[Senate Hearing 106-1016]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1016

                   UNITED AIRLINES-US AIRWAYS MERGER

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                    BUSINESS RIGHTS, AND COMPETITION

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2000

                               __________

                             ALLENTOWN, PA

                               __________

                          Serial No. J-106-98

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
             Manus Cooney, Chief Counsel and Staff Director
                 Bruce A. Cohen, Minority Chief Counsel
                                 ------                                

      Subcommittee on Antitrust, Business Rights, and Competition

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
             Pete Levitas, Chief Counsel and Staff Director
        Jon Leibowitz, Minority Chief Counsel and Staff Director




                            C O N T E N T S

                              ----------                              

                     STATEMENT OF COMMITTEE MEMBER

                                                                   Page

Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Donahue, Jim, Deputy Attorney General, Commonwealth of 
  Pennsylvania...................................................     4
Doughty, George, Executive Director, Lehigh Norhampton Airport 
  Authority......................................................     6
Gates, Elmer, Chairman, Lehigh Valley Economic Development 
  Corporation....................................................     3
Longmuir, Shelley, Senior Vice President, International 
  Regulatory and Governmental Affairs, United Airlines...........    15
Nagin, Larry, Executive Vice President, Corporate Affairs and 
  General Counsel, US Airways....................................    17
Toomey, Hon. Pat, a U.S. Representative in Congress from the 
  State of Pennsylvania..........................................     2

 
                   UNITED AIRLINES-US AIRWAYS MERGER

                              ----------                              


                         MONDAY, JULY 24, 2000

                          U. S. Senate,    
 Subcommittee on Antitrust, Business Rights
                                   and Competition,
                                Committee on the Judiciary,
                                                     Allentown, PA.
    The subcommittee met, pursuant to notice, at 8 a.m., in the 
Glass Conference Room, Lehigh Valley International Airport, 
Allentown, PA, Hon. Arlen Specter presiding.
    Also present: Representative Toomey.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Senator Specter. Good morning, ladies and gentlemen. We 
will begin this hearing of the Subcommittee on Antitrust of the 
Judiciary Committee on the proposed merger of US Airways and 
United Airlines. This is a matter of great importance to the 
United States and of special importance to Pennsylvania because 
of the concentration of US Airways activities in our State. 
Immediately after the proposed merger acquisition was 
announced, Senator Santorum and I wrote to United and US 
Airways, expressing a series of concerns.
    On May 25, Senator Santorum and I met with the chief 
executive officers of the two companies. There was a hearing 
before the Antitrust Subcommittee in Washington on June 14. 
Then it was decided to have a series of hearings around 
Pennsylvania, with a hearing in Philadelphia on June 26, 
Pittsburgh on July 10 and here today in the Lehigh Valley, and 
we are considering additional hearings. A principal concern 
nationally involves the potential lessening of competition and 
the triggering off of other mergers with very substantial talk 
already underway about combinations of American Airlines with 
Northwest and a combination of Delta Air Lines and Continental.
    A major concern is that we may be heading to an oligopoly 
of airlines in America, which would have the inevitable result 
of increasing fares for passengers. In Pennsylvania, US Airways 
is a very dominant factor, employing some 17,000 people, major 
hubs in Philadelphia and Pittsburgh, and the impact on the 
Lehigh Valley is very, very important. There is almost no 
competition on flights from the Lehigh Valley, with only 
Orlando and Washington, DC served by more than one airline.
    This has led to the Lehigh Valley's ranking of 13th-most-
expensive place to fly out of among the top 125 United States 
cities. Philadelphia is almost in as bad a position at 17th, 
and Pittsburgh is in not too much better shape at 28th. The 
importance of the airport here--the Lehigh Valley airport 
tenants and visitors contribute more than $300 million in 
economic benefits to the Valley annually. Every airplane that 
lands or takes off has a proportionate benefit of some $2,000 
of economic advantages. The airport's point of interest serves 
about 4,000 businesses a year and represents more than $28 
million in annual duties.
    The airport, of course, is a very, very important source of 
attracting business and we have worked hard on the 
Appropriations Committee with a series of appropriations to 
improve the airport. It may be that the pendency of the merger 
will provide some leverage to provide some additional 
competition, with a spinoff of gates. We have already had some 
movement. Last week, the United announcement was made that 
there will be proceedings with the maintenance center in 
Pittsburgh for about $160 million. That is short of what had 
been proposed for Pittsburgh, with some $600 million.
    There have been some comments about the reservation area, 
which are promising up to this point, and there has been some 
talk about no furloughs and price maintenance; and we are still 
looking to have all those commitments reduced to writing 
because, candidly, without having binding commitments, not a 
whole lot of credence can be placed in what is only 
conversation.
    I am pleased to be joined by my distinguished colleague, 
Congressman Pat Toomey, today. Thank you for joining us, Pat, 
and I will turn to you for opening comments.

STATEMENT OF HON. PAT TOOMEY, A U.S. REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF PENNSYLVANIA

    Representative Toomey. Thank you, Senator. Let me first 
thank you for conducting this series of hearings, as you have 
across the State. This is obviously an extremely important 
contemplated merger for Pennsylvania. I want to thank the 
panelists for being here and sharing their expertise with us 
today.
    When one considers that approximately 58 percent of the 
passenger service from Lehigh Valley International Airport is 
carried by one of the two airlines that are contemplating this 
merger, clearly it is a very, very important question that we 
need to address from the point of view of the Lehigh Valley; 
and we need to think through whether this merger will, in fact, 
enhance service and competition and provide more options for 
the traveling public, or whether the effect would be to the 
contrary, to diminish those important goals.
    So, I welcome the opportunity to be here and to hear from 
your testimony; and again I want to thank the Senator for 
conducting the hearing.
    Senator Specter. Thank you very much, Congressman Toomey, 
and thank you for joining us. We turn now to our first panel 
and our first witness is a good friend of mine, Elmer Gates. He 
currently serves as chairman of the Lehigh Valley Economic 
Development Corporation, which is comprised of approximately 
300 member companies in the Lehigh Valley; bachelor's degree in 
engineering from Clarkson College in New York; former general 
manager of General Electric's Large Motor and Generator 
Department; and a former president, chairman and CEO of Fuller 
Company in Bethlehem. Thank you very much for joining us, Mr. 
Gates, and we look forward to your testimony.

   PANEL CONSISTING OF ELMER GATES, CHAIRMAN, LEHIGH VALLEY 
ECONOMIC DEVELOPMENT CORPORATION; JIM DONAHUE, DEPUTY ATTORNEY 
  GENERAL, COMMONWEALTH OF PENNSYLVANIA; AND GEORGE DOUGHTY, 
    EXECUTIVE DIRECTOR, LEHIGH NORTHAMPTON AIRPORT AUTHORITY

                    STATEMENT OF ELMER GATES

    Mr. Gates. Thank you Senator. I am here representing the 
Lehigh Valley Economic Development Corporation, of which I have 
the privilege of serving as chairman.
    Senator Specter. Elmer, we are going to be setting the time 
limit at 5 minutes. If you exceed it a little bit, it is OK, 
but that will give us the maximum amount of time for Q and A, 
dialog.
    Mr. Gates. That will not be a problem with me, Senator.
    Senator Specter. Which part will not be a problem, the 5 
minutes or the Q and A? [Laughter.]
    Mr. Gates. The 5 minutes.
    Senator Specter. OK.
    Mr. Gates. I appreciate the opportunity to present our 
concerns to your distinguished committee. The Lehigh Valley, as 
I am sure both you and Congressman Toomey are aware, is leading 
the Commonwealth of Pennsylvania in new job creation, and this 
is based on the entrepreneurial, free-market and pro-business 
culture that exists in Pennsylvania under Governor Ridge's 
administration and the aggressive implementation of successful 
economic development activities in the Greater Lehigh Valley.
    As an example, Lucent Technologies, as you are aware, is in 
the construction phase of a significant addition to its 
microelectronics facility that will generate 1,500 new high-
tech jobs. Small businesses, especially e-commerce start-ups, 
are being created at a rapid place here in the Lehigh Valley, 
and businesses are locating here from other States in the 
United States and other countries around the world, such as 
Israel, Germany and England.
    More area businesses are creating high-paying jobs through 
increased exports, from candy makers to heavy machinery, to 
industrial valves and industrial gases. So, the concerns that 
we offer are from this perspective, of a viable, dynamic 
economic activity here, which we want to make sure nothing that 
is done in this merger and others constrains the momentum that 
we have built.
    As you are aware and have already commented on, there is 
significant ticket price discrimination for travel in the 
United States based on the airport of origin. Fares for 
business travel from the Lehigh Valley International Airport to 
points west in the continental United States are significantly 
higher than flights originating from Philadelphia or Newark, 
forcing many business travelers to travel one-plus hours to one 
of these cities to depart.
    With the cooperation of Lehigh Valley International Airport 
officials, our State and national elected officials and 
PennDOT, a number of actions have been taken to try to reduce 
this price discrimination, but with very little success. When 
lower-fare airlines have initiated service to and from Lehigh 
Valley International Airport, the major carriers immediately 
reduce fares to this lower level. When a low-cost carrier is 
forced to exit this market, prices rise again.
    This proposed merger would reduce competition among 
airlines locally and the practice of price discrimination would 
continue unabated, with less incentive to the merged airline to 
reduce fares to destinations in the continental United States. 
We do not need the prospect of higher airfares. We need the 
prospect of lower airfares, to allow us to compete favorably 
with major-metropolitan-area airports and to allow us to invest 
the savings that we would achieve in new product development, 
productivity-enhancing equipment and so forth.
    The elimination of one airline serving the Lehigh Valley 
leads us to the concern that the number of flights originating 
from the Lehigh Valley International Airport will be reduced, 
and a further concern that nonstop service to popular business 
destinations will also be reduced. With the increase in 
economic activity that I just explained, we need more flights, 
not less, and more nonstop flights to popular business 
locations, not less. A final concern, of course, is the impact 
this merger would have on the employees of both airlines.
    Obviously, there will be a need for fewer customer-service 
agents, baggage-handling, maintenance, administrative and 
management personnel. These are our three concerns: Continued 
or greater price discrimination; the prospect of fewer flights 
and the possibility of the layoff of competent, dedicated, 
loyal employees. We are confident that you will address these 
issues in your deliberations on the proposed merger. We thank 
you very much for listening.
    Senator Specter. Thank you very much, Mr. Gates. Thank you 
for concluding before the red light went on. That is a relative 
rarity at our hearings. We now turn to James Donahue, Esquire, 
Chief Deputy Attorney General of the Antitrust Division for the 
Commonwealth of Pennsylvania. Mr. Donahue received his 
bachelor's degree in journalism and government from Lehigh 
University in Bethlehem, and a J.D. from Duquense University 
School of Law in Pittsburgh. He has worked for the Office of 
Attorney General since 1985. Attorney General Mike Fisher 
joined us at our hearings in both Philadelphia and Pittsburgh, 
and provided very important testimony. I know the Attorney 
General's Office has been working very hard on this matter; and 
Mr. Fisher wanted to be here today, but could not because of 
scheduling conflicts. We are pleased to have you here, Mr. 
Donahue, and we look forward to your testimony.

                    STATEMENT OF JIM DONAHUE

    Mr. Donahue. Thank you, Senator Specter, and good morning, 
Congressman Toomey. Thank you for the opportunity to address 
you today about the acquisition of US Airways by United 
Airlines. Attorney General Fisher has asked me to pass on that 
the recent commitments by United with regard to building a 
maintenance base in Pittsburgh is a positive step, but that 
step does not change the fundamental focus of our review, which 
is whether this merger will reduce competition. At the outset, 
let me state that we are in the middle of a merger 
investigation that we are conducting jointly with the U.S. 
Department of Justice and 25 other States.
    Under the Department of Justice's Federal-State merger 
protocol, which governs multistate merger investigations, we 
are required to keep all the information we receive from the 
parties confidential, and we must keep that information 
confidential unless we file a lawsuit. Even then, we may only 
use the information we have obtained in the law-enforcement 
proceeding. Therefore, I cannot comment or share information 
that we have obtained so far in our investigation.
    I also want to add that, when I am making comments today, I 
am not speaking for the U.S. Department of Justice or the other 
States. I thought I would start today with an anecdote. Given 
our early start today, the fact that we are meeting here at the 
airport, and our knowledge that United, Northwest, and Delta 
all have nonstop service between Harrisburg and Allentown, we 
thought we might fly up this morning. We also expected such a 
flight to be inexpensive. After all, the reason that Delta, 
Northwest and United have nonstop service between Harrisburg 
and Allentown is that they cannot fill an airplane from either 
city to their hubs. The fare actually is $475 for a round-trip 
between these two cities for a 22-minute flight. US Airways, 
which offers connecting service from Philadelphia, is even more 
expensive. So we drove.
    Merger reviews are very intensive projects. We often have 
to cram 3 years' worth of work into 3 months. Typically, we 
want to get the views of all those involved in a particular 
industry. It is not uncommon for us to have interviewed 
hundreds of people after the conclusion of a merger review, and 
the people that we would talk to would be competitors, 
suppliers and customers.
    While I cannot discuss what we have learned so far, I can 
report that we are well into the evaluation process. In 
addition to the interview process, merger reviews also involve 
learning the industry ten-times better than the industry 
participants know it themselves. We have begun that process, as 
well. We are learning that the airline business is highly 
complex. Even something as simple as changing the type of 
aircraft which flies a particular route can have a variety of 
impacts on the rest of the airline system.
    Now, every industry has its unique features, and this tends 
to lead parties in merger cases to say to us: Well, you do not 
really understand our business. You cannot apply the usual 
tests of market share or the usual types of antitrust analysis 
to get an accurate picture of competition. Our experience is 
that competition matters, and the only thing which guarantees 
consumers the best service at the best price is a vigorously-
competitive market.
    This merger has received a lot of attention in the media. 
Much of that attention is focused on service between the hubs 
of the respective airlines, Philadelphia/Pittsburgh and 
Chicago, for example, and the impact on large cities like New 
York, Boston and Washington DC. The Attorney General wants you 
to know that we will be looking very carefully at the impact on 
small cities like Allentown, Bethlehem and Easton. To us, the 
impact on consumers traveling from Philadelphia to San 
Francisco is as important as the impact on consumers flying 
from Allentown to Kansas City.
    We will invest the resources needed to analyze all the 
various markets that are impacted by this merger. After all, 
the antitrust laws prohibit mergers,

    Where, in any line of commerce or in any activity affecting 
commerce in any section of the country, the effect of such 
acquisition may be to substantially lessen competition or tend 
to create a monopoly.

    Thank you for the opportunity to address you this morning.
    Senator Specter. Thank you very much, Mr. Donahue. We now 
turn to Mr. George Doughty, who has served as Executive 
Director of the Lehigh-Northampton Airport Authority since 
1992; bachelor's degree in engineering from West Virginia 
University and graduate study in public administration at the 
University of West Virginia; business administration graduate 
study, Cleveland State and John Carroll University. Previously, 
Mr. Doughty was Director of Aviation for the city and county of 
Denver, at Stapleton International Airport; past-chairman of 
the Airports Counsel International North America; former member 
of the Board of Directors of the American Association of 
Airport Executives. Thank you for being with us today and we 
look forward to your testimony.

                  STATEMENT OF GEORGE DOUGHTY

    Mr. Doughty. Thank you very much, Senator, Congressman. 
First of all, I want to thank you both for your continued 
support of Lehigh Valley International Airport and your role in 
the improvements that we have made here. We also want to thank 
you for your interest in this very important subject. You have 
received copies of my written testimony, which I appreciate 
being made part of the record, but to give a general summary of 
that testimony and point out to you some of the key issues that 
the Lehigh Northampton Airport Authority is concerned about 
with regard to this merger.
    Our perspective must be from the standpoint of the 
consumer. That is who we represent. That is who pays the bills 
at the facility. It is from that perspective that these 
comments are made. Congress has heard from a number of people 
over the last several weeks who have expressed serious concerns 
about this merger and also concerns about the downstream 
effects of subsequent mergers, which, Senator, you alluded to 
in your opening remarks.
    The merger would, for this airport, result in a 58-percent 
concentration of service; 58 percent of our passengers would be 
served by one airline. We think actually the reverse benefits 
us. When there are more airlines and more choices, prices are 
generally lower and options are greater for travel. While this 
merger is not, in itself maybe, a very serious concern, 
certainly, as you mentioned, the downstream effects are. In 
fact, should there become a series of mergers that would result 
in three major carriers serving about 80-to-90 percent of the 
U.S. market, there would end up being approximately 90 monopoly 
markets; and some of these would be fairly large markets, such 
as Philadelphia/Denver or Pittsburgh/Denver.
    We believe, as has been recommended by others, that there 
needs to be a moratorium on mergers for some period of time. It 
may be years, rather than months, particularly a moratorium 
that would involve the major carriers. We think Congress needs 
time to review various issues in the airline business, which 
have been raised over the past five years, that we believe are 
anticompetitive. When Congress enacted the Deregulation Act 
several years ago, we went from a totally-regulated marketplace 
to essentially a free-for-all, and there has been almost zero 
enforcement of any antitrust laws with regard to the airline 
industry since that time.
    We think practices such as frequent-flier programs, 
override commissions, predation, in general, majority-in-
interest clauses at airports, long-term leases at airports and 
slot allocations and slot ownership by carriers, and many 
others ought to be examined by Congress over a period of time. 
During that period of time, a standstill situation should occur 
with regard to mergers by major carriers. I would be happy to 
answer any questions that you may have, Mr. Chairman.
    [The prepared statement of Mr. Doughty follows:]

                Prepared Statement of George F. Doughty

    Mr. Chairman and members of the subcommittee, my name is George F. 
Doughty and I am the Executive Director of the Lehigh-Northampton 
Airport Authority. I appreciate the opportunity to testify about this 
important matter.
    Over the past several weeks Congress has heard testimony from 
economists, airline executives, consumer advocates, and others 
expressing their serious concerns about the dangers of this merger and 
subsequent similar mergers. I do not wish to cover the same ground but 
rather make just a few additional points.
    Airports serve many constituencies, but the air travelers and 
shippers are always our primary client. It is from that perspective 
that these comments are provided.
    This community has a significant interest in this matter. Of the 
top 125 U.S. airports, Lehigh Valley International Airport ranks number 
13 in average fares paid in 1999 according to U.S. DOT data. Our air 
service remains seriously inadequate despite some gradual improvement 
over the past decade. Our fares remain nearly double those of 
comparable northeastern cities like Providence, Manchester, Hartford, 
and Islip. Our citizens spend millions of dollars more each year for 
air travel than they otherwise would simply because Southwest Airlines 
has not yet chosen to serve our airport.
    Right now US Airways and its regional affiliate serve 40% of our 
passengers and United and its affiliate serve 18%. The combined carrier 
would have 58% of the total market. We are happy they are here 
providing important service to the community, but with this additional 
concentration, logic would bring anyone to conclude that fares would go 
up and service options down. Our community simply cannot afford to be 
punished further.
    Those of us who supported the deregulation of the airlines did not 
anticipate the events and actions that have created the existing 
environment. This already overly concentrated marketplace results in 
extreme pricing with short-haul fares as high as $2.00/mile. Monopoly 
nonstop routes are the rule rather than the exception even in large 
city pairs like Philadelphia-Pittsburgh, Houston-Newark, Cincinnati-
Atlanta, and Washington-Denver. Large fortress hubs allow airlines to 
control specific markets while creating inefficiencies, inconvenience, 
congestion and delay.
    Even in markets served by more than one major carrier no price or 
service competition exists. Fewer airlines clearly will make it easier 
to cooperate rather than compete. This environment not only results in 
monopoly routes and monopoly pricing but also fails to force 
efficiency.
    It is our view, however, that the airlines are not to blame for 
this situation. Government has failed to define the rules of the game. 
We went from total economic regulation to afree-for-all environment 
where no act, regardless of how anticompetitive it may be, is punished. 
Frequent flyer programs, airport majority-in-interest clauses, travel 
agent override commissions are all anti-competitive tactics used by 
major carriers to control market shares. Yet neither Congress nor any 
administration has seen fit to control or eliminate them.
    The speed limit on the Ohio Turnpike is 65 miles/hr. If I knew that 
the limit would not be enforced, I can assure you I would drive well 
over 100 miles/hr. to cut my travel time in half and so would most 
everyone else. It is simply human nature.
    When deregulation became a reality Allegheny Airlines and Piedmont 
Airlines were well positioned, efficient regional carriers that could 
have evolved into the Southwest Airlines of the Northeast and Southeast 
respectively. Each operated basically two aircraft types and provided 
reliable short-haul point-to-point service. They could have become high 
frequency, low-fare efficient airlines with a single aircraft type. 
That kind of evolution, in fact, was what the advocates of deregulation 
envisioned.
    Instead, a series of questionable management decisions and labor 
inflexibility led these carriers to attempt to emulate Pan Am and TWA 
rather than Southwest. Most significant, the government failed to 
question the logic of the merger of these companies that created the US 
Airways of today. US Airways now has the distinction of being the 
country's most inefficient airline with seat mile cost double that of 
Southwest.
    As of April 2000, it operated a fleet of 404 aircraft that includes 
nine basic types, making pilot training and maintenance very expensive 
nightmares. (The merged UA-US would operate 13 aircraft types.) It has 
had more than ten years to rationalize its fleet but has failed to do 
so.
    Inefficiencies such as these are costing consumers severely. A 
recent analysis by Morten Beyer & Agnew reveals the following: 
Southwest and US Airways' domestic systems are exactly the same size. 
In 1999 Southwest flew 36,768 million RPM's and US Airways' domestic 
system flew 36,187 million--a difference of one and a half percent. US 
Airways had 69.1 percent load factor, and Southwest 69 percent. Revenue 
hours were 980,053 for Southwest and 999,344 for US Airways--a 
difference of less than two percent.
    Southwest carried more passengers and had more departures than US 
Airways by about 20 percent due to its charter haul, but seats per 
aircraft mile were virtually the same at 134.2 for Southwest and 130.4 
for US Airways. Two peas in a pod? Not on your life! Southwest's total 
operating costs were $3.954 million compared to $7.717 million for US 
Airways! Ninety-five percent more at US Airways to carry fewer 
passengers, make less departures, and fly virtually the same number of 
RPM's! And Southwest made an operating profit of $773.6 million 
compared to $248 million at US Airways.
    Most industry observers agree that US Airways has failed to become 
an everything to everyone major carrier and its survival long-term is 
not assured. There are, however, clear indications that it could still 
become a very vital airline on its own. Unfortunately, there are not 
adequate incentives for management and labor to cooperate to achieve 
that end.
    If US Airways management and labor were forced to face a reality 
that they must succeed or fail on their own, something nearly every 
other business must do, it would be reasonable to expect that labor and 
management would work aggressively to build a successful company. They 
might even be inclined to try to produce a better product at a lower 
cost, a rare goal in the airline business today.
    It is generally agreed that this merger would lead to subsequent 
merger proposals that if approved would leave three mega-airlines 
controlling 80%-90% of the U.S. domestic air travel marketplace. Some 
see no problem with this citing other industries that have similar 
concentration. Unfortunately, airline service is much different than 
for example, the automotive industry.
    There are three large ``domestic'' auto producers in the U.S. They 
compete aggressively with each other because all of their products are 
available to every consumer throughout the country. In addition several 
``foreign'' producers also offer very good competing products. Further, 
Federal law generally limits auto producers' ability to price their 
products differently in different parts of the country. In addition 
there are numerous opportunities for consumers to purchase used 
vehicles. Indeed the automotive industry is an almost ``perfect'' 
market.
    Airline service is much different; not every airline offers service 
in every city. Most routes today are monopoly routes. With three 
carriers operating their own fortress hub network, some very large city 
pair markets would be monopolies where the carriers could charge 
anything they wanted and be immune from competitive challenge.
    For example, if the ``big seven'' combine to three carriers such as 
UA-US; DL-CO-TW; AA-NW; thirty major monopoly routes would be created. 
(Chicago-Charlotte, Chicago-Washington, Pittsburgh-Charlotte, 
Pittsburgh-Philadelphia, Pittsburgh-Denver, Pittsburgh-Washington, 
Charlotte-Philadelphia, Charlotte-Denver, Charlotte-Washington, 
Philadelphia-Denver, Philadelphia-Washington, Denver-Washington, St. 
Louis-Atlanta, St. Louis-Cincinnati, St. Louis-Newark, Salt Lake-
Atlanta, Salt Lake-Cincinnati, Salt Lake-Newark, Atlanta-Cincinnati, 
Atlanta-Newark, Atlanta-Cleveland, Atlanta-Houston, Cincinnati-Newark, 
Cincinnati-Cleveland, Cincinnati-Houston, Newark-Cleveland, Newark-
Houston, Dallas/Ft. Worth-Detroit, Dallas/Ft. Worth-Minneapolis, 
Detroit-Minneapolis).
    Even today the ``big seven'' are very careful not to go after each 
other's hub-to-hub traffic by providing low-fare connecting options. 
This would certainly continue and these monopolies would go 
unchallenged. Not only will prices rise in this new monopoly system but 
passengers in non-hub cities such as the Lehigh Valley could expect to 
see increased pricing as they travel on connecting routes via the 
monopoly segments.
    We believe Congress needs to take action now to prevent this merger 
and subsequent similar mergers. We agree with the recommendations of 
others that a moratorium is needed to allow you to carefully examine 
the constraint to airline competition and to develop remedies.
    We believe all aspects of this issue need to be explored, not only 
consolidation but also barriers to entry and anti-competitive 
practices, some of which I previously noted.
    The Lehigh Valley and the Pennsylvania air travel community is 
suffering and not receiving the full benefits that an unregulated open 
marketplace should provide. We urge your assistance in addressing this 
most important matter.

    Senator Specter. Thank you very much, Mr. Doughty.
    Mr. Gates, let us begin the rounds of questions with you. 
We will do these in five-minute periods, just as was the 
testimony. You have commented that the Lehigh Valley is the 
fastest-growing area in Pennsylvania, for additional jobs and 
economic expansion. Certainly, I have observed on my many trips 
to the Valley the expansion and the tremendous growth as a very 
desirable area to live, and the attraction that the Valley has 
had for new businesses.
    To what extent do you personally believe that the airport 
is a significant point of attraction for bringing in 
corporations and corporate executives and business and economic 
expansion?
    Mr. Gates. I know we have two types of clients that we 
serve--the economic development corporation, I am talking 
about, serves the existing businesses, and we go out to attract 
new businesses to come here. The airport is critically 
important. Some of the businesses that are located here are 
located here because the airport was here. So, the airport is 
not only important to businesses that are considering us versus 
other locations, the airport is very important to the 
businesses already located here.
    Always--as companies start up or locate here--always there 
is the concern for the ability to get air travel. The airport 
is extremely critical. It is a very important step, a very 
important part, of making the Lehigh Valley an attractive place 
to live and work and to run a business. So, it is critically 
important.
    Senator Specter. Mr. Doughty, you have been rather direct 
in your testimony that there ought to be a moratorium on 
mergers, at least for major air carriers. That is a pretty flat 
statement of opposition to the kind of a merger we have here, 
with the Nation's number one carrier and the Nation's number 
six carrier. Tell me your reasons for feeling that there ought 
to be--expand on your reasoning for feeling there ought to be a 
moratorium which would impact or reject this proposed merger.
    Mr. Doughty. Mr. Chairman, first of all, it may be that 
after a period of moratorium and after the Congress has the 
opportunity to study that, that it would not be a permanent 
restriction on mergers, and maybe there would be some market-
share limit to what carriers could be able to obtain through 
merger. But the problem is that, if you look at other major 
businesses in the United States and you look, as I used the 
example in my written testimony of the automotive industry, 
every type of automobile is available to people here within a 
10-minute drive, every one manufactured in the United States 
and a number of foreign products. But I have only one way to 
get nonstop from here to Pittsburgh and I have only one way to 
get nonstop from here to Chicago.
    The problem with the airline industry is these locational 
monopolies are automatically created even when there are a 
number of carriers, and the locational monopolies become even 
greater when there are only a few carriers. So, the fewer 
carriers, the fewer competitive opportunities there are.
    Senator Specter. Are you prepared to say, in categorical 
terms, Mr. Doughty, that you are opposed to this merger?
    Mr. Doughty. Yes, I am, sir.
    Senator Specter. Well, that is more direct than I have 
been. I have expressed my skepticism and my concerns in a 
series of questions, but coming from you, with your background, 
that is an important statement.
    Mr. Donahue, how many airlines did you say service 
Harrisburg to Allentown?
    Mr. Donahue. Three, nonstop.
    Senator Specter. Well, I would pursue that further, but my 
red light is on. I want to turn now to my distinguished 
colleague.
    Mr. Toomey. Thank you, Senator. If I could start with Mr. 
Gates; you mentioned that one of your concerns is the price 
discrimination that we have, particularly here in the Lehigh 
Valley. When one considers, obviously, the wonderful quality-
of-life improvements we have--that I think we have--versus 
people that live in the big cities, we probably expect that 
there would be some degree of higher cost to fly out of the 
Lehigh Valley than out of a Philadelphia or New York airport.
    Is it your sense that, for the business traveler, the 
typical trip, that the Lehigh Valley price discrimination is 
worse than it would be in a typical medium-sized market?
    Mr. Gates. Yes; I think that Mr. Doughty, in his written 
testimony, has provided the specifics on the fares. But there 
is no question--and I am speaking from a business point of 
view, it is easy to combine tourist rates or economy rates and 
business rates, and that paints one picture. But, from a 
business point of view, there is no question, A, that it is a 
significantly higher cost to fly out of here; and, B, when 
there have been attempts led by the airport, and your office 
has been involved and our State senators and the Department of 
Transportation, to find solutions to that problem, they have 
been really hard to come by, including when the new airlines 
have offered service here, low-cost airlines, all the majors go 
down to meet that price. After some period of time, the low-
cost carrier is forced to exit. Guess what happens? Prices go 
back up.
    So, yes, the price discrimination is greater than you would 
expect if you are willing to pay a premium for the quality of 
life. But, you and I being free-market guys, there is no reason 
why you cannot have the quality of life and the low fares. I 
mean, one view is that you ought to pay more for the quality of 
life here. The other view says that, in a free market, you 
could have the quality of life and low-cost, accessible air 
transportation.
    Mr. Toomey. Thank you.
    Mr. Doughty, you mentioned in your testimony that, if the 
merger were to go ahead, then 58 percent of the passenger 
service from Lehigh Valley International would be carried by 
one carrier. Is that kind of concentration atypical? Is that a 
greater concentration than markets of this size typically have?
    Mr. Doughty. Well, in the current situation, it is 
difficult to say. An airport our size, which is a million total 
passengers, which is relatively small, termed a small-hub 
airport, may have that level of concentration. But I think in 
the majority of cases, and certainly airports slightly larger 
that are not hubs, will have a much more diverse situation. We 
now have, the largest carrier I believe, is 34 percent, which 
is US Airways, and that includes their express carrier. Then 
there are actually 11 total carriers, including express 
carriers, at the airport right now.
    So, we certainly want to encourage that and include more 
competition by adding more carriers. So, I would say it is 
probably more concentrated than typically for airports this 
size. However, if the merger goes through, there will probably 
be other airports in the country who will end up in the same 
situation, who now have US Airways and United service.
    Mr. Toomey. Thank you.
    Mr. Donahue, I wanted to follow up on a point that you made 
in your testimony, which is that, as I understand it, the 
Clayton Act refers to a substantial lessening level of 
competition as the criteria that you will be evaluating. Could 
you discuss how you evaluate that in light of the fact that the 
airlines will tell us that in some markets, there will be 
greater competition, while in others, there will be lesser. How 
do you balance that and evaluate and decide what is 
substantial?
    Mr. Donahue. There is always that attempt at horse trading 
in these merger cases where the--well, look at the benefits 
that this is going to bring to Cleveland, to this other 
market--so Allentown is a little disadvantaged. We have heard 
that again and again in a lot of different merger cases. We 
have done a number of cases in the waste industry that have 
directly impacted the Lehigh Valley here, where, in the 
negotiations, that very argument was made; that, well, you are 
overlooking the benefits in this other part of the country.
    I do not think that is an appropriate standard. I think 
that the citizens of a community are all equally entitled to 
competitive markets, so you really cannot trade off a benefit 
in another community to the detriment in a place like Allentown 
or some other smaller community. So, we have to look at the 
individual markets and weigh, in the individual markets, the 
costs and benefits of the merger.
    Mr. Toomey. Thank you.
    Senator Specter. Thank you very much, Congressmen Toomey.
    Mr. Donahue, picking up where we left off, what are the 
fares charged by the three airlines on service from Harrisburg 
to Allentown?
    Mr. Donahue. It is $475 on a fly-up-today and go-back-
today.
    Senator Specter. Are they all the same?
    Mr. Donahue. Yes, they are all the same.
    Senator Specter. Is there any suggestion on that of 
coordination or, perhaps a less complimentary term, collusion?
    Mr. Donahue. Price equality is--can be an indicator of 
collusion. It could also be an indicator of the fact that you 
may have a commodity product and, when you have a commodity 
product, the prices tend to be the same.
    Senator Specter. What was that last thing you said about a 
commodity product--that I did not understand? How could the 
identical price mean anything other than, at least, if not 
collusion, conscious parallelism?
    Mr. Donahue. Well, if you were to go, say, to the New York 
Commodities Exchange and buy a barrel of oil today, no matter 
which supplier you bought it from, you would pay the same 
price, because it is a basic commodity.
    Senator Specter. You could hardly say that a flight from 
Harrisburg to Allentown is a basic commodity.
    Mr. Donahue. In the sense that a seat on a plane going the 
100 miles between here and Harrisburg is the same on one 
airline or another.
    Senator Specter. How well do they do at that price for that 
distance?
    Mr. Donahue. How well do they do?
    Senator Specter. How many people occupy their seats, if you 
know?
    Mr. Donahue. I would suspect that----
    Senator Specter. I do not want to know what you suspect. I 
want to know if you know.
    Mr. Donahue. I don't know.
    Senator Specter. OK; we will check that out. It is a pretty 
important point.
    Mr. Gates, you comment about the lower airlines being 
driven out of business once the lower-cost airlines come in. 
Are there some specific illustrations of that that you have in 
mind, perhaps with reference to the Lehigh Valley Airport?
    Mr. Gates. Yes; I think Mr. Doughty has included that--
haven't you, George?
    Mr. Doughty. I included the list that I provided to the 
Senator, the listing of average prices for 1999 at airports 
throughout the country. You alluded to that. We were ranked 
13th. Where we see the biggest problem is in the business fares 
and westbound. The problem is fares change. During this 
hearing, fares will change 100 times. So, it is difficult to 
nail that down.
    Senator Specter. There is litigation now undertaken by the 
Department of Justice against American for flights from Wichita 
into Texas, where a low-cost carrier came in. I just wondered, 
Mr. Doughty, if you have any specific illustrations of that 
from the Lehigh Valley.
    Mr. Doughty. Yes, we had Midway Airlines enter the market a 
few years ago to Chicago. Fares went from, at the time, about 
$300 each way to under $100 each way. United matched it. As far 
as we know, everybody was full on United, or all the United 
fights were full because everyone was very familiar with 
United. People were unfamiliar withMidway. Midway did OK, but 
not great.
    There were some corporate decisions by Midway which caused 
them to leave Chicago in that particular case. But essentially 
what happens is that the major carrier will match and----
    Senator Specter. And Midway was driven out of business?
    Mr. Doughty. Well, that was not the reason why they left 
the marketplace, because they relocated their hub to another 
city and it made it impractical. However, had their loads not 
improved fairly significantly, they would have left the market 
anyway, yes.
    Senator Specter. In your testimony, Mr. Doughty, you make a 
comment. You compare Southwest and US Airways, and you note the 
enormous difference in operating costs, notwithstanding very 
substantial other similarities, and you make the comment about, 
``It's survival long-term is not assured.''
    The one factor in this picture that would lead me 
personally to not oppose the merger would be if there is a real 
risk that US Airways would not survive. That would obviously be 
a major calamity to Pennsylvania, with 17,000 employees. How do 
you assess that? You comment in guarded and carefully 
articulated terms, ``Its survival long-term is not assured.''
    What is the risk of US Airways not surviving, so that we 
ought to be looking to the, in effect, bailout by this kind of 
an acquisition?
    Mr. Doughty. Senator, I am certainly not an airline 
analyst, and my opinion is reflective of what I have read that 
analysts have produced with regard to US Airways; but you have 
to take a look at the fact that they are the highest-cost 
carrier in the United States. They are double the cost per seat 
mile, almost, of the low-cost producer, which is Southwest 
Airlines.
    That, obviously, over time, is a serious problem. 
Unfortunately, when these situations come about--and for awhile 
there was the doctrine of failing carriers, which is now a much 
more difficult test--but in the early days of deregulation, if 
you looked like you were not going to survive, all you had to 
do was say: We are going to fail, so therefore we have got to 
merge with this other airline.
    So, what you ended up doing was merging inefficient 
operations into sort of more efficient operations. I just think 
that US Airways has the potential to survive, and I think we 
need to give them some tough love and say: You've got to 
survive on your own; management has got to get together with 
labor and you have got to reduce your costs and improve your 
efficiency and make the airline work better.
    Short answer.
    Senator Specter. Congressman Toomey.
    Representative Toomey. I would like to follow up with Mr. 
Doughty. You mention in your testimony that, of the top 125 
U.S. airports, Lehigh Valley International ranks number 13 in 
average fares. I assume you mean 13th-highest.
    Mr. Doughty. Yes. It is not a list you want to be high on.
    Representative Toomey. Exactly. I am just wondering if you 
could share with us, to what do you attribute the fact that we 
have such high fares, relative to comparable airports, in fact?
    Mr. Doughty. Well, I asked United Airlines why the fares 
were as high as they were one time, and United's response was: 
We can get them.
    It basically is that the corporations in the Lehigh Valley 
need the service, and most of that problem is in the business 
fare area. The leisure fares are very, very close. There is 
really not much difference in leisure fares, unless you are at 
Southwest airport, then your fares are very low for everything.
    Representative Toomey. So, that ranking, does it include 
business fare and leisure fare----
    Mr. Doughty. It includes both, yes, but business fares are 
where the problem is. Because it is a hassle for the business 
traveler to go to Newark, work, although some do and some 
companies force their employees to go to Newark if the fare is 
lower or go down to Philadelphia if they can catch a lower 
fair--some even force them to go to other airports, even as far 
as Baltimore, to get a low fare, if they are going to the west 
coast or something.
    But the fact of the matter is they are able to do that, 
they are able to get the fares, because businesses, in some 
cases, will pay it for the conveniences of this airport.
    Representative Toomey. But any idea why businesses in the 
Lehigh Valley would be willing to pay that more so than 
businesses in, say, the greater Providence area or Hartford?
    Mr. Doughty. Well, if you take Providence, for example, you 
have Southwest Airlines in the marketplace, and that is a very 
good disciplining activity with regard to the fares in that 
community. If you look at the list and you mark airports that 
are Southwest-served, except for the Hawaii airports, the last 
page is almost all Southwest airports. The next-to-the-last 
page is about half Southwest airports. On the front, I do not 
think there are any. So, it is clearly competition that makes 
that work.
    Representative Toomey. We have heard about how the big 
airlines can effectively force the smaller carriers out of the 
market by lowering the prices for as long as it takes to take 
the market share from them. Are there any other major 
obstaclesthat prevent or impede a small, lower-cost carrier from coming 
in and competing and providing lower costs and better services here?
    Mr. Doughty. Well, here, no, because we do not have 
exclusionary leases. We have resolution and we have 
preferential uses of the gates at the airport, and we can 
assign any airline to any gate, and we have plenty of capacity. 
But there are airports where long-term leases are in effect, 
and airlines control the physical facilities, and it is 
sometimes difficult for a new entrant carrier to enter that 
airport without leasing from the other carrier that is already 
there at a premium price.
    The other issue is slot controls. Slots were literally 
given to the major carriers a few years ago at Washington, 
LaGuardia, Chicago and Kennedy Airports. That is being relaxed, 
to some extent, with the new law. But, in the case of 
Washington National, those are treated as property rights 
essentially by the major carriers, and they really belong to 
the Government, and the Government should reallocate those. 
That is part of the debate, I think, that should take place on 
these competitive issues over time, and there should be some 
reallocation mechanism so that every carrier has access to 
Washington National, not just those who have been there for 20 
years.
    Representative Toomey. A quick follow-up; if the allotment 
of slots were done in the fashion that you would find better, 
would that have a significant improvement for the Lehigh 
Valley?
    Mr. Doughty. That probably would end up hurting us under 
the current circumstance. We have two trips into National right 
now. They are commuter slots, and they are obviously premium-
priced. I would think that the demand for National will always 
keep prices there higher than, say, Baltimore or Dulles. But, 
in the interest of fairness, other carriers ought to have an 
opportunity to get some of those slots.
    Representative Toomey. Thank you.
    Senator Specter. Thank you very much, Congressman Toomey. 
Well, thank you very much, Mr. Gates, Mr. Doughty, Mr. Donahue. 
If you gentlemen would stay with us for the next panel, we 
would appreciate it, because something may arise where we may 
want to come back to you and ask a question.
    We now turn to Ms. Shelley Longmuir and Mr. Larry Nagin. 
Ms. Longmuir is senior vice president of International, 
Regulatory and Governmental Affairs for United. She graduated 
magna cum laude, earning a double degree in semantics and 
English Shakespeare from Brown University and has a law degree 
from New York University School of Law. Prior to joining 
United, she held senior positions in the Bush administration in 
the Department of Transportation. Welcome, Ms. Longmuir. We had 
heard that your CEO was going to appear here today. What 
happened?
    Ms. Longmuir. I am to send you his personal regrets, 
Senator. As you know, we have had some discussions with our 
pilots, and we had a breakthrough at the negotiating table last 
week, and Mr. Goodwin is in Chicago today.
    Senator Specter. We had looked forward to having Mr. 
Goodwin at least at one of our three State hearings. Perhaps we 
will schedule a fourth to give him one more chance. Thank you 
for joining us and the floor is yours.

 PANEL CONSISTING OF SHELLEY LONGMUIR, SENIOR VICE PRESIDENT, 
  INTERNATIONAL, REGULATORY AND GOVERNMENTAL AFFAIRS, UNITED 
AIRLINES; AND LARRY NAGIN, EXECUTIVE VICE PRESIDENT, CORPORATE 
            AFFAIRS AND GENERAL COUNSEL, US AIRWAYS

                 STATEMENT OF SHELLEY LONGMUIR

    Ms. Longmuir. Thank you, sir. Senator Specter, Congressman 
Toomey, on behalf of United Airlines' 30 employees in the 
Lehigh Valley and more than 100,000 employees worldwide, I 
appreciate the opportunity to be here today to discuss our 
merger with US Airways. I want also to thank you for the close 
attention you paid to the merger since we announced it two 
months ago. We are especially pleased that many Pennsylvanians 
have expressed their support for our merger, and we hope that 
as others learn more about the benefits of this transaction, 
they, too, will support it.
    United began flying to Allentown in 1935, just eight years 
after the Federal Government began renting 50 acres as an 
emergency field for airmail pilots. In fact, the first airport 
United began serving anywhere in Pennsylvania was the 
Allentown-Bethlehem-Easton Airport, now the Lehigh Valley 
International. We are very proud of our long association and 
pleased that United will, once our merger is completed, play an 
even more important role of serving theair travel needs of our 
consumers here.
    We are especially proud of our employees for the positive 
impact they make in the local community. For many years now, 
United Airlines employees have flown fantasy flights at 
Christmas time for terminally-ill children and their families. 
Our employees also sponsor an annual Thanksgiving essay 
contest, and through their community action team, United 
employees volunteer their time with groups such as Dream Come 
True, the Camelot House for Children, and Life Path.
    Senator Specter and Congressman Toomey, any discussion of 
the benefits of our merger for communities must address an 
issue of great importance to you and the people who live here: 
Its impact on air service in midsize cities. At the heart of 
the merger is our goal to build a truly national airline 
network that will carry passengers as conveniently and 
efficiently as possible. Small and mid-size communities are as 
important a part of United and US Airways network as any 
international destination. The same will be true for United 
after the merger.
    We understand how critical access to the national air 
transportation system is for these cities. By connecting the 
Lehigh Valley to a larger national and international network, 
the United-US Airways combination will help attract new 
business investment and drive economic growth. Today, United 
and United Express have a total of 10 daily departures from 
Lehigh Valley. That includes four nonstop jet flights a day to 
Chicago and another six flights a day on our express carrier to 
Washington-Dulles, with connections to destinations around the 
world.
    Following the merger, United and United Express will 
provide 22 daily departures from Lehigh Valley, all nonstops to 
cities such as Philadelphia, Pittsburgh and Boston, in addition 
to the service we already offer to Washington and Chicago. As 
you know, as part of the transaction, United has pledged that 
there will be no furloughs of any US Airways employees for 2 
years following the close of the merger. Beyond this promise, 
which is a part of our merger agreement with US Airways, we 
have made a firm commitment with no strings or time limits 
attached not to furlough any US Airways employee. We are also 
confident that our business will grow and create more 
opportunities and more jobs in the future.
    Just last week, United made another promise to 
Pennsylvania. Our Chairman, Jim Goodwin, announced plans to 
spend $160 million to expand maintenance operations in 
Pittsburgh by building two new hangars and refurbishing four 
existing US Airways maintenance hangars once the merger is 
completed. Of course, United's commitment to Pennsylvania goes 
well beyond that promise. We are committed to providing high-
quality air service to the consumers who use the Lehigh Valley 
International Airport, and the 12 other airports in cities 
large and small that United will serve in Pennsylvania.
    I think our employees here have demonstrated their real 
commitment to this community in many other significant ways. I 
would be happy to answer any of the questions that you may 
have.
    Senator Specter. Thank you very much, Ms. Longmuir.
    We now turn to Mr. Larry Nagin, executive vice president, 
Corporate Affairs and General Counsel of US Airways since 
February 1996; bachelor's degree from the University of 
Southern California, law degree from the University of 
California, Hastings College of Law; also a past executive vice 
president of Corporate Affairs and general counsel for United 
Airlines.
    Thank you for joining us, Mr. Nagin, and we look forward to 
your testimony.

                    STATEMENT OF LARRY NAGIN

    Mr. Nagin. Thank you, Senator and Congressman. It is good 
to be with you this morning, and on behalf of the 50 employees 
of US Airways here at Lehigh Valley who are all guaranteed a 
job with United, we are delighted to be here. In looking back 
on these three field hearings that you have held, Senator, at 
first blush, someone might say, ``Oh, my God, you are going 
back again.''
    In retrospect, looking at these hearings, they have had 
real value because you have held hearings in Philadelphia, 
Pittsburgh and now in the Lehigh Valley. I consider the Lehigh 
Valley to be a proxy, if you will, for the 13 other small 
cities that we serve in the Commonwealth of Pennsylvania.
    Senator Specter. Are you looking forward to hearings in 
each of those 13 cities?
    Mr. Nagin. If it works for you, Senator, we will be there. 
We are delighted to be there. I think it works for the people 
of the Commonwealth.
    Senator Specter. Between now and then, I will certainly be 
there. We may invite you to come along. [Laughter.]
    Mr. Nagin. I think there have been real benefits, because 
it has raised important issues. We have been able to hear 
firsthand from community leaders, as we have here today, about 
their concerns.
    Senator Specter. I bumped into Steve Wolf, your president. 
He was standing on the street corner outside of the Russell 
building--you will get a little extra time, Mr. Nagin--and he 
and Ron Reeves--I have got a corroborating witness here. Ron, 
where are you? Are you going to corroborate this?
    Mr. Reeves. Yes.
    Senator Specter. Before you hear it? [Laughter.]
    Mr. Nagin. That's why Mr. Reeves is sitting in the 
audience. He corroborates before he hears it, Senator.
    Senator Specter. They were standing on the street corner, 
looking very forlorn, about 6:15. I was on my way to, if you 
will pardon the expression, somebody else's fundraiser--not 
that it was somebody else's, just that it was a fundraiser--and 
I stopped the car and said, ``Can I give you a ride?'' We will 
come to Mr. Wolf's termination pay--and he apparently did not 
have a ride, and after awhile, a limousine arrived, and the 
front-end was at one street and I think the rear-end was at the 
street behind it. I am just kidding about that. It was just a 
regular limousine.
    He commented that our hearings have done some good. I have 
not been able to figure out exactly why, but perhaps we can 
come back to that.
    Go ahead, Mr. Nagin.
    Mr. Nagin. Well, Senator, there was a contemporaneous 
utterance after you stopped by the corner, because Mr. Wolf 
called me immediately on his cell phone to say, ``You will 
never believe who I just ran into on the street corner,'' and 
his recollection matches yours, so it must be accurate.
    Senator Specter. Spontaneous declaration.
    Mr. Nagin. That is right.
    Senator Specter. Admissible. Meets the hearsay rule.
    Mr. Nagin. Yes. I am going back to my public defender days, 
and I recognize you were a prosecutor.
    Senator Specter. I was a public defender before I was a 
prosecutor.
    Mr. Nagin. Well, I never saw the light. I stayed as a 
public defender. [Laughter.]
    Senator Specter. I am still a public defender.
    Mr. Nagin. Being a public defender for the county of Los 
Angeles, though, did not prepare me for these hearings. What 
has prepared me for these hearings, Senator, is a realization 
of what is going on in our industry. I think a previous witness 
here commented about how complex this industry is, and indeed 
it is complex.
    Senator Specter. Let's start Mr. Nagin's time again, if you 
would, please.
    Mr. Nagin. The Senator made some very serious comments that 
we take very seriously in terms of the future of our company. 
We have been serving this State for over 50 years. It is a 
wonderful State and it has been very supportive of our company 
through some very difficult times and some very tragic times. 
We recognize that and we appreciate it, and it is off of that 
base that we are considering where do we go from here.
    Mr. Doughty, the very able airport manager here at Lehigh 
Valley, has a wonderful facility here that everyone should be 
very proud of. But there are available gates here.
    Senator Specter. Have your views to his ability diminished 
any since he flatly opposes the merger?
    Mr. Nagin. Oh, I have been used to Mr. Doughty's opinions 
over the years at various places where he has managed, in 
Denver and various places, and we have not disagreed on many 
things; but he is entitled to his opinion. I am not sure it is 
the opinion of the airport authority, but it is certainly his 
opinion. But, having said that, we are not Southwest Airways.
    Southwest ordered a record-breaking new order for Boeing 
737's in excess of 200 planes, and their chairman announced 
that he is going to place them all on the east coast. We know 
who that is coming at. That is coming at us.
    We are the last of the mid-size carriers left. We are not a 
failing company. We are not one foot away from the bankruptcy 
court; but we are an endangered species, if you will. We are 
the only one left, and it is from that position that we 
contemplate this merger with United Airlines. It works for 
Pennsylvania. Indeed, are there problems on pricing nationwide? 
There are problems on pricing nationwide.
    It is a very expensive commodity. If you go up to purchase 
a ticket to travel that day or in the next couple of days, it 
is expensive. But our statistics show that over two-thirds of 
the passengers traveling within the Commonwealth of 
Pennsylvania to any point on our system are traveling on a 
discounted ticket. Now, that must mean that we are providing 
something at a cost that is competitive for the traveling 
public.
    It is the business traveler who is paying a higher amount 
because he or she wants to have that commodity available at a 
moment's notice. One thing that is lost in all of the dialog is 
that that business traveler has the ability to get a full 
refund on that ticket. You are paying for it, but you have the 
ability to get a refund. You have the ability, Congressmen, to 
change your travel plans on a moment's notice and use that 
ticket for another flight.
    There are all sorts of benefits you get from that. But is 
it expensive? You bet it is expensive. That is the cost that we 
have to allocate to it, to reserve that seat for the last-
minute traveler. US Airways is approaching this merger because 
we want to approach it from a position of whatever relative 
strength we have today. It is an extremely competitive 
business. We do not have the size or mass to spread our cost. 
Mr. Doughty made reference to our costs. Indeed, they are the 
highest in the industry. We are not proud of that.
    Consolidation will or will not happen for various reasons. 
Here in the Lehigh Valley, I have been told considerable 
consolidation has occurred here. In fact, this airport is 
called the Lehigh Valley to represent that consolidation. The 
same thing is happening in our business. We have to be 
competitive, and by joining United, there are vast and 
pervasive benefits for the traveling public.
    Thank you, Senator.
    Senator Specter. Thank you very much, Mr. Nagin.
    Ms. Longmuir, since we heard your testimony in Pittsburgh 
on July 10th, the New York Times had a major investigative 
report Sunday, July 16, and found that United was--well, to put 
it bluntly, about the worst in every category; led all the 
airlines in cancellations; led the airlines in delays; failure 
to have on-time arrivals; of the five most delayed regularly-
scheduled flights, United took first place in four of them; 
worst baggage-handling. Would it not be a fair requirement for 
the Antitrust Division or for Congress or for America to say 
that United ought to get its own house in order with some basic 
efficiencies, before you look to acquire a major airline like 
US Airways?
    Ms. Longmuir. Senator, no one is more distressed by the 
incredible inconvenience and discomfort that our passengers are 
experiencing right now.
    Senator Specter. Oh, I do not agree with you at all. The 
passengers are a lot more distressed, if you read the stories 
about what happens to your passengers. I am not going to sit 
here and listen to you tell me no one is more distressed than 
United. The passengers are put at risk all over the country 
and, too often, Arlen Specter is one of them. How about getting 
it corrected before you come in and ask to acquire a major 
airline?
    Ms. Longmuir. Senator, those passengers pay this employee-
owner's salary. We understand, in this highly-competitive 
industry, particularly throughout the U.S. network, there are 
many other places passengers could go. We have to get our house 
in order and, in fact, we are trying desperately with, 
unfortunately, the confluence of several dramatic events 
coinciding at one time.
    Senator Specter. Ms. Longmuir, where else can they go?
    Ms. Longmuir. Our pilots' contract is open, sir. Our 
machinists' contract is open. We have an air-traffic-control 
system that is absolutely in utter disarray.
    Senator Specter. All the airlines face the same control 
system that United does.
    Ms. Longmuir. Absolutely, sir, and all of them are having 
tremendous difficulties with additional costs layered on in 
addition to that.
    Senator Specter. But United is the worst.
    Ms. Longmuir. I think, sir, looking at what happened to 
American Airlines 1\1/2\ years ago, when their pilots' contract 
was open, you see, unfortunately, a sad occurrence that is 
echoed at this point in time for us. I think Mr. Goodwin's 
absence today and presence in Chicago with the master executive 
council of the pilots is a demonstration of how hard we are 
trying to work to correct that.
    Senator Specter. Mr. Nagin, in Pittsburgh, I raisedthe 
question with you about the extraordinary compensation with which the 
chairman, Stephen Wolf, will receive, and the Chief Executive Officer, 
I guess Gangwal, will receive. Mr. Wolf is getting some $11.6 million 
and Mr. Gangwal getting $12,800,000. I raised the issue with you at 
that time about the propriety of that compensation on termination, but 
companies can pay whatever they like.
    A more fundamental issue is the reliability of their 
testimony when they have so much at stake. There is an inherent 
conflict of interest when somebody stands to gain $12 million 
if the transaction goes through and to lose that $12 million if 
the transaction does not go through. You testified at that time 
that it may well be unfair, and you listed a whole litany of 
other kinds of people who are in compensation; and since your 
testimony, I have had quite a few comments about the 
seriousness of that kind of a conflict situation, more 
fundamental than the unfairness issue.
    Would you care to respond to that?
    Mr. Nagin. Well, certainly, the unfairness issue or the 
fairness is one that we will not retread that territory, 
Senator. With respect to the conflict of interest, I think, if 
you go to the Securities and Exchange Commission, and, indeed, 
any panel from the Senate or House that has looked at any 
business transaction, every of them will have senior executives 
being bought out of a contract or having their employment 
terminated as a result of an acquisition.
    I daresay every one of them have this issue, and what every 
one of them have is the requirement that chief executive 
officers and chairmen of companies have to act in a fashion 
that is consistent with their fiduciary duty. There are checks 
and balances throughout our system that provide for that. 
Senator, I think your voicing this in Pittsburgh and again here 
today underscores the fact that there is some concern out there 
with respect to that issue.
    But whether it be Mr. Wolf, Mr. Gangwal or anybody--any 
others throughout our employee system who have contracts that 
provide protection for change-in-control, in American business, 
that is the way you provide for good management. You give 
people protection, should they be out of a job. Unlike union 
members, who are all guaranteed a job and have a seniority 
number, executives in companies do not have seniority numbers.
    So, they do not have that job protection; and, indeed, I 
would think the plaintiffs bar, if they were as aggressive as 
they are, and shareholder lawsuits abound, none of those issues 
have been raised, nor should they be. This is fully disclosed, 
consistent with our board of directors' fiduciary duty. Our 
shareholders have approved them. It has been full disclosure 
from day one, and these are not contracts that were put in 
place because United came knocking at the door. These were 
contracts that were put in place when Mr. Wolf was hired in 
1996, as well as Mr. Gangwal.
    Senator Specter. Well, my red light is on, so I will not 
pursue it beyond to say that you may need incentives to join 
the company. I do not know that you need incentives when you 
leave the company. Just because everybody else does it, does 
not tell me a whole lot. You talk about these class-actions and 
plaintiffs lawsuits, I have a concern about the settlement of 
those cases where again there is extraordinary compensation to 
the plaintiffs' lawyers, which raises question in my mind.
    We just had a big merger in Philadelphia involving First 
Union, and the compensation of the departing executives was 
very much on my mind, and I commented about that. I see a lot 
of people on the street in Philadelphia who tell me I was 
right. But it is a little after the fact. I do not want that to 
happen when I visit the Lehigh Valley in a few years.
    Mr. Nagin. I respect and appreciate that, Senator.
    Senator Specter. Congressman Toomey.
    Representative Toomey. Ms. Longmuir, my main concern in 
this merger is, of course, how it will affect the Lehigh 
Valley, and specifically our air travelers, in terms of air 
fares, the number of flights, the number of destinations and 
the quality of their service. If we could zero in for a moment 
on the number-of-flights issue, I wanted to review what you 
said earlier, to see if I understand it correctly. Did I 
understand you to say that there are currently 10 flights a day 
between the two airlines being flown out of Lehigh Valley 
International today?
    Ms. Longmuir. No, there are 10 flights that United and 
United Express currently offer today.
    Representative Toomey. OK; how many does US Airways offer?
    Ms. Longmuir. Then, in addition, there are another 16, I 
believe, that US Airways flies.
    Representative Toomey. So, there are a total of 26, and 
that would be reduced to 22 flights?
    Ms. Longmuir. Correct.
    Representative Toomey. What kind of assurance do we have 
that the 22 flights would last? For how long would it be 
likely?
    Ms. Longmuir. Before I get to answering that specifically, 
if I could respond to the differential in the number there. 
There are two flights that D.C. Air will be flying back and 
forth to National Airport, which addresses that--the 
differential in the number there. So, for purposes of a 
consistency in number, to reassure you with respect to the 
representation of the current number of flights. With respect 
to your immediate question of a guarantee of United's current 
service patterns, we fullybelieve, sir, that we will continue 
to grow the operation of US Airways network.
    We will have two hubs within Pennsylvania now, Pittsburgh 
and Philadelphia. That creates synergies for us, of growth, not 
of cost-cutting. The benefits of this merger are not of the ilk 
of decreasing numbers and getting efficiencies through 
reductions, but rather growing the network and growing the 
service, as we have done historically in the past with other 
domestic expansions in United's system.
    So, the benefits to United of taking on this additional 
debt and making this expensive acquisition are to stimulate 
more traffic, and, through enhanced revenue, continue to grow 
the system.
    Representative Toomey. Let me see if I understand what you 
said earlier. There are currently 26 flights offered by the two 
airlines. Am I correct in understanding that two of those 
flights will now be carried by a third carrier?
    Ms. Longmuir. Correct.
    Representative Toomey. There would be 22 flights carried. 
So, there would be a net loss of two flights.
    Ms. Longmuir. Let me make certain I have my numbers 
correct, sir; 22 flights by United will continue to be carried; 
one additional flight by D.C. Air, which will be the spinoff, 
the round-trip to Washington, DC. So, there are essentially 
three flights that are changing their service patterns. United 
will offer a nonstop to--excuse me. There will be one nonstop 
to Orlando, one nonstop to Charlotte, and one to DCA on D.C. 
Airways.
    Representative Toomey. So, for a net loss of three flights 
per day or two?
    Ms. Longmuir. Well, they are changing from a nonstop to a 
one-stop. I can get you specifics on that, sir.
    Representative Toomey. Yes, I would appreciate that.
    Ms. Longmuir. Absolutely.
    Representative Toomey. Mr. Nagin, my question for you, my 
first question, is simple. Why is US Airways' cost structure so 
high?
    Mr. Nagin. We are an amalgam, Congressman, of many 
airlines: Allegheny; Mohawk; Empire; Piedmont; PSA--to name a 
few, if you will. These are companies that were local-service 
carriers who, whenever they had a new labor agreement, they 
were able to go under regulation to the Civil Aeronautics Board 
and get an increase in fares. So, it was in lock-step with 
whatever the labor contracts were. As the companies came 
together eventually under the banner of then--USAir, quite 
frankly, Congressman, the contracts were cherry-picked and the 
best were put in there and layered and layered and layered.
    Representative Toomey. So, are you saying you have the 
highest labor cost structure in the industry?
    Mr. Nagin. Highest labor cost structure, compounded by the 
fact that we do not have a broad network, and that is what the 
United transaction allows us to have, a broad network over 
which to spread our costs. Rather, we are a short-haul, almost 
a local-service carrier, serving 16 cities in the Commonwealth. 
As a result, our costs are spread over a much narrower base, 
which makes for higher unit costs, giving us the highest costs 
in the industry.
    Representative Toomey. Thank you.
    Senator Specter. Ms. Longmuir, the announcement was made 
last week about a maintenance facility for $160 million in 
Pittsburgh. US Airways had projected a maintenance facility for 
$600 million. Will the $160 million commitment be expanded 
ultimately to the $600 million initial projection?
    Ms. Longmuir. Senator Specter, there was--a similar 
question was asked at the press conference, and the 
clarification was given by Mr. Wolf, which I would defer to 
Larry to explain. I think that was in looking at additional 
phases of potential maintenance development. But if I could 
clarify the underlying premise of your question, my 
understanding is----
    Senator Specter. My question is very flat. Are you prepared 
to commit to go to $600 million or not? I have only got five 
minutes.
    Ms. Longmuir. On phase one, sir, we are matching, if not 
exceeding, US Airways' commitment. At this point, sir, we are 
committed to $160 million for phase one of a maintenance 
development program in Pittsburgh.
    Senator Specter. Well, I will take that to be no as to a 
commitment on the $600 million. Let me move to the next 
question, Ms. Longmuir. When you talk about no furloughs, you 
have 30 United employees here and 50 US Airways. When there is 
attrition as to some of those, will those spots be kept open 
for new employment?
    Ms. Longmuir. They will, within the context of the United 
Airlines network, sir. As we have discussed, Mr. Goodwin, as 
well as I, have had the pleasure in previous meetings, we will 
not commit to an aggregate number of jobs remaining within 
Pennsylvania. But we are optimistic about the growth potentials 
of this network, of being able to meet and exceed that.
    Senator Specter. I understand your optimism. I understand 
your hope. I take that to be another no. With respect to the 
question of transfers, if you do not furlough, but you are 
going to transfer somebody from Allentown to San Diego, that 
does not mean a whole lot for job retention. I asked you this 
question in Pittsburgh and you said it was your hope not to 
transfer people. Can yougive me any further assurance that a 
job will not be lost on a transfer, which makes it impossible for the 
person to maintain his job by moving far away?
    Ms. Longmuir. No, sir, other than to repeat the fact that 
from a purely commercial perspective, it makes no sense for a 
company to go through the high cost of transferring an 
employee, because that causes great dislocation and the goal is 
rather to keep a productive and satisfied workforce by having 
minimal incursions on their private lives.
    Senator Specter. Well, Ms. Longmuir, I understand that sort 
of a rationale or rationalization as to what you may hope to 
do. What I am looking for are really commitments that employees 
can rely upon, and keeping rates the same, which we have not 
gotten into here and we ought to do in some detail, as to 
maintaining the rates for a 2-year period.
    Let me again express to you my question as to whether 
United is prepared to put all of these statements into writing? 
If there is no writing at the end of the rainbow here, I am not 
going to agree to it--not that my agreement is any more weighty 
than Mr. Doughty's agreement. But I do not consider hopes or 
projections or business needs, and I respect United's right to 
do whatever it chooses. It is a free enterprise system, 
competition. You can do what you choose, and we all have that 
option, and the Antitrust Subcommittee has that option, in 
terms of what we do with the Antitrust Division of the 
Department of Justice. But is United prepared to put in writing 
its commitments?
    Ms. Longmuir. Sir, with respect to the fare-cap issue, 
which we have discussed in the past, as we had shared with you, 
if the Department of Justice demands that, we will enter into 
attempts to satisfy that. You have been a very vocal and 
aggressive representative for the Commonwealth of Pennsylvania 
on that issue. Mr. Goodwin, in his latest correspondence with 
you, did make that commitment to you in his letter.
    With respect to the job allocation number, again, sir, we 
have to really ultimately respond to the realities of the 
marketplace, despite our best intentions, and we feel that we 
have taken a fairly unprecedented step in the context of a 
merger of committing to no furloughs for two years, which Mr. 
Goodwin extended to an unlimited basis.
    Senator Specter. Well, I take that to be no writing, except 
as to fares, subject to the demand by the Department of 
Justice.
    Congressman.
    Representative Toomey. Thank you.
    One of the things that Mr. Goodwin testified to, according 
to the script that I have here, is that the merger would result 
in a significant increase in convenience for air-travel 
customers. I guess my question for you is what kind of 
conveniences, what kind of new, improved services could Lehigh 
Valley travelers expect? For instance, are there going to be 
any new nonstop destinations? Will there be significantly 
greater access to other flights, single-stop flights? Could you 
share with me your thoughts on that?
    Ms. Longmuir. Thank you, Congressman. I think, through some 
increased flying opportunities that we are putting in place 
both in Pittsburgh and in Philadelphia, and the enhanced 
connectivity between the Lehigh Valley International Airport to 
those hubs, as well as up to our Dulles hub, we will have in 
place a one-stop to Portland, Oregon, to San Jose and to Orange 
County, CA, out of Philadelphia, I believe it is, as well as 
also the ability now to connect to our international network 
through Dulles and also through the existing hubs in O'Hare.
    Representative Toomey. Any new nonstops from Lehigh Valley?
    Ms. Longmuir. No. No, sir.
    Representative Toomey. One of the things that you know we 
are very concerned about is the effect that, apparently, less 
competition could have on air fares. What kind of assurances do 
we have that the air-fare structure would not get worse in the 
Lehigh Valley as a result of the merger?
    Ms. Longmuir. Well, sir, we believe that, as a result of 
having the ability to have greater connectivity to the existing 
flights that we will be maintaining to the Lehigh Valley post-
merger, we will be able to offer some of the very large 
businesses that exist in this community, like Air Products and 
Chemicals, Binney, Rodale Press, the ability to distribute 
their products domestically and internationally through better 
connections to our international hubs.
    We also think that right now, where there may be an 
interline arrangement between United and US Airways, with it as 
one company, the ability to have one check-in and have seamless 
travel will improve the flying experience for a significant 
number of business and leisure travelers here.
    Representative Toomey. That speaks to the question of 
convenience, but what about air fares?
    Ms. Longmuir. Well, with air fares, sir, I think the cost 
structure of US Airways is different than the cost structure of 
United. I need to be careful about not making representations 
going forward on that. But we are looking at the fare structure 
very closely, of how we would be able to spread the higher unit 
cost that US Airways has over our much larger network, and we 
are optimistic--I know, Senator Specter, that does not give you 
much comfort. But I hope that the reputation of United in the 
other small communities and other small cities which we serve 
will provide some comfort in going forward in this scrutiny and 
analysis thatyou are performing.
    Representative Toomey. Thank you.
    Mr. Nagin, briefly, if I could, you mentioned that 
Southwest has bought a significant increase in its fleet; it is 
targeting the Eastern Seaboard. Southwest is one of the lowest-
cost carriers in the industry and you are one of the highest-
cost carriers. How can you survive that competition if they do 
come in here, assuming this merger does not go ahead?
    Mr. Nagin. That is probably the most difficult question 
that could be asked at any hearing, and it has been asked 
before, and I am not suggesting there is an easy answer. There 
is not an easy answer. We are going to stay focused and do what 
we should be doing, managing our airline. But the reality is 
here that we really should get this transaction completed for 
that very reason.
    Baltimore is a great story. US Airways was number one at 
Baltimore. Southwest came in, a terrific airline, very well-
managed, terrific business plan, great operational integrity, 
and they handed us our lunch. We were gradually pushed out and 
decreased our presence at Baltimore very significantly. We are 
seeing that erosion occur wherever they come in, not because 
they are evil, not because they engage in predation. They are 
not evil and they do not use predatory tactics. They are just 
very, very efficient.
    We do not have one of the highest costs in the industry. We 
have the highest cost in the industry. So, we want to do this 
transaction so the communities here in Pennsylvania--not to be 
a sob-sister or to wear it on our sleeve--so there is a 
continuation of service with a strong and well-managed company 
like United, whose record should be looked at, not for the last 
two months of their operations, but for their total history of 
superb service.
    They are going through an iteration now that every carrier 
in the United States has gone through, and everyone comes out 
of it, and they will come out of it with flying colors. It is 
an excellent airline with good people managing it who are true 
to their word, and I think this community will be well-served 
as a result of that merger, sir.
    Representative Toomey. Thank you.
    Senator Specter. Thank you very much, Congressman Toomey.
    Thank you very much, Ms. Longmuir and Mr. Nagin. We thank 
all of the witnesses. The issue of this acquisition and merger, 
from a national point of view, turns on whether competition 
will be lessened, which is the concern of the antitrust laws. 
As a Senator representing Pennsylvania, I am obviously 
concerned about Pennsylvania's interest very decisively. As the 
United States Senator and a member of the Antitrust 
Subcommittee, I am concerned about what happens to the Nation 
as a whole.
    We have had a series of hearings around the State and we 
will consider more. Senator Santorum wanted to be here today. 
He was in Pittsburgh. He has been very active in this entire 
matter. The purposes of the hearing around the State--we have 
heard Ms. Longmuir and Mr. Nagin for the third time. When she 
says I may not get much consolation from her optimism, she 
overstates it. I do not get any consolation from her optimism.
    In a sense, we may be shadowboxing now, because the final 
push is going to come down the line. I am going to seek 
hearings in Washington from the Antitrust Division of the 
Department of Justice and Mr. Joel Klein, whom I have already 
discussed this matter with, to get some perspective of this 
merger in the context of a national picture. But as it relates 
to Pennsylvania, I am not only not satisfied, I am dissatisfied 
with the repetitive answers of noncommitment which I am 
hearing.
    A nonfurlough policy does not mean much if there is going 
to be an extensive transfer policy, and a non-furlough practice 
does not cover the issue as to job opportunities which are 
present now and, under the current system, if there are 
furloughs, there are job openings for new people.
    When you talk about having something in writing, it is not 
meaningful to me unless it is in writing. There are a whole 
series of matters like the maintenance center and the 
reservation center which are weighty, although I concede they 
are parochial. A note the Express Times had in an editorial on 
July 24, ``Consolidating United and US Airways Not the Best 
Ticket for the Lehigh Valley.'' Part of what we are doing here, 
to repeat, is to stimulate interest and a dialogue within the 
State, because these matters which happen in far-away 
Washington, within the beltway, sometimes do not reach home.
    Congressman Toomey and I are here, and Senator Santorum and 
I were in Pittsburgh, and we do them around the State, and then 
there is a focus--and we want to promote that focus, to see to 
it that the national interests are protected and Pennsylvania's 
interests are protected. So, stay tuned.
    Thank you all very much.
    [Whereupon, at 9:27 a.m., the subcommittee was adjourned.]