[Senate Hearing 110-413]
[From the U.S. Government Publishing Office]
S. Hrg. 110-413
AN EXAMINATION OF THE DELTA-NORTHWEST MERGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 24, 2008
__________
Serial No. J-110-87
__________
Printed for the use of the Committee on the Judiciary
----------
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For sale by the Superintendent of Documents, U.S. Government Printing
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Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Stephanie A. Middleton, Republican Staff Director
Nicholas A. Rossi, Republican Chief Counsel
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma
Jeffrey Miller, Chief Counsel
William Castle, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 2
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
prepared statement........................................... 111
WITNESSES
Anderson, Richard, Chief Executive Officer, Delta Air Lines,
Atlanta, Georgia............................................... 10
Bush, Darren, Associate Professor of Law, University of Houston
Law Center, Houston, Texas..................................... 13
Chambliss, Hon. Saxby, a U.S. Senator from the State of Georgia.. 4
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota.. 5
Mitchell, Kevin P., Chairman, Business Travel Coalition, Radnor,
Pennsylvania................................................... 11
Steenland, Douglas, President and CEO, Northwest Airlines, Eagan,
Minnesota...................................................... 8
QUESTIONS AND ANSWERS
Responses of Richard Anderson to questions submitted by Senator
Kohl........................................................... 36
Responses of Darren Bush to questions submitted by Senator Kohl.. 42
Responses of Kevin Mitchell to questions submitted by Senator
Kohl........................................................... 53
Responses of Douglas Steenland to questions submitted by Senator
Kohl........................................................... 57
SUBMISSIONS FOR THE RECORD
Air Carrier Association of America, P. Nicholas Peterson,
Legislative Counsel, Washington, D.C., letter.................. 71
Anderson, Richard, Chief Executive Officer, Delta Air Lines,
Atlanta, Georgia, statement.................................... 75
Buffenbarger, R. Thomas, International President, International
Association of Machinists and Aerospace Workers, Upper
Marlboro, Maryland, statement.................................. 86
Bush, Darren, Associate Professor of Law, University of Houston
Law Center, Houston, Texas, statement.......................... 98
Memphis Regional Chamber and the Memphis/Shelby County Airport
Authority, John W. Moore, President and CEO, Memphis Regional
Chamber, Larry D. Cox, President, Memphis/Shelby County Airport
Authority, Memphis, Tennessee, joint statement................. 113
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, and Metropolitan Coalition of Chambers,
Daron Van Helden, Chair, joint statement....................... 120
Mitchell, Kevin P., Chairman, Business Travel Coalition, Radnor,
Pennsylvania, statement........................................ 125
Moak, Lee, Captain, Chairman, Delta Air Lines Master Executive
Council, Air Line Pilots Association, International, statement. 131
Shook, Veda, International Vice President, Association of Flight
Attendants-CWA, AFL-CIO, Washington, D.C., statement........... 136
Steenland, Douglas, President and CEO, Northwest Airlines, Eagan,
Minnesota, statement........................................... 149
AN EXAMINATION OF THE DELTA-NORTHWEST MERGER
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THURSDAY, APRIL 24, 2008
U.S. Senate,
Subcommittee on Antitrust,
Competition Policy and Consumer Rights,
Committee on the Judiciary,
Washington, DC
The Committee met, pursuant to notice, at 2:08 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Feingold, Schumer, Cardin, and Hatch.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good afternoon. Our hearing today will
examine the $3.7 billion merger between Delta and Northwest
Airlines, a merger that will create the world's largest
airline. Many predict this merger will just be the beginning in
a wave of mergers in our Nation's airline industry.
We recognize the tremendous pressures that the airline has
endured in recent years. After recovering from the horrible
tragedy of 9/11, the industry now faces skyrocketing fuel costs
at many of our major airlines, including both Northwest and
Delta, and have undergone the painful process of bankruptcy
filings.
Yet, while it has been the worst of times for the airline
industry, it has been no better for the flying public. We all
complain about airline service; uncomfortable flights, frequent
delays, and mysterious prices are a staple of air travel.
Now the airlines suggest that they will be able to merge
their way out of their troubles in a way that will benefit
customers. As we analyze their claim, we will confront the
crucial question of how this merger will affect air competition
and whether it will lead to higher prices and reduced services
for customers.
We need to very carefully examine the impact of this deal,
and others that well may follow, on air service offered to
small- and medium-sized cities that depend on frequent and
inexpensive air service for their economic health.
We expect to hear from the airline executives here today
about their plans to maintain service to these communities.
While there may always be ample competition between New York
and Los Angeles, what does this deal tell us about the future
of competition for the rest of us? Of equally vital interest to
me is that this merger do no harm to the independence of
Midwest Airlines of Milwaukee, Wisconsin, which is, in fact,
regarded as our hometown airline.
Midwest Airlines is a unique company in the airline
industry, an airline that offers the highest quality of service
and is actually beloved by its customers. In the last year,
Midwest Airlines was acquired by an investment firm that
partnered with Northwest Airlines. If the merger before us
today is completed, Delta will acquire Northwest's stake in
that airline. I will expect today to hear from Delta that this
will not harm the independence, the quality, and the frequency
of service or competitive viability of Midwest Airlines.
Both Delta and Northwest defend this merger by arguing that
they operate largely complementary route structures that
overlap only occasionally. Whatever the merits of that claim--
and we expect the Justice Department to scrutinize it carefully
-our inquiry cannot end merely with an examination of
overlapping routes. These two airlines are competing national
networks. Each airline takes passengers from small- and medium-
sized cities through their gigantic hubs and then on to the
travelers' final destinations. There are now six of these
national networks. This merger will reduce it to five, and many
analysts expect even more mergers soon to reduce the number to
four, or even three.
As we go from six, to five, to four, and maybe even three
or even less, we need to stop and ask the question: what will
be the impact of the loss of competition on price and service?
Are the few smaller, low-cost airlines really sufficient for
competition or will the remaining dominant airlines gain a
stranglehold on our air transportation system?
Other important issues are implicated by this merger, such
as the hard-won rights of employees of both airlines. We are
concerned that this merger not lead to any loss of labor
protections enjoyed by the airlines' employees. While no union
is testifying here today in person, we are including in the
record submissions from any union concerned about this merger.
In closing, the executives who lead these airlines have a
responsibility to their shareholders to create the strongest
airline, but we on this subcommittee have a different, and
perhaps more important, responsibility. Our responsibility is
to the public, to protect consumers, and to ensure that no
airline or small group of airlines gains a stranglehold on the
market.
We need to be sure that the announcement that we have all
heard flight attendants say at the end of the flight, ``We know
that you have a choice among airlines'', does not become as
obsolete as airlines as TWA, PanAm, Eastern, Braniff, ATA, and
now, perhaps, Northwest.
Senator Hatch, the Ranking Member of this Committee, is
with us today and we turn to him for his comments.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I appreciate
your leadership on this Committee. I'm sorry I'm just a little
bit late. I've been behind all day long. So, I apologize to you
again.
It's always been a pleasure to work with you, and I
appreciate that you've called this hearing so quickly after the
announcement of the proposed Delta-Northwest merger. This is a
matter of the highest importance to all of our States, and in
particular my home State of Utah as well. I also want to thank
our witnesses for accepting the subcommittee's invitation to
testify here today.
Mr. Chairman, I am looking forward to the possibilities
that this merger offers. Both Delta and Northwest play
important roles in the smaller communities that are found in
the mountain west and upper midwest. The merger holds the
promise of efficiently connecting those communities not only to
additional locations inside our own country, but to Europe,
Asia, and Latin America.
The proposed business plan for this merged entity is novel.
Instead of eliminating duplicative route service or leveraging
similar aircraft fleets, the purpose of the merger is to
increase revenue by offering increased route offerings.
However, this transaction raises important antitrust
questions: first, do Delta and Northwest routes overlap?
Second, will the merger result in higher prices? Finally, what
type of analysis should the regulatory officials perform when
considering this transaction?
First, Delta and Northwest routes are largely
complementary. In fact, Delta states that the transaction will
result in only 12 non-stop domestic city-pair overlaps. City-
pair overlaps are defined as those locations that both Delta
and Northwest currently offer flights between. Of the 12
overlaps, 5 cities will have 3 or more non-stop competitors
after the combinations, and 3 other cities will have 2
competitors after the merger. There will be only four city-pair
overlaps, reduced to a single carrier providing non-stop
service. Those city pairs are Salt Lake to Detroit, Salt Lake
to Minneapolis, Cincinnati to Detroit, and Cincinnati to
Minneapolis.
Delta contends that these non-stop service overlaps will
affect only 573 people, and I might add, will compromise only
0.3 percent of the combined airlines' origin and destination
domestic traffic.
Second, many speculate that this transaction will result in
higher ticket prices. Now, this is a legitimate concern.
However, Delta argues that their new business plan is designed
to raise revenue. It can be very difficult to raise prices
drastically due to potential competition from low-cost
carriers, yet ascertaining the possible range of price
increases will be one of the more important aspects of today's
hearing.
Finally, there is the question of what type of analysis
should be performed on this merger. Traditionally, antitrust
regulatory agencies perform their analysis only on the merger
``in front'' of them. However, other mergers are considered as
part of the analysis if they affect a similar market, and those
mergers occur during the period in which the initial merger is
being considered.
In the case of this merger, Mr. Mitchell and the American
Antitrust Institute advocate the Department of Justice perform
a scenario analysis. Now, scenario analysis takes into
consideration other possible mergers that could occur even
though they have not been announced or negotiated. I believe
this could have disadvantageous consequences, and I look
forward to discussing this matter with you in greater depth.
That being said, Mr. Chairman, let me just thank you for
calling this hearing. I look forward to a thorough discussion
of these issues, and I appreciate your leadership on this
matter.
Chairman Kohl. Thank you very much, Senator Hatch.
We now turn to two distinguished Senators who are here to
make a statement, Senator Chambliss from Georgia and Senator
Klobuchar from Minnesota.
Senator Chambliss, we'll hear from you.
STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM THE
STATE OF GEORGIA
Senator Chambliss. Mr. Chairman, thank you very much. I
appreciate you and the Ranking Member, Senator Hatch, holding
this hearing today and letting us have an opportunity to come
before you. I particularly appreciate the opportunity to
introduce Delta Airline's CEO, Richard Anderson. Delta's
headquarters is based in Atlanta in my home State of Georgia,
where they are the largest tenant of the world's busiest
airport, Hartsfield-Jackson International Airport.
Richard joined Delta as a member of their Board of
Directors in April of 2007. In September of 2007, he had
succeeded one of Delta's finest chief executives, Gerald
Grinstein. I've been pleased to have the opportunity to get to
know Richard over the past few months. Last year when he took
over, Delta had recently emerged from bankruptcy and,
interestingly enough, he came to Delta after having served at
Northwest.
Under his leadership, Delta strengthened its balance sheet
at time when we have seen numerous airlines file for bankruptcy
or see separations. Richard brings more than 20 years of
airline experience to the job, as he has previously served as
the chief executive officer of Northwest, whose merger
obviously you are here today to discuss. Richard's experience
lends him the necessary skills to successfully meet the demands
that will be placed on him should this merger be approved.
Mr. Chairman, we are here today to discuss the viability
and the effect on consumer choices that a merger between Delta
and Northwest Airlines would have on consumers. These two
companies would form a stronger airline that would offer
consumers increased access to international destinations.
Delta has a strong presence on the East and West Coast and
in European markets, while Northwest maintains a strong
presence in the Midwest and Asia. These synergies should not
adversely affect customer choices in air service, but should
actually enhance them and result in a stronger airline that
should be less susceptible to economic downturns and the ever-
increasing fuel prices.
Delta Airlines has come a long way since its beginnings in
Monroe, Louisiana to the international commercial airline it is
today. It has been an economic engine for Georgia and the
Southeast for many years. Delta, as many airlines after 9/11,
has faced many challenges and has emerged as a strong carrier.
As a resident of rural Georgia, I fly Delta Airlines from
my home to Atlanta and back, usually at least once a week.
Excuse me. I get back and forth to Atlanta once a month, at
least. I fly it all the way home. So, I depend on the connector
airlines also. And you are right, Mr. Chairman, that is a very
integral part of this in the overall restructure should this
merger be approved and it is something that I look forward to
you following very closely, but I know it is going to be
successful and is going to be continued.
I am very proud to have the honor to introduce today a
superb airline industry leader and a fine American in my good
friend, Mr. Richard Anderson.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Chambliss.
Senator Klobuchar?
STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM THE STATE
OF MINNESOTA
Senator Klobuchar. Thank you very much, Mr. Chairman and
Senator Hatch. Thank you for the opportunity to testify today
on a matter of great concern to my home State of Minnesota, as
well as the people we represent and the future of the airline
industry.
The proposed merger of Northwest Airlines and Delta Air
Lines, which has been called a mega-merger--it would in fact
produce the largest airline in the world--represents a turning
point in the history of our country's airline industry, so I
will start with a few words of history.
Northwest Airlines was founded in Minnesota in 1926 to
carry mail for the U.S. Post Office, and it established the
first air mail service from Minneapolis to Chicago. During
World War II, it joined the war effort by flying military
equipment and personnel to Alaska, and after the war, was
designated by the Federal Government as the United States' main
carrier in the Pacific.
In 1947, Northwest became the first American airline to fly
commercial passengers from the United States to Japan, and by
the 1960's it was one of the premier U.S. carriers between the
United States and the booming economies of Asia.
I recite this history not out of nostalgia, but to describe
the importance that Northwest Airlines has always played, and
plays today, in the economy of Minnesota and the Midwest.
Northwest, represented here today by many employees as well as
CEO Doug Steenland, provides nearly 12,000 high-skilled jobs in
my home State, including trained mechanics, pilots, flight
attendants, and the many workers who support its airport and
headquarters' operations. In addition, it operates major
reservation facilities in Eagan, Minnesota and in Chisholm,
Minnesota on our State's Iron Range.
Moreover, Northwest is a vital link connecting the
communities of Minnesota to one another, and Minnesota to the
world. Minnesota ranks No. 9 in Fortune 500 companies, and in
addition to being the home to a major research university, as
well as major medical facilities like the Mayo Clinic, we are
hope to many people that need this competitive air service.
If Northwest has been good to Minnesota, our State has been
good in return. In 1991, when Northwest was threatened with
bankruptcy as a result of rising fuel costs and an economic
recession, the legislature passed a loan package worth nearly
$300 million in exchange for Northwest's promise to stay in
Minnesota and build new facilities in Minnesota.
More recently when Northwest faced financial difficulties
again, our Metropolitan Airports Commission granted it millions
of dollars in rent reduction and agreed to share airport
concessions. These efforts came on top of a $15 billion
financial rescue package that Congress created in 2001 to help
the airline industry after 9/11.
So I think it is fair to say that the people of Minnesota
have had a partnership with Northwest and other major carriers
over the last many years, and I think that Northwest has an
obligation to uphold their end of the deal.
The proposed merger has ramifications not only in
Minnesota, but beyond our borders. Already, passengers are
concerned about adequate choice and competitive fares. As the
industry stands today, the top four carriers--American, United,
Delta, and Southwest--control nearly 50 percent of the market.
Many airline analysts predict that a Delta-Northwest merger
would trigger a new wave of consolidation in the airline
industry that would further increase market concentration.
Already there is speculation about a merger between United and
Continental, and some analysts foresee a consolidation of our
country's airline industry from seven major carriers to just
three.
I am concerned that the agencies with jurisdiction--the
U.S. Department of the Transportation and the U.S. Department
of Justice--will evaluate this merger in isolation and not
consider its effects on the airline industry as a whole,
something that Senator Hatch was just speaking to.
I would urge that the departments, as part of their
competition review, ask for specific assurances from the
executives of these carriers. If the merger triggers further
concentration in the industry, what evidence do they have that
fares will not go up? What assurances can they give that
consumers will still have meaningful choice?
One of the major reasons given for this merger, the
increasing oil prices, how can they show that those oil prices
would somehow change as a result of this merger or that Delta,
which is already the third-largest carrier, would somehow be
able to negotiate better oil prices--much better oil prices--
than they do now? How can they guarantee that affected
communities will still have frequent, high-quality service?
These are the questions I hope this Committee asks, as our
Commerce Committee will do at a later hearing.
In short, it is essential that the Departments of Justice
and Transportation not review this merger in a vacuum, but
consider the likely broader implications for the aviation
industry and society as a whole. This merger must be considered
and looked at as to whether increased concentration would lead
to an oligopoly -that is, a market controlled by a few--
increased barriers to entry, and diminished competition. They
must also consider establishing formal conditions for approval
of this merger that would assure the government and the public
that the industry will have the robust competition necessary to
move forward.
Concentration, as we know, often leads to higher prices and
that is the core, the central concern of our country's
antitrust laws. I would also add that for those of us that
represent States that include rural areas, we are not only
concerned about the hub, but the spokes. One of the things that
I think we must explore, is former Delta CEO Gerald Grinstein,
which Senator Chambliss mentioned, when he spoke about his
opposition to the merger between Delta and U.S. Air before the
Commerce Committee, on which I serve, he asked: ``In terms of
service to small communities, are you better off with six
network carriers or are you better off with three? Are you
better off having these network carriers fiercely competing
with each other, trying to get into those markets? If you
approve one merger, how are you going to say no to other
carriers? You will devolve into three network carriers, and
once that happens you won't get the same level of service.''
I think it is important that members of this Committee use
this hearing, and as we will do on our Commerce hearing, to
hold the airlines accountable for the commitments they have
made about this merger and to create a record for the
Department of Justice so that the DOJ understands the impact
that this merger may have on jobs, on communities, and on the
American flying public. In short, what we learn here today and
what we will learn at the upcoming Commerce Committee hearing
should help guide the Department of Justice as it considers the
impact of this merger on our competition laws.
In conclusion, I urge this Committee to look at this from a
global standpoint, not just in isolation, for the impact it
will have on the airline industry. I urge this Committee to ask
the Federal regulators to undertake a full and comprehensive
review of the consequences of this proposed merger. We must
proceed with care and caution, with an eye not only to the
bottom line for Wall Street, but the bottom line for Main
Street.
Thank you very much for this opportunity.
Chairman Kohl. Thank you, Senator Klobuchar.
There is a vote on the floor, so we will have a recess of
10 minutes.
[Whereupon, at 2:29 p.m. the hearing was recessed.]
AFTER RECESS [2:49 p.m.]
Chairman Kohl. The hearing will continue.
We would now like to introduce our second panel of
witnesses. Our first witness on that panel today will be
Douglas Steenland. Mr. Steenland is the president and CEO of
Northwest Airlines, where he has served in various capacities
since 1994. Before joining Northwest, Mr. Steenland worked as
senior partner at the law firm Verner Liipfert in Washington,
DC.
Following him will be Richard Anderson. Mr. Anderson is the
CEO of Delta Air Lines, where he has served since September of
2007. Prior to joining Delta, Mr. Anderson was the executive
vice president of United Health Group from 2004 until 2007. He
worked at Northwest Airlines from 1990 to 2004, where he was
the CEO from 2001 to 2004.
Following will be Kevin Mitchell. Mr. Mitchell is the
founder and chairman of the Business Travel Coalition, where he
writes and speaks on airline competition and other aviation
issues. Prior to founding BTC, Mr. Mitchell was the vice
president of Human Resources and Services at Cigna.
Finally, we will be hearing from Darren Bush. Dr. Bush is
an Associate Professor of Law at the University of Houston Law
Center, where his primary research interests are antitrust and
regulated industries, energy, as well as intellectual property.
Dr. Bush also served in the Transportation, Energy, and
Agricultural sector of the Antitrust Division at the Department
of Justice.
We thank you all for appearing at the subcommittee's
hearing today.
We ask you all to stand and raise your right hand.
[Whereupon, the witnesses were duly sworn.]
Chairman Kohl. Thank you.
Mr. Steenland, we'll hear from you first.
STATEMENT OF DOUGLAS STEENLAND, PRESIDENT AND CEO, NORTHWEST
AIRLINES, EAGAN, MINNESOTA
Mr. Steenland. Thank you, Senator. Chairman Kohl, Senator
Klobuchar, I am Doug Steenland, chief executive officer of
Northwest Airlines. I appreciate the opportunity to appear here
this afternoon to explain the benefits of the recently
announced merger between Northwest and Delta, and the fact that
this merger will not lessen competition.
The U.S. airline industry is at a crossroads, creating two
choices for Northwest. One choice is to continue on the road
now traveled as a stand-alone airline, being whipsawed by
rising oil prices which will cost Northwest an estimated $1.4
billion more this year, facing competition from discount
carriers that have now captured one-third of the U.S. market,
and internationally facing heightened 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.
Most importantly, the merged airline will be more
financially resilient and stable, better positioned to meet
customers' 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. We
would like to focus on that for a second. In the U.S.,
Northwest operates hubs in Detroit, Memphis, and Minneapolis.
In recognition of the service we provide and the essential
nature we are to the community and the commitment we have made,
we received strong civic support in Michigan, in Memphis, and
in Minneapolis--in St.Paul we received the support of the
Minnesota Chamber, the St. Paul Chamber, and the Metro
Coalition of Chambers. 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 in only a minimum extent today.
Let us start, first, with international markets. The
question of competition internationally has been asked and
answered by the U.S. Government. Recently, the U.S. Department
of Transportation tentatively granted antitrust immunity to
Northwest, Delta, Air France, and KLN, and in doing so found
that there would be no reduction in competition over the
transatlantic from the combination of Delta and Northwest.
Northwest does not serve Latin or Central--Latin America, a
Delta stronghold, and Delta has only minimal service to Asia,
which, as Senator Klobuchar pointed out, Northwest has served
well since 1947.
Domestically, Northwest routes are concentrated in the
upper Midwest, while Delta is strong in the South, in the East,
and in the mountain west. The most important fact to remember
from today's hearing on competition is that, of the 800
domestic non-stop routes that Northwest and Delta today
collectively fly, there are only 12 overlap non-stop city-pair
markets. On the vast majority of those 12 markets, there is
robust non-stop competition that clearly will make sure 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 is the largest domestic airline in the United States
and carriers more domestic passengers than any other airline,
and that will continue to be the case even after this merger is
consummated.
In addition, online technologies with amongst the most
powerful search engines in the world, run by Orbitz,
Travelocity and Expedia, have really created a customer
revolution. Customers can now quickly and easily compare the
offerings of competing carriers on any given route, and if they
so choose they can push the ``lowest applicable fare'' button
and they're guaranteed to see low prices from the choices that
they select. All of these developments ensure the continued
competitiveness of the U.S. market post-merger.
For Wisconsin and Minnesota, this merger has a particular
interest. It has a particular history as well, and it is worth
recounting it briefly because it explains some of Northwest's
strengths today. Thirty years ago in one of the first
noteworthy airline mergers, North Central and Southern combined
to form Republic, becoming the largest airline in the country
measured by domestic destinations served. In 1986, Northwest,
then primarily known for its international service, acquired
Republic and, but for that merger, I think it is highly likely
that we would not be here today.
As you know, Mr. Chairman, Northwest is also a passive
investor in Midwest Airlines. We have a commercial cooperation
agreement with Midwest that is beneficial to both. Tim
Hoeksema, president of the Wisconsin-based Midwest Airlines,
confirmed this weekend that, in his judgment, this merger will
not adversely affect his company, and he observed that
maintaining the status quo is not the way to currently overcome
the industry's difficulties.
With this merger we have achieved our goal of crafting a
transaction that creates significant value for all of our
shareholders. The combined company will be more stable, better
positioned to meet the challenges of the future both at home
and abroad.
Thank you very much.
[The prepared statement of Mr. Steenland appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Mr. Steenland.
Mr. Anderson?
STATEMENT OF RICHARD ANDERSON, CEO, DELTA AIR LINES, ATLANTA,
GEORGIA
Mr. Anderson. Mr. Chairman, members of the Committee, thank
you. I appreciate the opportunity to be here today and to
represent the employees of Delta, many of whom are here with me
today.
This creates an opportunity for Delta and Northwest to
create a real global airline. As Doug stated, the world is
changing rapidly around us, both in terms of fuel and Open
Skies agreements and trade agreements around the world, we
really should be thinking about this business in a global
sense. I know it's very important. We serve a lot of small
communities together, but we really play on a much broader
stage and we need to be able to compete against the foreign
competition.
When we think about these two airlines separately, we are
not as strong as our foreign competitors. The European Union
and government agencies in other parts of the world have
allowed consolidation. Open Skies agreements have now resulted
in foreign flag carriers carrying more international passengers
to and from the United States than U.S. flag carriers.
U.S. airlines--we only have 5 percent of the worldwide
orders for wide-body airplanes in the U.S., so if you take all
the U.S. airlines and add up all their wide-body orders at
Boeing and Airbus, we are 5 percent of the outstanding backlog
of wide-body airplanes.
We are not here asking you for financial support, we just
want the ability to react to the marketplace and do the things
that we can do for our employees, our shareholders, and our
communities in response to fuel prices, which have doubled. In
the case of Delta, in the first quarter, our year-over-year
fuel bill went up over $500 million. Multiply that times four.
You essentially have fuel doubling in a 1-year period of time.
And what we miss on that are two factors. Fuel has gone
from $60 to $120 a barrel, but refining costs have doubled to
over $30 a barrel, and we're paying for it with dollars. Our
European competitors pay for it with euros. They're effectively
paying about $80 a barrel right now, while we pay $120 a
barrel.
These oil prices have driven five carriers to Chapter 11
since the beginning of the year. And what this merger does for
two already-strong carriers is give us the power to compete and
win versus foreign flag carriers. That is good for our
employees, communities, and shareholders because we have an
obligation to all of them to build a durable and lasting
network.
This consolidation is really complementary. When you look
at these two airlines, there are two simple numbers. In the
domestic market, 800 non-stops, 12 overlaps; 0.3 percent of the
capacity overlaps on a non-stop basis, and in those markets
there's plenty of competition. So, they are really end-to-end
networks.
The same thing internationally. There's really no
competition issue here whatsoever internationally, which is
over 40 percent of the combined flying of the two airlines. The
merger provides stability for our employees. This industry has
lost 150,000 jobs and $30 billion in financial losses since
2001, and we have built this combination with our employees,
communities and shareholders in mind.
First, we have made a commitment to provide substantial
ownership to the employees in the combined company. Second, we
are committed to fair and equitable seniority integration.
Third, we have a covenant in the merger agreement and the way
this has been set up will protect the pensions of the
employees. Last, we have made a commitment to the front-line
employees that there would be no furloughs as a result of the
transaction.
Small communities and large communities benefit because
there are no hub closures, and we become the largest airline
serving small communities, with over 140 in the U.S. We create
new service to 3,000 domestic market city pairs, and over 6,000
new international city pairs.
Keep in mind that oil is a game changer today--and by the
way, a much bigger game changer than just the airline business.
Fuel prices at this level changes many things in American
society today, and we have got to be in a position to be strong
enough to weather that.
The combined enterprise of these two airlines creates over
$1 billion in benefits, and the combined entity will have over
$7 billion in liquid assets. We have the best combined cost
structure, we have the best combined balance sheet, we have
solid strategies. We need to be given the chance to be able to
compete on our own. Customers will enjoy a significant
expansion of service options and an enlarged Frequent Flyer
program.
In sum, it is good for our employees, our customers, and
our communities. When you look at the stand-alone plans and you
look at what's happened in this industry over the last six or 7
years, we should be in a position to act together to build a
far more durable, far more stable platform.
I would also like to ask, Mr. Chairman, if I could enter
statements of support from the Detroit Chamber of Commerce, the
Memphis Chamber of Commerce, and the Airline Pilots Association
of Delta Air Lines.
Chairman Kohl. It will be done.
Mr. Anderson. Thank you.
[The prepared statement of Mr. Anderson appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Anderson.
We'll now hear from Mr. Mitchell.
STATEMENT OF KEVIN MITCHELL, CHAIRMAN, BUSINESS TRAVEL
COALITION, RADNOR, PENNSYLVANIA
Mr. Mitchell. Mr. Chairman and members of the Committee,
thank you for requesting that the Business Travel Coalition
appear before you today to represent the consumer on a
potential Delta-Northwest merger and airline industry
consolidation. My testimony today is also on behalf of the
400,000 members of the International Airline Passengers
Association.
As consumers stand uncomfortably on the precipice of the
first of several breathlessly hurried transactions, dangerously
poised to do permanent damage to our well-being, never have we
needed your leadership more.
From a consumer standpoint, Congress must insist that the
DOT and DOJ not focus on the proposed on Delta-Northwest merger
as a stand-alone transaction, but rather the analysis must
include implications for the competitive structure of the
industry resulting from a radical consolidation of the major
carriers.
Let there be no doubt, Delta-Northwest is the proverbial
canary in the coal mine. If this anti-competitive deal lives,
others will follow and follow fast, leaving us in an avian
apocalypse worthy of Hitchcock. We believe there are powerful
reasons why these mega-mergers would be harmful to consumers
and would solve none of the airlines' most serious problems.
With all due respect to my distinguished fellow panelists,
airline CEOs have long ago lost the benefit of the doubt when
it comes to reassurances about mergers and consumer impact. The
track record they run on is one of dashed dreams and broken
promises. In preparing for this hearing I reviewed the
celebratory merger press releases, followed by the coffee-
smelling Monday morning reality of shuttered hubs, wrecked
communities, disappointed employees, poor service, and, of
course, higher prices--and oh, yes, regretful CEOs.
The claims from Delta and Northwest you have heard so far
today represent the triumph of hope over experience. A rush to
judgment regarding this merger proposal is a sure-fire recipe
for a failed policy. BTC urges the Committee to examine the
consumer and competitive issues carefully and deliberately.
This transaction, and the others it will ignite, deserves
thorough and appropriate econometric and stakeholder impact
analyses.
Congress must not allow the DOT and DOJ to rubber-stamp
this troubling transaction based on the high price of fuel, an
unfortunate reality that also requires careful policy
consideration. However, one thing seems certain: this
transaction will do exactly nothing to address fuel prices.
The claim that a mega-merger would produce many billions of
dollars in network and cost efficiencies, enough to not only
provide a reasonable return on a very risky investment but
enough new profits on top of that to counteract high fuel
prices, is absolutely unrealistic. How can there be billions of
dollars in untapped cost savings at two airlines that just
underwent years of cost-cutting in bankruptcy? Likewise, how
can one claim huge-scale benefits from mega-mergers unless one
believes that airlines the size of Delta and United are too
small to be competitive?
How can one accept that there are billions of dollars in
revenue synergy when there are no plans to restructure either
network? Importantly, unless Delta can convince expert
outsiders of something on the order of $5 billion in readily
achievable synergies, there is no possibility this merger could
benefit consumers or the public interest.
What is more, mega-carriers create a risk of an operational
meltdown that could cripple the Nation's aviation system. Fuel
prices and the lack of merger-related synergies would create
huge pressures to cut corners on implementation spending,
exacerbating conflicts with and among employee groups.
Difficulties with integration of complex computer systems and
maintenance programs could create problems, but make the recent
American Airlines MD-80 debacle seem like an unobtrusive
glitch.
Then there are competitive--competition problems. Going
from three to perhaps--from six to perhaps three super-mega
carriers would make airfare increases and onerous consumer
policies easier to stick. Congress should also be concerned
that these super-mega carriers would have the ability to
exercise market power in adjacent markets and drive supplier
prices to below competitive rates for travel agencies, parts
suppliers, caterers, and all manner of participants in the
supply chain.
However, the primary objective and dirty little secret of
these mega-mergers is the permanent end--the permanent end--to
meaningful competition between the United States and
continental Europe. Two-airline competitor groupings, led by
Air France and Lufthansa, who are poised to provide the lion's
share of financing for these mergers, would control 90 to 95
percent of a profitable growing market of over 30 million
passengers, where there would be zero possibility of new
competition. Airlines could raise prices at will without any
risk that market forces could constrain competitive abuses.
As you can see, members of the Committee, this proposed
merger will do everything but help the competitive structure of
the airline industry and the airlines have failed to answer the
many questions consumers have surrounding this merger.
Thank you.
Chairman Kohl. We thank you, Mr. Mitchell.
[The prepared statement of Mr. Mitchell appears as a
submission for the record.]
Chairman Kohl. Dr. Bush?
STATEMENT OF DARREN BUSH, ASSOCIATE PROFESSOR OF LAW,
UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, TEXAS
Mr. Bush. Mr. Chairman and other distinguished members of
the Antitrust Subcommittee, I want to thank you for giving me
the opportunity today to speak to you about the potential anti-
competitive effects inherent in a new wave of consolidations
that might be spurred by the proposed merger of Delta and
Northwest Airlines.
In doing so, my remarks today are my own. I do not
represent anyone. I speak today based upon my experience as a
former Antitrust Division trial attorney, focused on
deregulated industries--in particular, airlines--and as an
economist, and as a law professor who has done extensive
research on the issue.
Rather than rehash my written testimony, I want to signal
to you not the things that may be problematic with the merger,
but rather those things that may be problematic with the
Department of Justice's ultimate decision with respect to the
merger. I do so to highlight larger issues in the world of
antitrust that are in dire need of your attention.
With any merger, the ultimate question posed to the
Department of Justice or the Federal Trade Commission is
whether the proposed merger injures consumers. The analysis is
far more complex than that, but the gist is to determine
whether there is anti-competitive harm and whether or not
anything about the transaction or the nature of the industry
mitigates that harm.
With respect to the anti-competitive harms, the DOJ, in the
context of the airline industry, has examined in the context of
mergers the following issues: the effect of the merger on
competition in non-stop city-pair markets, typically routes
between the hubs of the merging airlines. In many of these
routes, non-stop air passenger service faces a monopoly. In
other routes, there is likely to be reduction in service from
three to two.
The effect of the merger on competition and connection
markets. For example, connections from origins or destinations
east of Colorado in the Midwest to the East Coast destinations
may have a reasonable--may have as reasonable connection
options the hubs of the merging firms and Chicago-O'Hare, an
airport which is seriously congested and constrained.
In some markets, Delta may be a potential entrant into a
Northwest market, and vice versa. One example might be the Salt
Lake City to Detroit market, where Northwest might have
provided service but for the merger. In addition, there may be
numerous potential competition opportunities in connection
markets. The importance of potential competition in an industry
with rapidly eroding existing competition cannot be
understated, although such a case is difficult to bring in
court.
Competition for contracts is an issue. Northwest and Delta
may compete vigorously with each other for company contracts,
particularly where the corporation requires significant travel
on non-stop routes where the companies--where the firms
compete.
The combination may foreclose downstream and upstream
markets. Specifically, care must be taken to examine the nature
of any contract vital to the core function of providing air
passenger service. In particular, contracts between the merging
parties and vendors and suppliers should be examined to
determine whether there is a potential that the combined firm
could foreclose competitors from obtaining vital services.
These are the issues that DOJ gets. They understand this, and
DOJ's excellent press release in the United-U.S. Airways
investigation demonstrates the agency's understanding of these
issues.
However, I reserve judgment as to whether these issues,
apart from the first two listed, are fully understood by the
current Assistant Attorney General, whose track record in
bringing enforcement actions in mergers is a panorama of
inaction, with the notable exception of the Exxon merger and a
few others.
So what difficulties did the DOJ staff face in enforcing
the antitrust laws? Well, there are some issues that will give
the DOJ staff pause. The first issue is that there is a trend
in the courts and with the agency administration that
efficiencies are now the god of antitrust.
If there are cost savings involved in a merger or any other
transaction, it is often the case that, whether those
efficiencies are ethereal, illusory, only stated, not
cognizable, not verifiable, they are still given the benefit of
the doubt and the transaction moves forward. It cannot be the
case, however, in looking at this transaction that one only
looks at the notions of efficiencies without seeing that they
are actual efficiencies. Unfortunately that has not been the
trend, either in the court or in the Department of Justice
currently.
Even, however, if we examine the anti-competitive effects
of the merger at the Department of Justice and look at any
potential efficiencies, there are some other hurdles. If the
merger turns out to be anti-competitive, the DOJ may actually
have to bring an action in court. The courts have made it
abundantly clear that they no longer follow what is called the
incipiency standard in Section 7 of the Clayton Act. Whether or
not the transactions are likely to lessen competition is now
irrelevant in court, and what matters is only tangible evidence
that the merger will lessen competition, a nearly impossible
standard in a forward-looking analysis such as merger review.
Another issue that is of great importance is the fact that
current antitrust law, and if I were to challenge a merger, or
if anybody were to challenge a merger based upon the notion of
a follow-on merger creating anti-competitive effects, that
challenge would be thrown out of court. There is no ability for
the Justice Department to bring a case based upon some
speculative merger in the future.
However, there is an ability for the Justice Department to
determine whether there is in reality follow-on antitrust--
follow-on mergers. They have the potential and are likely to do
so to engage in civil investigative demands and other
investigative techniques to ensure, or enable to determine,
whether Continental and United were, say, merging. If that were
the case, then you would have to take those transactions as a
whole to determine the anti-competitive effects.
However, if the transactions are not sufficiently close
together, then of course there is no way to bring that kind of
challenge. So I am sorry, I am running out of time, but I
wanted to bring these issues up because it is not just the
transaction that is problematic, it is if this transaction is
anti-competitive, bringing a challenge to enjoin the
transaction is inherently problematic.
Thank you for your time.
Chairman Kohl. Thank you, Dr. Bush.
[The prepared statement of Mr. Bush appears as a submission
for the record.]
Chairman Kohl. Mr. Anderson, as we discussed in our meeting
yesterday in my office, the future of Milwaukee's hometown
airline, Midwest Airlines, is a major concern to me. I believe
it is crucial to our economy that Midwest remains independent
and locally owned and operated. As part of a deal that closed
earlier this year, Northwest Airlines owns 47 percent, as you
know, but has no operational control of the partnership that
owns Midwest.
We also understand that as part of that transaction
Northwest has an option to purchase the rest of Midwest. If the
Delta-Northwest deal is completed, we presume that Delta will
own that share and control that option. Can you assure us that
you will not exercise that option, Mr. Anderson?
Mr. Anderson. Well, the entities aren't merged yet so I'm
not perfectly familiar with the terms of that transaction, but
I can tell you that it would be our intention to keep them
independent. The transaction, as I understand it, contemplated
that Northwest would be a purely passive investor, that they
don't have any membership on the Board of Directors and the two
firms act independently. That was the whole idea behind the
investment, and it would be our intention to maintain that
position with respect to Midwest.
Chairman Kohl. So I can take that as something of a near
certainty?
Mr. Anderson. Yes.
Chairman Kohl. Thank you.
Mr. Anderson, will you pledge, as a major shareholder in
Midwest, that Delta will do everything it can to maintain the
independence of operations of Midwest and not take any action
to interfere with the route structure, frequency, and quality
of service of Midwest Airlines from its Milwaukee hub?
Mr. Anderson. Yes.
Chairman Kohl. After the merger with Northwest, will it be
Delta's business interest to have Midwest remain as an
independent and strong airline based in Milwaukee?
Mr. Anderson. Yes, because the whole transaction is
predicated upon a domestic alliance with Northwest, with the
shared Frequent Flyer program, connecting passenger exchanges
through code sharing, and that was an important part of the
transaction for Northwest, as I understand it. And that sort of
alliance relationship is important to Northwest's service
patterns in the upper midwest because they flow traffic on each
other, particularly international traffic, since Midwest
doesn't have an international network.
So I think the original agreement that Doug put together
contemplated that it would remain an independent airline. It's
got a great service reputation. It bakes cookies and does other
special passenger amenities on its flights, and I think it's
very well run--a very well-run hometown airline. It would be
our intention that it would remain that way.
Chairman Kohl. Finally, gentlemen--Mr. Steenland and Mr.
Anderson--what is it about Midwest that generates such strong
approval from customers that I don't think you find in too many
other airline businesses across the country? What is it about
their business that you feel cannot, or should not, be emulated
in your business?
Mr. Anderson. Well, if it's good customer service, we want
to emulate it.
Chairman Kohl. Well, their ratings.
Mr. Anderson. Right.
Chairman Kohl. You know, the things that characterize them
in the competitive markets in which it plays, from time to time
those things come out and Midwest seems to be somewhere close
to the very top.
How about you, Mr. Steenland. What do you think?
Mr. Steenland. Well, I think Midwest has done an excellent
job in terms of fashioning itself as the hometown airline.
Milwaukee travelers are very familiar with it. It has strong
local roots. It still has members of the Milwaukee community on
its board. It was a good civic supporter, and I think that
developed a loyalty and a responsiveness that is admirable.
Chairman Kohl. Thank you so much.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Chairman Kohl, and
thank you for allowing me to join this Committee today.
I know that you testified, both of you. And again, welcome
to both of you, and also welcome to all the employees from
Northwest and Delta that are here. I know that both of these
employee groups stood by their airlines when you went through
some very difficult financial times and I have their interests
in mind, as well as the interests of the people of this country
as we go forward.
I know this morning when you testified in front of the
House, a questioned was asked about the number of jobs that
would be lost as a result of the merger. I think one of you--
maybe it was you, Mr. Anderson--said something about, that it
would be less than 1,000 jobs.
Could you elaborate on that?
Mr. Anderson. That was a very general number. We have not
done the bottoms-up diligence to determine, you know, how the
merged airline will look. It was really a guesstimate, an
estimate of where we think it might end up. But, you know, we
haven't yet put together the transition planning teams to
really go department by department and figure it out.
Senator Klobuchar. You know, there are nearly 12,000
employees in Minnesota, but there are about 1,300 employees in
the Eagan headquarters. How do you think these employees' jobs
will fare?
Mr. Anderson. The efficiency savings comes from both
headquarters, so when you look at putting two companies
together, the efficiencies--those efficiencies will come from
both headquarters.
Senator Klobuchar. And so do you still stand by your words,
I think it was in the merger announcement, where you said that
Delta and Northwest were committed to retaining significant
jobs, operations, and facilities in the State of Minnesota?
Mr. Anderson. Absolutely.
Senator Klobuchar. All right.
Mr. Steenland, do you want to comment on that?
Mr. Steenland. I would concur. That was a joint press
release and we fashioned those words together. When you look at
the--clearly, if you start with preservation of the hub, which
we have signed onto, obviously all of the front-line employees
at the airports, the pilot base, the flight attendant base, the
ancillary services necessary to operate a hub, our res. offices
in Chisholm and in Minneapolis, our information technology
center, our pilot training center are all activities that will
need to be part of the combined entity going forward.
And just the fact that one particular activity or a
particular service was not named on that list does not mean
that they will not be included, it just means that's about as
far as the process has gone so far and that there will be a
joint transition planning effort under way where we will then
start getting into some more detail, into some more granular
efforts where we'll identify some of the additional services as
to--
Senator Klobuchar. Mr. Anderson?
Mr. Anderson. Well, so for just a little bit of history, I
was actually involved at Northwest with Mr. Steenland 16 years
ago when we negotiated that covenant with the State of
Minnesota, so I have a particular closeness to that commitment,
No. 1.
No. 2, Minneapolis is a very important part of this
combined network. It has a significant number of Fortune 200
companies. I'm on the board of two of them, Cargill and
Medtronic, in Minneapolis. And it's very important to the
vibrancy of that hub and to our commitment to Minnesota that
you make that same corporate commitment to the community. As
you know how that community works, that's a very important part
of the Minneapolis fabric. I understand that fabric, and we're
going to do our very best to live up to that statement in our
press release.
Senator Klobuchar. Thank you. And you understand, with
what's happened with some of these other airline mergers that
have been referenced and some promises made with TWA and
others, I'm just concerned about the staying power of these
commitments. In other words, what will prevent the combined
airline from laying off workers a year or two from now, you
know, claiming market forces drove them there?
Mr. Anderson. Actually, I would answer that by sort of
flipping it a little bit. You know, the reason why Northwest is
where it is today is the Republic-Northwest merger. There were
three international carriers at deregulation: PanAm, TWA, and
Northwest Orient, a set of three to which you do not want to be
a member, because you'll recall that both PanAm and TWA
liquidated because they had no domestic route system, and it
was a result of the Republic-Northwest merger in 1986 that
Northwest got a solidified hub position in Minneapolis,
Detroit, and Memphis. The same thing for Delta.
So my point is, we almost have to view it in light of what
our alternatives are, and the idea that you can put two
airlines together and make it stronger. Because the situation
with TWA was, the St. Louis hub was probably never a reliable
hub. It had been the result of a transaction between TWA and
Ozark when Ozark was not in very good shape. And so by the time
American had bought it, TWA had been through bankruptcy three
times and it was actually an asset acquisition, it wasn't a
merger. Today it doesn't have the local traffic base to really
support a large hub operation.
So I would sort of really answer it by saying that this is
actually the best alternative for those jobs and those
communities, because in the end the only real job security is a
sound business plan, when it's all said and done. And what this
combination allows us to do is be much stronger together, and
that's really--really--we understand our commitment to
communities and our employees, and so we look at the landscape
of what we can do in this fuel environment and the world
economy, and this is really the best and safest option.
Senator Klobuchar. You know, you mentioned the fuel
environment right now. I'm trying to understand this, because
if oil is $120 a barrel before the merger, there's a good
chance it's still going to be $120 a barrel for a combined
carrier. It's going to be the same price. And so could you
explain why this would make it different?
Mr. Steenland. The merger will not create an entity that
will have more negotiating power and will be able to drive a
lower price with respect to oil. You're exactly right. We'll
spend $120 a barrel prior to the merger, $120 after the merger.
Senator Klobuchar. And the fact that, say--because Delta is
already, what, the third biggest carrier? So I thought you
might make the argument that now we're even bigger so we can
get more leverage to get cheaper prices.
Mr. Anderson. The Federal Government can't even do that
when they fill the Strategic Petroleum Reserve, so if they
can't--
Senator Klobuchar. Yeah, we noticed that. OK.
Mr. Steenland. But what the transaction does do, is by
putting the two entities together we're able to generate cost
savings and revenue benefits not in the form of increased
fares, that on an annual basis, in our judgment, conservatively
create a billion dollars of additional value that falls to the
bottom line. That makes the two entities stronger as a result
than they would have been if they had stayed independent, and
that additional benefit helps offset.
We're not here saying it completely offsets. Oil remains an
independent, significant challenge to the airline industry
whether this merger happens or not. But if it does happen, we
will be in a stronger position to accept that challenge and to
tackle it than we would have been if we had stayed separate.
Senator Klobuchar. And so one of my focuses here is to get
information so the Justice Department can look at this, as well
as the information we need to enforce our agreements in
Minnesota. But clearly when I talk to my colleagues about this,
one of the first things they say is oil prices. And so I just
think it's very important people realize that that's not really
going to change, it just creates a challenge.
And my last one or two questions here is about the point
that Mr. Mitchell made. The argument is that you're going to
create this synergy, but you pledge to keep the hubs, you've
promised to maintain employment, around 1,000 job loss. You're
still looking at it. But I think, what was the word that
Chairman Kohl used? Near certainty. I would hope that it would
not cost that many employees. So could you again go through
where these synergies are that is going to save these
substantial costs?
Mr. Anderson. OK. I'll go on the cost side, and Doug can
take the revenue side.
First, is airports. There are many airports around the
country where we both have significant facilities and the
overlap, what we call station overlap--you go to a city like
Los Angeles where Northwest has Terminal 2 and Delta has
Terminals 5 and 6, we can consolidate into Terminal 5 and 6 and
basically give back one whole terminal at the airport and still
be able to accommodate our schedules. So you have the station
overlap.
The second thing is, you migrate to one IT platform. Today
we all operate a multiplicity of technology platforms. Believe
it or not, airlines are massive IT consumers with decision
technology and consumer technology, and moving from one--from
two IT platforms to one IT platform has a significant amount of
benefit.
Third, you move to single-commission agreements for sales
and distribution agreements. We get more purchasing power on a
combined basis when we're buying--we buy a lot at airlines from
oligopolists, and having joint purchasing power for aircraft
engine parts and other suppliers, caterers, is valuable in the
industry. And then there's the general and administrative
overhead. And you add all that up and the gross synergies or
gross benefit is in the $600 to $800 million range on the cost
line.
Doug, you could do the--
Mr. Steenland. On the revenue side, let me just give you a
very specific example. Delta has no wide-body airplanes that
have more than 275 seats. Northwest has a fleet of 16 747 400's
that have 400 seats. We operate some of those 400-seat
airplanes on routes that would be much more profitably served
if we had a 275-seat airplane. Delta operates it 275-seat
airplane on some routes that would be much more profitably
served if it had a 400-seat airplane. So the optimization of
our combined fleets over our collective network--Delta has no
airplanes between 77 seats and 140 seats. We have approximately
130 airplanes that fit in that size.
When you optimize the network, employing our combined fleet
over all of the opportunities that the combined network will
generate is literally worth hundreds of millions of dollars of
just efficiency and benefit by better matching the size of
airplane with the demand of route that we can't do today as
single and separate entities.
Senator Klobuchar. Thank you. I don't want to go beyond
Senator Kohl's midwestern hospitality as a visiting member
here, but I will save some other questions for the Commerce
Committee, and especially ones concerning how we try to enforce
some of the problems that have been made here today.
Thank you very much.
Chairman Kohl. Thank you very much.
We now turn to Senator Hatch.
Senator Hatch. Well, thank you, Mr. Chairman.
I will ask a question that Senator Grassley has courteously
asked me to ask, so I'll just put it out to you folks. He's
been interested in this issue particularly because Iowa air
travelers and businesses have never been shy about expressing
their concerns about the lack of competition in air service to
Iowa cities, as well as high airfares. Senator Grassley has
tried to stay on top of things and ask the hard questions when
airline mergers are proposed and when these competition issues
arise.
Now, here's this question, I believe: ``The proposed
Northwest-Delta merger is poised to offer certain benefits to
some consumers who will have access to a larger network with
greater flight frequency and more travel options. However, this
proposed merger also raises questions as to whether the
transaction will spark mergers of other air carriers and
thereby consolidate the airline industry so as to inhibit free
and fair competition.
Further, the proposed merger raises questions about the
effects on the air travel in smaller cities and rural
communities, both in terms of cost and services.''
Specifically, Senator Grassley has heard concerns about
possible reductions in the number if aircraft flown into Iowa,
which in turn could lead to reduced or eliminated service as
well as higher prices. He is very concerned about that.
As he has said before, ``Competitive air service is
directly related to the economic prosperity of smaller and
rural communities. With a weakened economy, even the threat of
route elimination, cutbacks in service, or higher airfares can
be extremely detrimental to these communities and their
economic development.''
Finally, he says, ``Related to this issue is how the
proposed Northwest-Delta merger will impact the regional
partners of these airlines. Regional airlines have been a
critical component in serving Iowa not only for air travelers,
but also for jobs in our community.'' He goes on about how Iowa
is affected.
So what he wants to know is whether the proposed merger
will impact essential air service, AIS contracts, and continued
service in Mason City and Ft. Dodge. You can take a crack at
that, if you will, in answer to that question.
Mr. Steenland. Let me take a shot at that, Senator.
Between Northwest and Delta, we presently serve seven--
actually, yes, seven cities in Iowa. Five are served
exclusively by Northwest. They are: Sioux City, Ft. Dodge,
Mason City, Waterloo, and Dubuque. We both serve Des Moines,
but we serve them to different cities, and we both serve Cedar
Rapids, and we serve them to different cities. So, there is no
overlap. We serve our cities over Minneapolis. We expect the
level of service to continue by being part of a more global
network as a result of the merger.
We would expect passengers coming out of these cities to
have more service offerings. The regional carriers that largely
provide these services will remain intact. We own two regional
carriers. The merged carrier will continue to own them. And we
have a long-term contract with another, and that will also
remain in effect.
Senator Hatch. OK. Thank you.
Let me ask both of you, Mr. Anderson, and you, Mr.
Steenland, according to the New York Times, Delta has raised
its fare 6 percent year-over-year, and Northwest increased its
fare by 2.9 percent from a year ago. However, as we all know,
fuel prices have increased 28 percent or more on an annualized
basis over the past 5 years.
Now, how do you respond to those who believe that this
merger is a ploy to raise prices? Do you forecast a raise in
your prices, and how much of a raise will it be in real terms,
once you factor in inflation and fuel costs?
Mr. Anderson. You know, as Doug stated in his testimony and
I stated in my testimony, it's really an end-to-end combination
between the two carriers.
Senator Hatch. Sure.
Mr. Anderson. The industry is incredibly competitive. If
you--we did an analysis and analyzed the number of city-pair
markets on what airfares were 30 years ago compared to today.
If you adjust for inflation, airfares are down about 30 percent
since deregulation. It is an incredibly competitive
marketplace, and it will stay an incredibly competitive
marketplace.
I think the issue that we face, which is separate and apart
from this transaction, is I don't think people have a
fundamental appreciation for what fuel is going to do to this
industry over the longer term. With crack spreads at $30 and a
barrel of fuel at $115, there is--you know, we are selling 15
to 20 airplanes, you know, pretty large airplanes--you know, we
are a pretty good-sized airline--15 to 20 airplanes, simply
because the fares have got to reflect the price of oil.
I don't know how to run a business effectively if the main
sort of commodity that you have to have to run the business
goes up, and every other thing we do, we go to the gas pump to
fill our car or pay our home heating bill, the utility company
or the oil company charges us full price. We don't do that for
airline tickets. Over time, ultimately this industry has got to
be able to recoup that in order to be successful. There's just
no other way to be able to do it.
So far we don't have any of the pricing power, and I doubt
we'll have the pricing power to be able to do that. So the way
that we deal with it, is we take capacity out. In other words,
as fuel goes up, more city pairs in the network become
unprofitable and you drop those city pairs. So I think the
biggest sort of issue you have with respect to service,
separate and apart from this merger, which is when fuel is
moving at these levels, flying that was economic to do at $60 a
barrel isn't economic to do at $120 a barrel, and that's really
the challenge that the industry faces.
Senator Hatch. Well, let me just say to both of you, as I
look at this merger--and I've been studying it pretty
thoroughly -it seems to me that they are both complementary to
each other and that this is a reality we're going to have to
face in the future. You know, there's a lot of concerns about
it, as there is in all mergers of huge industries. But unless
somebody can show some real reasons why this shouldn't go
through, it seems to me that this may be in the best interests
of air transportation in this country.
But I'll keep looking at it. Naturally, I want to listen to
everybody. I've been in five ``must do'' things this afternoon
and I have to leave right now for an interview, but I just want
to personally express my regard for both of you and what you're
trying to do to keep our country competitive and keep our
people and our country in the air, as needed.
Mr. Anderson. Thank you very much.
Mr. Steenland. Thank you for your support.
Chairman Kohl. Thank you, Senator Hatch.
Senator Cardin?
Senator Cardin. Senator Kohl, thank you very much. Thank
you for conducting this hearing, and I thank the witnesses for
being here. This is certainly an area of great interest.
The information that's been given to me concerning BWI
Airport, which is the major airport in Maryland, is that there
are 37 departures daily by the two carriers. None of the
markets overlap, so if I am hearing your testimony, the people
of Maryland should not be concerned because the service levels
will be maintained. So, I start with that.
But I am mindful of Mr. Mitchell's admonition that this may
lead to other changes within the airline industry, and am very
concerned about the process that we go through to look at the
competitive nature of the airline industry.
So let me try to understand your logic here for a moment,
because I am having a little bit of problems with the
economics. If, in fact, the service levels are going to be
maintained--and I understand, Mr. Anderson, your point about,
whether there's a merger or not, there's liable to be changes
because of cost issues. But as a result of the merger, if the
service levels are going to be maintained, the hubs are going
to be maintained, you can't do anything about fuel costs as a
merged entity, it's still going to be the same unit cost, so
you mentioned two major areas. You might have some savings by
closing a terminal building or doing your IT together. But help
me with the math here. If you're really going to--you're not
going to fire the front-line workers, and we'll get to the
other workers in a moment, where do we expect to do this great
savings that's going to make this combined entity much more
efficient?
Mr. Anderson. So take the stand-alone--the way you do a
classic sort of synergy analysis in an M&A transaction is to
take the two stand-alone plans and you put a series of
assumptions in there on fuel and you put the fuel wherever it
is, and you take the two stand-alone plans as a given. Then you
analyze what benefits you create by putting them together that
would be there--but for the combination would not be there.
But start on the revenue side of the line. Some of these
pictures--if we just put up any of--just put up any of these.
In the airline industry there's something called a QSI index,
it's called a Quality Service Index. It's a very well-known,
well-understood algorithm that calculates your passenger share
of the marketplace. Because of code sharing and alliances, we
have learned over time that, with the display in the CRS
systems and the way product is distributed, when we connect
these networks together we will get additional passengers that
we didn't have before.
So in a city where we are both, for instance, serving a
city like Los Angeles, we combine both of our schedules in Los
Angeles, even though we go to different places, and we increase
our local share of traffic in that market because we have
greater presence and greater utility. That's No. 1.
Senator Cardin. OK.
Mr. Anderson. All right. Do you want me to keep going or do
you want--
Senator Cardin. I understand that point, that you're hoping
to get greater passenger--
Mr. Anderson. Yes.
The second thing is, we create new online unique city pairs
from end-to-end. You may not think that my example in the
earlier hearing is, you know, we're going to be one of the best
ways to get from Lincoln, Nebraska to Key West, Florida, but
every day there are many passengers that travel collectively
from these different cities to other cities that, today, Delta
does not serve or Northwest doesn't serve.
The best example I can give you of how this works is an
effort we made when I was at Northwest in the Minneapolis/
Amsterdam market, where we put together a code sharing
arrangement with KLM in 1993. We started that with four flights
as week, not even daily service. Today it's three a day, with a
300-seat airplane. So you went from a market that didn't exist
to a much bigger market because you're combining networks.
Senator Cardin. I think you're answering my question. So
one of the things that might happen as a result of this
application, there's liable to be conditions attached to this
merger. It seems to me you are saying that you have little
concern about a commitment to maintain your employment level,
your employee benefits, your service levels, your hubs. Those
are issues that you, based on your assumption, would not
produce the greater profitability that you envision by a merged
company. Am I missing something on that or am I correct?
Mr. Anderson. Well, except for the overhead. I mean, the
overhead issue--you know, we do have to reduce the dual
overhead of the two airlines.
Senator Cardin. And define ``overhead''.
Mr. Anderson. You have two public companies.
Senator Cardin. These are the non-front line employees?
Mr. Anderson. Right. Non-front line.
Senator Cardin. So they're not being protected. Just so I
understand.
Mr. Anderson. Right.
Senator Cardin. OK. So I understand what you're saying
there.
Now, Mr. Steenland, let me ask you a question, and I'll
come back to Mr. Anderson in a moment. That is, can you give us
an explanation why the pilots and other workers and unions are
much more hostile in Northwest toward this merger than those at
Delta?
Mr. Steenland. I guess I'd answer that two ways, OK? First,
let's talk about the pilots. OK. Normally in an airline merger
transaction, as these deals have been done in the past, the
transaction gets announced, you wait until closing, and at that
point in time the effort is under way to take the pilot
contract--and let's just use the Northwest-Delta example, the
Northwest pilot contract, the Delta pilot contract--and
negotiate a single agreement, and then to take the two
seniority lists and merge them together.
Senator Cardin. On the seniority lists, you have the U.S.
Air and America West merger. They never seemed to be able to
get that worked out.
Mr. Steenland. Right.
Senator Cardin. Are you concerned that you can work that
out?
Mr. Steenland. Well, we undertook an effort to try to do
that differently this time. And so at the request of both pilot
groups, during the negotiation of the transaction the pilot
groups got together, worked on negotiating a new pilot
agreement, and worked on negotiating a combined seniority list.
A new pilot agreement was, in fact, reached, but the pilots,
working between themselves, were unable to get to a new
seniority agreement. If that had happened it would have been
revolutionary. That never would have--that has never happened
before in airline mergers.
We went ahead and announced the transaction, but in
announcing it indicated that we were prepared to go forward and
to continue that process and to try to get the seniority list
finished and a combined agreement completed prior to the
closing, which would also be precedent-setting. The two pilot
groups are working on that. They issued a statement the other
day indicating that that was the case, and we are confident
that, if everybody is acting in good faith, that we will, in
fact, be able to do that.
Senator Cardin. Prior to closing. But how about prior to
the DOJ's review?
Mr. Steenland. Well, the DOJ's review would have to occur,
and then the transaction would close.
Senator Cardin. I understand that. But it would be, I
think, helpful if there was an agreement between the pilots.
Mr. Steenland. Well, we agree.
Senator Cardin. Prior to the completion of the DOJ process
rather than the closing.
Mr. Steenland. Yes. Well, it will be almost simultaneous if
that happens.
Senator Cardin. And you're optimistic that that will
happen?
Mr. Steenland. We will certainly use our best efforts to
try to bring that about.
Mr. Anderson. I'm an eternal optimist.
Senator Cardin. Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Cardin.
Senator Schumer?
Senator Schumer. Well, thank you, Mr. Chairman, for holding
this timely hearing. I'd like to say to Mr. Anderson, you
wouldn't have the job you did unless you were an eternal
optimist. [Laughter.]
Mr. Anderson. You probably wouldn't either. [Laughter.]
Senator Schumer. That is exactly what I was thinking. You
beat me to the punch. I was going to say, neither would any of
us. [Laughter.] But in any case, it's good to be here, and I
thank you for coming.
I want to really thank Chairman Kohl. He's always on the
ball with these things, and this is a timely hearing and very
much appreciated.
Let me tell you my basic view. I generally think that our
antitrust policy has been too weak. I think we've seen too much
consolidation. Even in the airlines industry, mergers in
general don't appeal to me. I am worried that we'll only have
three or four big carriers.
However, my preliminary review of this merger is that it's
a good one. I will not sign off on it yet. We have a lot more
to explore. But I think that because there's very little
overlap in the service between Delta and Northwest and because
of the changing conditions in the airline industry, as I said,
on first glance it makes some sense. The negatives seem more
benign than in other instances and the positives seem more
real. Obviously with the dramatic increase in fuel costs, fuel
costs really are a game changer that affects, I think, how one
would view this deal, because the need to provide efficiencies
to make up for the dramatic increase in fuel costs is kind of
large.
Having said that, some of the other airlines that might
merge simply to eliminate routes and eliminate competition, you
have very little overlap of competition and would worry me a
great deal. So, I don't think anyone who supports this merger
does not--it does not necessarily indicate you'd support a
general merging of the airline industry.
I have two caveats here that I want to be careful with and
I want to put on the record before I ask questions. First, I
think it's very important that labor have a seat at the table
here. I know that some of Northwest's pilots feel that they
have not been adequately involved in the talks about the
merger, so I signed a letter with Senator Kennedy and others to
make sure labor interests from both companies were heard and
respected.
Second, and this is vital to me, I worked very hard to
bring good air service to Upstate New York. We had terrible
service 10 years ago, and I helped bring some of your
competitors to New York, particularly Jet Blue and Southwest to
Upstate, and they make money on those routes because they were
so under-served.
We met, Mr. Anderson and I did, yesterday. We went over it
city by city, and it seems that the effects will be either
positive or neutral in terms of both flights, number of
flights, where they go, and jobs. I'm going to hold Delta to
that, and that is key to, at least for whatever it's worth, my
view and my support on this. I know you're going to get back to
me in writing on the things we discussed, Mr. Anderson.
But, first, to just make it clear, it did seems as we went
through all of the New York State areas that there would not be
a cut-back in service or in jobs as a result of this merger. Is
that correct?
Mr. Anderson. That's correct.
Senator Schumer. OK.
Second, I would like to ask either you or Mr. Steenland
about the first question, unless you've answered it, because I
came in late, about the pilot situation.
Did you answer that already?
Mr. Anderson. We did, but I will--
Senator Schumer. You don't have to go over it. I'll look at
the record. I don't want to take people's time, as long as
that's been brought up.
Third, could you comment--one other point I want to make.
So jet fuel is--you guys are hollering about that, as you
should. So is the average motorist who drives around Rochester,
New York, or any other part of New York State.
But frankly, we have had a policy for 7 years that's done
nothing about this and the chickens are coming home to roost.
Frankly, we don't hear a peep out of industry. We hear it when
you come talk to us, but when some of us say we have to change
our policy the President's basic view--it's no secret--is,
what's good for big oil is good for America. It's sure not good
for Delta Air Lines, Northwest Airlines, or the airline
industry.
Yet--maybe because of solidarity among businesses--we don't
hear anything from you all. I think that's got to change in the
whole transportation industry, not just the airline industry,
in terms of this. Sitting at your seat, Mr. Anderson, a year or
two ago was Mr. Rex Tillerson, then the newly installed--I
think it was at a hearing that you called, Mr. Chairman--head
of Exxon-Mobil. He said, we don't believe in alternative
energy. That's what he said. And, you know, jaws dropped. But
basically through the friendship of the President and the
administration, we don't have an alternative energy policy,
despite the fact that, as I look at my four colleagues here,
every one of them, including myself, we pushed hard for it.
We need your help in that. We need you to speak out and we
need you to speak out on specific policies. Oil companies get
royalties that they got when oil was $19 a barrel to encourage
them to explore. They don't need them at $120, whatever it is
today, a barrel. But when we try to change them, the Chamber of
Commerce doesn't support us. Now, I understand the oil company
is a part of the Chamber of Commerce, but neither do we hear
from anybody else in business, and most of whom are affected
negatively.
Would you comment a little on any of the things I said,
because my time is running out?
Mr. Anderson. Well, OK. I have, in the past 6 months, at a
speech at the FAA Forecasting Conference about 6 weeks ago,
made the very clear statement that jaw-boning OPEC is not an
energy policy and that this industry suffers because we haven't
had an energy policy in this country.
Now it's not just airlines. It's going to fundamentally
change the fabric of how people live because many people live
far away from where they work, and we've all grown up with two
cars and our parents working far away from where we lived.
That's going to change. So, perhaps our voices haven't been
loud enough, but we have taken at Delta, and I know Northwest
has taken a public position in that regard, that's been
critical for the lack of an energy policy.
Senator Schumer. But, sir, we need your help on specific
issues, for instance, the royalty issue. I mean, you know, I
know that some of your confreres in the oil industry don't like
it. Or when we say that, you know--well, there are a whole
variety of policies and we need--rather than saying we need a
new energy policy--everyone says that except Mr. Tillerson--
Mr. Steenland. Senator, as an industry we went on the
record, I think it was last week, and took the position that we
should stop filling the Strategic Petroleum Reserve at $120 a
barrel.
Senator Schumer. Right.
Mr. Steenland. We had the chairman of the trade association
testify. We said that's a terrible thing to do. It's just
simply forcing up price, and we ought to stop right now.
Senator Schumer. Right. Right. OK.
Any other comments on anything I said? Because my time is
up.
Mr. Steenland. No, sir.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Schumer.
Senator Feingold?
Senator Feingold. Well, first I'd like to, of course, thank
the senior Senator from my State of Wisconsin and Chairman of
the Subcommittee for calling this important hearing. I share
Senator Kohl's concerns and questions about how the proposed
merger will affect the prices paid and the routes available to
the flying public. From the written testimony, the companies
estimate that the merger will result in ``over $1 billion in
annual synergies.'' While there could be savings from
consolidation of headquarters and from more efficient
allocation of planes, I fear that ``synergies'' may also be a
euphemism for increased cost and reduced service in the long
run.
So these are obviously serious concerns for my
constituents, and particularly the ones that read a recent
Milwaukee Journal Sentinel article headlined ``Northwest-Delta
Deal Could Yield Fewer, Costlier Flights Around State''. And
the impact would not just be felt in Milwaukee where Delta and
Northwest currently compete. The merger would also mean one
fewer competitor in Green Bay, Appleton, and Madison.
Smaller communities could be particularly vulnerable. For
example, Appleton, Wisconsin is currently served by only four
airlines, including Delta's Comair service to Cincinnati and
Atlanta, and Northwest's Airlink to Minneapolis and Detroit.
Despite the companies' expressed desire to retain all service,
there is speculation that service to some of the network hubs
will be reduced.
Specifically, Standard & Poor's suggests that some
Cincinnati and Memphis hub traffic may be shifted to Detroit or
Atlanta, respectively. That could leave my constituents in
Appleton facing the very real possibility of fewer airlines,
less competition, higher prices, and fewer destinations.
Mr. Chairman, I'm also concerned about the impact this
proposed merger would have on employees at Northwest and Delta
Air Lines. A number of employees have expressed doubt that the
proposed merger would improve their working environment. The
machinists union, which represents thousands of employees at
Northwest, has said ``we firmly believe that this merger is not
in the best interests of passengers, employees, and the
communities these airlines currently serve.''
The Association of Flight Attendants--CWA, which represents
thousands of Northwest flight attendants, and is working to
organize thousands of Delta flight attendants has expressed
concern that, while the executives of both companies have
promised employees will not be laid off, the companies have
refused to ``put that commitment in writing''.
The Northwest Pilots Union has also voiced concerns about
the fact that Delta and Northwest engaged the Delta Pilots
Union in reaching a merger deal, while leaving the Northwest
Pilots Union out of further discussions to date.
The fact that these concerns have not yet been addressed
troubles me. All employees and their bargaining representatives
must be included in pre-merger discussions, and I hope that the
companies make a concerted effort to reach out to these
employees and their representatives in the coming days and
weeks.
I understand that Senator Kohl has already asked some
questions with regard to Midwest Airlines. I will not ask
additional questions on that topic now, but I of course want
everyone to know, and to have the record reflect, that I share
Senator Kohl's concerns and support for our home State airline.
Now, Mr. Anderson, in your written testimony you state,
``...We have provided a written commitment to honor the
existing Northwest collective bargaining agreements, consistent
with applicable law, until any post-merger representation
issues are resolved.''
The fact that you have provided this written commitment
indicates that you may be unable to integrate the Delta-
Northwest work forces prior to the approval of the proposed
merger, and that you may have various work rules in place
should the merger go forward.
Various employees have voiced concern that differing work
rules could cause resentment among employees and potentially
result in less cooperation in a newly merged company. If you're
not able to fully integrate the different employee groups at
Northwest and Delta, how do you plan to realize the synergies
and the so-called ``substantial cost savings'' that you and Mr.
Steenland have testified about today?
Mr. Anderson. Well, the process under the Railway Labor
Act, where you have two separate groups of employees, we have a
legal obligation to--and really a moral obligation--honor those
collective bargaining agreements until the National Mediation
Board completes a determination of a single carrier and
completes a representation--resolves the representation issues
between the two carriers. So we have a legal obligation to do
that. Our hope is that we're going to be able to get that done
with the pilots in pretty quick order.
Senator, to give you just a little bit of background, the
way it's historically been done in the airline business is the
merger is announced, goes through the approval process, and is
closed and then the process commenced. So if you go back to the
North Central merger and the Republic merger, that's how it's
always happened in the industry. What we tried to undertake
with our pilots, the two pilot groups, was very unusual. We
think we can get that done. I'm optimistic that, between now
and the time that we close this transaction, that we're going
to be able to get that done with the pilot groups.
With respect to seniority protection, it's both Federal
law, it's a provision in the merger agreement, and it is
included in the resolutions of the company at Delta, so we have
very clear protections on Allegheny-Mohawk seniority
integration on the front line.
Last, we set aside a very significant portion of equity in
the new company for the employees so that the employees share
in the benefits that get created by the transaction. So, we
believe that ultimately it provides a more stable place. As I
said earlier in my testimony, the only true job security in the
airline business is working for a financially stable and
durable airline.
Senator Feingold. Mr. Steenland and Mr. Anderson, I
understand that both Delta and Northwest have affiliates that
provide services as part of their networks. What are the plans
with regard to the regional jet service? Are there any plans to
merge their operations or shift capacity?
Mr. Steenland. Northwest owns two regional carriers, Masaba
and Compass. We have a long-term contract with a third carrier
called Pinnacle. We have, as a result of this merger, no plans
to change those arrangements. Those three airlines will remain
providers of regional service. There might be some back-office
functions that get made more efficient, but in terms of a
separate entity continuing to operate the regional service that
we provide, there will be no change.
Senator Feingold. Mr. Anderson?
Mr. Anderson. And we have a wholly owned subsidiary called
Comair, which is based in Cincinnati and operates a significant
number of flights out of Cincinnati and JFK, and no change in
that regard.
Senator Feingold. Thank you, Mr. Chairman.
Chairman Kohl. Thank you very much, Senator Feingold.
Mr. Anderson and Mr. Steenland, many airline analysts
expect that the Delta-Northwest deal is just the first merger
in a massive wave of consolidation in your industry. Indeed, it
has been widely reported in the press that other major airlines
are in merger discussions as we speak.
Well, the now six major network airline competitors may
soon be down to four, or even three, legacy carriers dominating
our skies, and so consumers may be left with little or no
competition on many routes, with the remaining large airlines
carving up the country.
In your view, Mr. Anderson, what's the minimum number of
legacy airlines necessary for a competitive market? Would three
be enough? Would two? Would you like to have it all to
yourself?
Mr. Anderson. I'm not that optimistic. [Laughter.] You
know, that's a really hard question to answer. You know, I've
just been focused on this one. We've been focused on this one
because, in a classic analysis, a classic combination analysis
under the U.S. antitrust laws when you just look at the
Herfindahl-Hirschman Index and you look at the overlap and the
lack of overlap, this transaction is a transaction that should
be approved.
I would note the good point that was made by the Professor
down at the end of the table, that the legal analysis is to
look at each of these on a stand-alone basis. I think Mr.
Schumer may have had it right, which is, this is the right
transaction. It passes antitrust muster. That doesn't
necessarily mean anything that follows on would pass antitrust
muster. So, focusing on this one, this one should be approved.
Mr. Steenland. I also think, Senator, we can't forget
Southwest Airlines is out there. They remain the largest
airline in the United States. They have 20 percent market
share. In addition to Southwest, we have Jet Blue, we have
AirTran, we have a recent new entrant in the form of Virgin
America, and entry in this industry historically has not been a
problem. There is ample access to gates, facilities. Aircraft
historically, particularly in times when the manufacturers have
been wanting to keep their assembly lines going, have been easy
to finance and so it's an industry where entry is available,
and historically there has been no lack of it.
Chairman Kohl. OK. Yes. Mr. Mitchell, then Dr. Bush, would
you respond?
Mr. Mitchell. Well, I think that the main point here is
that this transaction is going to lead to additional
transactions, which will not solve the airline industry's
problems at all, will cause tremendous difficulties for
consumers, not just on the pricing side, but on the customer
service side. Republic-Northwest took close to 8 years after
that merger to get customer service levels back to an
acceptable level. Most consumers today would say we've hit the
floor in terms of customer service, very broadly defined:
cancellations, delays, no middle seats, employees looking over
their shoulders for the next shoe to drop, et cetera, et
cetera, et cetera. If we see the industry collapse from six
carriers down to three, virtually all at the same time, this
will make the Republic-Northwest merger look like a walk in the
park and we will go below the floor, we'll go into the
basement, and it will not be for 8 years, it will be for a long
time after.
I do not buy into the benefits of this merger at all. The
evidence has not been put forth in any kind of quantitative
way, and the structure of the industry will be forever changed,
to the detriment of the consumer and our economy.
Chairman Kohl. Yes, sir. Dr. Bush?
Mr. Bush. The interesting thing about merger is they're
much like marriages. It is very interesting that in times of
trouble, it's always nice to have someone to go along in those
times of trouble with, but it doesn't necessarily make sense.
When you look back at the history of the airline mergers and
you look at the economic literature, the history--that
literature demonstrates that they are typically bad marriages
for both consumers, and they do not present the synergies, or
as we call them efficiencies, that the companies purport.
Rather, what they tend to do is they tend to cause consumer
injury.
So when we are looking to save our companies by getting
them bigger to face international competition, which I find
ironic, given that they also said that they're having their
lunch handed to them by LCCs which are not big companies, I
think they're really tilting at windmills, or perhaps airline
turbines, because in fact they aren't going to receive those
synergies. What you're going to have is increased
consolidation, follow-on mergers because of that consolidation
whether or not those mergers make sense.
So you will be left with something like maybe three
systems, and that is problematic because I'm not convinced that
this merger--we don't have enough evidence that this merger is
pro-competitive. We don't have any evidence this merger is pro-
competitive. We have no evidence of efficiencies. We have
serious problems with respect to overlap. This is not
necessarily an end to end. There are systems-based competition
issues here, and therefore this merger requires deeper
analysis.
Chairman Kohl. Now, if I understand the two of you, it's
your judgment that this merger, as well as others that are
contemplated, the two primary things that are likely to occur
is that prices are going to go up and service is going to go
down. Now, I'm sure that Mr. Anderson and Mr. Steenland would
not see that as the two major characteristics of this merger,
is that right?
Mr. Steenland. That's correct.
Mr. Anderson. That's correct.
Chairman Kohl. We're not going to resolve that today, are
we?
Mr. Anderson. No.
Chairman Kohl. You both have pretty strong opinions on
this, don't you?
Mr. Anderson. Yes. [Laughter.]
Chairman Kohl. An expressive person. I appreciate that, Mr.
Anderson. We all do.
Yes. Ms. Klobuchar?
Senator Klobuchar. Thank you very much.
I just want to followup, Mr. Anderson, on some things that
your predecessor said--I mentioned them in my opening
statement--at a 2007 Commerce Committee hearing on U.S. Air's
proposed take-over of Delta. As you know, that proposed merger
went down a few weeks later. Former Delta CEO Gerald Grinstein
touched on concerns that Chairman Kohl was just mentioning
about this consolidation and what it would mean.
He said, ``In terms of service to small communities, are
you better off with six network carriers or are you better off
with three? Are you better off having those network carriers
fiercely competing with each other, trying to get into those
markets?'' Then a few sentences later he said, ``If you approve
one merger, how are you going to say no to other carriers? You
will devolve into three network carriers, and once that happens
you won't get the same level of service.''
Do you want to respond to that?
Mr. Anderson. That was in the context of a hostile U.S. Air
had made a hostile takeover attempt of Delta Air Lines, and
that hostile takeover attempt required the company to do
everything it humanly could to try to fight off the hostile
takeover attempt. Through the help of Congress and the
Creditors Committee and the Bankruptcy Court, they were
successful in doing that.
In that same testimony, Mr. Grinstein also said he's not
opposed to mergers, he was just opposed to bad mergers. The
U.S. Air transaction was a bad merger because there was a lot
of overlap between the U.S. Air network and the Delta network
on the East Coast.
Senator Klobuchar. But one of the reasons given for airline
deregulation was that we would have more competition, and that
would bring lower fares. Would you agree that if you had more
competition you'd have lower fares?
Mr. Anderson. The evidence on deregulation is compelling.
Just any fare study would show that the real average airfares
in the United States have gone down and the amount of service
has gone up.
Senator Klobuchar. With the number of competitors.
Mr. Anderson. Well, there's been an awful--there's free
entry. There's free entry, and unfortunately not free exit in
this business. There will always be free entry and exit. Virgin
America is the most recent new entrant into the domestic
market. You don't have real constraints at any of the airports
where we operate in terms of access. Airplanes are the most
easily financed assets in the world because you can always find
them, you can always move them to a different market, and
there's always a known value for them.
So no barriers to entry, free entry into the marketplace,
and that's not going to change. I mean, Southwest still carries
30 percent of the passengers and that's not going to change
after this transaction is approved.
Senator Klobuchar. You know, speaking of Southwest, we were
talking about the higher fuel prices. You have argued, both of
you, that this bigger mega-merger would better able you to cope
with these fuel prices, but it doesn't seem like all airlines
agree. The CEO of Southwest told the Wall Street Journal last
week that his airline's best course of action ``could very well
be to sit on the sidelines and let others combine.'' Other
airlines like Jet Blue and Southwest have been subject to these
same fuel increases, yet they haven't seemed to have made that
decision.
Mr. Steenland. Senator Klobuchar, Southwest is in the
enviable position of having made an extraordinarily successful
bet--and I underline bet--in terms of fuel hedging. So for this
year, 2008, I believe it's 75 percent of its fuel needs are
hedged at about $52 a barrel. So they have been spared the
tremendous run-up, and it's part of the competitive challenge
we face because obviously, you know, they've got a benefit in
that--on that side and we don't. But that's just the way the
free market works and that's the way competition works.
Senator Klobuchar. OK. Then my last question here is
another quote from your predecessor, Gerald Grinstein, at this
hearing, where I still remember he was arguing vigorously not
to have this merger. He expressed a concern that during merger
negotiations all airlines will promise to keep service and
maintain current levels of employment. Then, in his words,
``there is no one to enforce'' those promises. He said that
airlines' promises are ``not a contract, is it? Believe me,
trust me.''
You have made commitments today to all of these Senators,
and under oath, of keeping jobs, hubs, and service. Is it
possible, however, that you would come back a year or two from
now and say changed circumstances have forced you to change
your tune?
Mr. Anderson. The issue is going to be fuel. Tell me where
fuel will be. And this merger will not be the result of having
to make a dramatic change, but whether these carriers merge or
not, fuel is going to be the determinant of what capacity is
going to be in this country and what airplanes are going to fly
where. That is going to be the case before or after the merger.
Senator Klobuchar. So it is possible that you'd come back
and say that?
Mr. Anderson. It's going to depend upon fuel prices, but it
won't be the result of this merger because the merger is end to
end.
Senator Klobuchar. The last thing is, I hope that you will
join us, as Mr. Steenland mentioned with oil reserves, with
some of the things that Senator Schumer and I have been trying
to do with changing our energy policy, because we clearly can't
keep going the way we're going.
Mr. Anderson. I agree.
Senator Klobuchar. Thank you.
Chairman Kohl. Thank you very much, Senator Klobuchar.
Before we end the hearing, just on the cost of fuel, you
think about it all the time, gentlemen. That's the primary
thing in your business. Why is the price of oil, the price of
fuel going through the roof, other than China and India, which
of course is a part of it? But there must be a lot more. What's
going on, can you tell us?
Mr. Anderson. Well, I think there are two factors. One,
part of that increase is refining capacity in the United
States. We haven't added any refining capacity in the United
States. In fact, I saw some statistics recently that our
refining capacity, actual capacity, has been going down.
The second thing is, there's an enormous amount of
financial speculation. Because of the issues in the bond and
stock market, a lot of investment has moved to commodity
markets. So you see it with corn prices, wheat prices, gold
prices, oil prices. Oil has had a flood of just not people like
airlines that are buying it, but people that are just commodity
traders.
Chairman Kohl. Some people are making a ton of money.
Mr. Anderson. Yes. The third factor, Senator, is the weak
U.S. dollar. So oil is priced in dollars--
Chairman Kohl. Right.
Mr. Anderson.--and oil-producing countries do not want to
bear the devaluation risk or face what they would face if
prices had historically stayed in supply/demand limits with
them taking dollars at the weaker international level that
they're now at. So there is a clear correlation between how the
dollar trades and how oil trades.
Chairman Kohl. And isn't it also true that you can
speculate in this market with very small amounts of money, 5, 6
or 7 percent margin?
Mr. Steenland. Margin requirements are clearly less than
what they would be if you play in the equity markets or
something like that.
Mr. Anderson. Right. Because we do that. We hedge. Delta,
in the past 6 months, we've had to, you know, spend a fair
amount of money to hedge fuel. The margin calls are a lot less
than the margin calls if you're in a bond or a stock.
Chairman Kohl. Well, if we really want to do something
about this--not that this is the only thing--one thing that we
know is that if the margin calls were much, much bigger than
they are now, that would reduce speculation by a ton, wouldn't
it?
Mr. Steenland. I think you'd want to make sure that that
was done across all markets, because if the United States just
took that position, oil trades in Singapore, oil trades in
London--
Chairman Kohl. Absolutely.
Mr. Steenland. But if it was across the board it would have
a very positive impact on reducing oil prices.
Chairman Kohl. So would it benefit our collective societies
around the world if people at the top of the ladder in
government would get together and do just that?
Mr. Steenland. Yes.
Mr. Anderson. Yes.
Chairman Kohl. And they should.
Mr. Steenland. We agree.
Chairman Kohl. All right.
Mr. Anderson. Are we optimistic about that?
Chairman Kohl. That it will happen? I don't know. But
you're being very clear--
Mr. Anderson. We'll work with you to try to bring that
about.
Chairman Kohl. Well, why would people at the top of
government collectively not want to do that?
Mr. Steenland. If you look at--I think it's called the
paper trades, which is basically people not actually taking
delivery but simply trading as a trading mechanism, the volume
of that has skyrocketed over the course of the last 12 to 24
months.
Chairman Kohl. Huge.
Mr. Steenland. Yes.
Chairman Kohl. So would you like to make another comment?
Senator Klobuchar. No.
Chairman Kohl. We want to thank you all for being here
today. It's been very useful, very helpful. I'm sure we've not
heard the last word on this.
Before I close the hearing, very briefly I'd like to enter
into the record statements from the Association of Flight
Attendants, Memphis and Minneapolis Chambers of Commerce, and
the International Association of Machinists & Aerospace
Workers.
We thank you, one and all, for being here. This hearing is
concluded.
[Whereupon, at 4:17 p.m. the hearing was adjourned.]
[Questions and answers and submissions for the record
follow.]
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