[Senate Hearing 112-48]
[From the U.S. Government Publishing Office]
S. Hrg. 112-48
THE SOUTHWEST/AIRTRAN MERGER AND ITS IMPACT ON M-7 BUSINESSES,
CONSUMERS, AND THE LOCAL ECONOMY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
FEBRUARY 25, 2011
__________
PEWAUKEE, WISCONSIN
__________
Serial No. J-112-6
__________
Printed for the use of the Committee on the Judiciary
----------
U.S. GOVERNMENT PRINTING OFFICE
67-500 PDF WASHINGTON : 2011
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York JON KYL, Arizona
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
AL FRANKEN, Minnesota MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
Bruce A. Cohen, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
CHARLES E. SCHUMER, New York MICHAEL S. LEE, Utah
AMY KLOBUCHAR, Minnesota CHARLES E. GRASSLEY, Iowa
AL FRANKEN, Minnesota JOHN CORNYN, Texas
RICHARD BLUMENTHAL, Connecticut
Caroline Holland, Democratic Chief Counsel/Staff Director
David Barlow, Republican General Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
WITNESSES
Bateman, C. Barry, Airport Director, Milwaukee County's General
Mitchell International Airport, Milwaukee, Wisconsin........... 7
Fornaro, Robert L., Chairman, President and Chief Executive
Officer, AirTran Holdings Inc., Orlando, Florida............... 5
Kelly, Gary C., Chairman, President and Chief Executive Officer,
Southwest Airlines, Dallas, Texas.............................. 3
Moss, Diana L., Vice President and Director, American Antitrust
Institute, Denver, Colorado.................................... 10
Sheehy, Timothy R., President, Metropolitan Milwaukee Association
of Commerce, Milwaukee, Wisconsin.............................. 9
SUBMISSIONS FOR THE RECORD
Bateman, C. Barry, Airport Director, Milwaukee County's General
Mitchell International Airport, Milwaukee, Wisconsin, statement 21
Fornaro, Robert L., Chairman, President and Chief Executive
Officer, AirTran Holdings Inc., Orlando, Florida, statement.... 27
Kelly, Gary C., Chairman, President and Chief Executive Officer,
Southwest Airlines, Dallas, Texas, statement................... 34
La Macchia, William E., Chairman, Mark Travel Corporation,
Milwaukee, Wisconsin, statement................................ 39
Moss, Diana L., Vice President and Director, American Antitrust
Institute, Denver, Colorado, statement......................... 41
Sheehy, Timothy R., President, Metropolitan Milwaukee Association
of Commerce, Milwaukee, Wisconsin, statement................... 51
THE SOUTHWEST/AIRTRAN MERGER AND ITS IMPACT ON M-7 BUSINESSES,
CONSUMERS, AND THE LOCAL ECONOMY
----------
FRIDAY, FEBRUARY 25, 2011
U.S. Senate,
Subcommittee on Antitrust, Competition Policy, and
Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:16 a.m., at
Waukesha County Technical College, Pewaukee Campus Lecture Hall
B140, 800 Main Street, Pewaukee, Wisconsin, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senator Kohl.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good morning, one and all. We appreciate
your all being here.
Today we are here to examine the proposed merger between
Southwest Airlines and AirTran and its effect on travelers and
businesses here in the Milwaukee area. In recent years, air
travel at Mitchell Airport has been a commercial success story.
Mitchell Airport is one of the Nation's fastest-growing
airports, serving more and more passengers and routes every
year.
AirTran in recent years has made Milwaukee one of its key
hubs and now has the largest share of the market of any airline
serving Milwaukee. AirTran serves 19 cities with nonstop
service and carried over 2.6 million passengers in 2010 and has
gained a 31-percent market share.
Southwest began service at Mitchell Airport in November
2009 and now has achieved an 8-percent market share, carrying
nearly 800,000 passengers in 2010.
The competition between AirTran, Southwest, and fellow
discount carrier frontier has been an indisputable boon to air
travelers and businesses in the entire Milwaukee region. This
competition has kept airfares low, offered passengers frequent
and reliable air service to small, medium, and large cities
across the Nation, and has kept aviation-related employment in
this area high.
But we are now confronted with the plans of Southwest and
AirTran to merge. Southwest touts the national benefits of this
merger in giving it access to key east coast airports such as
Atlanta, New York LaGuardia, and Washington Reagan National,
arguing that this will make a stronger carrier to compete with
the other giant national airlines.
However, the important question for us is what this will
mean for air travelers and businesses in Milwaukee. Will the
loss of competition between these two airlines, who together
will have a nearly 40-percent market share at Mitchell Airport,
mean higher fares and decreased quality of service? Will
Southwest maintain the scale and growth of AirTran's hub
operations in Milwaukee? Will Southwest maintain AirTran's
level of employment and community involvement here? Will
Southwest's no-frills service be satisfactory for business
travelers who previously had the choice of upgraded levels of
service?
The experience of other airline mergers in recent years
gives us reason for caution. Shortly after American merged with
TWA a decade ago, American dropped TWA's St. Louis hub, costing
hundreds of high-quality jobs, despite promises to the
contrary. Formerly strong Delta hubs such as Cincinnati have
faced declining service after Delta's 2008 merger with
Northwest.
Just 2 weeks ago, we learned that the newly combined
United/Continental was eliminating 500 jobs at Continental's
former headquarters in Houston. This occurred despite
Continental's former CEO's promise at our hearing on the deal
last year in D.C. that we should expect to see ``a net gain''
in jobs in Houston.
So it is essential that we hear from Mr. Kelly and Mr.
Fornaro about their plans for the combined airline in Milwaukee
after the merger. The growth of air travel in recent years at
Mitchell Airport has been essential for travelers throughout
the Milwaukee region and has been vital for our economic
growth. In these difficult times it is critical that Milwaukee
have a convenient, reliable, and inexpensive air service to
other vital business centers. And vigorous airline competition
has been the key to the growth of air service at Mitchell
Airport.
We need to take care to ensure that nothing in this merger
will degrade airline competition here. We look forward to
hearing the views of our excellent panel of witnesses regarding
the impact of this proposed merger on competition and airline
service in Milwaukee.
I would like to introduce now our excellent panel of
witnesses, and we welcome you all here to Wisconsin.
Our first witness today will be Gary Kelly. Mr. Kelly
serves as Chairman of the board, president, and CEO at
Southwest Airlines. He began his career at Southwest Airlines
as comptroller in 1986, became CEO in 1989, and he has received
numerous awards for his leadership at Southwest.
Our second witness today will be Robert Fornaro. Mr.
Fornaro serves as chairman, president, and CEO of AirTran
Airways.
Next we will be hearing from Barry Bateman. Mr. Bateman has
served as the airport director for Milwaukee County's General
Mitchell International Airport since 1982.
Next we will be hearing from Tim Sheehy who has served as
President of the Metropolitan Milwaukee Association of Commerce
since 1993.
Finally, we will be hearing from Diana Moss. Dr. Moss is
director and vice president of the American Antitrust
Institute, and she is on the faculty of the University of
Colorado at Boulder.
Please keep your testimony to 5 minutes. Mr. Kelly.
STATEMENT OF GARY C. KELLY, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, SOUTHWEST AIRLINES, DALLAS, TEXAS
Mr. Kelly. Thank you, Mr. Chairman. On behalf of Southwest
Airlines' 35,000 employees, thank you for today's hearing and
inviting me and Bob Fornaro of AirTran to Milwaukee. During our
relatively brief time here, Milwaukee has welcomed us into your
community, given us access to a solid customer base, and
provided us with an efficient, well-managed airport facility
from which to operate. We are very grateful to Barry Bateman
and his team for their professional and courteous hospitality.
Southwest began serving Milwaukee in just November of 2009.
After 15 months, we feel like we are just getting started at
General Mitchell with 12 daily nonstop departures to six
cities. We entered the Milwaukee market because of the
opportunity to extend our low-fare brand and to fill a void in
our route map. Milwaukee is an attractive market as well as a
convenient alternative to Chicago's O'Hare Airport for northern
Illinois travelers.
Southwest sees our acquisition of AirTran Airways as a
platform for new growth to cities and markets across the
country that lack convenient low-fare service. Through our
proposed acquisition of AirTran, we look forward to providing
our Milwaukee area customers with access to an even stronger
and larger nationwide low-fare, low-cost carrier network.
During the past 10 years, which I think will forever be
known as a ``lost decade'' in the airline industry, with fewer
passengers, fewer flights, fewer airplanes, and fewer aviation
jobs, Southwest was different. We were and remain financially
strong. We survived without bankruptcy, without furloughs,
without pay cuts, without diminishing the customer experience,
and without abandoning our communities. In fact, during the
decade we added 206 aircraft, 13 new cities, and doubled our
revenues. In 2010, Southwest Airlines celebrated our 38th
consecutive year of profits and profit sharing with our people.
That profit streak is unprecedented in commercial airline
history because we have been a maverick. We specialize in low
cost and low fares. We are the low-fare leader in America. We
do things differently with no hidden fees, bags fly free, and
no change fees--and pardon my cold.
We are over 80 percent unionized, and here again we are
different. For 40 years, we have enjoyed outstanding labor
relations, and just this week we reached an agreement with our
pilots related to the AirTran transition. In fact, I would like
to introduce several of our leaders with us here today.
We have Captain Kevin Henry from Baltimore; Joe Hanson, a
first officer from Baltimore; Richard Jenkins, an FO from
Midway; Tom Windsor, FO from Midway; and Corey Pettit, who is a
first officer in Dallas. If you guys would just wave at the
Senator? And Tony Dorsch, our chief pilot from Chicago, is also
here today.
Also from our Milwaukee operation, our station manager,
Sean Fairbanks; and Chris Barbie, who is one of our supervisors
on the ramp.
I am very proud of these folks. They are representatives of
our pilots union, and we appreciate their support.
After 40 years of service, we still serve only 72 cities in
the United States. We have many places that we would like to
add to our route map. So due to the challenging economic
conditions which continue to face our country and our industry,
and especially high energy prices, Southwest has not been able
to add to our fleet or greatly expand our route map network
over the last year.
The goal of this acquisition is to change just that.
Provided that our economy continues to recover and fuel prices
do not escalate to prohibitive levels, we see bright skies
ahead for our combined company and the communities that we
serve. It is the potential for future growth at Milwaukee and
across the country that sets this airline acquisition from
other recent mergers in the industry. We do not simply combine
these two great low-cost carriers in order to consolidate or
shrink. This merger is all about creating a larger and stronger
low-cost airline that will spread low fares farther.
Southwest continues to work closely with the U.S.
Department of Justice, the Department of Transportation, and
various State Attorneys General on the review of our proposed
acquisition. We hope that this collaborative process will be
completed in the second quarter of 2011. The benefits of
Southwest's planned acquisition of AirTran can be summed up in
one word: growth. This transaction creates a host of exciting
and unique growth opportunities that otherwise would not be
realistic for Southwest, our customers, our communities, or our
people.
The biggest impediment to growth in the industry is the
high cost of jet fuel. Fuel prices are not affected solely by
the price of crude oil. The oft cited benchmark for crude oil
in the U.S. is known as ``West Texas Intermediate,'' but the
effective price of crude is currently understated for
businesses like airlines, which participate in global energy
markets. The world price of crude is more closely tied to a
different benchmark, which is ``Brent'' or North Sea crude. I
would have to get my iPhone out to tell you exactly what it is
right now, but as February the 22nd, WTI was about $95 a
barrel. As you probably know, it has actually gone over $100
and fallen back. But Brent is $111 a barrel, and that is
essentially what we have to pay for jet fuel, is off of that
crude oil price. That is an alarmingly huge run-up in prices
over a very short period of time, and, of course, if high crude
oil prices were not serious enough, the actual price that
airlines pay for refined jet fuel ``at the pump'' has risen
even faster.
Of course, high jet fuel prices do not diminish the
importance of this merger. To the contrary, they make it
absolutely imperative. The economies of scale and the revenue
and cost synergies presented by this merger are a ``hedge,'' if
you will, against higher fuel prices. Southwest is the industry
leader in hedging fuel through the derivatives market. But as
we learned in 2008 when oil prices went to $147, only to plunge
to $35 in a matter of weeks, derivatives are never the perfect
hedge. They are but one tool. High fuel prices have stymied
growth in the airline industry in the domestic U.S. market as
well as worldwide, and will continue to do so for the
foreseeable future.
The AirTran acquisition is a strategic hedge to enable a
resumption of growth by Southwest. Absent the merger, both
carriers will be constrained and even hard-pressed to maintain
current capacity levels. This transaction is the single best
strategic initiative that we have to preserve jobs and maintain
service to communities, and it gives us the best chance to grow
jobs and add new service to our communities.
Growth is important. It is important to the future for our
people, our customers, our communities, and our Shareholders.
The combination of Southwest and AirTran creates that event
where the whole is truly greater than the sum of the parts, and
that means more competition and better quality of air service,
happier employees, and lower fares.
I thank you for the opportunity to testify here today.
[The prepared statement of Mr. Kelly appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Mr. Kelly.
Mr. Fornaro.
STATEMENT OF ROBERT L. FORNARO, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, AIRTRAN HOLDINGS INC., ORLANDO, FLORIDA
Mr. Fornaro. Chairman Kohl, good morning and thank you for
holding this hearing and giving me the opportunity to address
these very important issues.
On behalf of the 8,300 hard-working men and women of
AirTran Airways, several of whom are here today, including the
president of our pilots union, Linden Hillman, it is my
pleasure to appear before you to talk about AirTran's presence
in Wisconsin and our plans to merge with Southwest Airlines.
Senator Kohl, your support of the airport and steps you
have taken to support airport operations and funding is one of
the reasons that General Mitchell International Airport has
continued to expand and is an important part of the economic
growth in this region. Thank you for that.
I would also like to acknowledge the support we have
received over the years. Barry Bateman and Tim Sheehy, who are
sitting next to me, have done an excellent job and played a key
role in the economic development of the Greater Milwaukee area.
As you know, a longstanding and high priority for AirTran
has been the continued expansion of our Milwaukee network.
Milwaukee is now our third largest market behind Atlanta and
Orlando. Since initiating service to Milwaukee in the summer of
2002, AirTran has grown consistently and now offers more than
55 daily departures. As a result of this increased competition,
General Mitchell International is one of the few airports in
the United States that have reported increased traffic over the
last few years. In fact, over the last five quarters, the
number of Milwaukee passengers has grown by double-digit
percentages while nearby Chicago O'Hare passenger numbers have
declined. I am proud to say that AirTran has played an
important role in setting these records, and we are now the
largest carrier, by market share, at MKE.
In 2007, we outlined our expansion plans and vision that
Milwaukee was an untapped resource. We strongly believed then
and continue to believe now that MKE has not reached its full
potential.
However, the business and economic challenges we face today
as a company and as an industry have substantially increased
since 2007. We continue to deal with very high fuel costs and
an uncertain economy, especially for domestic U.S. travel.
Growth in this environment has been very difficult, and AirTran
has not been an exception.
To weather the storm, in recent years we have dramatically
reset our fleet, selling aircraft, and deferring new deliveries
in order to restore profitability. Since 2008, we have sold or
deferred 47 airplanes. Milwaukee has been one of the few bright
spots over this period. Despite shrinking our overall capacity,
we have continued to grow our network here.
When we began discussions and negotiations with Southwest
last summer, the price of jet fuel, which is the benchmark
across the crack spread, was $85 a barrel. As of last
Wednesday, 2 days ago, the price of jet fuel was more than $125
a barrel. To put that into perspective, Mr. Chairman, every $10
increase for AirTran adds more than $90 million of annual
expense.
The difficult economy and fuel volatility is a key reason
AirTran agreed to merge with Southwest. We believe this merger
will create growth opportunities for both airlines that would
not happen independently.
Equally important, this deal is good for our shareholders,
our employee crew members, and the communities we serve. By
combining the AirTran network with Southwest, we can take
advantage of Southwest's history of financial performance and
substantial resources to create a stronger platform for growth,
while providing career certainty for our employees and
tremendous benefits to consumers, especially here in Milwaukee.
When we have the necessary Federal regulatory approvals and
can talk with our Southwest colleagues about market specifics,
it will be my recommendation to Gary Kelly and his team that
Milwaukee continues to be a key opportunity for growth.
AirTran's success and growth in Milwaukee has allowed us to
double our local employee in each of the last 4 years. Our 330
Milwaukee crew members are also proud to be active partners in
community service. We are proud of our sponsorship of the
Milwaukee Brewers and the Marquette Golden Eagles, and by
assisting groups like the YMCA, the Hunger Task Force, and
Habitat for Humanity.
I and all of our crew members are especially proud to say
that we sponsor the Donald Driver Foundation and that Donald is
an AirTran endorser. And it was great to see him and the
Packers win the Super Bowl.
Senator Kohl, thank you and your staff for all you have
done to promote this airport and community. I am proud that you
have given me the opportunity to represent AirTran and our crew
members today.
[The prepared statement of Mr. Fornaro appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Mr. Fornaro.
Mr. Bateman.
STATEMENT OF C. BARRY BATEMAN, AIRPORT DIRECTOR, MILWAUKEE
COUNTY'S GENERAL MITCHELL INTERNATIONAL AIRPORT, MILWAUKEE,
WISCONSIN
Mr. Bateman. Thank you for the opportunity to speak before
you, Senator Kohl, regarding the merger of AirTran and
Southwest Airlines.
Mitchell Airport is currently served by nine airlines. With
220 departures per day and nonstop service to 55 cities,
Mitchell Airport served a record 9.85 million passengers in
2010, a 24-percent increase over 2009. There were 2 million
connecting passengers, which was also a record number. Our
primary service areas are southeastern Wisconsin and northern
Illinois, but many of our passengers drive in from Rockford,
Illinois, and Madison, Appleton, Oshkosh, Fond du Lac, and
Green Bay. We also attract passengers from as far away as the
Michigan Upper Peninsula and eastern Iowa.
In 2010, our passenger count increased by 1.9 million. In
terms of passengers, we ranked 45th largest in the country. In
2010, we passed several airports, and we estimate that we are
now the 45th largest in the country.
The reason for this meteoric growth over the past 17 months
is the increase in low-cost carrier service at Milwaukee, which
has brought low fares and outstanding nonstop service to 55
cities. Nonstop service, as you know, sir, is of paramount
importance to business travelers and is also preferred by
leisure travelers as it saves time and avoids missed
connections. Low-cost carrier service and the competition which
it brings have resulted in Milwaukee offering the 93rd lowest
average airfares in the country.
Midwest Airlines was the growing and dominant carrier at
Milwaukee in the 1980s and 1990s. Starting in 1984 with service
to just three cities, Midwest grew to a peak market share of 54
percent in 2007. Its business model of providing ``first-class
service at coach prices'' worked well in the 1980s and 1990s.
But with the recession that began the summer of 2001, followed
by the tragedy of 9/11, that business model no longer worked.
Business travel had fallen off significantly. Midwest market
share fell to 34 percent in 2009.
AirTran, seeing the opportunities at Mitchell, entered the
Milwaukee market in 2002, with modest service and 1.7- percent
market share in 2002. AirTran was Milwaukee's first low-cost
carrier to enter the market, and with them came low fares to
the cities that they served. By 2008, they became our second
largest airline, with a 23-percent market share.
Frontier Airlines entered our market in 2003, with service
to Denver and Western cities. As a result, Milwaukee saw more
pressure of new low-cost carriers' influence on Milwaukee
ticket prices, and it was being felt most by Midwest.
On several occasions, AirTran proposed merger talks with
Midwest, but was rebuffed. Eventually, Midwest in the 11th hour
sold to TPG Holdings and Northwest. In spite of the new
ownership, Midwest continued to fail, and was bought by
Republic Holdings in 2009. Republic soon after purchased
Frontier and rebranded the carrier as Frontier. Together,
Frontier and Midwest account for 37 percent of our traffic in
2009 and 32 percent in 2010.
Southwest Airlines entered the Milwaukee market in November
of 2009. In 2010, Southwest had 7.99-percent market share and
became Milwaukee's fourth largest carrier. With Southwest's
entry, low-fare service has further increased, and Milwaukee
has become a pre-eminent low-fare airport.
Mitchell markets itself as Chicago's third airport. Our
location on the south side of Milwaukee presents an opportunity
to serve the northern suburbs of Chicago and Rockford and serve
as Chicago's third airport. There are almost 1 million O'Hare
passengers living in northern Illinois within 60 minutes of
Milwaukee that are potential growth passengers for us. There
are another quarter of a million in Rockford. We know that we
can attract more customers from northern Illinois, and if we
can do that, the airlines will respond with more seats and more
cities served. And that is good for Greater Milwaukee.
O'Hare, of course, is a formidable airport, with 1,100
departures serving 200 destinations. We have marketed ourselves
at the third Chicago airport for years, with limited success.
However, with Southwest's interest in the market in 2009 and
the strong brand and customer loyalty that they bring, we have
seen more northern Illinois plates in our parking structure
than ever before. Since Southwest entered the market in 2009,
our northern Illinois passengers have increased 20 percent.
Southwest's entrance into the Milwaukee market was the tipping
point, building on the previous efforts of Frontier/Midwest and
AirTran and has cemented our position as Chicago's third
airport. Southwest not only serves Greater Milwaukee, but has
bracketed Chicago with its Midway operation on the south side
and the Mitchell operation on the north side.
And in a case of a rising tide raising all ships, when
northern Illinois passengers book Southwest out of Milwaukee,
they discover that there are eight other airlines here flying
to 55 cities. We believe Milwaukee will continue to be very
cost competitive airport with O'Hare. We believe that the
airlines will take notice of that and use us as a northern
Illinois alternative, similar to the Fort Lauderdale/Miami
example.
Milwaukee, with its mid-continent location, is in the
unusual and enviable position of having two airlines hubbing--
AirTran and Frontier. There are only four other cities in the
country that have two hubbing airlines: Atlanta, Phoenix,
Denver, and Chicago.
Clearly, Milwaukee is smaller than those cities, and the
scale of the Frontier and AirTran hubs is not as large as the
hubs in those cities. Nevertheless, Frontier serves 33 cities
and AirTran serves 22. Fourteen of those cities are served by
both carriers. Now add Southwest, with their current six
cities, all of which are also served by other carriers.
Competition is alive and well in Milwaukee.
In 2010, AirTran had 29-percent market share, Midwest/
Frontier had 32 percent, Delta had 15 percent, Southwest had 8
percent. Other airlines at Milwaukee are United, American, US
Airways, Continental, and Air Canada, served by Jazz. In 2010,
in October, AirTran took over as the market share leader in
Milwaukee with 31 percent market share over Frontier's 30
percent.
Frontier and AirTran have built successful hubs at
Milwaukee which have been very important in supporting and
growing the economy of Milwaukee and the surrounding area.
Should the merger of Southwest and AirTran be approved, we are
very hopeful that Southwest will maintain and grow the
successful Milwaukee AirTran hub, not only for Milwaukee but
for the attraction of more passengers from northern Illinois.
We are confident that Frontier will remain a strong and growing
airline at Milwaukee. Milwaukee has the facilities and the
market to continue strong growth into the future, and we look
forward to the opportunities ahead.
[The prepared statement of Mr. Bateman appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Bateman.
Mr. Sheehy.
STATEMENT OF TIMOTHY R. SHEEHY, PRESIDENT, METROPOLITAN
MILWAUKEE ASSOCIATION OF COMMERCE, MILWAUKEE, WISCONSIN
Mr. Sheehy. Thank you, Senator, and thank you very much for
your leadership. I have prepared remarks that I submitted
earlier so I thought I would just highlight them briefly.
Our organization has about 2,000 companies as members that
employ 300,000 people in southeastern Wisconsin, so it is a
good chunk of the flying public and certainly great
representation of the flying business public.
When I think about the hearing today and the pending
merger, maybe I will start out with a piece of anecdotal
evidence since I am not an industry expert here today.
My counterpart who runs the Cincinnati Chamber and are both
going to the same meeting in Raleigh. We both had the same lead
time. My flight to Raleigh was 200 bucks, hers was 600 bucks.
It is a great example of what Barry talked about in terms of
competition, and why Milwaukee is so blessed in terms of having
that competition. And we certainly do not want to see anything
disrupt that.
Business travelers I do not think are different from other
travelers, but in particular, they are looking for markets
served directly, they are looking for frequency, and they are
looking for a competitive price. If we can continue to deliver
that here in Milwaukee, then we have a distinct advantage.
Our economy is built on our connectivity, our ability to
connect to other markets in the U.S., our ability, primarily
through O'Hare, to connect to other markets around the globe.
And when you look at Milwaukee in the metro area, which I would
look at from Madison to Green Bay to northern Chicago and
certainly the metro Milwaukee area. But metro Milwaukee has the
third largest concentration of Fortune 500 companies
headquartered here. We have 18 Fortune 1000 companies, and by
nature, those are the types of companies that demand good
quality air service. They feed off of it. It is a real
competitive advantage for us. Milwaukee's leadership in
manufacturing by its nature means that most of the customers
are not in Milwaukee, so air service is critical to us.
So when we look at this merger, when we look at the impact
on air service here, we feel positively about what is
transpiring. While in a sense we are losing a carrier, we are
gaining a stronger carrier. And maybe to put it in common
language for both of us, if we are going to create a new Dwyane
Wade here in Milwaukee, we want to make sure there are other
Brandon Jennings to compete with it. If we can continue to do
that in the marketplace here, then I think Milwaukee is going
to be well served and will have a competitive advantage and,
quite frankly, an advantage over some of our peers, like
Cincinnati, Pittsburgh, and Cleveland, that do not have this
rich mix of healthy competitors in their marketplace.
So, again, thanks very much for the opportunity to appear
today, and I would be happy to answer any questions when we are
finished.
[The prepared statement of Mr. Sheehy appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Mr. Sheehy.
Dr. Moss.
STATEMENT OF DIANA L. MOSS, VICE PRESIDENT AND DIRECTOR,
AMERICAN ANTITRUST INSTITUTE, DENVER, COLORADO
Ms. Moss. Thank you, Senator, and the Judiciary Committee,
for holding this hearing on the first major merger of low-cost
carriers in the U.S. airline industry. It is an honor to appear
here today.
For those of you not familiar with the American Antitrust
Institute, we are independent advocacy group. We advocate for
fair competition and enforcement of our antitrust laws.
My testimony here today is based largely on a White Paper
that the American Antitrust Institute produced called ``Airline
Mergers at a Crossroads: Southwest Airlines and AirTran
Airways.'' It is available on our website. In it we raise key
questions, novel questions about what this particular merger
might raise relative to former mergers of legacies.
The role of the LCCs in the domestic airline industry is an
important one. LCCs have penetrated markets that have formerly
been the domain of the legacy airlines. They have brought
benefits to consumers in the form of lower prices, increased
choice, innovative business models, and service offerings. LCCs
have challenging their legacy counterparts to become more
efficient and competitive.
Today I would like to address two major points: The effect
of the merger on Milwaukee, and also what more novel or
interesting questions, unusual questions this particular merger
of low-cost carriers raises.
So what are the major issues that we would like to see and
antitrust review give special attention to? One is the effect
of the merger on price discounting and entry. AAI has done a
significant amount of analysis looking at how Southwest and
AirTran, relative to other LCCs and legacies, price and what
markets they enter or have attempted to enter. The low- cost
carriers are probably each other's closest competitors, but it
is very clear that AirTran is an aggressive discounter relative
to Southwest. AirTran has also pursued a very aggressive
expansion strategy in new markets relative to Southwest.
The AAI, therefore, believes that it is important to
consider what taking a maverick-like firm such as AirTran out
of the mix, how that could change incentives for the merged
company to discount post merger and to enter new markets to
serve U.S. consumers.
With the ranks of the low-cost carriers reduced through the
merger, it is a fair question to ask, How will the remaining
low-cost carriers exercise rivalry and competition in the
market to restrain any potential price increases?
Another question that is worth asking and answering in the
course of this merger review is how output and capacity will be
affected. Merger concerns do not focus exclusively on price.
Fewer flights, loss of choice, and discontinuation of nonstop
service represent real potential adverse effects of a merger.
This is particularly true in cases where two carriers overlap
on routes, as they do with Southwest and at an, and are
particularly adept at managing or rationalizing their capacity.
The American Midwest is particularly at risk since
consumers rely on service at cities like Cincinnati, Milwaukee,
Memphis, Cleveland, and Detroit to connect to other larger
destinations.
Capacity cutbacks are demonstrated effects that have been
largely overlooked in airline merger analysis. Reductions in
flight frequencies at key airports such as St. Louis, Las
Vegas, and Cincinnati following the consummation of numerous
legacy mergers over the last decade show us how real those
cutbacks can be and what effect they have on consumers. The
Ohio Attorney General's efforts to obtain a commitment from
United and Continental to maintain service at Cleveland
punctuates the threat of post merger cutbacks. Low-cost carrier
mergers should be no exception to this concern.
Finally, how might Milwaukee be affected by the proposed
merger. I think it is safe to say that Milwaukee is a haven for
low-cost carriers. There are about 130 nonstop segments that
originate or terminate at General Mitchell Airport. Low- cost
carriers account for about 60 percent of total passenger miles
on those segments. Post merger, Southwest and AirTran would
have a share of between 40 to 50 percent, depending on how it
is measured.
Some routes originating or terminating at Milwaukee are
extremely important. For example, 19 nonstop and connective
service routes make the Department of Transparency's top 1,000
city pair rankings. Southwest and AirTran compete on almost 80
percent of those routes. They are the low-fare carrier on about
three-quarters of those routes, and together they account for
over one-half of total passenger miles.
The take-away from this analysis of Milwaukee is twofold:
First, passengers originating or terminating at Milwaukee
are clearly dependent on low-cost carriers for service. The
competitive discipline injected by LCCs here may be one reason
why airfares based on the Airline Travel Price Index have
actually declined 2.5 percent since 1995. In light of the
importance of the LCCs here, it is worth examining very closely
how the merger could change the competitive dynamics of rivalry
at the airport.
Second, passengers traveling two and from Milwaukee are
dependent not only on LCCs, but on Southwest and AirTran in
particular. These two airlines have a significant presence
here, are head-to-head competitors on important, heavily
traveled routes, and in light of the fact that AirTran exhibits
its characteristic aggressive price discounting here, it is
worth asking how the merger might change pricing behavior after
the merger is consummated.
The merged airline will be in competition against legacy
carriers and another major LCC, but they will no longer be in
competition with each other. While they may continue to be the
low-fare carrier, their fares could edge higher and rivalry
diminish and consumers suffer.
Thank you for the opportunity to testify, and I again refer
you to AAI's White Paper on our Web site.
[The prepared statement of Ms. Moss appears as a submission
for the record.]
Chairman Kohl. Thank you very much, Dr. Moss.
Mr. Kelly, we will start with you. Air travelers and
businesses in Milwaukee have greatly benefited from AirTran's
presence and growth in Milwaukee in recent years. The growth of
AirTran at Mitchell has been an unquestioned boon to air
travelers and businesses in the entire Milwaukee region.
Would you at this time commit to maintaining AirTran's
service and its growth plans at Mitchell Airport after this
merger takes place?
Mr. Kelly. Mr. Chairman, we are very enthused about
Milwaukee. We are very enthused about continuing to grow
Southwest Airlines. If I could commit what Colonel Qaddafi is
doing in Libya, and, the effect that will have an fuel prices,
I think I would have a better opportunity to make a firm
commitment about our future at Southwest Airlines. We want to
grow, we want to add airplanes, we want to add flights, we want
to hire more employees across our system. But we have to do
that in a fiscally responsible way.
Our fuel budget right now stands at about $4.5 billion for
a $12 billion company for 2011, and as it stands today, we are
probably close to $1 billion over our fuel budget. So, with
that, all else being equal, our earnings would actually be
lower this year than a year ago. In that scenario, would we
continue to grow? Of course not. We could not afford to. We
cannot operate in a deficit that way.
Do we have the desire to maintain the AirTran level of
service? Absolutely, and, in fact, we have the desire to take
the Southwest flights plus the AirTran flights, sir, and grow
it. I just cannot guarantee that we will have the fiscal
ability to do that because we cannot predict fuel prices.
Chairman Kohl. You already have a large operation at Midway
Airport in Chicago.
Mr. Kelly. Yes, sir.
Chairman Kohl. How do you plan to bring together these two
operations in a way that will benefit Milwaukee? It seems to us
that your large operation at Midway will inevitably tend to
diminish what you or what we might expect or hope that you will
do here.
Mr. Kelly. I do not see that risk at all. In fact, we
choose cities based on a market opportunity and then choose
airports based on that relative opportunity. So for years we
have had--our only focus in Chicago has been Midway Airport. So
we have never served O'Hare and have no plans to serve O'Hare.
We see Milwaukee as a separate market opportunity, and that
is why we have entered that market. So it will be a very nice
complement, and I agree with Barry's point that it is, I think,
logical to market it as the third area Chicago airport. But it
is a different marketing area. We have multiple airports that
we serve in the Washington, D.C., area, in the Bay area in
California. On the other hand, in Dallas we have one airport
that we serve because we believe that both airports in the
Dallas-Fort Worth area serve the same market. So we do not see
any purpose in serving DFW.
So I think they will be a very nice complement to each
other. It will actually provide some economies of scale for us
to increase our presence and be able to market in a broad area
that way. There clearly are some customers that will be
interested in using the Southwest/AirTran combined service from
either airport, and obviously that creates more choice from our
customers, and that is better for Southwest Airlines in the
long run.
Chairman Kohl. I think most of us, gentlemen, are
struggling with the idea of going from two airlines competing
with each other to provide service here in Milwaukee to one
airline in the sense of the two of you combining. And we are
trying to figure out why this will be better. We can imagine
how it might be worse in any which way, whether it is service,
price, name it. You know, when people compete things get better
for the consumer. When there is no competition or less
competition, unless there is some explanation, the consumer has
a right to imagine how things are not going to be better, they
might be worse.
One thing, for example, is that AirTran has at least two
classes of service. Is that right, Mr. Fornaro?
Mr. Fornaro. Yes.
Chairman Kohl. And Southwest has just one, and I am
assuming that that will be what occurs after the merger, and
you can correct me if I am wrong, but I think that is an
automatic.
So, Mr. Bateman and Mr. Sheehy and Dr. Moss and Mr. Fornaro
and Mr. Kelly, why will this be better for us? I can imagine
how this will be worse for us. I cannot figure out why this is
going to be better. Go ahead, Mr. Kelly. Mr. Fornaro, you are
next.
Mr. Fornaro. Just again to go back, as I mentioned, yes,
actually Milwaukee has been a bright spot. AirTran is smaller
domestically today than we were 3 years ago, and we are not a
growing maverick. We operate the same number of airplanes today
as we did 3 years ago, and, you know, we have had to
rationalize our focus. When we made a major aircraft order in
2003, the price of oil was just under $30 a barrel. And things
have changed dramatically, and we have had to react to that.
But as I view the opportunity, again, I think we are just
getting started in Milwaukee. When you look at our operation,
we are completely the opposite of what Delta and Northwest are
trying to do, or United and Continental. Those companies have
talked about consolidation. That is a word that we have not
mentioned. This is not about consolidation. This is about
combining Southwest and the Midwest and West and AirTran
perhaps on the east coast and the Southwest and really putting
them together. On that basis we think there are a lot of
opportunities. There are a lot of opportunities in secondary
markets that are not served nonstop today. And so we think
those opportunities, again, given the operating environment,
remain.
When we viewed the Milwaukee market 3 or 4 years ago, again
we envisioned a bigger operation than we are flying today.
Again, obviously we have adjusted because of fuel prices. But
it is our belief that we can dramatically broaden the route
portfolio in Milwaukee. And I would say it is dramatically
different than some of the other perhaps examples around the
country. We have no intention, again, to consolidate like the
other carriers, and our plan is to combine what is good about
both companies and make it larger.
Just a few examples. We believe, as an example, that
Southwest's great presence in the Western part of the U.S.
would allow a lot more customer choice because we could tie in
our strengths on the east into those great strengths that
Southwest has on the west.
So I think the geography, you know, works very, very well.
We do not have an overlap, and, again, I think we view
Milwaukee as an underserved market. It was under a different
time. We think the potential is still here, and we are seeing
it. We have only been at it for a few years now, and I think we
are going to continue to see the trends in this market remain.
Chairman Kohl. Mr. Kelly.
Mr. Kelly. Thank you, sir. Well, we are in business to
provide a customer service, so that is our passion. The more
customers we have, the better it is for Southwest Airlines.
This is an opportunity for us to grow our geography by
acquiring AirTran. We are buying a company that has a similar
low-cost philosophy. Our cost structures are neck and neck with
each other. We have similar low-fare strategies. We have very
strong work ethics within our company cultures. So it will be,
I think, a pretty seamless marriage between the two so that we
can think about this in a successful way. But we will be able
to add 39 new points of service on our route network, and from
AirTran's perspective they will be now connecting into a
customer base that is four times their size.
So there are very significant economies of scale to add new
itineraries and new service across the United States, and we
will just get our toe dipped in the water internationally.
Again, we are different, and this would be our third
acquisition in our history, and the first one in 17 years. But
after 40 years, we still are the low-cost leader in the United
States. We are still the low-fare leader in the United States.
That is what we do. We bring more competition, and by
definition, if we can go more places and serve more customers,
that by definition means more competition.
Even having said all of that, we are dwarfed by very large
legacy airlines. Their revenues are double and triple our size.
So it is an extraordinarily competitive industry and will
certainly remain so after Southwest acquires AirTran.
Chairman Kohl. Mr. Bateman, I want to ask you, and then Mr.
Sheehy, in your most idealized world, would you rather have
these two airlines merge or would you rather have them separate
and competing?
Mr. Bateman. In an idealized world, well, let me just
answer that this way, Senator. What we are seeing here is, I
think, scale. If you look at the fabric of the airline
landscape for the past several years, we are seeing
consolidation in United and Continental, America West/
USAirways, Delta/Northwest. And for AirTran particularly, and
Southwest to some lesser degree, to compete against those mega
carriers, they have to have some scale to do that. And as much
as one regrets seeing the loss of competition with the merger,
I think that for them to compete against those mega airlines,
they need greater scale to do that. And this is one step toward
that.
So as Tevye would say, on the one hand, you know, we regret
it. On the other hand, I think that it is going to be to the
benefit of Milwaukee.
Chairman Kohl. Mr. Sheehy.
Mr. Sheehy. Yes, the question may be a bit over my pay
grade, but I am going to take a shot at how we would look at it
from the business community standpoint. And, again, I know they
are not subject to this discussion, but Frontier, if you look
at what happened with Frontier purchasing Midwest or Republican
purchasing Midwest and then purchasing Frontier out of
bankruptcy, and you look at what's happened in this market, I
think as much as it is numbers of carriers and where they
compete on routes, I think as Barry said, it is also the
strength of the competitor. And, you know, having Frontier
here, they moved I think a couple hundred of their mechanics.
One of our M-7 recruitment projects was to strengthen their
focus here in terms of not only serving the market but their
employment base here, and they now have a couple hundred
mechanics serving their fleet here. They have a call center. So
I think they are well positioned to compete from here.
If that were not the case, maybe I would be a little more
worried about this merger. But I think having strong
competitors here, as much as we want low cost, we want the
flights, we do in a sense as a flying public want healthy
airlines. I mean, it is tough to look at a future if the
airlines are continuing to lose money. They are reacting to,
you know, global fuel prices. So I think numbers are important,
but so is strength of competitor, and the ability to look ahead
from the business community standpoint and plan that you can
make a capital investment here, that you can expand your
corporate headquarters and see a future where you have
consistent air service at a competitive price, and I think we
are going to get that out of here as much as I can see ahead.
Chairman Kohl. Dr. Moss, are we better served having two
airlines in Milwaukee here, AirTran and Southwest, or one?
Ms. Moss. Well, I think that is the million dollar or
billions of dollars' worth of question in this particular case.
I think in general more competition is always better. In the
airline industry, we have some special considerations.
First of all, if pressures to bulk up to compete with other
larger rivals in the market was the major motivation for
merger, then in theory we would have one airline, because we
would get onto the slippery slope of merging to get larger to
compete with larger rivals, those rivals again merge, and then
we trigger a set of mergers in the industry that is seemingly
unstoppable.
I think we are already onto that slippery slope, and the
downsides of that I think are very clear. The American Midwest,
as I noted in my remarks, is a particularly sensitive area.
These consumers are at risk because they rely on smaller cities
and access at smaller cities to get to larger destinations. So
prices are not the only consideration here. It is choice, it is
availability, it is nonstop versus connecting service, forcing
consumers to travel to other airports because nonstop service
was discontinued as a result of capacity rationalization I
think is a detrimental effect of the merger.
So the more competition, the better. I also take the point
very seriously that airlines grapple with some fundamental
economic issues. They have high fixed costs, they have high
fuel costs. American airlines have struggled in the last 20
years trying to remain profitable without getting bigger. So
this is sort of a basic economic problem that we deal with.
My last remark is I think we have to ask how effective are
the remaining low-cost carriers going to be if Southwest and
AirTran merge. If there were to be less aggressive price
discounts--let us put it that way. They would not discount as
much as they do now. Instead of raising prices, we might see
fewer discounts. If that were to occur--and I am not saying
that that would, but it is certainly a question that we ask in
mergers--how effective is the remaining competition? The
legacies are not going to discipline discounting behavior or
price increases. The legacies, when you put two legacies on a
high-fare/low-fare route, they come out with the highest
average fares of all possible combinations. So it is not the
legacies who would be putting competitive pressure on a merged
Southwest/AirTran. It is going to be the other low-cost
carriers. Well, we have got Frontier here. I flew on Frontier
last night from Denver. Is that enough? Is that enough
competition? How many do we need to potentially discipline
these post merger effects? I think that is a very valid
question to ask.
Chairman Kohl. OK. Mr. Kelly, you are going to gain
entrance to several major cities as a result of this merger. If
you did not have any of that, would you still make this merger,
Mr. Kelly? If you did not have those--I think there are four
major cities where you are going to gain: LaGuardia,
Washington, DC., Atlanta--what is the other one?
Mr. Kelly. Well, we are actually in New York LaGuardia, but
we are not able to add more departures or slots, so absolutely,
that is a very valuable asset that AirTran brings, is more
access to New York LaGuardia. We cannot get access absent the
acquisition to Reagan. So, yes, you are exactly right. And the
same essentially applies to Hartsfield. It is just not
otherwise an opportunity for us. I think those are the primary
three.
The other large category that I would describe that we are
very interested in that AirTran does is they have several dozen
small cities that we heretofore have not tried to serve. They
serve that with low frequency. They serve it with the Boeing
717 aircraft, which is smaller, a good short-haul aircraft, and
we are very intrigued with that opportunity as well.
Chairman Kohl. Yes, but my question is: In this merger, how
important is that consideration----
Mr. Kelly. Very important. Our desire is to grow Southwest
Airlines. The only way that an airline can grow in this world
is to offer something different. What we offer is low fares. We
have done that for 40 years. That is the way I see our vision
for the next 40 years, to keep our costs low and our fares low.
This, in addition to our desire to offer low fares to more
places, they bring us the places. And if AirTran did not have
those places, no, sir, we would not be acquiring AirTran. That
is one of the more valuable assets that they bring us,
expansion opportunities to new places where we can further grow
those markets by continuing to add--or serve the markets with
low fares.
Chairman Kohl. Well, that is an important statement you
made, and it is frank and honest, and we all appreciate that.
But if I hear you correctly, what you said is without those
entrees into these other major markets that we have discussed
this morning, you would not be buying AirTran.
Mr. Kelly. I do not see that.
Chairman Kohl. And I appreciate your frankness, but, you
know, to us who are concerned only about Milwaukee--and I am
sure you can understand that--we worry about how Milwaukee will
fare if and when this merger is consummated because your major
reason for buying AirTran is not AirTran's operations in
Milwaukee. Your major reason is because it gives you entree in
other cities. So if you are us, you worry about it. You worry
about it, Tim.
Mr. Kelly. Well, there is a long list of reasons that
AirTran makes sense for Southwest Airlines. Some of them are on
the Southwest Airlines side of the ledger. In other words, if
we were not financially strong, if we did not have a solid
leadership team, if we did not offer good customer service, we
would not be in a position where we could contemplate a
transaction like this. AirTran brings many, many things that
make it an attractive acquisition for us. Milwaukee is one.
Milwaukee is simply--it did not fit your description because we
are already in Milwaukee. But we will be able to grow Southwest
Airlines and AirTran faster in Milwaukee than we would
otherwise by virtue of the acquisition.
Chairman Kohl. What do you say to that traveler that is
pleased with the business class service that AirTran is
providing that you no longer will be providing? What do you say
to that traveler?
Mr. Kelly. Well, now every customer is going to get first
class service on Southwest Airlines, all 137 seats.
[Laughter.]
Mr. Kelly. But it is a model that has worked
extraordinarily well for 40 years. We have never held ourselves
out to be all things to all people. On the other hand, I would
argue that we actually carry more business customers in the
United States than any other airline. So try us. You just might
like it. We do have a product that is targeted for business
customers who want the seat that they want, and that is our
business select product, and our customers tell us that they
like it very well. But our brand rankings have never been
higher, and we do serve a very substantial number of business
customers.
Mr. Fornaro. Senator Kohl, if I could add one thing, when
Gary and I had our first conversation in early May, we talked
about four opportunities, as Gary described to me. Washington
National and Atlanta were brand new to Southwest, and the other
two opportunities were to increase our service in LaGuardia and
the other one was Milwaukee, as they viewed as an opportunity
strong Midwestern point and the third Chicago airport. So that
was in our initial conversation when we met in the first week
of May.
Chairman Kohl. What is going to happen to that relationship
that you now have at AirTran with SkyWest which enables you to
service Des Moines, Omaha, St. Louis, Indianapolis, Akron, and
Pittsburgh? Mr. Kelly, can you tell us that that relationship
or your ability to serve those communities will not be impeded?
Mr. Kelly. It is premature. First of all, again, over 80
percent of our employees are subject to collective bargaining
agreements. Our pilots' agreement has a provision in it that
restricts domestic code sharing with Southwest Airlines. So we
will want to and need to work with our pilots on the AirTran
relationship with SkyWest, and then we will also need to make a
determination, once AirTran is fully integrated into Southwest,
what we want to do with that service.
Now, four of those cities are already served by Southwest
Airlines. I can assure you that that the two that are not, we
want to serve. How SkyWest fits into that is just premature to
say at this point.
Chairman Kohl. What about employment here, Mr. Fornaro? You
have how many people in Milwaukee?
Mr. Fornaro. 330.
Chairman Kohl. And how many are located here right now, Mr.
Kelly?
Mr. Kelly. We have 35 to 40. Sean?
Mr. Fairbanks. About 50.
Mr. Kelly. 50.
Chairman Kohl. We are talking about somewhere close to 400.
Is that right? Is that going to be diminished in any way? Or is
that going to be enhanced?
Mr. Kelly. It will be different. You have a crew base here,
and we will not most likely. I do not know where those
employees live, on the other hand, because a lot of our crew
members will commute. But in terms of the airport operations,
again, what we want to do is we want to grow the daily
departures here in Milwaukee, and that would certainly grow the
airport operations employment if we are able to do that. That
would be our desire.
Across the country, as we look at job opportunities, this
is about growth. And Milwaukee, among the cities that we
jointly serve, is at the top in terms of opportunities to grow.
So I would hope that we could grow our flight activity and our
employment here in Milwaukee.
Chairman Kohl. So I take it you are saying the employment
will not diminish and it may very well grow.
Mr. Kelly. It will not diminish at least with the airport
operating employees, but we will not have a crew base here in
Milwaukee.
Chairman Kohl. How many people is that crew base?
Mr. Fornaro. That crew base has, I think, about 70 or 90
pilots.
Chairman Kohl. 70?
Mr. Fornaro. Yes.
Chairman Kohl. So those will be gone. That crew base will
no longer be in Milwaukee.
Mr. Kelly. The crew base would not be in Milwaukee, most
likely. Again, even that is premature to say, but I want to
give you a straightforward answer. But I do not know--and I
doubt that Bob knows--where those employees actually live. They
may very well not live in Milwaukee. They simply commute in to
start their duty period.
Chairman Kohl. And I am also taking for granted that the
two classes of service that AirTran now offers will no longer
be a part of service in Milwaukee.
Mr. Kelly. We do not have any plans to change our on-board
service. So it is all first class, yes, sir.
Chairman Kohl. Well, Mr. Sheehy, your organization has
many, many people who are willing to pay a little bit more to
travel on the business class of AirTran. What do you say to
them?
Mr. Sheehy. Well, I think that, again, what is important,
what is most important is the number of markets served directly
and the frequency. Price probably does come in third, although
I think in this economy and going forward more and more
companies are sensitive to the price they are paying for their
air service and I think will readily adapt to the model that
Southwest has. They have options on Frontier. They have options
on Delta and other airlines that are serving that. And I think
if the business flying public thought that was an issue and
they voted with how they flew, the airlines would adapt. But I
really do not see that as a big barrier to the quality or type
of air service that we have flying out of Milwaukee. I see Paul
Upchurch here from Visit Milwaukee. I do not think it is a big
issue for people coming in that are going to visit Milwaukee.
So I really do not see that to be much of an issue at all
unless, you know, you are Andrew Bogut or something, and then
we all have problems fitting into airline seats these days.
Chairman Kohl. I would love for Andrew Bogut to be
traveling on commercial airlines.
Mr. Sheehy. Less expensive on Southwest, yes.
[Laughter.]
Mr. Sheehy. We feel your pain.
Chairman Kohl. Well, I am getting the impression here--and
I have had since the merger was announced--that there are goods
and bads to it. Now, obviously, Mr. Kelly and Mr. Fornaro, your
job is to present the more positive aspects of it,
understandably. And our job is to be concerned that whatever
you do is good for Milwaukee. I think there are reasonable
questions that have been raised here this morning that cause us
to worry about whether this kind of a merger is good for
Milwaukee. It is obviously going to be good for your airlines.
But whether it is good for Milwaukee and Milwaukee consumers is
a question.
And maybe some of these questions cannot readily be
answered, so I would like to ask you, Mr. Kelly, whether you
are prepared to come back and visit with us annually and
publicly to analyze the merger and its impact on Milwaukee and,
if necessary, to make whatever accommodations or changes are
necessary in order for you to fulfill your pledge to us, which
is that this is going to be a good thing for Milwaukee and not
a mixed bag or a bad thing. I think you are telling us that it
is going to be a good thing for Milwaukee. You are not able to
be particular about it because things change and developments
occur, but you are assuring us that on balance this is going to
be a good thing for Milwaukee and nothing else but a good thing
for Milwaukee, and you do not want us to be disappointed. So
will you come back and report to us annually on how this is
benefiting Milwaukee?
Mr. Kelly. I would be delighted to do that, and obviously
we are here to serve our customers, and it is in our own
selfish interest for you and all of our customers in Milwaukee
to be happy. We know our communities want more service. We know
that they want low fares. And we are the one airline over 40
years who has lived up to that. We make commitments to our
communities. We become involved. We do not come in 1 year and
exit the next. Part of that is having the financial wherewithal
to see ourselves through the bad times.
I cannot promise you what changes we will need to make. We
have made dramatic changes in Southwest Airlines over the last
5 years. We were able to do that in a way where we did not
abandon our communities, where we did not furlough employees.
We did not ask them for pay cuts. And I am proud of that.
So what I can promise you is that we will give it more than
just our best effort, because we know this is important to your
community. If we did not believe that we could take care of the
Southwest and AirTran employees and crew members, also do good
things for our shareholders, also do good things for our
customers, we would not do it. And that is why we do
acquisitions infrequently. But the last acquisition we did, I
would just point out, we were probably 30 percent our size, so
the track record there is pretty good that we buy as an
incentive for us to continue to grow. And I hope that we can
come back and tell you that we have been able to grow Southwest
a lot.
We would be lying to you if we did not tell you that we are
concerned about gas prices. And we are. If we can keep moderate
or at least stable gas prices, I think we have a very, very
strong outlook for Southwest Airlines over the next decade.
Chairman Kohl. Thank you very much for coming. Thank you
all for being here today, and this hearing is closed.
[Whereupon, at 11:24 a.m., the Subcommittee was adjourned.]
[Submissions for the record follow.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]