[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
IMPACT OF CONSOLIDATION ON THE AVIATION INDUSTRY, WITH A FOCUS ON THE
PROPOSED MERGER BETWEEN DELTA AIR LINES AND NORTHWEST AIRLINES
=======================================================================
(110-129)
HEARING
BEFORE THE
SUBCOMMITTEE ON
AVIATION
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 14, 2008
__________
Printed for the use of the
Committee on Transportation and Infrastructure
U.S. GOVERNMENT PRINTING OFFICE
42-528 PDF WASHINGTON : 2008
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas JERRY MORAN, Kansas
GENE TAYLOR, Mississippi GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California HENRY E. BROWN, Jr., South
LEONARD L. BOSWELL, Iowa Carolina
TIM HOLDEN, Pennsylvania TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine SHELLEY MOORE CAPITO, West
BRIAN HIGGINS, New York Virginia
RUSS CARNAHAN, Missouri JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois TED POE, Texas
DORIS O. MATSUI, California DAVID G. REICHERT, Washington
NICK LAMPSON, Texas CONNIE MACK, Florida
ZACHARY T. SPACE, Ohio JOHN R. `RANDY' KUHL, Jr., New
MAZIE K. HIRONO, Hawaii York
BRUCE L. BRALEY, Iowa LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania CHARLES W. BOUSTANY, Jr.,
TIMOTHY J. WALZ, Minnesota Louisiana
HEATH SHULER, North Carolina JEAN SCHMIDT, Ohio
MICHAEL A. ARCURI, New York CANDICE S. MILLER, Michigan
HARRY E. MITCHELL, Arizona THELMA D. DRAKE, Virginia
CHRISTOPHER P. CARNEY, Pennsylvania MARY FALLIN, Oklahoma
JOHN J. HALL, New York VERN BUCHANAN, Florida
STEVE KAGEN, Wisconsin ROBERT E. LATTA, Ohio
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
(ii)
Subcommittee on Aviation
JERRY F. COSTELLO, Illinois, Chairman
BOB FILNER, California THOMAS E. PETRI, Wisconsin
LEONARD L. BOSWELL, Iowa HOWARD COBLE, North Carolina
RICK LARSEN, Washington JOHN J. DUNCAN, Jr., Tennessee
RUSS CARNAHAN, Missouri VERNON J. EHLERS, Michigan
JOHN T. SALAZAR, Colorado STEVEN C. LaTOURETTE, Ohio
DANIEL LIPINSKI, Illinois FRANK A. LoBIONDO, New Jersey
NICK LAMPSON, Texas JERRY MORAN, Kansas
ZACHARY T. SPACE, Ohio ROBIN HAYES, North Carolina
BRUCE L. BRALEY, Iowa SAM GRAVES, Missouri
HARRY E. MITCHELL, Arizona JOHN BOOZMAN, Arkansas
JOHN J. HALL, New York, Vice Chair SHELLEY MOORE CAPITO, West
STEVE KAGEN, Wisconsin Virginia
STEVE COHEN, Tennessee JIM GERLACH, Pennsylvania
NICK J. RAHALL, II, West Virginia MARIO DIAZ-BALART, Florida
PETER A. DeFAZIO, Oregon CHARLES W. DENT, Pennsylvania
ELEANOR HOLMES NORTON, District of TED POE, Texas
Columbia DAVID G. REICHERT, Washington
CORRINE BROWN, Florida CONNIE MACK, Florida
EDDIE BERNICE JOHNSON, Texas JOHN R. `RANDY' KUHL, Jr., New
ELLEN O. TAUSCHER, California York
TIM HOLDEN, Pennsylvania LYNN A WESTMORELAND, Georgia
MICHAEL E. CAPUANO, Massachusetts MARY FALLIN, Oklahoma
DORIS O. MATSUI, California VERN BUCHANAN, Florida
MAZIE K. HIRONO, Hawaii JOHN L. MICA, Florida
LAURA A. RICHARDSON, California (Ex Officio)
JAMES L. OBERSTAR, Minnesota
(Ex Officio)
(iii)
CONTENTS
Page
Summary of Subject Matter........................................ vii
TESTIMONY
Anderson, Richard H., Chief Executive Officer, Delta Air Lines,
Inc............................................................ 9
Baggaley, Philip, Managing Director, Corporate and Government
Ratings, Standard and Poor's Rating Services................... 63
Foer, Albert A., President, The American Antitrust Institute..... 63
Friend, Patricia, International President, Association of Flight
Attendants-CWA................................................. 41
Gellman, Ph.D., Aaron J., Professor, Transportation Center,
Northwestern University........................................ 63
Horan, Hubert, Aviation Analyst and Consultant................... 63
Mitchell, Kevin, Chairman, Business Travel Coalition............. 63
Moak, Captain Lee, Chairman, Delta Master Executive Council, Air
Line Pilots Association, International......................... 41
Neidl, Raymond, Analyst, Calyon Securities....................... 63
O'Connell, Jr., Hon. James J., Deputy Assistant Attorney General,
Antitrust Division, U.S. Department of Justice................. 28
Reynolds, Hon. Michael W., Acting Assistant Secretary for
Aviation and International Affairs, U.S. Department of
Transportation................................................. 28
Roach, Jr., Robert, General Vice President of Transportation,
International Association of Machinists and Aerospace Workers.. 41
Steenland, Douglas M., President and Chief Executive Officer,
Northwest Airlines Corporation................................. 9
Stevens, Captain David V., Chairman, Northwest Airlines Master
Executive Council, Air Line Pilots Association, International.. 41
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Braley, Hon. Bruce L., of Iowa................................... 85
Carnahan, Hon. Russ, of Missouri................................. 87
Cohen, Hon. Steve, of Tennessee.................................. 88
Johnson, Hon. Eddie Bernice, of Texas............................ 90
Mitchell, Hon. Harry E., of Arizona.............................. 94
Oberstar, Hon. James L., of Minnesota............................ 96
Salazar, Hon. John T., of Colorado............................... 102
Wu, Hon. David, of Oregon........................................ 104
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Anderson, Richard H.............................................. 108
Baggaley, Philip................................................. 130
Foer, Albert A................................................... 141
Friend, Patricia................................................. 149
Gellman, Aaron J................................................. 164
Horan, Hubert.................................................... 170
Mitchell, Kevin P................................................ 181
Moak, Captain Lee................................................ 188
Neidl, Ray....................................................... 197
O'Connell, James J............................................... 202
Reynolds, Michael W.............................................. 213
Roach Jr., Robert................................................ 221
Steenland, Douglas M............................................. 239
Stevens, Captain David V......................................... 278
SUBMISSIONS FOR THE RECORD
Anderson, Richard H., Chief Executive Officer, Delta Air Lines,
Inc.:
Responses to questions from Rep. Lipinski...................... 122
Responses to questions from Rep. Wu............................ 126
Steenland, Douglas M., President and Chief Executive Officer,
Northwest Airlines Corporation:
Responses to questions from Rep. Lipinski...................... 267
Responses to questions from Rep. Wu............................ 273
ADDITIONS TO THE RECORD
Aircraft Mechanics Fraternal Association, written statement...... 282
Consumers for Competitive Choice, written statement.............. 288
Detroit Regional Chamber, Sarah Hubbard, Vice President,
Government Relations, written statement........................ 290
Memphis Regional Chamber, John W. Moore, President and CEO,
Memphis/Shelby County, Airport Authority, Larry D. Cox,
President, written statement................................... 294
Minnesota Chamber of Commerce, David C. Olson, President,
Minneapolis Regional Chamber of Commerce, Todd Klingel,
President, Saint Paul Area Chamber of Commerce, Kristofer
Johnson, President, Metropolitan Coalition of Chambers, Daron
Van Helden, Chair, written statement........................... 302
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HEARING ON IMPACT OF CONSOLIDATION ON THE AVIATION INDUSTRY, WITH A
FOCUS ON THE PROPOSED MERGER BETWEEN DELTA AIR LINES AND NORTHWEST
AIRLINES
----------
Wednesday, May 14, 2008
House of Representatives
Committee on Transportation and Infrastructure,
Subcommittee on Aviation,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:00 p.m., in
Room 2167, Rayburn House Office Building, the Honorable Jerry
F. Costello [Chairman of the Subcommittee] presiding.
Mr. Costello. The Subcommittee will come to order.
The Chair will ask all Members, staff and everyone to turn
electronic devices off or on vibrate.
The Subcommittee is meeting today to hear testimony on the
impact of consolidation on the aviation industry with a focus
on the proposed merger between Delta and Northwest Airlines.
The Chair will announce that I will give an opening statement
then recognize the Ranking Member, Mr. Petri, for an opening
statement or any remarks he may have. We expect Chairman
Oberstar, the Chairman of the Full Committee, to be here. He
will be giving an opening statement or comments and so will Mr.
Mica.
At this time, the Chair would ask unanimous consent to
allow Mrs. Miller to participate in today's hearing under
Committee Rule 3(d). Hearing no objection, so ordered.
I welcome everyone to our Subcommittee hearing on the
impact of consolidation on the aviation industry with a focus
on the proposed merger between Delta and Northwest Airlines. On
April 15th, 2008, Delta and Northwest announced a proposed
merger, claiming that such a move would generate more than $1
billion in annual revenue and create cost synergies for more
effective aircraft utilization, a more comprehensive route
network and improved operational efficiency. This merger
announcement has increased speculation that other carriers
within the industry would merge. According to published
reports, discussions are underway between United and U.S.
Airways. The long-term implications of a series of mergers
could have a major effect on the future of the industry,
resulting in just a few megacarriers here in the United States.
Why are the airlines discussing mergers? Many believe it is
because of fuel prices. Every penny increase in the price of a
gallon of jet fuel results in an additional $195 million in
annual fuel costs for the U.S. airline industry. Although most
airlines made a profit in 2007, the increase in fuel and the
slowing economy have caused the majority of the airlines to
report significant first quarter losses for 2008. In the last
month, increased fuel prices have in part caused four air
carriers to stop operations and other carriers to reduce
capacity.
With very few areas for airlines to reduce costs, some view
merging as the only way to remain viable. While I am not
entirely convinced that this is true, we must take a look at
the impact of fuel on the industry.
I have some grave concerns about airline mergers. Previous
mergers have rarely produced the projected benefits and
efficiencies promised. This has frequently led to reduced
competition and higher fares. Mergers have been good for
airlines executives, but not so good for consumers or
employees. In addition, I doubt that the merger proposed by
Delta and Northwest would retain both carriers' existing hubs,
as they have indicated, at their current level. We have heard
that before. American Airlines executives, when they acquired
TWA, sat in this very Committee hearing room and testified from
that table that they would keep their hub in St. Louis and
would keep the TWA hub at its current level in St. Louis. Yet,
less than two years later, flights from St. Louis were cut from
over 500 per day to about 250 per day, just about in half in a
two-year period. And many TWA employees lost their jobs and saw
their pensions reduced.
Past mergers have shown that customer service tends to
suffer as carriers attempt to merge cultures, IT systems and
fleets. We must make sure that consumers and employees do not
end up paying a hefty price for consolidation.
I look forward to hearing from both the Department of
Transportation and the Department of Justice on the process
used in making decisions on proposed mergers and when a
decision could be expected in this case. I am also interested
in hearing more about how this potential merger will affect the
employees. I understand that Delta pilots are supportive but
other employee groups have not reached any agreement with
management.
Further, I am interested in hearing from the analysts on
our fourth panel today regarding the pros and cons of this
merger for both consumers and employees, and also if they
believe that this merger will lead to more mergers in the
future.
Finally, Members of the Subcommittee should know that the
Department of Transportation and the Department of Justice
witnesses can answer questions on the review process, but
cannot give specifics on the Delta and Northwest merger
proposal currently pending before the Department of Justice.
With that, let me again welcome all of you here today. We
certainly welcome our witnesses that will be testifying before
the Subcommittee. Before I recognize Mr. Petri for his opening
statement or any remarks that he may have, I ask unanimous
consent to allow two weeks for all Members to revise and extend
their remarks and to permit the submission of additional
statements and materials by Members and witnesses.
Without objection, so ordered.
The Chair at this time recognizes the Ranking Member, Mr.
Petri, for his opening statement or any comments he may have.
Mr. Petri. Thank you very much for holding this important
hearing today.
It is essential that this Subcommittee focus on the
financial issues facing the airline industry right now, not the
least of which issues is the unprecedented price of airline
fuel and energy generally. The Air Transportation Association
is projecting that the industry's 2008 jet fuel bill will be 72
percent higher than last year's. It seems as though we are
hearing of record fuel prices being reached on an almost daily
basis.
Increases in fuel prices impact the airlines in much the
same way as it impacts families filling up the tanks of their
cars and minivans. Difficult budgeting decisions have to be
made.
Skyrocketing fuel prices will inevitably lead to and has
already lead to tough decisions by air carriers. They must
consider ways to reduce costs and increase revenue where
possible. Air carriers without enough cash on hand will be
unable to weather the storm. In fact, eight airlines have filed
for bankruptcy since December. Many already have cut capacity,
added surcharges, tried to increase fares, perhaps slowed down
the flight rate that the planes are flying at to operate a
little more efficiently on a per-mile basis.
This is certainly not the first time that the airlines have
faced difficult economic times. Indeed, the airline industry is
a cyclical business. But the record fuel prices we are seeing
is an unprecedented event. Last month, Delta and Northwest
Airlines announced a proposed merger. The record high price of
jet fuel, global competition and the slowing economy are cited
as the main reasons for the merger. Since the proposed merger
was announced, aviation experts, labor groups, consumer
advocates and other interested parties have commented both for
and against airline mergers in general and the proposed Delta-
Northwest merger in particular.
The proposed merger's impact on the marketplace,
competition, the air service, employees and airfares have been
the subject of a great deal of speculation. Today we have
before us representatives of interested groups to testify about
airline consolidations, focusing on the Delta-Northwest merger.
We will also hear from the chief executive officers of both of
these airlines.
Finally, the Department of Justice and the Department of
Transportation are here to explain the extensive and lengthy
Government reviews required before any merger can actually
occur. So I look forward to the testimony and I again thank all
the witnesses for their participation and Chairman Costello in
particular for organizing the hearing today.
Mr. Costello. The Chair thanks the Ranking Member and now
recognizes the gentleman from Illinois, Mr. Lipinski, for any
comments or opening statement that he may have.
Mr. Lipinski. Thank you, Mr. Chairman.
First let me thank Chairman Costello and Chairman Oberstar
for holding this very important hearing, also Ranking Member
Petri and Ranking Member Mica.
I have serious concerns about the proposed Delta-Northwest
merger and further airline consolidations in general. That is
not to say that I summarily oppose any mergers, but as I am
sure will be expanded upon throughout today's hearing, a number
of past airline mergers have failed airline employees and
consumers. These mergers have created decreased choice, higher
fares, more frequent flight disruptions, lost luggage,
disrupted workforces and losses in employee benefits.
In March, I sent a letter co-signed by 46 of my colleagues
to the Attorney General and the Secretary of the Department of
Transportation, expressing our concerns about the potential
impact airline mergers could have on consumers and airline
employees. Now that these Federal agencies are actively
considering the proposed Delta-Northwest merger, I once again
urge them to strongly consider the concerns that we have
expressed and place the interests of the consumers and the
workers first.
As I said, I understand the desire to have these mergers.
The disruption right now being caused in the airline industry,
especially because of the high prices of oil right now, and of
jet fuel, so I understand that. But I think we need to take a
careful look at any mergers that are considered, not just the
Delta-Northwest merger, but any mergers.
So I look forward to hearing from the witnesses today and
hearing their testimony on this. I yield back.
Mr. Costello. The Chair thanks the gentleman from Illinois
and now recognizes the gentlelady from California, Ms.
Richardson.
Ms. Richardson. Thank you, Mr. Chairman. I would also like
to thank Ranking Member Petri for holding this very timely
hearing. I would say not only is it very important, it is very
timely that we have this discussion while we can still be
engaged in the process.
Admittedly, the current economic challenges that we are
facing, that commercial airlines are facing as well, has really
caused us all, I think, to take a step back of what is
happening currently in our economy. I was really disturbed when
I read a newspaper article that talked about the percentage of
a lot of the airlines, of how many of the planes now are not
even being serviced here in the United States, but actually, a
great amount of them are being serviced outside of this
Country.
I will tell you that in my district, I represent the area
with the Long Beach International Airport, the Compton-Woodley
Airport, and just neighbors to the Los Angeles International
Airport. Economically, this is a critical engine in my
particular district, employing thousands and delivering over
49,000 tons of goods each year.
Let me say, as a Member of Congress, we are all going
through tough times. If there is a role that we have to play, I
hope that eh witnesses would share with us not only this
proposal that you feel you need to take in order to survive,
but give us some suggestions of what we could do to work with
you to ensure that we can continue this industry. I do not
believe ultimately that this is best for our Country, but we
all have a role to play in fixing that. If there is something
we can do, I would very much like to hear about it today.
Thank you very much. I yield back the balance of my time.
Mr. Costello. The Chair thanks the gentlelady and now
recognizes the gentleman from Colorado, Mr. Salazar.
Mr. Salazar. Thank you, Mr. Chairman, and thank you for
having this important hearing.
I would like to submit my entire statement for the record.
I can understand and fully sympathize with what is going on
with the proponents of this merger. I think we can pinpoint
everything back to the high price of fuel. We see that Frontier
Airlines has also filed Chapter 11. There are many airlines
that are suffering.
But it is not only the airline industry. It is almost every
single factor in the entire economy, whether it is high food
prices because of the high cost of transportation. Mr.
Chairman, I want to make sure the people understand that most
of the blame has to go back to the high price of fuel on
everything that is going on in this Country right now. But I
would also like the witnesses to explain to us what their
proposal is and what impact it is going to have, the merger
specifically, on layoffs, on seniority integration and
pensions.
So with that, Mr. Chairman, I would yield back. Thank you.
Mr. Costello. The Chair thanks the gentleman from Colorado
and now recognizes the distinguished Chairman of the Full
Committee, Chairman Oberstar.
Mr. Oberstar. I thank you, Mr. Chairman, and thank our
witnesses for being here today. It is a long list, a very
important list of witnesses on an extremely important subject.
Not the first time that the Subcommittee on Aviation of the
Committee on Transportation and Infrastructure has visited the
issue of airline finances, alliances and mergers and leveraged
buyouts. We have been through all of that over a great many
years.
This one, however, has a far-reaching significance for the
future of aviation in America and worldwide. This should not be
and must not be considered as a standalone, individual
transaction, but rather, as a trigger of what will surely be a
cascade of subsequent mergers that will consolidate aviation in
the United States and around the world into three global
megacarriers.
I know that the witnesses, the two principal carries
involved, will disagree with that in their own self-defense. I
expect them to. But the reality is that that is what will
happen.
There are only a few of us left who were here in the dawn
years of deregulation. I sat just somewhere down there where
Mr. Cohen's seat is, and I rubbed my worry beads about voting
for deregulation. It was after I proposed an amendment that
succeeded in Committee, for what we know today as essential air
service, that I decided that in the end, the balance was in
favor of deregulation.
Offering my amendment for essential air service, I said,
Mr. Chairman, if we don't succeed with this amendment, there
are communities in my district that without air service, the
only way to get there is to be born there. Thirty years ago,
everybody laughed. They understood it. And the amendment
passed.
But the principle is the same today. If this merger
results, there would be communities at the end of the spokes in
the hub and spoke service after all the dust settles with the
merger, that will not have air service. Reducing the airline
industry as a whole sector of aviation to three major carriers
substantially will reduce competition, will limit consumer
choice and result in higher fares. In established carriers'
control markets, the tendency is for the carriers not so much
to compete as to do price following. Fares become identical,
passenger choice is limited. It will be even more magnified,
those issues will be, if there are only a few major airlines.
The strategy will result in a path leading to not the
greatest service but the greatest mutual profitability. Profit
is a good thing in the private sector. But not when it simply
results in disadvantageous effects on the traveling public.
Competition in such a scenario, many will reason, could prove
suicidal.
The Department of Transportation said ``Economic theory
teaches that the competitive outcome of a duopoly is
indeterminate. The result could be either intense rivalry or
comfortable accommodation, if not collusion, between the
duopolists.'' Mergers discourage competition at major hubs. GAO
found that fares at concentrated hubs already are higher, in
some cases 30 percent higher, than fares elsewhere. That would
only worsen in a merger environment.
Airlines have the right to defend their hubs, but not in a
monopoly construct. I hear Delta and Northwest say that the
merger proposal is pro-consumer, because they will provide
single carrier service in many new markets. I don't see how
they are not going to reduce service. I don't see how, when
they are flying, with 85 percent of seats filled, they can
provide new service without reducing it somewhere else.
They say they will increase revenues without raising fares
by selling more seats in international markets where they can
charge higher fares. If they fill the seats with international
passengers, there are going to be fewer seats for passengers
paying low fares.
The effect on international competition will be
significant. Two groups will control 80 percent of the traffic
between the U.S. and continental Europe. Mergers between U.S.
carriers will lead to less competition within and among the
three alliances. They already have, were on their way at
Northwest, to getting antitrust immunity with their
relationship with Air France--Air France, KLM, and other
continental carriers, and their relationship in the Pacific
Rim.
Government studies time and again, going back to the
hearings I held in the 1980s and early 1990s, markets where
merging carriers now compete, after a merger, fares go up.
Delta and Northwest also, as has been previously mentioned,
cite fuel costs as the need to get together, larger purchasing
pool just means larger costs for the bigger carrier. Last week,
Delta and Northwest levied a $20 round trip fuel surcharge, the
11th increase since December of 2007. They are doing their best
to pass the costs on. That is what they should be doing in a
deregulated market environment.
But to say that to keep doing that we need to merge
stretches credibility. Then there are all these problems that
result in the aftermath of the merger. Customer service drops
by the wayside while management tries to bring together two
very proud airline cultures, dealing with employee unrest,
integration of seniority lists. I saw those first-hand in the
Northwest-Republic merger. At one point there were 10 million
lost suitcases. We spent a lot of time trying to untangle all
that web.
The Weekly Standard, which is a supporter of free markets
and limited government regulation, recently wrote: ``History is
on the side of the pessimists.'' Count me in. ``In the period
immediately following every airline merger,'' they write,
``chaos is the order of the day or year. Pilots find that
control panels on the merged carriers differ. Baggage losses
mount as they did when Northwest acquired Republic. The merging
of reservation systems causes kiosks and websites to
malfunction, as U.S. Airways and America West discovered.
Strikes occur as disgruntled employees find the new pension
package inferior to the old one. All of these are in the new
Delta's future.''
The inescapable lesson for me of 29 years of deregulation
is that mergers and reduction in competition lead to higher
fares, deterioration of service, financially weakened survivor.
And we did not deregulate aviation in order to allow the
consolidation, the subsequent consolidation of this industry
into just a handful of carriers.
With that, I welcome the testimony and approach it with an
open mind.
[Laughter.]
Mr. Costello. The Chair thanks the Chairman of the Full
Committee and now recognizes the Ranking Member of the Full
Committee, Mr. Mica.
Mr. Mica. Thank you. And thank you for calling this timely
hearing. I think it is appropriate that Congress does conduct
oversight over what is taking place with passenger service in
the United States, and particularly in light of the proposed
merger between Delta Airlines and Northwest.
This may be the precursor of things to come, as you have
heard and others have said. I struggled as Chair of the
Aviation Subcommittee through six of what I thought were the
most difficult years. Right now, though, I think there is a new
set of incredible challenges that the industry faces.
I was Mr. No, I said just say no to Government bail-outs
and probably forced some of the airlines into bankruptcy.
Because of the disastrous effects of 9/11, many of them,
through bankruptcy, undertook a difficult task of paring down
their operations, cutting wages, eliminating sometimes outdated
equipment, and work procedures. The whole nature of travel in
this Country changed. Thousands of jobs were lost, even in the
service industry of catering, for example.
Right now, airlines feel the same pressure. This Committee
will not make a final decision on whether they can proceed,
Delta and Northwest, with a merger. That is up to the
Department of Transportation, as you know, and the Department
of Justice. My take is that there is not an overlap of, or an
attempt for one entity to consolidate all of the service or
create a monopoly, and more likely that this merger will be
granted. Having met with thousands of employees who lost their
jobs as a result of 9/11, this may be the beginning of another
disastrous situation for employment in the industry.
My biggest concern is that people, through the
consolidation, will also lose positions, seniority and other
things they have built up. That is very difficult, I know, for
them to deal with personally. But the industry in fact is under
tremendous pressure. And if they can't cut oil prices, they are
going to cut everything else.
I think that is the biggest concern that I have in this
question of to merge or not to merge. We will probably end up
with about three major carriers. I think that if their reliance
is on international fares, I believe that is a myth. Because
with Open Skies, they will face discount international
competition unlike any they have seen. You have carriers like
Rhine Air, Sky Europe and a host of others who will be in these
markets and fares will go down.
So do I have a solution for this? No. Maybe we will end up
with three major carriers, we will get back to some regulation.
My final concern would be, though, if the industry does go
south again, God forbid, a terrorist attack or dramatic
reversal of the economy, and we end up with three megacarriers,
even with re-regulation, the Government would be left holding
basically the financial bag and the obligations of what is
left. That is not a very bright prospect.
So this is an important hearing. There are a lot of
questions that we need to ask and find out where we are going.
And again, this may be setting the pattern that we will see in
the future.
So I thank you and yield back the balance of my time.
Mr. Costello. The Chair thanks the Ranking Member and now
recognizes the gentleman from North Carolina, Mr. Coble.
Mr. Coble. Thank you, Mr. Chairman. I will be brief, Mr.
Chairman. I thank you for having called this hearing.
I appreciate you all being here. As you may know, the topic
of this hearing, Mr. Chairman, provides a nexus between my work
on this Committee and my tenure on the Judiciary Committee,
which is also conducting a hearing now. I may have to leave for
that. Generally, Mr. Chairman, I believe it is important to
withhold judgment on merger proposals until the details are put
forth, so I will limit my remarks to the proposed merger
between Delta and Northwest for that reason.
I would like to acknowledge that I understand the
tremendous constraints placed on the aviation industry and the
impact this has put on the industry's condition. Unfortunately,
due to the increasing pressures in the marketplace, a carrier
that had a strong presence in my district had to recently cease
operations.
Further, Mr. Chairman, I would like to note that I believe
it is important that the Department of Justice Antitrust
Division have the time and ability to effectively and
efficiently review the proposal and the impact upon consumers.
It is also equally important that they receive input from all
the stakeholders.
Finally, gentlemen, should the merger be approved, I would
like to be the first to extend an invitation to you all to
expand your operations at the Piedmont International Airport in
North Carolina.
[Laughter.]
Mr. Coble. I feel remiss, Mr. Chairman, I have taken
advantage of this forum. But having said all that, I thank you,
Mr. Chairman, and thank you all for being with us.
Mr. Costello. The Chair thanks the gentleman.
Before we go to our first panel of witnesses, we will
finally recognize the gentleman from Tennessee, Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman and thank you for
calling this hearing. I will be very brief.
We have the best aviation system in the world, by far. We
should be thankful that the Government hasn't been running that
system, or we wouldn't have had that. I know this, though, we
had a hearing last week in this Committee in which we heard
that each one penny increase in diesel fuel costs the trucking
industry as a whole $391 million a year, and the diesel prices
have gone up far more than that. I have heard for years that
each one penny increase in aviation fuel costs the airline
industry $190 million to $200 million a year. So these oil
prices have really caused some very serious problems for
several airlines. We have to have some more domestic energy
production or we are going to have even more airlines in
trouble.
But as a general rule, the Country is better off, the
consumers are better off if they have more airlines instead of
fewer. I wish we had many more airlines. Because of that
belief, I think we need to look very closely at this proposal.
In fact, I think that generally, we should not approve a merger
unless the survivability of an airline is in question. But I am
willing to keep an open mind through these hearings and look at
any and all information about this.
Because of that, I appreciate, Mr. Chairman, your calling
this hearing. Thank you.
Mr. Costello. The Chair thanks the gentleman.
Finally I will recognize for brief comments the gentleman
from Georgia, Mr. Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
I just want to thank Mr. Anderson, especially, for being
here and the Delta family and what it means to Georgia. We
understand that with fuel costs where it is and the environment
that the airline industry is that there were not a lot of
choices out there. I think Delta and their board has made the
best choice possible.
So I hope that this Committee will look at it and
understand that the survivability of an airline today is much
different than what it has been in the past, and that Delta has
always, at the top of its list, had customer service routes
that make it possible for people to move all around this
Country and now all around the world, that we have some of the
best employees in the world and in the airline industry. I
think that we are trying to do the best that we can to make
sure that they all survive.
Not only that, but welcoming the Northwest family to that
airline and making it the best airline in the world. With that,
Mr. Chairman, I will yield back the balance of my time.
Mr. Costello. The Chair thanks the gentleman and would note
for the record Congressman David Wu from Oregon was here
earlier. He has submitted questions that we will ask the
witnesses to reply to in writing.
With that, we will go to our first panel and introduce Mr.
Richard Anderson, who is the Chief Executive Officer for Delta
Airlines; and Mr. Douglas Steenland, who is the President and
Chief Executive Officer for Northwest Airlines.
Gentlemen, your entire statement will appear in the record
and Mr. Anderson, you are recognized for your testimony.
TESTIMONY OF RICHARD H. ANDERSON, CHIEF EXECUTIVE OFFICER,
DELTA AIR LINES, INC.; DOUGLAS M. STEENLAND, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, NORTHWEST AIRLINES CORPORATION
Mr. Anderson. Thank you, Mr. Chairman. Thank you, Mr.
Oberstar, Members of the Committee.
First, I would just like for the record to introduce a
binder. We have letters of support from 33 States and the
District of Columbia. We also have a statement of support from
the Delta Board Council, which is a representative council of
Delta employees, in support of the transaction.
With that, on behalf of the many employees of Delta Air
Lines here with me today and the 47,000 Delta employees
worldwide, we appreciate the opportunity to talk about the
industry and the important issues that all of you have raised
in your opening comments.
The world that we face is a rapidly changing world. With
Open Skies agreements around the world and free trade
agreements around the world, we need to be strong to compete
against the foreign-flag airlines. In order to do that, you
really have to have strong financial footing and you really
have to have a network that has the breadth and scope of being
able to provide service to corporations around America doing
business around the world.
Open Skies agreements have now resulted in foreign-flag
carriers carrying substantially more U.S. passengers between
the United States, Europe and Asia. If you just look at it on a
daily basis, foreign-flag carriers carry about 22,000
passengers to Asia versus 15,000 on U.S-flag carries carrying
passengers to Asia. If you look at Europe, the Middle East and
Africa, about 40,000 passengers a day are carried by foreign-
flags and 30,000 by U.S-flags.
More importantly, if you look at the order book of
international wide body airplanes, U.S. airlines only have 5
percent of the worldwide outstanding wide body airplane orders
on their books. Ninety-five percent of all Boeing and Airbus
airplanes that are used for international service, two aisle,
two engine and four engine airplanes, are held by foreign-flag
carriers.
We have talked about fuel, you have all talked about fuel.
I won't touch that subject again. I think everyone understands
the tremendous impact that it has on this business. We aren't
here to ask you for financial support. I sat here six days
after September 11th and asked you for support, and Congressman
Oberstar, you came to the aid of the industry. This time we are
here not asking for that but asking for your support to allow
us to do what we think is in the best interest of our
communities, employees and shareholders. Hopefully, we can
answer your questions along the way and put your minds at ease
about this.
It really does give us the power to compete in a global
environment. Delta and Northwest have very complementary
networks. If you look at where Delta has historically flown, it
has not flown and does not fly in the places that Northwest
flies. So unlike many of the other transactions that this
Committee may have looked at over time, Delta and Northwest are
very complementary. Out of nearly one thousand city-pairs,
there are really only 12 markets where we compete with each
other on a non-stop basis in the U.S. Internationally, Delta
has no route network in the Asia Pacific and Northwest is
really the number one carrier to Japan and has the most
extensive route network in Asia.
So the complementarity of the route network should ease
your concerns about competition, because these are end to end
networks. We move forward in a world of European Union Open
Skies, and in Open Skies, we have very strong foreign-flag
carriers in Europe who have been allowed to consolidate. And in
order to be able to compete against those carriers, they are
much better capitalized and they are buying their fuel with
Euros, which means when we pay $125 a barrel for fuel, they are
probably paying about 50 percent less than that, because they
are not using dollars, they are using Euros.
So the merger really provides, and I know there are some
skeptics on the Committee, and I hope we can work through this
with you, but it really provides stability for the employees in
these airlines. We have kept the employees in mind as we have
gone forward here, because we have been able to craft an
agreement that allows us to keep all the hubs of the two
airlines. And these hubs have been scrutinized closely by both
carriers. Both carriers just came through bankruptcy. And in
the bankruptcy process, you have the right to reject aircraft
leases and airport leases.
So both of these businesses have been through the scrutiny
of creditors' committees and the bankruptcy process and have
gotten to a core business model that is a core business model
that will be viable over the long term with all of these hubs.
We have committed to provide substantial ownership in the
company to the combined employee groups. We have committed to
fair and equitable seniority integration under Allegheny-Mohawk
and have written that in the merger agreement.
In addition, this Committee, of course, and Congress,
enacted that into law last December, in legislation we
supported. We have committed to support the defined benefit
pension plans that have since been frozen but will be funded
over the course of the next 17 years. We have committed to keep
our front line employees from being furloughed as a result of
the transaction.
Let me speak really quickly about small communities and try
to address some of Chairman Oberstar's concerns directly. Hub
and spoke airlines are really built for small communities. The
discount carriers have never shown any interest or built
airline infrastructure, bought airplanes or bought gates and
made investments to serve small communities. When you looked at
the combined route network of these two airlines, a strong
route network of a hub and spoke carrier is the most secure way
to be certain we continue to serve small communities. Small
communities are really the bread and butter of a hub and spoke
system.
I do agree with Chairman Oberstar that we do need a real
essential air service program in this Country, one that really
works. We have been clear about that, both Doug and I, that we
would support that. Because we together serve more small
communities than any other two airlines in the United States.
We have made a lot of investments to serve those small
communities. So we have 34-seat airplanes, we have 50-seat
airplanes, we have 76-seat airplanes and we have made a lot of
investment over the years to be able to serve those small
communities.
When we go back to the competition issues and the issues
around consolidation, each of Continental, America, Southwest,
AirTran, JetBlue, have all been very clear in stating that they
are remaining independent. Since we have had our announcement
here, there has been an earnings cycle in the industry, so
there were the usual analyst meetings. They have all been
pretty clear in stating that they desire to remain independent.
This combination will ultimately, given the pull-downs that
Delta is in the process of making, because of fuel, this
combination will have perhaps around 17 percent market share
around the end of the year, given where we are going with pull-
downs. The low-cost carriers have over a third of U.S.
passengers, 60 percent of all domestic aircraft orders and have
been growing at double digits.
At the Senate Commerce Committee hearing last week, Pat
Murphy, whom many of you know as the Under Secretary of DOT for
many, many years, he, always a staunch proponent of
competition, essentially stated that the domestic market is
perfectly contestable and that there is free entry now and that
with the growth of the low-cost carriers, there really isn't an
issue of contestability in the U.S. market.
We have free entry in this business and real yields in this
business are down 30 to 50 percent in real dollar terms since
deregulation. The bottom line is, we think it is pro-
competitive. It is good for small communities and it will be
good for our employees.
I am sorry I was a little long.
Mr. Costello. The Chair thanks you, Mr. Anderson, and now
recognizes Mr. Steenland.
Mr. Steenland. Chairman Costello, Chairman Oberstar, other
Members of the Aviation Subcommittee, my name is Doug
Steenland, I am the Chief Executive Officer of Northwest
Airlines and I appreciate the opportunity to appear here this
afternoon to explain the benefits of the merger between
Northwest and Delta, and the fact that this merger will not
lessen competition.
Let me acknowledge and thank the Northwest Airlines
employees in this room for their contribution to running a
great airline. Let me also just take one second to acknowledge
and thank Congressman Kagen who provided some very important
medical assistance to a passenger on one of our airplanes last
week, Thursday, between Washington D.C. and Minneapolis. A
passenger fainted and the Congressman was able to provide some
very necessary and needed medical assistance. I want to take
this opportunity to thank him for that.
Mr. Kagen. Mr. Chairman, may I respond? I have to say it
was an honor to be available, and I have never had a flight
that landed so quickly and got to the gate so quickly.
[Laughter.]
Mr. Steenland. Let's hope that does not become a continuous
pattern, needless to say.
The U.S. airline industry is at a crossroads, creating two
choices for Northwest. One is to continue on the road now
traveled, as a standalone airline, being whipsawed between
rising oil prices, which will cost Northwest over $1.5 billion
more this year versus last year, facing increased competition
from domestic carriers that have now captured more than one
third of the U.S. domestic market, and facing heightened
international competition from large, well-funded foreign
airlines that have been allowed to consolidate and are
increasing service to the United States under Open Skies
agreements.
The other choice is to merge with Delta to create a single,
stronger airline, better able to face these challenges. By
combining the complementary, end to end networks of two great
airlines, we will achieve substantial benefits and build a more
comprehensive and global network.
More importantly, the merged airline will be more
financially resilient and stable, better positioned to meet
customer needs, better able to meet competition at home and
abroad, and better able to provide secure jobs and benefits. In
this merger, importantly, no hubs will be closed. I would like
to focus on that just for a second. Northwest operates hubs in
Minneapolis, Detroit and Memphis, and service to those hubs
will continue. The merger will create over $1 billion in annual
benefits that will help the merged carrier withstand volatile
fuel prices and cyclical downturns. All of these benefits will
be achieved without harming competition.
The existing domestic and international routes of Northwest
and Delta are complementary, so the two carriers compete only
to a minimum extent today. Let's start with international
markets. The question of competition internationally has been
asked and answered already by the U.S. Government. Recently,
the United States Department of Transportation tentatively
granted antitrust immunity to Northwest, Delta, Air France and
KLM, and in doing so, found that there would be no reduction in
competition over the trans-Atlantic from a combination of Delta
and Northwest.
Northwest doesn't serve Latin America, a Delta stronghold.
And Delta has only minimal service to Asia, which Northwest has
served extensively since 1947. Domestically, Northwest routes
are focused in the upper Midwest, while Delta is strong in the
South and the East and the Mountain West.
And the most important fact to remember regarding
competition, at today's hearing, is that of the 800 domestic
routes that Northwest and Delta today collectively fly to,
there are only 12 overlap city-pair markets between them. On
the vast majority of those 12 routes, there is robust, non-stop
competition that makes certain that substantial competition
will remain in the future.
The domestic airline industry has undergone a competitive
sea change over the past several years. Low-cost carriers have
grown at an average annual rate of 11 percent since 2000.
Southwest Airlines is the largest domestic airline in the
United States, carries more domestic passengers than any other
airline, and will continue to do so even after this merger is
consummated.
In addition, online technologies, having some of the most
powerful search engines in the world, run by Orbitz,
Travelocity and Expedia, have created a consumer revolution.
Customers can quickly and easily compare the offerings of
competing carriers on any given route. If they so choose, they
can push the lowest-applicable fare button that is guaranteed
to give them access to the lowest fares. All of these
developments ensure the continued competitiveness of the U.S.
market post-merger.
There clearly has been speculation about a potential wave
of mergers that might take place. However, recently Continental
announced that it would not pursue a merger with United, and at
a minimum, Delta, Continental, American and Southwest, together
with AirTran and JetBlue and other low-cost carriers that exist
today and will enter into this market, will continue as
independent competitors in the domestic marketplace.
With this merger, we have achieved our goal of crafting a
transaction that creates benefits for all of our constituents,
especially when we take into account the massive oil price
increases that we have experienced. The combined airline will
be more stable and better positioned to meet the challenges of
the future both at home and abroad.
Thank you very much.
Mr. Costello. The Chair thanks you, Mr. Steenland.
Mr. Anderson and Mr. Steenland, if you will, you have heard
my opening statement and Chairman Oberstar and other Members
who spoke about their concerns of how the employees will be
affected with the merger, how consumers will be affected. I
have read the reports from your testimony over in the other
body that if I am correct and if the reports that I read were
accurate, you indicated that when the merger takes place, if in
fact it does, that you do not intend to have layoffs, that you
are going to keep the existing workforce, and that you are
going to maintain the hubs that you currently have. Is that
correct?
Mr. Steenland. With respect to the layoff issue, we have
extended that to front line employees, which has been defined
as pilots, flight attendants, reservation agents, ramp workers,
customer service agents and others who are directly involved in
the provision of air service. And again, because this is an end
to end merger, that involves little or no overlap, we don't
expect and we don't anticipate service reductions as a result
of this merger.
As we discussed, we obviously have a competing challenge
whether we have merged or not, that is the impact of fuel
prices. We will have to take actions accordingly. But as a
result of the merger, we don't anticipate any reductions in
service.
If we could talk a second about hubs, if you think----
Mr. Costello. If I can ask you to clarify a point. When you
say that you don't expect a reduction in service with the
merger, how does that affect the employees? Same number of
employees when the merger takes place?
Mr. Steenland. Not in totality, because we have
acknowledged that clearly, within the management ranks, there
are redundancies and there will be reductions and there will be
reductions as a result of that. But again, with respect to
front line employees, if you think about Minneapolis-St. Paul,
for example, we operate a large hub in Minneapolis-St. Paul. We
anticipate continuing to operate a large hub at Minneapolis St.
Paul, and probably on any given day we have more vacancies in
the Northwest workforce than Delta has employees in
Minneapolis. So we anticipate meshing those workforces quite
easily in that hub operation, and clearly would expect no
layoff of front line employees. That is just one example of how
we would anticipate that working.
Mr. Costello. Surely in your discussions, when you began
discussions, talking about the merger and talking about how you
achieve efficiencies, you acknowledge that there will be some
administrative people who will be affected. What are your
estimates? How many people will be affected? How many will
either lose their jobs voluntarily or involuntarily on the
administrative side and total number of workforce?
Mr. Steenland. We haven't come up with an exact number yet.
We kicked off last week the transition planning process. And as
that gets more detailed and we get more specific, we would
expect to have a more precise answer as to what that number
might be.
Mr. Costello. So you might be able to provide that number
when?
Mr. Steenland. I would say two months from now.
Mr. Costello. The issue of maintaining your current hubs
after the merger is approved, if in fact it is, you heard me
say in my opening statement that American Airlines executives
sat in this room at that table and assured me and other Members
of the Subcommittee that they in fact would continue to
maintain their current hubs after taking TWA over. And in
particular, in St. Louis, that not only would they maintain St.
Louis International Airport as a hub, but the current level of
service as well.
So when you say that we are going to continue to have, to
maintain the hubs at the current level of service, I indicated
we were told that St. Louis, same level of service, less than
two years later, the number of flights went from over 500 per
day to about 250 per day, a significant reduction, and a number
of employees were affected or had their pensions reduced. So I
wonder if you might comment about the level of service at both
hubs.
Mr. Anderson. If I may draw a contrast between the TWA-
American transaction----
Mr. Costello. And we understand the contrast. TWA was in
trouble, TWA was going bankrupt and they were going out of
business. We understand that issue.
Mr. Anderson. Right.
Mr. Costello. But the point that I am making is, we were
given assurances by American Airlines. They could have said, we
don't know, we don't know what the price of fuel will be, we
don't know what the future holds. But that is not what they
said. They said that we are going to maintain the hub in St.
Louis at its current level of service.
So what I am asking you is, how can you give us assurances
here that you are going to maintain the same level of service
in both, at your hubs, and continue basically with the same
workforce? What is the point of merging if in fact you are not
going to see reductions in either service or employees to
achieve efficiencies?
Mr. Anderson. You are not going to see a reduction in the
front line employees, because, go back to the example that Doug
used, there is so very little overlap between the two airlines
that there really aren't any redundancies. I used the example
of Salt Lake City where Northwest has five flights and five
employees. We have at Delta 500 flights, counting our regional
carriers, and the absorption of their flights onto our gates
and their employees will be seamless. So because it is not an
overlapping consolidation, you have the ability to be able to
transition.
Now, that is not true, just so we are clear, Mr. Chairman,
that is not true with respect to overhead, general and
administrative expenses. And as Mr. Steenland said, we are in
the process now of doing a bottoms-up analysis of how you put
the two airlines together. And we will be forthcoming to the
Committee with what that is, at your request.
The main factor that is going to drive capacity up or down
is going to be fuel prices. And it won't be sa a result of this
merger, as I go back to the point I made in my earlier remarks,
both of these airlines just went through bankruptcy and if you
will, really cleaned up their strategies. If the Cincinnati,
Memphis, Detroit, Atlanta, if any of these hubs were not
viable, you can bet that the creditors' committee and
constituents in the bankruptcy process would have required the
carriers to reject the leases and the airplanes. So we are
really comfortable that we have solid assets there.
But as to level of service, it is going to be dictated by
fuel prices, whether this merger occurs or not.
Mr. Costello. Final question, at least at this point, then
we can move on to other Members who have questions. Mr.
Steenland, you stated, I believe, in your testimony that small
communities will benefit, and the reason they will benefit is
you will even have a larger national and global network. Both
Northwest and Delta, you have both already announced a decrease
in capacity, that you are going to reduce capacity.
So if in fact you already have plans to reduce capacity,
wouldn't the small communities be the first to be affected,
since they are the least profitable for both airlines?
Mr. Steenland. No. First, I don't think it is a correct
assessment to necessarily say that they are the least
profitable. As Richard said, we have designed a network, and we
have purchased equipment to be in a position where possible,
obviously there are EAS cities where it is not possible, but
whether we are flying into Brainard or we are flying into
smaller cities in North and South Dakota, we have airplanes
that range from 34 seats to 50 seats to 76 seats, all of which
are tailored to meet the needs of that small community and try
to provide a frequency of service.
That small community, someone coming out of Chisholm can
come into Minneapolis and has the opportunity to basically go
to approximately 175 destinations that we serve, with 500 or
more departures a day. As a result of this transaction, there
will be more additional online destinations that will be
available through that hub. We have created a network and we
have created an infrastructure that is designed to serve those
cities in a profitable way. Otherwise, we wouldn't be there.
Mr. Costello. Thank you. The Chair now recognizes the
Ranking Member of the Subcommittee, Mr. Petri.
Mr. Petri. Thank you very much, Mr. Chairman.
I was corrected, I misspoke earlier when I said that since
December there had been eight airlines that have filed in
bankruptcy or suspended business. I was wrong, there have been
nine, as Air Midwest this morning suspended, announced it was
suspending operations.
A question for both of you. The airline business is
obviously a local and a regional business in the United States,
but it is also a global business. We have laws requiring that
there be American-controlling ownership of airlines who each
have alliances with overseas airlines, that have themselves an
alliance, Air France and KLM. So as this consolidation goes on,
is there where a lot of the savings are going to occur? Is this
irrelevant to your merger? Our Government looks evidently
totally at domestic implications of the merger. How are they
defining the market that is merging, I guess is what I am
asking? Does the European alliance or merger between those two
airlines, is that in part driving your merger here in our
domestic market?
Mr. Anderson. Globally, the industry has been
consolidating, when you look at what has occurred in Asia and
Japan, for instance, what has occurred in Europe. So there is
consolidation globally. But our alliance with Air France and
KLM will be improved by this transaction, because Northwest and
KLM have an immunized alliance across the trans-Atlantic. And
Delta and Air France have an immunized alliance across the
trans-Atlantic. And where the real efficiency comes is when you
are in our position of a Northwest or Delta, and we are trying
to appeal to the business traveler in Europe. So we have a
strong base in the U.S. and we want to appeal to the business
traveler in Bucharest or Frankfurt or any of the other large
firms in Europe.
We don't have a sales and distribution or brand that
travels the way Northwest travels in Minneapolis and Delta
travels in Atlanta. In those countries, everyone looks at KLM
and Air France and the foreign-flag carriers as their flag
carrier. So in order for us to get into those markets, and one
of the things that this transaction gives us the opportunity to
do through our relationship with Air France-KLM, is to have a
strong and significant presence in foreign markets. Because we
essentially sell our product through the Air France-KLM
distribution network. So we aren't treated as an ``American
flag-carrier,'' we really get to participate in those large
traffic pools as a participant with Air France-KLM.
Mr. Petri. Is there a difference in the profitability of
international as opposed to domestic flights?
Mr. Anderson. Yes.
Mr. Petri. Which is more profitable?
Mr. Anderson. International.
Mr. Petri. So this could drive, this could be a significant
benefit in increasing your international business over time?
Mr. Anderson. Correct. You could be an airline executive.
[Laughter.]
Mr. Costello. The Chair thanks the gentleman and now
recognizes the Chairman of the Full Committee, Chairman
Oberstar.
Mr. Oberstar. Thank you, Mr. Chairman, and I thank Mr.
Petri for his thoughtful comments and questions, and our
Ranking Member of the Full Committee for his thoughtful opening
statement.
We have before us two of the smartest, most seasoned and
most experienced airline executive in the industry today, the
best. That is why you are dangerous.
[Laughter.]
Mr. Oberstar. You referenced international competition. And
just accepting your figures, foreign carriers have roughly 60
percent of the Pacific traffic, and 55 percent of the Atlantic
traffic. That is a bit of a shift from just less than 10 years
ago, when we had 70 percent of the Pacific and 65 percent of
the Atlantic for U.S. carriers. But that is still U.S. against
the world.
So what will the merger accomplish in trans-Atlantic
service that the alliance, which you will be given tentative
antitrust immunity, will not accomplish? And I was an advocate
for that joint venture, for the alliance, the JV has not yet
been accomplished. And I interceded with Air France, it is on
the record, I sent a letter urging them to reapply after the
first turn-down. So I have supported this alliance.
But what will the merger do that the alliance cannot?
Mr. Steenland. I would say, Mr. Chairman, that if we just
isolate the trans-Atlantic, the merger will be incrementally
beneficial on top of the benefits that the alliance, the
immunized alliance would otherwise provide. Clearly, the
immunized alliance will provide benefits, the record speaks for
itself. You are a strong supporter of it, and the Department of
Transportation, with the advice of the Department of Justice,
concluded that there were no anti-competitive impacts created
by the formation of that alliance.
Now, where the benefits get to be better is, for example,
on the United States, there will be a single frequent flyer
program between Northwest and Delta, as compared to having
separate frequent flyer programs. So a person can, instead of
having to build up miles on the Northwest account and then
build up miles on the Delta account and not being able to put
them together, now it will be all part of one pool, which will
make us a better competitor and a more effective competitor. We
will be able to share best practices that we previously could
not do, because under the alliance, Northwest and Delta
remained competitors domestically. And here we will actually be
able to sort of roll up our sleeves, compare notes as to what
we each do and we will both be able to learn from each other's
companies to be sure that we put our best foot forward.
The alliance and the immunity that the DOT has tentatively
granted is important and has real value. The merger provides
incremental value to that.
Mr. Oberstar. Heathrow continues to be the obstacle,
though, does it not, under Bermuda II, to an expanded U.S.
presence in the European market? You would agree with that?
There are only four carriers, U.S. carriers, really operating
in that market under Bermuda II, and even under the EU, they
haven't expanded. So how does the merger improve access to the
European market coming through London, where now you have two
carriers competing out of London Heathrow, and, well, only
Northwest in Gatwick? How does that improve competition?
Mr. Anderson. Mr. Chairman, the last round of EU
liberalization opened up Heathrow to both Northwest and Delta.
Mr. Oberstar. But they are of no value unless they build
another runway. No really substantial value unless they build
another runway.
Mr. Anderson. They should build another runway. They should
build another runway, but we have been able now to commit
service from our hubs to London Heathrow Airport, which
candidly was not something I don't think we ever expected would
occur. But it did occur, and through our alliance
relationships, we were able to procure slots and gates.
So we both started service from our hubs to Heathrow. I
think we all started in March, April time frame. So we have
been able to procure access. And Heathrow really is a spoke off
of our U.S. hubs. That access is sufficient for us, because our
principal hubs in Europe will be Amsterdam and Paris.
Mr. Oberstar. Yes. Well, that I understand. But still,
Heathrow is a massive entry point to the continent. It will
continue to be.
Mr. Anderson. By far the largest O&D market in the world is
the U.S. to Heathrow.
Mr. Oberstar. Right. You mentioned in a post-merger
environment the continued presence of what you call low-cost
and what I call low-fare carriers and cite Southwest as the
largest domestic airline. But if you look at Southwest's market
model, they have 3.9 percent of the market out of Detroit. They
have 13.8 percent of the market in Salt Lake City, zero in
Minneapolis-St. Paul, zero in Cincinnati, zero in JFK, zero in
Memphis.
So when is Southwest going to open their routes to London,
to Paris, to Amsterdam, to provide international competition?
Mr. Steenland. I don't know.
Mr. Anderson. We don't know.
Mr. Oberstar. They are not challenging you at your
strongholds.
Mr. Steenland. Well, I think they are. Southwest, even
though their percentage in Detroit might be relatively small,
they have a very big wake in terms of the fares that they set
and the impact that they have on the community. They operate in
other parts of our network, they operate to St. Louis, they
operate to Kansas City, they operate in Omaha, all of which
affects the heartland market.
Mr. Oberstar. In smaller markets. My point is, a bigger
carrier is going to be even more of a frightening effect upon
the smaller so-called low-fare, point to point domestic
carriers. I don't see Southwest morphing into a United Airlines
and becoming an international carrier, as United did after
deregulation in 1978. Everybody dismissed United, said, who are
they. Pan Am was expected to be the big winner, and Pan Am
turned out to be the big loser, because it was the domestic
network carrier that had the gravitas to compete in the
international trade. That is the market.
Southwest has no inclination to do that. And they have no
inclination to challenge you big carriers in your major hubs.
Mr. Anderson. In the case of Delta, we have a second
hubbing carrier in Atlanta, and that is AirTran, and we have a
second hubbing carrier in JFK, JetBlue. And we have a very
strong Southwest in Salt Lake City. I would note that Southwest
got its position in Salt Lake City through an acquisition of
Morris Air about 15 years ago.
So across the Delta network, we are in many, many
contestable markets.
Mr. Oberstar. I will withhold questions, there are other
Members. I want others to have an opportunity. Thank you.
Mr. Costello. The Chair thanks the gentleman and now
recognizes the gentleman from North Carolina, Mr. Coble.
Mr. Coble. Thank you, Mr. Chairman.
Gentlemen, thank you all for being with us and for your
testimony. I have a couple of questions.
There has been some discussion about vertical versus
horizontal mergers. How would you classify this merger and why?
Mr. Steenland. I think you would classify this as a
horizontal merger, because it is two network air carriers
getting together who are in the business of being hub and spoke
providers. We are end to end carriers. So we are taking our
existing businesses and we are expanding them, but we are
remaining in the same business. We are not merging with a
catering company, we are not merging with a maintenance
provider. We would like to merge with an oil company, but I am
not quite sure that would work in this environment.
So that is why I think we would call this horizontal, and
it would emphasize the end to end nature of it.
Mr. Coble. Mr. Anderson, do you concur with that?
Mr. Anderson. I do concur, and I would like to merge with
an oil company.
[Laughter.]
Mr. Coble. So would I--so would we all.
What, gentlemen, would be the impact on communities that
are seeking to attract air service?
Mr. Steenland. I would think that the benefit would be the
same if not better, because if it is a spoke community that is
trying to get access to one of our collective hubs, the scope
of service that that hub would provide would be greater, and
therefore, it would increase the likelihood that service from
that spoke would be more feasible and economic.
Mr. Coble. Mr. Anderson?
Mr. Anderson. I concur.
Mr. Coble. And I agree with that as well.
There has also, gentlemen, been discussion about the state
of the industry as a whole, given that approval of this merger
would maybe create a domino effect with other carriers. What is
your view of the industry as a whole if this proposed merger is
approved versus if it is rejected?
Mr. Anderson. From the standpoint of the organization of
the industry, as I remarked in my opening comments, each of
Southwest, American, Continental, AirTran, have each been clear
in stating that they want to be independent. From a
contestability standpoint, and you look at the size of the
remaining independent airlines, approval of this transaction in
the domestic marketplace, which is the only place where there
is even an issue of antitrust concern, there is plenty of
competition in the marketplace, and it will remain unchanged
after this transaction.
So we believe that what we are proposing here should pass
muster under the antitrust laws.
With respect to the overall industry, I think it was you
or, no, it was Congressman Petri, Ranking Member Petri noted
that there have been nine bankruptcies in the industry since
the first of the year. With fuel prices continuing to rise,
there is going to be more difficulties in this industry. And
the industry has to change and adapt as rapidly as it can to
increasing fuel prices if the prognostications that we hear
from the experts in the oil industry and the commodities
business are correct, that the price of fuel is going to $200.
What this merger allows us to do is create a much stronger,
much more durable airline that allows us to generate $1 billion
to $2 billion in additional benefits, which makes us stronger
in whatever fuel environment we face.
Mr. Steenland. Congressman, if you think about one of the
unique features of the airline industry, it is that airplanes
are mobile. If you are in the hotel business and you build a
hotel, you can't exactly pick it up and move it if you don't
like the market that you set it down in. If you are in the
airline world, your airplane can fly away and you can go attack
any market you want.
If you think about just what has happened over the last six
months or nine months, if you look at Denver and you look at
the increased competition that Southwest has brought into
Denver, facing up against United, facing up against Frontier. I
think that is testimony of how airplanes are a very mobile
arsenal. This industry will remain intensely competitive for
the long, long term.
Mr. Coble. Thank you both, gentleman. Thank you, Mr.
Chairman, I yield back.
Mr. Costello. The Chair thanks the gentleman and now
recognizes the gentleman from Illinois, Mr. Lipinski.
Mr. Lipinski. Thank you, Mr. Chairman.
Thank you for your testimony here today. It is obviously
not an easy case.
I want to start out by talking about my district in
Chicago. It is home to Midway Airport and we have O'Hare
Airport close by. They are both major economic engines, and
thousands of my constituents are employed at the airports or
with the airlines that operate out of these two airports. And
of course, my constituents rely on these airports when they
travel.
My understanding is right now, Midway has 15 Delta flights
and 11 Northwest flights each day, and O'Hare has 23 Delta
flights and 21 Northwest flights each day. So my first concern
is the impact that you expect this merge would have on prices
and flight options going in and out of the Chicago area, and
the impact on Delta and Northwest employees based in the
Chicago area. Is there anything that you could tell me about
that right now? I see you are going through a lot of papers
there.
Mr. Steenland. One of the points I would just note for
starters is that Southwest has a major presence at Midway. It
is one of the most competitive airports, I think, in the
Country. We operate to Midway just from our hubs. And we do so
with a level of frequency that, all things being equal, our
expectation would be for it to remain the same.
Mr. Anderson. And I was just looking up, we have a service
summary, because we anticipated this, so we went and checked
every one of your districts to determine where we stood.
[Laughter.]
Mr. Lipinski. Good homework, there. It is a big book.
Mr. Anderson. It is a big book. And we have eight and a
half, I don't know how you have a half a trip, but we have 8.5
trips to Atlanta and 6.5 trips to LaGuardia from Midway. We
serve Atlanta, Salt Lake, New York and Cincinnati from O'Hare.
As a result of this, there wouldn't be any change.
I think the only place in that market where we, separate
from this or we are always examining, is our service from
Midway to LaGuardia. We are trying to operate a shuttle product
from LaGuardia to Washington National, Boston and Chicago with
pretty high frequency. That has been a sometimes difficult
market, because there is a lot of service in the Chicago-New
York market.
So that will happen, though, separate from whether or not
this transaction closes.
Mr. Lipinski. So you are saying the transaction isn't
necessarily, as you see it right now----
Mr. Anderson. It won't have any effect on this service, the
transaction won't. We will still serve all our hubs.
Mr. Lipinski. One other issue I wanted to discuss in the
last couple of minutes I have here, I wanted to ask you, Mr.
Anderson, I know in your testimony before the House Judiciary
Committee, you didn't really succinctly answer the question on
whether or not you are remaining neutral in the
representational election of the Delta flight attendants, or
whether you were advocating a position. Do you still stand by
this? Or are you advocating a position on this?
Mr. Anderson. Yes, we are advocating a position. The way
the National Mediation Board works, and the process, Mr.
Congressman, is a process that essentially provides for
democracy, a democratic process where everyone is engaged, and
many of our employees are engaged. We have a view in that
regard, but at the same time we respect the determination of
our individual employees.
If you look at Delta's, and I think Congressman
Westmoreland said it, Delta has been unusual in that it has had
a long sort of direct relationship culture. While we have
collective bargaining units that we have great respect for and
work very closely with, you will hear from one after me,
Captain Moak and our dispatchers who are represented by
collective bargaining agreements, Delta has a long history of
the Delta family. We think that the employees have the right to
decide and we respect that. And we have a view about that, but
we think it should be fair and open and we respect the outcome
either way.
Mr. Lipinski. I understand that you certainly can't take a
position. I watched this video earlier today and I did have
some concerns about the phrase being used, when you were
suggesting that the flight attendants, when they get their
voting instructions, to give them a rip. That did concern me a
little bit in the suggestion there about what to do.
Mr. Anderson. It is an odd process under the Railway Labor
Act. The way you vote under the Railway Labor Act is not return
the ballot. I actually anticipated that question, and I don't
think I brought with me a ballot and the ballot instructions
from the National Mediation Board, but the way you vote, you
either vote yes and send it in, or you don't send it in. And
that is how the process is conducted by the National Mediation
Board. That is how the balloting instructions work.
Mr. Lipinski. I understand that. I did have some concern
about what the suggestion was there. I respect that you
certainly can't take a position on this. But I just want to
express that concern.
Mr. Anderson. That is fair. I think at the heart of it, we
want this to be a good place to work. If you look at the
history of Delta, Delta is the only major network carrier that
has never had a strike. It has always paid its employees and
provided benefits that were historically among the best in the
industry. And even today, when you compare our wages and
benefits with Northwest, they are higher. So in the end, we
want it to be a very good place to work, whether our employees
are organized or not. We respect that process.
Mr. Lipinski. The employees definitely deserve that right
to organize.
Mr. Anderson. They do.
Mr. Costello. The Chair thanks the gentleman from Illinois
and now recognizes the Ranking Member of the Full Committee,
Mr. Mica.
Mr. Mica. Thank you. Just a couple of quick questions.
You described a horizontal integration or consolidation of
the companies. Where are the biggest savings going to come
from? If you gave me like, one, two three?
Mr. Steenland. I will start and just mention one.
Mr. Mica. The top one?
Mr. Steenland. I would say it is in the top three. That has
to do with the better utilization of our aircraft. For example,
Northwest has almost 50 airplanes that are 300 seats or larger.
Delta has no wide body airplanes that are larger than 275
seats. It has a lot of wide body airplanes that have 200 seats.
Mr. Mica. Do you have two and three? Mr. Anderson, where
are the savings going to come from?
Mr. Anderson. Where are the savings coming from? I will
give them to you right in a row.
Mr. Mica. If you only have 12 sites where there are
overlapping markets, so there can be some consolidation there.
Mr. Anderson. I can get you $675 million to $950 million in
annual operating expense savings very quickly; $75 million to
$100 million in selling expenses, single sales force, single
set of corporate sales agreements. Information technology, go
from one massive platform, from two to one, that is $125
million to $150 million a year. The overhead reduction that we
have talked about earlier is $150 million to $175 million a
year.
Our facility overlap, take a location like Congressman
Lipinski's location in Chicago, we each both have pretty big
terminals in Chicago. We will be able to move to one terminal.
That is worth $150 million to $200 million a year. We think
that across the enterprise, general business productivity, $75
million to $100 million. And on our supply chain, dealing with
all the vendors, $125 million to $185 million a year, steady
state, which puts us at least at $675 million on a steady state
basis.
Mr. Mica. Do you project any reduction in numbers of
personnel? I think somebody told me there are 75,000 in the
consolidated organization.
Mr. Anderson. Yes, we do expect reductions in management,
overhead and corporate staff.
Mr. Mica. What about the rest of the crew?
Mr. Anderson. The front line employees, we don't expect any
and won't have any involuntarily layoffs of front employees. I
would note that Delta just went, we have just gone through a
significant downsizing that is in the process of being
finalized right now. We are in the process through an early out
of voluntary early out, early retirement program of reducing
about 13 percent of our staff.
Mr. Mica. So you can take some of that through retirements
and voluntary separations?
Mr. Anderson. Yes.
Mr. Mica. I think that is important, that people know where
the cuts are going to come from, how the consolidation is
actually going to take two airlines that are losing money and
hopefully have them, at least reduce their losses, hopefully
make a profit.
I had talked to you briefly and some of the other
executives, too, about the constraints you have in increasing
your ticket price. What could we do to allow you to keep the
price of the ticket concurrent with the fuel prices? Your fuel
prices have gone from 19 percent of your operating costs in
2004 to 40 percent. That is a trajectory that is, no matter
what you consolidate, how you dance around this, we have to
address this. You don't have the ability to pass some of that
on, is that correct? Or can you do that?
Mr. Anderson. It is a very tough market.
Mr. Mica. Is there a constraint legally?
Mr. Anderson. No, not that I am aware of.
Mr. Mica. There is no constraint? So you can pass that on?
Mr. Anderson. You can put it in your prices, but the
marketplace is going to determine what the market-clearing
price is.
Mr. Mica. The other thing too is you are paying 4.3 cents
fuel tax. What do they pay in Europe? Is there an aviation fuel
tax? Does anybody know?
Mr. Steenland. I don't know.
Mr. Mica. Does anybody in the audience know?
Mr. Anderson. Don't know.
Mr. Mica. I know that our gasoline tax is 18.4 cents, and
most countries in Europe it is $3 or $4. I just wondered what
they pay.
Mr. Anderson. I actually think that aviation bilateral
treaties prevent that kind of discrimination. In other words,
you can't put a large tax under the aviation bilateral
agreements like that to discriminate against aviation
bilaterals. But we can get back to you, Congressman Mica.
Mr. Mica. I am just trying to see, you are describing a
consolidation, I see problems that aren't going away. I am
looking for solutions. One is increasing your revenue. You told
me how you are going to cut your costs, through some
consolidation. But fuel is the big enchilada right here, and we
have to find a way to help you survive, help people who are
trying to fill up their gas tanks survive, and a host of other
things. I don't have time to get into all of them right now,
because Mr. Costello wants to take back my time.
Thank you.
[Laughter.]
Mr. Costello. The Chair thanks the gentleman.
Let me say to the gentleman that I think when you were out
of the room, both Mr. Anderson and Mr. Steenland committed to
give an estimate of about 60 days from now, that they would
know the numbers, how many administrative people would be
affected in the consolidation. So they have committed to
getting that information to us.
Mr. Mica. I am also interested in down the chain.
Mr. Costello. We are very interested in down the chain as
well, and they are supposed to supply that to us.
The Chair would announce that we are being called now to
the Floor for a series of three votes, but we have time to
recognize one, possibly two more Members for questions, and
then I will announce when we recess how long it will be, we
will try and get a determination to come back.
The Chair now recognizes the gentlelady from California,
Ms. Richardson.
Ms. Richardson. Thank you, Mr. Chairman. I will try and be
as brief as possible.
First of all, with all due respect, our Chairman here asked
you in several very polite ways how you expected to maintain
facilities at both locations and you gave us various reasons
why you expected no change at all. I have to be honest with
you, I am very skeptical, and that is a kind word that I am
using. So I would like to hear through additional discussions
of really the need, what is the real, true commitment that you
intend upon giving this Committee that there would be no hub
changes, that there would be no staff changes. Are you prepared
to give that to us, and give this Committee in writing? If not,
to me it is not worth a whole lot, the minimal statements that
you have made.
The second point I wanted to state, the gentleman, you said
that you are not asking us for support. I tell you, I would
much rather you ask us for support today to help this industry
than for you to cut back and us have to pay for unemployment,
us have to pay for people who don't have health insurance. We
are either going to pay one way or the other.
So I would rather us fix the situation, truly fix it. This
issue of oil prices, and we have talked about it and talked
about it, and maybe it is a key point. But that is not the only
point of why this merger is being brought to the table. I think
to lay it only on the oil issues really is not being fair and
appropriate.
So those are my very brief comments, if you would like to
respond.
Mr. Anderson. We have been very clear in testimony now,
this is the fourth time, twice in the Senate, twice in the
House, and in all the written materials we have provided with
respect to our strategy to keep the hubs and to not have
involuntary furloughs of front line employees. Now, with
respect to facilities, which I think I heard in your comment,
with respect to facilities, there will be facilities that we
will close and consolidate. Take Los Angeles International
Airport. Northwest is in terminal 2 and Delta is in terminal 5
and 6. We will figure out, between the two airlines, where we
can accommodate both of us and then work with the city to
rationalize facilities. So that will definitely happen and we
will be able to consolidate our operation.
We appreciate very much your concern about the industry. It
is always difficult in a deregulated industry to figure out how
effectively the Government can participate. This industry was
regulated for its first 60 years of existence. For a whole lot
of policy reasons, as Chairman Oberstar said, that was changed
in 1978. So it is difficult to sort of hazard what you would do
from a public policy standpoint, but we appreciate your concern
about the industry. One of the hardest things you face in this
business is when you have losses and you have to take cuts in
your cost structure that affect people and communities, because
in the end, the only really viable way to have job security is
to have a viable airline. That is really what we are doing
here, is building a much stronger airline in combination so
that we have a good place to work for our employees.
Ms. Richardson. Well, I would just summarize in saying, and
I want to yield back, because the Chairman really wants to give
other Members who have waited an opportunity to speak, I worked
in the private sector for Xerox Corporation and I have a
masters in business. For people who have been around a little
bit, and I may be a new Member of Congress, but I wasn't born
last night. When you say involuntary, non-voluntary, that is
the same as saying, if you are going to close the terminal in
L.A., well, yes, you can keep the job if you are going to move
to Minnesota. That is not necessarily dealing with the employee
issues.
You also stated the fact that, well, you could let us know
in two months what you think might happen with some of the
people. Well, if you are expecting our support in this issue
now, I can't give that to you if you can't even answer the
question.
Thank you. I yield back the balance of my time.
Mr. Costello. The Chair thanks the gentlelady and now
recognizes the gentleman from Michigan, Dr. Ehlers.
Mr. Ehlers. Thank you, Mr. Chairman.
In view of the time, I will be extremely brief. I have been
watching this particular proposal for some time and I have had
the opportunity to ask a number of questions over that period
of time, so I won't belabor the issue by asking questions now.
But let me just express one concern which has nothing to do
with this proposed merger. I do worry a bit that if this merger
goes forward, it might give an excuse to a couple of the other
airlines to attempt mergers, and we end up with only two or
three airlines in the Nation. And then I would begin to worry.
But I see nothing to indicate that we should stand in the way
of this particular merger. But I just want to serve notice that
if anyone else tries, we could end up with some very serious
antitrust situations in the future.
With that, I yield back.
Mr. Costello. The Chair thanks the gentleman for his
comments and now recognizes the gentlelady from Hawaii, Ms.
Hirono.
Ms. Hirono. Thank you very much.
I will keep my questions very short. I know that both of
you have testified, or Mr. Anderson has testified that there
are a number of other airlines who have expressed a desire to
remain independent. However, the fact that the two of you would
like to merge, would either one of you be surprised that other
U.S. airlines would want to merge in order to compete with your
merged airline? Would either one of you be surprised with that
result?
Mr. Steenland. No.
Ms. Hirono. Thank you.
Now, you have also testified a couple of times that you
intend no layoffs of front line employees, both of you. We know
that that number amounts to thousands and thousands of
employees. I think the key question is, though, can either one
of you tell us for how long you intend to not lay off front
line employees or for how long you intend to maintain your hubs
and your current level of services? In all honesty, can either
one of you commit to any length of time for that kind of a
goal, which is very worthy? We appreciate that.
Mr. Anderson. Right. Well, the word I used in the Senate
Commerce Committee is that it is as definite as you can ever
make a commitment in any business. We have both been operating
from these facilities and in these airports for 20, many, many
years. And it is a core part of what we do as an airline,
serving Atlanta, Salt Lake, Cincinnati, Minneapolis, Detroit,
Memphis. We have collectively been serving those locations in
most instances since the beginning of this industry in the
early 1920s and 1930s. It is our intention and our business
strategy to stay operating in these hubs and providing the
service that we provide to those communities.
Ms. Hirono. However, your merger does come in the context
of a changing industry and worldwide competition. So if you
wanted to ask some----
Mr. Steenland. No, I was just going to provide an example.
Today, Northwest flies two wide body airplanes a day from
Honolulu to each of Tokyo and to Osaka. Delta doesn't serve
those markets.
Ms. Hirono. I know that you were one of the original ones.
Mr. Steenland. We were one of the original ones.
Ms. Hirono. And that is why you have that.
Mr. Steenland. And on those airplanes, it is probably 99
percent Japanese tourists coming to Hawaii. So those airplanes
will continue to fly, subject to economics of fuel and the
like. No impact on those routes will be as a result of this
merger.
Ms. Hirono. I wouldn't think so, because Northwest I know
has a very favored status with regard to Japan.
Just one more thing. One of my colleagues expressed a
concern about the fact that Delta Airlines flight attendants
are in the middle of deciding whether or not they want to be
unionized. I note Mr. Anderson's testimony that says that
employee relations are really important. That all sounds really
nice, I commend you for that. And of course, you are going to
abide by any decision, which by law you have to.
But I have some information which leads me to think that
the position of management with regard to this unionizing
effort is what I would call very aggressive and in your face. I
have a concern about those kinds of tactics and I would like to
express those concerns to you here.
Mr. Anderson. And I respect your concerns. Thank you.
Mr. Costello. The Chair thanks the gentlelady.
We are down to about five minutes on this vote, so we will
recess. There are two additional votes. I will ask our
witnesses, I think we have other Members who want to ask
questions of these witness. I would ask everyone to come back
in 20 minutes. At 4:05 we will resume the hearing. The
Subcommittee stands in recess until 4:05.
[Recess.]
Mr. Costello. The Subcommittee will come to order.
The second panel consists of the Honorable James J.
O'Connell who is the Deputy Assistant Attorney General,
Antitrust Division for the U.S. Department of Justice and the
Honorable Michael Reynolds who is the Acting Assistant
Secretary for Aviation and International Affairs with the U.S.
Department of Transportation.
Mr. O'Connell, you are recognized under the five-minute
rule, and you both should be aware that your entire statement
will be entered into the record.
TESTIMONY OF THE HONORABLE JAMES J. O'CONNELL, JR., DEPUTY
ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT
OF JUSTICE, AND THE HONORABLE MICHAEL W. REYNOLDS, ACTING
ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS,
U.S. DEPARTMENT OF TRANSPORTATION
Mr. O'Connell. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Committee, I am pleased to
appear before you today to explain how the Antitrust Division
evaluates the likely competitive effects of airline mergers. I
would note, as the Chairman noted at the beginning of these
proceedings, that as pending transactions are pending law
enforcement matters, I will not be speaking specifically about
the Northwest-Delta merger today.
The Antitrust Division has pursued an active program of
enforcement in the airline industry for many years in order to
ensure that consumers receive the benefits of airline
competition. In October, 1998, for example, the Division sued
to undo Northwest Airlines' acquisition of a controlling stake
in Continental Airlines and, in 2001, the Division announced
its intent to challenge the proposed merger of United Airlines
and U.S. Airways after concluding that that merger likely would
reduce competition and result in higher fares on routes
throughout the United States and internationally. The parties
abandoned their merger plans in response to that decision.
The Division has also successfully challenged other
transactions that would have substantially lessened
competition, including proposed acquisitions of gates or slots
that we concluded would have eliminated competition in certain
markets.
In addition to challenging transactions, the Division has
investigation and challenged collusion under Section 1 of the
Sherman Act, most recently, for example, in an ongoing
Antitrust Division criminal probe of international airlines for
fixing rates for cargo shipments and for passenger
transportation, more than $770 million in criminal fines have
been imposed, and guilty pleas have been entered by several
international airlines.
My written statement provides additional examples of our
enforcement in these areas as well as some additional details.
All of these efforts have as their goal the assurance that
U.S. consumers receive the benefits of a competitive
marketplace. Most mergers raise no competitive concerns and can
benefit consumers. However, certain proposed mergers do raise
serious competitive issues.
Antitrust analysis is highly fact-specific and, in each
case, we carefully review the facts and the evidence to
determine whether a particular merger would violate the
antitrust laws. The Antitrust Division reviews mergers under
Section 7 of the Clayton Act which prohibits the acquisition of
stock or assets where the effect of such a transaction may be
substantially to lessen competition or to tend to create a
monopoly. The primary focus is to determine the likely
competitive effects of a merger in the future.
The methodology that the Division follows in all merger
reviews, including those in the airline industry, is set out in
our longstanding horizontal merger guidelines. Under the
guidelines, mergers should not be permitted to create or
enhance market power or to facilitate the exercise of market
power. By market power, we mean the ability profitably to raise
prices above competitive levels or to reduce competition on
dimensions other than price such as product quality, service or
innovation for a significant period of time as a result of the
transaction.
The antitrust agencies generally assess a merger's likely
competitive effects in all relevant markets--the product,
service and geographic markets in which the merging companies
compete--in order to determine whether the transaction would
likely substantially lessen competition in those markets. In
the case of airline mergers, those markets typically consist,
at least, of scheduled passenger service between a point of
origin and a point of destination. These are generally referred
to as city pairs.
The Division also considers broader issues in addition to
the concern over competition in city pair markets. To mention
just one example, concern about the merger's potential
competitive impact on competition for large corporate travel
contracts and government travel contracts was one of the
factors that drove our decision in 2001 to announce our
intention to challenge the United-U.S. Airways merger.
Once the relevant markets have been identified, the
Division looks at the number of other carriers serving each
market and at the nature of that service. We then focus our
analysis on those markets that might be conducive to the
creation or enhancement of market power as a result of the
merger.
In conducting this analysis, we consider a variety of
market factors and industry-specific practices to determine the
likely effects of the merger. For example, we examine entry by
other firms, and we consider merger-specific efficiencies of
the kind likely to enhance the merged firms' ability and
incentive to compete if such efficiencies exist.
The Division examines all available qualitative and
quantitative evidence when evaluating a merger's likely
competitive effects. We obtain evidence from the merging
parties as well as from their competitors and their customers.
We obtain evidence from other sources such as consumer groups
and third party experts and, in the case of airline mergers, we
consult with the Department of Transportation so that we can
take advantage of their extensive experience in this area as
well as the significant amount of data that they maintain.
By carefully evaluating all of this evidence, the Division
develops a highly detailed and thorough understanding of the
markets that are likely to be affected by a proposed merger.
In conclusion, Mr. Chairman, competition in the airline
industry is critical for the millions of Americans who depend
on air travel in their business and personal lives, and the
Division has a strong record of enforcing the antitrust laws to
protect competition in this important sector of our economy. If
we determine that a proposed merger will violate those laws or
that air carriers are engaging in illegal collusive or
monopolistic conduct, we will not hesitate to take appropriate
enforcement action to protect competition and American
consumers.
Mr. Chairman, this concludes my prepared remarks. I will be
happy to answer any questions the Committee may have.
Mr. Costello. The Chair thanks you, Mr. O'Connell, and now
recognizes Mr. Reynolds.
Mr. Reynolds. Chairman Costello, Chairman Oberstar, Ranking
Member Petri, thank you for the opportunity to discuss the
state of the airline industry, issues related to airline
consolidation and the role of the Department of Transportation
in the industry's ongoing restructuring. Although it would not
be appropriate for me to discuss the specifics of any
transaction, I hope that I can shed some light on the process.
With respect to the state of the airline industry, U.S.
carriers have been emerging from a major restructuring, one
that was precipitated by a fundamental change in passenger
demand that began prior to September 11, and it revealed an
outdated industry structure built around an unsustainable cost
structure.
Despite fuel price increases, the industry as a whole was
profitable for 2007. Legacy carriers had successfully
restructured and adapted their business models to compete in a
more price-sensitive environment with low-cost carriers that
have continued to expand throughout the decade.
In 2008, however, persistent record high fuel prices have
eclipsed the benefit of legacy carrier cost reductions and
efficiency gains and are changing the fundamental economics of
the industry. Going forward, the outlook for airlines has
certainly become cloudy. The industry faces three major
challenges in 2008: significantly higher than expected fuel
prices, a potentially weaker economy and labor cost pressures.
Wall Street currently estimates that with oil at $110 a
barrel, the U.S. airline industry will lose approximately $4.5
billion this year. Clearly, the major challenge for the
industry remains record high fuel prices, and we have heard a
lot about that today.
Fuel is now the largest single cost center for airlines,
from 19 percent of total operating expenses in 2004 to nearly
40 percent for 2008 based on current trends. While the industry
posted an operating loss of approximately $1.7 billion in the
first quarter of 2008, it would have posted an operating profit
of $3.6 billion in that quarter had fuel prices remained at
2004 levels.
Ongoing fuel price pressures have motivated industry-wide
cost and capacity discipline. All carriers are trying to adjust
their business models to cope with yet another significant
challenge. As low cost carriers continue to expand, legacy
carriers, in particular, must find ways to become more
efficient producers.
With respect to the broader economic environment, passenger
carriers report that demand currently remains fairly strong
going into the busy summer travel season. However, there is
some regional weakening in domestic markets and greater concern
for the fall and winter.
With regard to the process associated with airline
transactions, the Department of Justice is responsible for
reviewing proposed airline mergers due to its primary
jurisdiction over antitrust laws. The DOT typically provides
the DOJ with advice and analysis on airline competition issues.
Of course, my colleague from Justice has just explained his
department's role and perspective on these matters.
If the Antitrust Division does not challenge a transaction
between major airlines, DOT would then consider a wide range of
regulatory issues that fall within its jurisdiction including
international route transfers, economic fitness and code
sharing.
With respect to the role of government in the industry, the
issue of consolidation should be understood in the broader
context of allowing deregulation to address the airline
industry's perennial challenges. In an industry that is truly
subject to marketplace forces, we will inevitably see
restructuring. Each proposed transaction must be considered on
a case by case basis. The airline industry should be held to
the same antitrust standards as every other industry, and there
will inevitably be transactions that fail to satisfy a rigorous
antitrust test.
Our consideration of aviation economic policy must focus on
what is best for both a healthy and a competitive industry. Our
goal must be to strike what is admittedly a difficult balance
in the face of a complex and changing industry.
That concludes my oral statement. I would be pleased to
take any questions.
Mr. Costello. Mr. Reynolds, thank you for your testimony.
Mr. O'Connell, does the Department of Justice consider the
impact of one proposed merger on the entire industry and as a
whole and whether one merger might lead to others?
Mr. O'Connell. Well, Congressman, when we examine a merger,
we examine each merger that is brought before us when it is
brought before us and make our determination as to whether the
transaction may violate the antitrust laws based on the facts
of that transaction.
Mr. Costello. So would that be a yes or a no?
Mr. O'Connell. We do take all the factors into account. We
do examine the state of competition in all of the affected
markets. But ultimately the decision on any particular
transaction, because if we determine that a transaction may
violate the antitrust laws, we then have to go to court and
demonstrate that to a judge based on the facts of that deal.
The decision is based on the transaction itself, but we do
take every factor into account when we are examining them.
Mr. Costello. That is one of the factors, how it affects
the industry and a whole and if one merger may trigger other
mergers?
Mr. O'Connell. Well, Congressman, if I may, when we are
examining a merger, we are trying to determine whether it is
going to result in market power or enhanced market power in the
affected markets, and so the industry-wide implications can
play a part in that, but we do focus on the impact of the
transaction in specific markets.
Mr. Costello. Mr. Reynolds, in your testimony, you, of
course, point to the fact that DOT approves alliances between
airlines. As all of us know, some of these alliances are
extensive and involve some of the world's largest international
carriers.
You heard a question asked. I think it was by Mr. Cohen or
Mr. Kagen earlier, and that is: Given the worldwide scope of
these alliances, do airlines really need to merge in order to
gain access to international markets?
Mr. Reynolds. I don't know that mergers are necessary for
access to markets. It may be a question of whether they feel
they can compete better in a particular position or not, but in
terms of whether they have pure access or not, I don't know
that the merger plays either way into that.
We are trying to break down barriers, open skies and
provide access for our carriers_all our carriers across the
board.
Mr. Costello. The Chair now recognizes Mr. Petri for any
questions that he may have.
Mr. Petri. Thank you, Mr. Chairman.
I note we have several more panels, and we are starting to
get into the hour. So I will submit several questions for
written response and really only want to extend a question that
our Chairman asked, and that is something that is happening in
antitrust law more and more. How do you coordinate with the
European, in particular, antitrust authorities?
These are international organizations either themselves or
through alliances. The Europeans evidently allowed Air France
and KLM to merge, anyway they are part of the same structure.
Now these companies are both allied with one or the other of
those. So they have, in effect, merged in Europe already. Does
that influence your decision?
How do you define the market? Are you just looking at
Chicago and Atlanta or are you looking at how this impacts on a
global basis because a lot of these industries in
communications and entertainment and now here in air travel
have basically gone beyond national jurisdictions?
Mr. O'Connell. Congressman, two points: When we examine a
transaction and, again, not to speak specifically about this
one but any transaction in this industry, we look at all
dimensions of competition.
We look at, as I said in my opening statement, city pair
markets. We also look at other factors, other dimensions of
competition between the merging parties to determine whether
the transaction poses any competition issues in any of those
dimensions. And so, that would include looking at international
routes as well as domestic routes.
On your question about coordination with the European
Commission, we do coordinate very carefully with our
counterparts in Brussels and also in the European member
states. Often transactions raise similar issues in different
markets especially if you are talking about reaching towards a
consistent remedy so you don't end up with different outcomes
where the company is faced with conflicting results.
And so, our staffs coordinate very closely with one
another, and we also coordinate all the way on up the line,
discussing individual matters, provided that we are clear to do
so by the parties because there are confidentiality
restrictions in there. But we work very closely with the
Europeans to make sure that, to the greatest extent possible,
we reach results that don't conflict.
Mr. Petri. Thank you.
Mr. Costello. The Chair thanks the Ranking Member and now
recognizes the Chairman of the Full Committee, Chairman
Oberstar.
Mr. Oberstar. I have been waiting all day long for your
testimony. It is very important testimony. I stayed up, in
fact, quite late last night, reading both the Department of
Justice's and the Department of Transportation's testimony and
evaluating and digesting it.
I take great heart in your statement on page 5 where you
responded to Chairman Costello's question about this issue. The
agencies, meaning the Justice Department's Antitrust Division
and the Federal Trade Commission consider both post-merger
market concentration and increased concentration resulting from
the merger.
That begs more questions about what you consider to be
included in the concentration in market and resulting from
merger. You go on to qualify that statement somewhat.
But earlier on that same page, you say the unifying theme
of our guidelines to the two agencies is that mergers should
not be permitted to create or enhance market power or
facilitate its exercise. You define market power as the ability
profitably to--very carefully worded--to raise prices above
competitive levels for a significant period of time.
Now, let's translate that into today's market structure. In
exchange with the industry panel, I pointed out that while the
airlines are fond of saying there is lots of competition. The
network carriers are fond of saying there is lots of
competition from the low fare carriers.
Yet, at Detroit, Southwest that they all point to as the
leading domestic competitor has a 3.9 percent market share.
That is in competition with Northwest. In Salt Lake City, in
competition with Delta, it is 13.8 percent. In Minneapolis-St.
Paul, it is zero. Cincinnati, it is zero with Delta presence.
Atlanta, another Delta presence, it is zero. At JFK, it is
zero. At Memphis, it is zero.
So a low fare carrier, the biggest one in the business, is
not willing to challenge existing network carriers at their
strong point hub. How much more reluctant will that market be
to challenge a carrier that is more than 50 percent bigger than
what now exists in any of those markets?
Mr. O'Connell. Well, Mr. Chairman, that is the sort of
question that we would set out to determine in conducting a
review of a transaction, one of the questions we would set out
to determine.
As I explained in my opening statement, we would look at
all aspects of competition including hub competition and city
pair competition to determine what the current state of play is
and, most importantly, to determine to what extent, if any, the
transaction will alter that state of play, will change the
competitive dynamic. If we determine that there is a problem in
such a market, we would take appropriate action.
Mr. Oberstar. Now, while that merged carrier would be 50
percent bigger than the smaller of the two and while it would
not be the sole seller in the market, it really is a monopolist
in those markets, is it not?
Mr. O'Connell. Mr. Chairman, a question like that would get
a little close to the facts that we would be determining in the
transaction that we are reviewing, and so I wouldn't want to
hypothesize on specific markets.
Mr. Oberstar. You don't have to. I just want to plant the
idea with you.
Mr. O'Connell. So planted.
Mr. Oberstar. And nurture it.
[Laughter.]
Mr. Oberstar. Now, Mr. Reynolds, your testimony is
delightful. There are all sorts of wonderful, tantalizing
statements except that you don't bite the bullet. You don't say
we will counsel the Department of Justice on our views on this
particular or any merger. If they don't act, then you would
take some action.
I think you have a greater responsibility to the traveling
public because your jurisdiction is, in a way, broader. Your
scope of review is much broader than that of Justice. It was
looking at these very narrowly, very important, powerful. Would
that Teddy Roosevelt were still here as President, we would be
having a much more interesting discussion.
Powerful as that is, yours is a much broader scope. I
wonder whether you have, at DOT, given consideration to the
market consequences of this merger proposal.
Mr. Reynolds. Well, for the same reasons as my colleague
was reluctant to comment on this particular proposal, so am I.
But, as a general matter of course, as involved in aviation
policy matters, we do try and take a broad view of all the
things going on in the industry, including restructuring, in
terms of any competitive implications of any particular
transaction.
Of course, that is judged based on the antitrust laws and
by our colleagues at the Department of Justice and specifically
the Antitrust Division. They have the primary jurisdiction
there. So if there are anti-competitive effects, they are the
ones who will take steps to potentially address that in any
potential transaction.
Mr. Oberstar. Yes. I understand that.
At the very end of your statement, you say: @@Our
consideration of aviation economic policy must focus on what is
best for both a healthy and a competitive industry.''
But you don't say a healthy and a competitive consumer
environment. You have left out a very important sector here. It
is the traveling public that you also have a responsibility to,
do you not?
Mr. Reynolds. Oh, we do, and we are very concerned about
the traveling public from a number of standpoints. We believe
that vigorous competition in a health industry will serve the
public best, serve the consumers best, provide them more
choices, better fares, better offerings and potentially have a
wider variety of carriers providing a wider variety of
services. We have seen that a great deal in the current
marketplace, and we think that that is the proper course.
Mr. Oberstar. You do say here: @@Our goal must be strike a
difficult balance in a complex and dynamically changing
industry.''
It must also embrace not just short-term but the longer
term view on stakeholders. That is such a vague term so
frequently used. No one really understands what it means. Do
you include it in that the air traveling public?
Mr. Reynolds. Absolutely, no doubt about that.
Mr. Oberstar. You should have said that. It would have been
very comforting to a lot of people.
Mr. Reynolds. Well, we do care.
Mr. Oberstar. When you did the antitrust--not you
particularly but when the Department did the review--I assume
along with the Justice Department, of the alliance between
Northwest and Air France-KLM to consider antitrust immunity,
you considered a very broad set of factors, did you not?
Mr. Reynolds. Yes.
Mr. Oberstar. Can you cite those?
Mr. Reynolds. Well, at the moment, that is an active
proceeding.
Mr. Oberstar. But just the factors, not how you came to it,
but the factors that you considered because they are spelled
out in the document that you issued.
Mr. Reynolds. Sure.
Mr. Oberstar. For the record, could you just say what you
considered in that process?
Mr. Reynolds. We, obviously, looked at a variety of factors
including competition in various markets, both at city pairs,
country to country, Europe to the United States. So we looked
at a wide variety of issues in coming to our tentative
decision.
Mr. Oberstar. Would it not be appropriate to look at those
and other factors in evaluating the domestic scene of this
merger proposal?
Mr. Reynolds. Whatever the transaction, not speaking to
this one in particular, of course, we try and take a broad view
and understand what is going on in the industry and with a
particular transaction.
Mr. Oberstar. Would you consider, in providing counsel to
the Justice Department, the effect of a merger in an Open Skies
treaty versus the effect of an alliance with antitrust immunity
in the context of that same Open Skies treaty?
Mr. Reynolds. We will look at the big picture with regard
to international aviation policy, with regard to any
transactions that we may be facing.
Mr. Oberstar. Would you also then look at the potential
shrinkage of competition where there is now a Delta presence in
the London Heathrow and Northwest presence in London Heathrow
and at Gatwick and what the consequences of a domestic merger
might have on that international market competition?
Mr. Reynolds. Well, again, those are very fact-specific
issues.
Mr. Oberstar. I am not asking you to make a conclusion
about it but whether you would consider those as factors.
Mr. Reynolds. Oh, yes, we look at all those factors. Yes.
Mr. Oberstar. You would. You would give some thought to it?
Mr. Reynolds. I think we have actually done that already as
part of our tentative decision in Sky Team, which we have not
yet finalized.
Mr. Oberstar. Would you also give consideration to the
consequence both for the carriers and for the Pension Benefit
Guarantee Corporation and well as for another group of
stakeholders, the employees of the two carriers, of the current
as well as outstanding future obligations that would be
incurred in the event of a bankruptcy of that bigger carrier to
the PBGC?
Mr. Reynolds. The broader issues associated with pensions
and a lot of the labor issues are not directly within the
Department of Transportation's purview. Of course, we try to
have an understanding of all factors that affect the airline
industry, but that is not where our expertise or jurisdiction
lies.
Mr. Oberstar. True, but that is probably a ten or twelve
billion dollar--I am just horseback estimating--factor that
weighs heavily on the economic ability, that is the fitness, of
the two carriers or the merged carrier to compete in the
marketplace. That is a very important economic consideration.
Mr. Reynolds. Well, it could be, depending on the
particular merger involved.
Mr. Oberstar. Yes. Again, I want you to consider those
factors. I think they are very important for you to.
Coming back, Mr. O'Connell, to I said I took heart from
your statement concerning both post-merger market concentration
and increased concentration resulting from the merger. Chairman
Costello pursued it somewhat with you. I want to pursue it a
little further.
Isn't it reasonable for the Justice Department to give
consideration to the consequences to the marketplace of a
merger of carriers of this dimension, this magnitude, and the
cascade of actions that will take place in its wake?
Mr. O'Connell. Mr. Chairman, yes, and that is something
that we do look at. When we look at individual markets to
determine the effect of a transaction in a marketplace, we look
at all available information. But, again, when the decision
comes, if the decision comes to challenge a particular
transaction, we then have to go to court and demonstrate to a
judge that that deal, based on its merits, is anti-competitive.
So we do look at the entire industry. We do look at all the
factors, but ultimately at the end of the day the situation
with a given transaction has to rise and fall on the merits of
that particular deal in those affected markets, which can vary
significantly across markets.
Mr. Oberstar. Yes. Market concentration, as we discussed
earlier, relates to the ability of other competitors to enter a
fortress hub and compete effectively. That competition can be
one dimension with a smaller carrier but a vastly different
dimension with a much bigger carrier in frightening off
competition.
If that structure results in a collapse of the industry
into three network carriers, then you have a vastly different
domestic market competitive structure, don't you?
Mr. O'Connell. That would be a potential result which is
why we would look at each transaction that would be presented
to us as it is presented to us. The decision in one
investigation doesn't necessarily bear on what we would decide
in another.
The facts are always very different. The impacts can be
very different. We look at each as a separate analysis and
don't consider ourselves bound by decisions in previous
transactions in that industry. We take each one as they come.
Mr. Oberstar. I take great heart from your responses.
Would you, finally, then look abroad to see what the
consequences of a domestic merger would be in the international
marketplace, considering that Americans, our fellow citizens,
are traveling on these two carriers and would have fewer
options, fewer competitive choices in an international
marketplace such as Heathrow? It accounts for--let's see. It's
the entry point for 50 percent of the European market.
Mr. O'Connell. Well, without commenting on the facts here,
in any airline merger, we would look at its impact on American
consumers whether you are talking about purely domestic routes,
New York to Atlanta, or whether you are talking about U.S. to
abroad or abroad to the U.S.
The entire spectrum of the competitive effects of the deal
on American consumers is part of our analysis, and we would
look at all of that.
Mr. Oberstar. You would not limit yourself to the domestic
scene but also consider the international competitive
implications?
Mr. O'Connell. Absolutely.
Mr. Oberstar. And the same to you, Mr. Reynolds?
Mr. Reynolds. Absolutely.
Mr. Oberstar. I take heart from those comments. Thank you.
Mr. Costello. Thank you, Mr. Chairman.
The Chair now recognizes the gentlelady from Hawaii.
Ms. Hirono. Thank you, Mr. Chairman.
The industry panelists both said that they would not be
surprised if as a result of this merger, should it be approved
or allowed to go through, that there would be more mergers
coming down the pike. However, as we have more mergers, though,
I would say that there would be less competition.
So would the subsequent merger analysis be more difficult
for the Department to approve because you are just going to end
up with more and more concentration in the industry?
It is a hypothetical. Would that be what the Department
would be faced with analyzing?
Mr. O'Connell. Well, Congresswoman, any merger review has
to take as its starting point the condition of the marketplace
that is presented to us as it exists at that time. So previous
activity in an industry would be relevant. We would take the
market as we find it and make our decision based on how we
thought the merger was likely to change the market going
forward based on the facts of that case.
Ms. Hirono. Wouldn't it make sense that as more and more
airlines begin to want to merge, that it is going to be harder
to justify and there would be more of an anti-competitive
impact?
Mr. O'Connell. Well, Congresswoman, if I could step back a
little bit from the airline context so I don't get too close to
the things that are pending in front of us, different
transactions, it all depends on the facts. I mean the facts are
stubborn things, and that is what we have to focus on.
Individual transactions can have different impacts on
different markets. You could have a transaction that is highly
anti-competitive in one market and not in others. You have a
transaction that is fine. It varies enormously from transaction
to transaction. So it is difficult to generalize.
Ms. Hirono. Well, I am talking about the ones that involve
really large airlines.
Mr. O'Connell. It is difficult.
Ms. Hirono. United, Continental, those kinds of airlines
because we can anticipate that those could be coming down the
pike.
Mr. O'Connell. The Antitrust Division would look at any
proposed transaction very carefully based on the facts as they
exist at the time, and we would take appropriate action if we
determine that the transaction, any future transaction was
going to lead to a problem in any market.
Ms. Hirono. I don't want to beat a dead horse, but it seems
reasonable to think that if we have subsequent mergers of
really large airlines, that the analysis becomes, I suppose,
the anti-competitive impact on the marketplace would be more
pronounced.
Mr. O'Connell. Well, again, Congresswoman, it would depend
on the facts of those deals. Each deal is different. They each
raise different issues in different markets, and I wouldn't
want to hypothesize about what we might decide in a future
investigation.
Ms. Hirono. Okay. Well, I guess we can draw our own
conclusions.
I do have one quick clarifying question. It is about Open
Skies. We have heard that reference made by the industry
panelists. I wanted to have clarified, do we allow non-U.S.
airlines to come into one of our cities, say, New York, pick up
American passengers, and go on to another U.S. city and pick up
U.S. passengers?
Mr. Reynolds. No. That would be illegal. The cabotage laws
prevent that.
Ms. Hirono. Yes. So we still have first, second, third,
fourth, fifth, all those freedoms and limitations.
Mr. Reynolds. No. That isn't allowed under the Open Skies.
A carrier could fly between New York and Los Angeles. It
just couldn't carry any passengers, paying passengers on that
load.
Ms. Hirono. Right. So we actually have in place a lot of
restrictions on the competition from foreign carriers. I know
that the industry, what they have done is they do code sharing
and all of that to try and get around some of those
limitations.
Mr. Reynolds. Yes.
Ms. Hirono. They are able, in other ways, to compete with
the non-U.S. carriers without merging, don't you think?
Mr. Reynolds. Are you speaking of international air
carriers, foreign air carriers?
Ms. Hirono. Yes, they can compete against foreign carriers
because we do have a lot of limitations on what foreign
carriers can do in our Country.
Mr. Reynolds. Not for domestic traffic, they couldn't
compete for that in any way even if it was through code
sharing.
They can compete for traffic that involves an international
point, a foreign point, depending on the air services
agreement. Under Open Skies, of course, there are very, very
few limits, if any, on what carriers may do on those
international routes.
Ms. Hirono. It is just domestically that we pretty much
keep out the international carriers.
Mr. Reynolds. That is correct.
Ms. Hirono. Thank you very much.
Mr. Costello. The Chair now recognizes the gentlelady from
the District of Columbia, Ms. Norton.
Ms. Norton. Well, thank you, Mr. Chairman.
I stayed to perhaps get some clarification on a question I
asked earlier because Mr. Reynolds raised in his testimony the
challenges of the merger between two very different airlines.
His testimony mentions the unexpected costs and delays in
integration that are likely when you have two different
airlines merging.
I am certain that everybody wants to succeed, and they will
make fairly conservative estimates, but there is some precedent
off of which to work. That is that historically when large
mergers occur, there are quite high near-term costs and less,
of course, near-term revenue than the acquiring company had
projected.
Assuming integration costs, because I would like to know
how you go about, given the fact that you are given a set of
figures yourself and you indicated that you understand that
there could be unexpected costs, so I have to assume that they
would be costs that the parties haven't given you.
In this case, if there were higher than anticipated revenue
projections, they would meet at the same time very substantial
business risks that are perhaps unique to this industry. There
would be the oil prices which may strike them even worse than
everybody else, all the rest of us. There would be the ever
tightening credit markets. Look when they are coming forward.
Then there would be a downturn in the economy because it
doesn't look like it is turning up any sooner.
I wonder how you would, in light of your testimony, deal
with and analyze the unexpected costs and delays in integration
that are unanticipated in trying to decide whether this is a
worthy merger.
Mr. Reynolds. Well, again, I don't want to speak to this
particular merger. As you indicated, airline mergers can be
costly, complex, difficult undertakings and with a lot of up-
front costs. We have seen that several times.
We definitely have a very challenging environment for air
carriers; the fuel, the potentially weakening economy as I
cited. So there are a lot of things that are going to be
difficult for them.
Of course, it is going to be a business decision for any
two companies in any industry to decide how they are going to
behave, whether or not it is in a merger or consolidation of
some kind, and how they undertake that and whether they move
forward.
As to whether those sorts of factors play into approving it
or not, that would really be, again, for the Department of
Justice. I don't know how they factor those particular aspects.
Ms. Norton. Then I will have to ask the Department of
Justice.
Mr. O'Connell. Congresswoman, when we examine a merger
under the antitrust laws, what we are setting out to determine
is whether the transaction will result in a substantial
lessening of competition in the affected markets.
Transactions succeed or fail for a variety of reasons. I am
not just speaking about airline mergers here. Consumers may not
be as enamored of the combined product offerings of the company
as the parties thought. Management may have difficulty
integrating cultures, any one of a number of reasons why
transactions can succeed or fail.
Many of those factors are not factors that are relevant to
the antitrust analysis because what we are setting out to
determine is a very important question but a relatively narrow
one which is whether post-merger the combined company will have
market power.
Ms. Norton. Well, I don't know why he passed the question
on to you then.
First of all, Mr. Reynolds, you raised the issue of
unexpected costs and delays in integration.
I understand what you are saying, Mr. O'Connell.
I was interested in, for example, whether these companies
would be worse off, given what looks like an unusually
challenging set of factors they face at the time that the
merger is going forward or would wish to go forward, whether
they are better off or worse off as a merged entity than as
standalone airlines. They thought they would be actually better
off as a merged entity.
Since you are the Transportation official and you have to
look directly at that issue, that is why I directed the
question to you in the first place.
Mr. Reynolds. Thank you, Congresswoman.
I think it is more that we are just pointing out some of
the issues. Mergers can have positive and negative impacts on
many of the different stakeholders, whether that is the owners,
the employees, the communities being served.
We don't take a view as to necessarily whether the mergers
themselves are positive or negative. They are part of the
marketplace, and if carriers make mistakes or if any companies
make mistakes in combining, if it is a bad deal, if it is a bad
business decision, the marketplace will punish them. That is
not the basis.
Ms. Norton. Well, okay, Mr. Reynolds, you have truly
frightened me because, in other words, if you are left with two
airlines going down the tube, that is not merely the
marketplace punishing the two airlines, whatever that means. It
is punishing the American public.
That is why I was interested in whether or not it mattered
to you, whether or not standalone airlines, they could take it
more easily than if these same factors, unexpected factors,
challenge them as a merged entity.
It does seem to me that somebody has to take that into
account, whether the United States is better off with two
standalone airlines in bad shape or a merged airline in better
shape, given--and this is what I posited because I got this
from your testimony--that there are all kinds of unexpected
costs, even costs beyond what they factored in because that is
the history of these mergers, except that I am not sure we have
ever had a merger of an airline in a more challenging
environment than this one. So I can only that these be matters
that you would at least consider so that the matter would be on
the table somehow.
Thank you, Mr. Chairman.
Mr. Costello. The Chair thanks the gentlelady and thanks
both you, Mr. O'Connell and you, Mr. Reynolds, for your
testimony today.
We look forward to your making a very thorough and careful
review of this proposal, and we look forward to your decision.
We will be monitoring it with great interest. We thank you.
AFTER 6:00 P.M.
Mr. Costello. The Chair would now ask the third panel to
come forward, and I will introduce the panel as they are coming
forward.
Captain Lee Moak, Captain Moak is Chairman of Delta Master
Executive Council, Air Line Pilots Association, International;
Captain David Stevens who is the Chairman of Northwest Airlines
Master Executive Council, Air Line Pilots Association,
International; Ms. Patricia Friend, International President,
Association of Flight Attendants; and Mr. Robert Roach, Jr.,
General Vice President of Transportation, International
Association of Machinists and Aerospace Workers, if you will
take your seat at the table.
You should know that all of your statements will appear in
the record as they have been submitted, and we would ask that
you summarize your testimony in five minutes.
The Chair now recognizes Captain Moak.
TESTIMONY OF CAPTAIN LEE MOAK, CHAIRMAN, DELTA MASTER EXECUTIVE
COUNCIL, AIR LINE PILOTS ASSOCIATION, INTERNATIONAL; CAPTAIN
DAVID V. STEVENS, CHAIRMAN, NORTHWEST AIRLINES MASTER EXECUTIVE
COUNCIL, AIR LINE PILOTS ASSOCIATION, INTERNATIONAL; PATRICIA
FRIEND, INTERNATIONAL PRESIDENT, ASSOCIATION OF FLIGHT
ATTENDANTS-CWA; ROBERT ROACH, JR., GENERAL VICE PRESIDENT OF
TRANSPORTATION, INTERNATIONAL ASSOCIATION OF MACHINISTS AND
AEROSPACE WORKERS
Mr. Moak. Mr. Chairman, Ranking Member Petri and Members of
the Committee, thank you for providing me the opportunity to
testify at today's hearing. I have submitted a written
statement for your consideration, so I will keep my testimony
brief.
My name is Lee Moak. I am a 20 year captain with Delta
Airlines, and I am the Chairman of the Delta Master Executive
Council of the Air Line Pilots Association, International, the
union that represents 7,300 pilots of Delta Airlines.
I welcome the opportunity to testify in support of the
proposed merger between Delta Airlines and Northwest Airlines.
My goal and the goal of our union is that our pilots be
provided with pay, benefits and retirement commensurate with
the responsibility and experience we bring to the profession.
An airline with the increased potential to be financially
healthy with a stable long-term future provides the best
opportunity to ensure that that happens.
Prior to the announcement of the merger, the Delta Pilots
Union was able to reach a consensual agreement with Delta
management designed to facilitate the merger while providing
financial returns for the unique value that we brought to the
transaction. This agreement will provide a solid framework for
a new joint collective bargaining agreement to include the
Northwest pilots.
We welcome the Northwest pilots as partners in the building
of the new merged airline and look forward to not only the
rapid completion of a new joint agreement but also a fair and
equitable negotiated seniority list. Our goal is for both to
take effect at the close of the corporate merger.
So why are we here today to talk about a merger? Since the
terrorist attacks of September 11th, 2001, our Nation's
aviation industry has been through the worst seven and a half
years of its existence. Last week, the price of crude oil went
through $126 per barrel, an increase of over 90 percent in the
past year. The Nation's economy is suffering, and the credit
markets have become increasingly difficult, if not impossible,
to access.
Last month, four U.S. air carriers ceased operations.
Another announced that it will be closing its doors on May
31st, and yet another filed for Chapter 11 protection.
In short, our Nation's aviation industry is now in jeopardy
for the second time since September 11th, 2001. If our industry
is to survive and, more importantly, thrive, there must be
change. The time for rational and sensible industry
consolidation has arrived.
Careful Government scrutiny and oversight must ensure that
any potential industry consolidation is in the best interest of
the traveling public. I submit that this merger, the proposed
merger between Delta and Northwest, is not only in the best
interest of the traveling public but also the employees of both
airlines, the communities we serve, the communities we live in
and our Nation's economy and aviation industry.
We look forward to working with all 78,000 employees of the
merged Delta as we help build our Nation's first truly global
airline.
On behalf of the 7,300 pilots at Delta Airlines, thank you
for the opportunity to testify before the Committee. I welcome
the opportunity to respond to any questions or comments you
might have.
Ms. Hirono. [Presiding.] Captain Stevens, you have five
minutes to present your testimony.
Mr. Stevens. Thank you, Madam Chairman and Members, for
holding this hearing and providing me with the opportunity to
testify with regard to the proposed merger between Northwest
Airlines and Delta Airlines.
I am Captain Dave Stevens, and I am Chairman of the Master
Executive Council of the Air Line Pilots Association at
Northwest Airlines. I am a 23 year Northwest pilot previously
employed by People Express and proudly served in the U.S. Air
Force as an active and reserve pilot.
There are currently over 5,200 ALPA-represented pilots
flying for Northwest Airlines. The pilots at Northwest have
undertaken an ongoing review of the proposed merger. We
recognize that the combined company has the potential of
becoming a stronger and more viable airline. However, the
Northwest ALPA Master Executive Council and our pilots strongly
oppose the merger as it now stands.
The total economic potential of the combined corporation
will not be achieved without a joint pilot contract which is
the only way for all of the predicted revenue enhancements and
cost savings to be realized. A joint contract would also
resolve potential labor discord which is counterproductive to
achieving economic success.
Given the current high cost of fuel, the broad economic
downturn and substantial costs related to an airline merger,
the future viability of the combined company will be in
question if it is unable to take advantage of every revenue
opportunity. A critical evaluation of the economics of the
proposed merger is in the best interest of all groups affected
by the merger.
Management of the two airlines has stated that the merger
will produce greater profitability as a result of a series of
synergies that allow increased revenue and reduced costs. They
will predict a financially stronger airline, one better to
serve all its stakeholders including its customers. According
to management, these synergies will result from an end to end
merger rather than a traditional overlap production merger.
However, many of the synergies and therefore much of the
economic benefit management is counting on will be unavailable
without a common contract that includes the Northwest pilots.
Indeed, for the new combined Delta-Northwest to have any chance
of fully realizing its potential, all employee groups must be
treated fairly regardless of their pre-merger carrier.
Why is this true? Without a joint pilot contract, the two
airlines' flight operations must remain separate. Without a
single airline operation, much of the needed revenue growth and
cost savings will not be achieved. Layer in the bad will
created by contractually treating Northwest employees as B
Scale, and the matters will be even worse.
We appreciate Delta management's statement of optimism that
we can obtain a common contract and an integrated seniority
list prior to the date of corporate closing. However, we
believe actions speak louder than words. To date, we have no
negotiating session scheduled.
Furthermore, Delta management has found the time to reach a
tentative agreement with Delta pilots effective on the date of
closure that excludes Northwest pilots. The more we review this
document, the more questions we have as to Delta management's
intent. We feel there is no reason to have several of the
provisions in the new Delta pilot contract if the intent is
truly to have a joint contract before closing.
We are concerned that the reason for this agreement may be
to put economic pressure on the Northwest pilots to agree to an
unfair seniority list. We will not do that. Contract terms can
be changed. Seniority lives forever.
We agree with the statement from Delta that in their
analysis a merged Delta-Northwest airline is stronger than a
Delta standalone airline. However, our review shows that as
currently structure the same is not true for Northwest. Given
the current structure of this merger, we believe a standalone
Northwest is stronger than a merged Delta and Northwest.
Our review also shows that Northwest Airlines is the best
place of any legacy carrier to weather the current high cost of
fuel and economic downturn. Northwest has an enviable route
system that includes the Pacific hub, a flexible fleet a fuel
efficient order book of Boeing 787 aircraft and the most
relative cash on hand of the legacy carriers.
We understand that integrating the operations of these two
large carriers will require a delicate balancing act to
minimize the employee discontent and maximize the employee
harmony required to access the proposed synergies necessary for
the merged carrier to be successful going forward. However, the
steps to date will largely have the effect of maximizing
employee discord.
Rather than a joint statement by Mr. Anderson and Mr.
Steenland that the new carrier was committed to a fair and
equitable integration of the workforces, we have only the
statement of Mr. Anderson that he will protect the seniority of
Delta employees with the implication being that current
Northwest employees will have to fend for themselves. Rather
than negotiating a joint contract, Delta Airlines chose to
negotiate contract improvements only for Delta pilots.
Notwithstanding the events leading to this point, the
officers and representatives of the Northwest MEC are willing
to negotiate with Delta management and Delta ALPA. However,
time is critical. There is a small window of opportunity
remaining in which to conclude a joint contract and a joint
seniority list outside the traditional merger process.
I have tried in this statement to explain to you, Northwest
ALPA's concern about the current situation. I ask that you
evaluate this merger in the current context. I urge you to
critically examine management's promises and statements of
their present intentions.
Will the company meet its financial obligations and manage
to abide by its promises to maintain current service and hubs
or will it shrink and shed thousands of jobs?
What will the loss of those jobs mean to the broader
economies of the States and regions affected?
Will this merger work if management cannot achieve the
expected synergies?
In short, what happens if the merger does not succeed?
We believe the marketplace shares our concern as evidenced
by tremendous loss of value of the share price of both
companies since the merger announcement.
In our view, the proposed merger is risky for Northwest and
Delta passengers, communities and employees. With the price of
oil, the weak economy, the closed credit markets and the huge
costs of combining the two companies, there will be no margin
for error. As it now stands, the combined company will not have
access to the predicted synergies due to lack of a joint pilot
contract.
Ms. Hirono. Captain Stevens, your time is up, if you could
just wrap up.
Mr. Stevens. The same lack of a joint contract is likely to
cause a pilot labor friction. Labor friction in other employee
groups is possible. The net result may be a weak combined
carrier in a terrible economic environment. We must all seek to
avoid this result.
Again, Madam Chairman and Members, thank you for calling
the hearing and providing me with the opportunity to testify
regarding the Northwest pilots' perspective on the proposed
merger. I stand ready for any questions you may have.
Ms. Hirono. Thank you.
Ms. Friend.
Ms. Friend. Thank you, Madam Chair, and we wish to extend
our thanks to Chairman Costello and Mr. Petri for holding this
hearing on this proposed merger. We very much appreciate having
a seat at this table to share our views and concerns because it
is the only table where we do have a seat to discuss our
concerns about this merger.
In the very near term, we are very worried that 9,000
Northwest airlines flight attendants who have had the benefit
of collective bargaining rights for more than 60 years are in
danger of losing those rights. We are also skeptical of the CEO
promises of no job losses and no hub closures and the resulting
financial burden on the workers.
In the wider view, we remain concerned that in the absence
of a sound national aviation policy, our national aviation
system continues to flounder in search of an effective business
plan in a deregulated environment.
This merger between Northwest and Delta has drawn
significant attention from the media, communities served by
both carriers and here on Capitol Hill. The attention being
paid to what will create the largest airline in the world is
appropriate and necessary.
While we are confident that many are looking out for the
interests of the communities served and for the interest of
those who rely on air transportation, there are virtually no
protections for airline workers in this or any other merger.
Very little attention is being paid to the upheaval that
mergers create for the thousands of airline employees who find
themselves unemployed or whose lives are disrupted.
We have heard the guarantees from the two CEOs about no
furloughs and no hub closures, but each guarantee is qualified
with references to the current environment.
As we look for solutions to cushion the enormous negative
impact this latest merger could have on workers at Northwest
and Delta and the potential for a wave of airline mergers, it
is time to revisit the concept of employee protection from the
deregulation act. As part of this and any airline merger plan,
money must be set aside to protect the financial security of
the employees.
There were many important protections in place for airline
workers prior to the Airline Deregulation Act but no real
protections exist today. After deregulation, employers
successfully lobbied for an end to the labor protective
provisions because, as they argued at the time, these matters
are better left to the collective bargaining process.
Union contracts do provide a level of protection for those
employees covered by a contract, but there is no protection for
nonunion airline employees. The majority of the Delta employees
have no collective bargaining agreement. This merger seriously
jeopardizes the existing collective bargaining rights of all
the Northwest employees who have fought for and won the legal
right to have union representation.
It is true that today the nearly 14,000 Delta flight
attendants are the closest to securing their future by forming
a union through AFA-CWA as they are currently engaged in a
representation election.
But the management of Delta Airlines has declared that the
current Delta, essentially a nonunion company, when it becomes
the new Delta will also be a nonunion company. They have
launched the largest, most vicious anti-union and voter
suppression campaign I have witnessed in my 40 years in this
industry. Whatever else this merger is permitted to be, it must
not be permitted to become a vehicle for union busting.
The selection among the Delta flight attendants is not just
an opportunity for them to gain a voice on the job and a seat
at the table, it is the first line of defense to protect the
over 60 years of collective bargaining rights for the Northwest
flight attendants. The airline executives have realized the
opportunity this merger presents for them, and it is not just a
chance to prevent thousands of nonunion employees from gaining
a union. It is a chance to eliminate the unions that already
provided protection for their members at Northwest.
Using this merger as an opportunity to destroy unions
provides these airlines and all who would follow with an
opportunity to drive down wages, work rules and benefits for
all airline employees. It excuses them from any responsibility
for the workers' lives destroyed and disrupted by their plans.
It sets the stage for them to set industry standards back to
levels we have not seen in decades.
If the new Delta is a nonunion carrier as well as the
largest carrier, they will be poised to set in motion an
unprecedented remaking of the entire airline industry that will
destroy forever airline jobs as a stable and secure middle
class career.
I urge the Members of this Committee to send a strong and
clear signal to Northwest, but more especially to the Delta
executives, that they must not use this merger as a means to
destroy the collective bargaining rights of the employees.
While much will be made over the coming months about the
impact of this merger on consumers and communities, I urge you
to remember that hundreds of thousands of airline employees
across this Country. Keep us in mind as you review this merger
and the impact that it will have on our lives and our families.
It may be the Department of Justice and the Department of
Transportation that will ultimately decide whether this mega-
merger is approved and in what form, but you have the ability
to stand up for the workers caught in the middle, restore the
financial protections lost through the deregulation of the
industry and stand up for the rights of those workers to freely
choose to form a union without the influence and interference
of their employer.
Without our unions and our collective bargaining rights, we
have no protection. Please don't let them, with their high-
flying grandiose plans, destroy the one thing we have
protecting us, our unions.
Federal regulators will look carefully at the impact this
merger and others will have on the consumers and communities.
We hope that this Committee and other congressional committees
will continue to exercise vigorous oversight responsibilities
as well.
Thank you again for this opportunity, and I look forward to
your questions.
Mr. Costello. [Presiding.] The Chair thanks you for your
testimony and now recognizes Mr. Roach.
Mr. Roach. Thank you, Mr. Chairman and the Members of the
Subcommittee for the opportunity to speak to you on behalf of
airline workers throughout the United States.
My name is Robert Roach, Jr. I am General Vice President of
the International Association of Machinists which is the
largest airline union in North America. I appear here on behalf
of International President R. Thomas Buffenbarger and the more
than 160,000 active and retired airline workers in every job
classification including flight attendants, ramp service
workers, mechanics, customer service agents, reservation agents
and office employees.
It is my firm belief and the belief of many others that
some airline executives are using a crisis of their own making
to justify the establishment of what can only be called a
monopoly. Some airlines are consistently asking the Government
for relief, begging the courts to abrogate labor contracts and
forcing the Government to absorb its pension obligations.
History has shown that poorly managed airlines cannot
operate without Government assistance. These airlines
repeatedly appeal to the Government for bailouts. They abuse
the bankruptcy laws to decimate shareholder values or pay
millions of dollars in professional fees. This is tantamount to
killing the patient, so the undertaker can make money and then
having a rebirth and killing the patient all over again.
Hundreds of millions of dollars were spent in the last
several years in airline bankruptcies for professionals, for
lawyers, for economists while the airline employees lost
hundreds of millions of dollars in benefits, wages and health
insurance.
Airline executives continually argue that they must
consolidate and reduce air miles, air seat miles. Well, Mr.
Chairman and other Members of the Committee, Pan American is
gone. TWA is gone. People's Express came and left. Ozark is
gone. Braniff is gone. Still, they beg for more consolidation
in the industry.
We have put together a committee of airline professionals,
lawyers and economists, and we have determined that the merger
of Northwest Airlines and Delta Airlines would not be in the
best interest of the flying public, the cities or States that
they serve or the employees that work at these airlines or the
airline support employees.
We have determined that, based on published reports, United
Airlines is working very closely with U.S. Airways and will
probably announce a merger in the next couple of weeks.
Continental Airlines has been talked about here by airline
executives who have said they want to stand alone. Published
reports indicate they are in the process of forming an alliance
with American Airlines which will mean, as many of you have
stated, three megacarriers in this Country, running the smaller
carriers out of business.
As you have seen, they talk about the airlines that no
longer exist or recently filed for Chapter 11. These are the
smaller carriers that are unable to compete because all the
industry consolidation has already taken place.
They indicate the high oil prices are the reason for this
merger. If, as they say, we are going to have an end to end
merger and all the hubs and all the buildings and all the
people are going to stay, then the high oil prices are not
going to come down. They are only going to double.
I would like to remind this Committee that it was the
Congress that provided the Pension Protection Act for Delta
Airlines and for Northwest Airlines which means they have $7.5
billion combined under-funded pension liabilities and an
elongated period of time to pay off these liabilities.
As Congressman Holmes indicated, if this massive airline is
put together takes, it three to five years to put a maintenance
program together. There are massive problems in integrating an
airline.
I, myself, come from TWA. Again, I have lost my pension,
and my fellow coworkers lost their pensions. They lost their
health insurance, and they lost their jobs based on promises,
as you indicated, Mr. Chairman, that were made in this very
same room.
If this massive airline, we are talking about an airline
that would have 40 billion in debt, inclusive of that $7.5
billion of pension obligations. Those pension obligations, if
that mega-airline were to go into Chapter 11, would fall to the
Pension Protection Guarantee Corporation which would mean that
the people of the United States would either have to fund this
under-funded PBGC to the tune of $7.5 billion in addition to
the under-funding that is already there from United Airlines
and U.S. Airways that have already dumped their pensions onto
the quasi-Federal Government agency.
If they were unable to pay that through the PBGC, then the
cities and States of the United States, the citizens, would
have to pay to put people on welfare because that is where
people will go without their pensions, without their health
insurance.
So this is another Government bail-out. This is just
killing the patient again in order to line the pockets of
executives to the tune of 15 to 30 million dollars in addition
to all the other executives from the major carriers that will
soon announce, as published reports, additional airline
mergers.
We believe, as we have urged since 9/11, that we need a
format. We need an airline summit. We have requested that from
the airline management. We think we need labor, management and
Government to sit in a room with the Department of
Transportation, if you will, and come up with a real plan to
fix the problems in the industry.
You must remember that Southwest Airlines, Continental
Airlines and American Airlines, they are now operating under
the same situation as the other carriers, but they have not
come here looking for merger relief. They are looking for the
bailout that Northwest and Delta are looking for. If that is
approved, then the others must follow.
As Chairman Oberstar indicated, you must look at this
process as the entire industry. You cannot look at it, as one
of the witnesses, in isolation because it is already publicly
reported what is going to happen in the industry. It is not a
secret, and it will happen very quickly.
Again, it will be detrimental to the industry because it
will take a very long time to put this process together and a
lot of things can happen in the interim period.
So, in sum, we urge the Congress and we thank the Congress
for voting to stop putting oil into the strategic oil reserves.
We ask you to go further and ask President Bush to turn the
spigot on and reduce the cost of oil to all of America. We ask
for a moratorium on all airline mergers until such time as we
can sit down--management, labor and Government--sit down in a
format that we can resolve the industry problems.
We are talking to many people. We are talking to the former
CEO of American Airlines, Robert Crandall. We don't agree with
everything he says, but in a newspaper editorial he clearly
stated this merger is not going to fix the problem.
The only thing that may fix the problem is some small,
slight re-regulation because you cannot continue to sell seats
for less than what it costs to produce that seat and intend to
stay in business.
Thank you, Mr. Chairman. I will be here to answer any
questions that you may have.
Mr. Costello. Mr. Roach, thank you for your testimony. I
share many of the concerns that you just expressed, concerning
not only front line employees but a number of other issues that
you touched on.
Captain Stevens, you mentioned in your testimony that much
of the synergy and the economic benefits that management is
indicating that they will achieve through this merger will not
be there unless there is a common contract that includes
Northwest Airlines. I wonder if you might elaborate on that.
Mr. Stevens. I thought it was interesting that Mr. Anderson
mentioned six different synergies, all of them under $200
million.
Mr. Steenland mentioned the biggest item being cross-
fleeting. You will remember earlier in their testimony, they
referenced $2 billion in savings. Well, if you take those six
out, there's about a billion left over. Somewhere in that
billion is where they are expecting in their business plan to
achieve much of their efficiency, and that would be the cross-
fleeting.
In the original contract that was negotiated between the
Delta pilots and the Northwest pilots, that was accomplished in
a joint contract that was achieved in February. Now they
recognize that by only having one of the partners, they can
only achieve in the cross-fleeting perhaps a quarter to a third
of what they could do in a joint contract.
So, if this is the direction that the management chooses to
go, we feel that in all likelihood costs are going to be higher
than they expect, and so they should take advantage of every
possibility to generate greater revenue to have the greatest
possibility for this merger to succeed. The best way to
accomplish that would be with a joint contract between the
Delta and the Northwest pilots and Delta management.
Mr. Costello. Ms. Friend, you referred in your testimony to
efforts by Northwest management to outsource flight attendants'
jobs to foreign nationals. I want to ask you to talk a little
bit about that and also some of the concerns that you raise
associated with the organizing drive for representation by
Delta flight attendants, which Mr. Lipinski raised earlier. He
raised it just prior to me having the opportunity to raise it.
So I wonder if you would comment on both.
Ms. Friend. Right. Well, obviously, the outsourcing issue
is a big concern and becomes a greater concern if we are
looking at the possibility of this combined group of flight
attendants having no collective bargaining rights.
During the bankruptcy, during the Northwest bankruptcy,
when we were negotiating with Northwest management for the
concessionaire agreement, one of the things that they put on
the table was the ability to staff all of their international
flights with non-U.S. citizens. Their proposal was that the
existing Northwest workforce would retain domestic flying, only
point to point within the United States, and anything that left
the United States and returned would be staffed by non-U.S.
citizens.
We have some experience with that in some of our flight
attendant contracts, and we know what they do there. We have
isolated usage of what we refer to as foreign nationals in
specific parts of the world, particularly in the Pacific but
nothing that ever touches the U.S.
We know what they do. They chase, obviously, the cheapest
labor that they can find. So I mean that just adds to our
urgency of this group of flight attendance retaining a
collective bargaining agreement so that we can preserve those
jobs.
When we filed for the election under the National Mediation
Board rules for an election, the day we filed, Delta management
put up in their offices, their in-flight offices where the
flight attendants have to go to check in before their flight.
They practically wallpapered these areas with anti-AFA, anti-
union posters.
As Mr. Lipinski referred to it, under the Mediation Board
Rules, if you don't cast a ballot, it is a no vote. In order
for these flight attendants to form a union, 50 percent plus 1
of them have to actually cast a vote.
So the management campaign is when you get your ballot,
don't vote. Rip it up because then that becomes a no vote. So
that is the theme of their campaign. As I said, they
practically wallpapered their in-flight offices with this
message.
They produced a DVD video from Mr. Anderson. That is what
Mr. Lipinski has a copy. That is what he referred to, where Mr.
Anderson talks about all the bad things that will happen to you
if you should join a union. It will completely destroy Delta
Airlines. He actually repeats falsehoods about his interaction
with the flight attendant union at Northwest Airlines for the
period that he alleges he was there.
Because they give lip service to this idea that the flight
attendants who are supporting forming a union are supposed to
have equal access to talk to their coworkers, they have
isolated them into what they define as the non-work area.
Now, the non-work area continues to shrink. In our
estimation, our workplace is the aircraft, but they have
defined the work area as every place except a kitchen area that
is attached to some of these in-flight areas. Even if our
flight attendant supporters are in this very narrow area and
they happen to be wearing a tee-shirt because our slogan for
this campaign is Pro-Delta, Pro-AFA.
So if the flight attendant supporter is wearing a Pro-
Delta, Pro-AFA tee-shirt, they are not allowed to leave this
narrowly defined non-work area, wearing that tee-shirt in spite
of the fact that the rest of the area is plastered with these
anti-union don't vote. It is massive voter suppression. It is.
We were told when this merger was first announced. Our
Northwest leadership contacted Northwest management and said we
need to sit down and talk about this merger. We were told by
Northwest management, there is no place for you to discuss this
merger because it is the intent of the people who will manage
the new Delta Airlines that when the dust settles you will have
no union.
They are true to their word. They are going to try to stop
it here. Then if we have to go through the second phase with
the combined group, it will be just more of the same.
Rather disingenuously, Mr. Anderson answers the questions
about the DVD, saying, well, we have a lot of passionate flight
attendants on both sides.
I find it really very difficult to believe that these so-
called passionate flight attendants who are anti-union were
allowed to use his name and his photograph without his
permission.
Mr. Costello. The Chair thanks you and now recognizes the
Ranking Member, Mr. Petri.
Mr. Petri. Thank you.
We apologize a little bit for the length of the hearing,
but it is an important subject, and we appreciate your taking
the effort to stay and participate and for the statements that
you and your organizations prepared for this occasion.
I just want to say as a member of the traveling public, I
appreciate the dedication and seriousness with which nearly all
of your members take their jobs. I know there has been a lot of
stress, and it has been difficult work for a whole variety of
reasons, and people are sometimes cranky, but my own experience
has been actually getting top-flight service.
I just wonder if you could answer two questions. One, there
have been articles about whether the merger would succeed or
not based on and doubting that it would because of what were
described as quite different employee cultures between the two
organizations.
All of you probably have been through various mergers.
There have been a lot in the airline industry. If you have been
with either of your companies for any number of years, you have
experienced some. Would you care to comment on that?
Is it possible that will be an impediment or is it
something that is a concern but can be overcome?
The second one is I think the chief executives testified
that they were hoping after the merger to unite the pay
schedules and benefits at the higher of the two levels--at
least that is what I heard--between Delta and Northwest.
Obviously, the airline pilots and probably the mechanics,
you have union discussions to figure out how you are going to
be working on that as well as dealing with the companies, but I
wonder if you could comment on that as well. That sounded like
a pretty good outreach to me.
Mr. Moak. Congressman Petri, I would like to start with
that. I believe that this merger is going to be very successful
and, not only that, I believe it must be successful and that we
are going to have to work together. We are going to have to all
come together and say, what can we do to make this work?
You hit the nail on the head early on when you said nine
airlines have gone into bankruptcy or liquidated over the last
few months. Those airlines, those employees of those airlines
are not going to get a hearing here in order to talk about a
potential merger. They have lost their jobs. They will not be
here.
I, myself, have an interesting experience as a Delta
employee because I was up here last year in January, leading an
effort to fight the hostile takeover by U.S. Airways of Delta
Airlines. That was a Wall Street transaction, and they had no
shame. They came out of the gate and what they said to the
Delta employees is 10,000 Delta employees would be on the
street and 1,000 pilots would lose their jobs.
At that hearing, I agreed with Mr. Roach. That was the
wrong merger at the wrong time.
But right now, we are faced with all the different events
we have talked about, whether it is oil, the economy or
competing with flag carriers in Europe. Lufthansa alone is
worth more. The German-flag carrier is worth more than all the
legacy airlines put together.
So, not only are we going to make this work, we must make
it work or we won't be at another hearing ever again.
As far as Captain Stevens and the Northwest pilots, we were
working together. We met today. We will be meeting after this
hearing is over, and we will get this done because our members
demand it and it is important for the airline as we move
forward.
The U.S. Air merger, one more time in contrast, at that
time, when they were trying to do the hostile takeover of Delta
Airlines, they had not completed that merger. They have still
not completed that merger today.
So it may be a little contentious right now, okay, but the
merger was just announced three weeks ago. We have been working
three months on it, and I am confident we are going to get the
job done because we need to get it done. Culture aside, we will
get it done.
Mr. Roach. Can I comment on that?
I respect the captain and what he said. I have been in this
industry 33 years. I have never seen an airline merger work
yet.
History tells us what is going to happen here. Northwest
and Republic, big culture clash, okay. Very recently, U.S.
Airways and America West, they are still fighting down there.
It has gotten to the point where employees couldn't even get
along with each, that they left the union of their own accord.
These are serious problems. You just can't put two airlines
together. They have two different cultures. They have two
different ways of working.
We work on different aircraft. We service the passengers
different, and there are different types of management. There
is a whole history and culture of working with a company or an
industry.
It takes, in the best of conditions, three to five years to
put an airline merger together because you have a maintenance
program, you have aircraft that you have to either get rid of
or downsize, retrain pilots, retrain mechanics. It is a whole
host of things that happen.
With all the good intentions, we were at the Senate
hearing, and Mr. Anderson and Mr. Steenland admitted that all
these guarantees don't mean anything because they are not
likely to happen.
If somebody asks, could you put that in writing, you never
got an answer to that because they said it is not going to
happen. That is what they told the Senate side. It is not going
to happen because we can't guarantee anything because anything
is liable to happen.
So all these promises that are being made and how wonderful
everybody wants to do this and I am quite sure with all good
intentions. But, Congressman Petri, you are right. There is a
cultural difference.
There is a cultural difference, and U.S. Airways and
America West have been at it for over two and a half years.
There are lots of internal problems. There are internal
problems with employees, internal problems with meshing as to
flight schedules. They are still operating as two separate
airlines. So it is a problem.
To diminish the problems that are going to happen would
seriously take away from the process. There is going to be
problems. People can work as hard as they want. I don't think
people are not. There are going to be problems.
Our view of the world is this is not in the best interest
of the American people, period. End of story.
Mr. Costello. The Chair thanks you, Mr. Roach.
Let me announce that we have a series of three votes going
on the floor. We have about three minutes to get over for the
first vote, two five-minute votes after that. So I would ask
the panel to return, and we will recess.
Mr. Petri. Mr. Chairman?
Mr. Costello. Yes, Mr. Petri.
Mr. Petri. One of the additional witnesses was hoping to
say something. If they do it when they come back, would that be
possible?
Mr. Costello. On this panel?
Mr. Petri. Are we done with this panel?
Mr. Costello. No.
Mr. Petri. Yes. I think Captain Stevens has something.
Mr. Costello. Quickly, if you will add what you need to
add.
Mr. Stevens. Yes, Mr. Chairman.
Unfortunately, because of the airline industry, I did
participate on the unsecured creditors committee from 2006
through 2007, attending all those meetings and seeing the
challenges faced by all the different groups that Captain Moak
also referenced in this challenging environment.
I also was of the belief and again expressing it to my
executive board of the benefits of a cooperative merger
starting last December. I do find it somewhat ironic that also
suggested for all employees at Northwest that they emerge
similar to management with an equity program to get everybody
pulling in the same direction starting in February of 2007.
Fortunately, it is now I have the irony of seeing in the
announcement statement for the merger with Delta, the only
group that is excluded from equity being contemplated are the
Northwest pilots. I find that frustrating along with the----
Mr. Costello. I hate to interrupt you, but we have a minute
and 50 seconds to get over to the floor.
Mr. Stevens. I have a final point, and I am done.
Mr. Costello. I will ask the panel to come back and be
ready to answer questions at 7:15. So the Subcommittee will
recess and ask you to be back at 7:15. Thank you.
[Recess.]
Mr. Costello. The Subcommittee will come to order.
The Chair, at this time, will recognize the gentleman from
Wisconsin, Mr. Kagen.
Mr. Kagen. Thank you, Mr. Chairman, for holding this
Committee hearing and thank you to everyone for appearing. I
don't know how many hours ago you began to be involved in this
Committee, but this is part of the listening process and part
of oversight and asking questions.
So my question has to do with the three things having to do
with the overhead of the companies that you are employed by. As
I understand the transportation industry with regard to Delta
and Northwest, they have some major areas of cost involved in
people/employees, their fuel costs and their equipment. So, of
these three categories, as they seek to consolidate and merge
their organizations, which of these three do you think that
they can control?
Can they control their fuel cost? Unlikely.
Will the merger in some fashion lower their fuel cost? I
think not.
Will it lower their cost for their equipment? I doubt it,
not for their acquisition cost of new planes and new engines
and new equipment that goes onboard.
So the only area left to really cut costs is going to be
for the employees and the people, and that is really where the
economy of scale comes in, in my mind.
When I first began to take lessons in business, it was when
I was a little kid watching television on Saturday night. There
was Gussman Presents. It was a movie. He would present
different movies. Mr. Gussman, he sold automobiles, and he said
there is quality, price and service.
On these three aspects of quality, price and service, the
question I have for all of you is I would like you to address
the areas that you believe the merger will improve upon
efficiency of scale either by lowering the cost of the fuel,
the equipment or the cost for employees and also what effects
this merger will have on the quality of the service that you
are able to offer.
Ms. Friend. I will go first because I think my answer will
probably be the briefest since we are essentially locked out of
this process.
Our Delta flight attendants have no union representation,
and our Northwest flight attendants, whom we represent, have
been denied access to any information or any discussions about
the merger because, as I said in my testimony, it is the
intention of the management of the new Delta that when the
merger is complete the flight attendants will have no union. So
we don't have, other than what we hear them say publicly, which
we are extremely skeptical of.
I will say in response to the question that was asked just
before the last recess that, yes, however this comes together,
whether it comes together with both flight attendants having a
voice through their union or with the flight attendants having
no voice, there will be cultural differences to work through. I
believe that they can be worked through under normal
circumstances.
But I have to say that if you rip away the collective
bargaining rights of 9,000 of those flight attendants that they
have had for more than 60 years. These are flight attendants
who have never, ever worked without a collective bargaining
agreement. The concept is completely foreign to them.
If you rip up their contract in front of them and say now,
go and be nice to the Delta flight attendants, I think that is
going to be an extremely protracted integration process. It
will be extraordinarily difficult.
Mr. Roach. It is employees. Clearly, putting these two
airlines together, the purpose is to reduce the overhead, the
labor costs.
They have admitted on CNBC, and they admitted last week at
the Senate that the reservation agents will be reduced. They
didn't say that today, but they have said that before. They
consider them back room, those 1,000 employees, office and
clerical people who will be reduced.
I don't know how, what the work rules are for flight
attendants and pilots, but obviously there is some issue with
seniority.
Regardless of what they say and we have heard from industry
analyst, Mr. Nadelle, last week, there is only one way for this
to cut costs, and that is to reduce employees. That will reduce
service because both of these airlines have cut employees to
the bone.
You go there and you see a machine, and there is not enough
people to work it, not enough people to load the planes, not
enough people taking reservations. It is bad for the employees
which will be bad for customer service, but fuel is not going
to go down and putting these two airlines together is not going
to make it any cheaper to operate.
Fares need to be what they need to be. That is the real
issue.
Mr. Moak. I say this is good for employees. It is good for
our communities, and it is good for the traveling public.
I do understand the cultural issues slightly. I believe
airline employees, mechanics, flight attendants, gate agents,
reservation people, on and on and on, are all required to work
together to make an airline work. An airline is a very
complicated and complex operation, and I believe that these
people are intelligent, and they are going to be able to work
together.
At Delta, we have a long, proud history of being formed by
four mergers. We had the CNS. We had the Northeast merger of
1972. We had the Western merger of 1987, I believe. We had the
Pan Am merger of 1990.
In every one of those mergers, we took care of our people.
We moved forward, okay, and we need to move forward because
customer service in the operation is what is going to make the
airline profitable.
Mr. Kagen. So, if I understand you, Captain, you are saying
that by reducing the number of employees, that makes life
better for the consumer and that by reducing the pay and the
negotiation ability of the employees, somehow that makes life
better for them.
Isn't it really the history of the labor movement, that the
labor movement by collective bargaining, by having effective
collective bargaining, didn't that raise the vote of everybody?
Didn't it give us the middle class?
Mr. Moak. Well, Congressman, I beg to differ. That is not
what I said.
What I am saying is this: I am not going to jump on the
management bandwagon or apologize for things that other
managements have done. But if you are going to vilify every
single management team, eventually you are going to have a
management team that arrives that is trying to work through the
problems. This is a difficult time, difficult problems.
Now through the collective bargaining process, okay, the
Delta pilots modified their contract. However, we worked
together with the Northwest pilots over the last three months
in what was a first ever attempt to negotiate a contract before
a merger was announced. We weren't successful, but we are not
giving up.
We are years ahead of everybody else. We will get it done.
I am confident of it.
We raised the bar for the Delta pilots over the next few
years. It is approximately a 20 percent pay raise. It increases
the retirement for the Delta pilots, for the Northwest pilots,
and I am confident we will get it done.
I will say it time and time again. I am working with
Captain Stevens. We welcome them, and we are going to get it
done.
But for some of his equipment, some of his pilots, it will
be a 35 percent pay raise over the life of the agreement. That
is the right thing to do.
As far as equity, there is equity for all the employees. I
know we haven't completed the negotiation with Captain Stevens
and the Delta management, but I am going to stand here. I am
sitting here, telling you that I believe there is equity for
the Northwest pilots also. There has to be to make this work.
So I think the collective bargaining process. You are
seeing it work. We are working together. We are going to get it
done.
Mr. Kagen. What I haven't seen is it work for the consumer
today as they get bumped off of one flight because of maybe
overweight or the seats just aren't available or the seat is
double-booked. They have squeezed down the number of seats
available for the existing clientele that they have. I haven't
seen it work.
You get to see it from the cockpit. I get to see it from
coming in off the chairs and from people that talk to me.
Mr. Costello. The Chair thanks the gentleman from Wisconsin
and let me comment, if I can.
Captain Moak, you indicated that you are going to vilify
every management team. I don't think it is anyone's intent to
vilify a management team here. It is our intent to recognize
the facts, and the fact is that when you look at the Federal
budget and you try and balance the Federal budget or do
something about it, the lion's share of the outlays are for
entitlement programs.
When you look at the aviation industry and you look at
Delta Airlines or Northwest Airlines or any legacy carrier or,
for that matter, Southwest or JetBlue, the vast majority of the
outlays are in fuel and in labor. We heard testimony today, and
everyone recognizes that there is not much that management can
do about the price of barrel of oil or jet fuel. It is probably
going to continue to increase.
So where do you get your cost savings? It is in labor. I
think Mr. Roach has indicated that the history of mergers in
the past paints a pretty skeptical picture.
I think you or anyone else would have to say you probably
have reason to be skeptical when we have heard time and time
again that we are going to keep the employees, we are going to
maintain our hubs, people are going to be able to keep their
pensions when, in fact, that has not been the case. So, just an
observation and a comment.
With that, the Chair would recognize the Chairman of the
Full Committee, Chairman Oberstar.
Mr. Oberstar. I can only say amen to your observations, Mr.
Chairman.
Captain Moak, Captain Stevens, do you know whether the
merger application has been filed with the Department of
Justice yet?
Mr. Stevens. I believe it has, Mr. Chairman.
Mr. Oberstar. You believe it has?
Mr. Stevens. Yes.
Mr. Oberstar. Do you know, Captain Moak, whether it has
been?
Mr. Moak. I also believe it has.
Mr. Oberstar. The Justice Department, under their rules,
has been saying to us that they are not at liberty to divulge
whether that has occurred or not. It is important to know where
all these things stand.
Do you think, Captain Moak, Captain Stevens, that Northwest
and Delta squeezed out all the excess cost that was reasonable
to squeeze out during bankruptcy?
Mr. Moak. Chairman Oberstar, it hasn't really been brought
up today, but both of us were involved in our bankruptcies. We
both went into bankruptcy at the same time, same day, same
court in Manhattan.
Through efforts by you and many people up here, the
pensions were preserved of the employees of Northwest and of
Delta except for one group, the Delta pilots. I believe
everything has been squeezed out of the Northwest employees and
the Delta employees.
As we move forward, which I guess is more than you are
asking me, I truly believe that this is a one plus one equals
three merger.
Mr. Oberstar. At any time during the bankruptcy
proceedings, was there any suggestion, any hint of a merger
with another carrier?
Mr. Stevens. Mr. Chairman, I think there were some
considerations, and I do feel during the bankruptcy, to your
original question, it was more than what was necessary was
squeezed out of all of the Northwest employees. It was a very
frustrating experience to be part of. I attended all of the
meetings after my election. It has been over a year.
I also testified in bankruptcy court. I also appealed to
Mr. Steenland at the end of 2006 that he had gotten more than
he needed and he needed to remotivate the employees and
appealed on behalf of the flight attendants.
I then, in February, also asked him, besides a management
equity plan that was grossly outsized, to have an employee
equity to motivate and to reward employees. That fell on deaf
ears in February of 2007.
We then came out of bankruptcy, and now we face quite a
challenge.
It is true what Captain Moak says, that we did work hard
here to try to come to a conclusion of a cooperative merger. It
seems to be, though, that Mr. Anderson has brought the style
that was learned at Northwest Airlines, and now we are omitted
from equity. With great irony, we are the proponents of equity
for all employees. We are left out.
Also now, Mr. Anderson has taken on a strategy of reaching
pay parity for the Northwest pilots over a multi-year period.
We do have the support of the Delta pilots in opposing that as
they published, but the idea that that strategy going forward
is some inclination of perhaps how they think it will answer.
I think to answer the other Congressman's question, that
creates the question of increasing costs. Costs will go up, and
they do need to have a joint contract in order to have all the
synergies. The top line has to increase. Costs have to go down
if you are going to have an airline that works. It is basic
economics as we both learned, apparently.
Mr. Oberstar. Are your respective pension plans the same
before the Northwest plan was frozen at the same period of time
as the Delta plan?
Were those contributory pensions or are they 100 percent
company contributed pensions?
Mr. Stevens. We still have our DB plan, a traditional
pension plan.
Mr. Oberstar. Defined benefit.
Mr. Stevens. Defined benefit frozen, and then we also have
a smaller defined contribution than Delta does.
Mr. Oberstar. Yes, going forward. Does Delta have the same
structure?
Mr. Moak. No. We had a defined benefit plan going into
bankruptcy.
Mr. Oberstar. Was that 100 percent company contributed?
Mr. Moak. Absolutely.
Mr. Oberstar. Yes, okay.
Now do you know what happens in the event of a liquidation
bankruptcy?
Mr. Moak. Absolutely.
Mr. Oberstar. What is your standing?
Mr. Moak. With PBGC?
Mr. Oberstar. Yes.
Mr. Moak. We have been meeting with the PBGC to get a
valuation on our pension.
Mr. Oberstar. I will answer my own question. You are
unsecured creditors.
Mr. Moak. Absolutely.
Mr. Oberstar. Unsecured creditors, so with the machinists,
so with the flight attendants. We have been through that with
the steel industry and been through that in other sectors as
well where there are 100 percent company contributed pensions.
In the event of a bigger bankruptcy, you get nothing except
that little bit that is left on the table. So, think very
carefully about where you are headed with this proposition.
Now let me ask Captain Moak first. How many aircraft do you
think or might you speculate that are likely to be retired in
the new Delta?
Mr. Moak. Chairman Oberstar, I believe like I said earlier,
that although there are announced domestic capacity drawdowns
related to the price of fuel, in the press announcement of the
new global Delta, there are 20 additional wide body planes that
will be coming and there are many markets that will be added. I
believe that.
Mr. Oberstar. Captain, if you believe that, then I have a
bridge I would like you to buy, if you believe a press release
issued by your company. They can't tell you on their sacred
oath and word and trust, and you have to read it in press
release.
Mr. Moak. Sir, that is all I can.
Mr. Oberstar. Captain Stevens, let me ask you what you
think is likely to happen. How many aircraft?
They aren't going to continue with this fleet as it stands.
How many DC-9s? How many 737s? How many?
Go deeper into your regional carrier fleet. How many of
those below 50 passenger capacity aircraft are likely to be
retired?
Mr. Stevens. Below 50, they will be gone.
The aircraft larger is a more difficult question. It
depends on the routing and what the yields are because, for
example, our DC-9s don't have any current lease payments. So it
will be very dependent.
If fuel continues to rise, where no business plan works,
clearly many of them will be parked. In the other scenario, if
fuel moderates, there is a future for the 9.
My bigger frustration is that Mr. Steenland didn't follow
our advice not today but over a year ago in putting in a risk
management policy for the price of fuel. Everybody argues that
the cost of fuel is extremely expensive to hedge when, in fact,
by using a method of collars, it is a very inexpensive
insurance process. It would be like not having health insurance
for any of us, and that is by far the greater problem that we
have.
If you look at Mr. Kelly's success at Southwest, it isn't
great management of the airline. It isn't a single airplane. It
is that over 50 percent of the fuel is hedged at half the price
the legacy carriers are paying.
Mr. Oberstar. Well, it is surprising he didn't take that
advice because when Mr. Anderson was at Northwest, he and Mr.
Steenland both combined on a hedge proposition that made $200
million profit for the airline.
Captain Moak, have you had a little time to think about
that question of retiring of aircraft?
Mr. Moak. Absolutely, sir. That was a public announcement.
As you know, I am under a confidentiality agreement. I can't
talk about private matters.
Mr. Oberstar. I am asking you to speculate.
Mr. Moak. Well, I speculate that the answer to the question
is fuel. The current fuel hedge program at Delta is worth $800
million. They have 25 percent of their fuel hedged.
However, like you said and you have been very clear with
this, if fuel goes up, there is a real risk of planes being
parked, but that is whether you are merged or you are a
standalone carrier. The same thing would happen.
Mr. Oberstar. I would suspect that in the larger carriers,
you have at least 100, maybe more, aircraft parked.
You are not going to continue flying the DC-9 fuel-eaters.
You are not going to continue, in the regionals, the smaller
capacity aircraft. I don't know what the age of the 737 fleet
at Delta is. At least, I don't remember it, but the older
versions will be phased out. That is about 1,000 jobs.
Now, before I go to Mr. Roach and Ms. Friend, do the
contracts with Delta's and Northwest's regional carrier pilots
differ from those with the network carrier? Are those different
tier contracts?
Mr. Stevens. If I understand the question correctly, yes,
the main line.
Mr. Oberstar. Pay scales?
Mr. Stevens. The pay scale is higher on the main line, and
we have a very good relationship with Compass, Mesaba and
Pinnacle, and we have flow-through agreements both with Compass
and Mesaba because they aspire to join the main line at
Northwest.
Mr. Oberstar. Can those pilots migrate up the line?
Mr. Stevens. Yes, sir, they can contractually.
Mr. Oberstar. What about Delta?
Mr. Moak. At Delta, we don't have a flow-through, but in
the last year we have hired 650 pilots. We just stopped hiring.
Mr. Oberstar. But the seniority lists are very different
between Northwest and Delta, are they not?
Mr. Stevens. Because of the bankruptcy and we are in a
unique circumstance, the pilots at Northwest are older than the
pilots at Delta.
Mr. Oberstar. More senior, don't say older.
Mr. Stevens. Well, I have debate on that from my
counterpart, whereas many Delta pilots chose early retirement
to get part of their DB plan, so they didn't become unsecured
creditors as you pointed out.
Mr. Oberstar. Mr. Roach, with the outsourced maintenance
that is rampant within the industry except for American
Airlines which still does their maintenance in-house, how do
you see the playing out of the conduct of maintenance of
aircraft in a merged carrier, a vastly larger carrier, against
the backdrop of the hearings this Committee held just a couple
of weeks ago?
Mr. Roach. Well, Northwest subcontracts the majority of
their maintenance work, a lot of it overseas, and I believe
Delta subcontracts a good portion of their work. You can see,
based on saving money, that a great deal more work will be
subcontracted out. Probably they will send planes to Singapore
and all over the world to be maintained.
On the Northwest side, which they have an independent
organization, they really have no restriction on this, and
there is no restrictions on Delta sending this work out. So you
can see a lot more work being subcontracted out.
Mr. Oberstar. Would there be conflicts with the
multiplicity of providers? There are a number of maintenance
providers, MROs, in the U.S. for these carriers.
Mr. Roach. Right. The problem is when you start talking
about a merger. You have to integrate a maintenance plan. They
have two different maintenance plans. They have two sets of
aircraft, two different aircraft, types of aircraft.
So the FAA, they have to go in and reorganize an entire
maintenance plan and put that plan together. Until that is
done, the mechanics from one carrier can't work on the planes
from another carrier. They have to redo the maintenance
manuals. This is a three to five-year process.
These planes have to be maintained separately or maintained
by somebody who has been trained on that particular plane. DC-9
aircraft is about as old as I am, and they require a lot of
maintenance. These older aircraft require a lot of maintenance.
I would just like to answer one question you said before to
the pilots. You said, were there discussion during the
bankruptcy about this merger. There were discussions.
I think I have some documents--these weren't in
confidential meetings--that I would like to give to the
Chairman, that there were some discussions about Northwest and
Delta merging during the bankruptcy.
It was a Mr. Checchi who was a former executive of
Northwest. He was going around with a current member of the
board of directors of Delta Airlines, Mickey Foret, trying to
sell this Northwest-Delta deal. We didn't want anything to do
with Mr. Checchi or Mr. Foret or anybody else, and that is what
we told them, but this was shopped before.
I am not sure if they should have discussed this with the
bankruptcy court. These two companies were in bankruptcy,
talking about mergers, and the board of directors of Northwest
Airlines sanctioned these discussions.
If I have those documents, I will make sure that you get
them.
Mr. Oberstar. I invite you to submit those documents to the
Committee. It is vitally important.
I asked the question for that very specific reason. I knew
of contacts during that period of time, and they were not made
public. I had no documentation about it.
Mr. Roach. I believe I still have those documents. We will
check tomorrow and, if I do, we will give them to you.
Mr. Moak. Chairman Oberstar, can I weigh in on that also?
Mr. Oberstar. Of course.
Mr. Moak. During bankruptcy, as I said a little bit
earlier, Delta was in bankruptcy when a hostile takeover was
made by U.S. Air of Delta Airlines. It was a very public and a
very painful process.
At the end of the day, $10.7 billion was offered to the
creditors committee. The creditors committee ultimately turned
that down because they didn't think they would get their money
in a timely fashion. If that would have happened, Delta, I
believe, would have still been in bankruptcy today. That fell
apart January 30th of 2006.
Mr. Oberstar. Well, Ms. Friend, the merger of flight
attendant lists would be a nightmare, wouldn't it?
Ms. Friend. No. I guess it depends on whether or not the
Delta flight attendants are successful in forming a union. If
they are successful in this process that they are engaged in
right now, and we will know that on the 28th of this month,
then they will become members of AFA.
Our AFA policy is when two AFA-represented airlines merge,
we put those seniority lists together by date of hire. There is
no conflict. It is done, and we hold the seniority list until
we have a single contract.
Mr. Oberstar. But absent that, absent a successful vote?
Ms. Friend. If they are not successful, then we are going
to rely on the new legislation that Senator McCaskill helped us
with in the Senate and that you were helpful with here which
says that if the two groups of flight attendants--in this case,
workers--but two groups of flight attendants can agree on how
to merge and to integrate their seniority lists, then it will
be subject to arbitration.
I can pretty much guarantee you that if the Delta flight
attendants are still represented by their management, our
Northwest flight attendants will come to the bargaining table
and propose date of hire. I don't know what the Delta flight
attendants, through their management, will propose, but it
won't be date of hire. And so, we will end up with an
arbitrated list.
Mr. Oberstar. Chairmen and panelists, the information that
you have provided us and the testimony is not going to be
considered by the Justice Department in reviewing a merger
proposal. That is why we have you at the table. That is why we
have your testimony here.
We will see to it, though, that the Justice Department has
this information as a matter of record.
Thank you for your testimony.
Mr. Costello. Thank you, Mr. Chairman.
Let me again thank our panelists for being here today. It
has been a long day. We appreciate your patience and your
contribution to this hearing. So, thank you.
I would ask the last panel, the fourth panel and final
panel to please come forward, and I will introduce you as you
are coming up to the witness table.
Mr. Kevin Mitchell, who is the Chairman of the Business
Travel Coalition; Dr. Aaron Gellman who is a Professor at the
Transportation Center, Northwest University; Mr. Hubert Horan,
an Aviation Analyst and Consultant; Mr. Albert Foer, President,
the American Antitrust Institute; Mr. Philip Baggaley, Managing
Director, Corporate and Government Ratings, Standard and Poor's
Rating Services; and Mr. Raymond Neidl who is an Analyst with
Calyon Securities. So, if you will please take your seat at the
witness table.
The witnesses should be aware that your entire statement
will appear in the record. We would ask you to summarize your
statement, and we will begin with Mr. Mitchell. If you are
prepared to proceed, we will begin with you.
TESTIMONY OF KEVIN MITCHELL, CHAIRMAN, BUSINESS TRAVEL
COALITION; AARON J. GELLMAN, PH.D., PROFESSOR, TRANSPORTATION
CENTER, NORTHWESTERN UNIVERSITY; HUBERT HORAN, AVIATION ANALYST
AND CONSULTANT; ALBERT A. FOER, PRESIDENT, THE AMERICAN
ANTITRUST INSTITUTE; PHILIP BAGGALEY, MANAGING DIRECTOR,
CORPORATE AND GOVERNMENT RATINGS, STANDARD AND POOR'S RATING
SERVICES; RAYMOND NEIDL, ANALYST, CALYON SECURITIES
Mr. Mitchell. Thank you. Thank you, Mr. Chairman and
Members of the Committee for requesting the Business Travel
Coalition to appear before you today.
Delta and Northwest are playing the fuel card and
suggesting that their merger is an inevitable response to high
fuel costs, but does the Delta-Northwest merger math make any
sense?
Even if we give them the undeserved benefit of the doubt
that they will achieve $1 billion in annualized synergies, many
analysts believe 75 percent of that would be captured by a new
and well-deserved pilot agreement, leaving just $250 million.
The project pro forma fuel bill for the combined carriers for
2008 will be $12 billion.
So how is it possible that $250 million will materially
help with fuel costs especially given the $1 billion in
projected up-front integration costs? The math simply does not
work.
What is more, these mergers were planned when fuel prices
were less than half of today's level. The idea that they are a
necessary response to $125 fuel is absurd.
Importantly, many energy experts predict that oil prices
will retreat to the $50 to $75 range in a relative near term
especially against a global economic slowdown. Building an
irreversible national aviation policy around the current price
of oil makes no sense.
Delta and Northwest would have you focus on just 12
overlapping nonstop markets when the real story, as far as
domestic U.S. competition is concerned, is the 550 nonstop and
one-stop markets where the combined carrier would have 50
percent market share or higher. In 139 one-stop markets, the
market shares soar past 70 percent. These are the small and
mid-size communities where capacity will surely be ripped out
and fares increased.
However, there are many not so small communities that will
be seriously harmed as well, like Nashville and Baltimore,
where in numerous city pair markets the standard DOJ measure
for competitive concentration, HHI, the index is off the
charts.
DOJ merger guidelines say that 100 HHI points increase in
highly concentrated markets, characterized as those market with
a score of 1,800 or more, establishes the presumption that the
merger is likely to create or enhance market power or
facilitate its exercise. In Nashville, for example, there are
numerous city pair markets where the HHI skyrockets to 8,000,
9,000 and nearly 10,000. Make no mistake, these are the markets
that matter.
Delta and Northwest don't want you to focus on these. All
their promises about no layoffs, no hub closures, no service
degradations will fly out the window faster than Ferris Bueller
with a stomachache on a sunny, spring school day or evening as
it were.
Delta, however, realizes HHI is the valid trip wire. In its
own presentations to Congress last year, rebuking U.S. Airways
overture with assistance from BTC, the carrier stated,
``Capacity reductions and fare increases cannot justify
mergers,'' and quoted the DOJ merger guidelines as follows:
``Cognizable efficiencies do not arise from anti-competitive
reductions in output or service.''
Delta now claims that the circumstances have changed. That
was then and this is now. Inevitable hub closures last year are
inevitable no more. But, in truth, Delta's strong reaction to
the unsolicited U.S. Airways merger that Delta found so
abhorrent and anti-competitive is a polygraph test for Congress
and regulators to study in connection with Delta-Northwest.
Despite the Delta-Northwest spin machine, there are
scenarios for airlines other than ill-considered mergers, and
some could produce far better results. If the Delta-Northwest
merger is the proverbial canary in the coal mine, as time
passes, the canary is inhaling gas and gasping for air. It is
time for policy-makers, regulators and airlines to look for
alternatives to avert disaster.
What are the choices?
Status quo: In this scenario, airlines accelerate their own
unilateral reductions of uneconomic capacity and continue to
address cost and efficiency issues.
Robust recovery: If oil prices should fall back to $80 as
many predict, because of the cost-cutting initiatives of the
past few years, the major network carriers could come out on
the other side of the current U.S. economic slowdown and
experience a robust airlines sector recovery.
Liquidations: If the proponents of the let the market work
its will truly believe what they say, then let major carriers
fail instead of propping them up with Government-sanctioned
anti-competitive combinations. Antitrust law is not meant to be
sympathetic to industries that cannot solve their own problems.
Perhaps the most authoritative voice about airline options,
however, comes from Delta itself. I quote from an Associated
Press story on February 29th: ``If Delta's consolidation talks
with Northwest fall apart, the airline isn't committed to
finding a replacement deal, said Chief Financial Officer, Ed
Bastian. When asked if Delta had a Plan B ready if the
Northwest deal fails, Bastian said, it is not a Plan B. It is a
Plan A. That is our standalone plan. Bastian said, the company
expects solid growth for the year, that the airline has a
great, great standalone plan.''
As you can see, this merger proposal will neither help
consumers nor the competitive structure of the airline
industry, and there are options.
Thank you.
Mr. Costello. The Chair thanks you.
Professor Gellman, I would like to thank you. I know that
you had a flight out this evening to try and get back, but we
appreciate your staying here and offering your testimony. Thank
you, Dr. Gellman.
Mr. Gellman. Chairman Costello, Chairman Oberstar, I am
indebted to Captain Moak, who left, because he kept saying ``we
will get it done.'' The only thing we are going to get done is
this hearing and soon.
I am Aaron Gellman, Professor at the Transportation Center
at Northwestern.
There are five reasons most often given these days for
seeking to become a single airline through merger or
acquisition:
Economies of scale which leads to reduction of costs;
Economies of scope where there will be more single-line
service to more places especially internationally;
A varied fleet that can be deployed to meet more precisely
the needs of each city-pair market;
High and mounting fuel costs; and,
Reduction in the rate of growth of the U.S. economy.
I will consider each of these reasons in turn, but before
doing so I need to state that the views I express today are my
own and do not necessarily reflect those of the university, its
faculty and staff, nor of the Transportation Center at
Northwestern with which I am principally associated.
I should also make it clear that I am not categorically
against mergers between airlines. There are amalgamations that
make economic and public policy sense. But, as I hope to
demonstrate, this is not one of them.
Let's consider economies of scale, reduction of costs. I
should not be surprised if certain non-flying jobs would be
eliminated at Northwest and Delta if they were to marry. Some
functions are surely duplicated in the two carriers, and not
all the associated people will be needed in the future if they
merge.
The challenge for a new management team is to assure that
the best, most productive persons are retained while the
others, sadly but necessarily, pay the price of displacement.
But the history of mergers generally, in this as well as other
industries, gives little comfort that this will be the case,
thus decreasing the prospective cost savings.
It is very hard to believe that surviving will be only the
best. If they are at Northwest, they are already handicapped
because there is a cost to move them. Indeed, many of them may
not want to leave the Twin Cities despite their winters.
As for other cost-related issues, there would be some
benefit from geographically broader, more efficient advertising
and marketing programs, but airport space rental and
maintenance costs are unlikely to be much reduced, given the
representations of the prospective partners not to close hubs
or cut services significantly.
The prospects regarding the pilots of the two carriers
suggest either a minimal beneficial effect on costs or a
substantial increase in costs. In the former case, it will
require the two carriers to continue operating essentially as
two airlines much as U.S. Airways has now had to do all these
many, many months since US Air and America West got married.
Many economies of scale would be sacrificed in the process
while costs attributable to pilots may well not change much.
On the other hand, in order to achieve real and full
integration of the two airlines, it will be necessary to bring
the pilot corps together through a merger of the two seniority
lists on a basis that is acceptable to both pilot groups. This
is something that U.S. Air has still not been able to
accomplish, and this is likely to be a far greater issue with
Delta and Northwest.
Assuming the new Delta can do it, this will mean a
substantial additional cost burden for some time as seniority
number rather than pilot age or experience will determine what
equipment the pilot can bid for. Given the great and perhaps
unprecedented disparity of the two airline fleets, this will
take a considerable period to implement with attendant training
and logistics costs all along the way.
Turning now to economies of scope, there are economies of
scope to be exploited in a combined carrier. Perhaps this is
why there is the pledge in this instance to retain all the hubs
now in the system. But how the economies work out from greater
scope and the value of such economies is not clear except for
the advertising and cost savings previously cited.
It should also be noted that one of the principal reasons
given for international alliances in which both carriers
already participate is that they enable airlines to gain many
economic and marketing benefits without the need to merge. In
any case, the greater profitability now to be found in the
intercontinental markets is not immutable.
Low cost carriers will enter the markets and some very
soon. Look who has ordered 787s. There are some carriers, a
few, that were charter airlines in Europe. They are not going
to use those for charters. They are going to use them to enter
the transatlantic market as low cost competitors.
One of the most amazing claims that has been made in my
view has to do with the varied fleet of aircraft that the two
airlines will present. A disparate fleet of aircraft is not
usually productive of economic benefits.
To be sure, a variety of aircraft is required to carry out
the wide range of missions of Delta and of Northwest either
individually or combined, but the number of aircraft types must
be constrained if all the benefits of economies of scale are to
be realized. This means in the present instance that either one
of the carriers has to substantially re-fleet, which will be
exceptionally costly and take considerable time or that, again,
the two carriers be operated separately with all that entails.
Note that at present the only aircraft type flown by both
carriers is the 757-200 with Pratt and Whitney power.
Otherwise, Northwest is oriented to Airbus and Delta is
exclusively Boeing in its main line fleet.
In any case, presently each airline alone appears to have a
fleet varied enough to assign aircraft types to the markets
best suited to them. Also, each carrier has regional jet and
turbo prop operations either through subsidiaries such as
Comair or through contracts, and these provide each with even
greater flexibility. Therefore, to make a virtue of an
exceptionally diversified combined fleet seems more of an
excuse than a reason to merge.
Now, let's consider, finally, high and mounting fuel costs
and a slowing economy. First, again, we have excuses being
offered as reasons. Regarding fuel, with very limited
exceptions, all U.S. airlines are faced with the same
conditions. Of course, the major exception is Southwest
hedging.
Moreover, how can the combination of these two airlines
influence either condition, either fuel price or the slowdown
of the economy? Only by reducing service can fuel costs be
lowered in the short run, and there is the representation that
this will not be pursued to any significant degree if these
carriers combine.
It is true this may have changed. Mr. Anderson earlier
stated here today that service will be reduced if fuel cost
continues to increase regardless of whether the merger is
completed or not, and that is a direct quote.
But a larger issue must be faced: When fuel prices decline
and economic growth is restored, both of which I truly believe
will happen, what of these ``reasons'' then?
You will not be able to unscramble the egg. If these were
not valid bases for consolidation, how much will the public
suffer in future because of higher fares and reduced services
as a result of the merger having taken place?
I would like to conclude with four general observations.
First, the recent withdrawal of Continental Airlines from
negotiations with United is of considerable importance in the
present context. Note that Mr. Kellner, Continental's CEO,
prominently cited cultural differences as a reason for not
going forward.
One has to admire Mr. Kellner for his candor which is of
benefit to you and indeed to all of us because cultural
differences do matter in mergers between firms, and we know
that from the history of mergers in all kinds of industries. It
is especially true that culture matters where the companies
that are merging serve the public with a ``soft'' personal
product like transportation.
Second, what, if any, has been the role of the hedge funds
in the present urge to merge of several airlines?
After all, how can this question be ignored when a fund
named Pardus, out of whole cloth, announced to the world some
months ago that Delta and United were negotiating after which
both carriers quickly and firmly denied it?
Was this an attempt to manipulate the share prices of one
or both companies?
Shouldn't the SEC be alert to the possibility, even
probability, that this is an emerging pattern?
Third, the Civil Aeronautics Act of 1938 was bottomed on
the stated premise that airlines are ``vested with the public
interest.'' Although this language no longer is present in
governing legislation, the airlines are no less so vested.
I, in no way, want to see re-regulation. At the same time,
I believe we must be careful, and we must take a long-term view
of this industry. Congress can show the way in doing this.
Finally, there is the issue of how do you hold a merged
airline to the representations made in order to gain approval
to join? Will the system be maintained as promised? If not,
what can be done?
I don't have an answer. I certainly hope that you do.
Thank you for your attention and the opportunity to appear
before you.
Mr. Costello. Thank you, Professor.
The Chair now recognizes Mr. Foer.
Mr. Foer. Thank you, Mr. Chairman.
I am Albert A. Foer, President of the American Antitrust
Institute which is a 10 year old, independent nonprofit
education, research and advocacy organization.
The essential points of our written statement are three.
First, air transportation is an industry in which there are
substantial network effects, but the incremental costs of
expanding an already large network may offset the benefits.
Second, the industry is already moderately concentrated on
a national basis, but this generalization underestimates the
market power that is present at most hubs and on most routes
including the transatlantic routes where three alliances behave
increasingly like three global companies operating through a
variety of branded subsidiaries.
And, third, a merger of this magnitude will, in all
probability, lead to at least one more merger of similar size
such that it is imperative to look at the forest and not merely
the trees, by which we mean the DOJ must not only apply to the
Delta-Northwest merger the standard antitrust analysis that
requires the divestiture of overlapping city pairs in
concentrated markets, but it must also pay attention to systems
competition and ask the difficult question of whether the five
or possibly four or even three national networks that will
emerge from this process are sufficient to provide a
satisfactory range of choice in service and sufficient
competition to keep prices close to costs.
While it is unlikely that the non-system airlines, the LCCs
and connectors, will emerge in the next few years as
competitive network carriers, they might very well benefit from
a raised price umbrella if a less competitive network strategic
segment is more easily able to raise its prices. The public
would pay more, not only because of fuel costs, which is
legitimate, but because of increased market power which is not
legitimate.
In most circumstances, a particular travel experience may
be accommodated by only one or two systems. Reducing the number
of systems could only be justified if there are substantial
economies of scale and scope that a competitive industry will
assure gets passed on in substantial part to consumers.
If there is one thing that we have learned from the long
history of antitrust, it is that efficiencies are easy to
assert, difficult to achieve and rarely of the magnitude that
the parties predict. In this regard, it appears that a system
which relies heavily on hubs is expensive to operate compared
to a point to point system, and there may be limits to the
efficiency gains achievable through already large networks.
For example, bigger networks create peak load problems at
an airport with all the planes arriving at the same time and
departing at the same time. Such a system is also fragile and
particularly so with all the outsourcing that we now see.
A delay in a plane's arrival at a hub can quickly
metastasize through the system. As networks grow and the number
of alternative systems decreases, minor inconveniences become
major national inconveniences, if not emergencies. This is an
external cost that is not calculated in the antitrust analysis.
Allowing additional market power to the airlines that
survive the proposed mergers will obviously not reduce the
price of fuel.
The question is whether the inevitable downsizing needs to
be handled through cartelization of the industry or by
individual decisions by the incumbent airlines. It is our
commitment to competition in the airline industry, as opposed
to regulation, that is fundamentally at stake here.
Now the ultimate question is whether the public will be
satisfied with four domestic and three global air
transportation systems.
There is little, if any, empirical knowledge that says how
many systems are needed to provide a workable degree of inter-
system competition.
There is substantial data, however, both empirical and
theoretical that suggest that competitive problems increase as
a market becomes highly concentrated. There is substantial
experience with domestic air mergers that suggest how difficult
they are to execute successfully, how few efficiencies have
resulted from big carrier mergers and how slow entry has been
at the network level.
We suggest that the magnitude and certainty of the
proclaimed efficiencies in this case should be analyzed with
great skepticism and must be weighed against inefficiencies due
to other dis-economies of scale and scope, the cost of
consummating the merger and the reduction in competition
arising from the merger.
Thank you very much.
Mr. Costello. The Chair thanks you and now recognizes Mr.
Horan.
Mr. Horan. Mr. Chairman, the Delta-Northwest merger is part
of a well-planned, organized movement toward extreme
consolidation of large intercontinental airlines. The most
important immediate goal of these mega-mergers is permanent
elimination of market competition on the North Atlantic.
My belief that mega-mergers will be bad for consumers and
bad for the future economic efficiency of the industry is based
on 25 years of experience as to how these airlines actually
compete and how these types of mergers actually work.
Mr. Chairman, these mergers can only be financially
justified by artificial profits from anti-competitive behavior.
Every comparable U.S. airline merger since deregulation has
been a dismal financial failure. They all underestimated
implementation costs and wildly overestimated synergies.
The profit from anti-competitive behavior in these mega-
mergers will occur in two stages. In the first stage, the Delta
and prospective United mergers complete this five-year process
of eliminating competition between the United States and
continental Europe, a highly profitable strongly growing market
of over 30 million passengers that never needed any mergers.
As I will show you on the next slide, the Delta and United
mergers entrench a permanent duopoly controlling 90 percent of
this market. This duopoly, which is the two collusive alliances
led by Delta's and United's partners, Air France and Lufthansa,
have full immunity to collude on prices, capacity and service
with huge entry barriers protecting them from future
competition. With market dominance of this magnitude, 90
percent, and high entry barriers, the U.S.-Europe duopoly will
be able to raise prices at will.
You will quickly see an application from British Airways,
American and possibly Continental to form a third collusive
alliance that would have similar dominance and pricing power in
the U.S.-U.K. market.
These anti-competitive gains from gouging consumers will
create an ongoing stream of what economists call artificial
supernormal profits. All of the claimed synergies you have been
hearing about today are just a smoke screen. The gain from
anti-competitive pricing will be large enough to totally
justify all the complex costs and risks of these mergers.
The second stage of the anti-competitive threat is that the
megacarriers will be able to use the artificial profits from
gouging North Atlantic consumers to badly distort domestic U.S.
competition including every domestic market where they compete
with airlines that don't serve overseas markets. A prime
example, Delta can use North Atlantic profits to block
AirTran's ability to profitably grow in Atlanta, completely
undermining the way competitive airline markets are supposed to
work.
Domestic concentration would also undermine basic free
market dynamics because you create three big inefficient
airlines that were too big to fail. The mega-mergers would
create a situation where these three or four companies control
80 percent of the total U.S. airline revenue base, which is how
you ought to look at it, and 100 percent of many important
sectors in the market where low cost carriers do not compete
including all mid-sized and smaller cities and all the large
fortress hubs.
This table, I hope you can see it and it is in the
testimony, shows several traditional measures of market
concentration in the U.S.-continental Europe market over recent
periods of time.
The U.S.-Europe market enjoyed vibrant profitable
competition with low levels of concentration until very
recently. The increases in top line concentration that you see
going from, say, 38 percent in 1995 to 55 percent in 2003
reflected the normal workings of a dynamic market that was just
going through a period of deregulation and posed no threat to
consumers.
The shift to extreme consolidation, going from 55 to 75 and
soon in the nineties, was completely driven by mergers starting
with the Air France-KLM merger in 2004 and has absolutely
nothing to do with normal, healthy market competition.
Transatlantic competition ends for good with these mergers,
with the establishment of a collusive alliance between America
and the U.K. and Continental's final decision. Does it join and
collude with the United-Lufthansa group or does it go with the
British Airways-American group?
These three competitors will control 95 percent of the
entire North Atlantic, and no market or regulatory forces will
be able to stop them from gouging consumers for years to come.
There are two critical pieces of evidence that you need to
focus on: one, the hard data of the concentration of this huge
market that you see before you and the evidence that this
extreme concentration was not driven by market forces over the
last five years. It has all been part of a concerted, well-
organized plan to eliminate competition on the North Atlantic.
This slide just lists a few of these artificial events:
Policy shifts at the European Union away from letting the
market decide to deliberate government intervention to drive
intercontinental mergers; the mergers that occurred within
Europe; the huge industry consolidation press campaign that has
been going on in the United States for the last four years led
by United Chairman Glenn Tilton; the Air France and Lufthansa's
drive to encourage the two mergers that are before us this
week; and, the long delay over a new Open Skies Treaty while
the Europeans didn't only want the right for the collusive
alliances but wanted the right to control their U.S. partners.
Here is a snapshot of the end results. This is the North
Atlantic five years ago. The two separate European and U.K.
markets with lots of competition and low concentration will
have been completely eliminated.
You will have three competitors, 93 percent of the entire
market, two controlling Europe, one dominating the U.K., and
they will have the ability to raise prices at will, and you
won't be able to do anything about it.
These mergers fail every important antitrust test. The
concentration is increasing markets with very high entry
barriers. It is not increasing because of marketplace success
or economic efficiency.
There is no way regulators can rely on market forces. These
transatlantic markets are not in any way, shape or form
contestable.
The small, wildly overstated, as you have heard, claims of
efficiency gains can't possibly justify the risks to consumers.
There are no offsetting benefits to consumers in terms of
clearly lower prices, rapid growth in new service.
It is not helping a shakeout of uncompetitive industry
capacity. It is not improving the allocation of capital across
the industry. In fact, it is going to make that problem worse.
Mr. Costello. The Chair thanks you and now recognizes Mr.
Baggaley.
Mr. Baggaley. Thank you. Good evening.
Mr. Oberstar. Mr. Chairman I would just like to welcome
Phil Baggaley once again. Over many years, 20 some, he has been
a constant and consistent contributor to the work of this
Committee.
Mr. Baggaley. Thank you very much, Mr. Congressman.
I do feel a bit of a sense of deja vu. Once again, the
airline industry is facing a financial crisis, in this case
caused by very high jet fuel prices and a weak economy.
The managements of Delta and Northwest suggest that a
merger will help them survive these challenges. My testimony
will address the magnitude of the financial problem, how the
proposed merger seeks to address that and what broader effects
the merger and others that may follow would have on the
industry.
The industry faces a huge increase in jet fuel prices,
potentially 15 to 20 billion dollars higher this year, which is
more than triple their pre-tax profits last year.
The airlines' choices of how to respond are limited: cut
non-fuel costs and raise revenues. Unfortunately, having
squeezed costs for years, airlines are running out of places to
cut. The other choice, increasing revenues, means filling more
seats on already crowded planes and raising fares in a weak
economy.
Would merging Delta and Northwest help? The companies
forecast at least $1 billion of revenue and cost synergies
annually by 2012.
We would agree that a larger combined route network should
allow them to capture market share from competitors and boost
revenues by reallocating planes and flights throughout the
enlarged system. As for costs, combining any two companies
provides an opportunity to cut overhead, and we believe this is
no exception.
However, we also see significant risks. Combining the two
airlines will require a one-time investment of up to $1 billion
to integrate aircraft fleets, information systems and for other
merger-related expenses. Depending on the timing of the merger
investments and the benefits, cash outlays could actually
exceed benefits in the first year.
Perhaps, more important, we believe airline mergers have a
checkered track record, rarely delivering on expected gains and
usually creating labor unrest and service disruption.
In the case of Delta and Northwest, our main concern is the
cost of new labor contracts. Employees at both airlines made
deep sacrifices in bankruptcy and will want better compensation
and new contracts. Therefore, the actual net merger benefits
may be less than forecast, though still positive.
We also think that the labor unrest and service problems
that plagued other airline mergers are a risk here as well.
What about the effect on air fares? An understandable
concern is that a big merger could create market domination. On
this point, the merger of Delta and Northwest appears less
problematic than some other possible combinations because there
is little direct route overlap.
That said, this merger and further consolidation could
cause some increased fares. With fewer airlines, some hubs
would no longer compete against each other for connecting
traffic, for example, Detroit and Cincinnati.
Another reason for potentially higher fares is that any
general price increase can succeed only if all the major
airlines go along. If there are fewer big airlines that have to
agree, there is probably a better chance that a fare increase
will stick. Even so, we believe that economic conditions and
competition from low cost carriers would continue to serve as
somewhat of a check on fare increases, even in a more
consolidated industry.
Also, bear in mind that airlines need higher revenues to
offset higher fuel prices. This could occur in at least three
possible ways:
Airlines could manage to raise fares still further and fill
more seats. This is getting harder, given the state of the
economy.
Airlines could fail to do so, forcing some to file for
bankruptcy or even shut down. That would reduce the supply of
seats and make it easier for the survivors to raise fares.
Or, airlines could find it easier to raise fares in a more
consolidated industry.
Most likely, there will be some combination of these three.
In any case, revenues need to increase if the industry is to
remain solvent. If this were a regulated utility, airlines
would be applying for rate increases based on higher input
costs.
To sum up, we believe there are three key points. First,
the U.S. airline industry faces a potential financial crisis if
it cannot offset much higher fuel costs.
Second, the proposed merger of Delta and Northwest offers
potential financial gains but also material risks. Overall, it
is probably neither as beneficial as supporters promise nor as
dire as its critics suggest.
Lastly, one way or another, ticket prices are likely to
rise if fuel prices remain high.
Thank you for your attention.
Mr. Costello. We thank you, and the Chair now recognizes
Mr. Neidl.
Mr. Neidl. Good evening. I want to thank the Committee for
inviting me to present today.
Representative Oberstar, it is good seeing you again. Thank
you for having me.
Being that I am the last presenter, I will keep it brief.
I come from a family, a long line of family that has been
involved with transportation, the rails. I have a love for the
industry. I have been brought up in the industry.
I saw the passenger railroad industry die as a child. It
broke my heart, so I got into airlines, thinking I would get
into the wave of the future. I love the industry also. I worked
for American Airlines.
I worked for a creditor agency. I worked as a bond analyst.
Now I am a stock analyst. So I have seen this industry,
financially speaking, from all sides.
I try and put my emotions aside of the love of the industry
when I try and analyze it, and usually I get criticism from
everybody: labor unions, politicians, management. So I will
just go ahead and speak my mind here again tonight.
Now I have never been a big fan of airline mergers. I have
been through the cycle a number of times, and I have seen a lot
of them really struggle the first couple of years as they try
and integrate the systems, the aircraft types and, most
importantly, the work groups. I know we have heard a lot of
this all day during the testimony. I was listening to it, but I
agree with a lot of what I have heard.
However, we are in an environment that I have never seen
before, even after 9/11. I was here after 9/11, testifying. I
am more scared now than I was even after 9/11 for the industry.
With oil at $120 a barrel and people saying it is going to go
even higher on a permanent basis, we have to look at this
industry differently than we did when oil was at $20.
Now I followed Delta. I followed Northwest. I have been
through a number of airline bankruptcies. I used to also follow
casinos, so I have been through a number of Donald Trump
bankruptcies as well. It is a little different in the airline
business.
But looking at the Delta and Northwest bankruptcies, at
least in my opinion, they did it the right way. They squeezed
just about everything they could. They got their balance sheet
deleveraged. They got the unit cost structure down.
They squeezed their employees. They squeezed their
creditors. They squeezed everybody. I couldn't think of another
thing they could do.
In fact, if Delta or Northwest were to go into bankruptcy
again tomorrow, it would be Chapter 7 because there is nothing
else they can do in bankruptcy. They really did work hard at
that.
I am going to say something that you are not going to want
to hear. I don't want to hear it, but it is the truth. With oil
prices shooting up over $100 a barrel, we, the traveling
public, had not been paying our way.
It is like telling a gas station, oil prices are up, but
you only can charge a dollar a gallon. How long would they stay
in business? That is what is happening with the airlines right
now.
In my opinion, airline management has been too weak over
the past two years in putting through further price increases.
Now they are afraid of the low cost carriers. They are afraid
of the elasticity of demand. Nobody really knew what that was.
But we are seeing that the market is supporting price
increases. People are still traveling even with the weaker
economy. The question is how much more can they put through?
My opinion is they may be running up against barriers. If
that is the case, a lot of capacity has to come out of the
system which is going to drive out the marginal traveler.
In other words, I won't be able to do my weekend trip to
Florida anymore because the price will be going up. I will have
to do it every other week or something, but I mean those are
the facts of life. That is my broad prospectus of where I come
from.
Now to address mergers, again like I say, in the past, I
have never been a real fan of mergers, but the industry right
now is changing. It is becoming more global.
Since 9/11, we have low cost carriers that are actually
succeeding. Before 9/11, I think it was Southwest. Now we have
a number of them. Some of them are failing, but they have a big
part of the market, probably over 30 percent of the domestic
market. So, in my opinion, the industry is too fragmented.
Mergers wouldn't hurt. If we did have a couple of the big
carriers getting together, it would give them some ability to
raise ticket prices more than they have. Like I say, I think
airline management has been too weak on raising ticket prices
in light of the increased costs. So this would give them a
little bit more ability to raise prices.
Certain mergers do make sense like the Delta fighting off
U.S. Airways' proposal. I thought they did a good job. I like
the management of U.S. Airways, but I just thought there was
too much overlap there. As an outsider, I never thought the
Department of Justice would approve that because there was just
too much overlap.
If you look at Delta-Northwest, there is not a lot of
overlap there.
Who knows? Maybe you are getting an airline that is too
big, as some of the former speakers said, but I think this
would give them worldwide mass market, a better ability to
compete with the giants that are emerging in Europe: Air
France, KLM, British Airways, Lufthansa.
So when you do an end on end merger, if it is done right, I
think you have a more powerful competitor.
My main problem is I am not sure where the cost-cutting is
going to come from if they are not going to cut costs. With
high fuel costs, that is something that is going to have to be
done.
Again, I get back to capacity is going to have to be
reduced. It will drive out the marginal traveler, at least in
the short term, until new low cost carriers emerge.
New low cost carriers will emerge. We have seen them
coming. We have seen a lot of them go. We see a lot of them
staying and gaining market share, and that will happen in the
future.
I mean the old joke is how do you become a millionaire very
fast? You start with $10 million and start an airline.
I think I am running out of time, so basically let me just
wind this up by saying airline mergers are time-consuming. They
are risky if they are not done right. You do have to have the
employees onboard. But if it is an end on end merger where they
can look at cost-cutting, I think it is something that is
worthwhile looking at.
Thank you.
Mr. Costello. Mr. Neidl, thank you for your testimony.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Kagen.
Mr. Kagen. Well, before I begin, I might ask for a little
bit more than five minutes because a lot of data have been
presented here.
Let me just start with the last. Mr. Neidl, thank you for
your testimony, but I couldn't disagree with you more with
regard to the greater concentration within an industry.
In the medical field, when you get less choice, you get
higher prices. Instead of having maybe 100 different doctors to
call in a city, you might get 2 big and bigger clinics. So I
don't know how that a greater concentration in the marketplace
of air travel can lead to a better choice.
Mr. Horan, I really appreciate your point of view, and it
raises this question. It is a question I have been asking
myself and my constituents for a number of months and years.
Whose side is this Administration on?
You say in your testimony, @@But it could never have
happened without the full support of the European Union and the
United States Department of Transportation.''
I would like you to amplify. Whose side is this
Administration on? Whose side is the Department of Justice on
and the Department of Transportation?
Mr. Horan. I would actually give some credit to the
European Union for honesty. They have come out explicitly--DG
Comp, the agency in Brussels is doing that--and said, we don't
care about the good of European consumers. We care about
mergers that would involve the owners of two companies,
wealthier.
They are having the same problem in Europe that we will
soon see in America_the artificial profits for Air France and
Lufthansa are turning around and hurting consumers and the
owners of Ryanair, Air Berlin, Vueling and EasyJet who are more
efficient.
The DOT has been silent. There is no policy discussion.
There is no congressional oversight. But if you look at the
recent decisions up to and including the tentative review of
the Air France-Delta-Northwest-KLM four-way merger, they simply
ignore all the data.
Oh, there used to be 55 percent concentration with 6 very
reasonable healthy competitors, and tomorrow there will be
none. Well, we didn't look at that. But the DOT continues to
insist that there is no problem for consumers.
Mr. Kagen. But if you have greater concentration and these
hubs are also concentrated and controlled by larger companies,
how does a $10 million startup airline get access to that hub?
They don't have the gates. They don't have the marketing
muscle. They don't have the ability to sell tickets. So how
does a small company?
Mr. Horan. Where you get the ability, where your
constituents are going to get gouged first and hardest is
markets where they have the highest concentration, where the
market is not contestable.
Southwest or JetBlue or AirTran or Ryanair cannot become a
competitor on the North Atlantic. It would take them billions
and billions of dollars to acquire of intercontinental
airplanes. They have never flown them before. They wouldn't be
available until 2016, and there is no way to serve markets like
Kennedy, Newark, Philadelphia, Chicago, London, Paris,
Frankfurt.
Mr. Kagen. Mr. Foer, would you join in on this, answering
this question? Whose side are they on?
Mr. Foer. The problem with the antitrust analysis is one
that goes back 20 to 30 years. Analysis that focuses on
narrowly defined markets, which is what the Chicago School
revolution led us to under President Reagan and has pretty much
continued ever since, takes us down to this point where the
only thing they really care about is overlapping city pairs.
If that is the only thing that is going to be applied here,
this merger goes through, at least with the Justice Department.
DOT could, in theory, rule differently based on its public
interest jurisdiction.
But, if I made a prediction, my prediction is the Justice
Department will take this narrow view. Remember, they didn't
want to get pinned down on the question of whether they would
look at two more or less simultaneous mergers. They won't, at
least not outwardly.
But if we have two or more clearly contemplated, I think
that one thing this Committee could do is to find out what the
other airlines really are planning and thinking. They have
plans. They know what they are going to do. We don't know, but
we have speculation.
So, to answer your question, we have locked ourselves into
a way of thinking that is simply too narrow and isn't going to
get us the solutions that are necessary to serve the public
interest.
Mr. Kagen. Professor?
Mr. Gellman. Well, this is a little hard to say here. When
you put your reliance and trust in the Justice Department, as
long as they are trained to look back, at most they are trained
to look at now. What we are mostly talking of here is what the
future effect of all this is.
Somehow, we need to discipline those people who hold sway
over this to look at the dynamics of it going forward, and I
don't know how you get that done the way the antitrust laws are
dealt with at the DOJ. I think it has always been a problem. I
believe that in many industries, many companies and the country
have suffered because of it.
But I can't think of a case or a situation, timing either,
where it is more important to make sure the dynamics of the
future. If this happens, then that. There has never been a time
like this where that is so important.
I don't know how you get the Justice Department disciplined
enough to do that. I would hope that you can, but I can't tell
you how to do it because I am not a lawyer.
Mr. Kagen. Mr. Horan?
Mr. Horan. Just to respond to a question that several
Members of the Committee have been posing all day long. There
is no plausible antitrust logic, whether liberal or
conservative, anywhere where you could say yes, this Delta-
Northwest merger is kosher, but the next one is not. That is
key to this well-orchestrated plan. It has always been the plan
for Delta-Northwest because of superficial appearances to go
first.
If that is done, there is no way you can turn down any
merger that United Airlines wants to do, or any request to
expand the collusive alliances to Europe.
British Airways, American and Continental will say, well,
how can you turn us down? The answer is you can't.
Mr. Kagen. So the precedent is rather important.
Mr. Horan. Precedent is everything. It has been planned.
All of these lawyers and PR people have been working on this.
They are not stupid.
Mr. Kagen. Mr. Mitchell?
Mr. Mitchell. Yes. The DOJ, from my investigation of the
last few weeks, has the ability and, in some cases, the
obligation to look at mergers at the industry level. They have
even gone so far as to call for a timeout in certain
industries.
So I think some of the answers today were just by the book
from the DOJ. I think there is opportunity to ensure that they
look at this at the largest possible picture level.
The second thing I would say is that there are a number of
people here today saying the same thing in different ways in
the sense that Mr. Roach said we need a summit. Ms. Friend said
we need something to get at a national air transportation
policy. Bob Crandall, the former Chairman of American, said the
same thing in a New York Times editorial within the past few
weeks.
I think whether it is the recent problems with the FAA or
the situation we find now. We deregulated the industry, but we
never had a debate, the debate on who is it supposed to serve,
what are the priorities, et cetera. We don't have a framework
and, consequently, we have a lot of knee jerk reacting within
the industry.
I think, if anything, this should be a wake-up call to slow
the process down, take a step back and impanel the right people
to get that part of the job done.
Mr. Kagen. I thank you for your testimony.
I think you will find I will be a very strong advocate for
greater choices. The more choices we have, the more competition
will exist.
If the competitive marketplace really existed, these two
airlines could raise their rates and increase their profits and
their survivability. If they can't raise their rates, it is
because it is not competitively to their advantage.
So I yield back my time and thank you for the extension.
Mr. Costello. The Chair thanks the gentleman.
This has been very interesting. It is unfortunate that Mr.
Anderson and Mr. Steenland are not here to hear the testimony
and attempt to refute some of it.
The Chair now recognizes the Chairman of the Full
Committee, Chairman Oberstar.
Mr. Oberstar. Mr. Chairman, you are very generous to forego
your questioning.
Goodness, it is almost 9:00. This is getting to be a record
hearing. Again, we thank you for your patience and want each of
you to know how vitally important your testimony is to the work
of this Committee, to the air traveling public, to the
communities served by these airlines because you have made an
enormous contribution.
My wish is that we had you on earlier so Justice and DOT
would have been here to hear your testimony in addition to
Steenland and Anderson.
Now where to begin. Mr. Mitchell, you talked about 550
markets in which Delta and Northwest have roughly a 80 percent
market share. You know we heard earlier in the day these dark
references to European carriers and Pacific Rim carriers who
are dominating the international trade market.
Time out. Lufthansa doesn't have a domestic network to
serve. Air France doesn't have a domestic network to serve.
British Airways doesn't have a domestic network to serve.
They have TGV/Talgo and the ICE in Germany. They have high-
speed intercity rail service. Between Brussels and Paris, there
is no air service today, no passenger air service, but there is
a TGV or a Thalys leaving every 3 minutes with 1,100 passengers
aboard from 6:00 a.m. to midnight at 184 miles an hour, going
from Brussels to Paris in 80 minutes, a trip that when I went
to graduate school in Europe took 6 hours.
Well, we don't have, several of you referred, a plan or a
national policy, but the Europeans do. They have a plan.
Anything over 1,000 kilometers gets air service preference.
Between 750 and 1,000 kilometers, there is a competition
between rail and air service. Below 750, it is preference for
high-speed passenger rail.
Actually, they are now getting to a point where 1,000
kilometers is preference for high-speed rail because they are
increasing their speeds to well over 200 miles an hour.
So, if you have long-haul air service as your principal
operation, it is highly profitable compared to short-haul
service, less than two-hour air service. Of course, it is.
I just dismiss this argument about well, we have to compete
with Lufthansa, so need a different model. Baloney. We have a
different structure.
Mr. Foer, you said incremental costs could well offset
benefits. You talked about the market power of hubs will lead
to at least one more merger and to look at systems competition.
I was trying to get the Justice Department folks to talk
about the merger behind the merger. They don't want to address
that, but at least they said they would consider it. Do you
think that is enough of an opening?
Mr. Foer. I understand their problem. If they have to go to
court, they have to go to a conservative court, and the courts
have not been very favorably disposed toward antitrust lately.
The question is when do you take a risk as a law enforcer
to serve the public interest and possibly lose a case or
possibly have more leverage to negotiate a proper outcome?
Mr. Oberstar. That is a good point, Mr. Foer.
Mr. Foer. I don't think that this Department of Justice has
the backbone to do that based on recent experience.
Mr. Oberstar. Does it strike any of you in this panel as
odd that there is more scrutiny given to a simple request for
antitrust immunity for an alliance than there is for a merger?
Mr. Mitchell?
Mr. Mitchell. That is a very interesting observation. It
seems that the applications for antitrust immunity, there are
reams and reams and reams of data that are validated, verified
by independent experts, and when it comes to mergers a lot
seems to be taken at face value.
Mr. Oberstar. It is narrowed down. The scope is so narrowed
down to just this particular merger and its anti-competitive
effects whereas the alliance, as you said, they looked at reams
of paper, documents, what the effect was going to be on the
international trade in the North Atlantic when they were
considering the Northwest-Air France.
Mr. Horan?
Mr. Horan. Mr. Chairman, if I may disagree with the point
to say that if you look at the recent review, the tentative
decision on merging the two alliances, they didn't do any
analysis whatsoever. You are giving them way too much credit.
Remember, I was involved with the original KLM-Northwest
alliance back in 1993. I was the one who developed that joint
network. I am very familiar with that. I recall the level of
antitrust scrutiny that was required.
Quite properly, an alliance is, from an antitrust
standpoint, the same as a merger. You are eliminating
competition.
Mr. Oberstar. That is right.
Mr. Horan. There is full collusion. That is why I am
careful to call them collusive alliances to distinguish them
from frequent flyer programs and things like that.
But if you look, they simply ignored. They pulled out an
OAG and counted some departures, ignoring the fundamental basis
that these are network airlines. They had no evidence of the
trend towards high levels of concentration over time.
When American Airlines actually put evidence saying, well,
wait a minute, but prices are going up and service is going
down, they said, we are going to ignore that because you
haven't proved it, but we are going to accept all of the claims
of the billions in savings with no evidence.
That is a core factual question here, and they are not
doing any of objective independent analysis.
Mr. Oberstar. Professor Gellman?
Mr. Gellman. From the very beginning, I felt that it was
not proper to grant antitrust immunity to any alliance. I doubt
there is an alliance that would not have happened without it. I
don't think it was a necessary condition for very many
alliances, if any.
Look what we gave up in the very first one. The very first
antitrust immunity was Northwest-KLM. We got access, grandly
so, to Schiphol Airport in Amsterdam. There is no other airport
in the Netherlands that we could serve, and there isn't today,
whereas KLM got all of the United States.
Mr. Oberstar. I asked that same question at the time that
was being proposed.
Mr. Gellman. So did I.
Mr. Oberstar. So we get access to the Netherlands,
wonderful, wonderful. We have some ore carriers in the Great
Lakes that are wider than the Pays-Bas as they call the
Netherlands. Come on. They get access to our whole market.
The answer was oh, no, but you get access to Europe through
Schiphol.
Mr. Gellman. What I was told by one of the two people who
made the decision to grant antitrust immunity was that they
wanted the alliance and it wouldn't have been entered into
without it. I don't believe that.
Subsequently, some years later, I had the opportunity to
talk very frankly with the CEO of another airline, a large
European one, that was in an alliance. He assured me that
antitrust immunity was not a necessary condition for the
alliance he was in.
I just think that that was a path we should never have gone
down because we see now that antitrust immunity adds a layer of
anti-competitive behavior to something that is at least mildly
anti-competitive from the beginning. I think the alliance is
not a bad idea per se, but to layer antitrust immunity was a
terrible public policy mistake.
Mr. Oberstar. I am not sure that we really get the
competition effects with alliances that you do with head to
head competition. If our carriers had to buy aircraft, provide
crews, provide ground service and all the rest, set up a real
competition, you might get a better result for the consumer,
not such a good deal for the airline but a better result for
the consumer.
Mr. Mitchell, you had your hand up.
Mr. Mitchell. Yes. I just wanted to add that if Delta-
Northwest were to go through or any of these other mergers that
have been proposed or talked about, they are going to have,
according to their own press releases, such grand reach and
scope and scale that I would think that the DOJ would consider
as a remedy in all of this to reverse the policy of antitrust
immunity and code sharing. If they are that big with that much
reach, why do they need it today?
Mr. Oberstar. That is right.
How do you hold the airlines to pre-merger promises was a
question raised by the panel. Here is a good example. Chairman
Costello has already cited the effect on St. Louis with the
American Airlines saying in testimony in our Committee room, we
will maintain the hub but, poof, it was gone within a couple of
years.
In Minnesota, the Metropolitan Airports Commission gave a
loan to Northwest to bail them out of their high cost short-
term debt, $380 million. It is paid down to $245 million.
How long do you think it will take the new Delta to buy out
that loan and throw the hub overboard, throw the Northwest
headquarters overboard and throw the personnel under the bus?
In a heartbeat.
A question and then I have to close. In a mega-carrier era,
will the U.S. ownership law have any relevance in a real world?
Mr. Baggaley?
Mr. Baggaley. Well, the ownership law is actually still
quite important which is one reason why the E.U. is pressing to
change it so much.
Mr. Oberstar. Right, are desperately trying to change it.
Mr. Baggaley. Certainly, antitrust immune alliances allow a
greater level of cooperation than otherwise, but I think the
ownership law still represents a large, large barrier.
I mean we don't take positions on public policy. I am not
saying that is good or bad, but I think it is a significant
factor.
Mr. Oberstar. But does it have any real world application,
Mr. Horan and Mr. Foer?
Mr. Horan. One of the intellectually dishonest things of
the industry consolidation discussion out of the E.U. is in all
of the negotiation over Open Skies and can we control U.S.
airlines is, oh, we need to break down artificial barriers. Why
are airlines different from Coca-Cola? Why do we have national
barriers? It leads to efficiency.
The flaw with that argument, it is absolutely true if you
look at airlines in Southeast Asia. Why do we have to have
separate Cambodian and Vietnamese and Thai airlines? They have
six airplanes, and they have three and they have 14, and it
might be very efficient.
If you have a home market the scale of the United States,
the European Union or maybe the People's Republic of China,
getting rid of the ownership achieves nothing from a pure
economist academic efficiency standpoint. You are already
there.
So, to answer your question, no. It would actually make it
harder. With megacarriers, you need to keep the ownership law
there
Mr. Oberstar. Mr. Foer?
Mr. Foer. I think I would disagree with that. It seems to
me that as we achieve this very high level of concentration
domestically and we have financially weak airlines, that
allowing foreign ownership is the way out to generate
competition domestically. But at the same time I think you have
to take away the antitrust immunity from the alliances.
I was told by the general counsel from Northwest that when
Northwest and KLM got their antitrust immunity, they became a
single company for transatlantic purposes. That is why, in my
testimony, I talked about three global companies.
We have to worry about that too. The whole globe has to
worry about that because three global companies operating
airline transportation worldwide, that is sinful.
Mr. Oberstar. In the testimony, I don't remember whose
testimony it was, but I think it was Mr. Neidl who said that
the next stop for these two carriers in a financial crisis was
Chapter 7 and that Government ownership of carriers is not
realistic.
The reverse side of that coin is in Europe if any one of
their carriers, if Lufthansa were on the verge, Air France on
the verge or look at Alitalia. Berlusconi pulled Alitalia out
of the Air France merger as soon as he was sworn in as
president. They are not going to let their flag carrier go down
the drain.
They were owned by the national government before the E.U.
If there is any risk of losing their flag carrier, they will
pull them back into national flag ownership again.
Well, Mr. Chairman, I have been berating this thing. This
is like a seminar. It has just been wonderful.
Mr. Costello. I think Professor Gellman has something.
Mr. Gellman. I just had one point that I think we sort of
glossed over. If we are going to talk about alliances, we need
to think about the code sharing aspect of alliances.
Mr. Oberstar. Yes.
Mr. Gellman. There was a time when I was on the fence about
code sharing in alliances. I am not talking about domestic code
sharing. I am talking about intercontinental.
I had an opportunity to spend quite a lot of time with the
senior management of Lufthansa, and I was attacking the idea of
code sharing. The route that they wanted to focus on was a
route between South America and Germany. They pointed out the
value of code sharing which was drawn primarily from the fact
that both Varig--now you know the country--and they were each
flying very low load factor flights every day between the two
points. So they wanted to code share, in order to do things
more efficiently.
That seemed reasonable. When I came back to the States, I
got to thinking about it, and it occurred to me that, first,
put a time limit on a code share arrangement. Preventing an
alliance to code share for more than, pick a number, five years
sounds about right to me.
Then reexamine it. If, in fact, the code share is leading
to less service, less profitable service for the two airlines
than there would be without it, then you don't let it continue.
If it needs to continue because it is pro-efficiency, you do
that.
The other aspect is that alliances have many more benefits
for alliance partners than just code-sharing. There are myriad
other benefits. I think we ought to recognize that some of
those benefits accrue to the public, but not all of them.
I think the alliances need to be structured in a way that
is not anti-competitive any more than they have to be to get
whatever net benefits flow from them. So the net benefits
should be there even though there are some social costs to be
paid that are less than the net benefits.
Thank you.
Mr. Oberstar. Mr. Chairman, I just looked at a note I made
for myself.
In a mega-carrier era, would the domestic airline service
return to a pre-deregulation model where you have a domestic
feeder network to these international carriers? What happens to
the airline service model?
Mr. Horan is saying no.
Mr. Gellman. I happen to think we need to watch carefully
at what evolves in the relationship between JetBlue and
Lufthansa. As you know, JetBlue has sold about 20 percent of
its equity to Lufthansa.
Now Lufthansa has some difficulty, I am sure, in
transferring passengers to or from JetBlue if they are front-
end passengers; but still that is the best case now before us
to understand whether the answer to your question is yes or no.
Mr. Oberstar. Mr. Horan?
Mr. Horan. With the mega-mergers, if we are down to three
or four legacy carriers, they have 80 percent of the entire
U.S. revenue base. The entire LCC group_Southwest plus JetBlue
plus AirTran plus Hawaiian and Alaskan have the other 20. They
are in narrow niches.
Of the legacy megacarriers, they are going to look just
like they do today: more service if fuel costs get better, less
service if fuel costs don't.
The problem with the whole theory of airline competition
without Government interference is you want carriers who are
better run with better service and more efficient operations to
be able to grow and the ones that have lousy service, bad
management, et cetera, to shrink and go away.
In the mega-carrier world, that breaks down. You have three
big carriers who can be just as arrogant as Pan American was 27
years ago: Well, what do we care about this stuff?
To answer your narrow question, you are going to freeze in
today's route structure. You are not going to see a change back
to the pre-deregulation. The problem is the efficient carriers
in the markets like Southwest and JetBlue are not going to be
able to grow, and that is an efficiency question.
It is not just come help our loyal shareholders and
employees. You have to hurt the loyal shareholders and
employees and customers of these other companies that are
actually more efficient.
Mr. Costello. The Chair thanks you.
Mr. Mitchell, a final comment and then we will close the
hearing.
Mr. Mitchell. Yes, thank you, a quick comment.
Last week, someone I work with was sitting at breakfast at
a hotel here in Washington, listening to one of the two airline
teams that are proposing this merger plan for their day on the
Hill. They said three things. Number one, the fleet integration
is going to be a disaster. Number two, the reservation systems
are a nice match. Number three, one hub is closing and another
hub is going to be significantly downsized.
So a remedy perhaps could be that for a period of five
years they have to maintain seat capacity at all their major
hubs.
Mr. Costello. Very good. This has been an excellent
hearing, and we deeply appreciate the contributions that each
of you have made. It has been a long day for all of you, and we
appreciate your patience and your contribution.
With that, the Chair will close the hearing, and Mr.
Gellman, we are actually going to close the hearing now.
The Subcommittee stands adjourned.
[Whereupon, at 9:15 p.m., the Subcommittee was adjourned.]
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