airlines the regulatory approval to operate out of John F.
Kennedy International Airport which lies in the center of my
Congressional district.
However, the announced agreements between United Airlines
and US Airways, as well as American Airlines' acquisition of
TWA's assets, have my strong support because I believe that
both deals will increase domestic competition, continue air
service to communities that now have service, and protect the
jobs and retiree health and pension benefits of thousands of
current and former employees.
I judge each deal on a case-by-case basis, weighing the
merits and public interest benefits. In the United/US Air and
American/TWA proposals, consumers, employees, creditors and
other stakeholders will benefit from not having two financially
distressed airlines, such as US Airways and TWA, go out of
business like their former counterparts Pan Am, Eastern and
Braniff.
It is important for you to recognize the economic impact of
having an airline go out of business. My district still suffers
from the devastating economic losses of Eastern Airlines and
Pan American Airways. In both cases, the court allowed the
airline's assets to be liquidated to the highest bidder. It
resulted in the two airlines' competitors acquiring Eastern and
Pan Am's most prize routes only.
However, it also resulted in thousands of permanent
displaced workers who in many cases were employed by one of the
carriers for more than 30 years. This action by the bankruptcy
court left those American workers without a job and no benefits
after a lifetime of service and dedication to Eastern or Pan
Am.
Despite the claims by opponents that are being made against
the two announced consolidation proposals, if you look back
closely to the Eastern and Pan Am cases, you will see a
contradiction to the argument being made against the United/US
Airways and American/TWA deals.
Eastern and Pan Am's competitors achieved greater market
concentration with their newly acquired assets from two
liquidated, defunct airlines. Mr. Chairman, I ask how did this
increase competition? It did not. As I stated earlier, it only
resulted in the employees and retirees of Eastern and Pan Am
being hurt the most. We must not repeat that mistake again.
Let me be very clear. The proposed agreements between
United/US Airways and American/TWA are in the public interest.
As a result, a New York Times editorial said travelers in the
Northeast will probably see more competition as a result of
these agreements. I agree.
For example, these deals will bring a strong third
competitor into the lucrative Boston-New York-D.C. shuttle
market. Meanwhile, the nationwide competitive impact will be
enhanced greatly. For example, United's Charlotte hub will
compete more vigorously with Delta's Atlanta hub, United's
Philadelphia hub will compete more vigorously with
Continental's Newark hub, and American's St. Louis hub will
compete more vigorously with Northwest's Minneapolis hub.
Furthermore, the DC Air/American deal will also ensure
strong competition between United and DC Air in the Washington,
D.C. region. DC Air's agreement with American Airlines also
ensures the initial success of DC Air as an independent entity
with a lower cost structure, which can be translated into lower
fares for consumers which will be served on the 45 routes by DC
Air.
The DC Air/American Airlines partnership enables DC Air to
move from a virtual airline, which it must remain until the
United-US Airways merger is approved, to a fully operational
airline serving some 45 communities from Washington National
Airport overnight. It ensures that the commitment which DC Air
has made to uninterrupted service to these communities will be
kept.
On a personal note, I am honored to support this endeavor
by Bob Johnson. Bob has made significant contributions to the
African-American community and our country. I enthusiastically
welcome his entry into the aviation industry for three reasons.
First, as a businessman Bob has successfully demonstrated
time and again that he can effectively and efficiently manage
an organization from the ground up. Second, Bob Johnson is a
man of the highest character and integrity. He will be a
welcome addition to an industry that once upon a time not too
long ago was represented by two individuals who I believe had
the lowest of character and no integrity, two individuals who
intentionally bankrupted successful companies for their own
personal gain. Third, and finally, he will be the first
minority owner of an airline in over 30 years.
Mr. Chairman, let me conclude by again thanking you for the
opportunity to testify. I hope that this distinguished
Committee sees the many public interest benefits of the United/
US Airways, American/TWA, as well as DC Air transactions.
Fostering an environment that allows low-cost carriers such as
Southwest, JetBlue, DC Air and others to grow alongside the
global network, full-service airlines is the best means to
encourage competition and affordable air travel.
Thank you, Mr. Chairman.
Senator DeWine. Congressman, thank you very much.
Let me just say to all of our panel members I thought the
statements were excellent. Each one of you brought a very
interesting and valid perspective to our hearing. It has been a
real contribution.
Senator Bond, let me just say that, as you and I have
personally discussed before, you make a very compelling
argument about the problem in regard to TWA. I think that those
of us who do have some concerns about the big picture here and
what is going on fully realize the unique TWA problem, and that
our problem with these different proposals really does not have
directly to do with TWA. We know that that has to be dealt with
and we look forward to working with you to resolve that. We
have a lot of jobs at stake and we understand that, and we
appreciate your very compelling testimony.
Senator Bond. Mr. Chairman, thank you very much for your
understanding. If other members of this Committee or other
members of this body wish to discuss it, I will be happy to
discuss it either here or later and I am at your service. If
there are questions, it would be my honor to be able to provide
answers and such persuasion as I might muster.
Senator DeWine. Well, you have done a good job in both
cases.
Senator Bond. Thank you, sir.
Senator DeWine. We appreciate that very much.
We thank the panel very much.
Representative Myrick. Thank you.
Senator DeWine. Thank you.
I will have a statement that I am going to make right now,
and then I will turn to Senator Kohl and Senator Schumer.
We are holding this hearing today to examine the
competitive impact of the announced mergers involving United
Airlines, US Airways, DC Air, American Airlines, and TWA. Since
the United/US Airways merger was announced in late May of last
year, the Antitrust Subcommittee of the Judiciary Committee has
been actively examining all implications of that proposed deal.
We held a hearing last June, and at that time many of us noted
that the most troubling aspect of the merger was the likelihood
that it would lead to further consolidation. Sure enough, here
we are again today.
I am troubled about this. I am troubled because it seems
that our worst fears are being realized, that we are headed in
a direction that could cripple competition in the domestic
aviation market. Just look at what has happened since our
hearing last June.
American Airlines has joined in the United/US Airways deal
apparently because it believes it will not be able to compete
effectively with the new United Airlines unless it also grows
in size. Not surprisingly, the other major airlines also are
considering their options for growth.
The significance of this rapid consolidation cannot be
overstated. The proposed mergers will dramatically restructure
the domestic aviation market, likely leaving us with three or
four giant mega-carriers. Each of these carriers, these mega-
carriers so to speak, will have extensive national networks
that would make it very difficult for regional and for startup
carriers to ever compete.
As we have learned through experience, when airlines are
able to dominate a hub city, for example, they are likely to
raise prices in that particular market. And so it would seem
that it is very likely that if several airlines are also able
to dominate large sections of the aviation market nationwide,
consumers across the Nation will have to pay higher ticket
prices.
The resulting mega-carriers would compete with regard to
scheduling and frequent flyer benefits certainly, but price
competition likely would suffer as a result. Those smaller
carriers that remain and that are able to stay in business
likely would be relegated to a role of serving regional markets
with little chance of growth. In circumstances such as this, I
believe that competition in the aviation market would clearly
be at risk.
Additionally, I believe that adverse consequences await
U.S. travelers if we are forced to rely on only a few, a
handful of mega-carriers for the bulk of our air transportation
needs. We already have seen the serious congestion and
frustrating delays that passengers face when one of the major
airlines has labor difficulties. I shudder to think of the
impact on the flying public if a merged United/US Airways would
face a work stoppage.
These disturbing facts are certainly not going unnoticed.
Last week, Senator McCain chaired a hearing in the Commerce
Committee to examine this issue. He and others on the Commerce
Committee expressed serious concerns about these deals. Also,
last week Senator Kohl and I, along with six of our colleagues
from the Judiciary Committee, sent a letter to the Justice
Department expressing our concerns and asking for a thorough
review of the competitive impact on the aviation industry of
consolidation on competition and consumers.
Yesterday, I met personally with Secretary of
Transportation Mineta to express my concerns, and I asked that
the Transportation Department carefully scrutinize these
transactions to determine whether or not they are in the public
interest.
Now, let me make it clear, as I did a moment ago to Senator
Bond, that my primary concern lies with the larger proposed
deals, those involving United, US Airways, and American. While
it is certainly important for the Justice Department to examine
the specifics of the agreement between American Airlines and
TWA in the context of these larger deals, I believe that review
must be done in an expedited manner.
There is little dispute that TWA has been struggling for a
long time. In fact, the airline has not been profitable since
1988 and has just entered bankruptcy for the third time. Most
people would agree that TWA is not viable in its present form.
Moreover, we are all concerned about the preservation of
20,000 TWA jobs and continuing service to the many communities
that TWA currently serves. For that reason, we believe that
review of this deal should be completed, whatever the result,
as quickly as possible.
The larger deal among United, US Airways and American will
require much more scrutiny, and we will continue that process
today. We are glad to have with us each of the airlines
involved in the proposed mergers, as well as representatives of
a number of other airlines and experts on airline competition.
My hope is that we can gain a better understanding of the
proposals and their competitive impact. However, based on what
we have learned so far, it does not appear that these deals are
good for the domestic aviation market, nor for the American
flying public.
Instead, it at least appears that the results of this
consolidation will be to improve the fortunes of one or two
giant airlines at the expense of the American consumer. That,
in my opinion, would be simply unacceptable. I do think,
however, that we have more to learn about these deals. That is
why we are having this hearing today, and I look forward to
further examining these issues.
On a final note, I want to stress that these are important
issues which have tremendous competitive implications and are,
of course, very important to the individual businesses
represented here today. We are fully cognizant of that fact--
the impact on businesses, the impact on the stockholders, and
the impact on the employees.
As we work our way through this process, it is important
that we as policymakers continue to discuss these issues with
those in the industry who struggle with these problems every
single day. I would like to thank in advance those in the
aviation community who have taken time from their busy
schedules to be here with us today. You have all been very
forthright and willing to work with us as we examine these
issues and we certainly very much appreciate it, and we look
forward to hearing your testimony.
I am going to turn now to Senator Leahy, the Ranking Member
of the committee, and then after Senator Leahy we will turn to
Senator Kohl, the Ranking Member of the subcommittee.
Senator Leahy, good morning.
Senator Leahy. Mr. Chairman, I would yield first to Senator
Kohl. This is the Subcommittee that is going to have the most
work on this.
Senator DeWine. Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you very much, Mr. Chairman and Senator
Leahy.
Mr. Chairman, we thank you today for holding this hearing.
This is indeed a crucial time for us to consider airline
consolidation because we could be witnessing the beginning of
the end of airline competition.
If all the proposed mergers and acquisitions go through as
announced, real competition among airlines could be virtually
eliminated in many markets, and American consumers will pay. So
we should say it: these proposed mergers are dangerous to
American consumers. If we do not intervene to protect
competition now, in a few years two or three large airlines
could dominate the skies all across America.
With all the mergers and acquisitions among the airlines
announced in the last few months, we may be seeing the
competitive situation in the airline industry, already far from
ideal, take a sharp nose dive. The result of all these deals,
if they are approved, will be a radically concentrated domestic
airline industry.
Two airlines, United and American, will collectively
control about 50 percent of the domestic market, with their
closest competitor, Delta, behind with about 18 percent of the
market. Yet, in the last few days the press has reported that
Delta and Continental are now in serious merger discussions.
So this massive restructuring and consolidation among
competitors whose size and scope has rarely been seen in modern
times in any industry leads us to worry about the future of
competition in the airline industry, or if indeed there will be
any meaningful competition left at all.
Today's hearing will closely examine these issues, but we
need to do more. We need to consider legislation to help ensure
that airline competition does not become a distant memory and
to loosen the grip that large airlines have on essential
facilities and airports.
We do not criticize any airline for doing all that it can
to make it the strongest and the best airline in its markets.
Indeed, all of the CEOs who will testify before us today have a
responsibility to their shareholders to do just this. But we
here in the Congress have a very different and perhaps more
important responsibility, for our responsibility is to the
public to protect consumers and to ensure that no airline or
small group of airlines gains a stranglehold over the market.
We need to be sure that the announcement that we have all
heard flight attendants say at the end of a flight, quote, ``We
know that you have a choice among airlines,'' does not become
as obsolete as airlines like Braniff, Pan Am, Eastern,
Republic, Piedmont, People Express, and now TWA and US Airways.
So we thank all of our witnesses for appearing here today.
We look forward to your testimony on these very important
issues.
Thank you, Mr. Chairman.
Senator DeWine. Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman, and I compliment
you and Senator Kohl and Senator Hatch and others for having
these hearings.
I worry that the airline industry is going in the wrong
direction. I see many of the leaders whom I respect greatly
here in the audience, but I look at it from the point of view
as one who travels a great deal, perhaps more than I would
like. And I worry that the region that is going to suffer the
most is along the East Coast, States which I would remind
everybody--each of those States have two Senators, including
even the smallest State in the Northeast, Vermont, a lovely
State.
I worry that control of landing and takeoff slots and the
control of gates by just two major airlines, United and
American, could become a stranglehold on competition on the
East Coast.
I updated a chart which I used during our June hearing.
Now, as you can see, the cost of a round-trip ticket--
incidentally, I realize you can always get tickets for less. I
am talking about yesterday we called a travel agency and asked
for a 1-week fare. Washington to Burlington, Vermont, is $772.
Washington to London, a lovely city, I understand--many speak
English there and everything else--is $338. Washington to San
Francisco is $408.
Now, I like London, I like San Francisco. I live in
Burlington. I am going to be going to Burlington a lot more
often than I am going to be going to London or San Francisco. I
still have a hard time understanding why it costs twice as much
to go 500 miles to Burlington than it would cost to go to
London or San Francisco.
If the airline mergers that are on the table are approved,
two major carriers will control more than half the air traffic
in the U.S., and I think that they will charge what the traffic
will bear using monopoly slots. Landing slots, like the
spectrum which carriers television shows and wireless phone
calls, have become a priceless commodity, even though they are
nothing more than the use of space for a period of time. But as
Benjamin Franklin said in 1748, time is money.
From a more national perspective, these mergers will put us
one merger away from an oligopoly of three major carriers, and
higher air fares and reduced competition will follow unless
there is significant divestiture of slots and gates and other
assets.
The industry is going to be one work stoppage away from
closing down one-quarter to one-third of America's air system.
This prospect has become even more frightening when you read
the papers the last couple of days and see the potential labor
strikes at four major airlines--Delta, American, Northwest, and
United.
The American purchase of bankrupt TWA does not present
serious competition issues. That was going bankrupt. It
protects 20,000 jobs. I know Senator Carnahan and others have
worked hard on that. But the United merger with US Air and the
slots which American will receive, coupled with the next
defensive merger which could be either Delta with Continental,
or Delta, I guess, Senator Schumer, with Northwest--that means
over 75 percent of airline service is from only three large
airlines with large hubs, lots of slots and gates, alliances
with overseas carriers, and frequent flyer deals galore.
Now, when Vermonters write to me about air service, they
don't talk about networks or connections. They tell me the
prices are too high, service is poor, and they don't have
enough choices. It comes down to price, and it is so difficult
for somebody to say I can go 5,000 miles or I can go 500 miles,
but the 500 miles is going to cost me a lot more.
I don't see how this situation is going to improve in
Vermont or a whole lot of other cities, especially along the
East Coast. It is already an uphill battle for low-cost
carriers to break into new markets. I think we need more slots
for airlines like JetBlue and Southwest and AirTran and other
low-cost carriers. If you don't do that, you are not going to
have real competition.
When we get through this merger, I think it is going to be
impossible for any competitive low-cost carrier to break in
unless we have some real conditions, Mr. Chairman. I don't have
a magic wand to tell us exactly how to do it, but I know that
if you are in rural America, and that can be Ohio, Wisconsin,
New York or Vermont, you may find yourself with a real problem.
If you are in one of the very, very large hubs where there is
competition, then it is a different situation.
Thank you.
[The prepared statement of Senator Leahy follows:]
Statement of Hon. Patrick J. Leahy, a U.S. Senator from the State of
Vermont
Mr. Chairman, the airline industry is going in the wrong direction.
The region likely to suffer first, and the most, is th East Coast,
which includes a lot of states with two Senators each, including a
wonderful state called Vermont.
As I have pointed out in the past, control of landing and takeoff
slots and control of gates by just two major airlines--United and
American--can become a stranglehold on competition on the East Coast.
I updated a chart which I used during our June hearing. Now, the
situation has just gotten worse.
As you can see, the cost of a roundtrip ticket to Burlington,
Vermont, is $722--whereas similar advance-purchase roundtrip tickets to
London are $338, and a trip to San Francisco costs $408.
If the airline mergers on the table are approved, two major
carriers will control more than half the air traffic in the U.S. and
will offer ticket prices based on what the market can bear--using
monopoly slots, rather than providing low-cost service.
Landing slots, like the spectrum which carriers television shows
and wireless phone calls, have become a priceless commodity even though
both are nothing more than the use of space, for a period of time.
From a more national perspective, these mergers will put us one
merger away from a oligopoly of three major carriers.
Higher airfares and reduced competition will follow unless
significant divestitures of slots, gates and other assets are mandated.
The industry will also be one work stoppage away from closing down
one-fourth to one-third of America's air system. This prospect has
become even more frigthening with potential labor strikes at four major
airlines (Delta, American, Northwest, United).
The American purchase of bankrupt TWA does not present serious
competition issues, by itself, and is needed to protect 20,000 jobs. I
know that Senator Carnahan has worked diligently to help keep these
current TWA jobs in Missouri.
However, the United merger with U.S. Air and the slots which
American will receive, coupled with the next ``defensive'' merger--
Delta with either Continental or Northwest--down the pike, will mean
that over 75 percent of airline service is from only three large
airlines with large hubs, lots of slots and gates, alliances with
overseas carriers and frequent flyer deals galore.
Proponents of the mergers say that consumers will benefit from
wider networks and seamless connections. But when Vermonters call or
write me about air service, they don't talk about networks or
connections, they tell me that prices are too high, service is poor,
and that they do not have enough choices.
With the proposed merger, I don't see how this situation will
improve in Vermont or in hundreds of other cities across the country.
In fact, I'm afraid it can only get worse--and the worst of it will be
on the East Coast.
In many cases, it's already an uphill battle for low-cost carriers
to break into new markets. We need to get more slots to JetBlue,
Southwest and AirTran, and other low-cost carriers, to increase real
competition.
After this round of mergers, it might be like trying to scale Mt.
Everest for a new carrier to break into the market.
This is especially true in rural America.
Mr. Chairman, if the United merger is approved without conditions
it will upset the delicate balance that has allowed more Americans to
fly at a lower cost. If we don't tread carefully re-regulation will be
around the corner with all its inefficiencies.
[GRAPHIC] [TIFF OMITTED] T6913.001
Senator DeWine. Senator Schumer.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Thank you, Mr. Chairman, and I want to
thank you and Senator Kohl for holding this hearing in such a
timely way on the proposed mergers by United, US Air, DC Air,
American, and TWA.
I also want to wish Senator Kohl a happy birthday. I am
sure everyone here joins us in wishing him just that.
I just want to say that these far-reaching proposals are
going to have a dramatic effect on consumers, especially in my
State, New York State, where upstate New York has been treated
extremely poorly by airline service, not only costing consumers
more but costing us jobs. When you interview corporate
executives about why they don't move to upstate New York,
infrequent, high-cost service is one of the top two or three
issues that they mention. So I will make a number of points in
that context.
First, I would like to say that I support American's
acquisition of TWA and agree with my colleagues from Missouri,
with Senator Leahy, and with others that the TWA deal should
move forward as a stand-alone proposal. The deal would, of
course, save jobs, 20,000, and over 4,000 in New York State,
and preserve the carrier's route network and St. Louis hub. The
jobs, health benefits, and retirement security of thousands of
TWA employees are at stake, and DOJ and the bankruptcy court
must move quickly. This acquisition would not lower
competition. It would actually increase it because if there is
no acquisition, TWA is gone. So this is not a question of
eliminating competition; this is a question of creating
competition.
Having said that, I am troubled by the other mergers before
us, greatly troubled. First, the huge mega-merger between
United and US Air, and then the division of some of the spoils
of that merger with American, create real problems for
competition. If we were to emerge, as most experts think we do,
with three major airlines, competition suffers.
When we deregulated airline competition over 20 years ago,
we thought it would increase competition. How in God's good
name can having only three major airlines increase competition?
I have talked to Alfred Kahn, who couldn't be here today--I
know he was invited--the architect of deregulation. He is
appalled at this situation, and would be willing to say so to
the committee. He believes that what he and others structured
has gone awry, and our flying constituents see that everyday.
For that reason, I am sending a letter today to DOJ asking
for a moratorium on consideration of all these future mergers
now. Let the Department of Justice study the situation for 9
months, figure out where we are going, and not be dragged willy
nilly, piecemeal, merger by merger, and end up with a situation
that nobody wants and everybody feels will foster less, not
more, competition.
DOJ, the Antitrust Division, has a real challenge here
before it. If they are simply to approve each merger on an ad
hoc basis, they will end up undercutting antitrust law, as I
read it. A moratorium to study the situation, to study how we
can foster new competition particularly with low-cost carriers,
to look at the issues of predatory pricing--in my State, Mr.
Chairman, we have experienced, when a new, startup airline
comes in, the big boys lower the price, put that new airline
out of business, and then raise the price back up. All that has
to be studied before the United, American, US Air and DC Air
mergers are approved.
Finally, and my No. 1 concern, is the issue of upstate New
York. As I mentioned, we have been struggling with poor air
service, and only recently with the advent of Southwest and
JetBlue have prices begun to come down. They did come down when
United, American, US Air and Delta provided most of the
service. They got higher and higher, so that Buffalo, Rochester
and Syracuse were in the top 20 in terms of price.
The chart that my good colleague Senator Leahy showed in
terms of Burlington could be repeated for Albany, Syracuse,
Rochester and Buffalo. But all of a sudden, when competition
came in, the prices have gone down, when low-cost air carriers
came in.
And in that regard, of particular troublesome nature to me
is the creation of DC Air and then its purchase of 49 percent
of its shares by American. American is a nice, good company,
but they sure haven't done much for upstate New York. The 222
slots which are being given to DC Air at what most experts
believe is a reduced price are a public good.
There is nothing in the merger proposal that would say that
that reduced price should have the benefits passed on to the
flying public. In fact, given the recent structuring of the
deal and removal of a no-flip clause that required the
forfeiture of any profits from the sale of DC Air within the
first 3 years, I feel that DC Air will all too quickly be
subsumed by American, leaving the U.S. market dominated by just
three or four major carriers, leaving upstate New York, which
has finally begun to see progress, in the same poor position.
So, Mr. Chairman, these mergers are vital to the people I
represent. They are vital to all consumers of New York because
costs are important. They are vital, as well, to upstate New
York, whose economic viability depends on getting better air
service.
I thank you, Mr. Chairman.
Senator DeWine. Thank you very much.
We have a statement from Senator Feingold which we will
make a part of the record at this point.
[The prepared statement of Senator Feingold follows:]
Statement of Hon. Russ Feingold, a U.S. Senator from the State of
Wisconsin
Mr. chairman, thank you for holding this hearing. I share the
concerns, voiced by some of my colleagues, about the trend toward
consolidation in the airline industry. We feared that the proposed
merger between United and US Airways announced last year would spur
additional mergers. That fear was realized when, in January, American
announced plans to acquire TWA and work with United to acquire a piece
of US Airways. United and American are currently two of the so-called
``Big Three'' in the airline industry. But if these mergers are
approved, United and American will become the ``Big Two'' of the
airline industry: together they will have a nearly 50% share of the
domestic market. This raises real concerns about competition and
consumer choice. I joined in the letter sent by Senators DeWine and
Kohl and others on this Committee on February 1st to the
Justice Department urging a full and thorough review of the
implications of the merger transactions among United, US Airways and
American on Competition and Consumers.
Now, it appears that the concerns we raised in that letter are even
more troubling. Just this week, we learned that Delta and Continental
are reportedly in merger talks. Delta is the third of the ``Big
Three.'' If Delta, in fact, enters a merger agreement with Continental,
the ``Big Three''--United, American and Delta--would be poised to claim
an even greater share of the domestic airline market, thereby
threatening competition and consumer choice.
I appreciate the need for efficiency and the airline companies'
desires to reduce costs and increase profits. I also understand that
there is a potential upside of a United/US Airways merger for some
Americans who could benefit by ``seamless,'' one carrier travel, as
United would gain access to some east coast markets that it previously
serviced on only a limited basis or not at all. But I believe the
federal government has an important role in ensuring that increased
efficiency and profits do not come at the cost of lack of consumer
choice or poor service.
Airline consolidation, particularly when service is concentrated
among only 2 or 3 major airlines, means fewer choices for consumers. If
the mergers proposed by United and American are approved and completed,
some markets may be served by only two carriers or even one carrier.
This is devastating to consumers. Reduced competition means increased
fares. This is especially a problem for small city and rural markets--
markets in places like my home state, Wisconsin.
Take, for example, the Dane County airport in Madison, Wisconsin.
Currently, there are eight commercial passenger airlines providing
service to that airport. There are an average of 104 daily departures
and arrivals fairly evenly spread among those eight airlines. But if
the proposed acquisition of US Airways by United and American is
completed, as well as the acquisition of TWA by American, there will be
a concentration of departures and arrivals by the new United and the
new American. Over half the 104 average daily departures and arrivals
will be under the control of the BIG TWO airlines. Smaller airlines
that already struggle to compete are likely to find it even more
difficult to compete with the Big Two. Even Midwest Express, a
successful regional airline, may find it difficult to compete with only
about 9 average daily departures and arrivals. Mr. Chairman, our
economy--both consumers and businesses--has thrived when there is
healthy competition. And I believe the airline industry is no
different. How can United US Airways and American assure this Committee
and the American people that Americans will continue to have choice and
competitive fares?
Finally, I also would like to hear about how a proposed merger
would affect employees. Our nation has already seen a spate of lay-offs
in recent months. I fear that the proposed mergers would result in even
more hard-working Americans losing their jobs.
I think the Justice Department should consider the many issues that
have been raised and will be raised at this hearing. I look forward to
hearing about how United, US Airways and American propose to quell the
very real fears of lack of competition, increased fares and continued
poor service and delays.
Mr. Chairman, I commend you again for holding his hearing and I
look forward to hearing from the witnesses. Thank you.
Senator DeWine. Let me invite our first panel to come up,
and as you come up I will begin to introduce the members.
Gordon Bethune is Chairman and Chief Executive Officer of
Continental Airlines. He has held major management positions in
several airlines and is also a licensed pilot and mechanic. We
welcome him back to the committee.
Leo Mullin is Chairman and Chief Executive Officer of Delta
Air Lines. Prior to joining the airline in 1997, Mr. Mullin
served as Vice Chairman for Unicom and served 15 years with
First Chicago, culminating in his appointment as President and
Chief Operating Officer of the bank. We also welcome him back
to our committee.
William Franke is the President and Chief Executive Officer
of America West Airlines, and also serves as Chairman of the
Board for the airline's parent company, America West Holdings.
His career also includes service in U.S. Army Intelligence.
Joe Leonard is Chairman and Chief Executive Officer of
AirTran. He joined them in 1999. His experience in the airline
industry includes executive positions with Allied Signal,
Boeing, Northwest Airlines, and American Airlines.
Professor Michael Levine is Adjunct Professor of Law at
Harvard. His research interests lie in regulation and
deregulation, with a specific focus on the airline industry. He
has published numerous pieces regarding airline competition.
Mr. Bethune, we will start with you and then we will just
proceed right down the panel. Each one of you has submitted a
written statement which will be made a part of the record. We
would ask you to proceed as you wish. We will go through the
whole panel and then we will open it up for questions.
Mr. Bethune?
STATEMENT OF GORDON BETHUNE, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CONTINENTAL AIRLINES, HOUSTON, TEXAS
Mr. Bethune. Good morning, Mr. Chairman and members of the
subcommittee. I am Gordon Bethune, Chairman and Chief Executive
Officer of Continental Airlines. It is certainly a pleasure to
be here representing the 54,300 employees of Continental. Four
thousand, I might add, work at our Cleveland, Ohio, hub and are
honored to be represented by the distinguished Chairman of this
subcommittee, Senator DeWine.
Let me start with a short version of my written testimony,
if I may.
The proposed mega-merger of United, American, US Airways
and TWA, if implemented, will create a cartel that will control
the U.S. domestic market and marginalize smaller carriers like
Continental. Unchecked by competitors anywhere near the same
size, these 800-pound gorillas will be a certain disaster for
consumers and communities.
In the short run, the poor customer service which is
characteristic of the current operations of these carriers
seeking to merge will look glorious compared to the inevitable
service disruptions and even worse customer service that will
prevail ion a post-merger environment.
Nearly 50 percent of U.S. air travel consumers suffer while
the new cartel attempts to integrate the operations and the
employees of four separate airlines. Continental, I might add,
stands to gain in the short term because we will offer a
welcome alternative to the surly and unreliable service offered
by these mega-carriers.
But we are not big enough and can't grow fast enough to
offer a truly competitive alternative in the long run.
Therefore, if these mergers go forward, as I fear they will,
further consolidation will be inevitable and necessary if we
are to preserve competition. So, Mr. Chairman, I believe the
right answer to these merger proposals is just say no.
I know the Department of Justice has the responsibility and
capability to stop these mergers, and the Justice Department
was just recently successful in opposing a much smaller airline
acquisition, Northwest's purchase of 51 percent of the voting
stock of my company. Federal approval of these mergers would be
directly at odds with the Department's position in the
Northwest/Continental case. In fact, it would be absurd, given
the much larger size and scope of United and American's
acquisitions.
Everyone should understand that if the mergers are
permitted to occur, the rest of the industry will be forced to
consolidate. Let's look at what is being proposed here.
American and United have proposed to build a cartel that will
divide and conquer the United States aviation market. United
and American actually have an agreement between them to
stabilize the relative shares of the two largest airlines in
the world. I am not making this up; it is publicly filed
information. GAO testified that they had never seen such an
extraordinary agreement. I have attached a copy of this
agreement to my written testimony.
Today, there is a competition equilibrium among the major
airlines in the United States. Most significant viewers of the
airline industry, whether they be academic or government, have
concluded that the major network carriers provide effective
competition. Concentration levels in the airline industry since
deregulation have remained relatively low, and while each major
airline has strengths in specific areas of the country, none is
overly dominant.
Today, we have the big three, who are roughly the same size
and who really actually balance competition. The big three are
considerably larger than the next group of airlines, but they
provide an equilibrium for each other. The four medium-sized
carriers, of which Continental is one, can remain competitive
on a national basis because their scale disadvantage is not so
large that they cannot at least partially overcome it by
offering superior service or lower prices as compared to the
big three. There are also three smaller national carriers that
have added competition by way of their own regional focus.
Finally, there are a number of new entrants and low-cost
carriers that also compete in a limited number of individual
markets.
Against the backdrop of a competitive environment that is
basically at equilibrium, United and American have proposed to
divide and conquer the entire U.S. market. The immediate result
will be two giant carriers that control nearly 50 percent of
the U.S. airline market. The mega-carriers will each have twice
as many hubs as Delta, Northwest, or Continental.
They will be 50 percent larger in terms of capacity,
traffic and revenue than the next largest non-merged carrier,
Delta, and three times as large as ourselves, Continental. They
will dominate America's Northeast and Western regions, as was
said earlier, which accounts for most of the revenue and most
of the business traffic. They will have frequent flyer loyalty
programs two or three times as large as their nearest
competitor. Post-mergers, their distribution and marketing
systems will smother other airlines.
Let me give you an example close to home. If this deal is
approved, almost 80 percent of all the slots at the four
federally controlled, slot-controlled airports will be
controlled by the duopoly of American and United. At Washington
Reagan and at New York's LaGuardia, where slot controls are
likely to remain indefinitely, the two mega-carriers will have
control of over 65 percent of the slots. By comparison,
Continental operates with less than 5 percent of the slots at
Washington Reagan or at New York's LaGuardia Airport.
Should these proposals be approved, United and American
will each be of such vast scale and scope that other U.S.
airlines will be unable to offer effective competition to them.
Significant harm to consumers, communities and employees is
inevitable.
Other airlines will be forced to combine, be carved up, or
be put out of business by the onslaught brought upon by the
United and American cartel. Communities will be adversely
affected by the loss of competition, and the process of getting
to that dismal future won't be pretty. If you thought last
summer was bad, buckle up your seatbelt because with these
pending mega-mergers, you haven't seen anything yet.
These mega-mergers are bad for customers, they are bad for
communities, and they are bad for their employees. In recent
years, American has been through pilot and flight attendant
slow-downs. Just last summer, United endured a work slow-down
which created one of the worst operational and customer service
problems this industry has ever known.
For the year 2000, United ranked last in the Department of
Transportation on-time performance statistics. Their future
partner, US Airways, ranked seventh out of the ten major
airlines. You put these two together and they will rank 17th.
Their performance at this dismal level is without being in the
midst of merging these two enormous airline systems.
Just think about the service disruptions and service
problems while nearly half of the airline service in the United
States is integrating systems and operations and aircraft
fleets, and most importantly four groups of fragmented and
sometimes hostile workers.
It is true that this would offer a short-term competitive
opportunity to Continental, which was ranked, I might add, No.
1 in on-time performance in the year 2000. We will be able to
offer an alternative to surly and unreliable service, but we
simply will not be big enough to offer a truly competitive
alternative because we won't be in enough markets with enough
planes and enough slots to put a dent in the market share of
the mega-carriers. The vast majority of passengers will have no
choice but to suffer whatever United or American may want to
offer.
Why can't we and Delta and others simply grow in order to
compete with mega-carriers? Obviously, we could try to do that,
but even if we grew at twice the aggressive way in which we
have just grown over the past few years, it would take us
nearly two decades to grow to something approximating the size
of United and American. And that assumes that we could get the
slots particularly at Washington and New York, the routes, the
capital, aircraft and the employees necessary to grow that fast
for that long, or are we going to put out of business by these
guys during that time?
So internal growth is not a long-term solution here.
Consolidation won't be just inevitable; it will be necessary to
preserve competition. Super-United and mega-American will
dominate the aviation market unless a third and even a fourth
network carrier of similar size can recreate the competition
necessary to serve the traveling public.
So let me end this testimony as I started it. Congress, the
Department of Justice and the Department of Transportation
should just say no, and say yes to continued, vibrant
competition and constantly improving service for our Nation's
airline passengers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Bethune follows:]
Statement of Gordon Bethune, Chairman and Chief Executive Officer,
Continental Airlines, Inc.
Good morning, Mr. Chairman and Members of the Subcommittee. I a
Gordon Bethune, Chairman and Chief Executive Officer of Continental
Airlines. It is a pleasure to be here representing the 54,300 employees
of Continental. It is a special honor to be able to appear before a
Subcommittee headed by Chairman Mike DeWine of Ohio, who represents our
Cleveland hub. Continental is honored to have such strong
representation in the Senate and we thank you for your leadership.
I thank you for your invitation to discuss the important topic of
aviation industry consolidation, and specifically, the proposed mergers
between United Airlines and US Airways, and between American Airlines,
TWA, and US Airways. As the fifth largest airline in the United States,
Continental has a unique perspective on the two proposed mergers and
the effect these mergers will have on the U.S. aviation system and on
the passengers that utilize air travel every day.
My goal today is to explain to the Subcommittee why we at
Continental believe that the proposed airline mergers should not be
approved. The mergers will harm competition and consumers. Moreover,
federal approval of these mergers today would be directly at odds with
positions taken by the government just a few months ago when the
Department of Justice successfully opposed a much smaller airline
acquisition: Northwest's purchase of 51% of Continental's voting stock.
While I know that it is ultimately the Department of Justice's decision
as to the future of the proposed United and American mergers, it is
important that everyone be fully briefed and that everyone understand
the inevitable outcome if these mergers are permitted to occur. I
intend to explain why other airlines will be forced to grow to remain
competitive and to discipline the two new mega-carriers. I will show
why this growth can only be achieved through further industry
consolidation.
Continental itself is an airline that emerged from a series of
mergers in a very different era and a very different industry
structure. Texas International, New York Air, PEOPLExpress and Frontier
all merged into what is now Continental Airlines. As a result,
Continental went through years of delivering poor service to customers,
treating employees poorly and managing its finances poorly (including
two bankruptcies). However, in 1995 Continental implemented a sensible
plan and motivated its employees to turn things around, and over the
past six years things have been very different at Continental.
Continental is now recognized as the best major airline in the
industry. In fact, over the past five years Continental has won more JD
Power and Associates/Frequent Flyer Magazine awards for customer
service (this year taking top honors for both long and short haul
flights) than any other airline in history. Just two weeks ago,
Continental was named 2001 Airline of the Year by Air Transport World,
the second time Continental's worldwide peers have recognized it in
five years. Finally, I am especially proud of the fact that we have
been ranked in the top half of the past three Fortune magazine lists of
the 100 Best Places to Work in America, this year ending up in the top
twenty. No other major airline, except Southwest, is even on the list.
It is from this perspective that I want to give you my thoughts on what
is currently facing the U.S. airline industry.
I. The Airline Industry Currently is Characterized by a State of
Competitive Equilibrium
Allow me to describe the current environment within the U.S.
airline industry. There is currently a competitive equilibrium among
the major airlines in the United States. Major reviews of the airline
industry since deregulation have concluded that the major network
carriers provide effective competition. Air travel has skyrocketed
since deregulation, airfares (adjusted for inflation) have declined and
the current system of carriers has been able to offer a wide variety of
competitive services. The levels of concentration in the airline
industry since deregulation have remained relatively low for a network
business. Even after the airline mergers of the 1980's, concentration
in the airline industry has stayed below critical levels. While each
merger airline has strengths in specific regions of the country, none
is truly strong in every U.S. region. Thus, national competition has
been balanced and effective.
The major carriers can be split into three distinct groups: very
large national carriers (the ``Big Three''), medium national carriers,
and small national carriers. United, American, and Delta make up the
very large national carrier group. Each of these three airlines has
over 16% of domestic system capacity and traffic. They are the largest
three airlines in the world. They already have the largest frequent
flyer programs and distribution channels, and they control more airport
real estate than any other carrier. While the Big Three are
considerably larger than the next group of carriers, they provide
equilibrium for each other. Moreover, the medium national carriers can
remain competitive because their scope and scale disadvantage is not so
large that it cannot be at least partially overcome by offering
superior service or lower prices compared to the Big Three.
The medium national carrier group consists of Northwest,
Continental, Southwest, and US Airways. Each of these carriers
maintains between 7% and 9% of domestic capacity and traffic. These
four airlines, while not as large as the Big Three, offer strong
competition on a national basis and have found a niche in which they
are able to compete. For example, US Airways holds many slots at the
four federally slot-controlled airports and has a strong position in
the important Northeast region of the country. Southwest competes based
on price. Northwest has a strong North Central and Asia market
position. Continental competes based on our internationally recognized
superior customer service. Each medium sized carrier has found a way to
be successful, even though they are about half the size of their larger
counterparts.
The final group, small national carriers, consists of TWA, America
West, and Alaska. These carriers are each between 2.5% and 6% of
domestic capacity and traffic. While these carriers have found it more
difficult to compete against the seven larger airlines, all but TWA
have been successful in their regional focus. TWA has historically
shown strength at its Midwest hub, while both America West and Alaska
have shown similar strengths in the West.
Finally, there are currently a number of successful new entrant/low
cost/niche carriers that help in maintaining balance and competition in
the airline industry. Airlines such as Midway, Midwest Express, Air
Tran, and JetBlue all compete vigorously with larger carriers in a
limited number of individual markets.
II. The Proposed Mergers Will Harm Competition
Against this backdrop of a competitive environment that is at
equilibrium is the proposal of United and American to split up US
Airways and for American to also absorb TWA. This will create an
unbalanced competitive environment in which the two resulting mega-
carriers are significantly larger than their next largest competitors.
Clearly United and American's plan is to reach detente, build a cartel,
and carve up and dominate the U.S. air travel market. Look closely at
the proposals; they include sharing the Northeast shuttle and sharing
the Northeast region between the cartel members. Ultimately, the same
way United and American have split Chicago O'Hare and London
(Heathrow), they will split the rest of the U.S. (and maybe even split
global aviation). The two mega-airlines have even incorporated a
provision in their agreement that restricts American's ability to merge
with other carriers and puts limits on American's growth. Should
American grow faster than United wants it to, United would have the
right to terminate the Northeast shuttle agreement the two airlines
have proposed. United would also have the right to repurchase certain
US Airways assets being divested to American and a right of first
refusal for any assets American divests as part of a subsequent
transaction. This provision is clearly a horizontal restraint between
major competitors. It allows United to restrict American's future
growth by acquisition, requires cooperation between United and American
on future acquisition, and has the effect of stabilizing the relative
shares of the two largest airlines.
After consolidation, United and American will each be of such vast
scale and scope that other U.S. airlines will be unable to offer
effective competition against them. The airline industry will change
for the worse, adversely affecting competition, consumers, communities
and employees. Other airlines will be forced to combine, be carved up,
or be put of business by the onslaught brought on by the United and
American cartel.
After the current wave of proposed consolidation, United and
American will control nearly 50% of the U.S. airline industry and have
twice as many hubs as Delta. Northwest, or Continental. The new United
will serve one hundred more domestic destinations than its nearest
competitor. Additionally, American and United will each become more
than 50% larger in terms of capacity, traffic, and revenue than the
next largest non-merged carrier (Delta), and they will be almost three
times as large as Continental. After the mergers, United and American
will also be the #1 and #2 airlines in the largest regions with the
most revenue and business traffic, the Northeast and West regions. Via
the mergers, United and American will have created the only two truly
national networks. While other airlines may continue to maintain some
regional presence, their ability to compete nationwide will be lot.
Consummation of these mergers will allow United and American to ensure
that they have eliminated competition on the national (and even on the
global) stage. In conjunction with their national presence, the two
mega-carriers will have frequent flyer loyalty programs two or three
times as large as their nearest competitors, and distribution and
marketing systems that no other airline will be able to match. The
combined effect of this will be to produce a quantum shift in the
distribution system that squeezes out other carriers in a manner that
has never occurred before.
Finally, the two airlines will operate almost 80% of all slots at
the four federally slot-controlled airports (Washington Reagan, New
York LaGuardia, New York JFK, and Chicago O'Hare). At Washington
Reagan, where slot restrictions are expected to remain in place in
perpetuity, and at New York LaGuardia, where the FAA has already
stopped expansion and slot restrictions are likely to be reinstated,
the two airlines will control over 65% of all slots. By way of
comparison, Continental operates only 3% of all slots at the four
airports, with less than 5% of the slots at Washington Reagan and New
York LaGuardia.
In order to compete with the two mega-carriers, other airlines will
need to grow to at least a scale that is near that of the market
leaders. Independent growth to the scale of United or American will be
nearly impossible. An airline like Continental, with just over 8% of
the current domestic capacity, would need nearly twenty years to grow
to the size of United and American even if Continental could grow at a
very aggressive average annual rate of 10% (2-3 times expected GDP
growth) and if the two mega-carriers grew at expected GDP levels of
about 4%. By comparison, over the past six years that I have been the
CEO, Continental has only been able to grow at an average annual rate
of just under 5%. Hyper-growth of 10% annually for Continental is not
realistic over the long term.
First, as I mentioned earlier, slot restrictions at Washington
Reagan, New York LaGuardia, New York JFK, and Chicago O'Hare limit
growth in major eastern markets. Not only is access to these airports
limited, but United and American will hold the keys with their combined
80% share of the slots. Additionally, the limitations on the supply of
capital, mechanics, pilots, and aircraft, and limitations on the
capacity of the air traffic control system, will also impede the
ability of airlines to grow at such a hyper-rate for extended periods.
More importantly, however, Continental is concerned that faster than
historical growth will limit our ability to do what we do best, which
is providing passengers with quality customer service. With hyper-
growth, an airline runs a serious risk of spoiling its product,
something Continental is not willing to do.
The destruction of the competitive equilibrium that is the obvious
and direct result of these proposed mergers means that independent
growth to compete with Unite and American is virtually impossible.
Airlines will be left with no choice but to merge in order to compete
effectively with the two mega-carriers. Additional airline mergers will
be required to restore a competitive playing field to an airline
industry that would otherwise be split by the United and American
cartel.
III. The Proposed Mergers Will Harm Consumers, Communities, and
Employees
The labor and service disruptions coupled with reduced customer
service brought on by the integration of the four merging airline
systems will, in the short run, benefit Continental as we attract
passengers looking to escape the uncertainty and problems they will
experience with the mega-carriers. The service disruptions and customer
service complaints of the past few years are nothing compared to what
is coming if the proposed mergers are approved. Think back over the
past few years. American has been through pilot and flight attendant
slowdowns. United also has been through work slowdowns which created
some of the worst operational and customer service problems this
industry has ever known. United ranked last in Department of
Transportation on-time performance statistics seven times this past
year, with an average quarterly on-time performance (in the second and
third quarters) of barely 50% Continental, by way of comparison, ranked
in the top three each quarter of the year. I might add that
Continental's on time performance last summer was better than previous
years and in December we beat our closest competitor by almost seven
percentage points in on time performance. Continental was also the #1
airline in on-time performance for the entire year 2000, out of all
major network carriers. With regard to baggage performance, United
again had poor performance, finishing each quarter in ninth or tenth
place, with statistics at least 25% worse than the industry average.
And regarding customer complaints, let's just say that United's record
is so bad that by the third quarter of last year, United's number of
complaints per 100,000 enplanements was more than double the industry
average. Now think about the same service disruptions and service
problems aggravated by the incredibly difficult task of integrating
four systems, four aircraft fleets, and most importantly four distinct
groups of fragmented and hostile workforces. If you think that the
problems this industry has seen over the past few years have been bad,
you have not seen anything yet! And while Continental stands to gain in
the short run because we offer an attractive alternative to surly and
unreliable service, we will simply not be big enough to offer a truly
competitive alternative in the long run. The vast majority of
passengers will have no choice but to be forced to suffer whatever
service, or perhaps more accurately, lack of service, United or
American may offer.
Understand that this is not a call for legislation to re-regulate
the airline industry. That is exactly the wrong way to go. I have long
said that customer service is a competitive issue, not a legislative
one; you simply cannot legislate whether someone enjoys coming to work.
Continental has made great strides in customer service, and we have
received much recognition for it. We are proof of what a competitive
response to customer service issues can be. We have even gone to
federal court to stop United from installing baggage sizing templates
at security screening checkpoints here at Dulles Airport, which
prevented Continental passengers from utilizing Continental's flexible
baggage policy and large overhead bins. These bins were installed at a
cost of many millions of dollars to accommodate customer expectations
and desires. In its ruling in favor of Continental and finding that
United violate antitrust law, the court said ``Indeed, if there is
proof of failure in the market to be gleaned from the record, it is
United's failure to provide what its customers desire.'' The court
agreed that customer service is a competitive issue (it said, ``. . .
the record unambiguously discloses that airline carry-on policy is not
an insignificant aspect of airline competition.''), and it is worth
noting that the carrier attempting to carve up its smaller rivals
(United) is one of the least competitive with regard to service.
The proposed mega-mergers are bad for consumers, bad for
communities, and bad for employees. The picture I have painted clearly
explains the problems that consumers face. Operational disruptions will
be widespread. Customer service levels at the merging carriers will
continue to tumble as those carriers will be able to do nothing more
than keep just their systems running.
The proposed mergers are also bad for communities. According to the
General Accounting Office, in its report ``Aviation Competition, Issues
Related to the Proposed United Airlines-US Airways Merger,'' released
December 2000, 290 markets will have reduced competition or have
competition eliminated completely because of only this one merger. The
report goes on to state that ``About 16 million passengers traveled in
those 290 markets in 1999. . .'' Last week in testimony before the
Senate Committee on Commerce, Science, and Transportation, the GAO
reported that ``the United and American proposals would each reduce
competition in approximately 300 markets, with each affecting over 10
million passengers.'' As a point of comparison, the Northwest/
Continental transaction opposed by the Department of Justice entailed
reduced competition in only 63 markets affecting 2 million passengers.
Finally, many more markets and passengers will be affected by the two
proposed mega-mergers if the GAO analysis is expanded to include all
markets.
Communities will not only be affected by a loss of competition and
deteriorating service, but also could face service cutbacks and route
elimination as United and American rationalize their systems. By
merging all of the routes each carrier serves from their pre- and post-
merger hubs, it is highly likely routes will be eliminated to reduce
overlap. While United has given a ``commitment'' that it will not
eliminate routes, this ``commitment'' is for only two years, does not
hold for American, and does not extend to reductions of service on
routes short of route elimination.
It is clear that the proposed merger will be bad for consumers and
bad for communities. The mergers will also be bad for employees. Unlike
Continental, which prides itself on its excellent management-labor
relationships and on the fact that it is a great place to work, history
has shown that both United and American have different views on how
they treat employees. The United and American mergers will occur on the
backs of the employees of both the acquiring and acquired airlines. The
ramifications of poor labor relations that we have felt over the past
few years will be amplified and continue for years to come. Significant
labor integration issues have accompanied virtually every major airline
merger in the history of our industry, and these proposed mergers will
not be exceptions to this rule. Think of how disruptive a relatively
simple merger like American/Reno Air was. Now think of the complex
issues raised by American merging with not one but two airlines much
larger than Reno Air.
IV. US Airways and TWA Have Other Options Readily Available
There are other options for the two acquired companies. While it is
clear that TWA has significant problems, allowing it to merge with
American and parts of US Airways is not its only option. A truly level
process for competitive bidding, which Continental has fought for in
the bankruptcy court, could provide alternatives for TWA. As an aside,
as I have said publicly before, if American were to follow through with
its statements and unconditionally commit in writing to hire all of the
TWA employees and protect the benefits of all employees and retirees of
TWA, and if this commitment were not contingent on the US Airways deal,
then Continental would step aside and not oppose the American/TWA
transaction. Of course, the Department of Justice would still face the
task of prescribing remedies to restore competition, such as requiring
the divestiture of some slots and facilities to smaller national
network carriers, like Continental.
Turning to US Airways, it is unclear to me that any merger is
necessary, as US Airways has one of the richest pools of valuable
assets in the industry. Their cache of lucrative slots and their
Northeast strength cannot be matched. If Continental was able to turn
itself around (with its more limited assets yet intensely focused
management team) and become the financial and commercial success it is
today, there is no reason that US Airways, with the right incentives
and appropriate management, utilizing US Airways' crown jewels of
assets, cannot do the same. But if US Airways is determined to sell
itself, allowing the airline to be split by United and American is not
the only option. Continental made an offer for US Airways' Washington
Reagan position that was for a much higher price than the current DC
Air/American deal. Continental's offer was turned down, not based on
the economics, but based on the fact that it would put a crimp in the
cartel's plan. Continental is also very interested in the significant
slot and facility holdings of US Airways in New York. These assets were
never even offered to anyone except American.
V. If the Proposed Mergers are Approved, Then Remedial Action Must be
Taken to Preserve What is Left of Competition
So what is the answer to the proposed mergers that will create two
mega-carriers that have the ability to dominate the market, reduce or
eliminate competition and are bad for all constituencies? JUST SAY NO!
The conspiracy by United and American to reach detente, create a
cartel, and control the U.S. domestic market (thereby tightening their
stranglehold on foreign markets as well), if implemented, will be so
devastating that it should be disapproved outright. The government
should stop trying to find fixes to mergers that should not be approved
in the first place. And the government needs to clearly understand that
it cannot fix, after the fact, the problems these mergers will create.
It is important to note that, just last month, the Department of
Justice prevailed in its antitrust challenge of Northwest's proposed
acquisition of 14% of Continental's stock (representing a little more
than 50% of Continental's voting rights). This case was brought to
trial notwithstanding the fact that Northwest signed a governance
agreement limiting its control of Continental for at least six years.
The government brought the case because it believed that Northwest's
partial ownership would lessen competition primarily on routes between
the six Northwest and Continental mainland U.S. hubs. Today we are
faced with the prospect of a combined United/US Airways (10 hubs) and
American/TWA/US Airways (7 hubs). Consolidation of these carriers would
give the combined firms more than 90% of the non-stop traffic on the
routes between their respective hubs. Moreover, unlike the Continental/
Northwest transaction in which Continental and Northwest would have
continued to compete, United and American will actually have eliminated
their primary competition between those important hubs.
While the facts should compel the government to reject the proposed
acquisitions, I am not confident that the right thing will be done to
protect airline consumers and competition from the United and American
cartel. Because of my skepticism, I must impress upon you that if,
against all of the best wisdom, United and American are allowed to move
forward with their plans, further airline consolidation is inevitable
and will be required to assure effective competition. The U.S. aviation
industry will require at least three or four large national network
carriers to recreate the equilibrium that we currently have and that
will be lost if United and American are allowed to complete their
proposed transactions. Only through the smaller airlines' ability to
grow and their ability to further consolidate will marketplace
protection be possible.
If the proposed mega-mergers are approved, as I fear they will be,
action must be taken by the Congress, the Department of Transportation,
and the Department of Justice to give some small glimmer of hope that
competition in the aviation industry can survive. The ability of
airlines to obtain assets in order to create networks of similar scale
and scope is key to disciplining the United and American cartel.
Congress, the Department of Transportation, and the Department of
Justice must ensure that appropriate slots, gates, and other facilities
at slot and capacity constrained airports are made available to smaller
network competitors by the two mega-carriers. Special attention must be
paid to airports such as New York LaGuardia, Washington Reagan, Chicago
O'Hare, Boston Logan, Los Angeles International, and San Francisco
International.
The Department of Transportation must also exercise fully its
duties and responsibilities in determining whether the international
route transfers occurring in these mergers are consistent with the
public interest and what impact they have on competition in the
domestic airline industry. The Department of Transportation should re-
award those international routes to competitors of the mega-carriers as
necessary to preserve competition.
It is crucial that the U.S. ensure that government operating
privileges, such as slots, are not used to create monopoly power at the
very airports necessary to provide effective competition among
networks. Specifically, the U.S. must be prepared to insist that a
concentration of slots by the largest of carriers does not occur and
that a process exists so that competing networks can get the needed
slots. As discussed above, post-merger United and American will control
nearly 80% of the slots in the highly significant business markets of
the Northeast and North Central. Competition simply cannot survive in
those cities with that level of concentration between two carriers who
actually are cooperating with each other.
If the proposed mergers are allowed to proceed, there must also be
assurances that the remaining U.S. airlines have more access to the
capital they will need to sustain continued growth. Currently, U.S.
carrier access to new capital is severely limited by unnecessarily low
limits on foreign investment. The foreign ownership limits on U.S.
carriers should be increased to 49%. This will provide new sources of
capital while maintaining U.S. control and protecting U.S. employees.
Finally, as United and American strengthen their domestic
positions, the ability of other U.S. carriers to compete
internationally will be reduced. For example, United and American are
already the only two airlines with the right under the U.S.-U.K.
bilateral to fly into London Heathrow airport, the most important
business airport in Europe, United and American's growing control of
the domestic market will make this already huge disadvantage to
Continental and other U.S. airlines even greater. The U.S. should renew
its efforts to negotiate more access to London Heathrow for competitors
of the mega-carriers or negotiate to substitute other carriers at
London Heathrow for the two mega-carriers. Additionally, United and
American have a large array of foreign partners with which they have
alliances, making their control of world air transport even greater.
The ability of small network carriers to offer foreign partners enough
scale and scope in the U.S. is limited, and it is clear that given a
choice of partnering with a member of the cartel or partnering with a
smaller carrier, foreign airlines will choose the cartel. As antitrust
immunity only exacerbates this problem, I call for a serious re-
evaluation and possible revocation of the antitrust immunity already
granted to the mega-carriers and their foreign partners.
VI. Conclusion
Mr. Chairman, I know what I have discussed today will not be
popular with many people, especially my peers at United and American.
But I have no choice but to make sure that the U.S. Senate, your
constituents, and all Americans are aware of the consequences that the
proposed United and American mergers will have on consumers,
communities, employees, and on the U.S. aviation industry as a whole.
While I know that it is not ultimately this Committee's decision as
to whether the deals are allowed to proceed, it is within this
Committee's power to ensure that all of the facts are available and
that the consequences are known. If the Department of Justice
nonetheless decides to allow these mergers, you must insist on the
action items I have proposed today. If these two mega-deals are
permitted, other airlines will be forced to merge and those mergers
will be necessary to restore effective competition. Therefore, once the
Department of Justice approves the pending merger others will follow
and must be approved.
Mr. Chairman and members of the Committee, I thank you for giving
me the opportunity to discuss this very important issue with you and
for your attention. I would now be pleased to answer any questions that
you may have.
Senator DeWine. Mr. Bethune, we always appreciate your very
candid testimony. Thank you very much.
Mr. Mullin?
STATEMENT OF LEO F. MULLIN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, DELTA AIR LINES, ATLANTA, GEORGIA
Mr. Mullin. It is always difficult to follow Gordon
Bethune.
I, too, am grateful to testify, Mr. Chairman, because much
is at stake here. I submitted to the Committee an expanded
version of my testimony and ask that it will be included in the
record, and I will be brief in my comments.
The apparent subject at hand is United Airlines and US
Airways, and, of course, American and TWA. But actually
decisions on this matter will not represent a simple ruling on
these transactions. In fact, it will be the catalyst for a
complete structural and competitive change to the industry.
Mergers and acquisitions are a good, basic business tool
for all industries, including aviation, but they require
careful review. If approved, these deals will create two mega-
carriers with giant networks, and size matters. United
Airlines, American Airlines and Delta currently have comparable
shares, at 17 percent of the domestic market. As mega-carriers,
the numbers will be United, 27 percent; American, 22 percent.
And in the strategically important Northeast markets, where
there is currently a balance of power and no dominant carrier,
it will be changed dramatically, such as Senator Leahy has
suggested.
To take some statistics and to elaborate on what Gordon
Bethune has said, the duopoly will represent 58 percent at
LaGuardia, 64 percent at JFK, 60 percent in Boston, 60 percent
at DCA, 76 percent at Dulles, and 76 percent in Philadelphia.
Given the current issues in customer service and labor the
current seven network carriers are experiencing, the act of
concentrating air service with only two carriers must take
careful review. With that as a context, let me address a
specific area of concern about how the transactions before us
might at some point proceed.
Should these transactions proceed, then the airlines at the
next layer down will be required to make dramatic competitive
responses, including mergers and acquisitions. What cannot
occur is that the current two transactions simply be allowed
and that that be followed with some thought of a ``the door is
now closed'' policy.
If these deals go through, Delta, like other airlines, must
use the full range of competitive tools, including internal
growth. But internal growth, as Gordon Bethune has just said,
will not suffice for any of the other airlines to reach the
necessary size.
In short, approval of these transactions, in my judgment,
must be viewed as tacit approval for those that follow because
it will be a necessary step for us to take in order to compete
with them. Thereby, the Government will have initiated the
process that will result in the total remaking of the airline
business as we know it today.
Mr. Chairman, it is my belief that such a dramatic
structural and competitive change in the vital area of the
Nation's transportation system requires time and forethought,
and should not be accomplished simply as a consequence of
approving current transactions.
Therefore, I would recommend that the decisions on these
very important issues, with the exception which I agree with of
the American/TWA acquisition, which is essentially a rescue
mission, in contrast with the US Airways situation which is
clearly not a rescue mission--US Airways is not a failing
carrier--I would recommend that all of these other transactions
be delayed until we can fully assess the consequences.
I am expressing, I find, in different words the same idea
that Senator Schumer has just expressed. I propose we pause to
aim before we fire. With such a pause--the Senator used the
term ``moratorium''--we gain the time to fully consider what
type of aviation system we want for our country.
In 1792, while President Thomas Jefferson was confronting
one of the most difficult decisions of the Washington
administration, he wrote to then President George Washington
and said, quote, ``delay is preferable to error,'' end quote.
None of us can predict exactly where these consolidations will
lead, but we do know that it will be profoundly different. And
for that reason, I believe our next step should be to ensure
that the decisions made about this important subject reflect
the commitment we all share to ensuring that America's air
transportation system remains the best and most competitive in
the world.
I will be delighted to answer any questions.
[The prepared statement of Mr. Mullin follows:]
Statement of Leo F. Mullin, Chairman and Chief Executive Officer, Delta
Air Lines
Mr. Chairman and Members of the Committee, I am grateful for the
opportunity to appear before you today to deliver a message which I
believe is of crucial importance to the continued health of our
nation's air transportation system. This is a very timely hearing and I
commend the Committee for its attention to the issue of consolidation
in the airline industry.
As you consider the proposed transactions among four of the seven
major U.S. hub-and-spoke carriers--American, TWA, United and US
Airways--you are reviewing what could become the catalyst for a
complete structural and competitive alteration of U.S. airlines. The
conclusions reached about these proposals will have an effect on the
future course of the entire aviation industry--an industry of immense
importance to the social and economic health of our nation--and it will
also impact the viability and success of individual airlines.
Mr. Chairman, there are many issues that you must consider as part
of this important hearing, but the eventual outcome must be accompanied
by a decision, that, in approving the currently proposed transactions,
so must there also be tacit approval of any further airline
combinations--obviously with appropriate modifications for the public
interest.
This morning, I would like to outline for you three primary
implications of the proposed transactions which I hope will illustrate
how such a decision would affect everyone connected with the aviation
industry--including the 670 million passengers airlines serve each
year.
1. These transactions will require that other airlines make
dramatic competitive responses.
2. The option of future mergers and acquisitions must be available
to these airlines if they are to continue to compete effectively.
3. As all airlines make responsive competitive moves, these first
transactions discussed here today will have the effect of completely
changing the airline business as we know it today.
these transactions will require that other airlines make dramatic
competitive responses.
First, let me describe for you how the aviation marketplace will
look if these deals are successfully implemented.
United will have 50% more capacity than Delta; American will
have 42% more capacity.
United will have 939 planes, American 991. Delta currently
has 606 planes.
United will have 26% of the U.S. airline market, and they
will gain a substantial foothold in the lucrative domestic
market east of the Mississippi River.
American, through its acquisition of TWA, DC Air and US
Airways assets, will have a market share of 22% of the domestic
market. American too, will gain a sizable share of the East
Coast market.
Clearly, the impact on the industry will be huge. These carriers
are simply doing what their customers and shareholders are demanding:
growing to meet customer demand.
The mission of every airline--be it Delta, American, United or any
other carrier--is to create a network that allows us to take our
customers from anywhere to everywhere. By doing so, we create the
convenience as well as the benefits (such as frequent flyer programs)
that cause our customers to call on one airline for all their travel
needs. Because customers will choose as ``their airline'' the carrier
that provides service to all the places they want to go, size
definitely matters when it comes to networks and market share.
Mergers and acquisitions are a means to create a network large
enough to accomplish that mission. Such transactions allow carriers to
grow their business in an efficient, cost-effective manner--which is
what American and United propose to do. As I have said since I joined
this industry three years ago, mergers and acquisitions are essential
strategic options for any industry, including aviation.
The proposed transactions before the Committee are not, per se,
anti-competitive. However, if these transactions are allowed to go
forward with an understanding that ``the door is now closed'' in terms
of further industry consolidation, then consumers and other carriers
may be required to deal with a huge duopoly. Essentially, Mr. Chairman,
the current competitive balance in the industry will be disturbed--and
the remaining airlines will be required to make dramatic competitive
responses. And mergers and acquisitions must be part of the competitive
response arsenal.
Hence, my second point:
the option of future mergers and acquisitions must be available to
these airlines if they are to continue to compete effectively.
Let me interject at this point that certainly Delta is among the
airlines giving careful consideration to how we can continue to compete
effectively if these transactions occur. My purpose here today is not
to discuss any possibilities we might have under consideration, nor can
I speculate about Delta's planned response.
As I have stated on many occasions, we are always talking to a
number of airlines about commercial opportunities, be they mergers,
marketing partnerships, alliances, or other possible arrangements. And
while my point is that we must ensure that the option of mergers and
acquisitions remains open, I do want to emphasize that internal growth
is a viable option for us.
Delta has been the most profitable network carrier for three
straight years and we have the lowest unit costs of the large network
carriers. We are confident of our ability to compete effectively with
American and United in the near term.
Currently, Delta is the largest carrier in the Eastern U.S. Though
strategic acquisitions and internal growth, we have targeted our
franchise to be a strong competitor in this region, and we have been
very successful in that effort.
Delta will continue to respond to this consolidation trend by
choosing from all the tools of the marketplace those which best
position us to be more effective competitors--and certainly that will
include internal growth.
Now, the question often asked is why Delta and other airlines
cannot rely solely on internal growth as a means of achieving parity
and restoring balance to the industry. Mr. Chairman, if American and
United grow to be mega carriers, then to ensure continued competition,
all carriers must also grow in some proportionate way.
And while internal growth is an important component of our
competitive response, we will require other sources of growth if we are
to keep pace with the mega carriers. Consider the math:
Delta has grown traffic at an average annual rate of 5
percent for the past five years--in a vibrant market.
Assuming United grows at 3% a year, it would take us more
than 18 years to eliminate the network gap.
My point, Mr. Chairman, is that if and when other airlines need to
access the powerful tool of mergers and acquisitions in order to remain
competitive, they must be allowed to do so.
If the decision the government makes in this case is that ``the
door is closed'' on mergers following these transactions, then the U.S.
airline industry will face a competitive problem: dominance by two
large carriers. The suggestions that competition would be preserved by
closing the merger option to other carriers after the pending
transactions are completed is an intellectually barren theory. If
United and American are allowed to use mergers to expand their
networks, others must be allowed to do so as well.
This brings me to my final point:
as all airlines make responsive competitive moves, these first
transactions discussed here today will have the effect of completely
changing the airline business as we know it today.
In short, Mr. Chairman, approval of the transactions under
consideration must be viewed as tacit approval for those that follow.
Once mega carriers have been created, then a competitive marketplace is
possible only if the remaining airlines are allowed to respond
effectively, with all the necessary tools, which must include
acquisitions and mergers.
And thereby, the government will have initiated the process that
will result in the total re-making of the airline business as we know
it today. As Bismark once said, ``Events will be in the saddle.''
None of us can predict today exactly where this will lead--but we
do know it will be profoundly different.
Mr. Chairman, we appreciate your consideration of Delta's views on
this critical issue. I would be happy to answer any questions that you
or members of the Committee may have.
Senator DeWine. Mr. Mullin, thank you very much.
We have a statement that has been submitted by Senator
Santorum which will, without objection, be made part of the
record.
[The prepared statement of Senator Santorum follows:]
Statement of Hon. Rick Santorum, a U.S. Senator from the State of
Pennsylvania
Thank you Chairman Hatch, Senator Leahy and members of the
committee. I appreciate the opportunity to submit testimony today on
the impending airline mergers. Last year, I appeared before the
Antitrust, Business Rights, and Competition to express my concerns
regarding the effect of this merger on my constituents. I have also
joined Senator Specter at a subcommittee field hearing in Pittsburgh
further investigating the specifics of the proposal. Finally, I
submitted written testimony for the Senate Commerce Committee's hearing
last week on this subject. In each of these instances, I have expressed
my particular interest in how the United-US Airways merger relates to
jobs and services for my constituents and how they impact competition
in the airline industry.
I made it clear when the United-US Airways merger was first
announced that to gain my support the airlines had to address my two
principal concerns--protecting existing jobs in my state and continuing
plans to build a new maintenance facility in Pittsburgh. Since that
time, I have received commitments from both United Airlines Chairman
Jim Goodwin and US Airways Chairman Stephen Wolf that these concerns
would be addressed.
In particular, I was very pleased that United Airlines committed to
the long-planned expansion of the maintenance facility in Allegheny
County. As one of the largest employers of Southwestern Pennsylvania,
this project is critical to the economic well-being of the region and
to the thousands of maintenance workers that depend on these jobs to
support their families.
I have also heard from many of the small regional airports in
Pennsylvania who are concerned that this merger threatens commercial
air service to their facility. However, I am heartened by Jim Goodwin's
commitment to continue providing the best small community air service
possible. I appreciate Mr. Goodwin's recognition that these airports
are economic development engines for their rural communities, and I
will hold him to his commitment.
I understand that there are still critics of the United-US Airways
merger, but I respectfully request that you consider the alternative.
Just a few weeks ago, US Airways reported that high fuel prices and
expanding low-cost and network carrier competition combined to produce
disappointing financial results for the company--a net loss of $269
million for the year 2000. Absent this merger, US Airways would be in
dire financial straits and jobs at US Airways would be in jeopardy.
Previous air carriers didn't have the opportunity that US Airways has
today. Consider the employees of Pan Am, Eastern and Braniff and how
the states where they operated have been impacted.
The status quo is not an option for US Airways. Without the merger
to preserve US Airways' service network, the future of air service to
Pittsburgh, Philadelphia and smaller communities across may state is in
doubt. The merger would not only ensure but expand service to and from
the Commonwealth of Pennsylvania.
Thank you, Mr. Chairman.
Senator DeWine. Mr. Franke, thank you very much for being
here.
STATEMENT OF WILLIAM A. FRANKE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICA WEST, PHOENIX, ARIZONA
Mr. Franke. Mr. Chairman, Senator Kohl, Members of the
Subcommittee, thank you for the opportunity to appear today to
consider the important issue of airline competition. I am Bill
Franke and I represent the 16,000 employees and 20 million
customers of America West Airlines.
Four years ago, I appeared before the Senate Aviation
Subcommittee and warned that the task of airline deregulation
had not been completed. I explained that in the Northeast the
lack of access to airport gates and facilities, slot
restrictions at New York-LaGuardia, Reagan National and
Chicago-O'Hare, and the perimeter rules at LaGuardia and Reagan
National represented the unfinished business of deregulation.
They still do.
In 1997, I noted that fares in the Northeast were much
higher than in the Southwest, where such constraints do not
exist, and I urged Congress to take immediate action to level
the playing field by creating access and enabling competitive
new entry to promote more consumer choice and lower fares.
The Department of Transportation and Congress in last
year's AIR 21 legislation took some limited--I might add very
limited--steps to address these entry barriers. However, these
actions were simply inadequate based upon the scope of the
problem. Without significant remedial measures to ensure access
to markets by new, limited incumbent, low-cost carriers,
approval of the United Airlines/US Airways merger and
American's acquisition of TWA, coupled with the splitting of US
Airways and DC Air between United and American, firmly closes
the door on competition at major Northeast airports.
Fares will go up, particularly in the Northeast to Western
markets where, upon completion of these transactions, American
and United will together control approximately 62 percent of
the market. With the publicly reported possible arrangement
between Delta and Continental, the big three would then control
over 80 percent of the market.
For 9 years, America West has worked to expand service from
its Western hubs in Phoenix and Las Vegas to the Northeast.
Today, America West is the only post-deregulation full-service,
low-cost network carrier to achieve major carrier status, as
defined by the Department of Transportation.
We currently serve 91 cities in the U.S., Canada and Mexico
directly or indirectly through America West Express. In East
Coast-West Coast markets, our average fares are approximately
29 percent below the major incumbent carriers, and our walk-up
fares in these markets are an average of approximately 50
percent below those of our major competitors.
If these proposed transactions are approved, our current
level of service in these markets will be threatened and our
ability to grow will be stymied. Simply stated, these
transactions represent an attempt by the two dominant carriers
to insulate themselves against competition from low-cost
carriers such as America West. The transactions will do nothing
to make gates, facilities and slots available to new-entrant/
limited-incumbent carriers, the only carriers that can provide
true stimulus to competition.
With this background, I would like to briefly discuss what
must occur with respect to airport gates and facilities, slots
and perimeter rules to preserve the potential for new entrant
competition in the Northeast.
If the Department of Justice rejects all the proposed
transactions, it will still be necessary for the Government to
take action establishing reasonable access for new entrant
limited incumbents if competition in the Northeast markets is
to exist.
First is the issue of gates and facilities. Nothing is more
necessary to airline service than an airport gate.
Unfortunately, at most of the Northeast airports and Chicago
O'Hare, America West and others cannot obtain gates. We simply
cannot obtain gates. America West and other new entrants must
sub-lease gates and facilities from major incumbent carriers
under short-term leases. New entrants have virtually no ability
to expand service at these airports or to respond to demand.
For example, at LaGuardia we currently sub-lease a gate
from TWA, with which we have a joint frequent flyer program,
and recently signed a code share agreement that also provides
us access to facilities at several key airports. When American
takes over TWA, we have been advised that these arrangements
will probably disappear. And without adequate conditions to
ensure our access to gates at LaGuardia, our service there is
threatened.
At four airports crucial for business markets--Reagan
National, New York-LaGuardia, as well as Boston and
Philadelphia--the new American/United duopoly will expand from
a combined 70 gates to 160 gates. We have been serving the
three New York airports for 15 years, but still cannot obtain a
gate of our own for our own control and use. We have also been
unable to secure gate space in Philadelphia.
Another problem for us is Chicago's O'Hare Airport. While
American and United have long dominated this key market, after
the proposed transaction they will control 49 percent of the
traffic. While officials at O'Hare talk about building a new
runway, building gates for new entrants seems beyond their
ability.
We are currently sub-leasing a gate from Continental.
Recently, when we discovered that six new gates were being
built, we asked for two of them. We were refused. Airport
officials explained the gates were being built with private
money, so the airport was powerless to provide access. We then
offered to build two gates ourselves. No, they said, we can't
accommodate that. By the way, these six new gates are going to
United Airlines.
The incumbents' control over many of these airport
facilities is de facto regulation and anticompetitive behavior.
The Department of Transportation and the GAO have documented
that the major incumbents do not fully utilize their airport
facilities and simply refuse to make them available to the low-
cost competition.
Significantly, United and American each stands to acquire,
respectively, a total of 27 and 33 scarce gates at Logan,
LaGuardia and Reagan National Airports. Unless enforcement
action is taken, United and American will control 60 percent of
all gates at these high-density airports.
To ensure competition is a condition to approval of these
transactions, if you should so be inclined, United and American
should be required to make a sufficient number of gates and
other critical airport facilities available to allow for
meaningful competition by new entrant, low-cost carriers to
these hubs at the congested airports that United and American
will dominate either individually or in combination.
In this regard, American should also be required to honor
TWA's existing contractual obligations to lease gates and
facilities to America West at Reagan National, LaGuardia,
Hartford, JFK, Dallas/Fort Worth, and other airports.
The second requirement for competition is the availability
of slots at high-density airports. Every study ever issued on
airline competition recognizes slots are a significant barrier
to competition. Washington National, LaGuardia and O'Hare are
among the top ten markets for virtually every airport in the
country. AIR 21 in part was designed to help alleviate the slot
problem. Unfortunately, particularly at LaGuardia, the net
result was the major airlines obtained even more slots, while
new entrants received a trickle of their need.
The transactions before us will result in American and
United gaining 404 and 434 slots, respectively, at LaGuardia
and Reagan National Airports, this at a time when America West
cannot gain any slots for new service and, in fact, is at risk
to lose existing Columbus-Reagan National and Columbus-
LaGuardia service due to the potential loss of slots.
If, through a lack of slots, we were forced out of the
Washington National and LaGuardia-Columbus markets, our
Columbus hub and the competition it generates could be lost.
This is at a time when United and American together would
control nearly 75 percent of the slots at LaGuardia. At high-
density airports, the two will control 69 percent of the slots.
The FAA should exercise its authority to withdraw slots
United and American would acquire pursuant to these
transactions and create a substantial slot pool made available
on an as-needed basis to ensure that new entrant/limited
incumbents could operate up to 20 slots a day, as contemplated
by AIR 21. This slot pool could exist at both LaGuardia and
Reagan National to create the potential for new competition at
these critical airports.
The final and third component of competitive barriers that
continue to exist is the perimeter rules at Reagan National and
LaGuardia. Both DCA and LaGuardia are the subject of archaic
rules which restrict the geographic reach of service to and
from these airports. These rules prevent carriers like America
West from flying non-stop from our primary hubs.
Currently, the larger network carriers operate a minimum of
7 to as many as 20 daily flights to primary hubs for
connections to Western networks from these markets. These
numbers will go up considerably if these transactions proceed
as currently structured. Without adequate service between our
Western hubs and these two vital markets, America West's
ability to provide a substantial competitive option to
consumers will be prevented, and American and United will be
able to raise fares dramatically on coast-to-coast service.
Well, why does all this matter, some might ask. I believe
there are two major reasons. First, air fares to the consumers.
The presence of America West or other low-cost airlines in the
market gives the consumer a low-priced option, as well as
placing pricing pressures on the larger airlines.
A case in point is our service to Chicago-O'Hare. O'Hare is
a slot-constrained facility. Prior to 1999, we had only a few
flights to O'Hare, mostly at less than optimal times. In 1999,
the DOT granted us a number of slot exemptions at O'Hare. An
example of the impact has been that our Chicago-to-Ontario
service has seen a 100-percent increase in market share, and
average fares are 39 percent below United's service. In fact,
as I have stated previously, our average fares from these
Eastern business markets to the West are currently 29 percent
below those of the larger carrier networks, and nearly 50
percent below the walk-up business fares.
Next, the issue of diversity of service. If essential
facilities are concentrated in the hands of a few mega-
carriers, they will be used primarily to serve the mega-hubs.
This threatens the continuation or expansion of hubbing
activity for smaller cities, for places like Columbus or
Milwaukee which can support this activity only if they have
access to important markets.
As others have stated, we are at a competitive crossroads.
Without immediate action in the short run to create access for
new entrants at capacity-constrained airports, the Northeast
will face escalating fares and a lack of choice in air travel.
United and American will not compete on price unless compelled
to do so by low-cost carriers.
Mr. Chairman, the commercial airline industry is a network
business. You must be able to build a network to compete. In
fact, my friend Don Carty, CEO of American Airlines, stated
last week at the Senate Commerce Committee hearing that, quote,
``If one airline is able to grow its route network
significantly larger than its competitors, that airline would
have a competitive advantage,'' end quote.
Mr. Chairman, I certainly agree with that principle. We are
trying to grow our network, we are trying to be competitive.
Approval of these transactions without requiring remedial
measures to guarantee access to these key markets is a recipe
for disaster. And where would it all end? Fix two airlines and
endanger five others? Force 75 percent of the markets into 3
carriers? What about America West's 16,000 employees and 20
million customers? We just want to compete. We just want to
compete, Mr. Chairman.
Thank you.
[The prepared statement of Mr. Franke follows:]
Statement of William A. Franke, President and Chief Executive Officer,
America West Airlines, Phoeniz, AZ
Mr. Chairman, Senator Kohl and members of the subcommittee, thank
you for the opportunity to appear before you today to consider
important issues of airline competition.
Four years ago I appeared before the Senate Aviation Subcommittee
and warned that the task of airline deregulation had not been
completed. I explained that in the Northeast the lack of access to
airport gates and facilities, slot restrictions at New York LaGuardia,
Reagan National and Chicago O'Hare, and the perimeter rules at
LaGuardia and Reagan National represented the unfinished business of
deregulation. They still do. In 1997, I noted that fares in the
northeast were much higher than in the southwest where such constraints
do not exist and urged Congress to take immediate action to level the
playing field by creating access and enabling competitive new entry to
promote more consumer choice and lower fares.
The Department of Transportation and Congress in last year's AIR 21
legilsation took some limited--very limited--steps to address these
entry barriers. However, these actions were simply inadequate based
upon the scope of the problem. Without significant remedial measures to
ensure access to markets by new entrant/limited incumbent low cost
carriers, approval of the United Airlines/U.S. Airways merger and
American's asset acquisition of TWA, coupled with the splitting of US
Airways (including DC Air) between United and American, firmly closes
the door on competition at major northeast airports. Fares will go up,
particularly in the northeast to western markets where, upon completion
of these transactions, American and United will together control
approximately 62 percent of the market. With the publicly reported
possible arrangement between Delta and Continental, the big three would
control over 80 percent of this market.
For nine years American West has worked to expand service from its
Western hubs at Phoenix and Las Vegas to the northeast. Today, America
West is the only post deregulation full service, low cost network
carrier to achieve major carrier status as defined by the Department of
Transportation. We currently serve 91 cities in the U.S., Canada and
Mexico directly or through America West Express.
In East Coast/West Coast markets our average fares are
approximately 29 percent below the major incumbent carriers and our
walk up fares in these markets are an average of approximately 50
percent below those of our larger competitors. If the proposed
transactions are approved, our current level of service in these
markets will be threatened, and our ability to grow will be stymied.
Simply stated, these transactions represent an attempt by the two
dominant carriers to insulate themselves against competition from low
cost carriers such as America West. The transactions will do nothing to
make gates, facilities and slots available to new entrant/limited
incumbent carriers--the only carriers that provide a true stimulus to
competition.
With this background, I would like to discuss briefly what must
occur with respect to airport gates and facilities, slots, and the
perimeter rules to preserve the potential for new entrant competition
in the northeast. If the Department of Justice rejects all the proposed
transactions, it will still be necessary for the government to take
action establishing reasonable access for new entrants/limited
incumbents if competition in the northeast markets is to exist.
First is the issue of gates and facilities--Nothing is more
necessary to airline service than an airport gate. Unfortunately, at
most of the northeast airports and Chicago's O'Hare, America West and
otehr cannot obtain gates. America West and other new entrants must
sublease gates and facilities from major incumbent carriers, under
short-term leases. New entrants have virtually no ability to expand
service at these airports to respond to demand.
For example, at LaGuardia, we currently sublease a gate from TWA
with which we have a joint frequent flyer program and a recently signed
codeshare agreement that also provides us access to facilities at
several key airports. When American takes over TWA, we have been
advised that these arrangements will probably disappear, and without
adequate conditions to ensure our access to gates at LaGuardia, our
service there is threatened. At four airports crucial for business
markets, Reagan National, New York's LaGuardia, as well as Boston and
Philadelphia, the new AA-UA duopoly will expand from a combined 70
gates to 160 gates. We have been serving the three New York airports
for 15 years but still cannot obtain a gate of our own to control and
use. We have also been unable to secure gate space in Philadelphia.
Another problem area for us is Chicago's O'Hare airport. While
American and United have long dominated this key market, after the
proposed transaction they will control 94% of the traffic! While
officials at O'Hare talk about building a new runway, building gates
for new entrants seems beyond their ability. We are currently
subleasing a gate from Continental. Recently when we discovered that
six new gates were being built, we asked for two of them. We were
refused. Airport officials explained the gates are being built with
private money so the airport is powerless to provide access. We then
offered to build two gates ourselves. No, they said, we can't
accommodate that. The new gates, by the way, are going to United
Airlines.
The incumbents' control over many of these airport facilities is
defacto regulation and anticompetive behavior. The Department of
Transportation and the GAO have documented that the major incumbents do
not fully utilize their airport facilities and simply refuse to make
them available to the low cost competition. Significantly, United and
American each stands to acquire, respectively, a total of 27 and 33
scarce gates at Logan, LaGuardia and Reagan National airports. Unless
enforcement action is taken, United and American will control 60% of
all gates at the high-density airports.
To ensure competition and as a condition of approval to these
transactions, United and American should be required to make a
sufficient number of gates and other critical airport facilities
available to allow for meaningful competition by new entrant or low-
cost carriers to their hubs, at the congested airports taht United and
American will dominate, either individually or in combination. In this
regard, American should also be required to honor TWA's existing
contractual obligations to lease gates and other facilities to America
West at Reagan National, LaGuardia, Hartford, JFK International,
Dallas/Fort Worth International, and Philadelphia International
airports. The second requirement for competition is the availability of
slots at the high-density airports. Every study ever issued on airline
competition recognizes slots are a signfiicant barrier to competition.
Washington National, and LaGuardia and O'Hare are among the top ten
markets for virtually every airport in the country. AIR 21 in part was
designed to help alleviate the slot problem. Unfortunately,
patticularly at LaGuardia, the net result was the maor airlines
obtained even more slots while new entrants received a trickle of their
need.
The transactions before us will result in AA and UA gaining 404 and
434 slots respectively at LaGuardia and Reagan National airports. This
is at a time when America West cannot given any slots for new service,
and, in fact, is at risk to lose existing Columbus-Reagan National and
Columbus-LaGuardia service due to a loss of slots. If through a lack of
slots, we were forced out of the Washington National and LaGuardia-
Columbus markets our Columbus hub, and the competition it generates,
could be lost. This is at a time when United and American together
would control nearly 75% of the slots at LaGuardia. At high density
airports, the two carriers will control 69% of all slots.
Prior to these transactions slot concentration was at an all time
high. The formation of a UA-AA duopoly will raise slot concentration
levels to the point of monopolistic control. Competition among network
carriers is possible only if they have sufficient slots at these
constrained airports to enable them to provide a competitive level of
service to their hubs. Control of these airports by the UA-AA duopoly
directly threatens not only route competition but also utimately the
viability of any new entrants seeking to compete as network carriers.
The FAA should exercise its authority to withdraw slots that United
and American would acquire pursuant to these transactions and create a
substantial slot pool, made available on an as needed basis to ensure
that new entrant/limited incumbents could operate up to 20 slots a day
as contemplated by Air 21. This slot pool should exist at both
LaGuardia and Reagan National to create some potential for new
competition at these two critical airports.
The third component of competitive barriers is the existing
perimeter rules at Reagan National and LaGuardia. Both DCA and LGA are
the subject of archaic rules which restrict the geographic reach of
service to and from these airports. These rules prevent America West
and several other new entrants from flying nonstop to our primary hubs.
Currently the larger network carriers operate a minimum of seven to as
many as twenty daily flights to primary hubs for connections to western
networks from these airports. These numbers will go up considerably if
these transactions proceed as currently structured. Without adequate
service between our western hubs and these two vital markets, America
West's ability to provide a substantial competitive option to consumers
will be prevented and American and United will be able to raise fares
dramatically on coasty to coast service.
These rules provide no current benefit as their original purposes
to stimulate use of Dulles and JFK have long been achieved. Today the
LaGuardia perimeter rule not only contributes to the high cost of
service but also encourages the misallocation of airport resources that
has led to the current congestion problem. Only Congress can abolish
the perimeter rule at Washington Reagan and it should proceed to do so
immediately. Either Congress or the Department of Transportation,
however, can override the perimeter rule at LaGuardia. These are
critically necessary actions to benefit consumers using these
facilities.
``Why does all this matter?'' some might ask. I believe there
are two major reasons:
First--airfares to the consumers. The presence of America West or
other low cost airlines in a market gives the consumer a low-priced
option as well as placing pricing pressure on the larger airlines. A
case in point is our service at Chicago O'Hare. O'Hare is a slot
constrained facility. Prior to 1999 we had only a few flights to
O'Hare, mostly at less than optimal times. In 1999, DOT granted us a
number of slot exemptions at O'Hare. An example of our impact has been
that our Chicago to Ontario service has seen a 100% increase in market
share, and average fares are 39% below United's service. In fact, as
I've stated previously, our average fares from the eastern business
markets to the west are currently 29% below those of the larger network
carriers and nearly 50% less for walk-up business fares.
Next--the issue of diversity of service. If essential facilities
are concentrated in the hands of a few mega-carriers, they will be used
primarily to serve the mega-hubs. This will threaten the continuation
or expansion of hubbing activity in somewhat smaller cities, places
like Columbus or Milwaukee which can support this activity only if they
have access to the most important markets. There is no reason cities
such as these should be denied the economic benefits of affordable and
convenient air service as envisioned by airline deregulation.
As others have stated, we are at a competitive corssroads. Without
immediate action in the short run to create access for new entrants at
capacity restrained airports the northeast will face escalating fares
and a lack of choice in air travel. United and American will not
compete on price unless compelled to do so by low cost carriers. If
these transactions are approved, without adequate conditions imposed by
the Department of Justice coupled with actions by DOT and Congress to
promote competition, there will be limited or no low fare competition
at many major airports. In addition, the potential to extend
competition into smaller communities, as America West does in the west
and seeks to do in the east through Columbus, will be lost. These
issues are discussed in detail in our submissions to the Departments of
Justice and Transportation, which I have attached to my testimony.
Mr. Chairman, the commercial airlines industry is a network
business. You must be able to build a network to compete. In fact, my
friend Don Carty, CEO, American Airlines, stated last week at the
Senate Commerce Committee hearing that ``If one airline is able to grow
its route network significantly larger than its competitors, that
airline would have a competitive advantage.''
Mr. Chairman, America West agrees with that principle. We are
trying to grow our network--to be competitive. Approval of these
transactions, without requiring remedial measures to guarantee access
to these key markets is a recipie for disaster.
Senator DeWine. Mr. Franke, thank you very much.
Mr. Leonard?
STATEMENT OF JOE LEONARD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
AIRTRAN AIRWAYS, ORLANDO, FLORIDA
Mr. Leonard. Thank you, Mr. Chairman, Senator Kohl, members
of the committee. Thank you for inviting me here this morning.
What the Government does or does not do in the next few
weeks with regard to airline consolidation will have a very
long-term impact on the costs and the quality of service in the
airline industry throughout this country for decades to come.
In my view, there is only one way to reconcile the public
interest with the market forces that exist, and that is a new
initiative of genuine competition. You implement that
initiative by breaking open the door to the fortresses that the
major carriers have skillfully constructed around the publicly
owned and government-regulated assets, i.e. slots and gates.
That can be done under existing authority, and it should happen
without delay and without regard to whether any of these
mergers go forward.
DOT has the authority, and has exercised that authority in
the past to open gates and slots to competition. In the next
few days, AirTran intends to file a complaint with the DOT
against American and United and TWA and US Air, without regard
to what DOJ is doing on these antitrust issues, to open the
facilities to us. I urge you to join in supporting that
petition and I urge to join any other low-cost carriers that
file similar petitions, which I believe there will be.
Whatever else you think about these deals, it takes quite a
bit of imagination or an intense sense of humor to argue that
they comply with the antitrust laws and that they conform to
the DOT's mandate to advance competition. These are not
separate agreements, as has been announced. They are very much
linked by the American role. Long-term control of assets
without regard to who they belong to now is the end game here.
Let's take a look at a couple of the terms of the deal. In
this case, the devil is definitely in the details. American and
United have agreed that for the next 20 years they will fix
fares and schedules in the shuttle markets. They have agreed to
fix both corporate discount rates and consumer rates as well.
American and United have agreed not to operate or work with
any other carrier in the high-frequency, competitive market
between Boston and Washington. United has agreed to lease
scarce gates and locked-in slots to American at a nominal rate,
while at the same time every time we try to get a slot it is at
an exorbitant rate. American and United have agreed to code
share flights that feed hub-to-hub flights, including markets
like San Jose-to-Denver where they are the only two
competitors.
United has essentially sold the D.C. slots to American,
with the elimination of the no-flip turn, from its original
agreement with US Air. Therefore, DC Air can sell its slots to
American any time it chooses, and its supposed role as an
independent competitor will vanish completely.
American and United have agreed to limit each other's
growth, with penalties if American gets too big. American and
United have agreed to only sell and lease hangars to each
other. This is simply another way of controlling yet another
vital resource and asset in the aviation industry.
This sounds to me more like an antitrust extravaganza than
a remedy to the problem. The human tragedy is that the
employees of US Air and TWA and the cities that they serve are
inadvertently hostages whose future is presented to you as a
tradeoff for this anticompetitive consolidation.
For the cities affected, I would suggest that you study
American's history in serving marginal cities after they
acquire airlines. After the acquisition of Air Cal, all of
those routes were eliminated. They have eliminated the Raleigh-
Durham hub, the Nashville hub, the San Jose hub, and more
recently the Reno hub. Reno is now down to 11 flights a day by
American Airlines. So if history is a good teacher here, and I
suggest it is, if I lived in St. Louis or Syracuse or
Charleston or Morgantown, I would start checking the train
schedules.
The only way to cure a monopolistic, anticompetitive
practice is through real competition, which means open airports
to low-fare carriers like AirTran and JetBlue. We will and can
discipline the major airlines. We have demonstrated that in the
markets that we currently operate in. Allowing us to develop
networks is fundamental for competition to go forward.
You can't accomplish this by distributing a handful of
slots here and a handful of slots there. For us, that means 100
to 150 slots so that we can build a meaningful network at DCA
and in many of your States. Whether the slots come from the FAA
or DC Air or United, American and TWA is irrelevant. What is
important is that there be a redistribution of these vital
assets to create a network service on the East Coast. We are
certainly willing to compete; we just need some help in opening
the door.
Mr. Chairman, you and members of the Committee are the
guardians of the consumers, the traveling public and the
communities across America. You must speak out now before these
events take place and it is too late. Otherwise, a year from
now there will be another hearing talking about why fares are
so high and service is so small and why service has been
eliminated to small and medium communities.
Mr. Chairman, thank you very much for permitting me to be
here today.
[The prepared statement of Mr. Leonard follows:]
Statement of Joe Leonard, Chairman and Chief Executive Officer, AirTran
Airways
Mr. Chairman and Senator Kohl, members of the Committee, I thank
you for the opportunity to testify this morning. I commend you for your
leadership in acting quickly to investigate proposals that will
transform the airline industry as profoundly as did deregulation.
Make no mistake--what the government does, or does not do, over the
next several weeks with regard to airline consolidation will have a
long-term impact on our economy and on business and communities
throughout the country. Unchecked and unmodified, the pending
agreements will stifle competition, raise fares, and condemn hundreds
of small and medium size communities to limited and high-cost air
service for years. No one can seriously doubt that outcome.
Regardless of what happens with the pending proposals, this problem
is not going away. The gravitational pull of market forces have brought
these deals together, and those same forces will bring them back to you
time and time again.
Interlocking networks, and the ability to flow passengers to
multiple destinations, is the lifeblood of an airline--whether it be an
old-line institutional carrier or a low fare provider. These deals are
on the table because airlines want slots, gates and big networks--Don
Carty told us taht last week. What he didn't say was that American and
United want these resources without the inconvenience of effective
competition.
In my view, there is only one way to reconcile the public interest
with these market forces--a new initiative on genuine competition.
You implement that initiative by breaking open the door to the
fortress that the major carriers have skillfully constructed around
publickly owned or government-regulated assets--slots and gates. That
can be done now under existing authority and it should happen without
delay and without regard to whether any of these mergers go forward.
Let me turn to the issues that confront the Subcommittee today--the
legal and anticompetitive implications of the pending consolidations
and acquisitions.
Whatever else you might say about these deals, it takes a lot of
imagination or a great sense of humor to argue that they comply with
the antitrust laws and conform to DOT's mandate to advance competition.
These are not separate agreements--they are linked by American's
role. Control of the assets is the issue and how they fall into
American's hands to the advantage of American and United is not a
particularly relevant consideration. TWA's slots and gates are as much
public assets as those belonging to USAirways. Putting them under
American's control has the same anticompetitive consequences--the
consumer pays and American profits.
All of these agreements among American and United, United and
USAirways, American and DCAir and American and TWA are linked. They
cannot be reviewed, approved or rejected separately. They are linked in
terms of teh business plans that stimulated them and they are linked
because collectively they will define price and service for the
consumer for years to come.
American and United will control 50% of the airline seats in the
nation with levels of concentration that would make the robber barons
of old green with envy:
--94% at Charlotte
--80% at Philadelphia
--65% at Washington National
--92% at Pittsburgh
These agreements provide American and United with a major
structural advantage that they do not have today. That structural
competitive advantage--the carving of the nation into three or four
cartels--is the only reason these interlocking deals make sense. As my
colleague at TWA, Bill Compton, has acknowledged, no offer came to his
table until the original USAirways/United deal was on the radar screen.
It also did not come until it appeared that DOJ was saying no to the
original proposals.
Lets take one moment to look at some of the terms of these
agreements--in this case the devel is definitely in the details--
--American and United have agreed that for 20 years they will
fix fares and schedules in the shuttle markets--one of the most
important business markets in the nation--they have even agreed
to fix corporate discount rates on the shuttle and if that is
not enough, they have also agreed to fix their non-published
fares--the net fares and those discounted fares that are sold
through consolidators--all of this on the back of their control
of slots and gates in these markets;
--American and United have agreed not to operate or work with
any other airline to operate high frequency competitive service
between Boston and Washington;
--United has agreed to lease scarce gates and locked-up slots
to American at a nominal rate;
--American and United have agreed to code share on flights
that feed certain hub-to-hub flights including markets like San
Jose/Denver where they are effectively the only two
competitors. At the same time they won't codeshare with any new
entrants;
--United has essentially sold the DCA slots to American with
the elimination of the ``no flip'' term of its original
agreement with USAirways; what this amounts to is that DCAir
can sell its slots to American at any time and its role as an
independent competitor--if it would in fact ever be one--is
totally dependent on a ``trust me'' representation by its
owner. I happen to have a great deal of respect for Bob Johnson
as an honorable and smart businessman. But I have to note that
when he was talking recently to the Washington Post about slots
he commented that every businessperson has to have an exit
strategy. Based on published reports, he appears to have
financial incentives to sell his assets sooner rather than
later. Whatever tiny element of competition comes with DCAir
goes away when American controls it;
--American and United have agreed to limits on each other's
growth--if American acquires any major airline that makes it
7.5% larger than United, American has to sell back all of the
shuttle assets and if there is a divestiture in any acquisition
deal, American must first offer to United the assets to be
sold--a good way to avoid nuisance hearings before Congress;
--Finally, and here I must say this one is a bit of a
puzzle--we have the ``mystery of the maintenance bases.''
American and United, which each have multiple line and heavy
maintenance bases, have agreed that for 10 years they would not
sell or even lease any such base without offering it first to
the other. Don Carty last week testified that the four TWA
maintenance bases were scarce resources and that that was one
of the reasons American wanted to acquire TWA. That suggestion
of control of scarce resources may explain the ``mystery'', but
what is that agreement doing in a deal that is supposed to be
remedying antitrust concerns arising out of a carving up of
USAirways?
As I said earlier, the devil is in the details. The details of
these agreements sould awfully like an antitrust problem rather than a
remedy.
The human tragedy is that the combined employees of USAirways and
TWA and the cities that they serve are inadvertent hostages whose
future is presented to you as the trade-off for an anticompetitive
consolidation.
For the cities affected, I would suggest that they study American's
history of promises when it acquires airlines. When American bought Air
al and Reno, it trumpeted the same promises of more and better service
and ended with American slipping out of town and leaving the
communities with less service than before.
History is a good teacher here, and if I was in St. Louis or
Syracuse or Charleston or Morgantown--I might start checking train
schedules.
Let's also not be fooled by the now familiar theme that Southwest
will save the consumers with the ``Southwest effect'' on fares--
essentially this amounts to American and United saying, ``don't worry
if we gouge you on fares--Southwest will protect you.'' Well, Southwest
is big in Baltimore, but travelers out of Washington National still pay
premium rates goign to the same places. That is not going to change
simply because American replaces USAirways in Washington. As Mike
Levine testified last week, Southwest appeals to a different market and
is not going to save the nation from the major airlines as they
consolidate.
As obvious as it is, it bears repeating now--the only way to cure a
monopolistic, anti-competitive practice is through competition. Opening
airports to low fare providers like AirTran can and will discipline the
major airlines. It will spawn a new generation of low far providers
like AirTran and Jet Blue. Allowing us to develop networks is a
foundation stone for competition going forward.
You cannot accomplish this with an Air 21 type solution of handing
out a handfull of slots. In a place like Washington National, AirTran
and other low fare carriers needs a significant number of slots and a
fair number of gates to effectively compete. For us that means we need
at least 100 slots to put together a meaningful network to bring low
fare service to Washington National. Whether those slots come from the
actions that the FAA should take to fairly distribute these public
assets or from DCAir or from the hundreds that American, United,
USAirways and TWA collectively control is not the issue. What is at
stake is the use of these public assets to bring competitive choice to
consumers. We are prepared to compete against all of them--just let us
get in the door.
DOT has the authority to open the gates to competition and in the
next few days AirTran intends to file complaints at the DOT against
United, American, USAirways and TWA to proactively force divestiture of
slots without regard to what DOJ says on antitrust issues. I urge you
to join in supporting that petition or similar petitions by other low
fare carriers.
Mr. Chairman, you and the members of this Committee are the
guardians for consumers, travelers and communities across America. You
must speak out now before events make it too late. Otherwise, a year
from now you will be having hearings on why fares are too high and why
service is so poor to small and medium sized communities. At that
point, it will be too late to do anything.
Do not let this situation turn into an airline version of the
California power deregulation crisis. Do not put yourselves or the
American people into a position a year or two from now when everyone
may be saying--``how in the world did we get into this mess?'' You have
the answer to that question today.
Thank you again for letting me appear before you today.
Senator DeWine. Mr. Leonard, thank you very much.
Professor Levine, thank you for being here.
STATEMENT OF MICHAEL E. LEVINE, ADJUNCT PROFESSOR OF LAW,
HARVARD LAW SCHOOL, CAMBRIDGE, MASSACHUSETTS
Mr. Levine. Thank you, Mr. Chairman, and thank you for the
Committee inviting me. I am, as you probably know, as a
Committee witness. Unlike these gentlemen, I don't represent
thousands of employees or anyone else, but I do have a
perspective that I hope the Committee will find useful.
I have been a lifelong student of the airline industry and
airline deregulation. I was a student of Bob Bork's at the Yale
Law School and I studied economics at the University of
Chicago, and I am not hostile to very active business
competition and I don't think that mergers are, per se, a
terrible tool for managing a company.
But we do have laws that are designed to keep mergers from
forming monopolies, and I spent much of my early career trying
to deregulate the industry so we could unleash the forces of
competition. I have studied that. I was chief of staff for Fred
Kahn at the CAB when we deregulated the airlines.
I have had experience in the business with three different
kinds of airlines--Continental, which was then a transitional
carrier moving from regulation to deregulation and struggling
to change itself; New York Air, which was a new entrant carrier
and in which I discovered how difficult it can be to compete a
new entrant carrier; and more recently Northwest Airlines,
which is one of the larger network airlines. So I think I have
a somewhat different perspective on the industry from most
people.
I am here because I frankly worry about the threat
represented particularly by the American Airlines/United
Airlines and US Air deal to deregulation and the fruits of
deregulation.
A little history might be useful here. American and United
are the survivors of the big four of the regulated period. They
included Eastern, now gone to its reward, and TWA, whose
funeral we are sort of presiding over as we sit. They adopted
after deregulation a strategy that was going to allow them to
grow, to become very big, ubiquitous network airlines. They
kind of started an arms race between themselves.
Other airlines decided they didn't want to get left behind,
and what you may remember from the 1980's was a sort of an orgy
of expansion as everyone tried to become ubiquitous. The
expansion was terminated abruptly by the recession of 1990 to
1992. Ubiquity seemed like a sort of disastrous pursuit.
Coming out of the recession, airlines built strong
networks, as Mr. Bethune was saying, built around regional
cores that also had a national extent. What happened,
interestingly enough, is that market share actually began to
move toward Delta and toward Continental and toward Northwest,
particularly, and originally toward US Air as well for a while.
That market share threatened to erode the network superiority
that the ubiquity strategy was designed to achieve.
What has happened is that basically they have decided--
United made the last move in attempting to put together a
network by the US Air acquisition on its own. That has serious
antitrust problems. It has been said that the so-called carve-
out solution with DC Air didn't pass the laugh test. I don't
mean that unkindly to Mr. Johnson or his intentions at all, but
no one seriously believes that DC Air can be a major competitor
in Washington to a large trunk airline that controls assets up
and down the East Coast, especially if it is operating at
relatively high cost with relatively small airports. DC Air is
going to have relatively few big jets. Regional jets are
another matter and they don't represent the same kind of
competitive arrangement.
What happened was when that ran into trouble, American, in
what I regard as a really brilliant move, concocted these two
deals, the TWA deal which cast a kind of failing company, dark
pall over the whole business and suggests that you can see this
whole transaction--and it was presented here this morning as a
transaction to save two failing carriers. There is only one
failing carrier here, and that is important to understand.
And then, in addition, to end the war for ubiquity by
declaring a truce with United, they are going to divide up US
Air. As has been pointed out here by other members of the
panel, the most important asset you get is control of the
fortress; that is, of the limited slots and gates that are in
the Northeast which is the key to running any network in the
country because of the large number of people who want to
travel there and who originate there. Those people cast a
benefit over your whole system, a benefit which will be locked
up by United and American by this transaction.
It is important to understand that this is a quantum leap.
It is not just an evolutionary move, it is a revolutionary
move. It is designed to end what had evolved into a rather
competitive network industry. I don't mean to suggest there are
no defects. I don't mean to suggest that some people don't pay
some very high fares under some circumstances, and you can
argue whether they should or not.
But the business on the whole has been examined by scholars
for 20 years and every one of them has found it to be
relatively competitive and beneficial to most travelers most of
the time. This is designed to end that arrangement and to
restore what they regard as the natural, rightful leadership of
American and United as a big two, and a big two protected from
encroachment, as you have heard on the panel this morning, by
the slot, gate and runway shortages in the Northeast which are
going to be with us for a long time to come.
I think it is important to understand this deal that way
because this is not just another merger. It shouldn't be dealt
with by the Justice Department as just one more business
proposition put in front of them to examine. It should be
understood in context, and I am trying to provide the Committee
with some context this morning.
Joe has just been through some of the rather odd aspects of
the United/American deal. I won't highlight them any more, but
there are a couple of really interesting points that ought to
be considered.
United and American have testified that they are arch-
rivals, or at least American has testified last week that
United is its arch-rival and they can be expected to be
extremely competitive. Why is it United is prepared to let its
arch-rival, American, provide competition at National Airport
rather than Continental, which offered to make an arrangement
for carve-outs, and Joe Leonard's AirTran which offered to make
arrangements? I know that there are some non-public offers that
have been made.
There is no question that these slots at Washington
National are very valuable, and that there are several
volunteers who would be happy to step up and assume the public
duty of providing United with some competition here in
Washington, D.C. I think it is kind of interesting that United
has chosen its arch-rival, American, as its competitor.
United is acquiring as part of the US Air deal the shuttle,
which is really from a network standpoint a crown jewel, as
Delta recognized a while ago when they took over the other
shuttle, the one we started at New York Air, actually, many
years ago. The reason it is a crown jewel is that a lot of
people who buy a lot of tickets to a lot of other places fly
the shuttle. If you can get them in your frequent flyer
program, if you can get their corporations to make contracts
with you on the shuttle, it gives you a big leg up in making
contracts elsewhere in what is a network business.
United has offered to share the shuttle with American, its
arch-rival. Isn't that extraordinary? But the deal is off if
American gets too big. That is also extraordinary. This is not
a declaration of a new competitive war at a new level. This is
a truce. This is at least an armistice that is meant to--I
would say it is meant to last at least as long as the one in
Korea has lasted. I don't really know what will happen 50 years
from now, but it is probably good for another 50 years. I think
that is also extraordinary.
It has been suggested that you need not worry about this
because Southwest and other low-cost carriers are going to
provide competitive discipline. I have enormous respect for
Southwest and the job they have done. I admire the consumer
benefits they have brought. Their example and PSA's example in
California I cited in an article 35 years ago when I urged the
country to adopt airline deregulation as a strategy.
But what Southwest does is not a direct substitute for
network competition. It provides an extremely valuable
alternative to people who want to use it and who, in effect,
Southwest pays for using it. I think that is great, but it
won't get you to either the biggest airports, because Southwest
finds many of them too expensive to operate to, or many of the
smallest airports because Southwest doesn't flow enough traffic
to them to make them valuable parts of its network.
Business people and leisure people need both network
airlines and discount, quasi-network airlines to provide
competitive choice. If the big two create a price umbrella,
Southwest--I mean, Herb is a great guy and he is very
benevolent, but Southwest will use that and take advantage of
that to work their prices up--I don't mean to personalize this,
but to work their prices up under that price umbrella. It gives
them a lot more room. So customers will not only pay United and
American, they will pay Southwest because of the United and
American big two that has been organized.
You will see attempts by some of the other members of the
panel and by others not here to try to form coalitions in
response. That will have the effect of hyper-concentrating the
industry. I don't think that is really good. It certainly isn't
the vision I had in mind when I worked on airline deregulation.
I realize I have taken a lot of time and I am sorry for
that. The written statement is even longer. I apologize.
Senator Schumer. I don't want him to stop, Mr. Chairman.
Mr. Levine. Finally, the Justice Department needs to take
another serious look at its own guidelines for airline mergers.
They are both too narrow and too broad. They focus on city pair
competition and then they focus on share of the national
market. What they don't focus on is the viability of network
competition in a network business.
A rework has been done. In my testimony, I suggest a little
bit directions in which that might go. But I think that if you
do end up asking the Justice Department to examine these
mergers very closely, you ought to also ask them to rethink the
criteria that they are using to judge airline mergers, not to
abolish airline mergers forever, not to eliminate mergers as a
tool of business, but to eliminate the possibility of snaking
around the antitrust laws to build a so-called competitive
position which cannot be eroded for years and years and years.
Thank you. I will be happy to answer questions.
[The prepared statement of Mr. Levine follows:]
Statement of Prof. Michael E. Levine, Harvard Law School
Mr. Chairman and Members of the Senate Antitrust Subcommittee:
Thank you for giving me the opportunity to testify before you today at
what I believe is a critical point in the development of the
deregulated airline industry. I testify at the invitation of the
Committee as a private citizen and not on behalf of any airline,
industry group or other organized interest. My reason for testifying is
simple: I have dedicated most of my career first to bringing about a
competitive deregulated airline industry and then to demonstrating
through my own personal efforts that it is possible for a well-managed
airline to survive and prosper in a competitive environment. I see a
threat to the continued success of airline deregulation, and I hope to
play some part in countering that threat.
I am at present a member of the faculty of the Harvard Law School,
teaching courses in regulation and international joint ventures. I have
attached a detailed biography to this testimony for your information,
but let me say briefly that I have had the unusual opportunity to
study, to regulate and to work in the airline industry. This experience
has included work as a dean and scholar who has advocated and continues
to advocate deregulation at USC, Caltech, Yale and Harvard. It also
included a position as the senior staff member at the Civil Aeronautics
Board under Alfred Kahn and then Marvin Cohen during the most pivotal
deregulation period. And I also have had the opportunity to participate
in the industry as a CEO or senior executive of a transitional network
airline (Continental), a new entrant airline (New York Air) and finally
at the fourth largest airline in the United States (Northwest).
I am very concerned about the consequences for industry competition
and ultimately for consumers of the proposed division of US Airways
between United Air Lines and American Airlines.
Before I discuss that transaction I should make clear that the
``companion'' merger between American and TWA on its own presents no
serious competition problems. That TWA is a failing company seems
beyond doubt. The TWA deal may present difficulties for American in
terms of labor, fleet and systems integration. Those problems may
present service problems for the traveling public but if they
materialize, the public can deal with them by avoiding American. They
will still have that choice because the American-TWA transaction will
not change the structure of the industry and does not present a threat
to the competition that is necessary for deregulation to succeed as a
public policy. This matter should be left to the marketplace and the
bankruptcy courts.
American has justified its merger with TWA on its own merits at the
same time that it has presented it as part of a strategic package that
includes American's agreement with United to divide US Airways. It
seems clear to me that the most important purpose of the TWA deal is to
help give a ``failing-company'' cast to the whole four-airline
transaction, and to provide political cover (preserving 20,000 jobs and
a large-airline hub presence at St. Louis) to politicians and
government officials as they consider a total transaction much more
difficult to justify on competition grounds. The second major benefit
to American is not the chance to operate a St. Louis hub, but rather to
use TWA's slots and facilities at congested East Coast airports to
bolster American's New York and East Coast strategic position and to
use TWA aircraft to achieve market share parity with United as part of
the Big Two strategy discussed below.
The significance of the TWA transaction is that a closer look at it
raises suspicions about American's strategic motives. On its own, the
TWA transaction is difficult to justify commercially. TWA has been
carefully examined as an acquisition candidate by every major airline
(more than once, in many cases), and I believe that those studies all
came to the same conclusion: while St. Louis is well-located and can
support a hub of some size, it would be very difficult for a ``normal''
network airline to make any significant profit there.
First and most important, operating a hub on top of Southwest
Airlines means that normal hub economics are impaired by the inability
to charge normal hub fares to short-to-medium haul business travelers,
and as Southwest's system continues to evolve out of its previous
short-haul, point-to-point mode, that effect becomes more and more
severe. Just ask America West, which has had considerable difficulty
maintaining at Phoenix a revenue base adequate to support a
significantly profitable hub operation, even at its very low costs.
When you add into this equation American's labor costs and the
transition costs of labor, systems and fleet integration, it's
difficult to believe that American's better credit and better fuel
purchase position and the overhead savings from eliminating TWA's
management infrastructure make this transaction taken by itself
additive to American's earnings or worth the risk. I know these numbers
didn't work for anyone else, and would be surprised to learn that they
suddenly make sense on their own for American.
Second, this is clearly a case where American is acting in concert
with United to achieve jointly-shared strategic goals. If United was
only interested in solving the Washington, DC part of the antitrust
problem presented by its own US Airways deal, any number of other
airlines would have been willing to help them out. But rather than
Continental or Airtran, who have publicly indicated a willingness to
work with Robert Johnson to produce a DC Air that would be a full-
blooded competitor to United (or rather than the couple of other
airlines who are rumored to have expressed serious interest), United
has chosen to work with the airline that is its supposed arch-rival and
that should be its most difficult competitor from the standpoint of
network coverage (``scope''). In fact, when the transaction is taken as
a whole United has cooperated in fashioning a deal that represents a
giant step forward for American in achieving its stated goal of network
ubiquity even as it impairs United's attempt to build a uniquely
ubiquitous position. Why would United do this? To understand, I think
we need to look at a bit of history.
American and United are what remain of the prederegulation ``Big
Four''. Eastern has gone to its reward and TWA, shrunk to a shadow of
its former self, is about to follow. Both were victims not only of
their own managements' strategic mistakes, but also of their inability
to persuade their own labor forces to adapt proactively to the changed
circumstances of deregulation. United and American, facing the same
concerns about their ability to survive deregulation given their high
costs, adopted a different management strategy: they persuaded their
labor forces in the postderegulation period to reach accommodations
that lowered marginal labor costs (``B''-scales, ESOP, periodic scope
relief, etc.) and allowed fleet and system flexibility in return for
assurances of growth, producing more job security and richer lifetime
career paths for employees. They coupled this with adoption of a
``ubiquity'' strategy, in which the size and reach of their networks
would allow them to meet almost every air transportation need of every
airline customer. This ubiquity would be used to differentiate
themselves from new entrants for business travelers and to gain a
revenue advantage over other network competitors. United announced
shortly after deregulation that it had become the first airline to
serve all 50 states. American moved to Dallas so that it could serve a
very large, centrally located, facility-unconstrained O&D market as a
national hub. The idea for both American and United was that they would
ultimately overwhelm smaller network competitors as customers and
travel agents chose to sign contracts with and use the frequent flyer
benefits of the airline that could satisfy the largest portion of their
needs.
On their way to unchallenged ubiquity, two things happened. Other
network competitors saw what was happening and refused to roll over
quietly. First Texas Air, then Delta, Northwest, Allegheny/US Air
(remember the Piedmont merger and the name change?) and Continental on
its own attempted expansions designed to enhance their own ubiquity and
thus survivability. A sort of ubiquity arms race ensued, which caused
severe self-damage to more than one participant and nearly destroyed
the entire industry when the economic expansion of the 1980s segued
into the recession of the early 1990s. In the process, Delta became
large enough to approach American and United in size, but more
important, the recession-induced stunting of the growth process evolved
the industry into an ``almost-national'' mode, with each successful
network airline building and defending regional core positions that
supported a large but incomplete national hub system. The traveling
public benefited hugely from this process (shareholders benefited
less!). The almost-national systems were very large and provided many
of the benefits of complete network scope. People in spoke cities often
had a choice of as many as half a dozen competing hub carriers that
could meet a particular trip need, hub-located travelers could get
nonstop service to 80 or more destinations comprising most of their
travel needs and most travelers could meet virtually all their needs by
concentrating their business on two systems, for which they were
rewarded with frequent flyer benefits they valued greatly.
But from United's and American's perspective, this was not such a
splendid state of affairs. They had built their labor strategies around
paying labor for growth and the ability to use their network strength
to capture revenue premiums (monopolistic rents). Growth was slowing as
it had become clear that capacity expansion would be defensively
matched and there was not enough new business to support profitable
expansion for American and United relative to the rest of the industry.
The national market became more concentrated among the top five network
airlines and Southwest, but almost all of the incremental share went to
Southwest, Delta, Northwest and Continental. The development of
alliances by smaller airlines as a way to achieve many of the benefits
of network size without the risks of overcapacity further eroded their
revenue premiums. The net result of twenty years of deregulation was
NOT that American and United had become uniquely ubiquitous airlines,
but rather that they had come to share the network industry with
several competitors that not only wouldn't go away, but which
constrained the possibility of further share expansion. For American
and United, the strategic question became: how can we (either American
or United or both) gain a network size advantage that can't be
duplicated and eroded and which will yield monopoly rents to support
our very high costs?
Both airlines came to the conclusion that the key was the East
Coast: United already dominated network service on the West Coast, but
the West Coast has relatively few cities and while those cities
wouldn't support more than one network (as American repeatedly found
out through expensive tests--the Air Cal and Reno acquisitions and the
San Jose north-south hub), its relatively uncongested, separated
airports were ideal for expansion by Southwest. Further competitive
shifts toward American/United were unlikely there. Delta's Atlanta hub
operation along with expansion by Southwest and Airtran made the
Southeast unpromising. The midline of the country provided as many
opportunities to Continental and Northwest as to American and United,
especially given the constraints at Chicago-O'Hare.
By contrast, the East Coast has a variety of interesting features
which might allow it to underpin a sustainable network size and scope
advantage which could be leveraged into a dominant position: a large
part of the nation's population and travel origin is located there.
Airports are congested and facilities tight, making substantial
matching expansion by network competitors difficult and substantial
discount competition at the primary business airports nearly
impossible. Four major population concentrations are the focus of much
of the business traffic: Boston, New York City, Philadelphia and
Washington. Northwest has no presence there except through the
Continental alliance. Continental's and Delta's strength is largely
limited to Newark (Continental) and north-south and transatlantic
service (Delta). Transcontinental business is already dominated by
American and United. Continental has only been able to build a
significant transcontinental business from its Newark hub using
narrowbody aircraft and Delta has been unable to make a significant
dent in these markets. United has built a hub at Dulles and American
has made a significant effort to build its presence at Boston, but
neither of these efforts have produced a sufficient increment in East
Coast presence to allow unduplicable network expansion that could cast
a halo over the entire United States system.
American started to build an alliance with US Airways, the only
airline with strategically-located sufficient mass that could make a
difference to its network strength. The alliance involved codesharing,
a frequent flyer deal and computer systems integration which lowered
American's costs. Northwest and Continental built an alliance which
made Northwest a much stronger competitor to United in the Midwest and
over the Pacific and strengthened Continental's position in New York.
These developments concerned United greatly. United was offered the
opportunity to do something decisive in response by US Airways
management's conclusion that its structural and cost problems couldn't
be overcome without major flexibility by its unions, and its consequent
decision to save its shareholders by bailing out after an attempt to
reach union accommodation failed. The result was the United/US Airways
deal.
What United expected to get out of the deal was an effective
monopoly in Washington and Philadelphia, a greatly enhanced position in
Boston and New York, and a major frequent flyer presence in the very
important Shuttle markets. It hoped simultaneously to strengthen its
revenue position vis-a-vis American, achieving through system market
power what it had never been able to achieve through service and
operations and to finally separate itself from the increasing
competition offered by Delta, Continental and Northwest. That United
paid too much is a tribute to Stephen Wolf's bargaining skills. That it
did the deal without getting the union consents that would have helped
manage transition costs is a confirmation of the priority that United's
management gave the deal and how much impact on competition of the
priority that United's management gave the deal and how much impact on
competition they expected it to have. There are many who think that
this transaction might have in the end cost so much that it wouldn't
have made a profit for United. That the costs of integrating the two
airlines might have been such that its shareholders might not
ultimately have benefited does not mean that there were no monopoly
profits to be made, but only that the monopoly profits would be
distributed among US Airways shareholders, United's labor force and
Robert Johnson.
The only problem with all this is that the United/US Airways deal,
despite its beautifully prepared political campaign, appeared to be in
danger of failing. The DC Air ``cure'' to the Washington problem was
not passing the laugh test. No one seriously believed that a United-
supported DC Air with a large commuter component was likely to provide
significant stand-alone competition to United in Washington. Offers of
``help'' by Continental and Airtran put United between the devil and
the deep blue sea with respect to its transaction goals. Giving
Continental a strong Washington position was the opposite from what
United was trying to achieve in redistributing network system strength
away from its pesky pursuers. And allowing a discount airline like
Airtran to operate from the business revenue heart of its East Coast
hub strength (bad enough to have Southwest at BWI!) would be very
damaging to United's Washington economics and would make the
transaction even more expensive by a substantial margin (in much the
way that Southwest's presence at St. Louis makes the TWA transaction
expensive for American).
American, with the prospect of losing its US Airways relationship
and of seeing its United rival get a structural lock on a superior
network position, offered United a brilliantly-conceived truce that was
much more valuable to United than a failed deal and a continued war
with Delta, Continental and Northwest. In effect, it offered to jointly
share ubiquity, establishing barriers to further merger. With the TWA
deal and the deal as American and United have structured it, American
and United would be almost exactly the same size at about 25% of the
national market. Each of the Big Two could sustain a revenue premium
relative to Delta, Continental and Northwest and generate network
monopoly premiums to help stave off the economic impact of Southwest.
Neither would have the incentive to erode those rents through price
competition with the other (because little relative share gain would be
possible), so pricing discipline would be maintained without collusion.
While there would be a possibility that Delta or Continental might try
to defend itself by combining with Northwest, none was a failing
company and the Justice Department could be expected to be hostile,
given its record in the Northwest/Continental control case.
Paradoxically enough, the United/American joint monopoly position could
be defended with the antitrust laws!
Even if their rivals could merge, no one would have the combination
of Boston, Philadelphia and Washington strength available to the Big
Two and could achieve the same system leverage. American could make
itself stronger in New York through the TWA system leverage. American
could make itself stronger in New York through the TWA deal, achieve
near-parity in Washington and Boston, and concede Philadelphia. It
could make excellent network use of the Washington and other Northeast
slots and gates it gets in this deal because of its success in using
regional jets to maintain presence on mainline routes. Its ability to
sustain a network advantage over ``the others'' would be assured.
United would strengthen its position in Washington, Boston and New
York, gain control of key facilities and slots, and build an East Coast
North/South system. For both American and United, rivalry with each
other along nonprice dimensions while each had market power relative to
the rest was an attractive alternative to the status quo.
The Big Two position that these transactions would create is likely
to last a very long time. The large pool of customers available in the
Northeast and the ability to use the scarcity of slots and gates at its
congested airports to lock them up will make it impossible to duplicate
the Big Two position that American and United will share. No comparable
opportunity will be available to other big network airlines and
therefore no other network airline will be able to match United's and
American's ability to offer corporate contracts, travel agency and
internet incentives and frequent flyer benefits. Over time, Delta,
Northwest and Continental will find it increasingly difficult to
capture East Coast business passengers, providing less flow at their
hubs and supporting less service than American and United will be able
to sustain. The gap between American and United and the ``others'' will
grow.
Among the strongest pieces of evidence that this narrative captures
what the participants predict and intend in this deal is the treatment
of the US Airways Shuttle, which is a crown jewel in any network scope
strategy. The Shuttle is used primarily by a group of business
travelers who are also the ones most likely to buy high-priced tickets
to elsewhere from Boston, New York and Washington. In Delta's hands,
the other shuttle is one of the assets most valuable in its efforts to
move toward network parity with American and United. As a potential
source of monopoly dominance, the US Airways shuttle is wasted in US
Airways' hands because US Airways doesn't have the complementary system
strength to take advantage of it. In fact, the Shuttle doesn't even
serve Philadelphia, which is US Airways focus for much of its valuable
business flying! American had a temporary advantage over United through
its alliance with US Airways. United grabbed it back. United's giving
up exclusive control of the network value of this Shuttle only makes
sense in the context of a shared-dominance strategy in which both
airlines see its principal value as enhancing their ability to suppress
competition on the rest of their networks. This view of the transaction
is confirmed by the fact that United gets to keep all of the Shuttle if
American concludes an acquisition that makes its bigger than United!
This discussion doesn't deal with all of the potential objections
to this transaction, some of which are common to the United/US Airways
transaction as well. For example, public vulnerability to labor
disruption is increased as more of the system falls into fewer hands.
The public consequences of a job action on an airline so big that the
rest of the system simply cannot absorb its business are very serious,
as are the consequences of the associated imbalance in bargaining
power. I have tried instead to focus on the subtle and complex
competitive dynamics that underlie this transaction in an attempt to
explain why this is not just another merger and just another rescue of
some threatened airline jobs. (On that subject, I should say that the
notion that US Airways is, like TWA, a failing company is entirely
wrong. Faced with no alternative, management and labor could work
together at US Airways to achieve costs and revenues that would enable
it to survive, although some surgery might be necessary. But that's
another story for another time.)
What can be said in favor of this transaction? Only that if
consumers prefer to concentrate their business on one very large
system, we should accomplish them. And there is no doubt that some
consumers would prefer to do so, especially if all other things were
equal. But all other things will not remain equal. This convenience
will come at the price of choice and long-term competition. There are
often conveniences to monopoly, as anyone who used to have only one
number to call when they wanted to discuss their phone service will
attest. But there are benefits from competition which have generally
been judged superior as a matter of public policy. If one compares the
utility to consumers of having competitive choices among airlines,
almost any two of which can satisfy almost all their needs, with the
``convenience'' of one-stop shopping in a duopoly, I believe that most
consumers would prefer competition. That comparison is reflected not
only in our antitrust laws, but in the regulatory policies of the past
twenty-five years.
It has been urged by at least one observer that we need not be
concerned about loss of competitive pressure in the network business
because Southwest in particular and other low-cost airlines in general
represent a large enough share of the business to discipline United and
American. I suppose that the first rebuttal is American and United
clearly don't agree with him. It's difficult to justify the cost
commitments and vulnerabilities which this transaction entails for
American and United without assuming that they believe that they will
earn substantial monopoly benefits from the transaction.
There are good reasons for thinking they may be right, even if in
the end the transition and labor costs of the deal are so large that it
ultimately doesn't benefit their shareholders:
First, although Southwest and its ilk offer a valuable service to
their passengers, it is not a service, equally valuable to all
passengers. These airlines do not have significant presence (indeed,
Southwest has no presence) at the very congested and constrained
airports that are the principal focus of this transaction. Business
travelers value and will pay for airport convenience, which is why, for
example, business fares are much higher from Boston to Reagan National
than they are from Providence to Baltimore-Washington International.
Second, these discount airlines do not maintain networks that are
easy to use for complicated itineraries or which afford easy access to
airports close to smaller cities. They rely on the willingness of a
traveler to drive to reach an airport where fares are low. For many
travelers, this is an excellent tradeoff, but for a substantial number
of business travelers, it is not.
Third, Southwest may be second in the nation in the number of
passengers it carries, as some are fond of noting, but it is much
smaller in terms of its overall volume of business, which is ultimately
how economic impact is measured. Southwest is seventh in the number of
Revenue Passenger Miles (the standard measure of output) and even if it
grows as rapidly as analysts assure us it will, it will still be
responsible for a substantially smaller share of industry total revenue
or industry total output than its large network rivals, not to mention
the Big Two.
Finally, Southwest itself is not a charitable organization, fully
conceding Herb Kelleher's legendary benevolence and charm. Its pricing
is constrained by network carriers, just as network carriers constrain
it. If the pricing umbrella is set higher by the Big Two, Southwest
itself can charge more. Southwest claims that its main competition is
the car, but that is only true in the short-haul, point-to-point
markets that are no longer the mainstay of its system or the source of
its growth. In fact, the car has become much more a complement for
travel on Southwest than a substitute. Its customers drive significant
distances to get to its uncongested airports. If the Big Two price
higher, Southwest can charge more and still make it worthwhile for its
customers to drive to its flights. Each rise in Southwest's price level
would cost the public a very great deal. Southwest and its breathren
are a very valuable part of the U.S. airline system, but its existence
is certainly not a substitute for strong competition among network
airlines.
In conclusion, this is not just another merger and not just another
bailout of a failing airline. The American/United/US Airways
transaction is an attempt to undermine the competition created by
deregulation. It will do this by building a wall of scarce East Coast
infrastructure around a fortress occupied by a Big Two, who will use
the protection of that fortress to attack their pursuers. With all its
imperfections, deregulated airline competition has served the United
States well. The Big Four of the CAB, protected from each other by
regulation, is now a group of six highly rivalrous network airlines in
which at least three of the smaller players are gaining on the larger
two, supplemented and disciplined by a large and growing discount
airline system. Congress and the Administration should not allow those
who have the most to lose from this evolution to put a halt to it.
What should be done? In my view, the current Justice Department
merger guidelines are inadequate to deal with network airline
competition. By focusing on city-pairs and national markets, they are
simultaneously too narrow and too broad. Creating duopolies in affected
nonstop city-pair markets ought not to be the goal of merger policy.
Counting remaining networks as one by one gets picked off without
considering the degree of effective rivalry that the survivors can
offer is equally shortsighted.
By considering mergers only one at a time, DOJ's policies allow
eggs to be scrambled without gaining an understanding of the recipe of
which they are a part. The Department should focus here on the fact
that effective national network competition requires adequate traffic
density to support competitive frequency and roughly comparable network
scope, either directly or through alliances, to be able to meet
competitively the transportation needs of a significant portion of the
national market. Justice may wish to argue that the East Coast assets
of US Airways and TWA when combined with existing American and United
assets create a barrier to entry in national network competition
because of the impossibility without them of building a network of the
size and scope necessary to compete with the American and United that
will emerge from this transaction.
American and United will achieve Big Two dominance by using
together network scope much larger than their competitors and an access
lock on the Northeast markets that serve as a source and destination
for much of the nation's traffic. If these transactions go ahead, it is
to be expected that as the remaining firms fall behind, they will try
to combine their Northeast strengths and then try to offset their
Northeast weakness relative to American and United by building a
national network even larger in scope. The ultimate result would be an
industry with three network competitors, two jointly dominant and one
large and struggling, instead of six. DOJ should develop a merger test,
at least for network businesses, that allows or requires them to look
at and take into account both the implications for network competition
and the probable further transactional consequences of mergers before
them. If it doesn't believe it can do that within the current statute,
the Congress should help them by making clear that DOJ has the right
and obligation to do so.
I have already indicated why I don't think non-network discount
airlines like Southwest represent a ``cure'' for the competitive
illness this would produce. And I don't think that American and United
should be given a ``failing company'' license to dismember US Airways.
US Airways is a troubled, but not failing, company. Its management and
labor have elected to sell out at a good price to a duopoly that will
pay off shareholders and maintain above-market labor arrangements
rather than to accept the hard choices that would be necessary to make
their airline healthy again. It's the public that's expected to pay the
bill.
In short, we have reached a critical point. We can either preserve
competition among four or five or six network competitors, none of
which have the potential of achieving a level of dominance which makes
the others unable to compete. Or we can turn the deregulated airline
industry into the preserve of two powerful airlines who have pulled up
the ladder of access to the East Coast and who expect to watch their
rivals fade away as they struggle to overcome an impossible competitive
disadvantage. The authorities and the Congress should not stand by
while this happens.
Senator DeWine. Professor, thank you very much for your
testimony.
Senator Grassley, do you have any opening comments, or
Senator Specter?
Senator Grassley. Are we going to ask questions?
Senator DeWine. We will go to questions, but I wanted to
see if you wanted to take the opportunity to make any opening
statement, either one of you. Then we will go to questions
after that.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you very much. I have been
following airline competition issues closely for several years
because of their importance to my State of Iowa. Iowa air
travelers and businesses have long been vocal about the lack of
competition in air service and high air fares that have
seemingly been much out of line for Iowa cities compared to
other Midwestern cities like Omaha or Kansas City.
Competitive air service is directly related also to the
economic future of our communities. The ability of business
people to get in and out on a punctual and competitive basis is
very important for economic development in my State.
I have been concerned about predatory pricing and other
anticompetitive practices in the airline industry. I have also
been concerned about airline mergers reducing competition and
resulting in higher fares. I have been concerned that mergers
between the large carriers could trigger other large airlines
to merge, and then we would just have a handful of airlines
controlling the lion's share of the United States market.
Right now, a number of airline transactions are being
considered. I won't list those now because of time, but I would
like to distinguish the American acquisition of TWA as somewhat
unique in the sense that this transaction seems to be the only
solution in terms of saving thousands of jobs and sustaining
crucial flights in and out of Iowa.
I have gotten some assurances from Chief Executive Don
Carty that American would not reduce flights into Des Moines,
Cedar Rapids and other points in Iowa. So I believe that this
particular asset buy, because of the dire straits and
bankruptcy that TWA finds itself in, may be the only solution
that is going to maintain competition in air service for these
rural communities. I think that the alternative of TWA going
out of business could be worse.
All of the talk of mergers fuels my general concern that if
the largest carriers control the majority of the market hubs,
gates and networks, won't they also have the pricing power to
restrict the entry of startup airlines? How will these mergers
then help air travelers, and how will these mergers help
competition?
We also have to understand how existing regional airlines
such as Great Lakes, Corporate Air, Chatauqua, Allegheny,
Piedmont and PSA, will be treated under these mergers and
acquisitions. They are, of course, the epitome of essential air
service that we all talk about.
In the past, I have urged both the Justice and
Transportation Departments to make sure that they are doing
everything under their statutory authority to investigate and
take enforcement action for antitrust violations by airlines. I
have pushed the Justice Department to closely review all
airline mergers, alliances, and other contractual arrangements
that might violate antitrust laws.
A free market is the best system by which to solve the air
service problems in the cities of Iowa and other rural parts of
America. But I want to assure that rural communities like those
in Iowa do not experience higher air fares, fewer flights and
fewer connections just because there is no competition among
airlines.
The Justice and Transportation Departments obviously should
enforce the antitrust laws. I just want to make sure that it is
done in the proper way, and make sure that competition out
there is always high on the Justice Department and
Transportation Department's agenda.
If you are wondering why we in Congress are talking about
this--we are not enforcing the laws--we do it because we have a
constitutional responsibility of oversight to make sure that
the antitrust laws work and the resulting competitiveness of
the U.S. airline industry or any industry is the result.
Thank you.
[The prepared statement of Senator Grassley follows:]
Statement of Hon. Charles E. Grassley, a U.S. Senator from the State of
Iowa
I thank the Chairman for holding this hearing this morning and
giving me the opportunity to speak and ask questions on this subject.
As you know, I've been following airline competition issues closely for
several years because their importance to my state of Iowa. Iowa air
travelers and businesses have long been vocal about the lack of
competition in air service and high air fares out of Iowa cities. On
many occasions I've noted that competitive air service is directly
related to the economic futures of these communities.
Because of this, I've been concerned about possible predatory
pricing and other anti-competitive practices in the airline industry.
I've also been concerned about airline mergers, particularly how
mergers between the larger carriers can reduce competition and result
in higher fares throughout the country. Moreover, I've been concerned
that mergers between the larger carriers could trigger other large
airlines to merge, resulting in just a handful of airlines controlling
the lion's share of the United States market. That unquestionably
appears to be the case today.
Right now, a number of transactions are being considered. United
and US Airways, American and TWA, and the latest reports are that Delta
and Continental are in preliminary discussions about a possible merger.
Now, I want to distinguish the American acquisition of TWA as unique.
This transaction may be the only the solution in terms of saving
thousands of jobs and sustaining crucial flights into and out of Iowa.
I've gotten assurances from American Chief Executive Done Carty that
American will not reduce flights into Des Moines, Cedar Rapids or other
points in Iowa. So, I believe that this particular asset but, because
of the dire straits in which TWA finds itself, may be the only way to
maintain competition and air service to these rural communities. The
alternative, TWA going out of business, could be fare worse.
Nonetheless, all this talk of mergers fuels my general concerns
about continuing consolidation in the airline industry that if the
largest carriers control the majority of the markets, hubs, gates and
networks, won't they also have the pricing power to restrict the entry
of start up airlines? How will these mergers help air travelers? How
will these mergers help competition?
We must also understand how the existing regional airline,s such as
Great Lakes, Corporate Air, Chatauquea, Allegheny, Piedmont, and PSA,
will be treated under these mergers and acquisitions. They help to
provide service to smaller, underserved communities that the larger
brands do not serve, though sometimes under a name directly affiliated
with the larger brand. In many cases, they are the ``essential air
service'' that all of us talk about. Media reports raise doubts about
some of their futures.
In the past, I've urged both the Justice and Transportation
Departments to make sure they are doing everything under their
statutory authority to investigate and take enforcement action for
antitrust violations by the airlines. I've pushed the Justice
Department to closely review all airline mergers, alliances and other
contractual arrangements that might violate the antitrust laws.
I still believe that the free market is the best system by which to
solve the air service problems of Des Moines and other cities in Iowa.
But if there is anti-competitive behavior, the free market system
cannot work. If anti-competitive mergers go through, the free market
system cannot work. I want to ensure the rural communities like those
in Iowa do not experience higher airfares, fewer flights and fewer
connections because there is no more competition among airlines. The
Justice and Transportation Departments should enforce the antitrust
laws. I want to make sure they do that. And we here in Congress have a
significant role to play in terms of oversight of the competitiveness
of he United States airline industry. So, I'm pleased that the
Judiciary Committee will be reviewing the possible negative
implications of excessive consolidation in the airline market.
Senator DeWine. Senator Specter?
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman. I begin by
thanking you, Mr. Chairman, for convening these hearings. They
are very, very important.
As I take a look at the list of witnesses who have already
testified and the others who are scheduled to testify, I am
concerned about our other busy schedules, where we all have so
many other commitments. I believe it may be necessary to carry
over some of these witnesses to another day because the issues
are extraordinarily complicated and extraordinarily important.
I am very much concerned, to echo what Senator Grassley has
said, about the wave of mergers, concerned about what is
happening with the reported talks between Continental and
Delta, American Airlines taking over TWA, those bankruptcy
proceedings, and what is happening with the proposed
acquisition of US Airways by United.
The national implications are absolutely overwhelming, and
they have a special application where one of the airlines is in
a specific State, as US Airways is so dominant in Pennsylvania.
It is a little hard to understand how the acquisition by United
of US Airways is going to help United, where they have such
major problems at the present time with so many complaints
about customer service, so many complaints about baggage, so
many complaints about late arrivals.
I worry about 17,000 Pennsylvanians who are employed by US
Airways. The acquisition is one which has so many potential
problems to be weighed against the concerns which are expressed
that US Airways conceivably might not survive and those 17,000
jobs may be in jeopardy. That is a very hard issue to analyze
and to make any determination on.
As I have heard the testimony this morning about low-cost
air carriers, American West and AirTran and their efforts to
get gates and compete, it is candidly chilling. You can't
compete if you can't get slots and if you can't get gates.
And I wonder as I hear Mr. Leonard testify about the
potential for private antitrust actions. The Justice Department
has had some vigorous activities under Joel Klein, but the
Justice Department can only go so far. It is my hope that the
new Attorney General will be even more active and I have talked
preliminarily to him about that, But Congress has provided for
private rights of action to go into court and to stop these
anticompetitive practices if, in fact, they are as serious as
you say and if, in fact, they do violate the antitrust laws.
And having had some experience in that field, it looks to me as
if they do.
Let me mention an unmentionable word, regulation or re-re-
regulation. That is anathema to a free enterprise society, as
Senator Grassley points out. But is free enterprise working? I
would not like to see the Federal Government back regulating
the airlines, but I wonder if we are better off now than we
were before deregulation occurred.
I know that on the principal flight I take between
Philadelphia and Pittsburgh, we had two carriers before
deregulation and now we have one and what I consider to be
very, very high fares. Problems about flying from Pittsburgh to
Harrisburg: it is more expensive to fly from Harrisburg to
Pittsburgh than it is to fly from Harrisburg to San Francisco
with a stop at Pittsburgh. I have listened to long explanations
which I still don't understand.
So, Mr. Chairman, I hope this Subcommittee will have time
to really do a job here and try to figure out this maze because
there are an enormous number of problems, and I worry that
these acquisitions and these mergers can only spell higher
costs for the consumers and, in the long run, problems for
employees of these companies.
Thank you, Mr. Chairman.
Senator DeWine. Thank you very much.
Let me invite Professor Kahn, who is here, to come on up
and join us. Professor, thank you very much for being here.
The professor is Emeritus Professor of Political Economy at
Cornell University and a special consultant to National
Economic Research Associates. He is, of course, the former
Chairman of the Civil Aeronautics Board, and is well-known
throughout the industry as really the father of airline
deregulation. We welcome him back to the committee.
Professor, you did not have the opportunity to make a
statement, but we certainly welcome you to the Committee
hearing. Maybe you could just take a moment and explain what
impact you think the proposed mergers would have on the airline
industry.
STATEMENT OF ALFRED KAHN, EMERITUS PROFESSOR OF POLITICAL
ECONOMY, CORNELL UNIVERSITY, ITHACA, NEW YORK
Mr. Kahn. Well, when I testified last before this Committee
on the United Airlines/US Air merger, I said that I hadn't
totally made up my mind about it, partly because it appeared
that there were some ways in which it might actually improve
service. I noticed that Senator Rockefeller was a very strong
proponent of it at that time, presumably because it did offer
the possibility of improved service in an area that he
represented.
I identified three reasons why I was eager to have the
Department of Justice look at it very, very hard. One, of
course, was direct competition, not merely on O and D routes at
which ends they were both represented, but one of the most
powerful forms of competition in the industry, which is over
different hubs.
I noticed Senator Specter's example. The reason undoubtedly
that he could get a lower fare Harrisburg to San Francisco than
Harrisburg to Pittsburgh was that he had a choice of going
Harrisburg-Pittsburgh-San Francisco, maybe Harrisburg-O'Hare-
San Francisco or Harrisburg-Cleveland, Cincinnati. So he had a
choice of different carriers--respectively, US Air, probably
American, or United. Cleveland would be Continental, Cincinnati
would be Delta.
So there you would have a direct elimination of competition
even by this merger alone.
The second was, of course, potential competition. I said
that if it is really important for United to have a stronger
hub in the Northeast, if it is really powerfully important for
them, let them build one competitively rather than simply buy
out the existing hub.
The third was the snowball effect. It was obvious at the
time that if they got the competitive advantages that they
would get by merging, other airlines would be quick to follow.
And, of course, now we are seeing American Airlines doing
exactly that and Delta already expressing an intention to do
the same.
On that, there is nothing I can say that would improve on
what Professor Levine has said. It has been effected in two
splendid pieces of testimony. One is his and the other is by
Don Carty, and I think both are brilliant. But if you read Mr.
Carty's testimony, it is an elaborate and very powerful defense
of this arrangement.
What is clear is that American, faced with the United
acquisition of US Air, would then find itself at a
disadvantage, and so it then began to exert pressure, partly
because of the Government holding its hand over the United one
and threatening to disallow it, in order to get equivalent
advantages for American.
So the question is, is this a declaration of an intention
to compete? In some ways, it probably will strengthen
American's ability to compete for business traffic. Or is it a
Treaty of Versailles, a non-aggression pact in which we too
then will agree to accept equality of position?
Of course, there are aspects of it that are hard to argue
with, like the acquisition of TWA, although then I would like
to worry a little bit about the Caribbean and whether some
sloughing off of assets might be required. It is possible that
DC Air would by this be converted into a much more effective
and powerful competitor.
But then look at the shuttle. I mean, what kind of
increasingly effective competition is that if we agree to
divide the shuttle between us? And indeed I understand that if
American grows larger than United, the shuttle part of the deal
is off.
So in a sense, this is a fulfillment of my prophecy, for
which I claim no originality. It was perfectly obvious. We are
really judging the likely transformation of the industry into
one dominated by about three carriers, and I just think that is
very troublesome.
Senator DeWine. Thank you very much.
Because of time, we are going to limit the questioning, at
least the first round, to 5 minutes apiece. I will start off.
Mr. Mullin, TWA and US Airways have both argued that these
transactions should be approved because they are both failing
airlines. It seems pretty clear that TWA is, in fact,
struggling. We have talked about that. But as someone who has a
great deal of experience running an airline, what is your
opinion of this statement?
You have already said US Air is really not failing. Do you
want to elaborate on that? Why do you say that?
Mr. Mullin. Well, I feel very strongly about that, Mr.
Chairman. I think, first of all, you could look at US Airways
in many different ways. It is true that they have had net
income losses in the past short period of time. But if you look
at their cash from operations, as best I can tell from a quick
review of their financial statements, their cash from
operations has been extremely positive--$870 million in 1997,
$1.2 billion in 1998, over $600 million, I think, in 1999.
They have good, solid cash reserves on their balance sheet
right now. In 1998, it was $612 million. I think it is about
$500 million as we speak. They have completed a very, very
extensive stock repurchase program in the period from 1997 to
1999. How, in fact, can a failing carrier possibly be even
giving the remotest of consideration to a stock repurchase
plan?
I think that the ultimate measure of that would be what
United itself has, in effect, said by virtue of the bid that it
has made. I mean, United is a wonderful airline, led by
extremely competent people, and they have evaluated US Airways
as worth $60 a share, when it was selling in the mid-20's.
Now, how, in goodness sake, could anybody look at a
situation like that and say that you have increased the price
from in the mid-20's to $60 a share and pay that kind of price
for a failing airline? I think it is absurd on its face. US
Airways is not a failing carrier. It has a tremendous amount of
capacity and great assets all up and down the East Coast. So I
would reject that proposition as offering any justification for
moving forward at this point.
Senator DeWine. Any other panel members want to comment on
that?
Mr. Levine. Yes, I would like to if you don't mind. It is
very unpleasant particularly in a network airline to do the
things you have to do to become competitive if you currently
find yourself in a high-cost position faced by some low-cost
competition.
I have enormous respect for Mr. Wolf and the CEO of US
Airways, Mr. Gengwal. They have a lot of experience between
them at reorganizing and fixing airlines. It is interesting to
me. I believe they came in with the idea that they could fix US
Airways. They might then be happy, make money from their stock
options, but I also believe that they had an exit strategy.
They worked with US Airways' unions. They could not come to
an accommodation that gave US Airways competitive costs, and
they have found a way out for them and for the shareholders of
US Airways, but the people who are going to pick up the bill
are the traveling public.
Senator DeWine. Anyone else on the panel?
[No response.]
Senator DeWine. Senator Kohl?
Senator Kohl. Thank you, Mr. Chairman.
Mr. Mullin and Mr. Bethune, are your discussions defensive?
Do you want to go through with your merger regardless of what
happens? Are you willing to put it aside if the other mergers
don't happen? What is behind the strategy with respect to your
discussions?
Mr. Mullin. I think from the standpoint of Delta Air Lines,
we feel we have got a great competitive position as it stands,
Senator Kohl, and that would be very much our preferred option.
As I mentioned in my testimony, I think that in the decisions
that are made on these specific transactions, it will, in fact,
launch exactly the kinds of thought processes to which many of
the witnesses here have referred.
As all of us look for opportunities to catch the mega-
carriers, American and United, there is just no way through
internal growth alone that any of us could proceed to reach
that size. So it must by itself force us to consider this
itself.
As I said in my testimony, I think that given that these
two transactions are going to launch the total remaking of the
industry, it is a time to pause and step back and ask whether
or not the industry that we have, with six major hub-and-spoke
carriers, with Southwest Airlines as a terrific disciplining
airline with respect to prices in the industry, and many small-
size carriers and discount carriers coming along--it is a great
industry and we are about to totally transform it.
Senator Kohl. Are you saying that your merger is only in
response to theirs? If their merger doesn't occur, then yours
doesn't occur?
Mr. Mullin. I would say that I would prefer to stay where
it is, and therefore not pursue those kinds of transactions,
yes.
Senator Kohl. Mr. Bethune, do you have the same position?
Mr. Bethune. Yes, sir, Senator. We have come such a long
way in the last 6 years and we have shown this equilibrium that
I have discussed works for us. We have gone literally from
worst to first in customer satisfaction and employee
satisfaction. We can compete. We think the future for us is
best if we are just allowed to compete in this equilibrium that
currently exists.
Should that change, then we know that ultimately things
will change for us because we can't, long term, survive with a
consolidated structure. But our preferred route, as my friend
Leo just said, is to remain independent, continue to compete in
the marketplace and offer real competition and consumer
satisfaction.
Senator Kohl. Do you all think that the Government should
use its authority to control slots at major airports, when we
can utilize that authority. Mr. Levine, what do you think?
Mr. Levine. It is a little complicated. I think if it were
up to me, I would allow slots to be bought and sold, subject to
antitrust restrictions on acquiring so many that you dominate
an airport. I think another alternative which might be even
better would be to allow congestion pricing at the airports and
to allow airlines to respond to those prices and schedule their
flights according to how scarce the time of day they wanted to
fly was. I have a problem with that.
Airports are themselves monopolies, and one problem I have
with congestion pricing is you are giving the airport owner,
who is a monopolist, an incentive to exploit the airlines. So I
have actually proposed at an FAA seminar that the congestion
prices go into a fund that could only be used to build capacity
at capacity-restricted airports, which I think would have the
beneficial effect of both allowing competitive access to
airports and getting more infrastructure. But we have probably
gone off the subject here.
Senator Kohl. Mr. Kahn, what authority should we use here
that we have at the Federal level to control this?
Mr. Kahn. Well, I think the antitrust laws should clearly
be sufficient in this case. These are acquisitions that, taking
into account all their effects, threaten the effectiveness of
competition in the industry. I shouldn't say I can't think of
any others. It would happen even more if they all got together
completely. I think the antitrust laws should clearly be
sufficient.
Now, as Professor Levine points out, that does not solve
what I think is the greatest failure of the last 22 years. And
I am proud to say I gave a speech at the FAA in March 1978 in
which I said exactly this, that deregulation was going to
create a great new demand for infrastructure and we were not
going to accommodate DOT by restricting or having slots. We
wanted to unleash competition, and it was the job of the FAA
and airport traffic control to respond to that. That was No. 1.
Second, you can give a parrot a Ph.D. in economics by
teaching it to say supply and demand. The other is that you
have got to price intelligently. You have got to set up a
system the way our bumping rules do. The people to whom time is
less valuable than money accept the bribes and they get off the
planes. The people to whom money is more valuable than time
reject the bribes and stay on the planes. The latter pay higher
fares. The people who are flexible pay lower fares.
We just refuse to apply those simple principles to the
pricing of this major input. The Achilles of heel of
deregulation, I suspect more than lack of enforcement of
antitrust, is that our institutions for providing and pricing
infrastructure just stink. I think that Secretary Mineta is in
a wonderful position if he can talk about how we will
reorganize the pricing and the provision of airport capacity.
That is something he can do now and nobody can understand the
problem better than he. ``Stink'' is an economic term.
[Laughter.]
Mr. Leonard. Senator Kohl, I think that as a matter of
public policy that any time there is a merger of airlines there
ought to be a reallocation of a certain percentage of the slots
that those airlines have.
If you take the current case, slots were awarded to TWA,
United, US Air and American under totally different
circumstances than are being proposed today. If they had to
give up 20 percent of their slots to get the deal done, they
would calculate what that costs and then they could make a
decision to go forward with the deal or not based on the
economics.
It has been done in the past. In 1983, when the FAA deemed
that there was a misallocation of slots, a new lottery was
provided and slots were taken away and reallocated to the pool
and redistributed. So there is precedent for doing that. The
DOT certainly has the power to do that today, but they don't. I
think as a matter of policy, any time there is a merger or a
misallocation, they ought to be reallocated.
Senator Kohl. Thank you.
Senator DeWine. Before turning to Senator Grassley, it is
my understanding, Mr. Bethune, you have to leave. We will give
you a 2-minute closing here, if you want to make any other
comments.
Mr. Bethune. Well, thank you, Senator. I certainly
appreciate the remarks of my colleagues and I largely agree
with the positions here. I think given our druthers, as Senator
Kohl asked, Continental would like the right to compete. I
think we have offered real choices to Americans to find that
there is a better way to get from A to B that will actually get
you there safely with your underwear in a very consistent
fashion. We have been very profitable with that approach.
We hate to be constrained in our ability to grow in the
future by this behemoth that is on the table today for
consideration, allowing two members to form a cartel to block
what would be half of the American marketplace, which will
certainly put a dampening effect on competition and certainly
put a dampening effect on our ability to grow and to be
profitable and provide literally thousands and thousands of
jobs across America.
Thank you, Senator, for allowing me to testify.
Senator DeWine. We thank you very much for your testimony.
Senator Grassley?
Senator Grassley. Well, I am going to submit a question to
Mr. Bethune because I wanted to know how the Continental/TWA
deal might affect my State of Iowa and what would happen to the
TWA route structure in my State.
Senator DeWine. You have brought him back, Senator. He is
still here.
Mr. Bethune. Senator, I want to be clear that we have
publicly said that we do not oppose the TWA transaction, as Mr.
Carty has represented in public that he would consummate it. We
ask only that he confirm that representation in a document and
say that he will, in fact, protect the jobs of the 20,000
people and protect the pensioners. When he does that, we will
step aside in the bankruptcy court because we think those jobs
are important.
We made a business at Continental that we decided we would
fly to places people wanted to go to, and we are listening to
the public and their demands. We haven't been able to grow in
capital structure to get to your State the way we would like
to, but it is very much our intention to try to get there.
Given this consolidation, I would seriously doubt we would ever
have the ability to fly to Iowa.
Thank you, Senator.
Senator Grassley. Professor Levine, Mr. Schumer suggested a
9-month moratorium at the hearing this morning. Are you
advocating a moratorium or cooling-off period for these
mergers, and would you then propose a change in merger rules
and how would you do it?
Mr. Levine. Well, first, I oppose these mergers. Cooling
off is better than letting them go ahead. Disapproving them
would be better than cooling off. I do think that the Justice
Department does need to rethink the merger guidelines it is
applying to airlines. I think that airlines are network
industries. In fact, it is clear that the Justice Department
needs to do some work more generally on what competition rules
for network industries are to be.
So it would be acceptable to me if these things were put on
the back burner and the Justice Department was requested to
restudy its posture with respect to competition in network
industries. But as I say, I think under the antitrust laws you
could disapprove the United/American/US Air transaction right
now.
Senator Grassley. The end result of such a moratorium would
then be to permanently change the merger rules?
Mr. Levine. Well, you are not changing the law, Senator. As
I am sure you know, the Justice Department uses internal
guidelines to decide what mergers it will challenge and what
mergers it won't. The guidelines were developed for very
different kinds of industries than the network industries that
have emerged in transportation and telecommunications. In my
judgment, the Department absolutely ought to take another very
close look at those guidelines as they apply to these
industries and come up with something that addresses the
reality of network competition. I think right now the rules are
both too narrow and too broad. They are not targeted right.
Senator Grassley. So you are asking them to take a look at
it and possibly change them, but you are not in a position from
your position as a professor to suggest certain things?
Mr. Levine. Well, I have given a few broad hints in my
written testimony and I am certainly willing to talk to Justice
about whatever it is they might want to talk about.
Senator Grassley. Mr. Leonard, you may not be the only one
I should address this too, but quite frankly you did a very
thorough job of discussing the slot system with Mr. Kohl. I
guess my question to you would be, other than the lottery you
mentioned, what would be an equitable way to reallocate slots?
My background on this is I think that since we do have a
slot system at several of our busiest airports--and I doubt if
anybody in Congress when it was first created thought that
slots would end up being worth the money that they are today,
and evidently they are worth a great deal of money. I happened
to be a member of the AIR 21 conference Committee when that
legislation was finalized. As a member of that conference
committee, and even before that, I advocated that the slot
system be eliminated through a phase-out. That is my position.
Now, you have already spoken to Senator Kohl about it and I
guess the only thing that you could cover for me that you
didn't cover for him is if there is anything beyond the lottery
system, then, as an equitable way of doing something about
slots. Also, anybody else on this panel who wants to comment on
this should do so if they wish.
Mr. Leonard. Well, I think that if you take a look at
JetBlue, in my view JetBlue is one of the four small, new
airlines that will likely be successful. I include Southwest in
that. They are not new anymore, but you have really got us,
Frontier, JetBlue and Southwest that are new entrants that are
doing quite well.
JetBlue was awarded 75 additional slots by the Government
to permit it to get started. One of the proposals that we have
placed on the table is that as a condition of United/US Air,
100 to 150 slots should be taken away from them and given to a
low-cost carrier to create a network at Washington National.
Now, we would like for that to be us. We have a self-interest
in that, but it could be JetBlue or it could be someone else.
It could be Bill Franke, but there needs to be creation of a
network.
If you give us four or five slots, we are going to fly to
Atlanta. That is all we are going to do, and the network
benefit of a low-cost carrier would be lost. We save the
consumers in Atlanta $700 million. We believe that with a
network of 100, 150 slots, we could create $600 million of
value to the consumers in the Washington and upper Northeast
region and would get the same kind of benefits. But there have
to be enough slots to make the network work for that to happen.
Senator Grassley. I have no further questions of this
panel, unless anybody else wanted to comment on the slot
question.
Mr. Franke. I would make a comment, Senator. I think the
slots, and to some extent the gates are an anachronism that go
back in time that have no present place in the management of
the airline system. As Mr. Leonard and I have pointed out, they
are an impediment to successful competition by those of us who
can provide lower-cost fares to the consumer.
We now have an opportunity to right some of that because
there are specific proposals before the Department of Justice,
the Department of Transportation, and you regarding specific
transactions which involve hundreds of slots. So whether it is
a lottery based on proof of public necessity or who can provide
the best results to the consumer, I am not here to day, but I
do think it is important that we stop now and take a look at
the opportunity so we don't, as I said in my remarks, end up
back here in a couple of years with several of us trying to
figure out what to do with our systems without our ability to
compete because of the gates and slots restrictions.
Mr. Leonard. Senator, could I make one more point?
Senator Grassley. Yes.
Mr. Leonard. One of the things that we experience is that
we have been trying to buy or lease slots, and we are capable
of doing that. What we frequently find is that when we get
close to a deal, the person who has these excess slots who is
willing to lease them or sell them then goes to our competitor
and says, oh, by the way, we are going to sell these to
AirTran, you ought to pay a premium. And they do; they pay a
premium as much as $30,000 a slot. So it is another way that
the big carriers are able to keep these vital assets out of our
hands.
Mr. Kahn. Senator, may I just interject one sentence on
this? Slot purchase and sale is clearly better than allocation.
I mean, after all, we were supposed to have deregulated this
industry 22 years ago and here the Government is still
allocating ration tickets to compete or not compete.
Second is the point that is suggested right here by Mr.
Leonard and by Professor Levine. If you just permit purchase
and sale of slots, slots will always be more valuable to the
incumbent to whom they are protection of monopoly power than to
a new entrant, for whom it is merely an opportunity to compete.
Slot allocation is an abomination. It has nothing to do
with regulation. We should let the price system do it, and that
will create large returns and those should be used, as Mike has
clearly suggested and I have been saying for years, to develop
subsidiary airports, which would relieve the congestion problem
as well.
You could have competition in England between Heathrow and
Stanstead and Luten. Stanstead and Luten went out and got Ryan
Air in there to compete with Aer Lingus, and so you have low-
fare competition. You don't get that now, except by Government
allocation, which is not what we want. WE have got to get out
of the business.
Senator Grassley. Thank you.
Senator DeWine. Senator Specter?
Senator Specter. Thank you, Mr. Chairman.
Mr. Franke and Mr. Leonard, in looking over your testimony
you make some very, very strong charges. Mr. Franke, in your
testimony at page 5 you recount your experience at O'Hare and
say, quote, ``Recently, when we discovered that six new gates
were being built, we asked for two of them. We were refused.
Airport officials explained the gates were being built with
private money, so the airport is powerless to provide access.
We then offered to build two gates ourselves. No, they said, we
can't accommodate that. The new gates, by the way, go to United
Airlines.''
In your testimony, Mr. Leonard, you use very strong
language, and I am not disputing it. Perhaps somebody else
will. We want to give others a chance to talk about it. At page
2, ``These agreements provide American and United with a major
structural advantage that they do not have today. That
structural competitive advantage, the carving of the Nation
into three or four cartels, is the only reason that
interlocking deals make sense.'' When you talk about cartels,
you are talking about antitrust violations.
Then you go on to say that American and United have agreed
that for 20 years they will fix fares and schedules in shuttle
markets. That certainly sounds to me like restraint of trade.
And then you say at page 3, ``American and United have
agreed not to operate or work with any other airline to operate
high-frequency, competitive service between Boston and
Washington.'' That again sounds like an agreement on restraint
of trade.
Then you say, ``United has agreed to lease scarce gates and
locked-up slots to American at nominal rates. American and
United have agreed to code share on flights that feed certain
hubs,'' and some more language, and you say they won't code
share with any new entrants.
Have you considered a private right of action to sue under
the antitrust laws for treble damages because of these injuries
to your company?
Mr. Leonard. We have considered it, Senator. We haven't
done it to date, quite frankly, because we didn't have the
money to afford the legal fees. We know this would be a very,
very long fight. The legal fees would be quite expensive.
Senator Specter. Some of those cases are undertaken on a
contingent fee arrangement.
Mr. Leonard. I understand that, but we have--
Senator Specter. Well, how about it? Have all the lawyers
turned you down on undertaking your case on a contingent fee?
Mr. Leonard. We haven't pursued that yet, Senator.
Senator Specter. Why not?
Mr. Leonard. Because we are trying to pursue this through
the Department of Justice and the Department of Transportation,
which we think is the best course to take.
Senator Specter. How long have you been pursuing it with
the Department of Transportation and the Department of Justice?
Mr. Leonard. Well, we have been pursuing predatory behavior
for about a year-and-a-half, and we have filed formal
complaints with both the Department of Transportation and the
Department of Justice.
Senator Specter. Maybe after this hearing airs on C-SPAN
you will get some calls from lawyers who can show you a faster
timetable.
Mr. Leonard. We might. I think to your point, Senator, we
have taken this language directly out of the public documents
that have been filed, and we do believe each one of these is an
antitrust violation, as does our antitrust counsel.
Senator Specter. Well, how about it, Mr. Franke? It sounds
pretty problemsome when new gates are being built and you ask
for a share and you offer to put up some private money and they
won't deal with you. How about some self-help there on a
private right of action?
Mr. Franke. We brought this to the attention of the Justice
Department and the Transportation Department as an example of
the kinds of practices that prohibit or limit competition for
those of us who--
Senator Specter. How long ago did you bring it to the
attention of the Justice Department and the Transportation
Department?
Mr. Franke. At the time we were denied, which was about 8
months ago.
Senator Specter. And what have they done?
Mr. Franke. They have taken it into account as a part of
the same process of reviewing the United/US Air transaction.
Senator Specter. They have taken it into account as part of
the process and the transaction, but no direct assistance for
you?
Mr. Franke. No, sir.
Senator Specter. Have you considered a private right of
action to sue yourself?
Mr. Franke. We haven't because we want to see this process
played out and completed before we do that. As Mr. Leonard
pointed out, it is expensive. It consumes a significant amount
of management time and the results are not predictable. So we
want to follow the regulatory process first and then we will
see where we are.
Senator Specter. Would your airline be better off, Mr.
Franke, under regulation, before deregulation, with all the
problems you are facing here?
Mr. Franke. I don't think so, Senator. We believe strongly
we can compete. We have the lowest unit costs of any of the
major hub-and-spoke carriers. We have successfully competed for
the last 5 years. We simply want the right to fly the markets.
Senator Specter. Mr. Leonard, would you be better off with
re-regulation?
Mr. Leonard. No, Senator, the same as Bill said. We have
demonstrated that we can compete. We have demonstrated that we
are a highly profitable company. We are a rapidly growing
company, but we do need access to the key business markets to
be successful in the long term.
Senator Specter. Mr. Mullin, I read in the media that
Delta, as the bigger of the two as between Continental and
Delta--there is talk about having Continental acquire Delta.
How does it work out that the smaller of the airlines would
acquire the larger of the airlines? What are the economics
behind that if, in fact, those media reports are true?
Mr. Mullin. It beats me, Senator. I don't know.
Senator Specter. You only read it in the newspaper, too?
Mr. Mullin. Well, there has certainly been some speculation
about that in the newspapers.
Senator Specter. Are you the last to know as the CEO?
Mr. Mullin. No. I am saying that I am sharing your sense of
incredulity about such a transaction. Certainly, Continental is
a very fine airline. In 1998, we attempted to enter into a
transaction with them, and that in turn led to their
association with Northwest.
We have kept in touch with all other airlines throughout
this entire effort that has gone on that we are discussing here
today, but Delta's fundamental position is we would very much
like to continue with our current framework of competition. We
have no great interest in any merger or acquisition
transaction.
I think that I have just attempted to reinforce the
fundamental point that if, in fact, these transactions are
allowed to go forward, that would in turn absolutely cause us
to enter into some more serious discussions pertaining to such
actions.
Senator Specter. One final question, Mr. Chairman, if I
may, to Professor Levine and Professor Kahn.
You haven't exactly had a full picture, but based on the
testimony of Mr. Franke and Mr. Leonard, do you think, prime
facie, there is an antitrust violation here, Professor Levine?
Mr. Levine. Well, the antitrust violation would have to be
focused on particular airports. One of the problems, as you
know, Senator, and I know you know a great deal about this,
with private action is that it is focused on damage to
particular firms at particular times in particular places,
whereas the Department has the ability to fashion and request
broader relief from the courts that is more structural in
nature.
Senator Specter. They have the right to do that if they do
it, if they sue.
Mr. Levine. You mean the private--
Senator Specter. The Department has broader authority, but
an inactive and an inert Department has less authority than an
active private litigant.
Mr. Levine. Well, as I have tried to testify here this
morning, sir, I really believe the Department ought not to be
inert and I hope it will not be inert. Transaction and
litigation costs are very high. I have experienced this. I was
CEO of a new-entrant airline for a while, and reaching for the
lawsuit weapon when you are a relatively small company puts you
in a position where you are consumed by the lawsuit, whereas
your larger defendant opponent sort of departmentalizes it,
except when you can get the CEO for deposition, and it becomes
a pretty uneven contest.
Senator Specter. Professor Kahn, will you take the case?
Mr. Kahn. Fortunately, I am not a lawyer. I would be very
reluctant.
Senator Specter. I can understand why, since you are not a
lawyer.
Mr. Kahn. Oh, I can do better; I can speak quite freely. My
life expectancy would undoubtedly be exhausted before--
[Laughter.]
Senator Specter. All of our life expectancies may be
exhausted by the length of this hearing.
Thank you very much, Mr. Chairman.
Senator DeWine. Senator Schumer?
Senator Schumer. Thank you, Mr. Chairman. I thank the
witnesses for their testimony. As you probably heard in my
opening statement, I am sending a letter to DOJ asking for a
moratorium so they can study all of this. I know Mr. Mullin
mentioned that he was in favor of it.
Could I ask the other witnesses, would they support a
moratorium so that DOJ could study this new situation and not
just approve the merger piece by piece by piece? Mr. Franke?
Mr. Franke. I think the answer is I agree with Professor
Levine. There is plenty of room in the antitrust laws as they
exist today for more time to be given this process. I mean,
there is a second request process and it is not uncommon to see
one of these major transactions drag on for over a year. So I
don't think we need any special action to accomplish that
objective.
My concern is that we are acting on a piecemeal basis
without any strategy, we understand, by the Justice Department
for reviewing transactions in the airline industry, and that
should be developed.
Senator Schumer. Well, that is my point, Mr. Franke, that
they ought not just delay, but they ought to delay and get a
comprehensive picture of where we are going. I mean, you might
look at each airline and not look at the whole consequence of
where we will end up and come up with a different answer and an
answer that wouldn't be--that is what the letter says. Would
you support that letter?
Mr. Franke. I agree with that, Senator.
Senator Schumer. Thank you.
Mr. Leonard?
Mr. Leonard. Yes, sir, we would certainly support that,
Senator.
Senator Schumer. Professor Levine?
Mr. Levine. I think I said earlier in response to a
question about that that would be my second preferred solution.
My first preferred solution would be that this merger be
challenged and prevented from going forward, but certainly the
suggestion you have made would be a lot better than considering
it piecemeal according to the current guidelines.
Senator Schumer. Professor Kahn?
Mr. Kahn. I agree with what Mike has said. I would, before
doing it, ask the people at Antitrust what they are doing.
Maybe you have to wait until the administration decides who is
going to be Assistant AG in charge of antitrust, but one way or
another they have got to look at this thing.
Senator Schumer. I would like to ask Mr. Leonard some
questions. As you know, I have great concerns about this new DC
Air in terms of the cost, in terms of the ability to fly, and
in terms of their independence.
Mr. Leonard. Yes, sir.
Senator Schumer. Now, you have had certain preliminary
discussions, or at least you have indicated that you would be
interested in acquiring those slots on your own or somehow in
conjunction with DC Air. Do you believe your costs would be
cheaper than a DC Air/American proposed merger, and if so why?
Mr. Leonard. Our costs would be substantially below the
American/DC Air situation primarily because we start with a
much lower base. Our costs versus American's are about 30
percent lower than American's at a 500-mile stage length, and
so DC Air will start with high costs, i.e. American's costs on
the jet portion of it.
Mr. Johnson has testified that he intends to expand the
rest of the system with regional jets. Regional jets are much
more expensive to operate on a seat-mile basis than our Boeing
717s. So if you start with high costs and then you downsize the
size of the airplane, you cannot under any circumstances--Mr.
Johnson is an excellent businessman and has an excellent track
record, but he cannot defy the laws of physics here. Smaller
airplanes, RJs, cost more to operate than 717s on a seat-mile
basis.
Senator Schumer. Now, did you have any discussions? Did you
let either United, US Air, DC Air, whoever, know that you were
interested in getting involved here and maybe getting some or
all of those slots?
Mr. Leonard. Yes, Senator, we have let all three of those
parties know--United, US Air and Mr. Johnson--that we would be
certainly willing to partner with Mr. Johnson, take over the
slots and run them ourselves, any number of things. We
submitted several different plans to do that.
Senator Schumer. Would you like to get those slots at the
cost Mr. Johnson is getting them at?
Mr. Leonard. We can arrange financing and buy those slots
in short order, I can assure you.
Senator Schumer. What happened when you made these
requests? Did you hear anything back?
Mr. Leonard. We didn't hear anything back from United. We
had one limited conversation with US Air. We did have a number
of conversations with Mr. Johnson and at the end of the day he
decided to go with American.
Senator Schumer. And why do you think he did that, given
that you will be able to offer better service, lower-cost
service, at least in your opinion, to the people of New York
and elsewhere?
Mr. Leonard. He obviously got a better deal from American
than he thinks he could have gotten with us. I happen to
disagree with him. I think he would actually make more money
with us, but obviously with more risk with us than with
American.
Senator Schumer. Now, Professor Levine, you said that the
DC Air proposal didn't support the laugh test. Could you
elaborate on what you mean by that?
Mr. Levine. Yes. That is not at all an insult to Mr.
Johnson, who I understand to be an excellent businessman.
Senator Schumer. I agree with you. He is an excellent
businessman, very successful. That has nothing to do with it.
Our job is to provide the best service to the consumers.
Mr. Levine. The laugh test comment was related to the idea
that DC Air as a carve-out to cure the monopoly problem in the
Washington area just simply doesn't make any sense. What you
are going to end up with is a relatively high-cost, small-
aircraft operation that will be tied by a frequent flyer
program to either American or United, depending on whether you
are talking about this version of the deal or the previous
version of the deal. It is clearly designed, as Mr. Carty
testified last week before the Commerce Committee, to work as a
partner with American.
I have already testified that I have some doubt that
American and United will be vigorous price competitors. I have
no doubt that they will elbow each other for the last point of
market share. But that they will be vigorous fundamental
competitors I think defies logic and defies anything you might
know about game theory.
It is clear that Mr. Johnson's role in this is to continue
to provide service to small communities who are thought to be
politically very important, and I don't mean to minimize at all
the significance of that.
Senator Schumer. It is far more than politically important.
It is life and death for a lot of these communities.
Mr. Levine. I don't doubt that. I am trying to, I guess,
put together the strategic logic behind the construction of the
deal, if you will. It was hoped that the DC Air aspect would
operate as a sort of a reassurance and would gain political
support for the deal as a result of being set up in that
particular way. As originally constructed, it was meant to
answer the objection that the slots will just migrate into
other uses.
The removal of the flip provisions calls that into some
doubt as well, but I am not sure that this would be a good idea
even if you got Mr. Johnson to swear on a large stack of
whatever he holds dear that he would operate these routes
forever. I still think there would not be effective competition
in the Washington area from this.
Senator Schumer. These slots are extremely valuable,
obviously.
Mr. Levine. Yes.
Senator Schumer. Do you think a different arrangement could
be made so that we would get a lower-cost airline flying to
these places?
Mr. Levine. With all due respect, Senator, I really oppose
the idea of regulatory tinkering in which you decide that Joe
Leonard or Bill Franke are really nice guys and they ought to
get the slots and operate. The experience, by the way, with
those experiments has been rather poor. The slots tend to end
up ultimately in the hands of the big airlines, for reasons
that Professor Kahn explained a couple of minutes ago.
So I would hate to see a fundamentally anticompetitive deal
approved with a kind of a carve-out bone tossed to a low-fare
competitor who would have the incentive to operate at lower
fares in Washington.
Senator Schumer. Because you feel that wouldn't last?
Mr. Levine. I don't think it would last and I don't think
it would solve the fundamental problem, which is that the
Northeast--Boston, New York, Philadelphia, Washington--
themselves are the lynch pin of any network system and it is
all being gathered into one duly administered fold.
Senator Schumer. You are saying, in other words, that in
the context of the big merger a little solution like this
wouldn't work?
Mr. Levine. Absolutely, sir.
Senator Schumer. I have got it, OK.
Thank you, Mr. Chairman. I thank our panel.
Senator DeWine. Thank you, Senator Schumer.
Let me thank our panel very much. We appreciate your time.
Your testimony has been very helpful. Thank you.
We invite our next panel to begin to come up as I introduce
you.
Donald Carty has been President of American Airlines since
1995, and became Chairman, President and Chief Executive
Officer of American Airlines in 1998. He has testified before
our Committee before and we certainly welcome him back today.
James Goodwin is Chairman and Chief Executive Officer of
UAL Corporation and United Airlines. Prior to his appointment
in March 1999, he served as President and Chief Operating
Officer. His service to United dates back to 1967, and he has
held senior vice president positions for both the North
American and international markets, as well as mechanical
operations. He has also testified before this Committee and we
welcome him back as well.
William Compton is President and CEO of Trans World
Airlines. He joined TWA in 1968 as a pilot and has worked for
the airline ever since. He has maintained his pilot's license
and continues to fly for the airline on a monthly basis.
Robert Johnson is Chairman and CEO of DC Air. Mr. Johnson
is also the Chairman and CEO of BET Holdings. He has also
served on the US Airways Board and as a member of the Board of
Governors for the Rock and Roll Hall of Fame, in Cleveland,
Ohio. Mr. Johnson testified before the Subcommittee last June.
Mr. Johnson, thank you for coming back again.
Stephen Wolf is the Chairman of US Airways and of the
company's airline operating arm, US Airways, Inc. Previously,
Mr. Wolf served from 1987 through July 1994 as Chairman and CEO
of United Airlines. Mr. Wolf's aviation career began in 1966
with American Airlines. He has also testified before us on a
number of occasions.
Mr. Carty, we will start with you. Thank you, all of you,
for your patience and waiting, and we are eagerly anticipating
your testimony, particularly in light of the last panel's
comments.
STATEMENT OF DON CARTY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
AMERICAN AIRLINES, FORT WORTH, TEXAS
Mr. Carty. Good morning, Senator DeWine and Senator
Schumer.
Senator DeWine. Good morning.
Mr. Carty. Thank you, in turn, for the opportunity once
again to address this committee. Rather than read aloud my
written statement, I would like to spend a couple of minutes
trying to respond to specific concerns raised by several
members of the Committee in your recent letter to the
Department of Justice, by members, of course, of the previous
panel, and by you, Chairman DeWine, in your testimony before
the Senate Commerce Committee last week.
Senator DeWine. That would be helpful.
Mr. Carty. You are quite right to be concerned about
industry consolidation and its ultimate impact on the consumer.
So are we, but the real question is not whether any given
transaction is desirable in the abstract. Rather, the question
should be whether a given transaction is more desirable and
pro-competitive than its alternative.
In that regard, I believe that there is an overwhelming
consensus that our proposed acquisition of the assets of TWA is
by far a better alternative than allowing that carrier to
simply shut down and liquidate, and that clearly was the only
alternative for TWA. As Bill Compton, I am sure, will testify
today, no other carrier was willing to acquire TWA, none.
To turn the TWA deal would, as a number of people have said
this morning, simply put 20,000 people out of work and
eliminate the highly competitive St. Louis hub, and neither
could possibly be beneficial either to consumers or helpful to
the economy.
The proposed United/US Airways transaction is clearly more
complex. I would strongly argue that American's role in the
United/US Airways deal is to provide the remedy that certainly
we, but also many others sought in order to make the
transaction pro-competitive.
I was a little bit amused to hear charges made both last
week and today that our agreement with United must be part of
some grand conspiracy to divide up the market between us and
then simply to declare a truce on competition. To us, that
really is an absurd proposition, and I say that for a couple of
reasons.
First, if there were a conspiracy, then clearly the Justice
Department would have to be a co-conspirator because if it
wasn't for express concerns about the magnitude of the original
transaction, United would never have entered into discussions
with us that led to this deal.
Second, I am fairly sure that the last thing that United
had in mind a year ago when they began to think about this
transaction was to make American a stronger player in the
Northeast. In fact, contrary to what has been said by a number
of people today, as Metropolitan Washington Airports Authority
Chairman Jim Wilding stated, United and American are like the
cobra and the mongoose. We are as fierce competitors as they
come, and have been for many, many years.
In fact, American entered into our proposed transactions
with United and DC Air because we shared precisely the same
concerns that many of you did about the original merger
proposal. In our view, without remedies, under the original
deal United would simply have become too large, with a network
far greater certainly than ours. And it would have dominated,
in particular, the Washington market, and its relationship with
DC Air was troublesome to all of us.
Now, our role in the transaction is to explicitly provide a
remedy to each and every one of those problems. I have to
remind the Committee that, to date, we have been a relatively
small player in the Northeast corridor. By almost any measure,
most of our competitors are far stronger in the Northeast than
we are. After all, our closest hub is some 600 miles away, in
Chicago. We are not in the shuttle markets. For us, the
Washington airports have for many years simply been spokes from
our hubs in Dallas/Fort Worth and Miami and, of course, in
Chicago.
In contrast, using the strength of their shuttles and high-
frequencies in all the airports in the corridor, the dominant
north-south carriers on the East Coast are Delta and US
Airways. United operates a major hub at Dulles Airport. Both US
Airways and Southwest have hubs at Baltimore. Continental has a
huge hub at Newark. Delta operates the largest international
network in the Nation at JFK, and last year the Department of
Transportation gave JetBlue 75 slots to establish a hub at JFK.
So let's make it clear. In the Northeast corridor, American
does not have the resources to divide the market because, to
date, we don't have anything to divide. For us, this
opportunity is about entering or expanding, at least, in an
area of the country in which others have been firmly
entrenched. In fact, insofar as these markets are concerned,
American is the new entrant.
By acquiring planes, gates and slots from United, we are
bolstering our network in a part of the country where our
competitors are already firmly entrenched and substantially
larger than we are. As a consequence of this deal, we will for
the first time be able to compete much more vigorously with
them.
Now, some have argued that US Airways' slots and gates
should be divested to new entrant, low-cost carriers. That is,
in fact, in my view, what is on the table with the proposed
divestiture to DC Air. Over the past several weeks and months,
I have gotten to know Bob Johnson and I can tell you that Bob
Johnson is for real.
American's role as an investor and a marketing partner with
DC Air is simply to provide the resources and the cooperation
to assure the success of DC Air. And make no mistake about it.
If the transaction is approved, the Northeast will see a
vigorous new competitor in DC Air. Moreover, this is the only
competitor that has pledged not only to providing competitive
air fares, but to serving the markets that clearly would lose
service if the slots and gates were divided up among several
others.
DC Air is going to give United, it is going to give Delta,
it is going to give Continental, Southwest, Atlantic Coast,
JetBlue and AirTran a run for their money in the Northeast.
Quite frankly, at American we are very proud to be a partner of
theirs.
In short, we have stepped up to the plate to provide very
explicit, measurable remedies to the most pressing problems of
the proposed United/US Airways merger. By any measure, this
transaction will result in less concentration and more
competition than what was in the original proposal.
I thank you very much for the time this morning and I will
be glad at the right time to be responsive to questions.
[The prepared statement of Mr. Carty follows:]
Statement of Don Carty, Chairman and CEO, American Airlines
Good morning. Thank you for the opportunity to appear again before
this Subcommittee and testify on consolidation in the airline industry.
Ever since United Airlines proposed acquiring US Airways last May,
airline consolidation has clearly been on the Congressional radar
screen. And rightly so.
I note that last week several Members of this Committee wrote to
the Department of Justice to express strong concerns about the
potential impact of United's proposal. That same day Chairman DeWine
explained those concerns in testimony before the Senate Commerce
Committee. Many others have warned that its approval would inevitably
spark more mergers or acquisitions. In fact, I testified last September
that United's proposed merger with US Airways had triggered us at
American Airlines to think long and hard about a defensive response.
That examination resulted in our announcement last month of an
agreement that directly addresses many of our concerns about the size
and scope of the United/US Airways merger while positioning American as
a much more vigorous competitor in the Northeast.
Coincidentally, an opportunity arose for us to enter into a
completely separate and unrelated transaction. Quite simply, TWA's
continuing downward financial spiral had finally reached a point of no
return, threatening the jobs of its 20,000 employees and air service to
communities throughout the nation's heartland. With only $20 million in
the bank and needing $40 million to meet its obligations necessary for
operating a normal schedule, TWA filed bankruptcy on January 9. We
agreed to acquire substantially all of TWA's assets and have provided
it $200 million in financing so that the airline can continue to fly
during bankruptcy. As I will discuss in more detail later, the
immediacy of TWA's situation as well as the carrier's significantly
smaller size clearly dictates that this transaction be treated swiftly.
Let me begin, however, by addressing the broader question of
airline consolidation. In an increasingly globalized business such as
ours, competition will suffer if one network is allowed to dwarf all
other networks. From a customer perspective, the benefits of a much
broader network are clear. Our customers--both leisure and business
travelers--increasingly expect their airline of choice to be able to
take them everywhere they want to go. Accordingly, if one airline is
able to grow its route network significantly larger than its
competitors, that airline would have a competitive advantage.
The original United/US Airways proposal presented just such a
scenario. Had its initial proposal been approved, United would have
become 50 percent bigger than its nearest competitor, namely us. As you
might imagine, for a company like ours that is determined to create a
domestic and international network that is second to none, this got our
attention. For air travelers, the unbalanced landscape caused by the
lack of one or more competing networks of similar size and breadth
would have surely led, I believe, to an eventual reduction in overall
competition.
The ultimate size of United's route network was not the only cause
for concern. As we all know, high market concentration on routes to and
from the nation's capital led United and US Airways to propose creating
a new entrant at Reagan National Airport named DC Air. While I tip my
hat to both carriers for being able to persuade such an accomplished
businessman as Robert Johnson to get mixed up in our industry--where
margins are think and headaches plenty--I think the relationship
envisioned between United and DC Air caused most everyone, both inside
government and out, to be somewhat skeptical. Simply put, it was hard
to see any competitive benefit coming from the transaction given that
DC Air's aircraft, flight crews, operational support, and management
staff were mostly being supplied by either United or US Airways.
The potential effect on competition in the Northeast and on routes
between United's hubs and US Airways' hubs was also problematic.
American has a relatively small share of the key business routes
between Boston, New York, and Washington, D.C. Our fear was that the
proposed merger would entrench United, complete with its new, vastly
larger transcontinental network, in an effective duopoloy with Delta in
these shuttle markets, an outcome that rightly alarmed outside
observers as well.
In the closing months of last year, it became apparent that the
original United/USAirways proposal would not stand. This prompted
American--and a number of other competitors--to enter into discussions
with the merger parties regarding proposals of asset sales.
In early January, we agreed to acquire certain key strategic assets
from US Airways and to acquire a substantial stake in DC Air--both
contingent upon the reconstituted United/US Airways merger receiving
regulatory approval. In a nutshell, we would acquire from US Airways 14
gates, 36 slots, 66 owned aircraft and an additional 20 leased
aircraft, as well as the gates and slots necessary for us to operate
half of the US Airways Shuttle. In addition, to introduce immediate new
competition on United/US Airways hub-to-hub routes, we agreed to
guarantee that the following routes would be served by at least two
roundtrips a day for the next 10 years: Philadelphia-Los Angeles,
Philadelphia-San Jose, Philadelphia-Denver, Charlotte-Chicago, and
Washington, D.C.-Pittsburgh.
As for DC Air, we agreed to take a 49 percent stake in the carrier
and enter an exclusive marketing arrangement with it in which DC Air
will participate in American's frequent flyer program. We will also
provide DC Air with 11 100-seat Fokker 100 aircraft in an arrangement
by which American Airlines personnel will be flying and maintaining AA
aircraft marketed as DC Air service. American will also have the right
of first refusal on the acquisition of the remaining 51 percent of DC
Air.
Taken together, we believe these transactions relieve the
competitive imbalance in the Northeast. They will also increase
competition by making DC Air a real competitor with significant
independent backing while affording us, for the first time, a
significant presence in Washington, D.C. and the Northeast. American,
for example, now accounts for roughly 13 percent of passenger boardings
at Reagan National and far less than that at Washington Dulles and BWI.
As in the Washington area, our expanded presence throughout the upper
East Coast will ensure that there are at least three major competitors
of comparable size on the Shuttle routes and at least two competitors
on the hub-to-hub routes. And, passengers travelling along the East
Coast will also benefit by our establishing another source of
connecting service to compete with the service offered by United,
Delta, Continental and other East Coast competitors.
Obviously, we have given the Justice Department and the Congress a
lot to digest. American looks forward to working with both Justice and
this Subcommittee as you attempt to determine whether what we have put
on the table sufficiently remedies the United/US Airways merger and,
ultimately benefits the flying public.
On a more personal note, regardless of Justice's disposition of the
transactions before it, I must say that I have gotten to know Robert
Johnson over these past few months and am most impressed. He is a take-
charge executive who knows how to provide consumers a service, and
quite frankly, how to make money. Let there be no mistake, Robert
Johnson and his team will run DC Air. He will be the majority owner and
he will make the decisions. He has already begun recruiting a seasoned
management team. American will be his marketing partner, and we will
work closely together to add value to our respective networks. DC Air
will be a valuable addition to our industry and bring to it the first
minority-owned airline. I know that I speak for each and every one of
American's 103,000 employees when I say that it has taken our industry
far too long to reach this milestone and that we at American are proud
to be affiliated with it.
As for the impact of America's entry into this equation, Jim
Wilding, the president of the Metropolitan Washington Airports
Authority, was recently quoted as being highly enthusiastic about the
vigorous competition that American's affiliation with DC Air will bring
to the Washington market in comparison with the original proposal. In
Mr. Wilding's words: ``If American and United are anything, they're
competitors. They're like the cobra and the mongoose wherever they
go.''
Now let me turn to TWA--a storied but beleaguered airline that
after 12 consecutive years of heavy losses and 3 bankruptcies has, in
spite of valiant efforts by Bill Compton and his team, simply run out
of money, time, and options. Carl Icahn has stripped this company over
a period of years, selling assets, such as the prized route rights to
London's Heathrow Airport, just to pay the bills. Going into this
winter, typically the leanest months in the airline business, with the
price of fuel soaring, TWA had nothing left to sell or mortgage that
wasn't already encumbered. It also had a debt of $100 million coming
due on January 15. Unable to secure or justify additional financing
from traditional sources and with no one willing to purchase the
airline, TWA in early January faced the very real likelihood that it
would have to shut down and liquidate.
From time to time, we at American had looked at TWA as a possible
merger candidate. Indeed, its centrally located St. Louis hub provides
a nice complement to our operations at capacity constrained Chicago
O'Hare. In addition, TWA's current management team had--in the face of
some formidable obstacles--done a very good job of improving the
airline's operation, and in particular, of modernizing its fleet.
Unfortunately, very high ownership costs on TWA's new fleet and an
unusual arrangement that allows an entity owned by Carl Icahn to sell
TWA's ticket inventory at a substantial discount, made a potential AA/
TWA merger a non-starter.
TWA's bankruptcy filing and looming collapse three weeks ago,
however, presented a far different set of circumstances. We stepped in
to provide--when no one else would--the cash TWA had to have to keep
operating. We are proposing to acquire substantially all of TWA's
assets, to hire all of TWA's employees and to continue a hub operation
in St. Louis. Obviously, this transaction, which excludes certain TWA
contracts such as Mr. Icahn's deal, is contingent on bankruptcy court
approval.
We look forward to adding TWA's 20,000 employees to the American
Airlines family. We are keenly aware of TWA's illustrious history and
know that were it not for the hard work and great performance of the
people throughout TWA, they would not be the perfect fit for American
that we believe they are. We also recognize what a good corporate
citizen TWA has been in the state of Missouri and I can assure you that
our company will be as well.
In closing, permit me to be blunt. Time is of the essence with
regard to TWA. We at American cannot commit our shareholders' money to
keep TWA afloat indefinitely. There is simply not enough collateral for
debtor in possession financing. Also, I fear, uncertainty will only
serve to accelerate TWA's collapse as travel agents will likely book
away from TWA, as was the case with the demise of Eastern Air Lines a
decade ago. Similarly, consumer uncertainty will eventually cause
travelers to not advance book flights on TWA, effectively shutting off
the airline's already severely limited cash flow.
As for the Justice Department review of this transaction, I think
it is fairly evident that there is a failed firm here, which in itself
should serve to expedite the review process. Even so, the transaction
gives rise to very few competition issues. Indeed, the market share of
this one-time giant of the skies has now fallen to only 3.9 percent in
2000. Finally, even if TWA were not failing and therefore unable to
compete on a going-forward basis, there are only two hub-to-hub routes
where American and TWA both offer non-stop service. In the case of St.
Louis-Chicago, for example, Southwest Airlines, which has 12 gates at
St. Louis Lambert, provides 15 daily nonstop roundtrips between St.
Louis and Chicago Midway, while United provides 4 daily nonstops
between St. Louis and Chicago O'Hare.
The bottom line is that TWA's situation presents a truly unique and
exceptional circumstance. Indeed, our acquisition of its assets is not
contingent on approval of the other deals. As such, it is truly a
stretch of the imagination to believe that the American/TWA transaction
would in any way trigger the merger of far larger airlines. Instead,
what is before you is our taking on a financial risk that no other
airline was willing to take and commitments to the 20,000 TWA employees
and their families that no one else would make.
Mr. Chairman, that concludes my statement. I would be happy to
answer any questions you or the Members of this Subcommittee may have.
Senator DeWine. Mr. Carty, thank you very much.
Mr. Goodwin?
STATEMENT OF JAMES E. GOODWIN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, UNITED AIRLINES, CHICAGO, ILLINOIS
Mr. Goodwin. Chairman DeWine, Senator Schumer, on behalf of
United Airlines' more than 100,000 employees, it is good to be
back in front of this committee, and I welcome the opportunity
to discuss our proposed merger with US Airways.
Last June, I appeared before this Committee to explain why
United believes our customer-driven merger with US Airways
should be approved, and how this transaction will significantly
benefit consumers and the communities served by both carriers.
Since that time, there have been several developments that
United believes enhance the competitive benefits of our
proposed merger with US Airways, and I appreciate the
opportunity to describe them to the committee.
Simply put, we believe a good deal for consumers has gotten
even better. Let me explain the significant steps we have taken
in response to concerns you and others have raised. Also, I
wish to discuss the pro-consumer impact of other transactions
related to our proposed merger.
First, I would like to turn to DC Air. When I appeared
before this Committee last year, United was very enthusiastic
about the creation of DC Air, an independent carrier that will
enhance competition at Reagan Washington National Airport.
The committee's reaction to DC Air was cautious.
Specifically, some Members of Congress were skeptical that DC
Air would compete vigorously against us at United Airlines in
the initial phases of the startup operation. There was also
some concern expressed that DC Air lacked the experience to be
a viable, long-term competitor. Last month, American Airlines
entered into an agreement to acquire a 49-percent stake in DC
Air, and we believe this transaction fully responds to the
committee's concerns.
First, the transaction provides DC Air with access to a
substantial network and operating expertise which will allow it
to provide strong competition against United. Now, American
will provide the support that United would have provided to DC
Air.
Second, as this Committee knows, United and American are
like the Hatfields and the McCoys when it comes to competing
vigorously against one another, and I fully expect American to
help DC Air carry on that tradition. Finally, with American as
a partner, concerns about DC Air's long-term staying power
should be laid to rest.
In addition to DC Air, some concerns were raised about a
potential loss of competition on a number of routes where
United and US Airways were the sole non-stop competitors.
Again, we have taken corrective action, we believe, that fully
addresses that concern.
Last month, we entered into an agreement with American
Airlines under which it will provide non-stop competitive
service on these key hub-to-hub routes. This service will
ensure a minimum of two-carrier, non-stop competition on key
United/US Airways hub-to-hub routes, thereby ensuring that
competition is not only preserved but enhanced.
There are additional elements of our agreement with
American, including a joint venture to operate the Washington-
New York-Boston shuttle, and this agreement increases consumer
choice in the Washington-New York-Boston shuttle markets.
So what does United believe the net effect of our proposed
merger and these recent developments will be for consumers and
competition? We believe domestic competition will be enhanced
and consumer choice and convenience will be improved. In fact,
the New York Times in an editorial on January 11, 2001,
expressed the opinion that the United/American/DC Air
agreements are in the public interest. The Times went on to
note, and I quote, ``This deal should assuage any lingering
concerns about the United/US Airways merger. Indeed, travelers
in the Northeast will probably see more competition as a result
of these agreements,'' end quote.
The United/US Airways merger will create a 21st century
airline that offers consumers improved choices for more
convenient single-carrier service on thousands of routes around
the world. This transaction will enable United to fully use US
Airways' assets to compete vigorously in a way not currently
possible due to that carrier's financial challenges.
Second, the transactions also will increase the number of
competitors and level of competition in the Northeast region.
Currently, three network carriers compete in the Northeast
region--US Airways, Delta and Continental. As a result of these
transactions, there will be four key network competitors--
United, American, Delta and Continental. In addition, Southwest
continues to expand significantly its competitive presence in
the Northeast, as do JetBlue and AirTran.
Third, the transactions will greatly enhance inter-hub
competition. I was pleased to see that Transportation Secretary
Norm Mineta acknowledged the importance of inter-hub
competition during his recent confirmation hearings. Secretary
Mineta is absolutely correct. United believes consumers will
benefit greatly from improved inter-hub competition resulting
from our proposed merger. The transaction will enable United's
Charlotte hub to compete more vigorously with Delta's Atlanta
hub. Also, it will permit United's Philadelphia hub to compete
more vigorously with Continental's Newark hub.
In addition to those competitive benefits, I would like to
take a moment to reiterate the significant guarantees United
has made to the traveling public, employees of United and US
Airways, and the communities served by US Airways.
As you may recall, we have made the ground-breaking
commitment that no United or US Airways employee will be
furloughed because of this transaction. The daily reports of
layoffs at companies across the country underscores the
historic and important nature of this pledge to the employees
of both companies and the communities in which they live.
In addition, we will honor all labor agreements that both
carriers currently have in place. Also, as I testified in June,
United will continue to serve all cities currently served by US
Airways. Further, for 2 years following the completion of our
proposed merger, United has made the extraordinary commitment
not to increase structure fares, with the exception only for
increases in fuel costs and the Consumer Price Index.
Finally, when I appeared before you in June, Senator
Specter inquired about plans for a maintenance center in
Pittsburgh. I am pleased to inform you that United has reached
an agreement with the Commonwealth of Pennsylvania and
Allegheny County contingent on regulatory approval to build
that maintenance facility in Pittsburgh.
Mr. Chairman, I would like to conclude by again thanking
you for the opportunity to testify. We have listened and
responded to your concerns. We continue to strongly believe our
proposed merger should be approved, and I look forward to
responding to any questions you and the other Senators may
have.
[The prepared statement of Mr. Goodwin follows:]
Statement of James E. Goodwin, Chairman and CEO, United Airlines
Chairman Hatch, Ranking Member Leahy, and other Members of this
distinguished Committee, on behalf of United Airlines' more than
1000,000 employees worldwide, thank you for the opportunity to appear
again before you to discuss our proposed merger with US Airways.
Last June, I appeared before your Subcommittee on Antitrust,
Business Rights and Competition to explain why United believes our
customer-driven merger with US Airways should be approved and how this
transaction will significantly benefit consumers and the communities
served by both carriers. Since that time, there have been several
relevant developments that United Believes enhance the competitive
benefits of our proposed merger with US Airways. We appreciate this
opportunity to describe them to the Committee. Simply put, we believe a
good deal for consumers has gotten even better.
In my testimony before you last year, I pledged that I would listen
carefully to concerns you raised and, to the extent possible, United
would attempt to respond constructively to them. Let me explain
significant steps we have taken in response to concerns you and others
have raised. Also, I wish to discuss the pro-consumer impact of other
transactions related to our proposed merger.
Let me first turn to DC Air. When I appeared before your
Subcommittee last year, United was very enthusiastic about the creation
of DC Air, an independent, entrepreneurial carrier that will enhance
competition at capacity-controlled Reagan Washington National Airport.
In addition to providing consumers in the Washington-area with a new
competitive choice in air service, we were pleased that DC Air
committed to maintain the current service pattern from Reagan National
to many small communities. United has a longstanding commitment to
small city service and this was an important consideration for us.
The Subcommittee's reaction to DC Air was cautious. Specifically,
some Members of Congress were skeptical that DC Air would compete
vigorously against United due to our commercial agreements with DC Air
that were intended to assist that carrier in the initial phase of its
start-up operations. There tow was some concern expressed that DC Air
lacked the experience to be a viable, long-term competitor.
Last month, American Airlines entered into an agreement to acquire
a 49 percent stake in DC Air. We believe this transaction squarely and
fully responds to concerns Members of Congress raised. First, the
transaction provides DC Air with access to a substantial network and
operating expertise, which will allow it to provide strong competition
with United Now American will provide the support United would have
provided to DC Air. Second, as this Subcommittee knows, United and
American are like the Hatfields and McCoys when it comes to competing
vigorously against one another. We fully expect American to help DC Air
carry-on this tradition. Finally, with American as a partner, concerns
about DC Air's long-term staying power should be laid to rest.
In addition to DC Air, some Members also expressed concern about a
potential loss of competition in a limited number of city-pairs where
United and US Airways were the sole non-stop competitors. Again, we
have taken corrective action we believe fully addresses that concern.
Last month, we entered into an agreement with American under which it
will provide competitive non-stop service on these key hub-to-hub
routes. Specifically, American has agreed to provide non-stop service
on the following routes for a minimum of 10 years: Philadelphia to Los
Angeles; Philadelphia to San Jose; Philadelphia to Denver; Charlotte to
Chicago O'Hare; and Reagan National to Pittsburgh (service to be
provided by DC Air). This service will ensure a minimum of two-carrier,
non-stop competition on key United/US Airways hub-to-hub routes. In
some cases, as I will explain in a moment, United also agreed to sell
or lease to American facilities and equipment to support this
competitive service.
Mr. Chairman, let me be clear that our agreement with American to
ensure non-stop competition in these key United/US Airways hub-to-hub
routes will not simply maintain the competitive Status quo. To the
contrary, the agreement will improve non-stop competition in these
markets. By increasing the number of combined frequencies and overall
seats on these non-stop routes, competition and consumer choice will be
enhanced.
However, our efforts to make a transaction that is good for
consumers enable better did not stop there. Let me explain.
Last month, we agreed to sell American key US Airways assets at
several capacity and facility constrained airports to ensure that it
will be a meaningful competitor to United and other network carriers.
At New York's LaGuardia Airport, we agreed to sell American 22 jet
slots and 14 commuter slots. We also agreed to sell American five gates
at LaGuardia, three gates at Reagan National, three gates at Boston's
Logan Airport, one gate at Philadelphia International Airport, one gate
at Atlanta Hartfield International Airport and one gate at Newark
International Airport.
In addition to slots and gates, we also agreed to sell American a
large number of US Airways aircraft. Specifically, we agreed to
transfer to American forty Foker 100 aircraft, thirty-four boeing 757
aircraft and twelve MD-82 aircraft.
Mr. Chairman, again, we did not stop there. United also entered
into a 22-year joint venture agreement with American to jointly operate
the US Airways Shuttle. Under this agreement, United and American will
each fly half of the daily Shuttle flights between Reagan National, New
York's LaGuardia Airport and Boston's Logan Airport, with each airline
using its own planes and crews. Together, we will jointly market a
Shuttle product and coordinate all relevant aspects of the operations.
To ensure that consumers have the greatest choice possible, under the
joint agreement, customers will be able to select their frequent flyer
program of choice possible, under the joint agreement, customers will
be able to select their frequent flyer program of choice--either United
Mileage Plus or American's AAdvantage program--and earn reward and
recognition regardless of which airline's Shuttle flight they have
selected.
Mr. Chairman, let me make several brief points relating to our
agreement with American to jointly operate the Shuttle. This agreement
increases consumer choice in the Washington, New York and Boston
Shuttle markets. Instead of having the limited choice between US
Airways and Delta as currently is the case, consumers of Shuttle
service will have an added option of choosing between United, Delta or
American. Moreover, our cooperative relationship with American on the
Shuttle is strictly limited to the operation of the Shuttle. On all
other routes, as is the case today, United and American will remain
vigorous competitors.
So what does United believe the net effect of our proposed merger
and these recent developments will be for consumers and competition? We
believe domestic competition will be enhanced, and consumer choice and
convenience will be improved. In fact, the New York Times, in an
editorial on January 11, 2001, expressed the opinion that the United/
American/DC Air agreements ``are in the public interest.'' The Times
went on the note, ``This deal should assuage any lingering concerns
about the United-US Airways merger. Indeed, travelers in the Northeast
will probably see more competition as a result of these agreements.''
First, the United-US Airways merger will create a 21 st
Century airline that offers consumers significantly improved choices
for more convenient, single-carrier service on thousands of routes
around the world. The transaction will enable United to fully use US
Airways' assets to compete vigorously in a way not currently possible
due to that carrier's financial challenges.
Second, the transactions will greatly enhance inter-hub
competition. I was pleased to see DOT Secretary Mineta acknowledged the
importance of inter-hub competition during his recent confirmation
hearing before the Senate Committee on Commerce, Science and
Transportation. Secretary Mineta is absolutely correct. United believes
consumers will benefit greatly from improved inter-hub competition
resulting from our proposed merger. The transaction will enable
United's Charlotte hub to compete more vigorously with Delta's Atlanta
hub. Also, it will permit United's Philadelphia hub to compete more
vigorously with Continental's Newark hub.
Third, by creating a finished national airline network, the
combined United/US Airways will have the scope and network efficiencies
to compete vigorously in ever region of the country.
Fourth, the transactions also will increase the number of
competitors and level of competition in the Northeast region.
Currently, three network carriers mainly compete in the Northeast
region--US Airways, Delta and Continental. As a result of transactions,
there will be four key network competitors--United, American, Delta and
Continental--in this region. In addition, Southwest continues to expand
significantly its competitive presence in the Northeast and according
to recent DOT data, Southwest remains the largest domestic O&D carrier.
Finally, American's separate deal to acquire 49 percent of DC Air
will also ensure strong competition between United and DC Air in the
Washington, DC, region. The agreement gives DC Air a strong partner and
will give its customers access to American's vast global network, which
will also promote vigorous competition with United.
In addition to these competitive benefits, let me take a moment to
update the Committee on guarantees United has made to the traveling
public, employees of US Airways and communities served by US Airways.
As you Subcommittee will recall, we made the groundbreaking commitment
that no United or US Airways employee will be furloughed because of
this transaction. The daily reports of layoffs at companies across the
country underscore the historic and important nature of this pledge to
the employees of both companies and the communities in which they live.
In addition, we will honor all labor agreements that both carriers
currently have in place. Also, as I testified in June, United will
continue to serve all cities currently served by US Airways. Further,
for two years following the completion of our proposed merger, United
has made the extraordinary commitment not to increase structure fares,
with exceptions only for increases in fuel cost and the consumer price
index.
More recently, we have made several other important commitments.
United has committed to build multi-million dollar maintenance facility
in the Pittsburgh area. That decision is very important to the economy
of the Pittsburgh area and Western Pennsylvania, and an important piece
of our operational plan for the combined carrier. We too have committed
to maintain the reservation centers that US Airways currently operates
in Winston-Salem, North Carolina, Syracuse, New York and Pittsburgh.
Again, we recognized the importance of these facilities to the local
economies and we will be pleased to have them join our other
reservation centers in providing the best service possible to our
valued customers.
Mr. Chairman, let me conclude by again thanking you for the
opportunity to testify. We have listened listened and responded to your
concerns. We continue to stronly believe our proposed merger should be
approved. It is in the best interest of consumers, communities served
by both carriers and the U.S. economy. I'd be pleased to respond to
questions at the appropriate time.
Senator DeWine. Mr. Goodwin, thank you very much.
Mr. Compton?
STATEMENT OF WILLIAM F. COMPTON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, TRANS WORLD AIRLINES, ST. LOUIS, MISSOURI
Mr. Compton. Thank you, Chairman DeWine and Senator
Schumer, for allowing me, on behalf of the 20,000 TWA
employees, to testify here today. I appreciate the chance to
explain why our decision to pursue an asset purchase agreement
with American Airlines should be approved, and why this
transaction is a good global solution for TWA's customers, its
employees, retirees, creditors, and the communities served by
both carriers.
I would like to begin by giving you my personal perspective
on TWA and why, in my view, the proposed transaction is the
only comprehensive solution that adequately serves competition
and customers in light of the harsh realities facing TWA today.
Since the late 1960's when I became a pilot for TWA, the
airline industry and the economy have changed dramatically. It
has been an uphill battle for TWA, particularly over the last
15 years. To simply survive, TWA has struggled during that 15
years, after the acquisition by Carl Icahn during the merger
and acquisition period of that decade. Subsequently, TWA was
stripped of many of its most valuable assets.
Through the efforts and commitment of its employees, TWA
eventually was able to secure a change in corporate ownership.
At that point, however, TWA was saddled with enormous debt, an
aging fleet, a pension fund that had been deemed to be
seriously underfunded, and the loss through sale of many of its
most valuable routes.
The fact that TWA survived in those circumstances was due
to the sheer dedication of its employees. They gave concessions
and survived not one, but two bankruptcies, to ensure the
continuation of the airline to the present time. In fact,
notwithstanding our financial predicament, TWA has made a
remarkable operational turn-around over the last 4 years. TWA
has been ranked at or near the No. 1 spot in on-time arrivals
since 1997. In 1998 and 1999, customers voted us the winner of
the J.D. Power Award for Customer Satisfaction, and in 2000 we
finished second among all the major airlines in both J.D. Power
award categories.
We replaced almost our entire fleet, and that results now
in having one of the youngest fleets in the airline industry.
We made these improvements without huge capital outlays or
marketing campaigns. We did it with dedication,
professionalism, and pride--hallmarks of TWA throughout its 75
years.
But TWA's operational successes have not been enough. We
can no longer afford to operate, let alone sustain these
advances. Despite TWA's many accomplishments, profitability
remained illusive. The events of the 1980's had made it
virtually impossible to compete effectively. Due to its fragile
financial condition, TWA is paying premium leases for its
aircraft, almost twice the industry average.
The need to provide long-overdue wage increases for TWA
employees and the recent staggering increases in the price of
jet fuel have further drained TWA's reserves. TWA remains
essentially a single-hub operation, putting us at a schedule
disadvantage with the multiple-hub carriers.
Finally, this winter, by January 10, 2001, we ran out of
time. We had cash on hand of only $20 million, and needed more
than that amount just to make it through the next day. With our
cash reserves nearly depleted and a major commitment to lenders
coming due, our backs were squarely against the wall.
The financial crisis that hit TWA this winter did not
materialize overnight. A year ago, we could see the problems
looming on the horizon that culminated in our recent bankruptcy
filing, and we tried very hard to do something dramatic about
it. We recognized that the viability of our airline was at
stake, and we went knocking on doors to find a solution. There
is not an airline of any size in America that we did not
approach. There is not an airline of any size in America that
did not have an opportunity to step in and join with us.
No one was interested in TWA as a going concern. In my
view, most recognized that they would benefit from TWA's demise
and they were willing, at best, to stand back and watch it
happen. Only American Airlines saw fit to come forward with a
proposal that was not merely an offer to cherry-pick a prized
asset here or a prized asset there.
American proposed a comprehensive solution that will
realize for our creditors the value of TWA as a going concern.
It will preserve jobs for our employees and medical benefits
for our retirees, and it will promote competition by
maintaining our St. Louis hub and safeguard TWA's service and
major economic presence in additional communities around our
system, most notably Kansas City, New York and Los Angeles,
where we employ thousands.
The transaction proposed with American Airlines offers a
comprehensive solution to the problems facing TWA. It addresses
the varying needs of TWA employees, retirees, creditors,
consumers, and communities serves by TWA.
The transaction protects TWA's 20,000 employees and many
thousand retirees and dependents. American has made a bedrock
commitment to retain the vast majority of TWA employees and to
absorb responsibility for TWA's retirees' medical and dental
insurance benefits. Not only does this speak volumes about
American's integrity, it achieves TWA's goal of protecting its
skilled and dedicated workforce. It is here that American is
gaining TWA's greatest asset, its employees. American will find
that it has acquired motivated employees who carry out their
work with the highest level of quality and commitment.
The consumers and communities served by TWA will also be
better served by the American transaction than by a
liquidation. Liquidation of TWA's assets without a commitment
to maintaining TWA's jobs would result in vast reductions of
service to vast numbers of communities. Certainly, other
carriers would benefit from such a reduction in competition,
but consumers would pay the price.
The price to be paid in a TWA liquidation would be highest
in our home State of Missouri and our hub city of St. Louis. In
a court hearing the weekend before last, attorneys for the city
of St. Louis stated that the economic contribution of Lambert
International Airport in St. Louis to the local economy is $8
billion per year.
Other communities would also be harmed by the liquidation
alternative. TWA's 187 aircraft would cease to be in service.
Air service to more than 100 communities would be negatively
impacted. The result would be lower capacity, higher prices and
less service for the traveling public, and a diminished
business capacity for dozens of communities.
And acquisition of TWA's assets as a total operation best
serves to protect the traveling public and the communities that
rely heavily on TWA. American has committed to retain the St.
Louis hub operations, and with additional aircraft from TWA's
system American will be able to support TWA's route structure.
As I look to the future of aviation, there are many
chapters yet to be written. I believe, however, that TWA's
final chapter will be viewed in years to come as having
provided major benefits to the aviation industry. Among the
ranks of our current employees, there are many young and
talented folks who have benefited from their apprenticeships
under seasoned TWA veterans. They can take with them to
American and to every corner of the aviation world knowledge
and experience that is invaluable. When I consider this
possibility becoming a reality for so many of our workers
through this transaction, I know that all of our efforts will
have been worthwhile. Indeed, TWA's legacy, if not its grand
name, will be carried forward by its people.
Just as important, consumers will continue to see the same
levels of service, without the dislocation that would otherwise
have occurred if a bankruptcy with a parceling out of assets
had occurred. Indeed, this is the only way that the public
interest will be served in the long run.
Mr. Chairman, let me conclude by again thanking you for the
opportunity to testify today. As I have said, we strongly
believe that this transaction should go forward promptly.
Thank you.
[The prepared statement of Mr. Compton follows:]
Statement of William F. Compton, President and CEO, Trans World
Airlines, Inc.
Chairman DeWine, Ranking Member Kohl, and other Members of this
distinguished Subcommittee, on behalf of TWA's more than 20,000
employees, I thank you for the opportunity to testify today. I
appreciate the chance to explain why our decision to pursue an asset
purchase agreement with American Airlines should be approved and why
this transaction is a good global solution for TWA customers,
employees, retirees, and creditors, as well as the communities served
by both carriers. I would like to begin by giving you may personal
perspective on TWA and why, in my view, the proposed transaction is the
only comprehensive solution that adequately serves competition and
consumer in light of the harsh realities facing TWA, its employees and
retirees.
I. How We Got Here
Since the late 1960s, when I became a pilot the TWA, the airline
industry, and the economy have changed dramatically. It has been an
uphill battle for TWA, particularly over the last 15 years, to simply
survive. In 1985, TWA, during the height of Wall Street-driven mergers
and acquisitions, was acquired by Carl Icahn. Subsequently, TWA was
stripped of many of its most valuable assets.
Through the efforts and commitment of its employees, TWA eventually
was able to secure a change in corporate ownership. At that point,
however, TWA was saddled with enormous debt, an aging fleet, a pension
fund that had been deemed to be seriously underfunded and the loss
through sale of many of its most valuable routes. The fact that TWA
survived in those circumstances was due to the sheet dedication of its
employees. They gave concessions and survived not one, but two,
bankruptcies to ensure the continuation of the airline to the present
time.
In fact, notwithstanding its financial predicament, TWA has made a
remarkable operational turnaround over the last four years. TWA has
been ranked at or near the #1 spot for on-time arrivals since 1997. In
1998 and 1999, customers voted us the winner of the J.D. Power award
for customer satisfaction. In 2000, we finished second among all of the
airlines in both J.D. Power award categories. We replaced almost our
entire fleet, with the result that it is now, on average, one of the
youngest in the airline industry.
we made these improvements without huge capital outlays or
marketing campaigns. We did it with dedication, professionalism, and
pride--hallmarks of TWA throughout its 75 years. But TWA's operational
successes have not been enough. We can no longer afford to operate, let
alone sustain these advances.
II. TWA's Many Successes Have Not Been Enough
Despite TWA's many accomplishments, profitability remained elusive.
The events of the 1980s had made it virtually impossible to compete
effectively. Due to its fragile financial condition, TWA is paying
premium lease prices for its aircraft--almost twice the industry
average. The need to provide long-overdue wage increases for TWA
employees and the recent, staggering increases in the price of jet fuel
have further drained TWA's reserves. TWA remains essentially a single
hub operation, putting us at a schedule disadvantage to multiple hub
carriers.
Finally, this winter we ran out of time. BY January 10, 2001, TWA
had cash on hand of only $20 million and needed more than that amount
just to make it through the next day. With our cash reserves nearly
depleted and a major financial commitment to lenders coming due, our
backs were squarely the wall.
The financial crisis that hit TWA this winter did not materialize
overnight. A year ago we could see problems looming on the horizon that
culminated in our recent bankruptcy filing, and we tried very hard to
do something dramatic about it. We recognized that the viability of our
airline was at stake and we went knocking on doors to find a solution.
There is not an airline of any size in America that did not have an
opportunity to step in and join with us. No one was interested in TWA
as a going concern. In my view, most recognized that they would benefit
from TWA's demise, and they were willing, at best, to stand back and
watch it happen.
Only American Airlines saw fit this winter to come forward with a
proposal that was not merely an offer to cherry-pick a prized asset
here or there. American proposed a comprehensive solution that will
realized for our creditors the value of TWA as a going concern. It will
preserve jobs for our employees and medical benefits for our retires.
It will promote competition by maintaining the St. Louis hub and will
safeguard TWA's service and major economic presence in additional
communities around our system--most notably Kansas City, New York and
Los Angeles, where we employ thousands.
III. American Airlines Transaction Offers Comprehensive Solution
The transaction proposed with American Airlines offers a
comprehensive solution to the problems facing TWA. It addresses the
varying needs of TWA employees, retirees, creditors, and consumers and
the communities served by TWA.
This transaction offers protection for TWA's 20,000 employees and
many thousands of our retirees and dependents. American has made a
bedrock commitment to retain the vast majority of TWA employees and to
absorb responsibility for TWA retirees' medical and dental insurance
benefits. Not only does this speak volumes about American's integrity,
it achieves TWA's goal of protecting its skilled and dedicated work
force. It is here that American is gaining TWA's greatest asset--its
employees. American will find that it has acquired motivated employees
who carry out their work with the highest level of quality and
commitment.
The consumers and the communities served by TWA also will be better
served by the American transaction than by liquidation. Liquidation of
TWA assets without a commitment to maintaining TWA jobs would result in
vast reductions of service to many communities. Certainly other
carriers would benefit from such a reduction in competition, but
consumers would pay the price.
The price to be paid in a TWA liquidation would be highest in our
home state of Missouri and our hub city St. Louis. In a court hearing
the weekend before last, attorneys for the City of St. Louis stated
that the economic contribution of Lambert-St.Louis International
Airport to the local economy is $8 billion a year. TWA and its regional
airline partners offer approximately 75 percent of the departures from
Lambert. It is not difficult to envision the benefit of a continuation
of this service under the auspices of American Airlines (or, for that
matter, any other carrier that is willing to come forward in the
auction process and commit to an acquisition of the TWA operation).
Other communities also would be harmed by the liquidation
alternative. TWA's 187 aircraft could cease to be in service. Air
service to more than 100 communities would be negatively impacted. The
result could be lower capacity, higher prices, and less service for the
traveling public and a diminished business development capacity for
dozens of communities.
An acquisition of TWA assets as a total operation best serves to
protect the traveling public and the communities that rely heavily on
TWA. American has committed to retain the St. Louis hub operations.
With additional aircraft from TWA in its system, American will be able
to support TWA's route structure.
Our assets will be sold through a bankruptcy auction process, and
we remain open to higher and better offers. But, so far, the American
Airlines plan is the only global solution on the table. It is the only
solution that will preserve the competitive benefits of TWA as a going
concern for the consumers and communities we serve. It offers the most
benefit to the greatest number of TWA stakeholders.
IV. TWA's Final Chapter Ends on a Positive Note
As I look to the future of aviation, there are many chapters yet to
be written. I believe, however, that TWA's final chapter will be viewed
in years to come as having provided major benefits to the aviation
industry. Among the ranks of our current employees, there are many
young and talented people who have benefited from their apprenticeships
under seasoned TWA veterans. They can take with them to American, and
to every corner of the aviation world, knowledge and experience that is
invaluable. When I consider this possibility becoming a reality for so
many of our workers through this transaction, I know that all of our
efforts will have been worthwhile. Indeed, TWA's legacy, if not its
grand name, will be carried forward by its people.
Just as important, consumers will continue to see the same levels
of service without the dislocation that would have otherwise occurred
if a bankruptcy with a parceling out of assets had occurred. Indeed,
this is the only way that public interest will be served in the long
run.
Mr. Chairman, let me conclude by again thanking you for the
opportunity to testify today. As I have said, we strongly believe this
transaction should go forward promptly. It is in the best interest of
TWA employees, retirees, creditors, consumers, and communities served
by both carriers. I would be pleased to respond to any questions.
Senator DeWine. Mr. Compton, thank you very much.
Mr. Johnson, thanks for joining us.
STATEMENT OF ROBERT L. JOHNSON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, DC AIR, WASHINGTON, D.C.
Mr. Johnson. Thank you, Mr. Chairman, Senator Kohl, and
members of the committee. From the day that we announced the
creation of DC Air, my vision for this ground-breaking company
has remained intact. That vision is to build on the well-
established service from 44 communities throughout the Mid-
Atlantic region to Reagan National Airport that approximately 3
million passengers have come to rely on, to provide safe,
reliable, high-quality service at competitive to customers and
communities in the region we serve, to compete vigorously on
price and service in the communities we serve, to facilitate
the growth and economic development that accompanies air
service, and to develop and maintain an airline that the
Washington community will be proud to call its hometown
carrier.
In addition, as Chairman, CEO and majority owner of DC Air,
I pledged from our very first day to create, own and operate
this new airline, America's first minority-owned air carrier in
over 30 years, because in my heart I believed it would be good
for the communities, ensure competitiveness in air travel, and
do right by the 45 communities that we serve.
As you are well aware, Mr. Chairman, from the first
discussion of DC Air, critics speculated that its proposed
agreement with United Airlines for transition period resources,
however brief and arms-length they might have been, might have
compromised our goal of establishing DC Air as a viable,
independent carrier. Obviously, now this has all changed with
our announced partnership with American Airlines. American's
recently announced agreement to invest in DC Air as a minority
partner and to provide these transition resources proves that
DC Air will be an independent, competitive carrier.
Why DC Air choose to partner with American? We had received
expressions of interest from a number of carriers regarding
partnership and entered into very detailed negotiations with
several. While we could have chosen any of several different
paths, I had the opportunity at a critical point to meet and
get to know Don Carty, of American.
It became clear to me in that meeting and throughout our
subsequent discussions that not only were the economic terms of
the arrangement favorable to DC Air and the benefits to our
passengers outstanding, and particularly what I would call the
premium frequent flyer program in the country, American's
Advantage Miles, but more importantly--and this was very
important to me--that Don Carty and the American team truly
understand what DC Air and minority ownership is all about and
they are looking forward to being really true partners.
Let me clear about something that individuals have raised
and have been questioned about. First and foremost, under the
alliance with American I am the Chairman and CEO of DC Air, and
under my leadership DC Air will be an independent company. Let
me be absolutely clear about this. DC Air has no obligation
whatsoever to sell additional shares to American. American has
purchased a minority equity stake of DC Air. Consequently, as
the majority owner, DC Air will follow my vision.
Now, the other issue that has been raised about DC Air is
this question of will we be competitive. Mr. Chairman, I assure
you I wouldn't get in a business if I didn't think I could
compete and create value. We will be competitive because we
will fly the right size aircraft for our 44 routes.
One thing that you heard from Mr. Leonard is that AirTran
could be more competitive in flying the slots at DC Air. I
think what Mr. Leonard failed to point out is that AirTran
couldn't fly 104 of the 220 slots that we own because those
slots are commuter and regional jet slots and AirTran's 717s
couldn't fly those commuter and regional jet slots.
Furthermore, I disagree with Mr. Leonard. Regional jets are
not more expensive to operate in the smaller markets that we
serve. They are, in fact, substantially less expensive to
operate. If AirTran, as Mr. Leonard proposed, flew their 717s
in some of the smaller markets that we serve, they would have
to charge more. It would be the same as taking a 747 to
Buffalo. Most of the seats would be empty and the passengers
would have to pay more to get back and forth. That is why no
one does it.
So we will be a focused regional carrier with none of the
overhead costs of some of the global major carriers. Our
employees will be fairly paid at rates comparable to other
regional carriers, below the rate of the major carriers and
consequently far more productive.
Our alliance with American, as I have pointed out, provides
great customer benefits in the frequent flyer program. So DC
Air provides competition not just non-stop to and from
Washington, but up and down the East Coast. For example, we
will serve northern cities like Burlington and Buffalo and
Columbus to a number of southeastern destinations--Orlando,
Tampa, Jacksonville, Atlanta, Huntsville, Columbia, Charleston,
and so on. This is real new competition in over 450 city pairs
throughout the route system.
Mr. Leonard has talked about the slots and they should be
carved up and handed out. When I accepted the responsibility of
taking on the investment in DC Air, I made a pledge before this
committee--I said I would do it before the Justice Department
as part of a consent decree--that I will always fly those slots
to the 44 communities that have had this service for over 40
years. No one else in this industry will make that commitment
that they will continue to serve, Mr. Chairman, the 44
communities that have historically been served by US Airways.
We will do that.
So I disagree with Mr. Leonard's assumption that DC Air
would not pass the laugh test. I believe DC Air is, in fact, a
new entrant that will provide competition on the East Coast.
When you look at the East Coast market right now, there are two
major carriers, US Airways and Delta, flying the majority of
passengers up and down the East Coast. Now, we have Southwest,
AirTran and JetBlue. I should point out that DC Air on the
first day of its operations will be almost the size of AirTran
and significant larger than JetBlue.
So after the proposed merger, you would have Delta very
aggressive still, United very aggressive on the East Coast,
American, with the new merger terms, very aggressive, as well
as DC Air. In addition, you would have the low-cost carriers
that we talked about earlier. This sounds to me like more
competition, with DC Air being a part of it.
Now, in concluding let me go to one other issue that has
been raised, the so-called no-flip restriction on DC Air, and
what that was eliminated out of the original deal with United.
First of all, Mr. Chairman, I never supported that no-flip
agreement anyway. It would be the same as if someone sold your
house and said if you sell this house any time within the next
3 years, you have got to give me all the profits. Well, even if
you plan to live in that house for the next 25 years, no
prudent business person or homeowner would put that provision
into an agreement.
There is nothing in eliminating that no-flip arrangement
that implies in any way that I have any intention of flipping
DC Air to American or any other carrier. By the way, I should
point out there is nothing in the arrangement that prevents me
from finding a new partner if I wanted to reacquire the
opportunity from American.
So I think it is unfair to assert that DC Air, of all the
carriers in the industry who buy slots, should have a no-flip.
But I will tell you what I will do. If every airline would
agree not to take a profit off the flip of a slot, I will sign
with that same group of airlines. I doubt very seriously if
they will do it, and I don't think it is fair to impose it on
DC Air.
So, Mr. Chairman, I think when you look at the facts, DC
Air is inheriting a very attractive route system in a very
desirable airport, Reagan National Airport, and the opportunity
to continue to provide service to these 44 communities with 3
million passengers, flying a combination of business and
leisure customers that have historically come to rely on the
quality of service that US Airways provided. We will do it at a
lower cost. We will do it more focused, with more competition,
and we will serve the public, I believe, to the best of our
ability.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Johnson follows:]
Statement of Robert L. Johnson, Chairman, and CEO, DC Air
Mr. Chairman, Senator Kohl and Members of the Committee, from the
day that we announced the creation of DC Air, my vision for this
groundbreaking company has remained intact:
To build on the well established service from 44 communities
throughout the mid-atlantic region to Washington's National
Airport that approximately 3 million passengers a year have
come to rely on;
To provide safe reliable, high quality service, at competitive
prices to customers and communities in the region we will
serve;
To compete vigorously on price and service in the communities
we serve;
To facilitate the growth and economic development that
accompanies air service; and
To develop and maintain an airline that the Washington
community will be proud to call its hometown carrier.
In addition, as Chairman, Chief Executive Officer and majority
owner of DC Air, I pledged from our very first day to create, own, and
operate this new airline--America's first minority-owned air carrier in
over 30 years--because in my heart I believed it would be good for
consumers, ensure competitiveness in air travel, and do right by the 44
communities we will serve.
Mr. Chairman, I am proud and happy to report today that we have
made a number of significant strides forward in realizing the full
scope of this vision.
As you are well aware, from the first discussions of DC Air,
critics speculated that its proposed agreements with United Airlines
for transition period resources, however brief and arms-length these
may have been, might have compromised our goal of establishing DC Air
as a viable, independent airline. This has all changed with our
announced partnership with American Airlines. American's recently
announced agreement to invest in DC Air and to provide these transition
resources proves that these theories could not be further from the
truth.
Make no mistake about it, the resources that American Airlines is
bringing to Washington, DC--an experienced staff, capital, and
infrastructure--as it grows its operations here and throughout the
Eastern United States will go a long way toward making DC Air a
powerful, competitive, and independent airline on day one of our
operations.
By far the most important outcome of the DC Air-American Airlines
partnership is the benefits it will afford our customers. Of prime
importance will be the consumer benefits associated with the 20-year
marketing alliance between our two companies. This will allow
passengers traveling on DC Air to earn American AAdvantage frequent
flyer miles which they can redeem on DC Air, or anywhere in American's
national network or its global system. Thus, passengers flying on DC
Air will reap the benefits of what many consider to be the premium
frequent flyer program in the industry. In addition, DC Air passengers
may enroll in American's airport lounge program, accessing facilities
in National Airport and worldwide.
Through the alliance with American, DC Air's customers will also
have access to a vast network of new destinations. For example, our
passengers will be able to fly from Richmond to National on DC Air, and
then from National to New York or Boston on American Airlines' Shuttle
service. Additionally, DC Air passengers will have direct access to the
rest of American's network, which includes service to Chicago, Dallas
and Miami. And, should American's proposed acquisition of TWA be
consummated, passengers could also take advantage of convenient
connections over Reagan National to St. Louis and Los Angeles.
The alliance with American will expand DC Air's reach from point-
to-point service to and from Washington and connections up and down the
East Coast, into an established network that spans the globe. In turn,
American Airlines will get a strategic partner with a significant
network in the east, operating out of Reagan National Airport, to
complement its planned growth within the east. By adding its
relationship with CDC Air to its internal growth and announced
acquisitions, American will become a major competitor for North-South
traffic flows along the Eastern U.S.
While the benefits to passengers bode well for the success of DC
Air, many of the operational aspects of the DC Air-American alliance
will go a long way toward addressing of the broader public policy
concerns raised about DC Air's viability as a stand-alone entity and
our ability to enhance the competitive landscape on the East Coast.
As you may recall, our original plan for DC Air had been to manage
a rapid transition into a network of 44 cities using 37 aircraft on our
first day of operations. We had arms-length arrangements with United
Airlines to provide 10 wet-leased jet aircraft, as well as services
including ground handling and other items, to ensure that DC Air had
full access to all needed services on ``day one'' of operation.
Still, some observers of the process appeared concerned that any
from of ongoing relationship with United Airlines, no matter what is
was, somehow called into question DC Air's independence--in part,
because United would be one of our major competitors in this region.
In response to those concerns, we at DC Air accelerated the process
of entering into relationships with carriers other than United to
provide these services. We had received expressions of interest from a
number of carriers regarding a partnership and entered into very
detailed negotiations with several. While we could have chosen any of
several different paths, I had the opportunity at a critical point to
meet and get to know Don Carty, the Chairman of AMR, Americans parent
company. It became clear to me in that meeting, and through our
subsequent discussions, that not only were the economic terms of the
arrangement favorable to DC Air, and the benefits to our passengers
outstanding, but also that Don Carty and the American team truly
understand what DC Air is all about and that they are looking forward
to being our partner.
First and foremost, under the alliance with American, I am the
Chairman of DC Air and under my leadership DC Air will be an
independent company. American has purchased a minority equity stake,
49%, of DC Air, ensuring that the airline will follow the vision we
previously have so clearly set out for DC Air.
Under this alliance, American Airlines has stepped into provide
between 11 and 14 jet aircraft that will clearly help DC Air provide
quality service to more destinations each day and has agreed to provide
ground handling and other services to DC Air during its transition
period.
Although I believe most of you view our independence from United in
a positive light, I want to underscore to you that our alliance with
American will only ensure that we will be able to compete aggressively
in both service and fares with other airlines. United will no longer
help to provide transition services. United is our rival, our foe, our
adversary. And, we will face our competitors, including United, with
the support of American Airlines behind us as we go into battle.
I have received some queries about the cost structure of DC Air
under the arrangement with American. American will benefit from the
success of DC Air through its equity investment, and it providing
services at very competitive rate to DC Air. In addition, American has
significant economies of scale in various areas that can be passed
along beneficially to DC Air. Therefore, our costs will be fully
competitive and our vision of competing aggressively in both service
and fares is not only intact, but enhanced.
The American Airlines-DC Air alliance will ensure vibrant
competition throughout the Washington area. Without this alliance, the
metropolitan area would have one primary traditional carrier--United
Airlines--offering nonstop service to a variety of destinations and
connections to worldwide destinations from its hub at Dulles
International Airport. Of course, other airlines, notably Air Tran,
Delta Air Lines and Southwest Airlines, would continue to serve the
metropolitan area, but each of these airlines offers a more limited
scope of nonstop destinations to Washington passengers. Instead, this
alliance will bring into this region a significant new competitor, DC
Air, with the support of a traditional carrier, American, which is
combination will become the largest presence at Ronald Reagan
Washington National Airport. This will provide for intense competition
for both East Coast and worldwide passengers that will keep prices down
and help ensure high quality service for area travelers.
And, with the new support provided by American Airlines, DC Air
will have all the resources necessary to be fully operational on ``day
one,'' pending the closing of the merger. When it is operational, DC
Air will provide competitive air service to 44 communities--cities
that, for the most part, currently enjoy direct access to the
Washington area. As the majority owner of DC Air, I believe it is
critical to sustain and enhance the existing US Airways network, which
has provided affordable, safe, reliable service to cities in the
Northeast for so many years. Nothing in the American agreement changes
my long-term commitment to these communities.
When I agreed to build and run DC Air, I strongly believed it would
provide to be a strong, independent airline. The new alliance between
DC Air and American Airlines brings us closer to achieving the goals I
set out when I agreed to build and run DC Air--to provide high quality,
safe, reliable air travel, to help preserve competition in the airline
industry, and to make air travel affordable.
Thank you for the opportunity to testify before you today.
Senator DeWine. Mr. Johnson, thank you very much.
Mr. Wolf?
STATEMENT OF STEPHEN M. WOLF, CHAIRMAN, US AIRWAYS GROUP, INC.,
ARLINGTON, VIRGINIA
Mr. Wolf. Chairman DeWine and Senator Schumer, I appreciate
the opportunity to come before this Committee once again.
During my earlier opportunity to testify here, I stated my
concern that there was no place long term for a mid-sized,
mature-cost U.S. carrier in commercial aviation, recognizing
that US Air was the only one left out of an original group of
six airlines at the start of deregulation. Today, I am more
concerned than ever about US Airways' status.
In today's extremely competitive marketplace, there are
only two platforms on which to operate an airline successfully.
There is the low-cost, low-fare business model represented by
carriers such as AirTran, America West, JetBlue and Southwest,
and the mature, full-service network carriers such as American,
Continental, Delta, Northwest and United. US Airways is
neither, and there is no place for a ``neither.'' This is
simply an economic reality.
When I joined what was then US Air 5 years ago, the company
was seriously lacking in several respects. We had a fleet that
begged for rationalization, no strategic direction,
questionable service, multi-year, multi-billion-dollar losses,
and uncompetitive labor contracts. Clearly, we had to address
these issues, but the predominant and overriding concern was
one of size. We had to get substantially larger in order to
compete long term.
We committed ourselves to establishing US Airways as a
vibrant, financially secure, global carrier. To this end, our
superb and dedicated employees have made enormous strides. We
have made significant improvements in our operational
performance, established competitive labor agreements, launched
the modernization of our fleet, purchased the shuttle, and
expanded our international service.
Despite these improvements, the fundamental problem the
company faced of getting substantially larger has magnified
itself as a result of a significant increase in intra-east
competition. Allow me to share with you two gentlemen visually
just four charts that will sort of depict this graphically.
The first chart is US Airways' route structure, and of
course you can't read the city names, et cetera. Just sort of
look broadly at the lines. As you can see, US Airways is
heavily oriented to north-south traffic in the eastern quadrant
of the United States. If you look at the two vertical yellow
lines, it shows that we serve 13 cities west of the
Mississippi, and within those 13, 7 west of the Rockies. But,
please, just focus on that eastern quadrant, that piece of
geography, because I want to follow on with three charts that
only show that piece of geography.
This is Southwest's route structure when I joined the
company now some 5 years ago, clearly a limited pattern of
service, 9 cities served, 157 departures, deploying 19
aircraft. This is Southwest's route structure today. I should
add that in June of last year, Southwest placed its largest
aircraft order ever for some 290 new Boeing 737 aircraft. On
that occasion, Southwest's Chairman, Herb Kelleher, announced,
quote, ``a significant focus on the East,'' end quote, going
forward.
Earlier this week, in Florida, Mr. Kelleher spoke before
the Goldman Sachs aviation conference and indicated that
Southwest would increase its capacity in the next 4 to 5 years
by 50 percent, again heavily focused on the East Coast of the
United States.
What you are looking at here, gentlemen, is new jet routes
that Delta Air Lines has initiated during this same period of
time, 365 jet departures, 61 aircraft. Now, this is not Delta's
system in the East. These are the net adds that Delta has added
during this period of time.
Senators, these are two particularly fine airlines doing
what is in the best interests of their shareholders and
employees, but enormously harmful to US Airways employees. For
the 45,000 employees of US Airways and the communities we
serve, the status quo is simply not an option. This merger
preserves jobs, ensures the continuation of service to all
communities on our system, and significantly enhances
competition.
Senators, there are two certainties. One, US Airways does
not have the financial wherewithal to become a large network
carrier. Two, you cannot shrink an airline to profitability.
We all know all too well what happened to other similarly
situated carriers such as Braniff, Eastern, Pan Am, and now
TWA. Therefore, my strongly held view is that the merger with
United Airlines, with a job guarantee for all 45,000 of our
employees and a commitment to preserve and enhance service to
communities large and small, is in the best interests not only
of our employees, shareholders and the communities we serve,
but of the traveling public as well. In the end, with a
substantially larger American and United, competition in the
East is going to be dramatically enhanced.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Wolf follows:]
Statement of Stephen M. Wolf, Chairman, US Airways Group, Inc.
Mr. Chairman and Members of the Committee, on behalf of the entire
US Airways family, I appreciate the opportunity this afternoon to offer
some additional comments on our merger with United Airlines.
The have been some significant development in the aviation industry
since I testified before the Antitrust Subcommittee last summer, when
we first announced our merger. First and foremost, as a result of the
intense competitive pressures at work in the marketplace, TWA has filed
for bankruptcy, its third time in the last ten years. In connection
with the bankruptcy filing, American Airlines has agreed to purchase
TWA and provide immediate financing, allowing the airline to continue
its operations. Second, American has agreed to acquire an equity
interest in DC Air, the independent, new entrant carrier created from
our merger with United Airlines, ensuring vigorous competition in the
Washington, DC region. Third, American has entered into an agreement
with United to initiate flights on a select number of routes from US
Airway's hub cities and to operate the US Airways' Shuttle with United
pursuant to a joint venture. Fourth, despite the best efforts of our
hardworking and dedicated employees, US Airways reported a loss of $269
million for last year.
When I testified in June, I set forth in detail the driving forces
behind our decision to merger with United, namely, our desire to
provide comprehensive, global air service to our customers and our
communities, while preserving jobs, service, and significantly
enhancing competition. Importantly, the events that have transpired
since my prior testimony serve to significantly enhance the pro-
competitive, pro-consumer, and pro-employee benefits of our merger.
US Airways continues to be unique in the airline industry. There is
no longer any other carrier in the country like us. We are the last
mid-sized, mature-cost airline that remains out of an original group of
six pre-deregulation carriers. All of the others have either gone out
of business and disappeared completely, e.g., Braniff, Eastern, and Pan
American, or while still operating, have gone through multiple
bankruptcies, e.g., Continental and TWA (now, for the third time).
Neither of these options, in my estimation, is an attractive
alternative because of the serious disruption and uncertainty they
would bring to our employees, to our passengers, and to the communities
we serve. They are, however, real threats given US Airways' unique
position. Accordingly, the status quo is not a viable option for US
Airways, our employees, or the communities we serve. Let me explain.
US Airways in its current from in an amalgamation of several small,
pre-deregulation regional carriers such as Allegheny, Mohawk, and
Piedmont. As a result, the airline has a route network that, like its
regional airline predecessors, is largely confined to short-haul routes
in the eastern United States. Indeed, U.S. Airways has the shortest
average stage length of any major carrier. Combined with a route
structure that is essentially confined to the East Coast corridor, this
severely limits US Airways' ability to mass enough presence in other
areas to support any material expansion of its system.
As a consolidation of pre-deregulation carriers, US Airways also
pays labor rates that are comparable or higher than those of American,
Delta, Northwest, and United. The difference between US Airways and
these other carriers, however, is that the other carriers have vastly
larger route systems which permit them to spread their costs over a
great number of more efficient, long-haul segments that are relatively
less costly to operate.
Caught in the vice between its short-haul, high cost route system
and its mature labor structure, US Airways is far and away the highest
unit cost U.S. airline. For the year 1999, US Airways' average system
cost per seat mile, the measure most commonly used to determine costs,
was approximately 14 cents. By comparison, the average system costs
during the same period were approximately 9.5 cents per seat mile for
the major carriers and 7.5 cents for low-cost competitors such as
Southwest. In sum, when compared to Southwest, a carrier that is
aggressively expanding throughout US Airways' East Coast operating
territory, US Airways has costs that are nearly twice as high.
When I joined what was then USAir five years ago, I recognized the
historical reality that placed US Airways in such an ``in-between''
position--one that could not be sustained over the long run. US Airways
was neither a ``national'' carrier with low costs and point-to-point
routes. Accordingly, with the support of our employees, we committed to
a strategic plan to restore financial stability to the company and
establish the carrier's competitiveness, despite our high costs and
incomplete route structure. To this end, we have made enormous
progress. We have made significant and sustained improvements in our
operational performance, established harmonious labor agreements, begun
fleet modernization, and expanded our international service.
However, the fundamental problems that constrain US Airways--high
costs, short segments, and a limited network--remain in the face of
increasingly intense competition. Unfortunately, US Airways does not
have the financial reserves or the cost structure to support
significant internal expansion.
Meanwhile, competition from well financed, well managed low-cost
carriers such as Southwest, JetBlue, AirTran and others has been
increasing dramatically on US Airways' most heavily traveled and most
profitable routes. In 1995, for example, low-cost carriers had 618
departures per day in the eastern United States, US Airways' major
service area. By 2000, that number had almost doubled to 1,098. These
carriers now offer more than one out of every four domestic seats up
for sale in that region. At the same time, major carriers' share of
capacity actually fell one percent.
In the last year alone, Southwest, AirTran and Delta Express, as
well as new entrants such as JetBlue and Spirit, have added 181 daily
departures out of East Coast airports--a 25.5 percent increase over
1999. Since January 1, 1996, Southwest has increased its intra-East
route system in terms of daily departures by 238% (157 to 531) and in
terms of aircraft by 326% (19 to 81).
Facing ever more low-fare competition on its key eastern routes,
with costs well above the industry average and no realistic way to
alter that condition, US Airways is increasingly limited in its ability
to support its route network and achieve profitability. Accordingly, as
a stand-alone carrier, US Airways, which has sustained huge losses over
the past decade, does not have the luxury of maintaining the status
quo.
Neither did TWA and its fate is an example of what can happen. Over
the past decade, TWA has been forced to reduce its employee base by
almost half. Moreover, its once extensive global route network has
similarly decreased, from 216 nonstop routes in 1989 to 114 in 2001. In
sum, over the past decade, TWA has shrunk to a shell of its former self
in a valiant, but now apparently unsuccessful attempt to survive.
Fortunately, the downsizing we have witnessed with other carriers
is today not he only option for US Airways and our employees. There is
a viable alternative that allows US Airways to become part of a broader
and more efficient transcontinental and global system, thereby
preserving jobs, ensuring service to scores of communities that
otherwise could lose flights, and enhancing competition in the
industry--our merger with United airlines.
For US Airways, this merger will help us provide the efficient,
global service that our valued customers demand and deserve. Moreover,
by merging with United, service to US Airways' communities of all sizes
will be preserved, ensuring continued rather than decreased
competition. The creation of DC Air, a vibrant, minority-owned airline
that will have the benefit of American's frequent flyer program and
access to its extensive network, will also add a new competitor based
in the Washington, DC region with service throughout the eastern US.At
the same time, thousands of high-paying, union jobs will be protected
at a time of increasing economic uncertainty. For nearly a decade, the
employees of US Airways have faced periods of uncertainty about the
future of the company. Now they are guaranteed a secure future with a
financially strong, global carrier.
I have been involved with this industry for over 30 years, and I
understand, and appreciate, that there is some concern about
consolidation and the potential effect the two mergers we are
discussing today will have on consumers. But we cannot examine these
issues without recognizing the fundamental forces that are at work in
today's deregulated marketplace and acknowledging what will happen if
the transactions do not take place. Who would have thought 20 years ago
that Southwest would be the second largest domestic carrier in terms of
passengers carried and have, by a wide margin, the highest market
capitalization of any carrier in the world, that the original Pan Am
would be gone, and that TWA would be entering its third bankruptcy.
Nonetheless, these changes are happening, and the question is whether
the proposals we are discussing today to deal with these changes are
good for consumers, employees, and the traveling public.
The same can be said of American's proposed transactions. Like the
US Airways/United transaction, American's purchase of TWA, as well as
an equity position in DC Air, is not an issue of consolidation, but one
of saving jobs, jobs maintaining service, and preserving competition.
These transactions greatly enhance the scope and scale of American's
route network, transforming American into a truly national carriers. By
purchasing one-half of US Airways' shuttle operations, American
dramatically increases its presence in three premier eastern markets--
Washington, New York, and Boston. And by obtaining gates and terminal
space at several eastern airports, including Philadelphia and
LaGuardia, and agreeing to operate flights on certain routes from US
Airways' hub cities for up to ten years, American ensures that
consumers on these routes will have competitive air service.
Significantly, American's proposal to purchase 49 percent of DC Air
will directly link DC Air to a vibrant, financially strong major
carrier, ensuring competition in the Washington metropolitan area over
the long term and delivering important consumer benefits to DC Air
passengers. DC Air will be a participant in American's frequent flyer
program and will be linked to American's expansive domestic and
international network.
As a former Chairman of United Airlines, I can attest to the fact
that, despite the comments of some pundits who have declared that
American and United are attempting to divide up the eastern seaboard,
American and United are vigorous competitors and intense rivals. The
proposed transactions under consideration today will introduce the
benefits of this competition into new markets in the eastern United
States, where Delta traditionally has been, and is, a leading force.
They will also bring vigorous competition, innovation, access to the
global marketplace, and sustained employment and job growth for airline
workers. Importantly, by extending their rivalry into east coast
markets, United and American will position themselves to by vigorous
international competitors in the emerging open global aviation
marketplace. This is a win/win for consumers. Millions of passengers
begin or end their international trips in the eastern United States,
and many new communities will now have seamless access to efficient
global networks. At the same time, United American will be better
positioned to complete in the new global marketplace where there are no
guarantees. We know all too well, as we have witnessed radical changes
in other industries, that American businesses will face increasingly
challenging competition from their foreign competitors.
It will serve us all well to think outside the box. This is a
dynamic, changing global industry. We cannot--and we do not want to--
preserve the status quo. We must learn from our experiences in other
industries--autos, steel, finance, aircraft manufacturing. We have an
historic opportunity to create our first truly national and
international network carriers--Delta, American, and United--who will
compete vigorously with each to flow traffic over their systems, and,
and vibrant group of new-entrant and low-cost carriers--led by
Southwest, AirTran, and JetBlue--providing additional point-to-point
competition.
For most of the last century, U.S. aviation led the world in
technology, efficiency, innovation, and the development of free
markets. We are now in a period of revolutionary change. The U.S.
industry is responding to dynamic market forces and positioning itself
to maintain and enhance its leadership position. That same bipartisan
government, which first saw the wisdom of deregulation over 20 years
ago and last year passed historic legislation for this industry in AIR-
21, must not now constrain the industry's capacity to respond to
marketplace force. The U.S. must continue, as it has during the first
century of flight, to create conditions for innovation, efficiency, and
growth, and to respond aggressively to real problems such as adequate
infrastructure, air traffic control, and capacity that are serious
threats to our industry.
Thank you for the opportunity, once again, to share my perspective
with you.
Senator DeWine. We have a statement that has been submitted
by Senator Thurmond. Without objection, that will become a part
of our record.
[The prepared statement of Senator Thurmond follows:]
Statement of Hon. Strom Thurmond, a U.S. Senator from the State of
South Carolina
I am pleased that we are holding this hearing today on the
consolidation in the airline industry.
The competition that developed as a result of deregulation two
decades ago was a boom to the airline industry and to consumers. It
caused a drastic reduction in prices and a great increase in service.
Unfortunately, the competition that has made the airlines industry
so successful is increasingly at risk today. The proposed merger
between United Airlines and U.S. Airways would give the new United
control of about 27% of the U.S. market. I expressed concerns about
this potential merger at the time, and the passing months have only
made those concerns more real. American Airlines has now proposed a
merger that goes beyond simply acquiring financially-troubled TWA. If
all of these mergers are approved as proposed, United and American
together will control almost half of the domestic airline market.
However, it does not end there. It is likely that more airlines
will see the need to merge to stay competitive, and we soon could have
just a few giant airlines. In such an environment, it is hard to see
how small or start-up carriers could compete effectively.
It is true that mergers such as these create more convenience for
consumers. However, they also cause less competition and fewer choices.
This is not only a problem in hub cities, it is also a problem in
smaller markets where the merging airlines compete today. For example,
if United and U.S. Airways merge, the new United would control almost
half of the non-stop daily flights in the capitol of my state,
Columbia, South Carolina.
The airline mergers that are pending today must be reviewed
carefully in terms of their impact on overall competition. They could
have widespread consequences for the entire industry and our nation's
economy.
We are at a crossroads for the airline industry, and we do not know
what the future will bring. However, if history is any guide,
competition, not consolidation, is in our long-term best interest.
Senator DeWine. Mr. Wolf, let me just follow on your
testimony. I appreciate the charts and I appreciate the comment
about competition, but you heard Mr. Mullin's comments about
your airline and his belief that US Airways can't be considered
a failing airline. Professor Levine basically agreed and said
the same thing. We have heard that comment from other
individuals.
I just want to make sure I understand what your position
is. Is it your position that the merger is necessary for you
all to avoid bankruptcy, or just what are you saying?
Mr. Wolf. I heard Mr. Mullin's comments and I heard all the
comments. I would actually group the four airline executives
into two similar comments; that is, the comments of the two
network carrier CEOs and the comments of the two low-cost
carrier CEOs.
Let me refer to a Bloomberg report of November 29 in
Atlanta, where Mr. Mullin said, quote, ``US Airways needs help.
It is the most troubled of the large carriers, and I think the
Government may well be looking at this as a way to introduce a
strong carrier, United, into a weak carrier situation, US
Airways.''
If I was Mr. Mullin or if I was Mr. Bethune operating two
network carriers, if you look at that Eastern quadrant of the
United States, we are the big three, Delta and US Airways
bigger and about the same size. Continental is No. 3, at about
a 7.8-percent share. And they fall off dramatically from
there--American, about 7.5; United, about 3.
If I was either of those two gentlemen, would I rather
compete with US Airways in this market, as opposed to an
expanded and enhanced United and American? There is no question
about it, I would rather do that, and you would rather do that,
also.
The reality is, as I indicated, the facts are simply the
facts. We are not a low-cost carrier and we will never become a
low-cost carrier, no matter how many bankruptcies we go
through, as much as I abhor even imagining it. We must become a
larger carrier and we do not have the financial wherewithal to
do that. That doesn't make anybody bad or stupid. It is just an
economic reality.
The merger with American Airlines addresses the issue. It
preserves 45,000 jobs, it preserves service to all the small
communities that we serve in the Eastern part of the United
States, and it enhances competition significantly.
Senator DeWine. Mr. Goodwin, both you and Mr. Carty have
said American and United are, I think the term was arch-rivals,
and will certainly vigorously compete. The professor posed the
question of why you would enter into a deal with your arch-
rival instead of another airline. Do you want to answer that?
Mr. Goodwin. That was in response to the joint venture on
the shuttle agreement. I think both of us today do not
participate in the shuttle marketplace. It is the purview of
the Delta and US Airways. The shuttle market is a unique
product, unique to the three cities that basically it serves,
and we saw this is an opportunity, again in looking at the
issues that have been surfaced by members of this Committee
about concentration in the Northeast, to also introduce some
competition into the shuttle market.
We do not believe this is entering into a transaction with
our arch-enemy. We believe this is inducing competition into a
heavily traveled core market where the three major carriers
will have an opportunity to compete for passengers.
Senator DeWine. Senator Schumer?
Senator Schumer. Thank you, Mr. Chairman, and I thank all
of the witnesses for their testimony.
The first question is to Mr. Carty. As you probably heard
in my statement if you were here, the two parts of this merger
that give me least pause are the TWA/American, and except for
the DC Air part the US Airways/United original proposal didn't.
I mean, that had potential to help my constituents and help the
country.
But the one thing that I am worried about in your situation
is the domination that you, combined with TWA, would have at
JFK. You would control three of the nine terminals, one-third
of the real estate. What assurances can you give us that if
this merger were consummated that you would make room for other
carriers that are expanding, notably JetBlue?
Mr. Carty. Senator Schumer, we are right in the middle of
trying to assess our JFK needs in the context of both our own
terminal and the TWA terminal. Now, we have got a pretty clear
picture of the long term. We are building, as I think you know,
in excess of a $1 billion terminal that will encompass the
space historically that Terminal 8 and Terminal 9 had at
Kennedy. In the long term, that is all the terminal we will
need. We will not need the TWA terminal.
Senator Schumer. So you would be willing to sell that to a
competitor?
Mr. Carty. Absolutely. During transition, whether or not we
need some of the TWA space to be able to continue to operate
all the flights we have got going on while we construct, is a
question we are trying to sort out right now. We are working
with the port on that.
Senator Schumer. How long is transition?
Mr. Carty. Well, what we have got to do is figure out--
Senator Schumer. During transition, you have got to figure
it out?
Mr. Carty. Well, our construction process, Senator, is
really 5 years. The question is does the availability of some
gates that TWA is building allow us to accelerate that
construction so we get gates quicker than we otherwise
anticipate. I wish I could answer that question this morning
and I can't, but we will have answers in the next couple of
weeks.
Senator Schumer. Would you?
Mr. Carty. Yes.
Senator Schumer. Could I ask, Mr. Chairman, that those be
submitted in writing to me and to the record?
Mr. Carty. I would be delighted.
Senator Schumer. The next question is for Mr. Johnson, and
let me preface this, Mr. Johnson, by saying I have tremendous
respect for you as a businessman and what you have
accomplished. I must do what I think is best for my
constituents. As I read it, 98 percent of the experts I have
talked to who are not part of any side, no airline, think that
this merger is not good for upstate New York. So let me ask you
a few questions about that.
First of all, there are three issues here. The first is
cost. Right now, for instance, United's round trip from Dulles
to Buffalo is $700. Southwest's trip to BWI is $48 to $65. You
have obviously gone over the numbers here. You wouldn't have
risked so much money if you didn't.
What is your estimated cost of your flights from Buffalo to
National Airport?
Mr. Johnson. Mr. Schumer, I too share your commitment that
you are committed to upstate New York, and I respect your
concern about your constituents. On the matter of giving you an
actual price of a flight from Buffalo to D.C. based on the
restructuring of DC Air with American, with the combination of
American's frequent flyer program and all the assets, I
couldn't give you an actual price quote, but I could certainly
provide that information to you by working with your staff. I
could provide it for all the upstate markets, for that matter.
Senator Schumer. That would be very good. When we met with
your staff, they said it would be about 30 percent lower than
the existing flights, so you can see the huge gap between what
at least this low-cost air carrier charges. Admittedly,
National is more expensive to land at than BWI, but it is still
an enormous gap.
Mr. Johnson. I think that is right. I think we have got to
make sure we are comparing apples to apples because we fly only
from DCA. We don't fly from BWI or Dulles.
Senator Schumer. Understood, but I would like to know what
the costs are.
Mr. Johnson. We will certainly provide that.
Senator Schumer. A broader question which I am sure you had
to investigate is what do you estimate your rate per passenger
mile will be?
Mr. Johnson. Again, Senator Schumer, I couldn't give you
that number sitting right here, but I could certainly provide
it through the talented individuals I have hired to help me run
this airline. I probably couldn't tell you the spot cost of air
time on BET, and I ran that for 20 years, but I certainly could
find people who could give you that information.
Senator Schumer. Again, I am not trying to put you on the
spot.
Mr. Johnson. No.
Senator Schumer. This is vital information as to what the
costs will be to upstate.
Mr. Johnson. Absolutely, Senator, and we will respond to
any question you give us in writing, I assure you.
Senator Schumer. OK, thank you. Then we go to this
memorandum of understanding, the so-called flip. I don't really
care about the flip, how much profit you make or not. But I
would tell you the analogy to someone buying a house is false
because these slots are not your property, not Mr. Goodwin's
property. They are the public's property, and I think they have
been abused and that is one of the problems we face at the four
airports with slots. They limit competition.
So the bottom line is the experts I have talked to have
said you are getting them for a lower cost than they would go
for if they were just bid in the free market. I don't have a
problem with that if I would have some assurance that that
lower cost would be passed on to the consumer. I don't see any
of that in the numbers or anything else that you have given us,
but let me go to the flip agreement and then you can answer
that one.
Here is what I want to know. I want to know right now what
your commitment is to continue running the airline and not
selling your share to American. Is it a year, is it 2 years, is
it 3 years? I mean, the whole argument here is we will have an
independent airline. I think that is better than having a non-
independent airline.
But now with this agreement, 6 months from now you could
decide to sell to American Airlines. Because the slots at a
lower price, you might make an enormous amount of money. God
bless you, God bless America, but it wouldn't do much good for
competition. So what commitment can you give us right here and
now about how long you will keep this airline and not sell your
51 percent, particularly to American?
Mr. Johnson. Senator Schumer, as you said, God bless
America. One of the things I just absolutely think is essential
in this country is that businesses and individuals all be
treated fairly and alike. I will answer that question by saying
that I want to be treated just like the other carriers.
Let's go to the no-flip provision. I will sign the same no-
flip agreement on slots, if they are a public trust, that every
other airline will sign. If JetBlue were to sign a no-flip
provision on its slots that it was granted at the airports,
then I will sign the same kind of agreement.
Senator Schumer. If I might, JetBlue is independently
financed by investment bankers and different people. They are
not owned 49 percent by one of the major carriers that you
would compete against. That is not an analogy.
Mr. Johnson. Senator Schumer, there is nothing in JetBlue's
charter, I would imagine, that would prevent them from taking
money from Don Carty. I imagine any airline here could take
money from any other investor.
Senator Schumer. The bottom line is you will not make a
commitment of any amount of time that you will not sell the
airline to American. Is that fair to say?
Mr. Johnson. Senator, I will not make a commitment that the
other airlines will not make. I mean, I am here as a new
entrant. I am here as a minority American seeking an
opportunity to get in the airline business, and I am not going
to start that entry by signing agreements that the other
carriers have never signed.
If you could get the other carriers here to sign an
agreement that they will hold on to their airlines for the next
50 years or the next 10 years or the next 5 years, I will be
treated equally the same as those other carriers. But I will
not say what my business intentions are, as I wouldn't expect
any business person up here to say.
As far as I am concerned, we should all be treated equally,
we should all be treated fairly, and given the opportunity to
compete. I am paying full price. I didn't set the price. The
price was set by the marketplace, as transmitted to me by US
Airways. If I choose to sell, it will be based on my own
business decision, just as any of these gentlemen would have
the same right.
Senator Schumer. Mr. Johnson, you are certainly entitled to
that. I am entitled and my constituents are entitled to have no
guarantee at that point that there will be an independent
carrier with this huge bounty of 222 slots to compete.
Mr. Chairman, thank you.
Senator DeWine. Senator Brownback has submitted a statement
and questions for the record which, without objection, will
become a part of the record.
[The prepared statement of Senator Brownback follows:]
Statement of Hon. Sam Brownback, a U.S. Senator from the State of
Kansas
Mr. Chairman, Thank you for holding this hearing on this important
issue. I appreciate the opportunity to be here today although I am not
yet officially a member of this Subcommittee. Aviation issues are on
everyone's minds. In the Senate Commerce Committee on which I also
serve, When we held a confirmation hearing two weeks ago for the
Transportation Secretary Mineta, who I think will do an outstanding
job, by the way, the questions to him were almost eighty percent
involving aviation issues of one kind or another. Aviation issues are
at the forefront of everyone's minds, whether it is mergers and
acquisitions, delays and congestion, competition and pricing, or even
customer service.
I come from a rural State, which has no Hub Airports, and has a lot
of rural communities with little air service, or no air service at all.
Many of our communities are dependent on essential air service. I share
my colleagues' concerns that consolidation in the airline industry will
mean higher prices and fewer choices for consumers, particularly those
in rural states or states with no Hub Airports. If you Think Fares are
high in Hub Airport cities, Try Coming to Wichita, Kansas, where last
night, the walk up, round trip, same day return fare to Denver ranged
from $1,050 to $1,643, and the Cheapest Flight goes East to Kansas
City, Before Going West to Denver, In Fairness, I must point out, the
Walk up fare between Wichita and the number one Destination out of
Wichita, Dallas--Fort Worth, Ranged From $349 to $369. Pretty High for
a 50 Minute Flight. But if you Think Fares are high in Hub Cities, or
medium size cities which are spokes on the Hubs, try going to goodland
or Great Bend, Kansas, which have lost their essential air service, and
flying is not an option at all.
But as I Travel my home State, the number one aviation issue among
my constituents is not fluffy pillows or whether the gate agent was
helpful or not, or even which airline is going to combine with which
airline. Although these are all important issues to one degree or
another, the bottom line is, my constituents are tired of flying
because of flight delays, cancellations and congestion at our airports.
We have a capacity crisis in our nation's aviation infrastructure, and
my constituents have caught on. They fly defensively, avoiding if at
all possible certain airports because they are notorious for delays.
We must increase the capacity on the ground at out Nation's
Airports. We must build more runways and build them faster than we are
doing now. The new runway at Memphis, took, what 12, 16 years to
complete? That is absurd. The crisis is here it was last summers, and
it was the summer before that, and we still have done nothing about it.
I am committed to doing something about it, and I look forward to
working with the panelists and my colleagues in the Senate and the
House to see that at least this one aspect of our Nation's Aviation
capacity crisis is addressed by this Congress.
Senator DeWine. Mr. Carty, let me follow up a little bit on
the questioning that you and I had a moment ago, and let me
also reference your written testimony. In your written
testimony, you noted some of the problems with the United/US
Airways proposal and specifically indicated that United and
Delta would effectively have been a duopoly at least on the
Boston-New York-Washington shuttle routes. You said that that
rightly alarmed outside observers.
The new proposal allows American and United to jointly
operate the shuttle route. It seems to me you could still argue
that the shuttle route is going to be a duopoly of sorts, with
American and United operating one route and Delta operating the
other. Why shouldn't we continue to be rightly alarmed about
that?
Mr. Carty. Well, of course, the shuttle markets are a
duopoly today. They are US Air and Delta.
Senator DeWine. I understand.
Mr. Carty. And the question is a very valid one. I can't
remember who mentioned it earlier; I guess it was Jim who
mentioned how important these markets were, not just in
themselves but in their relationship to other markets, and you
make a carrier a much more effective competitor in dealing with
a corporate account.
When I go in the door of Goldman Sachs and try to get their
business and I am trying to sell them New York-L.A. and I don't
have as part of my package a shuttle offering, then Jim in the
context of United and Leo in the context of Delta have an
advantage over me.
So, in a sense, by allowing us access to the market, while
we are still constrained to two operations--and God knows this
is one more area that slots are constraining us. We would love
to have our own shuttle. We don't want to operate anything with
United, and I am sure Jim feels the same way, but once again we
have got this supply problem that Alfred Kahn talked about
earlier that is constraining us.
So what we insisted on in this deal--and this was quite a
negotiation; we wanted some things, United wanted some things.
One of the things that we wanted was access to those shuttle
markets, not just in the context of competing with United from
New York to Boston and New York to Washington, but being able
to go in the door to our big customers and say we have the
entire product offering and we are just as good as United and
Delta in that context.
But you are right. In terms of operation in those markets
exclusively, it is still two operations, and that unfortunately
has got nothing to do with the airlines. That has got to do
with the capacity we have at Washington National and at
LaGuardia.
Senator DeWine. Mr. Goodwin, yesterday the Washington Post
reported the possibility of strikes at the four largest
airlines this spring, big publicity on the nightly news. I am
sure you would agree that if any of these airlines experienced
a strike, the impact on air transportation would be
significant. With effort, you also could argue that the five or
six other carriers could probably handle the strain, at least
to some extent.
But if the proposed mergers are approved, a work stoppage
by one of the much larger airlines, much bigger airlines than
we see now, I would think could certainly cripple the Nation's
air transportation system. Isn't that something that public
policymakers have to look at and that the public should be
concerned about? Doesn't the problem just get worse and worse
and worse, and the effect much more dynamic if we are down to
just a handful of major carriers?
Mr. Goodwin. The short answer to that, Senator, is no, but
I think it requires a little more explanation.
Senator DeWine. You have got plenty of time.
Mr. Goodwin. The industry at this point in time is
unfortunately in a mode where we have a significant number of
contracts coming due. We are just on that cycle. I didn't see
the article, but I heard about the article that was in the Post
and I assume that it was referring to the fact that Northwest
and Delta and American and ourselves still have additional
contracts to negotiate this year.
I think the laws that we currently have today that govern
bargaining in our country and with respect to our industry have
anticipated that question you just asked of would not the
country be in jeopardy if a significantly large airline or a
group of airlines found themselves in a work stoppage in this
country.
The laws provide through the Presidential Emergency Board
the capability to return workers to their jobs, which gives the
country and the unions and the company an opportunity to get
the parties back to the bargaining table to settle their
differences. So I believe there are protections in place today
that would preclude us having to worry about that.
Senator DeWine. Well, I appreciate your answer. Yes, I
understand we have laws in effect and they certainly do exist.
I am cognizant of that fact. It seems to me that as we continue
to merge and as we get smaller and smaller and smaller and
fewer and fewer, anything that affects one of the much bigger
airlines is going to have a bigger impact on consumers. It just
seems to me to make common sense. Whether or not that can be
remedied by the labor laws is certainly always an issue, but it
seems to me that that is certainly a potential problem and it
is something that at least this member of the U.S. Senate
worries about.
Senator Kohl?
Senator Kohl. Senator Schumer has just one question.
Senator DeWine. Sure.
Senator Schumer. Thank you, Mr. Chairman. Before I ask my
question, I would just mention that when I negotiated slots for
JetBlue, they were treated the same way. We said they would
lose those slots if they stopped flying to the underserved
cities, and that is why they are 1-year renewable slots. I
believe slots are a public slots, and that is why the public
good should enter into them.
Now, I have a question of Mr. Carty and Mr. Goodwin. I am
not an expert on many things, but one of the few things I am an
expert on is the shuttle. I take it probably more than just
about anybody else because my family is in New York, and so I
am Mr. Wolf's and Mr. Mullin's good customer.
My question is this: Will United and American compete on
price with their shuttle? Can we expect, with this new
competition from the giants, to see the prices drop? I would
ask Mr. Carty and Mr. Goodwin to each answer that.
Mr. Goodwin. The proposal that we have put forth in front
of the Justice Department today suggests that we would like to
have permission to have a common price structure between
ourselves for that market so that we could hold out to the
consumer a common price structure. If we are going to fly at
ten o'clock and American is going to fly at eleven, that was
the initial proposal.
Are we going to compete effectively in the marketplace
against Delta Air Lines on a price basis? Absolutely, and we
think we are going to have a better product to compete with.
Senator Schumer. But I think if you asked the consumer,
they would want you to compete on price. They would like to get
more peanuts, they would like to get other things, but the No.
1 thing they want competition on is price. It would certainly
increase the percentage chance that the price of the shuttle
would decline or not go up as quickly, whatever the
circumstance may be--who knows what fuel oil will cost--if the
three of you would compete rather than the two of you.
Every economist knows that three is better than two in
terms of competition. Frankly, Mr. Wolf and Mr. Mullin have not
competed on price at all. They have competed in other ways.
They keep changing their snacks around and you get different
newspapers on different ones, but no price competition. So I am
not too optimistic about a dual competition. Why wouldn't three
of you compete on price?
Mr. Carty. The current proposal that is in front of Justice
doesn't have us competing on price.
Senator Schumer. It does not?
Mr. Carty. It does not.
Senator Schumer. Thank you, Mr. Chairman.
Senator DeWine. Senator Kohl?
Senator Kohl. Mr. Carty and Mr. Goodwin, are you really
going to make the argument that the best thing for the airline
industry in this country is to have three airlines controlling
75 percent of the market and a bunch of airlines fighting for
the crumbs of what is left after that?
It almost boggles my mind to think that you would suggest
this is going to be a good thing for the consumers of America
for just three airlines to have an enormously dominant position
in our country, and the power and the control that inevitably
will accrue. Are you making the argument that that is going to
be a good thing for the consumers of America?
Mr. Carty. Let me try to respond, Senator. An awful lot of
our earlier discussion this morning defined competition by
doing a tally of the number of airlines. When I was listening
to Senator Leahy earlier, it occurred to me what is important
to Senator Leahy and his constituents is not how many airlines
there are in the United States, but how many are in Burlington,
Vermont, and I would say the same thing is true of Senator
Schumer's constituents and your own.
What is important is how many players there are competing
in every dimension of the business in a market where a consumer
wants to go from A to B. I think what Steve's charts were
trying to demonstrate to you is in the last couple of years we
have had a dramatic increase on the East Coast. And while you
think of American and United as traditional carriers, we are
not traditional carriers in this market.
By US Air and United doing this transaction, United begins
to compete with Continental and Southwest and everybody else on
the East Coast, and by them spinning off a number of assets to
us, we enter this market now. So there are a whole bunch of
markets where instead of having two carriers, you might have
four, you might have five.
In those markets, as you think about the consumer, he or
she is much more concerned about that issue. When I go to the
counter, how many airlines are there that are willing to take
me from where I am to where I want to go, not how many are
there in the country.
I think what we have been trying to describe to you is we
are not buying carriers that compete with each other. We are
buying carriers that allow us to grow our system so we can
become, as I said my remarks, the new entrant into markets that
we are not present in today.
Mr. Goodwin. Senator, I agree with what Mr. Carty said, but
I would also like to point out that if you look at the
potential combinations--and we talked about this the last time
I was here--maybe you can get to give of the big carriers, but
I don't ever see us getting down to the two or three that I
keep hearing everyone talk about.
I guess sitting here reflecting on some of the conversation
this morning and listening to the testimony of some of my
colleagues, we were involved in another major transaction. We
took another bold acquisition step back in 1985 and we bought
the Pacific Division from Pan American Airways, not in
bankruptcy, prior to bankruptcy. It was a healthy, ongoing
concern. We bought routes and we bought airplanes and we bought
employees, and we made a lot of commitments when we did that.
I was looking at some old clippings of some of the
conversation that was going on when we announced that
acquisition, and I found a lot of similarities between what we
are talking about and the issues that we are wrestling with
today, the first being you paid too much money. Two, this is
going to create a wave of mergers in the industry because the
largest domestic airline in the country just bought the
Pacific.
In fact, several of the competitors who were flying in that
marketplace, notably in this case Northwest, publicly announced
that they wouldn't be able to compete. They would have to
totally withdraw and exit from the marketplace. I think 15
years later, history has demonstrated that none of that
happened. We have got more competition in the Pacific than we
had 15 years ago. We have got plenty of new entrants, both
foreign carriers and U.S. carriers.
So I think, again, as I said the last time I was before
this committee, putting together two airlines, two networks, is
not as simple as just sitting here and saying it is going to
happen. There has to be some fundamental value that is produced
not only for the employees and the shareholders which we tend
to talk a lot about, but the customers. We believe that what we
are trying to do benefits all three of those constituencies.
Senator Kohl. But your first responsibility is to your
shareholders. Your responsibility is to take those actions
which will do most to increase the value of your company. Your
second responsibility is to your customer, and to the extent
that those two things coincide, that is fine. To the extent
they don't coincide, your first responsibility is to your
shareholders, and if you say it is not, you will lose your job
this afternoon. So we understand that.
From our point of view, our first responsibility is to the
public, to your customers. It is altogether possible that there
is a difference, that your point of view, which is legitimate
for what you want to get accomplished, is not the same as our
point of view. You cannot be masters to both equally. There is
a difference between what is in the best interests of the
shareholders of United and American and what is in the best
interests of the consumers of America. In fact, I would bet
there is a difference.
We are trying to represent different constituencies, and
that brings us to the conflict that we have in this discussion.
I hope that you can convince us--or I will just speak for
myself, that what I am saying is not true, that your
responsibilities on behalf of your shareholders are not the
same as our responsibilities on behalf of the traveling public,
that there is a conflict there.
You will fight for what is best for you and we will do our
best to fight for what is best for the consuming public. Where
that takes us, who can speculate? But I think all the words
that I have heard today don't dissuade me from that fundamental
difference in what it is you are trying to do and what it is we
are trying to do. I would suggest it is fairly important for
you all to convince us that the American public doesn't need us
to protect their interests. I am not sure that the American
public feels that way.
I know you have to go, Mr. Carty, but would you respond to
that?
Mr. Carty. Well, I would only say this. We run service
businesses, and clearly the managers of service businesses,
like managers of every business, have a primary responsibility
to their shareholders. They are the people who hire and pay us.
But our view as a corporation and our corporate philosophy
is you cannot be successful in our business unless you are
serving all three constituencies. You cannot have a business
strategy that is articulated in a way that says if you
continually abuse your customers and your employees and your
shareholders' interests--that business model fails. We know
that business model fails.
Senator Kohl. Of course. That is an extreme point of view,
and you are absolutely right.
Mr. Carty. Similarly, your responsibility, of course, isn't
just to the traveling public. It is to all our million
employees in the business and our shareholders and everybody
else. What we are really talking about here is whether these
transactions are consistent with the antitrust laws, and I
think what we have been trying to argue is if you look at the
very specifics of market presence and market power market by
market, as opposed to just saying there were ten airlines and
now there will be nine, you will find that in many, many
markets in this country the transactions that we are talking
about will actually enhance competition.
That is really the argument, and I do think that is what
Justice is busy preoccupying themselves with analytically. It
is the reason that they said to Jim Goodwin and US Air, you
know, we have got five problems, you need to remedy them. That
is really where the American transaction came from.
Senator DeWine. Mr. Carty has to go.
Senator Schumer, do you have any additional questions?
Senator Schumer. Mr. Carty, what you just told me about
failure to compete on price on the shuttle--you are saying
bring more airlines in, but the consumer wants price
competition probably at the very top of the list, and it is
probably a valid difference in what Senator Kohl was bringing
up.
You would cut your margins further to better serve the
consumer and not serve as well your shareholder if you competed
on price. Is that an unfair statement?
Mr. Carty. That is not an unfair statement. On the other
hand, this is a game of balances. This is not a wildly
profitable business. It is not a wildly profitable business
anywhere. In fact, it is a disaster when you think about it
from financial reward. So it is hardly a business, when you
think about the antitrust problem, that has been busy milking
the consumer in favor of the shareholder. Where all the money
goes is a puzzle, but--
Senator Schumer. With all due respect, the shuttle is very
profitable. What you are saying is you won't compete there
maybe to do something somewhere else.
Senator Kohl. That may be true and I agree with you, but
the one thing that does argue in their behalf is that the
numbers in their industry are not very strong.
Senator Schumer. That is true.
Senator Kohl. Their return on investment and their
percentage of sales as a profit are all very modest, for
example, in contrast to the pharmaceutical industry, where it
is a whole different ball game.
So the one thing that does argue in your favor is you are
not--we had a small supermarket and my parents were from the
old country and they didn't know much about America at that
time. Their customers were Jewish people and one customer came
through my dad's store, I remember, one time and he thought the
prices were really high and he said to the checker, ``plenty
geskin to the people.'' That was a Jewish phrase that meant you
skin the people a lot, which wasn't true. It wasn't true.
So what I am saying is it is not true about you either on
the whole. It is not true. Where they can, they charge more. We
know that.
Senator Schumer. Right.
Senator Kohl. Where they have competition, they have to
charge less. There is no question about that. But on the whole,
your industry is not a big money-maker.
Mr. Goodwin. It sure isn't.
Senator Kohl. Mr. Wolf, is that true?
Mr. Wolf. Senator Kohl, I so very much want to say
something that I--
Mr. Carty. Could I interrupt? I really apologize, but I do
have to run off, and I apologize for that.
Senator DeWine. Mr. Carty, thank you very much.
Mr. Wolf?
Mr. Wolf. I think that there is enormously more harmony
here than I somehow think we are getting to. Senator Schumer
and you and Senator DeWine are very concerned about
competition, and we all know what the benefits of competition
are to the consumer.
If you look at that part of the United States right there,
that Eastern quadrant of the country, and disregard the lines,
just those States, in those States today there are two large
carriers competing, Delta and US Airways, intra-east, those
States, at about a 32-percent share. The next largest carrier
is Continental, at about a 7.8-percent share. American is 7.5,
United is 3 points.
Now, these two big guys that are competing--let me describe
Delta for 1 second: probably the strongest balance sheet in the
industry, the lowest unit costs of the major carriers, the
largest trans-Atlantic carrier in the world, runs the largest
hub operation in the world in Atlanta, a significant and
growing presence to South America, a growing presence into
Europe, and has just acquired ComAir and, in the process,
hundreds of regional jets.
The other competitor is a ``neither.'' You missed my
reference to ``neither.'' We at US Airways are neither a low-
cost carrier nor a network carrier. There is only one like us.
We lost $290 million last year. Delta made about $1 billion.
Delta is a particularly fine company. These are the two
competitors there.
If this transaction goes forward, Delta keeps it share of
about 32 percent. United goes from 3 to, I would estimate, 25
percent. American goes from 7.5 to, I would estimate, maybe
sort of double that, 14-something, low teens percent. We go
from one network strong, visible carrier to three overnight. By
the way, Southwest is still there, and JetBlue and the rest of
them policing all of us. Competition in this part of the
country goes up enormously if this transaction goes forward
versus what it is today.
Senator DeWine. Mr. Goodwin, as you know, the proposed
acquisition by Northwest of a majority share of Continental's
voting stock was challenged by the Department of Justice. The
General Accounting Office has released data showing that your
merger would reduce competition in far more markets than would
have the Northwest/Continental transaction. Do you believe
there is something unique about your deal that makes it less of
a concern?
Mr. Goodwin. No. I think it is a significant concern that
the Justice Department is doing a very due diligence job on
reviewing. The GAO which has been widely quoted is a study that
has created quite a bit of controversy because of some of the
information and the decision criteria that was used.
I think in their own study they suggested that it was not a
review of the antitrust impact of this transaction. In addition
to that, the study was completed in advance of a lot of the
transactions you heard about today. It did not include the
impact of DC Air in their analysis. It did not include the
impact of American in their analysis. So I believe that a lot
of the assumptions that were drawn and the conclusions that
were reached as a result of that are no longer perhaps valid.
Senator DeWine. Mr. Wolf, do you have a comment about that
at all? You don't have to.
Mr. Wolf. I think Jim covered it.
Senator DeWine. Very good.
Mr. Compton, let me just reiterate something that I said to
Senator Bond when he testified, and that is we are all
concerned about the employees at TWA and the people of St.
Louis, and believe that the Justice Department really should
expedite the review of the TWA/American acquisition to ensure
that if the deal is approved, jobs are preserved and service is
maintained. So we want to tell you that at least from this
member that is my position, and we hope the Justice Department
will move expeditiously forward.
Mr. Compton. Mr. Chairman, we very much appreciate that,
and the 20,000 TWA employees appreciate it very much. They are
hanging on every word here and it is very important to them,
and that reassurance will go a long way and I thank you for
that.
Senator DeWine. Well, thank you very much. Before we enter
the fifth hour of this hearing, I think it is probably time to
call it quits. I appreciate your patience, gentlemen. I think
we have had very good panels. I think you understood from the
time you entered the room today the skepticism of the members
of the panel.
You have given us something to think about, at least as far
as this member is concerned, this Chairman of the Antitrust
Committee. You will be hearing more from me on this, but I want
to have a chance to kind of digest what you have said today. We
appreciate your testimony very much.
Thank you.
[Whereupon, at 1:30 p.m., the Committee was adjourned.]
[Submissions for the record follow:]
SUBMISSIONS FOR THE RECORD
American Society of Travel Agents
Alexandria, VA 22314
The Honorable Mike DeWine
Chair
Senate Subcommittee on Antitrust,
Business Rights and Competition
161 Dirksen Senate Office Building
Washington, DC 20510
Dear Senator DeWine:
The American Society of Travel Agents (ASTA) Applauds your efforts
to monitor competition in the aviation industry by conducting a hearing
on ``Airline Consolidation: Has It Gone Too Far? '' As a proponent of
airline deregulation and an advocate of the traveling consumer, ASTA is
deeply concerned about the excessive concentration within the airline
industry.
With the looming American Airlines acquisition of Trans World
Airlines' assets, the proposed merger of United Airlines and U.S.
Airways, along with the potential for further mergers among Delta
Airlines, Continental Airlines and Northwest Airlines, the Nation will
be left with no more than three giant carriers. The result is an
unregulated shared monopoly in which consumers face increasing prices,
fewer choices and further deterioration in already unacceptable
service.
Attached is an editorial that was featured in the New York Daily
News, on Sunday January 21, 2001, entitled, Mergers: The latest air
rage. This editorial represents the views and concerns of ASTA, and we
ask that it be included in the hearing record.
Sincerely,
Richard M. Copland, CTC
President & CEO
Attachment
[GRAPHIC] [TIFF OMITTED] T6913.002
Statement of Hon. Tom Davis, a Representative in Congress from the
State of Virginia
Mr. Chairman, Members of the Committee, I am pleased that the
Committee has chosen to address the impending airline mergers, as I
believe they will preserve jobs, enhance airline competition, and
ensure quality service all of which benefit my constituents.
Specifically, I believe the benefits of these mergers can be placed
into three general categories: job security, greater competition, and
more convenient travel.
We are clearly, facing some difficult economic times. As the
President has stated, a warning light is flashing on the dashboard of
our economy. One does not have to look far to see signs of the flashing
red lights. Lately, it seems a day doesn't go by without a major
company announcing that it is laying off a substantial number of
employees. In the last few weeks alone, companies like Daimler
Chrysler, Lucent, AOL Time Warner, WorldCom and GE have indicated that
they are planning major lay-offs. Other like Bradlees, Montgomery Ward
and now, TWA have gone into the bankruptcy courts seeking relief.
That being the case, it is inspiring that in both the United-US
Airways merger and the American Airlines-TWA merger employees from both
carriers will be offered jobs in the new airline. Much has been said
and written about the need for the American Airline rescue mission of
TWA. TWA is a company with a proud and memorable legacy in American
aviation history. It is also a company whose time has passed in a
highly dynamic--some might say, ruthless--post deregulation competitive
environment in the aviation industry.
TWA is a mid-sized carrier that is saddled with high costs and a
limited reach. Although it has gone through the bankruptcy court--not
one, but twice--it cannot escape its fundamental structural flaws. It
is too small to compete against the United, Northwests, Americans and
Deltas of the world. And, its costs are simply too high to cope with
the competition provided by low-cost carriers, such as Southwest
Airlines within its own region of service. Frankly, its demise was
inevitable. And, we could all see it coming.
Mr. Chairman, US Airways finds itself in exactly the same
predicament. This company must merge or it will die. It is the last of
the mid-sized mature cost carriers. Its fate is the same as TWA, as
well as that of Eastern, Braniff and Pan AM. These were great companies
in their era. Much like Mickey Mantle and Magic Johnson were great
athletes in their era. But the magic ends and the era in which a
company like US Airways can survive has come and gone. There are many
benefits to the proposed merger of United and US Airways, but it begins
with the fact that United will save the jobs of 45,000 US Airways
employees--at a time when the major U.S. corporations are laying of
hundreds of thousand of workers--or closing their doors altogether. The
bottom line is that the United--US Airways arrangement is great news to
my constituents, as US Airways alone employs over 3,000 in Northern
Virginia.
With regard to airline competition, knowing that many critics of
these mergers cite competition as a key concern, I would like to offer
a different view. Under these mergers, my constituents and other
greater Washington area resident will see increased rather than
diminished competition. One of the keys to enhanced competition is the
creation of a new airline, DC Air, which will be based out of Reagan
National and owned by one of the Washington area's top corporate
citizens, Mr. Robert Johnson. By taking over most of US Airway's routes
to 44 cities in and out of Reagan National, DC Air will shake things up
at one of Washington's most convenient, but also most high-priced
airports. Mr. Johnson has already suggested that he plans to operate
his airline as a low-cost carrier. And, knowing that many of you fly
through Reagan National on a weekly basis, I am sure you are painfully
aware of the high fares that can be charged to fly through this
slot=controlled airport.
Clearly the introduction of this new carrier will be a welcome
addition, but what can it really do to alter the competitive landscape
in the greater Washington area.
Think about it.
United Airlines will have a hub at Dulles International, DC Air
will have its strong presence at Ronald Reagan National Airport, and
Southwest Airlines will have its strong presence at Baltimore-
Washington Airport and all three will be competing to provide service
to the millions of people who travel to the nation's Capitol and
surrounding areas each year. In the absence of these mergers, the
greater Washington area faces the prospect of one primary carrier and
no competition to keep down prices or ensure high quality airline
service.
Finally, with regard to travel convenience for consumers, these
mergers are a win-win. In every case--US Airways with United Airlines,
American Airlines with TWA, a partnership between American and an
independent DC Air--will enable travelers to reach more destinations
without switching airlines. Not only is direct travel more convenient
in terms of connection times, baggage handling and frequent flier
miles, it is also 55% cheaper than switching airlines.
Mr. Chairman, I would like to close by saying that I wholehearted I
believe that the mergers between United and US Airways and American and
TWA will be good for my constituents and for air travelers across
America. Most importantly, these transactions will provide secure
employment for the thousands of hard working families who without these
mergers would clearly lose their jobs, will spur rather than stagnate
competition and will ensure high quality services for airline
travelers. I believe that for these reasons, these transactions deserve
your strong support.
Statement of Hon Richard J. Durbin, a U.S. Senator from the State of
Illinois
Mr. Chairman, Senators DeWine and Kohl, thank you for holding this
important hearing today on airline competition.
I represent the State of Illinois which includes O'Hare
International Airport. Illinois has often been referred to as the
transportation hub of the nation, and aviation issues, especially in
the Chicago land region, are page one news.
In fact, I'd suggest that we are at a cross roads in my home state
when it comes to aviation. The issues revolve and around ensuring the
Downstate Illinois communities enjoy access to the Chicago and St.
Louis markets, expanding O'Hare, building a third Chicago airport, and
protecting the rights of consumers. I'd like to discuss these briefly
today.
First, let me say that Chicago O'Hare International Airport is a
vital economic engine in Chicago, the State of Illinois, and the
Midwest. It is among the world's busiest airports and serves as the
only dual hub with United and American Airlines basing significant
equipment, employees, and assets at the facility. O'Hare serves more
than 190,000 travelers per day, nearly 73 million in 1999. Some 2,7000
flights leave the airport daily. O'Hare employees 50,000 people and
generates about $37 billion in annual economic impact.
As we all know, the proposed United/US Airways merger is currently
under review by the U.S. Department of Justice. The American/TWA buy
out is under the jurisdiction of a bankruptcy court. Both may have a
major impact on O'Hare and Downstate air service. I prefer to let these
authorities work through the details and pass final judgement.
However, I continue to be concerned about Downstate Illinois air
service in a consolidated industry.
A Number of Downstate communities have struggled to gain or
maintain access to Chicago O'Hare. This service is vital to community
economic development and tourism. As we've faced concern over O'Hare
access, the one constant has been St. Louis service for these
communities. Obviously, the American/TWA buy out announcement has
caused great concern in the eight Downstate communities currently
served by TWA/TWE.
I have written and personally spoken to both Mr. Goodwin at United
and Mr. Carty at American to express my concerns about Downstate
Illinois air service. Both are sensitive to the unique circumstances
faced by these communities and have promised to work with the Illinois
Congressional Delegation. In fact, Mr. Carty has accepted my invitation
to meet with these communities in Illinois in the near future to
discuss their concerns. As these mergers move forward, I will hold them
to those promises.
Finally, with regard to consumers, let me say that although the
airlines have made strides toward more responsive customer service
plans--ones that treat the traveling public with respect, provide
timely information, an attempt to remedy problems as quickly and fairly
as possible--there's still a long way to go. I hope the airlines will
continue to aggressively address the consumer challenges that still
exit.
Mr. Chairman, there have been countless mergers and consolidation
in the airline industry. It's a natural part of the business
environment. The Department of Justice should continue to closely
review all proposals. However, it is vitally important that small-to-
medium communities, like those in Downstate Illinois, continue to have
access to the major markets. It's important for consumers to be treated
fairly. It's important for fares to be addordable. It's important that
we maintain and expand our aviation infrastructure where feasible. And
it's important that airlines don't take unfare advantage of a
deregulated industry.
I think this hearing goes a long way toward ensuring that the
public as well as the federal government continue to monitor airline
competition. Mr. Chairman, I thank you for the opportunity to
participate today.
Statement of Leonard L. Griggs, Jr., Director of Airports, City of St.
Louis, Missouri
Mr Chairman and Members of the Committee: I am Leonard L. Griggs,
Jr., Director of Airports for the City of St. Louis. The City is the
owner and operator of the Lambert-St. Louis International Airport,
historically the main hub for TWA. Thank you for allowing me the
opportunity to submit the views of the City of St. Louis Specifically
regarding the proposed acquisition of TWA assets by American Airlines.
Mr. Chairman, not all mergers are created equal. As Senator
Carnahan recently stated at a recent Senate Commerce, Science and
Transportation Committee hearing: ``[W]hile we may be initially
inclined to view all of the current airline mergers in the same light,
we must consider the American Airlines' acquisition of TWA
independently of the other proposed mergers.'' The City of St. Louis
agrees. Even as we explore and review the wide ranging implications
raised by the possible consolidation of the airline industry, it must
be stressed that the proposed American-TWA transaction should not raise
anticompetitive concerns.
american--twa merger is not like other mergers
The American--TWA proposed agreement is unlike any other mergers
currently being discussed. Contrary to press reports, and the opinion
of many pundits and even some critics in Congress, this proposed
acquisition will not necessarily harm the development of the airline
industry or be anticompetitive for consumers. On the contrary, given
TWA's current financial condition, I believe that consumers would be
worse off with the possible alternatives had American Airlines not come
forward with its proposal to acquire TWA. This is why St. Louis fully
supports the proposed transaction.
It was recently stated in our local newspaper that ``TWA, after
years of valiantly trying to turn around, is out of time and out of
money.'' In Contract to its previous financial problems, this time it
seems clear that without outside help TWA would have been forced to
stop flying and simply liquidate its assets. American Airlines came
forward with its proposal in the very same week that TWA would have
stopped operating due to lack of funds. Reportedly, Mike Palumbo, TWA's
CFO, testified before a Delaware bankruptcy court judge a couple of
weeks ago that, without American's debtor-in-possession financing, TWA
would have ceased to operate. Instead, American's commitment of $200
million in debtor-in-possession financing has allowed TWA to continue
serving the public until the transaction is completed.
In short, Mr. Chairman, without the American deal, TWA would have
ceased to compete in the marketplace. This acquisition should not raise
concerns of reducing or stifling competition. Instead, it is my opinion
that the proposed deal is simply making the best of a worrisome
situation.
Over the last few weeks, it became abundantly clear to us that
TWA's options were fast disappearing. Since TWA no longer had the
possibility of maintaining healthy, financially robust operations to
compete with the other U.S. regional or network carriers, we were left
with the choice of allowing American to take TWA as a whole, or
allowing TWA to fail, and let others pick at the carcass.
TWA is ``Failing Airline'' in Merger Parlance
This is a classic example of a failing airline whose on-going
business concern can only be rescued by allowing it to merge with a
healthy airline. Indeed, although Federal policy does disfavor the
acquisition of healthy air carriers by their competitors, there is a
long-standing exception when the proposed acquisition involves a
failing carrier. The rationale for the exception is that, no matter
what, a failing airline will not remain in the market. I believe that,
by now, there is enough evidence to conclude that TWA will simply cease
to exist. Therefore, the key question that must be answered is how to
maximize the public benefit in the distribution of its assets.
Bill Compton, TWA's CEO, was quoted as saying that he has been
``shopping'' the airline for some time, and has had no other viable
offers for its acquisition as a going concern that would preserve its
name and intangible assets. Moreover, although it is true that certain
assets (such as slots and leased aircraft) could be sold and placed
into service absent the proposed transaction with American Airlines,
most of TWA's many valuable assets and resources (such as certain
gatehold rights at Lambert, St. Louis aircraft maintenance facilities,
and, more importantly, TWA's St. Louis workforce) would have been
underused.
For St. Louis, the choice is clear. If the proposed acquisition is
not allowed to proceed, St. Louis risks losing its air carrier hub.
Without a large airline hubbing at our airport, our community will lose
large numbers of well-paying jobs, as well as its close link to
national and international markets that makes our region a favored
business location.
Air Service Requirements of St. Louis Area Are Substantial
Without TWA's operations, St. Louis risks the loss of substantial
levels of air service. Although TWA is only one of nine major airlines
serving the airport, it alone provides 73% of the daily flight
departures from the airport. TWA's 374 daily flights out of St. Louis
serve more than 100 non-stop markets, 65 of which would not otherwise
receive non-stop service. Without the TWA-American agreement, St. Louis
would lose valuable air service to many communities throughout the
United States, and possible, the world. So far, other than American
Airline's proposal, no other credible plan has been offered in the
bankruptcy process which would maintain St. Louis' present level of air
service.
New St. Louis Runway Capacity Supported by American Airlines
American Airlines's promise to serve St. Louis means the continuing
use of the City's public airport infrastructure. In fact, American
Airlines has stated that, after it completes its acquisition of TWA
assets, it intends to use the St. Louis airport and TWA's gates for a
mid-continental hub.
And Mr. Chairman, in connection with American's commitment to the
St. Louis community, I have been assured by American's senior
management, following an extensive briefing on our new runway project,
that American will be fully and enthusiastically supporting our new
runway (W-1W) expansion plan. This early decision by American is
critical to keeping our expansion on schedule so that Lambert can
maintain its hub status and remain competitive.
Local TWA Employment Would be Protected
The risk of mass unemployment in our area is real. If TWA were to
shut down, it could leave 20,000 TWA employees out of work, including
almost 9,000 in our immediate area, and 12,000 throughout Missouri. TWA
is the second largest employer in the City of St. Louis, and the
seventh largest in the metropolitan region. It has been estimated that
TWA's operations in St. Louis contribute more than $5 billion annually
to the local economy. American Airlines has proposed to maintain TWA's
unionized workforce and as much of its administrative employees as
feasible.
Conclusion
Mr. Chairman, the City of St. Louis asks that you consider American
Airlines' proposal to acquire TWA assets separately from the other
pending or proposed airline mergers. The American-TWA transaction is
not a competition-reducing merger. If TWA were to shut done and
liquidate, the City of St. Louis would lose most of its air service,
close to 9,000 of its area citizens could be airport infrastructure
would go unused, and valuable new national runway capacity might go
undeveloped. We must not let that happen. That is why St. Louis fully
supports the proposed acquisition of TWA.
Thank you.
Statement of Hon. John J. LaFalce, a Representative in Congress from
the State of New York
Chairman DeWine, Ranking Member Kohl, and Members of the
Subcommittee:
I appreciate the opportunity to submit this testimony to you
Subcommittee regarding the imminent consolidation of the airline
industry into perhaps three dominant airlines.
As you know, the current string of proposed airline consolidations
including the merger of United Airlines and US Airways; the purchase by
AMR Corporation/American Airlines of Trans World Airlines (TWA); the
creation of DC Air; and now the possible acquisition of Delta Airlines
by Continental Airlines would consolidate over 75% of the industry into
three corporations.
I have serious concerns about the impact of these transactions,
which are a serious threat to the national economy, and specifically to
the local economy of upstate New York.
As an example of what limited competition can do to a small market,
consider the plight of the business owners and residents of my district
in upstate New York. This region has suffered from unacceptably high
airfares for fare too long. In the past few years, Buffalo Niagara
International Airport (BNIA) and Rochester International Airport (RIA)
have been among the top five highest fare per mile destination in the
country. In both cases, this was due primarily to the dominance of one
carrier, US Airways, which had a market share of approximately 50% or
more in both markets in 1997.
This monopoly stifled competition and inflated fares. This cost has
burdened both business and retail travelers alike, and has been
extremely distressing to the whole region's economy. In fact, the
region is home to several Fortune 500 companies who have struggled to
remain competitive in no small part due to above market regional
airfares.
Today, through the efforts of federal, state, and local officials,
this region's airfares are slightly more competitive with the addition
of low fare airlines, such as Jet Blue, Southwest, Shuttle America, Air
Tran, and others. As a result, the most recent statistics indicate that
approximately 4.25 million passengers used BNIA in 2000, breaking the
previous record of 3.6 million passengers set in 1984. This enhanced
competition has allowed BNIA to fall from second to 48th
nationally on the list of cities with high airfares. The Rochester
market, with new low-fare service from JetBlue, has improved, but not a
significantly. The pending TWA transaction will also permit American
Airlines to invest in 49% of DC Air. I originally voiced by concerns
about Air in May, 2000 when it was announced that this new airlines
would assume the routes flown by US Airways from the Washington, DC
metro erea. I fail to see how these concerns about DC Air are addressed
by effectively transferring control of these routes from one dominant
carriers, US airways, to another, American. Any solution that does not
permit new competition, as opposed to repackaged monopolies, is
unacceptable.
Many people regularly fly between Buffalo/Rochester and Washington,
D.C., and are forced to pay much higher fares than those paid on routes
of similar distance. For example, it in now possible to fly between
Buffalo/Rochester and New York City for $100 round-trip (where JetBlue
provides real competition), but it is often necessary to pay almost
$800 to commute to Washington National Airport from upstate New York
because of the dominance of one carrier, US Airways, in the market. As
just one more example, US Airways once charged over $400 on a round-
trip fare from Buffalo to Albany, New York. When Shuttle America began
to compete on this route, offering a $200 round-trip, US Airways
immediately matched that fare. Shuttle America has since discontinued
this service and it comes as no surprise to me that the US Airways fare
on this route is again close to $400.
Clearly, fundamental economic theory and these examples dictate
that the crucial ingredient to low air fares is competition. The
national economy, and the economy of communities like upstate New York,
rely on competition to keep air fares low and business expenses
reasonable. These mergers threaten to eliminate the very heart of
competition in the airline industry and will negatively affect business
growth in every industry save this one.
I urge you to keep these concerns in mind as you carefully examine
airline consolidation.
Thank you.
Statement of Lynn Lenosky, US Airways Master Executive Council
President, Association of Flight Attendants, AFL-CIO
Thank you, ladies and gentlemen of the Judiciary Subcommittee, for
allowing me this opportunity to provide written testimony on the
proposed acquisition of US Airways by United Airlines. I am the US
Airways Master Executive Council President for the Association of
Flight Attendants, AFL-CIO, representing the more than 10,000 Flight
Attendants of US Airways.
In may of 2000, United Airlines announced its proposed purchase of
US Airways Group. That announcement came only weeks after the US
Airways Flight Attendants had ratified our new contract agreement
following three years of collective bargaining. The sale of our company
took all of us by surprise.
In our initial public statement, the US Airways Flight Attendants
said that we needed more details about the proposed transaction before
we would pass judgment on it. Our concern then, our concern today, and
our concern in the future is the long-term job security of the 10,000
US Airways Flight Attendants and their families.
We have literally hundreds of questions for United Airlines
management about the transaction, integration, and future plans for the
Flight Attendant group. If the transaction is ultimately approved by
the U.S. Department of Justice, we are confident that those concerns
will be addressed in our negotiations to merge the contracts that cover
the US Airways and United Flight Attendants. These negotiations must be
successfully concluded if United intends to merge the operations of the
two airlines.
Until now, the focus of debate has been mainly centered on
consumers and pricing. The elected AFA leaders at US Airways want to
ensure that the futures of the 10,000 US Airways Flight Attendants and
their families, and all US Airways employees are considered by this
Subcommittee.
As a Flight Attendant for US Airways for the past 15 years, I have
felt the brunt of this airline's attempts to make it through rough
times. US Airways Flight Attendants made significant sacrifices in pay
and work rules in our previous contract to help keep this airline
afloat. But all the tinkering and reshuffling has not secured the long-
term viability of US Airways.
US Airways Chairman Stephen Wolf and numerous airline industry
experts have testified before you and stated in the press that the
airline is very poorly positioned to continue in its current form. The
squeeze has already started with US Airways reporting losses of $101
million in the fourth quarter of the year 2000, and a loss of over $269
million for the entire year. These losses resulted in spite of fact
that revenues increased. Chairman Wolf and most of the experts agree
that, if US Airways were to continue in its current state, it would
likely fail.
United is bound by agreement and by law to the US Airways Flight
Attendant contract. While it contains language that protects our Flight
Attendants from furloughs through 2004, that contract can only protect
the jobs of our 10,000 Flight Attendants if US Airways is still in
business, or if US Airways is purchased by another entity.
Shutting US Airways' doors would have an irreparable, negative
impact on the working families at US Airways and on the communities we
historically have served.
The reality is that bankruptcies and business closures severely
hurt not only the working women and men involved, but also their
families and the communities in which they live. A failed US Airways
threatens the livelihood of every one of us at this company, and this
air service to many of the medium and smaller communities we now serve.
This Subcommittee frequently talks about the air service, but I implore
you not to lose sight of what this airline means to the tens of
thousands of employees who work for US Airways, as well.
It is in the public interest to maintain these jobs, which provide
medical and dental benefits, retirement benefits, and a living wage.
Allowing US Airways to shut its doors will force tens of thousands more
workers and families to seek state-sponsored support through
unemployment compensation and, potentially, welfare.
The risk of loss of air service, if this merger is rejected and US
Airways is allowed to fail, will be worst where US Airways has a
significant presence: in the eastern portion of this country. Medium
and smaller cities such as Norfolk, Virginia, Harrisburg, Pennsylvania,
and Dayton, Ohio depend heavily on US Airways for air service and
connections to communities across the country and around the globe. If
US Airways were to ``shut its doors,'' this service could end, leaving
potential passengers in these areas essentially stranded.
The nearly guaranteed impact of a US Airways bankruptcy is an
unemployed workforce and undeserved communities.
If things aren't allowed to change, this unacceptable alternative
may be just a step away for US Airways. In the event of an economic
downturn, it could happen much more quickly.
You and I have constituencies to serve. As members of the United
States Senate, I have no doubt you hold dear the livelihood and
vitality of the individuals and communities within your state. As an
elected labor leader, I, too, hold dear the well-being of my members.
It is here that we have common ground.
At stake are the jobs of tens of thousands of working families--
those of AFA members and your constituents. At stake is the air service
to thousands of communities--where you constituents and AFA members
live.
Like many of you, we believe United Airlines still has many
questions to answer before this deal should be allowed to be
consummated.
And with all of the questions we have about United Airlines' future
plans for US Airways, and its Flight Attendants in particular, it is
obvious the United is still struggling to get its current house in
order. The one issue in particular that concerns Flight Attendants is
United's stone-walling of discussions to provide a raise to its current
Flight Attendant group. United has stated its commitment to utilizing
the standards applied to other work groups at the airline in providing
a raise, rather than an outdated system that treats Flight Attendants
like second-class employees. But United has not yet fulfilled that
promise.
We urge United to come to a fair agreement with our sisters and
brothers and we support them in their fight for equal treatment.
Like your concern for you constituents, AFA's leadership is
committed to ensuring that the Flight Attendants at US Airways are
treated fairly in this merger process. As you do for your constituents,
we remain committed to ensuring our member's futures by utilizing all
of the legal and strategic means at our disposal. The security and
future of the working families and communities that depend on US
Airways should be the major focus of the debate over this proposed
transaction.
Thank you for the opportunity to submit the position of US Airways'
10,000 flight Attendants.
Statement of Roberta Quinn Pilkington, United Airlines Master Executive
Council Secretary/Treasurer, Association of Flight Attendants, AFL-CIO
Thank you members of the Judiciary Subcommittee for providing me
the opportunity to present this written testimony. My name is Roberta
Quinn Pilkington. I am a United Airlines flight attendant and member of
the Association of Flight Attendants, AFL-CIO (AFA), which represents
more than 50,000 flight attendants at 27 carriers. AFA is the largest
flight attendant Union in the world. I am the Secretary/Treasurer of
the United Master Executive Council (MEC) which represents 25,500
United Airlines flight attendants, located in twenty bases around the
world. I am writing today to tell the Subcommittee why the United MEC
has taken a position against the proposed US Airways/United Airlines
Merger.
Flight Attendants are known as safety professionals and passenger
advocates, world-wide. Our presence has been required on aircraft since
1952. The Association of Flight Attendants led the way to ``Smoke
Free'' skies, prevention of the removal of the over-wing exit doors on
the B-747, promotion of the international Air Rage Campaign, Air
Quality standards onboard aircraft, and ``Whistleblower Protections.''
We work very hard to provide a safe and comfortable environment for our
passengers on every flight, every day.
When the US Airways/United Airlines merger was first announced in
May, 2000, the United MEC maintained a neutral position. We wanted to
wait and hear all the facts and information regarding the merger and
assess the impact on our members. However, on November 6, 2000, the
United MEC took a strong position against the merger.
The summer of 2000 at United Airlines soon became known as the
``Summer from Hell,'' for not only U.S. air travelers, but United
flight attendants, as well. United's abysmal service record last summer
was unprecedented. And, as badly as our passengers were treated, United
management treated its flight attendants worse. Flight attendants were
sent to drug infested, filthy hotels for layovers when flights were
canceled. On several occasions, flight attendants were forced to get
their ``legal rest'' on aircraft because Crew Scheduling personnel
claimed they were unable to find hotel accommodations. Contract
violations were too numerous to begin recounting here, and many of the
situations are still unresolved more than six months later, despite the
best efforts of our Union representatives.
It is clear, that United Airlines continues to have difficulty
managing its current operation as management violations of our contract
persist unabated due to management's inability to schedule the airline
properly. Allowing United to add thousands of flights and tens of
thousands of employees at a time when it cannot properly manage its
current operation is asking for trouble.
We ask you to consider our opinion, as front-line employees of the
airline, who get a first-hand look at United everyday. United's current
management problems would be compounded exponentially--in terms of
further labor and operations problems--If the airline's proposed
transaction is allowed to go forward at this time.
Thank you for allowing me to submit these written remarks on behalf
of the United Airlines flight attendants.
Statement of Betsy Tettelbach, Eastern Region Master Executive Council
Vice President, Association of Flight Attendants, AFL-CIO
Thank you, members of the Judiciary Subcommittee, for allowing me
this opportunity to provide written testimony on the proposed
acquisition of US Airways and its wholly-owned subsidiaries by United
Airlines. I am the Eastern Region Master Executive Council President
for the Association of Flight Attendants, AFL-CIO, representing the
more than 600 Flight Attendants at US Airways' wholly-owned express
carriers Piedmont Airlines, Allegheny Airlines and PSA.
I am also the Local Council President for the Piedmont flight
attendants, and I continue to hold my position as a line flight
attendant for the airline.
The flight attendants at US Airways' wholly-owned Express carriers
are worried about where our companies and our careers are headed. At
this time, it is impossible for us to predict our future. We are a
workforce dedicated to our company's continued success. We want the
opportunity to continue our careers with a strong airline under a fair
contract.
But since this proposed acquisition by United, the flight
attendants at the US Airways' wholly-owned airlines have received
little or no information from management at either US Airways or United
Airlines on how the proposed purchase of US Airways Group will affect
our jobs and our communities.
In the press, United has set off a landslide of speculation about
whether the airline will continue the own the carriers, or whether they
will sell our airlines before the proposed acquisition is completed.
United's fippant treatment of the wholly-owned carriers is
disturbing. It leaves for all the question the security and future of
thousands of jobs and the continued, uninterrupted air service to the
large number of smaller communities that we are proud to serve.
The wholly-owned carriers are an integral part of the US Airways
system. In fact, US Airways' Express carriers account for 1,600 daily
departures. US Airways' mainline system has only 1,100 daily
departures. That means United must fully outline for its employees and
the flying public how it intends to maintain the jobs and essential air
service to most of US Airways system of operation.
The communities serviced by US Airways Express stand to suffer
along with the employees. In many cases, US Airways Express is the
primary link, and often the only link, between smaller cities and
business and leisure destinations around the world. These communities
count on the air service and jobs that US Airways Express carriers
provide. If that service were to be cut off or interrupted because of a
problem that arises from United's lack of planning, the effect on the
community and its residents could be devastating.
For United Airlines and US Airways Group to go forward in the
merger process without a full and open guarantee of the continued
existence of the express carriers and their routes is negligent.
If current events are any indication, the wholly-owned carriers'
employees are in for a drastic drop in working conditions or a
potential job loss altogether, and air service to the communities the
carriers serve is open to a questionable future.
The chain of events that has already been set into motion is
disturbing to say the least. A shadow company called Potomac Air has
been created as part of the planned acquisition. This new airline is
being set up to be spun off as the planned DC Air. The problem is,
however, that this carrier is being set up in violation of our
contract, and therefore the law.
US Airways and United management have taken Piedmont management and
Piedmont aircraft and given them to the new airlines, Potomac Air. As
the new airline, these aircraft fly what were once Piedmont routes.
This is clearly a shadow, or alter ego, corporation. It is also a
successor to Piedmont. And, therefore under the terms of our contract,
the flight attendants that fly on these flights should be covered by
the Piedmont flight attendant contract.
The timing of these anti-union activities is suspicious considering
the flight attendants were forced to ask the National Mediation Board
for a release from their contract negotiations at the end of December.
After nearly 20 months of talks, progress has stalled. The flight
attendants have already voted overwhelmingly to go on strike to get the
fair pay and treatment they deserve.
Regardless of which company ultimately owns the wholly-owned
carriers, the flight attendants at Piedmont, Allegheny and PSA have
contracts that will convey along with the airline because of the
successor language we were able to negotiate into our contracts.
But United's failure fully explain its plans for continuing the
operations of the wholly-owned US Airways' carriers begs the question:
Does United truly plan on maintaining the jobs at these airlines that
are so important to the communities they serve? Will United maintain
the air service that is also so vital to these communities?
The flight attendants will continue to demand answers from United
on these questions. And we thank you for hearing our voices and
continue to look for the answers to these important questions, as well.