[Senate Hearing 106-1125]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1125

                   UNITED AIRLINES/US AIRWAYS MERGER

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                          JUNE 21 AND 22, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


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                            WASHINGTON : 2003
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                             June 21, 2000

                                                                   Page
Hearing held on June 21, 2000....................................     1
Statement of Senator Breaux......................................    14
Statement of Senator Brownback...................................    11
Statement of Senator Cleland.....................................    75
Statement of Senator Dorgan......................................    17
Statement of Senator Frist.......................................     7
Statement of Senator Gorton......................................    57
    Prepared statement...........................................    57
Statement of Senator Hollings....................................     4
    Prepared statement...........................................     5
Statement of Senator Kerry.......................................    12
Statement of Senator McCain......................................     1
    Letter dated June 9, 2000 to Hon. John McCain from Alfred E. 
      Kahn, Robert Julius Thorne Professor of Political Economy, 
      Emeritus, Cornell University: Chairman, Civil Aeronautics 
      Board 1977-78..............................................     2
Statement of Senator Rockefeller.................................     7
    Prepared statement...........................................     9
Statement of Senator Snowe.......................................    15
Statement of Senator Wyden.......................................    14

                               witnesses

Collins, Hon. Susan M., U.S. Senator from Maine..................    17
    Prepared statement...........................................    19
Goodwin, James E., Chairman and CEO, United Airlines.............    20
    Prepared statement...........................................    21
Johnson, Robert L., Chairman and CEO, DC Air.....................    30
    Prepared statement...........................................    32
Leonard, Joseph, Chairman and CEO, AirTran Airways, Inc..........    35
    Prepared statement...........................................    38
Wolf, Stephen M., Chairman, US Airways...........................    25
    Prepared statement...........................................    28

                                appendix

America West Airlines, Inc., prepared statement..................   136
George, Kent G., Executive Director, Allegheny County Airport 
  Authority, prepared statement..................................   130
Neeleman, David, Chief Executive Officer, JetBlue Airways 
  Corporation, prepared statement................................   132
Perkins, Ed, Consumer Advocate, The American Society of Travel 
  Agents, Inc., prepared statement...............................   134
Response to written questions submitted to DC Air by:
    Hon. Slade Gorton............................................   107
    Hon. John McCain.............................................   108
Response to written questions submitted to James E. Goodwin by:
    Hon. Max Cleland.............................................   108
    Hon. Slade Gorton............................................   111
    Hon. Ernest F. Hollings......................................   113
    Hon. John McCain.............................................   115
    Hon. John D. Rockefeller.....................................   118
Response to written questions submitted to Joseph Leonard by:
    Hon. Max Cleland.............................................   120
    Hon. Slade Gorton............................................   122
    Hon. Ernest F. Hollings......................................   122
    Hon. John McCain.............................................   124
    Hon. John D. Rockefeller.....................................   125
Response to written questions submitted to Stephen M. Wolf by:
    Hon. Max Cleland.............................................   126
    Hon. Slade Gorton............................................   127
    Hon. Ernest F. Hollings......................................   128
    Hon. John McCain.............................................   129

                             June 22, 2000

Hearing held on June 22, 2000....................................    79
Statement of Senator Cleland.....................................   101
Statement of Senator Dorgan......................................    93
Statement of Senator Gorton......................................    96
Statement of Senator McCain......................................    79
Statement of Senator Wyden.......................................    99

                               witnesses

McFadden, Hon. Nancy E., General Counsel, Department of 
  Transportation.................................................    79
    Prepared Statement...........................................    82
Foer, Albert A., President, American Antitrust Institute.........    86
    Prepared Statement...........................................    87

                                appendix

Response to written questions submitted to Albert A. Foer by:
    Hon. Max Cleland.............................................   140
    Hon. Slade Gorton............................................   140
    Hon. Ernest F. Hollings......................................   141
    Hon. John McCain.............................................   142
Response to written questions submitted to Nancy E. McFadden by:
    Hon. Slade Gorton............................................   143
    Hon. John McCain.............................................   146

 
                   UNITED AIRLINES/US AIRWAYS MERGER

                              ----------                              


                        WEDNESDAY, JUNE 21, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. We will begin the hearing. First I want to 
thank our witnesses for testifying today on the proposed merger 
of United Airlines and US Airways. It is no secret that I am 
extremely skeptical of the proposal the carriers have laid 
before us. I look forward to a thorough discussion of the 
consumer benefits as well as detriments that could result from 
the deal. A combined United Airlines and US Airways would be 
twice as big as the next largest competitor, American Airlines. 
Its market power would be unprecedented.
    On the one hand, I would like to think that the merger 
would shake things up in the industry enough to see American 
and Delta, for instance, cut fares as they compete for their 
lives. On the other hand, I am realistic, or perhaps cynical 
enough to conclude that if the Nation's biggest airline is 
allowed to acquire another major carrier the rest of the 
airlines are sure to fall in line with their own merger 
transactions.
    Consolidation in the industry does not bode well for new 
entry, which is key to a competitive airline environment. 
Already, most successful, recent new entrant carriers 
acknowledge that they will not enter the majors' hub markets 
because they cannot survive in a head-to-head battle. This 
perception is our reality. Additional consolidation would only 
make it worse.
    Prospects for this merger, as well as further 
consolidation, are worrisome enough that even an established 
carrier like Southwest Airlines is concerned that a megacarrier 
or carriers would have deep enough pockets to drive them into 
the ground. Southwest, of course, is one of the clear success 
stories of airline deregulation. The Department of 
Transportation has documented that Southwest Airlines alone is 
responsible for many billions of dollars of consumer savings. 
The question we must ask is whether we can continue to depend 
on Southwest's ability to discipline prices if the deck is 
shuffled in their competitors' favor.
    I want the record to reflect that I have made no final 
decision on whether this merger should proceed and in fact have 
serious concerns as to whether it is indeed in the public's 
best interest.
    Statistics demonstrate the merger would likely result in at 
least seven hubs where a combined United-US Airways airline 
would have a dominant position in terms of passenger share. 
United would be a virtual behemoth in the East. Government 
restrictions such as slot controls and perimeter rules would 
only enhance and protect United's superior position on the East 
Coast.
    Airport restrictions, particularly on the East Coast, 
represents an area where the Congress and the Department of 
Transportation must take an active pro-competitive stance. 
We've made strides at New York's La Guardia and Kennedy 
Airports, for instance, but what good is it to loosen slot 
restrictions if new competitors do not have access to publicly 
funded gates.
    I turn now to the slot restrictions and perimeter rule at 
Reagan National. They must go away if we really expect to see 
competition at Reagan National. At the very least the parties 
here today who are asking us not to stand in the way of the 
marketplace cannot continue to stand in the way of our efforts 
to let market forces rule elsewhere.
    The father of deregulation, Professor Alfred Kahn, recently 
sent me a letter outlining his preliminary concerns with the 
proposed United-US Airways merger, which I would submit for the 
record.
    [The information referred to follows:]

                                     Ithaca, New York, June 9, 2000

Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Dear Senator McCain:

    I'm very sorry that I can't accept your invitation to testify 
before your Committee on June 20th, and hope that you will regard the 
arrival that day of my son and his family from Australia, for a brief 
visit, as a sufficient reason. I particularly regret my inability to 
take advantage of that opportunity to renew our acquaintance.
    Your Ann Choiniere has asked me to offer, as a substitute, a 
statement of my--as yet only provisional--opinions about the proposed 
merger of United Airlines and US Airways. I am happy to do so, even 
though, to repeat, I have by no means a settled final opinion about 
whether or not it should be approved.
    I do urge you to give careful consideration to its possible 
anticompetitive effects, however. The central premise of deregulation 
was that competition would best serve and protect consumers; that meant 
vigorous enforcement of the antitrust laws rather than direct 
regulation would become critical in the new regime.
    Primary responsibility for making this investigation rests, of 
course, with the antitrust agencies. It is my understanding, however, 
that the Antitrust Division's resources are severely strained by their 
other obligations, including other proceedings specifically involving 
the airlines; if they lack the resources to look at this latest 
proposed merger with great care, it seems to me that would be a case of 
the government being penny-wise and pound-foolish. Partly because of 
the possible direct effects of this merger and, perhaps even more, 
because of its threatening to set off a series of imitative mergers 
that would substantially increase the concentration of the domestic 
industry, there is a possible jeopardy here to the many billions of 
dollars that consumers have been saving each year because of the 
competition set off by deregulation.
    It seems to me there are several levels at which to assess these 
possible anticompetitive effects.
    1. The first goes to the question of whether there are any 
substantial number of particular routes on which United and US Airways 
are already direct competitors. In the case of the proposed merger of 
Continental/Northwest, the Antitrust Division identified several very 
important routes between their respective hubs (for example, Houston/
Minneapolis-St. Paul, Houston/Detroit, Cleveland/Minneapolis-St. Paul, 
Cleveland/Memphis, Newark/Twin Cities) on which it appeared those 
airlines were the two main if not only competitors, and their merger 
would simply eliminate that competition. I do not know to what extent 
there are similar overlaps between US Airways and United.
    2. In deregulating the airlines we relied very heavily on the 
threat of potential as well as actual competition to prevent 
exploitation of consumers: an important part of the rationale of 
deregulation was the contestability of airline markets. It seems to me 
highly likely that there are many routes in which United or US Airways 
is a potential competitor of the other. And it is my recollection that 
while studies of the behavior of airline fares after deregulation 
(notably one by Winston and Morrison and another by Gloria Hurdle, 
Andrew Joskow and others) demonstrated that one actual competitor in a 
market is worth two or three potential contesters in the bush, they 
nevertheless also found that the presence of a potential contester--
identified as a carrier already present at one or the other end of a 
route--did constrain the fares incumbents could charge.
    3. The likelihood that a United/US Airways merger would indeed 
result in suppression of this potential competition would seem to be 
enhanced by what I take it would be United's explanation and 
justification--namely, its need for a strong hub in the Northeast 
(commented on widely in the literature, along with attributions of a 
similar need to American Airlines). But if United really does feel the 
need for a big hub in the Northeast, this suggests that it is indeed an 
important potential competitor of US Airways, and that, denied the 
ability to acquire the hub in the easiest, noncompetitive fashion, by 
acquisition, it might instead feel impelled to construct a hub of its 
own in direct competition with US Airways: if some place within a 
couple of hundred miles of Pittsburgh is the needed location--observe 
the hubs of Continental at Cleveland and Delta at Cincinnati--then why 
not, say, Buffalo for United? And while I have the impression that the 
suppression of potential competition has not played a major role in 
most merger litigation, it might properly be definitive in this case, 
if only because, either explicitly or implicitly, United is in effect 
conceding the potentiality of that competition in its rationalizations 
of the merger itself. The stronger its argument that it does indeed 
require a big hub in the Northeast, the more that signifies that the 
alternative, if it were denied the opportunity to acquire US Airways, 
would be to construct a major competitive hub of its own.
    4. In addition, if indeed United's acquisition of a competitive 
advantage by this acquisition--giving it the first claim on traffic 
feed from US Airways' extensive network--does increase the pressure on 
other carriers, particularly American to merge similarly, then it seems 
to me that is a possible competitive consequence of this particular 
merger that should additionally be taken into account in deciding 
whether it should be permitted.
    I do hope you will undertake this important inquiry: we may be 
confronting a very radical consolidation of the industry, which cannot 
be a matter of indifference to people like you and me, who have 
regarded deregulation as a striking success thus far.
    With warm personal regards.
        Sincerely.
                                            Alfred E. Kahn,
                        Robert Julius Thorne Professor of Political
                             Economy, Emeritus, Cornell University:
                         Chairman, Civil Aeronautics Board 1977-78.

    The Chairman. He urges the Government to focus on a few 
areas, overlapping routes between United and US Airways, the 
continued ability of the potential for competition to 
discipline prices, and the likelihood and effects of additional 
consolidation downstream.
    I want to highlight another point that Professor Kahn 
makes. He states that United's main justification for the 
merger is the need for a hub in the Northeast. Why, then, 
doesn't United create one, rather than following the path of 
least competitive resistance by trying to acquire one of its 
competitor's hubs? I know that is the vision of airline 
deregulation we all shared.
    Again, I want to point out Mr. Kahn's letter, where he 
points out the likelihood that a United-US Airways merger would 
result in suppression of this potential competition, would seem 
to be enhanced by what I take it would be United's explanation 
and justification, namely its need for a strong hub in the 
Northeast, commented on widely in the literature, along with 
attributions of a similar need to American Airlines, but if 
United really does feel a need for a big hub in the Northeast, 
this suggests that it is, indeed, an important potential 
competitor of US Airways, and that denied the ability to 
acquire the hub in the easiest noncompetitive fashion by 
acquisition, it might instead feel impelled to construct a hub 
of its own in direct competition with US Airways.
    I hope that all of the witnesses today will take a careful 
look at Professor Kahn's letter, because I think he outlines 
very accurately the questions that arise concerning this 
proposed merger. Also, we will get into exactly what the new 
airline out of Reagan National Airport will entail.
    I think a very legitimate concern is that if an airline 
uses the assets, the employees, and all of the other facilities 
of another airline, there is a legitimate question as to 
whether that airline is indeed a new airline or simply an 
ancillary of the existing airline. That is a legitimate 
question and I think one that needs to be addressed, and also 
the knowledge and expertise of those who are running that 
airline, and their qualifications need to undergo examination 
as well.
    Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you very much, Mr. Chairman. I am 
skeptical also, and I agree the question is legitimate. I begin 
as a born-again regulator. We made a mistake in deregulation, 
and it took some time to prove that. Otherwise, I am always 
worried about hub concentration levels. The best I could get 
with the recently enacted FAA authorization was that a 
passenger facility charge would not be permitted until the 
various airports submitted their plans to promote competition. 
That's the best I could do, for now.
    That is rather spurious, but in any event it is my record, 
and it is not because of this particular merger. I have been a 
student of US Airways because I regularly pay the Government 
rate, which is high. Senator Collins, I also pay for my wife, 
which is absolutely exorbitant, $700. If I called this 
afternoon and said I want to fly Friday morning, if I hear from 
Senator Lott that we are not going to have any votes on Friday, 
I would want to get on that 9:30 direct flight. That is a 
little puddle-jumper. It has got a little motor to it. It is 
not a jet, and it is $700, and there is no first class. 
Everybody's on coach, and they give you a pretzel, I think it 
is, but I am glad to get it because that is better than going 
through Charlotte first.
    So in trying to study US Airways I have come upon the 
conclusion from experts that I have talked to in the airline 
business that they had, and have had historically, an unusually 
rich--and I want Mr. Johnson to listen to this, because I want 
to know how he is going to work his way out of it--an unusually 
rich pilot's pay schedule, and unusually rich flight attendant 
pay scale, higher than everybody else. In fact, US Airways 
cannot make money, and in fact that is why they lose money even 
charging the $700, even with their control of a number of hubs.
    Mr. Wolf really sold them on a real good sale, and he did 
an outstanding job. We cannot understand why United would want 
to buy US Airways, other than to get control of the East Coast.
    But they would still have that rich series of contracts. US 
Airways had all the business on the East Coast. Today, we have 
connecting carriers taking away passengers from US Airways and 
providing competition. It makes it harder to make it, and with 
those kind of expensive contracts, so one of the questions is, 
how can you work out of that predicament?
    And of course you have got the obvious skepticism, selling 
US Air to Bob Johnson to form a DC Air. Now, I happen to know 
him from years back. He is the most deserving fellow in the 
world, and we in Washington always say when you do not like 
somebody, you respect him. I not only respect him, I like him, 
but why didn't you all give that to Senator McCain and me? We 
could help you.
    [Laughter.]
    Senator Hollings. Why give it to Bob Johnson? I know about 
control, because I am very sensitive to the issues, and I 
sometimes am like my friend Congressman Oberstar in using the 
wrong language in this politically correct world in which we 
live, but I know--let's don't say captive or control of United, 
but I know Mr. Johnson is not an ingrate.
    And so when you get the equipment and you get the slots and 
you get the frequent flyer plan and you get everything else 
like that from United, although he wants to tell the Committee 
that oh, yeah, he is going to be competitive and reduce those 
rates, after all, I think he would go along with the merger, 
because it was the merger, somewhat like Vice President Gore 
going along with the President. After all, why should he raise 
sand about the President's conduct when the President made him 
the Vice President? Why should Mr. Johnson try to start 
competing when, after all, he would not even have the airline 
to begin with but for this deal?
    So it is going to be a real question in my mind how he can 
get out from under US Air's high cost structure, includes 
expensive overcostly arrangements with their pilots and 
attendants, so that they can get down to a competitive carrier 
and give us some service, because we do not have it.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Good morning. I wish to thank the Chairman for holding this 
hearing. Many other groups and individuals, including Members, the 
press and ``so-called'' experts, have commented on the proposed United-
USAirways deal, and now it is our turn.
    Let's start with one fact--deregulation has not given us what we 
wanted, and it is about to get worse. When we passed the Airline 
Deregulation Act in 1978, we were promised many things--low fares, 
better service, and the absence of predatory conduct, given that planes 
can easily be moved from one market to another. The government applied 
those theories to every transaction proposed, and with one exception, 
approved them all. The result is what we have today--a balkanization of 
our aviation system--major hubs dominated by single carriers. Such 
concentration will only get worse if we end up with 3 mega-carriers.
    My concerns with the proposed merger have less to do with the 
transaction before us, though it raises serious issues, than the path 
that we have allowed ourselves to be led down. If we are reduced to 
three mega-carriers, we will have to consider some form of consumer 
fare protection. Action may include zones of reasonableness for short-
haul, non-stop flights out of the hubs or conditioning all of the deals 
on divestiture of a substantial percentage of gates at the dominated 
hubs.
    The proposal before us today is controversial because of its scope 
and because of the industry-wide implications. The folks that will 
testify, Mr. Goodwin, Mr. Wolf and Mr. Johnson, are all businessmen who 
will try to convince us on the reasons why the deal--despite its 
antitrust issues--should be approved. Mr. Johnson clearly wants his 
turn to lose a fortune in the airline industry, and Mr. Goodwin and Mr. 
Wolf are more than willing to take his $144 million. Of course, they 
want to see Mr. Johnson succeed, or be in a position to succeed, and I 
know that Mr. Johnson is an independent, driven, and creative executive 
who wants to succeed. Some, however, have posed the essential question 
of whether the spinoff really creates an independent company.
    DC Air will have planes provided for by United--at market rates; 
slots and gates provided by USAirways--and paid for by Mr. Johnson; DC 
Air will offer its passengers United's frequent flyer program and 
provide other backup services. Yet, some will argue that all of this 
``assistance'' from United prevents it from being independent. Mr. 
Johnson knows that for the spinoff to be successful, DOJ must determine 
that DC Air is independent. To achieve this status, DC Air must be able 
to set its own fares--and hopefully lower than they are today. This is 
a critical factor.
    One thing that we must bear in mind--DC Air has given us 
assurances, and we will hear them again today--that it will continue to 
serve the 43 communities from Washington that are today served by US 
AIRWAYS. Service criteria may not be one of the matters DOJ will 
consider if it finds DC Air too dependent upon the consolidated 
carrier. Furthermore, DOJ or DOT can impose additional conditions on DC 
Air, if either determines from an antitrust or other perspective that 
such measures are necessary, i.e. prohibiting DC Air from code-sharing 
with United or requiring DC Air to contract with another carrier for 
frequent flyer miles. One other thing DOJ may want to consider--giving 
DC Air the shuttle flights, rather than allowing the United to keep 
these valuable routes. Giving DC Air these valuable routes may lead to 
lower fares between Washington and the Northeast.
    Let's look at the hub concentration levels. Right now there are 16 
hubs where one carrier accounts for more than 50% of the traffic. After 
the deal is approved, the number will stay the same. This is where the 
market power resides. For years, we have heard that the potential 
competition would keep fares low. We were told that carriers would not 
raise fares in markets such as that between Charleston and Charlotte, 
because if they did then someone else would bring their planes into the 
market. However, with the way the industry functions today, that never 
happens. The home team can raise or lower fares, with little likelihood 
of competitive entry. US Airways today has almost 90% of the traffic at 
Charlotte, and the combined carrier would have 91%. While this is not a 
significant increase, and the transaction transfers power from one 
entity to another, it still leaves the folks at Charlotte with only one 
choice in the short-haul, non-stop markets.
    According to DOT, the theory was that there was lots of competition 
in the longer haul markets where hubs compete with another. Flights 
from non hubs such Columbia, SC to destinations in the Midwest may have 
3 or 4 carrier options, each with one stop through a hub. DOT has told 
us in report after report that deregulation was working--more people 
were traveling, and at lower prices. Yet, how does this square with 16 
major metropolitan areas being dominated by one service provider. We 
now have local markets where 40% of the passengers have no choices in 
price or service.
    DOJ and DOT also must focus on the number of one-stop markets where 
competition may be lessened. We know that the consolidated United/US 
Airways hub flights will have no competition, but will there also be an 
erosion of competition in other markets? Finally, putting Reagan 
National Airport aside, at Dulles the combined carrier will have more 
than 50% of the market, giving United monopolies on several routes. DOJ 
must look at Dulles. Who else will go in there? In the recently enacted 
FAA bill, FAIR 21, we have directed DOT to stop funding these mega-
fortresses, unless we have some assurance that the airports will make 
every effort to provide facilities for other carriers, and thus help 
address the market power concerns.
    With respect to airports, and barriers to entry, we asked GAO to 
give us information on the ability to get gates at some of the hubs. 
Gates are there for the taking at some hubs (Pittsburg and Charlotte), 
but no one wants to challenge the home team. We have heard that it is 
harder to get gates since the major incumbent may have a say in the use 
of gates at their respective airports. We have given the DOT the 
ability to stop that. As I mentioned, they now must exercise the 
authority to ensure competition.
    What else has the government done? Last year, DOJ filed suit 
against American for its use of hub market power to drive out 3 new 
entrants at Dallas-Fort Worth. DOT has proposed predatory guidelines, 
but has yet to issue a final set of guidelines. I know that the 
proposal was controversial, but it is time to address those concerns 
and issue the final rules.
    In 1998, the Department of Justice challenged the Northwest-
Continental deal based on an overlap of mere 7 markets affecting 4 
million passengers. DOJ is finally waking up to the fact that we have 
untoward levels of market power--which were granted or obtained in the 
name of efficiency--which must be checked. This deal before us involves 
at least 4.9 million passengers in just the hub-to-hub routes of the 
two carriers, where there will be a reduction from 2 carriers to 1, or 
from 3 to 2, depending upon the market. In many of those routes, there 
is no likely carrier able or willing to enter the market. Few times do 
we see a carrier, be it a low cost carrier or a network carrier, 
challenge routes connecting two hubs. With the feed traffic at each 
hub, the combined carrier effectively controls price, service and 
scheduling. In addition, several cities like Boston and New York will 
see significant increases in concentration, as will Dulles.
    Proponents of the merger contend the merger will benefit the 
traveling public. The advantages include--64 new non-stops, 560 new on-
line connections, and 29 new international routes. Yet, both of these 
carriers rank near the bottom of the DOT on-time list, 7th and 10th. 
The new carrier will have to coordinate over 1,000 aircraft, and 
146,000 employees. If United or US Airways can not provide satisfactory 
customer service with their current size, how will they coordinate even 
more passengers and aircraft?
    We will be back here next year looking at how best to address 
competition policy matters. We took the authority away from DOT in 
1988, leaving it to our antitrust regulators. Next year, we will need 
to rethink that position if we continue to be beset by the types of 
problems we know exist, and will continue to exist, absent concrete 
action.

    The Chairman. Thank you, Senator Hollings.
    Senator Frist.

                 STATEMENT OF HON. BILL FRIST, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Frist. No statement, Mr. Chairman. I am just glad 
to be here.
    The Chairman. God bless you. Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Mr. Chairman, I would be glad to yield 
to Senator Collins. I do not see any reason to keep her here. I 
do want to make a statement.
    The Chairman. Senator Rockefeller, we will proceed with the 
way that the Senate Commerce Committee proceeds, and that is 
that sitting members will make their statements. If you do not 
wish to make a statement, we will move on to Senator Kerry.
    Senator Rockefeller. I plan to make a statement. I will 
make a statement.
    The Chairman. You are recognized. You are recognized for 5 
minutes.
    Senator Rockefeller. I am going to make my statement. Thank 
you, Mr. Chairman, very much for recognizing me for the period 
required in which to make my statement.
    When United first announced this kind of intention to 
purchase US Airways nearly a month ago, I was like the chairman 
and the Ranking Member, and I had some sense of initial 
nervousness and skepticism. If you come from West Virginia and 
you do not have skepticism, you are not West Virginian--
particularly when it comes to mergers and deregulations, as 
Senator Hollings has said.
    As I listen more closely to the details of the deal, 
however, and as I talk with the principals, I have come to have 
a little bit more of an open mind, and am a little bit more 
hopeful, though still cautious.
    Then I began digging into the details of it, because 
airline service is everything to us, as it would be to Senator 
Collins in Maine, and several of the other panelists. I 
actually became much more optimistic and, in fact, rather 
enthusiastic about the prospects of this merger and, to be 
quite honest, somewhat relieved.
    I, of course, reserve my right to raise concerns, as any 
responsible Committee member would. I know there are many 
questions to be asked. I know we have to hear from DOT and DOJ 
and all the rest, but from where I stand today the United-US 
Airways-DC Air deal looks like one that will be good for West 
Virginia and, quite frankly, since West Virginia shares rural 
backgrounds with many other States, I think it is going to be 
good for other small communities and other States now served by 
US Airways.
    Let me make clear that I do not make such a positive 
statement lightly. I have given it a good deal of thought, and 
I will continue to give it a good deal of thought. I know this 
is a major merger, and any time that happens there are 
questions that are raised.
    The railroad problem is something that I have been fighting 
about for 16 years, without any success in this Committee 
whatsoever. I am still right, and those who voted against me 
are still wrong, and it has hurt West Virginia's economy 
tremendously, so I am very sensitive to what it is, and very 
delicate and precise about what helps and what hurts West 
Virginia's economy, and I care about that a lot.
    Certainly, for West Virginia, competition and service in 
the pre-merger environment is the starting point for any 
meaningful discussion of this subject. Quite honestly, today 
the picture is not very pretty. US Airways is our biggest 
carrier. In fact, it is virtually our only carrier to most of 
our markets.
    I have great respect for Steve Wolf, but too much of our 
service from US Airways in West Virginia is provided by their 
weaker regional affiliates. It is not of the best quality. It 
has high fares, cramped aircraft, what I would call lousy 
schedules, frequent cancellations, and virtually no marketing, 
so in fact we have virtually no competition today in West 
Virginia as it is.
    On the other hand, I have been working with Mr. Wolf and 
others at US Airways to improve this situation for some time, 
and I will continue to do this while the merger is pending and 
beyond, if the merger is not ultimately approved, and I know 
that Mr. Wolf's people have worked hard on this, have had 
meetings with us, Pittsburgh and other places, when other 
airlines have turned up their noses at serving West Virginia.
    I do not like that. That makes me angry. I represent that 
State, and I do not like it when people do that. I do not have 
the luxury of having Phoenix and other places, or Boston for 
that matter. We have small places, but our people are just as 
good as anybody in Arizona or anybody in Massachusetts.
    But I hope my colleagues and our witnesses can understand 
that as we begin this consideration, what I do not like is the 
status quo, and things cannot get a whole lot worse, and so 
what I see in talking with Mr. Johnson on behalf of the new DC 
Air is mostly this.
    First of all, the concept raised by the Chairman that Mr. 
Johnson, who runs about a $3 or $4 billion company, may not be 
particularly skillful in airlines, is something that I 
necessarily reject.
    People come into the U.S. Senate from a variety of 
professions, and if they get elected, people treat them as 
Senators, and there is another school of thought which says 
that really good managers pick good people, and those good 
people help them run airlines.
    And I have full confidence, after a long talk with Mr. 
Johnson, that he is that kind of person, with a very, very 
strong commitment to doing this and, frankly, with a commitment 
to Washington, D.C., which is where a lot of our people want to 
go, and with a unique commitment to Washington, D.C. that 
virtually no one else has shown.
    So I see, one, a strong commitment to serving every one of 
our communities in West Virginia if this merger were to 
succeed, as I see it so far, a commitment to keep fares stable, 
or lower, for the next 2 years at least, a second and competing 
carrier into Washington, D.C., which would be very good for us, 
from several of our markets, a dramatic increase in the number 
of cities we can travel through to nearby hubs, which is vital 
for our people, the attention to quality that seems to come 
from a mainline service carrier, rather than an affiliate 
service, and meaningful opportunity to do something which 
people often overlook, which is market, marketing your 
airports, your facilities.
    So I want to say that basically, Mr. Chairman, I go at this 
with a fairly positive point of view, and I am looking forward 
to the hearing, and I thank you for your consideration.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller, IV, 
                    U.S. Senator from West Virginia

    Mr. Chairman, I want to thank you for holding this very timely and 
important hearing. I hope we can spend most of our time here today 
hearing from and posing questions to our witnesses, so I will be fairly 
brief in my opening remarks.
    When United first announced its intention to purchase US Airways 
nearly a month ago I had some of the same initial nervousness and 
discomfort--perhaps even skepticism--that some of my colleagues have 
expressed today and in other House and Senate hearing rooms over the 
last few weeks. As I listened more closely to the details of the deal, 
however, I was almost immediately more hopeful, though still cautious.
    And as I began digging into the details of the deal in the last few 
weeks--meeting with several of the panelists here this morning and 
talking with the West Virginia aviation community about what it will 
mean at home--I have found myself both relieved and optimistic.
    While I, of course, reserve my right to raise concerns in the 
future, my basic view going in to this hearing and this process is 
that:

        I know there are many questions still to be asked and still to 
        be answered. And I know we need and will look to the expert 
        opinions of the DOT and the DOJ on the anti-trust issues and 
        possible conditions for this merger.

        But, from where I stand today, the United-US Airways-DC Air 
        deal looks like one that will be good for West Virginia and, I 
        believe, good for other small communities and states now served 
        by US Airways.

    Let me be clear that I do not make such a positive statement 
lightly or without a good deal of thought and careful consideration of 
the facts. I know that when there is a merger of two major players in 
any industry (rail, telecom, oil and gas, chemicals, etc.), there are 
also serious and legitimate concerns about the potential for anti-
competitive consequences.
    Those of us in government have a clear responsibility to ask the 
tough questions. In this case we need answers, and advice, about issues 
like--

   possible fare increases and service losses,

   the true financial and competitive viability of the new DC 
        Air,

   the competitive effects on hub-to-hub routes, and

   the potential for this merger to set off a series of major 
        consolidations in the industry.

    And implicit in all of these forward-looking questions about the 
impact of the proposed merger, there is also the need for taking a good 
hard look at the state of the airline industry as it is today. 
Certainly for West Virginia, competition and service in the pre-merger 
environment is the starting point for any meaningful discussion about 
competition and service in the post-merger environment.
    Frankly, the picture today is not pretty.
    US Airways is our biggest carrier. In fact, it is the only carrier 
in most of our markets. With all due respect to Mr. Wolf, too much of 
their service into West Virginia is provided by weaker regional 
affiliates and is of poor quality--with high fares, cramped aircraft, 
lousy schedules, frequent cancellations, and virtually no marketing. We 
have almost no competition today.
    I have been working with Mr. Wolf and others at US Airways to 
improve this situation for some time, and I will continue to do that 
while this merger is pending (and beyond, if the merger is not 
ultimately approved). I know that Mr. Wolf and his people have been 
committed to West Virginia for many years, when others turned their 
noses up at us. I appreciate their willingness to try to make things 
better even now, and I know they have understood the urgency with which 
I have tried to recruit other airlines into the State to compete with 
them.
    But I hope my colleagues and our witnesses can understand that we 
begin in West Virginia, and perhaps in rural communities across this 
country, with the conviction that the status quo is unacceptable--i.e., 
that it can't get much worse.
    The question for us from that point is whether this proposed change 
presents an opportunity for making things better. We look carefully at 
what's being presented to us by Mr. Goodwin on behalf of United and by 
Mr. Johnson on behalf of the new DC Air, and what we mostly see is 
this:

   a continued strong commitment to serve every one of our 
        communities,

   a commitment to keep fares stable or lower for the next two 
        years,

   a second and competing carrier into Washington, DC, from 
        several of our markets,

   a dramatic increase in the number of cities we can travel to 
        through nearby hubs,

   the attention and quality that seems to come from main-line 
        carrier service (rather than affiliate service), and

   a meaningful opportunity to reinvigorate our marketing.

    Obviously the analysis doesn't and can't end here--and I don't mean 
to suggest that it's this simple or perfectly clear-cut. Regardless of 
my current optimism about this merger, I will watch carefully as it 
proceeds, and I'll be willing to act quickly if it becomes clear at any 
point that the merger will have a negative impact on my state or on the 
country as a whole.
    I look forward to hearing today from the General Counsel of the 
Department of Transportation and an esteemed anti-trust expert, Mr. 
Foer. I hope in the near future we might also hear directly from the 
Department of Justice. And I am interested to hear the perspective of 
AirTran, as a new entrant and low fare carrier that knows airline 
competition like few others.
    I also want to thank Mr. Goodwin, Mr. Wolf, and Mr. Johnson, for 
coming here to the firing line and for putting forth a carefully 
constructed merger proposal that gives all of us in the Congress and 
the country an opportunity to think hard and creatively about the state 
of the airline industry and the future of our air service.

    The Chairman. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, and thank you 
very much for holding this timely hearing. I think this is a 
very important subject, and I am delighted the Committee is 
holding a hearing on such an important subject and in such a 
timely fashion.
    I want to raise a couple of concerns that I hope the 
witnesses will address during the hearing as they come forward, 
particularly from the industry. I, as other people on the dais, 
am going to be looking at it for its impact on Kansas and the 
people in my State using US Air and United. I would hope that 
they would be able to assure us that the level of service we 
have had to date will be a floor above which hopefully this 
will go. I must admit some skepticism about whether that is 
going to take place or not, but I want to hear from the 
witnesses how they view that, and how they intend to provide 
those services into my State.
    A second concern is the survivability of DC Air. I wonder, 
if United and US Air, or US Air is being merged into United 
because they do not view themselves as big enough to compete or 
strong enough to continue, is DC Air going to be able to do 
that over a period of time? Certainly over a 2 to 4-year period 
of time, probably, but over a longer period of time, is that 
going to take place and, if it does not, what is it going to 
merge into, or what would we see taking place down the road, 
because I really wonder about that issue, given the premise of 
why this merger is taking place as well.
    I know there are other factors as well, not just being able 
to be competitive, is why the merger is taking place, but I 
know that is also a major factor as well, and DC Air will not 
be the size of US Air.
    And finally, our comments on another round of mergers, will 
this cause that to take place throughout the airline industry? 
That has been a concern that was raised in railroads earlier, 
that if you start this one, will it be another set, and what 
will that do to competition and availability of air flights 
across the country, and I hope that that question gets 
addressed squarely during the hearing as well, because I think 
these are all substantive issues.
    One is a parochial one for me that I think each of us 
carry, but the other one is industry-wide, their impact, that I 
hope to get to directly address, as I certainly have some 
questions about each of those areas.
    Thanks, Mr. Chairman.
    The Chairman. Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you. This is obviously a 
very important topic, an important hearing, and I appreciate 
that you are proceeding forward with it.
    I listened carefully to my friend from West Virginia, whose 
opinion I value greatly on these issues, because he is the 
Ranking Member on the Subcommittee and puts a lot of attention 
into it, and he always speaks very forcefully for West 
Virginia.
    I think, though, some of the questions we need to look at 
are beyond our States. I mean, I have concerns, obviously, 
about Boston and getting from Massachusetts to anywhere, let 
alone here, but I am also concerned about the national network, 
and what the outcome of this may be, and I am particularly 
appreciative to both Steve Wolf and Jim Goodwin for taking the 
time to come and meet and frankly answer a lot of questions and 
provide some insight, certainly, to calm some initial concerns, 
but it does not erase all the concerns about this. I think 
every colleague on the panel is voicing some of these concerns.
    Not so many years ago, when I first came to the Senate, you 
know, we had 14 airlines to choose from flying from Boston to 
anywhere, and now we are down to about four, and it is a lot 
harder to get certain places than it used to be, and very few 
of us would be comfortable saying that we think the quality of 
air traffic today is better.
    Sometimes it is. Sometimes it works out pretty well. 
Obviously, a lot more people can be moved a lot more rapidly. 
There are a lot more aircraft in the air. The entire system has 
expanded dramatically, and more Americans have access to travel 
than ever before, and that is a great benefit in many ways. It 
is a democratization of access, if you will, but it ain't 
better in many, many, many regards.
    In terms of the facilities, they are crowded. The aircraft, 
to the great benefit of the airlines, seem to be full, but 
obviously are more crowded, the quality of service is more 
difficult, and so forth, and these are all issues that I think 
need to be worked out.
    In the context of this merger we need to think about the 
overall impact on ticketing, on access, on routing, and 
particularly on competition. This merger will have an impact on 
service, prices, and competition, and none of us are precisely 
sure or capable of saying that that is going to be pure upside, 
or even be able to define exactly where the upsides are.
    What we do know is that the combination of United Airlines, 
the Nation's largest carrier, and US Airways, the sixth largest 
carrier, is going to create a giant airline with nearly twice 
as many flights as the nearest competitor, and that is of 
concern, so we have to ask questions about what that will do 
precisely to competition.
    Now, I understand, and both Mr. Goodwin and Mr. Wolf made a 
good case about the East-West versus North-South current 
structure, so they do not compete directly today, but that does 
not mean that when they come together their market force and 
what has been created is not going to have a significant impact 
on other airlines, even pressure other mergers to take place, 
and that is one of the most important considerations. If this 
merger is approved, what happens to the rest of the fabric of 
the American airline industry?
    There is currently a relative equilibrium in the airline 
industry as far as the number of flights per day. Of the top 
three carriers, United has approximately 3,200 flights, 
American approximately 3,000, Delta approximately 2,700. After 
the merger, United would have somewhere in the vicinity of 
6,400 plus or minus, depending on what happens, with what 
restrictions are placed on it, and with those kinds of figures 
it is very, very hard not to imagine other airlines coming up 
with their own merger proposals.
    We already hear of various discussions, but that means we 
could be reduced to the big three if the number of speculated 
mergers follow, so I think we have to ask what happens to 
prices and what happens to service, both of which are already 
very complicated.
    The fare structures are such that they can drive you nuts 
trying to transition from one ticket into another, as people in 
the business world often have to do because of last-minute 
arrangements, and as we have to do. It is both expensive and 
complicated, and I think we have to find out whether there will 
be any incentive for the new United to keep the fares low, 
notwithstanding a promise for a 2-year nonstructured fare 
change, and that raises its own questions.
    When you are only promising to deal with nonstructured 
fares, I think we have to look at the routes, and really try to 
figure out what assurances consumers are going to have. 
Consumers want to have competition in the airline industry so 
they can have a choice in the price of their tickets.
    It would be a very sad result, in my judgment, if this 
triggered a major consolidation in an industry that has already 
seen so much consolidation that you are beginning to see, I 
think, some restraints on the level of choice that consumers 
have, and the competition. The market forces that we want so 
badly to encourage seem to be diminished.
    Another concern I have, and I think many of my colleagues 
share this and Senator McCain mentioned it and others have 
mentioned it, is what happens in Washington, and here it is 
absolutely no commentary at all on Mr. Johnson, but it is just 
a simple question of how viable that entity will be.
    Mr. Goodwin and Mr. Wolf made some very, I thought, 
important observations to me about the time schedule on which 
complete independence would exist, and complete 
recapitalization of their own equipment and own facilities, and 
I think that is encouraging, and I think that is obviously 
something to look at.
    There are many reasons for the current problems that 
airlines face. They are not the sole fault of the airlines 
themselves. The FAA has been very slow. We have been slow. 
Congress has only just resolved this issue of the trust fund. 
It has taken far too long to get the capital improvements out 
there that are needed, and that has had a profound negative 
impact on the industry, too. We have to be honest about it and 
take blame for some of that.
    But nevertheless, the size issue remains a very important 
one. We have two very able CEO's who I think can help answer a 
lot of these questions and my mind, Mr. Chairman, will remain 
open subject to the kinds of issues that I have raised, which I 
think it is very important to resolve for the American people, 
and I thank the chair.
    The Chairman. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I believe strongly 
that Congress should not voice support for this merger until 
the implications for the entire airline marketplace are 
reviewed.
    I think it is worth noting that Bob Pitofsky, the head of 
the Federal Trade Commission, sat where Senator Collins is just 
a few months ago and he said one of his great concerns about 
the American economy is the threat of copycat mergers, and what 
we have seen in industry after industry is that you allow one 
of these gigantic deals to go forward, and as sure as the night 
follows the day, everybody else says, I have got to be just as 
big or else I will not be able to compete.
    I think what Senator Kerry touched on is the reality of 
what will happen, that if this deal goes forward, based on what 
we know now, we will see Delta ask for the opportunity to have 
another big merger, we will see American ask for it, we will 
then have three behemoths that will dominate the American 
airline marketplace, and the history of those kinds of mergers 
is for the public, the consumer gets less service, they get 
higher prices, there are more hubs, and there are fewer spokes.
    So I know we want to get on with the hearing, and I would 
only note that and I was very pleased and grateful to you, Mr. 
Chairman, and to Senator Hollings and to Senator Rockefeller 
that you all joined me as part of the debate on the 
transportation appropriations bill in indicating that we are 
going to review whether there ought to be a new yardstick for 
determining these airline mergers, and that yardstick would 
specifically focus on customer service.
    In the past, as we all know, it has been based on 
competition. Certainly we want to produce more competition. We 
have not seen that in all the marketplaces, but what we have 
seen is a deterioration in customer service, and when the 
Inspector General comes in with his report in a few weeks with 
respect to customer service, we are going to see that despite 
all those voluntary pledges that we got from the airline 
industry with respect to finding out about the lowest fare, 
with respect to getting the facts about overbooking, things are 
getting worse rather than better, and I look forward, as this 
Committee has done so often, to working in a bipartisan 
fashion.
    The Chairman. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Very briefly, Mr. Chairman, thank you and 
the Ranking Member, Senator Hollings, for setting this hearing 
up.
    It seems like more and more in this country we have less 
and less. More and more we have fewer railroads, more and more 
we have fewer communication companies, more and more we have 
fewer oil companies, and now today more and more we have fewer 
airlines.
    I am not suggesting that just because there is 
consolidation it cannot possibly increase efficiency and 
actually provide more competition in some areas. The railroad 
situation has gotten so bad the Committee has actually put a 
moratorium on any more consolidation of railroads for 15 months 
and said let's stop and take a look at where this country is 
going in the areas of transportation, communications, and so 
many other areas.
    So I am not against this. I am not supportive of it. I want 
to hear what I think all of our Members want to hear about it, 
but I have a great deal of concern that more and more we are 
having less and less.
    Thank you very much.
    The Chairman. Senator Snowe.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman, and obviously this 
is a very significant issue. The quality, the reliability, and 
the adequacy of air service in this country is no longer just a 
luxury or convenience. In fact, it is a major necessity, and it 
is an imperative.
    It is obviously crucial to economic development, to the 
quality of life, to any given region of the country, and that 
is why I think it is in our national interest to evaluate and 
to ensure that every region of the country has the ability to 
compete in this very competitive environment, and that means 
having quality, reliability, and service.
    I believe, Mr. Chairman, that it is important that we 
exercise our critical oversight responsibility to evaluate this 
merger between United Airlines and US Airways not only in terms 
of whether or not it is going to have a significant impact 
Nation-wide on prices, but also in terms of the impact it is 
going to have on small and medium-sized communities throughout 
the country.
    There is no question this merger would be a pivotal chapter 
in the aftermath of deregulation. We know that small and 
medium-sized communities have not fared well under 
deregulation, and the question is whether or not, and how could 
they fare well in the era of consolidation? The General 
Accounting Office did a report evaluating the effects of 
deregulation on small and medium-sized communities, and the 
benefits of deregulation were uneven.
    In fact, the GAO went on to say that many small and medium-
sized communities like communities in the State of Maine have 
witnessed a decline in the number of available nonstop service 
options, and the amount of jet service versus turboprop 
service, have experienced higher fares and poorer services 
since deregulation, and went on to say some analysts have 
observed that competition in certain markets has diminished due 
to the Federal Government's acceptance of most airline mergers.
    So clearly, we have experienced personally, as one who has 
been traveling and commuting for more than 20 years from the 
State of Maine, since the beginning of deregulation to now, 
that we have seen the quality of service decline. We have also 
seen prices rise significantly. In fact, in Northern Maine up 
until recently it almost did not have any airlines serving 
those communities, when in fact 20 years ago it had a 727 as 
well as other airlines, and fortunately US Airways was willing 
to come in and provide that service.
    Bangor, Maine, another major community in the State of 
Maine, up until recently did not have any jet service to any 
major community on the eastern seaboard. It did manage to 
attract a regional jet just in recent months.
    So clearly, deregulation has had a significant effect on 
the quality of air service to a State like Maine, so we might 
ask the question, why would this megamerger not further 
undermine service to areas such as small and medium sized 
communities in a State like Maine? Our best efforts to attract 
United to Bangor have not resulted in service to this key Maine 
city, so why would an airline maintain service to such markets 
in the long run?
    United and US Airways already serves Portland, the largest 
community in Maine, as they do many other cities, so is it not 
logical that consolidating these two competitors would reduce 
competition in places like Portland, where both carriers 
already serve a given city, and couldn't this reduced 
competition ultimately lead to higher prices?
    My concerns run the gamut, because of the experience that 
we have already seen in smaller and rural States throughout the 
country. I mean, Maine is one such example. That is why Senator 
Dorgan and I a couple of years ago asked the Department of 
Transportation to examine the impact of deregulation on small 
and medium-sized communities throughout rural America, and we 
have seen the answers to that question. It obviously has had an 
impact, and so this consolidation certainly further raises 
those questions.
    Both United and US Airways have four hubs in the East. 
Again, would it be likely that Portland, for example, that has 
been able to have access to four of those hubs, because they 
have both United and US Airways serving Portland, Maine, as a 
community, would they continue, or would that consolidation 
reduce the access to those four major hubs on the eastern 
seaboard?
    So those are some of the questions that I have a concern 
about. Further, obviously, the creation of DC Air here in 
Washington to serve the Northeast Region of the country also 
raises questions about whether or not an operation just working 
out of one major airport can maintain long-term viability for 
air service to the Northeast quadrant of the country.
    So Mr. Chairman, I think it is important that these 
questions are evaluated. This merger does require the strongest 
scrutiny by the Justice Department, particularly because we 
have to be exploring whether or not there is already too much 
consolidation in the airline industry, and whether or not, as a 
result of this potential consolidation, it would invite further 
mergers in the future, so that we have three major air carriers 
Nation-wide, and whether or not this would accelerate and 
advance an erosion of service that already has impacted many 
communities, as I have cited, in a State like Maine.
    Thank you, Mr. Chairman.
    The Chairman. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, I know that you have 
witnesses, and I will be brief.
    We all know there has been an orgy of mergers in this 
country in recent months and years, and it is true in every 
industry, and I think it is unhealthy for our economy. We do 
not need more concentration, especially in the airline 
industry. We need more competition.
    Post deregulation, the Federal Government in virtually 
every area that had some relationship to jurisdiction here had 
one huge rubber stamp, and it said approved. Want to get 
married? We approve it. Want to merge? We approve. I mean, you 
are hard-pressed to find anybody that says no with respect to 
this growing concentration.
    I happen to think that both of these companies are good 
companies, but again I say that the proposal that this will 
create seamless transportation capabilities is in my judgment 
something that ignores the consumer. The ultimate seamlessness 
for the airline, I suppose, would be to have one airline all 
across America. There would be no seams then, but of course 
there would be no competition, and that would not be in the 
interest of the consumers.
    We have created a system of regional hubs that are now 
largely dominated, and so we have regional monopolies that are 
unregulated in the airline industry. The consumer in most cases 
has fewer choices and higher prices, and Mr. Chairman, because 
you are an old pilot, you understand that in most cases when 
you pick up the microphone and call approach control in rural 
areas, they are not working with a whole lot of traffic. They 
say, just come right on in, you are cleared to land, 100 miles 
out of the airport, because frankly, we have less service and 
fewer choices in rural areas.
    Now, with respect to this proposed merger, I would say that 
I again think both of these are good companies. I like the 
companies, but we must, it seems to me, worry a lot about the 
consumer and whether we have robust, aggressive competition 
providing expanded choices and competitive prices in this 
industry to the American consumer. That is what needs to be our 
significant concern here today.
    The Chairman. Thank you, Senator Dorgan. Senator Collins, 
thank you for your patience. Welcome to the Committee.

              STATEMENT OF HON. SUSAN M. COLLINS, 
                    U.S. SENATOR FROM MAINE

    Senator Collins. Thank you very much, Mr. Chairman. Mr. 
Chairman, members of the Committee, I very much appreciate the 
opportunity to testify this morning about an issue of 
considerable importance to the people of Maine, and to share 
some of my concerns about the proposed merger of United and US 
Airways.
    In contemplating what this merger may mean for the American 
people, one critical question that I would urge the Committee 
to focus on is whether rural areas will lose access to quality, 
affordable air service or be left with fewer choices in the 
number of air carriers that serve their State.
    The importance of air service to small and medium-sized 
communities simply cannot be overstated. Our region's ability 
to attract and retain jobs in the global marketplace is 
inexorably linked to its transportation system. Unfortunately, 
many rural areas, including northern and eastern Maine, have 
not fared well under airline deregulation.
    I share many of the concerns expressed by Senator Hollings 
in this regard. Just last Friday, when I was flying back to 
Maine from Washington via Boston, I sat near a business 
executive who was flying to his summer home in Maine. He told 
me that his large company considered buying a business in 
Eastern Maine, and that the sole reason they ultimately decided 
not to make the investment was the fact that the area in 
Eastern Maine was so poorly served by convenient air 
transportation. Ultimately, that factor alone made them decide 
to not go forward with the purchase.
    I might add that this business executive and I had a long 
time to discuss this issue, as we sat on the runway at Logan 
for over an hour in a US Air Express plane in an 
unairconditioned plane before returning to the gate due to a 
mechanical failure.
    I got to hear a lot of opinions on that plane about the 
adequacy of air service to the State of Maine. Indeed, the 
number of cities served by more than two airlines has fallen by 
41 percent since 1989, and for many residents of smaller 
communities the result of deregulation has been poorer service, 
fewer choices, and higher costs. Add to that the ongoing 
consolidation within the airline industry, and it is very easy 
to see why this huge merger raises a number of red flags.
    In Maine, we are heavily dependent upon US Airways for our 
transportation needs. It provides service to Portland, Augusta, 
Rockland, Bangor, Bar Harbor, and Presque Isle, and we are 
grateful to the airline for providing this service.
    In each case, the service is critical to these communities 
and the surrounding area. For some of these communities US 
Airways is the only air service carrier. This service is 
essential not only for the residents but also for the 
businesses that provide the economic foundation of the region.
    So the question to me is, if this merger goes forward, will 
the result for Maine be less frequent and more expensive air 
service with fewer choices of air carriers? I recognize that 
the airline industry is seeking to meet the demands of a global 
economy, but that should not be used as an excuse to abandon or 
slash service to our smaller communities. The airlines are 
supported by billions of taxpayer dollars that the Federal 
Government has invested in our air transportation 
infrastructure.
    With this investment comes a certain amount of public 
responsibility that I believe the airlines need to assume. 
Clearly, each proposed merger should be reviewed on its own 
merits. Those that will enhance quality air service for all 
Americans, including those in rural areas should be allowed to 
move forward, but those mergers that fail to meet this 
threshold should surely be subjected to a heightened standard 
of review.
    Mr. Chairman, I very much appreciate your exploring this 
issue. I think it is tremendously important, and I hope that if 
this merger is approved, that it will only be approved if we 
are sure that it will not result in less service, diminished 
competition, and fewer choices to the people living in rural 
America.
    Thank you very much, Mr. Chairman. I would be happy to 
answer any questions that you or the members of the Committee 
might have.
    [The prepared statement of Senator Collins follows:]

  Prepared Statement of Hon. Susan M. Collins, U.S. Senator from Maine
    Mr. Chairman, first, let me thank you for giving me a chance to 
testify this morning before the Commerce Committee about an issue of 
considerable importance to the people of Maine. I appreciate having an 
opportunity to share with the Committee some of my concerns about the 
proposed merger between United Air Lines and the U.S. Airways Group.
    In contemplating what this merger means for the American people, 
one critical question is whether rural areas will lose access to 
quality, affordable air service?
    The importance of air service to rural areas simply cannot be 
overstated. A region's ability to attract and retain jobs in the global 
marketplace is inextricably linked to its transportation system. 
Unfortunately, many rural areas, including eastern and northern Maine, 
have not fared well under airline deregulation. Indeed, the number of 
cities served by more than two airlines has fallen 41 percent since 
1989, and for many residents of smaller communities, the result of 
deregulation has been poorer service, fewer choices, and higher costs.
    Add to that the ongoing consolidation within the airline industry, 
and it is easy to see why this huge merger raises a number of red 
flags.
    Mr. Chairman, we must ensure that this proposed merger does not 
result in rural communities facing the prospect of losing the only air 
service they have.
    In Maine, we are heavily dependent upon U.S. Airways for our 
transportation needs. It provides service to Portland, Augusta, 
Rockland, Bangor, Bar Harbor, and Presque Isle. In every case, this 
service is critically important to these municipalities and the 
surrounding communities. And in some of these less populous areas, U.S. 
Airways is the only air service carrier. For those communities, this 
service is essential, not only for the residents, but also for the 
businesses that provide the economic foundation of the region. If this 
merger goes forward, will the result for Maine be less frequent and 
more expensive air service with fewer choices of air carriers?
    While I recognize that the airline industry is seeking to meet the 
demands of a global economy, that should not be used as an excuse to 
abandon service to rural areas. The airlines are supported by billions 
of taxpayer dollars that the federal government has invested in our air 
transportation infrastructure. With this investment comes a certain 
amount of responsibility that the airlines need to assume.
    Each proposed merger should be reviewed on its own merits. Those 
mergers that will enhance air service for all Americans, including 
those in rural areas, should move forward. Those mergers that fail to 
meet this threshold should be subjected to a heightened standard of 
review.

    The Chairman. Thank you very much, Senator Collins. We know 
you have a busy schedule, and we thank you for your patience, 
and you are always welcome before this Committee. You and your 
compatriot are a sizable force here, as well as other parts of 
the U.S. Senate. Thank you for being here this morning.
    Senator Collins. Thank you very much.
    The Chairman. May I ask the members of the first panel, Mr. 
James E. Goodwin, chairman and CEO of United Airlines, Mr. 
Stephen Wolf, chairman of US Airways, Mr. Robert L. Johnson, 
chairman and CEO of DC Air, and Mr. Joe Leonard, chairman and 
CEO of AirTran, to please come forward.
    Welcome gentlemen. We will begin with you, Mr. Goodwin. 
Welcome. Thank you all for your patience this morning. It is 
obvious that many members of the Committee have great interest 
in this issue, and I appreciate your patience.
    Mr. Goodwin.

    STATEMENT OF JAMES E. GOODWIN, CHAIRMAN AND CEO, UNITED 
                            AIRLINES

    Mr. Goodwin. Good morning, Chairman McCain, Ranking Member 
Hollings, and other members of this distinguished Committee. On 
behalf of United Airlines, more than 100,000 employees 
worldwide, thank you for the opportunity to testify today. 
United Airlines appreciates the chance to discuss our merger 
with US Airways and explain how it will significantly benefit 
consumers and the communities served by both airlines.
    In short, my name is Jim Goodwin. I am chairman and CEO of 
United Airlines. Before assuming my current position I was 
president and chief operating officer. At various times I have 
managed North American operations, international operations, 
maintenance and marketing. I began my career at United 33 years 
ago this month. In short, I am an airline guy. I have spent my 
entire career learning how airlines work, and I have also 
learned how important it is to listen and listen carefully to 
what others have to say.
    Well, I have been listening over the last few weeks to what 
Members of Congress are saying about our merger, and today I 
want to address clearly what I have heard. The concern I hear 
most frequently is whether this merger will spark a future 
round of consolidation, and related to that is a concern about 
competition in the airline industry. A second deals with 
customer service and whether it will improve as a result of 
this transaction.
    Let me first talk about possible consolidation. It is a 
serious question, and one that deserves your serious attention, 
but I cannot predict what may happen. I can only tell you that 
consolidation in the airline industry remains an open issue, 
not an absolute certainty.
    I do know, and this I can predict with certainty, that this 
merger will create immediate and sure competition. Why? Because 
if fear of consolidation stops this merger, it will prevent 
Charlotte from growing as a hub and becoming a more vigorous 
competitor to Atlanta in the Southeast. If fear of 
consolidation stops this merger, it would prevent consumers 
from realizing the competitive benefits of the country's first 
truly national airline, an airline that will increase single 
carrier service to communities large and small across America, 
and deliver more convenience and more travel options to 
consumers.
    In short, this merger will expand customer access and 
choice. It will do so by introducing 93 new nonstop flights 
that United plans to immediately offer to U.S. and 
international destinations, half on routes where no airline 
offers nonstop service today. It will do so by offering single 
carrier service on 560 planned new city-to-city routes, routes 
not available today to customers of either airline. I believe 
that adds up to more competition.
    This is an industry open to new competition. Today there is 
a long list of airlines that did not exist 20 years ago, 
Frontier, National, Legend, JetBlue, Midway, AirTran, Vanguard, 
Spirit, and America West among them. They are just not 
competing. They are each competing against a major carrier in 
various regions of the country. Today, for a variety of 
reasons, the average domestic airline ticket costs 40 percent 
less in real dollars than it did 20 years ago.
    Now, I do not expect that others will defer to my sense of 
where the industry is heading. That is why this Committee will 
conduct its own review and why Congress has established a 
regulatory process to study mergers like this one.
    We welcome this scrutiny. We welcome it because we are 
confident that those who will be reviewing this transaction 
will conclude, just as we have, that this merger will benefit 
consumers. In my years in the airline industry I have looked at 
every single possible combination for United, and I am here 
today because this merger is the only one that will deliver 
what our customers tell us they want.
    United takes customer service seriously. As good as our 
record is, we know we can do better. Last year, 99.3 percent of 
our customers arrived at their destination without any baggage 
problems. I can tell you that I will not be happy until it is 
100 percent. Today, we are demonstrating our resolve to improve 
customer service through our United commitment. To cite just 
one example, United was the first airline to put leg room back 
on the airplane, 5 inches of extra space in economy plus on our 
domestic fleet of 450 aircraft.
    Should we do more? Of course we should. United must deliver 
the superior service that our customers deserve, and I pledge 
that we will do everything we can to fulfill that promise now 
and after the merger is complete. It is good business, and it 
is the right thing to do.
    There is a lot more I could say, Senator, about the 
benefits of this transaction. In the meantime, I look forward 
to talking with each of you during the course of this hearing.
    Thank you.
    [The prepared statement of Mr. Goodwin follows:]

       Prepared Statement of James E. Goodwin, Chairman and CEO, 
                            United Airlines

    Chairman McCain, Ranking Member Hollings, and other Members of this 
distinguished Committee, on behalf of United Airlines' more than 
100,000 employees worldwide, thank you for the opportunity to testify 
today. United appreciates the chance to explain why our customer-driven 
merger with US Airways should be approved and how this transaction will 
significantly benefit consumers and the communities served by both 
carriers.
    As I will explain in more detail in a moment, the merger is a ``win 
win'' for valued customers of both carriers as well as all air 
travelers. The transaction will create a 21st Century airline that 
offers consumers significantly improved choices for more convenient, 
single-carrier service on thousands of routes around the world. At the 
same time, it will usher in new, competitive air service at capacity-
controlled Ronald Reagan Washington National Airport.
    Moreover, communities, especially US Airways hub cities, will 
receive considerable travel and economic benefits as a result of the 
transaction. The combined reach and efficiency of the new network will 
also enable United to offer improved service to smaller cities 
throughout the system.
    Mr. Chairman, last year this Committee reminded us that as an 
industry we need to do a better job listening and responding to our 
customers. Frankly, you should not have had to remind us of this fact 
since customers are the lifeblood of our business. At United, we 
certainly took that advice to heart. We implemented a comprehensive 
customer service enhancement program--``our United Commitment''--to 
improve the traveling experience of our valued customers. I am proud of 
the improvements, which that program continues to produce. However, we 
are not resting on our laurels. Each day, the entire United family is 
striving to provide the best customer service possible.
    At the same time, we intensified our efforts to identify what type 
of service our customers valued most and expected us to provide. As a 
result of the evaluation, this is what we learned. Our customers told 
us they want hassle free, single-carrier service in as many city-pair 
markets throughout the U.S. as possible. Similarly, international 
passengers told us that they want seamless, global network service such 
as that offered by the Star Alliance, the premier alliance with which 
United is proud to be affiliated. Listening to the marketplace, the 
message was unmistakable--our customers expect us to offer them the 
benefits of the most comprehensive air service network possible and 
they want such service benefits as soon as possible.
    Put in that context, let me explain our decision to acquire US 
Airways. Like a chain, an airline's network is only as strong as its 
weakest link. As United examined its ability to respond fully to our 
valued customers, we considered whether we could improve our efficiency 
and the sustained level of service we provide. What we discovered was 
that United's weakest link was US Airways' strongest link and vice-a-
versa. Accordingly, United concluded that by combining the two 
carriers, we would draw upon the strengths of both airlines and 
simultaneously fill service voids in each other's existing networks. 
The result, we believe, will be the first truly efficient nationwide 
network that will provide consumers with unparalleled travel 
convenience and service.
    United has an extensive east-west system in the U.S. with hubs in 
the Midwest and the West. In contrast, US Airways has a comprehensive 
north-south route system along the East Coast anchored by hubs in 
Pittsburgh, Philadelphia and Charlotte. Together, the two networks are 
highly complementary.
    Let me emphasize the complementary nature of our respective 
networks and tell you the other reasons why the transaction will 
produce unprecedented consumer benefits. Unlike previous airline 
mergers dating back to the 1980s, United and US Airways do not share a 
common hub. Moreover, the United-US Airways combination will increase 
consumer choice and competitive service as we expand our network to 
improve single-carrier service throughout our system. For example, we 
plan to offer new single-carrier service on 560 city-to-city routes--
routes on which neither United or US Airways even competes today. 
Examples of new one-stop routes include Charleston, W.V., to Portland, 
Oregon and San Jose, Calif.; Charleston, S.C., to Austin and San 
Antonio, Texas; Bangor, Maine to San Diego, Calif.; Reno, Nev., to 
Tallahassee, Fla.; and Fargo, N.D., to Panama City, Fla. The 560 new 
routes also include a number of international flights as well, 
including new one-stop flights from Phoenix to Copenhagen; San Jose, 
Calif., to Madrid; Birmingham; Ala. to Brussels; and Tulsa, Okla., to 
London.
    Mr. Chairman, let me share several statistics that illustrate the 
complementary nature of our networks and how it will expand single-
carrier service options for consumers. Along the East Coast, US Airways 
carries about 38 percent of passengers compared to just 1.7 percent for 
United. On the West Coast, in contrast, US Airways flew under 1 percent 
of passengers while our share of that market is about 25 percent. By 
combining our complementary domestic systems, passengers on both 
coasts--especially US Airways passengers on the East Coast--will be 
better linked with United's network of global service.
    Not only are consumers and competition protected by the 
complementary nature of our respective networks, we have taken great 
care to proactively identify and remedy what we thought might be an 
issue for regulators. I am referring to the combining of our operations 
in Washington. To address any possible issue about the overlap on 
routes we would have as a result of the transaction, we are voluntarily 
divesting the bulk of US Airways' significant and valuable resources at 
Reagan National. As a result, DC Air, an independent new-entrant 
carrier, will be able to bring significant new competitive service to 
the nation's capital.
    Before I discuss the significant consumer benefits this transaction 
will produce by adding DC Air as a new entrant competitor at Reagan 
National, let me take a moment to respond to questions some have raised 
about DC Air's independence. Simply put, DC Air will be a wholly 
independent carrier owned by Mr. Johnson and United intends to compete 
vigorously against it just like any other carrier. Mr. Chairman, I 
cannot speak for Mr. Johnson but I firmly believe that DC Air intends 
to compete vigorously against us as well. To dispel any misperception, 
let me share some facts with the Committee. Like any other 
independently operated carrier, DC Air will (1) determine its own 
scheduling, (2) determine its own pricing, (3) collect its own revenue 
and (4) hire its own employees.
    Mr. Chairman, it is true that we have an arms-length agreement to 
assist DC Air in the initial phase of its start-up operations. That 
commercial arrangement is intended to help DC Air successfully get off 
the ground, not to somehow keep it under United's thumb. Let me be 
clear, United is merely offering DC Air the opportunity to acquire 
services. However, we are not obligating it in any way to do so on a 
continuing basis. In addition, the services are being offered to DC Air 
at market price, just as our subsidiary UAL Services offers services to 
a multitude of competitor carriers around the world. For instance, 
United is offering to wet-lease 10 Boeing 737-200 aircraft to DC Air 
during its initial two-year transition period but DC Air can 
discontinue this arrangement with four-months notice.
    As is commercially customary, the agreement also gives DC Air the 
option of extending the wet-lease arrangement under certain 
circumstances. By no means will this wet-lease arrangement account for 
DC Air's entire fleet. In fact, DC Air intends to lease 19 regional jet 
aircraft that currently are operated by US Airways commuter affiliates.
    In addition to aircraft, United also is offering DC Air the chance 
to purchase an array of other services at market price including 
station handling, maintenance, training, and access to club facilities. 
Consistent with industry practice, such agreements can be terminated by 
DC Air if it finds a better deal elsewhere.
    Now, let me turn to the significant benefits this transaction will 
create for passengers using Reagan National. The transaction will not 
simply maintain status quo competitive levels and consumer choice at 
Reagan National, it will expand both in a meaningful way. For instance, 
DC Air has said it plans to offer service from Reagan National to 43 
cities. That total includes all 31 cities in which US Airways' service 
from Reagan National competes today with United service from Reagan 
National or Dulles.
    In the case of routes between Reagan National and three cities--
Pittsburgh, Philadelphia and Charlotte--that currently are served by US 
Airways alone, United will enter those routes and offer consumers at 
Reagan National a new competitive choice. As part of the transaction, 
United will also operate the shuttle between Washington, New York and 
Boston. I can assure you that we will compete vigorously with Delta on 
those popular routes.
    Mr. Chairman, let me make one additional point about DC Air which I 
believe is very important. An important feature of the DC Air plan is 
to preserve non-stop air service between Reagan National and many small 
and medium-sized communities throughout the eastern U.S. Under the 
plan, DC Air will provide non-stop service from Reagan National to 
cities such as Charleston, S.C., Charleston W.V., Columbia, S.C., 
Knoxville, Tenn., Morgantown, W.V. and Portland, Maine.
    As I mentioned, combining our airlines will create the first truly 
efficient nationwide air service network. Now, let me explain how this 
translates into benefits for consumers, communities and the U.S. 
economy.
    For consumers, the combination of United and US Airways will create 
a new millennium airline that will deliver significant benefits to 
millions of passengers. This transaction brings together two 
complementary route systems that will result in a new network 
connecting US Airways' eastern U.S. routes with United's western U.S. 
routes and our international network. The result for consumers: more 
convenience and more travel options to more places in the United States 
and around the world. Added to that is the reach of our Star Alliance 
partners, which will link passengers to a comprehensive network that 
will directly carry them to destinations around the globe in a way not 
currently possible.
    The transaction will enable consumers to enjoy the considerable 
benefits that travel on United will offer--benefits that will help 
simplify travel and make it as hassle-free as possible. Those benefits 
range from the convenience of single-carrier service and one baggage 
check-in to United's #1-rated Internet site, the best airport lounges 
in the industry, and a frequent flyer program--Mileage Plus--that 
delivers more opportunities to earn miles and many more destinations 
for award travel throughout the world.
    For our cargo customers, the transaction means new, single-carrier 
service to more efficiently move freight around the world.
    United will continue to serve all cities now served by US Airways. 
However, by no means will United simply offer status quo service. 
Enhanced service is the hallmark of this customer-driven merger. 
Passengers will benefit from 93 planned new non-stop flights. Of these, 
64 are domestic flights and 29 will be international flights. It is 
important to note that half of these 93 flights will be on routes where 
no airline provides non-stop service today. On domestic routes, for 
example, consumers will benefit from planned new non-stop flights 
between Pittsburgh and San Jose, Calif.; Washington Dulles and Orange 
County, Calif.; Raleigh-Durham, N.C. and San Francisco, Calif.; Austin, 
Texas and Charlotte, N.C.; Denver, Colorado and Ft. Lauderdale, Fla.; 
and between San Francisco, Calif. and Tampa, Fla. Portland, Oregon will 
receive new non-stop service to Philadelphia, Pittsburgh and Charlotte.
    For United passengers, the merger will create new, single-carrier 
service to 93 destinations and add about 5,000 routes to the network. 
For U.S. Airways passengers, the benefit is even greater--new, single-
carrier service to 145 destinations and an additional 7,000 routes.
    United also plans to introduce daily non-stop service to other 
international destinations as well. For example, from Dulles, our plan 
is to offer the only daily non-stop flight from Washington to 
Copenhagen and, subject to government approval, the only daylight 
service to London Heathrow. In Boston, United plans an additional daily 
flight to Frankfurt and the only daily non-stop service to Tokyo. And 
from Denver, we plan to offer new service to London Gatwick.
    I would like to share another example of how our merger will 
improve the competitive landscape for consumers. The transaction will 
strengthen Charlotte's competitive position as a hub in the 
southeastern United States. Charlotte will become an important, 
competitive alternative to Atlanta and give the city and its businesses 
greater access to key domestic and global trade centers. It will also 
make it easier for Charlotte passengers to travel to Latin America, 
Asia, Europe and other destinations around the world on United and its 
Star Alliance partners.
    The strength of the Charlotte hub as a competitive counterbalance 
will be enhanced by new non-stop service we plan to offer. That new 
service includes new non-stop service to three cities--Portland, 
Oregon, Austin and San Antonio--as well as additional non-stop flights 
to Denver, Seattle and San Francisco. In all, United plans to provide 
non-stop or one-stop service from Charlotte to 215 cities in the United 
States, Canada and Mexico as well as to 34 other international 
destinations.
    In addition to injecting new competition into the domestic market, 
the merger will also benefit consumers by enhancing competition in 
international markets. US Airways' system will enable United to serve 
transatlantic, Latin and Caribbean routes more effectively. The 
transaction will significantly enhance the ability of US Airways' hubs 
in Pittsburgh, Philadelphia and Charlotte to grow and compete.
    Like consumers, communities served by United and US Airways 
similarly will benefit from this merger. As the Committee knows, air 
service is an engine for commercial activity. This is especially true 
in the increasingly global economy that is creating commercial 
opportunities literally worldwide. Planned new service and improved 
access through United's global network will benefit communities by 
stimulating economic activity, spurring tourism and facilitating new 
commercial opportunities.
    For instance, Pittsburgh will gain significant new single-carrier, 
one-stop service to the Asia/Pacific region as a result of this 
transaction. That service will act as an air service trade bridge 
creating new commercial opportunities for western Pennsylvania. The 
same is true for Philadelphia and eastern Pennsylvania, which will 
benefit from five new daily non-stop flights to international 
destinations that include Brussels, Frankfurt and Amsterdam.
    Examples of direct and indirect economic benefits for communities 
resulting from improved and expanded air service access range from new 
export opportunities to increased foreign investment to tourism. 
Sometimes such beneficiaries can be far removed from the airline 
industry. For instance, I understand the Maine and Massachusetts 
seafood industries may benefit as a result of gaining quicker and more 
efficient access to the Japanese market through our planned new, non-
stop access to Tokyo via Boston. Such community and regional economic 
benefits are inextricably linked with improvements in air service.
    This discussion of the benefits of the transaction for communities 
must address an issue of great importance to this Committee--its impact 
on small community air service. At the root of the merger is our goal 
to build a truly national airline network that will carry passengers as 
conveniently and efficiently as possible. Small communities are an 
important part of both United's and US Airways' networks. The same will 
be true for our combined network.
    Let me assure the Committee that United will maintain its firm 
commitment to provide the best small community air service possible. We 
understand how critical access to the national air transportation 
system is for smaller cities. We also recognize that small community 
air service is an important economic development issue for many small 
cities and some states.
    As the largest provider of Essential Air Service in the U.S., 
United has firsthand experience knowing how vital a link to the 
national air transportation system is for smaller cities. However, we 
are not limiting ourselves to that distinction. United is already 
delivering on its promise to expand our service to communities. Thanks 
to this Committee and this Congress, the easing of High Density Rule at 
Chicago O'Hare has allowed us to add flights from O'Hare to a number of 
small and medium-sized communities. United Express recently introduced 
service to Springfield, Ill. And by October, we will be offering 22 new 
daily United Express flights--mostly on regional jets--to destinations 
that will also include Tulsa, Okla., Columbia, S.C., and Little Rock, 
Ark.
    Passenger feed into our system from small city markets is critical 
to the efficient operation of our network. To put it succinctly, our 
network relies on passengers from small city markets and therefore we 
have an important stake in ensuring that our small community air 
service remains as vibrant and efficient as possible. The network 
efficiencies resulting from the merger will better position United to 
fully capitalize on opportunities in small city markets. For instance, 
we plan to give consumers in Charleston, S.C., new travel options by 
introducing one-stop service to three cities--Portland, Oregon, Austin 
and San Antonio--and additional one-stop service to three other 
cities--Denver, Seattle and San Francisco. Other small cities like 
Bangor, Maine, will gain new one-stop, single-carrier service to 
important international destinations such as Tokyo. Simply put, as our 
network expands and strengthens, our ability to serve small city 
markets improves.
    Finally, the merger is in the best interest of the U.S. economy. 
There is no doubt that the airline industry is a major contributor to 
our nation's economy and its prosperity. Besides its own direct 
spending and employment, our industry also contributes significantly to 
the creation of earnings and jobs in every major sector of the economy. 
A study by the Air Transport Association found that the U.S. airline 
industry generated $273 billion in economic activity in 1998 through 
direct, indirect and induced expenditures. Each dollar spent directly 
by the airlines produced another 2\1/2\ dollars in economic activity.
    Recently, there have been a number of press reports indicating 
possible consolidation in the airline industry in Europe and elsewhere. 
Airlines are not seeking to get bigger solely for the sake of size 
alone. That is not the case at all. As with this transaction, airlines 
are being forced by the marketplace to build the strongest and most 
comprehensive route structure possible to compete effectively in the 
global economy. As Clyde Prestowitz, the President of the Economic 
Strategy Institute, explained in Congressional testimony just last 
week, our transaction ``reflects the reality that the airline industry 
is not immune to the impact of globalization.'' To respond to 
consumers, airlines are seeking to build the strongest and most 
efficient networks possible.
    Since the airline industry is global in scope, it is in the 
national interest to ensure that our carriers are not placed at a 
competitive disadvantage vis-a-vis foreign carriers that are permitted 
to optimize network-operating efficiencies. Mergers such as ours should 
be considered with an open mind on a case-by-case, fact specific basis.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify today. As I have said, we strongly believe this 
transaction should be approved. It is in the best interest of 
consumers, communities served by both carriers and the U.S. economy. I 
would be pleased to respond to any questions.

    The Chairman. Thank you, Mr. Goodwin.
    Mr. Wolf, welcome.

       STATEMENT OF STEPHEN M. WOLF, CHAIRMAN, US AIRWAYS

    Mr. Wolf. Mr. Chairman, Mr. Hollings, on behalf of the 
entire US Airways family I appreciate the opportunity to be 
here this morning.
    I had prepared comprehensive remarks.
    The Chairman. I would ask that you pull the microphone a 
little closer, please.
    Mr. Wolf. Although when I submitted my testimony, I had 
prepared comprehensive remarks, I thought insightful remarks 
for today's hearing, but as I read them earlier this morning, I 
concluded I had missed the mark. They did not respond to the 
many comments I heard from Members of Congress over the past 
week to 10 days.
    Those comments fell into very broad categories, but in all 
cases they were tinged with angst, real angst, sincere angst: 
What is the business, how does it work, why is this happening 
and, importantly, what does it mean for my constituents, and in 
4 minutes I am going to try to answer.
    The Chairman. Mr. Wolf, please take as much time as you 
wish to consume. That is true for the other witnesses as well.
    Mr. Wolf. Thank you, Senator.
    What is the business? Above our obvious understanding, it 
has the four characteristics that you never want in your 
business. It is capital-intensive, labor-intensive, exceedingly 
complex, and phenomenally competitive.
    Capital intensity, $175 million to buy one airplane, to fly 
maybe 12 hours a day. Labor intensive, hundreds and hundreds of 
job categories merely to get one aircraft out on time and the 
bags on board and to its destination safely. Exceedingly 
complex, computer systems for inventory parts through tracking, 
aircraft availability, et cetera, beyond man's ability to 
almost deal with, and indeed, phenomenally competitive. I do 
not think I need to speak about that.
    Why is this happening, this merger between US Airways and 
United Airlines? From US Airways' perspective it is happening 
for two reasons. One is a push reason, and one is a pull 
reason.
    First, the push reason. My concern when I joined the 
company 4 years ago was not about its then-precarious financial 
condition, its absence of strategic direction, its fleet plan 
that was somewhat unexplainable. My concern 4 years ago when 
joining the company was, was there room long-term for a mid-
sized mature cost carrier in the country, recognizing there 
were six when deregulation came into being, and there was only 
one remaining.
    Braniff, Eastern, Pan American had gone away, and 
Continental and TWA had each gone through bankruptcy twice and 
in the process dramatically altered their cost structure. There 
was one remaining mid-sized mature cost carrier left, and the 
question remains, the pull reason, the communities we serve and 
the consumers who live there wanted access to a large online 
network with all of its associated benefits.
    Two anecdotal comments. I was in my job for 4 or 5 weeks 
when Governor Ridge from Pennsylvania was in Washington and 
came to see me, and the upshot of that conversation was, he 
wanted me to provide long-term online nonstop service, or at 
least one-stop service throughout the Pacific.
    The second anecdotal comment was, some 10 weeks ago when we 
initiated nonstop service from Charlotte to Paris, Governor 
Hunt came over on the trip, along with a group of economic 
delegates from the State, and at a reception we hosted that 
night, Governor Hunt said to me, Steve, if there is anything 
you can do for us, at the top of my list is online non-stop or 
one-stop service to Latin America.
    Now, I did not really tell them at the time that I doubted 
within their natural life we would be able to provide it. I did 
tell them we would do everything in my power to do so, and this 
transaction gives Governor Ridge one-stop service from 
Pittsburgh and Philadelphia to Hong Kong, Tokyo, Seoul, 
throughout the Pacific, and it gives Governor Hunt of North 
Carolina one-stop service throughout Latin America, Buenos 
Aires, Sao Paulo, Rio de Janeiro, et cetera.
    Importantly, in this transaction, our unit cost, US 
Airways, the highest in the industry, becomes dramatically 
lower, and indeed enables us to compete and become a viable 
carrier long-term, all under the banner of United Airlines.
    How does the business work? Hubs compete with hubs and in 
the process bring enormous consumer benefit, although this is 
clearly not understood. One example, we fly from Buffalo to 
Pittsburgh four times a day.
    In Pittsburgh we run off US Airways' hub complexes, where 
we have 508 flights per day. There are 24 passengers per day 
who fly from Buffalo to Pittsburgh. On average, we have six per 
flight, but as a result of our hub complex in Pittsburgh, where 
we have a product offering in Pittsburgh than is far greater 
than you could economically justify in the city of Pittsburgh, 
Pennsylvania, we are able to offer those flights because on 
those flights we not only sell Pittsburgh we sell a host of 
connecting cities.
    We compete vigorously in Buffalo for not only the 
Pittsburgh passenger, but even more so for the connecting 
passenger, and we compete against every network carrier in the 
country in Buffalo for those on-board passengers.
    Why do we fly Charleston, South Carolina to Charlotte eight 
times a day? There are only 34 people who want to go there. We 
have about four passengers, on average. We do it because we run 
a big hub in Charlotte, just short of 500 departures a day, on 
which they can connect and go onward.
    For the first time, passengers traveling between 515 city 
pairs will have a choice of online carriage all the way 
through. 4,943 city pairs will have online service for the 
first time, 103 new flights will be added almost immediately, 
mostly transcontinental and international. Indeed, providing 
our Charlotte hub, as an example, with new service to Austin, 
San Antonio, and Portland, Oregon, along with Aruba and 
Barbados will, indeed, enable Charlotte to compete in a more 
aggressive fashion with Atlanta.
    Fares. Boy, do they get their attention, and they should. 
At the time when deregulation came into being there was first, 
economy, night coach, and family fares. That was effectively 
it. Today, fares are far more complex and far more prolific 
than one can even imagine, all designed to attract the last 
remaining passenger.
    The industry had 68,000 fare changes yesterday. US Airways 
had 8,000 fare changes yesterday, each one of those designed to 
attract the last possible passenger onto their system.
    Service. It is the best commercial aviation service in the 
world, and does it have its warts? Of course it does. Do we 
misconnect a bag? Are the lines too long? Did we get the 
special meal on board? Not in all cases, but for the 600-plus 
million Americans who flew last year--excuse me, passengers, it 
worked for the vast, vast majority of them. It is the best 
system in the entire world, and when we spend some money on 
infrastructure, it is going to get even better.
    What does it mean? None of us could have predicted 20 years 
ago that Southwest would be carrying more passengers than all 
but four airlines in the world today. The aviation marketplace 
today is global in scope. It demands ease of access to Beijing 
and Budapest as well as urgency of access to Sacramento and 
Knoxville, and hence United Airlines will lead the way in that 
new future with opportunities for communities across the 
country unlike anything we could provide or they could provide 
independently.
    Mr. Chairman, we have a unique opportunity, and we look 
forward to putting in place the first network of the 21st 
Century.
    Thank you.
    [The prepared statement of Mr. Wolf follows:]

      Prepared Statement of Stephen M. Wolf, Chairman, US Airways

    Chairman McCain, Senator Hollings and Members of the Committee, on 
behalf of the entire US Airways family, I appreciate the opportunity to 
be here this morning to discuss the proposed merger between United 
Airlines and US Airways.
    I have been reflecting on the many comments that have been made 
about this transaction by Members of Congress and others over the past 
week. I have heard how this endeavor somehow will reduce competition 
and therefore lead to less service and higher fares. I have heard how 
it will trigger a wave of other mergers and how it will cost employees 
their jobs. I have heard how DC Air is not a real carrier and that 
slots at Reagan National Airport should go not to a new entrant but 
should be redistributed to existing carriers.
    Mr. Chairman, you have a reputation for plain speaking and for 
going to the heart of a matter regardless of the consequences. If you 
will allow me, I would like to be similarly direct on the issue before 
us today.
    The hue and cry we have heard--which I am sure has been well-
meaning--has been largely anecdotal and when held to the light of day, 
will be shown to reflect sincere if misplaced frustration over fares 
that people perceive to be too high and service that people perceive to 
be too low. These issues clearly are important, but the central issue 
before us today is: Will the merger of US Airways and United Airlines 
benefit consumers?
    Mr. Chairman, the fact of the matter is that this merger will bring 
overwhelming new opportunity and competition to scores of communities 
across this country by creating significantly expanded service options 
and greater consumer choice. It will bring new job opportunities and 
economic growth to these communities and a new competitive vigor to 
U.S. air carriers as they enter an era of heightened competition in 
domestic and international air travel.
    Mr. Chairman, as a result of this merger:

   37 communities will gain direct access to the vast United 
        national and international system that they do not have today. 
        Communities like Bangor, Maine; Erie, Pennsylvania; and 
        Asheville, N.C. will instantly experience a major increase in 
        their service options.

   For the first time, passengers traveling between 515 city 
        pairs will have a choice of on-line carriers. For example, 
        today, a passenger traveling between Albuquerque and Augusta, 
        Georgia, has a choice only of Delta; between Flint, Michigan 
        and Sacramento, only Northwest; and between Myrtle Beach, South 
        Carolina, and Portland, Oregon, only Delta. After this 
        transaction, there will be two choices.

   4,943 new city pairs will have on-line service for the first 
        time. While many of these involve small communities with 
        limited traffic today, the added opportunity of new service can 
        only mean an increase in the number of passengers choosing to 
        fly. Examples include Bangor, Maine to Anchorage, Alaska; 
        Myrtle Beach, South Carolina to Palm Springs, California; and 
        Fargo, North Dakota to Sarasota, Florida.

   103 new flights will be added, almost all of them 
        transcontinental and international, providing our Charlotte 
        hub, for example, with new direct service to Austin, San 
        Antonio and Portland, Oregon as well as new service to Aruba 
        and Barbados, giving it a stronger platform to grow and compete 
        with Atlanta. Philadelphia's already extensive international 
        service will grow with flights to Brussels and Amsterdam.

   In the face of the overwhelming presence of foreign carriers 
        serving our markets, this transaction enhances United's 
        competitive position. For example, our hub cities of Charlotte, 
        Philadelphia and Pittsburgh will now be only one stop away from 
        Tokyo, Hong-Kong and Seoul to the west as well as Buenos Aires, 
        Santiago and Sao Paulo to the south. This is an enormous 
        advancement in their patterns of service.

    And, Mr. Chairman, all of this will be done with a job guarantee 
and all will be done with a two-year fare freeze.
    If one steps back and looks at the fare issue, in 1977, just prior 
to deregulation, more than 240 million people flew on U.S. air 
carriers. Last year, U.S. carriers carried more than 635 million 
people. Those numbers alone attest to the widespread availability of 
affordable air travel.
    I well understand that there is no issue as sensitive as air fares 
and I have seen the charts and graphs Members have displayed over the 
past week of hearings. Yes, airfares ARE complex today, but this 
reflects the competitive nature of this industry. Under regulation, we 
had a simplified fare structure characterized by uniformly high fares. 
Congress' decision to deregulate led to intense price competition, 
resulting in an array of fares and greater consumer choice. The reality 
is that there has been a 44 percent decrease in average fares since 
1977, the last year prior to deregulation.
    Lower fares are the direct result of the efficiencies and the 
intense competition built into the far-reaching networks that have been 
created over the past two decades--efficiencies and competition that 
would be enhanced by this transaction. And this doesn't even begin to 
take into account the enormous impact of the Internet in giving 
consumers instant access to appealingly low fares for an 
extraordinarily wide array of travel.
    There have been suggestions that this industry will move to three 
or four or five network carriers--a future I for one do not have the 
wisdom to predict. But under any of these scenarios, this industry will 
continue to be characterized by intense competition. In fact, it would 
be enhanced in other ways beyond network competition. Just as DC Air is 
a new entrant by-product of the US Airways-United merger, it is 
inevitable that there would be other opportunities for new entrants and 
low-fare carriers as gates and other facilities are divested.
    These would add to the pool of aggressive carriers that have 
learned from past failures and today provide an added level of 
competition--carriers such as America West and Frontier, JetBlue and 
AirTran, Spirit and Legend and, of course, Southwest, which now is the 
fifth largest airline in the world in terms of passengers carried and 
growing rapidly into a national carrier of immense scope with the 
highest market capitalization of any U.S. carrier.
    For US Airways and the customers and communities it serves, this 
transaction offers an instant solution to the question of long-term 
competitiveness. US Airways is the smallest of the six major network 
carriers. Yet we have the highest costs in the industry.
    We already have seen what has happened to other mid-sized, mature-
cost carriers operating at the beginning of deregulation. Braniff, 
Eastern, and Pan Am no longer exist and two others, Continental and 
TWA, exist only after having gone through bankruptcy twice.
    In this environment, to provide our consumers with the truly 
national and global service they demand, we have to join with a partner 
that has a more extensive scope, breadth and reach. With a route 
network that primarily complements ours, a merger with United Airlines 
is the right thing to do. The result will be more jobs, more growth, 
and greater economic development for the communities we serve.
    And we have taken steps to ensure that US Airways' service to 
numerous medium and smaller sized cities from our nation's capital 
would continue through a new entrant carrier, DC Air.
    Some have argued that the slots at Reagan National should be put up 
for auction. This was considered but I firmly believe it would be the 
wrong solution. Make no mistake about it, history clearly shows that as 
airlines acquire slots at Reagan National, they use those slots in a 
way that is most profitable to them. That means serving National from 
their hub or hometown airports with additional frequencies. If US 
Airways' slots at Reagan National are redistributed piecemeal to 
incumbent carriers who will use that access to add more frequencies to 
Washington from their principal network cities, there will be an abrupt 
and painful loss of service to smaller communities such as Portland, 
Maine; Charleston, West Virginia; Columbia, South Carolina, and 
Burlington, Vermont.
    Instead, Bob Johnson, a person of impeccable business credentials, 
has pledged to continue service to all 43 cities now served from 
National and to improve it through the addition of more jet aircraft.
    In closing, allow me to step back for a moment and reflect upon 
this business of which I have been privileged to have been a part for 
more than three decades.
    Other than the world of the computer, I can't think of another 
industry that has been more dynamic and more vibrant than the world of 
aviation. It is a dynamic business driven by competition and change.
    Just as none of us could have predicted 20 years ago that Southwest 
would be carrying more passengers than all but four other airlines in 
the world, neither can we judge this latest evolution of the system 
within the framework of 1980. The aviation marketplace today is global 
in scope. It demands ease of access to Beijing and Budapest with the 
same urgency as to Sacramento and Knoxville. The world has never been 
more interconnected than it is today. Goods and services flow across 
borders and oceans with speeds and ease unimagined only 20 years ago. 
If our aviation system is to remain the envy of the world, we must look 
ahead, further into the 21st Century, not backward.
    The enhanced United Airlines will lead the way into that future, 
bringing with it opportunity for communities all across this nation. At 
the same time, the nature of its evolution will enhance not only 
competition among the major networks but also the entry of new carriers 
that has been one of the key transforming features of the era of 
deregulation.
    Mr. Chairman, we have a unique opportunity, if only we have the 
courage and wisdom to seize it.
    Thank you for allowing me to share my thoughts with you today.

    The Chairman. Mr. Johnson, welcome. Take the microphone, 
please.

    STATEMENT OF ROBERT L. JOHNSON, CHAIRMAN AND CEO, DC AIR

    Mr. Johnson. Chairman McCain, Senator Hollings, and members 
of the Committee. I thank you for the opportunity to be here 
this morning. I am the founder and chief executive officer of 
BET Holdings, a multimedia company whose principal business is 
the operation of the BET cable network, a 24-hour basic cable 
programming service that reaches 60 million cable households 
across the country. From an initial investment of $\1/2\ 
million by TCI in 1980, BET celebrates its 20th anniversary 
with a market cap of approximately $2\1/2\ billion, and is a 
preeminent business serving the entertainment and information 
needs of African Americans.
    I own 65 percent of the equity of BET Holdings. In addition 
to being a member of the board of directors of US Air, I also 
serve on the board of directors of Hilton Hotels and General 
Mills, and of course the United Negro College Fund.
    Mr. Chairman, last week I testified at two hearings before 
the House and Senate. The issues raised in both hearings 
concern my plan for building a competitive new airline based 
here in Washington, D.C. called DC Air. They were limited to a 
few key concerns, and let me take this opportunity to address 
them now for this Committee.
    First of all, I was asked if DC Air, a regional carrier 
which will serve 43 cities from Washington Reagan National 
Airport, can be competitive. It absolutely will be competitive.
    I am purchasing from United the slots to allow me to serve 
routes that US Airways has served profitably for in some cases 
as many as 50 years, and my costs will be lower than US 
Airways' or United's, because I am starting an all-jet carrier 
focused on D.C. that would not have the burdens or complexity 
or mature cost structure that US Airways has. DC Air will be 
competitive on both price and service with anyone who flies to 
Washington, D.C., Dulles Airport or BWI.
    I was also asked if DC Air would be truly independent. 
Would it be a truly independent carrier that would provide 
competition, with some concerns being raised by the memorandum 
of understanding with United Airlines because it provides 
transition service.
    Let me make the point here, 3 million people depend on the 
US Air routes to get back and forth to D.C. On the day that 
this transaction closes, if it is consummated, those same 3 
million people annually will look for this service to be there. 
In order for any new entrant, myself or anyone, to provide that 
service, we have to have a transition operation that can fly on 
day 1, and this arrangement I have with United will provide for 
that.
    It is an arrangement that I have the right to escape from 
on 4 months' notice, 4 months' notice to United Airlines, and 
it is an incentive for me to escape that arrangement, because I 
am paying higher costs for those services, so I have negotiated 
these transition services because I plan to run a full-fledged 
operation with 37 aircraft serving 43 cities on day 1.
    We are ready to begin discussions with other major airlines 
such as American, Delta, Continental, and Northwest to seek out 
partnering opportunities such as code-sharing and frequent 
flyer arrangements. We see these as beneficial to our 
passengers, who would be able to earn frequent flyer miles in 
the major airlines program while flying DC Air. We believe our 
services at National Airport will be perceived by these 
carriers as desirable features of their extended networks.
    I was also asked if this is a sweetheart deal, and I 
responded, if it is, it is a very expensive sweetheart. I am 
paying fair market value for the assets I purchased. Not only 
am I paying fair market value, I plan to invest hundreds of 
millions of dollars in jet aircraft, and I am paying market 
rate for every service I am buying. I am putting $200 million 
of my own money into this venture, and I am not doing it to 
help Steve Wolf or Jim Goodwin out of the goodness of my heart.
    And Senator Hollings, I think you are right, I think Vice 
President Gore desperately wants to be President, but I think 
his desperation pales in comparison to my desire to get a 
return on my $200 million. I am not doing this to curry favor 
with anybody. I am doing this because I have a history of 
creating value, and I have created value to the tune where 
today I have a personal net worth of $1.65 billion. I am not 
mad at my money. I am putting money into this venture because I 
believe it will be a competitive and profitable opportunity for 
me.
    I was asked why I felt that I should be the recipient of 
222 valuable slots at Washington Reagan National Airport. Well, 
my answer to that is, why not me? I am certainly capable in 
putting together the finances to acquire and operate this 
airline. I am certainly capable of hiring the best and 
brightest talent to run this airline, and I can be as 
competitive in operating this airline as anyone in this room, 
including the gentleman on my right and the gentleman on my 
left, and so I say why not a new entrant, and if that new 
entrant is DC Air, I want to be the one to operate it.
    One thing I will add, though, if these slots are sold off 
in an auction process I believe these slots will be sold to the 
highest bidders that will certainly not use these slots to fly 
to the small and mid-size cities that DC Air will serve, 
communities such as Portland, Maine, Knoxville and Nashville, 
Tennessee, Charleston, Columbia, and Greenville, South 
Carolina, and Charleston, West Virginia, and Providence, Rhode 
Island, just to name a few. Instead, they will be used to 
increase existing service to other airline hubs.
    And on the contrary, I am a resident of Washington, D.C. I 
have lived here for almost 30 years. I pay a huge amount of 
taxes here. BET is located in Washington, D.C. in one of the 
most depressed neighborhoods of this community. I am committed 
to this community, and I am committed to the economic 
development of this community, and DC Air will be Washington's 
home town carrier.
    The communities we serve from Washington, D.C. will not 
just be another spoke in a carrier's vast hub and spoke 
network. They will be our entire business.
    I was asked what impact the transition from US Airways to 
DC Air would have on the service to the communities we serve. 
The answer is simple. It will improve.
    Today, one third of the service provided to these 
communities are turboprops, while two-thirds are jets. On the 
day of DC Air's operations we will increase to 75 percent jet 
service, and we will move as rapidly as possible, subject to 
aircraft deliveries, to 100 percent jet service for all of 
these communities.
    I was asked what sort of employer would I be. I fully 
expect DC Air to be a union carrier. I intend to foster strong 
employee relations with all employees, because that translates 
into great service for our customers, and great service is what 
DC Air will be about.
    So in summation, my vision for DC Air is straightforward: 
to build on the well-established East Coast service that 
Washington Area passengers have come to rely on from Washington 
National Airport, to provide safe, reliable high quality 
service at competitive prices to customers in the 43 
communities we serve, to compete vigorously on price and 
service in the markets we serve, to facilitate the growth and 
economic development at our company's air service, and to 
develop and maintain an airline that the Washington community 
will be proud to call its home town carrier.
    Thank you very much.
    [The prepared statement of Mr. Johnson follows:]

   Prepared Statement of Robert L. Johnson, Chairman and CEO, DC AIR

    Mr. Chairman, Senator Hollings, and Members of the Committee, my 
name is Robert Johnson. I am founder and Chief Executive Officer of BET 
Holdings, Inc., a multi-media company whose principal business is the 
operations of the BET Cable Network, a 24-hour basic cable programming 
service that reaches 60 million cable households.
    From an initial investment of $500,000 by Tele-Communications, Inc. 
in 1980, BET Holdings celebrates its 20th Anniversary with a market 
capitalization of approximately $2.5 billion dollars and is the 
preeminent business serving the entertainment and information needs of 
African Americans.
    The recently announced acquisition of US Airways by United Airlines 
has created for me another historic and exciting opportunity. I have 
agreed to purchase certain assets currently operated by US Airways out 
of Reagan National Airport and will be launching DC Air. I do so not to 
create an African American owned airline, though it will be that. I do 
so not just to make sure that air transportation remains competitive, 
though I will do that. Rather, I do so to build a great and successful 
company that I believe with all my heart will benefit the Washington 
area, offer high quality service and value to passengers traveling to 
and from DC, and make us all proud that ``our airline'' is the best to 
fly.
    My vision for DC Air is straightforward:

   to build on the well-established East Coast service from 
        Washington's National Airport that Washington-area passengers 
        have come to rely on;

   to provide safe, reliable, high-quality service, at 
        competitive prices to customers and communities in this area;

   to compete vigorously on price and service in the markets we 
        serve;

   to facilitate the growth and economic development that 
        accompanies air service; and

   to develop and maintain an airline that the Washington 
        community will be proud to call its hometown carrier.

    In terms of its development and its creation, DC Air is a product 
of the United/US Airways merger, and that is great news for consumers. 
Why?
    The creation of a new airline is no small task in this intensely 
competitive industry. New entrant carriers face numerous obstacles such 
as high, fixed start-up costs, the lack of a strong identity, and an 
unproven route structure and business plan. DC Air, however, is not a 
typical airline startup company. Benefiting from the experience and 
expertise of United and US Airways personnel, we intend to build upon a 
proven network anchored at Washington's National Airport. DC Air will 
be a viable and totally independent competitor from Day One. At the 
same time, it will avoid the mistakes and pitfalls that often confront 
and, in many cases, overwhelm new entrant carriers in this industry. DC 
Air will be the largest carrier (measured by number of departures) at 
Washington's premier, close-in airport, offering 111 daily departures, 
flown by 37 aircraft, serving 43 airports, extending as far as Maine, 
Florida, and Kansas City. And as DC Air develops, we will assess 
opportunities to expand service to additional communities.
    For over several decades in some cases, great American cities like 
Albany, Allentown, Birmingham, Buffalo, Burlington, Charleston, 
Columbia, Greensboro, Greenville, Huntsville, Knoxville, Lewisburg, 
Manchester, Morgantown, Norfolk, Roanoke, Rochester and Syracuse, among 
others, have enjoyed nonstop air service to the heart of the nation's 
capital. These communities have relied upon this extensive service 
network, which has provided significant commercial, trade, economic 
development, and governmental relations benefits for these important 
cities.
    The network has been maintained during periods of economic growth 
and recession, during harsh winters and humid Washington summers. 
Sustained service to many of these cities is made possible by the 
efficiency of a network that is centered at the beautifully renovated, 
convenient Ronald Reagan Washington National Airport.
    DC Air is fully committed to sustaining and enhancing this network 
of service that links these critical American cities to our nation's 
capital. As a new entrant, DC Air will provide frequent, competitively 
priced air service, ultimately with an all-jet fleet. Retaining the 
synergies of the current route system is absolutely vital to ensure the 
important access for these communities to Washington, D.C.
    History clearly shows that as air carriers acquire the coveted, 
valued slots at Washington National, they use those slots in the most 
profitable way--in service to their hometown hub cities. In fact, 
excluding US Airways, the principal U.S. carriers serving National 
Airport only do so from their hubs or focus cities: America West from 
its hub in Columbus, Ohio; American from its hubs and international 
gateways in Chicago-O'Hare, Dallas, New York-JFK, and Miami; 
Continental from its hubs in Cleveland, Newark, and Houston; Delta from 
its hubs in Atlanta, Cincinnati, and Dallas, its New York-JFK 
international gateway, and its Delta Shuttle cities, New York-LaGuardia 
and Boston; Northwest from its hubs in Detroit, Memphis and 
Minneapolis; TWA from its hub in St. Louis and its New York-JFK 
international gateway; and United from its hub in Chicago O'Hare and 
its Miami international gateway.
    Only US Airways, the current hometown, Washington-based carrier, 
offers breadth of service to the Washington passenger, serving not just 
its hubs in Charlotte, Philadelphia and Pittsburgh, but also 46 
additional communities each day. That is why the creation of the 
hometown D.C. carrier is so critical to the preservation of a route 
system that has served medium and small cities throughout the eastern 
United States for so many decades. That is why the merger proposal 
reflects the strong conviction of each of the three principal players 
that not only must competition be preserved in the D.C. metropolitan 
area, but that new competition must come in the form of a carrier able, 
willing, and completely dedicated to preserving and enhancing the 
existing network of service upon which the citizens of so many of these 
cities have come to rely.
    The prospects for vigorous new competition and improved quality of 
service to these communities are boundless. DC Air is up to the 
challenge and is eager to assume the historic commitment to these great 
American communities by providing safe, reliable, high-quality service 
with outstanding employees.
    I appreciate that the airline industry is unique in many ways, and 
I further appreciate that the industry is highly unionized. I welcome 
all employees--whether union or non-union--to the DC Air family. My 
plan is to provide fully competitive compensation and benefits 
packages, while fostering an environment of participation and common 
goals for all our employees. This plan, I believe, will result in high 
job satisfaction among DC Air employees, which, in turn, will translate 
into the top-quality service our passengers should expect and demand.

Startup of Operations
    To assist in shaping and realizing the vision of DC Air, Bruce 
Ashby has been named acting President of DC Air. Bruce has 14 years of 
airline experience, most recently with US Airways, where he held the 
position of senior vice president--corporate development. Prior to 
that, he held the positions of senior vice president--planning and vice 
president--financial planning and analysis. Before joining US Airways 
in April 1996, he held corporate officer positions at Delta Air Lines, 
where he was vice president of marketing development, and at United 
Airlines, where he was vice president of financial planning and 
analysis and vice president & treasurer. Bruce played a key role in the 
formation of three ``airline-within-an-airline'' units: MetroJet by US 
Airways, Delta Express, and Shuttle by United, all of which were 
successfully launched and grown by these respective carriers, and 
continue to operate today. Bruce's broad background at a senior 
management level in the areas of airline finance, planning, marketing, 
operations, and labor negotiations will prove invaluable to DC Air.
    As I mentioned earlier, unlike a typical airline startup, which 
might begin with one or two airplanes flying one or two routes, DC Air 
will be a fully operational airline serving 43 communities from 
National Airport with 111 daily departures. This plan brings important 
consumer benefits, by providing nonstop service and a new, competitive 
force to the 43 communities that we plan to serve, 36 of which are 
served from Washington's Dulles airport as well.
    To enable this level of startup, DC Air has entered into a 
memorandum of understanding with United Airlines, as part of the 
proposed United-US Airways merger, that will provide DC Air, from Day 
One, with the hard assets it requires to mount its operations. These 
include 222 departure and arrival slots at Washington National Airport; 
necessary gates and related airport facilities, for which DC Air will 
assume the leases; and the operations of one of its commuter airline 
subsidiaries, including the management staff, turboprop aircraft, and 
related assets. In addition, during a brief transition period in which 
DC Air will build its own fleet, United will ensure near-term aircraft 
availability through customary contractual ``wet-lease'' relationships 
for up to ten B-737-200 aircraft and up to 19 regional jet aircraft. In 
short, DC Air will have the necessary people, aircraft, and airport 
rights and facilities from Day One.
    In addition to the Day One hard assets, United has agreed in the 
memorandum of understanding to provide DC Air, if DC Air so requests, 
with certain supporting services at market rates. These services are 
typically purchased by airlines, and include items such as fuel, 
occasional use gate agreements, station-handling contracts, and 
standard industry interline ticketing and baggage agreements. DC Air is 
free to purchase any and all of these services on the open market from 
the numerous other providers of such services.

It is critical to appreciate that none of these understandings 
        compromises DC Air's independence.
    We are rapidly moving through the process of turning the vision of 
DC Air into an operating reality. We have begun discussions with 
aircraft manufacturers in order to build our long-term all-jet fleet of 
aircraft. We are drafting the definitive documentation with United 
Airlines to implement our memorandum of understanding. We will soon be 
entering into detailed discussions with the DOT and FAA to obtain the 
required permits and certificates. And, we are engaged in working with 
the federal, state and local governments and community leaders to 
ensure that their needs are met.
    In addition, we are ready to begin discussions with other major 
airlines, such as American, Delta, Continental and Northwest, to seek 
out partnering opportunities such as code-sharing and frequent flyer 
arrangements. We see these as beneficial to our passengers, who would 
thus be able to earn frequent flyer miles in these other major airline 
programs while flying DC Air. We believe our service at National 
Airport will be perceived by these carriers as a desirable feature of 
their extended networks.

Service
    DC Air's initial aircraft fleet will be composed of turboprop 
aircraft operated by DC Air employees, plus 19 regional jets obtained 
through an industry contractual relationship with current US Airways 
affiliates and 10 Boeing 737-200s obtained through a wet-lease 
arrangement with United Airlines.
    Currently, the markets that DC Air will serve are flown by US 
Airways with 34% turboprop departures and 66% jet departures. Of the 
111 daily departures to be flown by DC Air, 25% will be turboprops and 
75% jet departures. We will move to an all-jet fleet of aircraft over 
the first few years of operation; ultimately 100% of DC Air's service 
will be flown by jets.
    DC Air intends to retain service to the communities it serves. One 
of the key benefits that comes to the communities we serve is that we 
are purchasing from United all of the slots required to serve these 
communities. Were the slots to be divided up among several larger 
carriers, none of these carriers would have sufficient slots to serve 
all the communities and each would naturally tend to add service to 
high-volume markets, such as hubs and focus cities where they already 
have a significant presence. Conversely, DC Air is committed to 
continuing service to all of our mid-size and smaller communities, and 
its sole focus is on serving these communities with the highest quality 
operation. Access by these 43 cities to the heart of the nation's 
capital will be assured.

Competition
    DC Air will provide Day One competition to the Washington, DC area, 
with competitive pricing and high-quality service.
    DC Air will offer nonstop competition to larger incumbent carriers 
from National Airport in eight of its 43 markets: Atlanta, Georgia; 
Charlotte and Raleigh-Durham, North Carolina; Columbus, Ohio; Detroit, 
Michigan; Ft. Lauderdale, Florida; and Philadelphia and Pittsburgh, 
Pennsylvania. These constitute 22 of its 111 daily departures, or 19%. 
All eight of these markets are also served from Washington's Dulles 
airport.
    In addition, DC Air will compete in 28 markets with service 
currently offered from Dulles Airport: Albany, Buffalo, Rochester, 
Syracuse and White Plains, New York; Allentown, Pennsylvania; Hartford, 
Connecticut; Burlington, Vermont; Charleston, Columbia and Greenville, 
South Carolina; Greensboro, North Carolina; Charleston, West Virginia; 
Dayton, Ohio; Indianapolis, Indiana; Kansas City, Missouri; Nashville 
and Knoxville, Tennessee; Louisville, Kentucky; New Orleans, Louisiana; 
Norfolk, Richmond and Roanoke, Virginia; Portland, Maine; Providence, 
Rhode Island; and Jacksonville, Orlando, and Tampa, Florida. These 
constitute 70 of its 111 daily departures, or 63%.
    In seven of its markets, DC Air will face no direct competition at 
National or Dulles airports. These include two designated Essential Air 
Service markets (Lewisburg and Morgantown, West Virginia), as well as 
Birmingham and Huntsville, Alabama; Little Rock, Arkansas; Manchester, 
New Hampshire; and West Palm Beach, Florida. Washington's National 
Airport represents the only nonstop link for these communities to the 
nation's capital.
Summary
    DC Air is an airline that works. It works for our customers, who 
will receive top-quality service at competitive prices between 
Washington's premier airport and the forty-three other cities we plan 
to serve. It works for our many mid-size and small communities, because 
it will retain nonstop service to National from those communities that 
otherwise would likely be converted to connecting service over another 
carrier's hub. It works for our employees, who will enjoy the benefits 
of working for a competition-focused, all-jet carrier with a clearly 
defined mission. And it ensures that airline competition will grow and 
thrive here in Washington.

    The Chairman. Thank you very much, Mr. Johnson.
    Mr. Leonard, welcome.

STATEMENT OF JOSEPH LEONARD, CHAIRMAN AND CEO, AIRTRAN AIRWAYS, 
                              INC.

    Mr. Leonard. Mr. Chairman, Senator Hollings, and members of 
the Committee, thank you very much for letting me be here this 
morning. Similar to Mr. Wolf and Mr. Goodwin, I have spent more 
than 30 years in aviation. In fact, I have spent all of my 
adult life in this industry. My experiences include running 
operations for Northwest and American Airlines. I was chief 
operating officer and president of Eastern Airlines, president 
and CEO of Allied Signal Aerospace Services Division, and for 
the past year-and-a-half I have been chairman and CEO of 
AirTran Airways.
    In that time, I have experienced some highs and some lows 
in the industry, and have learned a thing or two about 
competition. I am proud to say that I presided over the turn-
around and return to profitability of AirTran Airways. We have 
established a profitable low fare network by focusing on low 
cost and providing a safe, quality product.
    We currently operate 52 jets. We have taken delivery of 11 
brand-new 717's, which we were the launch customer for, and we 
have orders for an additional 39, which will be delivered at 
one a month over the next 3 years. This puts us in an enviable 
position to regulate our growth based on the economic 
conditions and market opportunities.
    To accomplish this, however, has not been very easy. It is 
a result of overcoming daunting bouts of anticompetitive 
behavior by major carriers and an array of barriers to entry 
that are so commonly employed to discourage genuine low fare 
competition. That is the key point, Mr. Chairman. The state of 
competition in the airline industry today is at best poor in 
terms of the type of competition that consumers benefit from 
the most, that being price competition. It is limited to those 
relatively few routes where carriers like AirTran Airways and 
Southwest Airlines compete.
    The big six do not compete on price today, and in fact the 
United and US Air combination will not change that fact 
materially. The big six already operate like the big three with 
code-sharing agreements and marketing alliances. The proposed 
merger will only formalize those relationships.
    From the perspective of someone that has been struggling 
against anticompetitive practices of the majors for sometime, I 
can tell you that it really does not matter if you are squished 
by the 800-pound gorilla or you are squished by the 1,100-pound 
gorilla. You are still squished and it still hurts.
    I believe that most of the critics of the merger will agree 
that the key provision is not whether it will help United and 
US Airways. It definitely will. It is also clear that the 
merger acknowledges the requirement to divest of the assets at 
Reagan National Airport. They have made that part of their 
proposal.
    The question is whether the proposed DC Air is a true 
divestiture. Will it result in meaningful competition and 
provide a remedy for competition resulting from the merger? I 
submit, based on the facts presented here, that the answer is a 
resounding no. Even a cursory review of the business plan 
clearly indicates that DC Air will not be independent, contrary 
to statements made.
    DC Air will lease aircraft from United, flight crews from 
United, maintenance facilities from United, maintenance crews 
from United, ground facilities from United, and participate in 
United's frequent flyer program, all under the direction of a 
current US Airways vice president. To affirm this control, 
United has placed very strict limitations on the sale or lease 
of slots at DCA, the primary asset of the new carrier. It is a 
very, very clever way to make sure that no real competition 
will enter the Washington metropolitan marketplace.
    Given the structure of the proposed new airline, DCA would 
have the highest cost in the industry. Perhaps in time DC Air 
will be able to achieve a more competitive cost structure and 
even reduce fares, but it certainly will not happen for years, 
if at all, and I doubt that it will be.
    Furthermore, in regard to FAA activity in this area, most 
new carriers these days are requiring a year-and-a-half or 2 
years to get certification, and the FAA has had a very dim view 
on virtual airlines, which this looks very much like, and both 
the FAA and the Department of Transportation in the past years 
have rejected similar proposals.
    So I do not know if there is a plan to give DC Air a 
special handling, but if it does not get special handling it 
will take a very long time to get this situation put together 
based on recent history of Legend Airways, Access Air, and 
others who have recently started.
    High cost and extensive use of smaller airplanes is not a 
realistic formula for low fare service. Clearly, no real 
competition and no consumer benefits will result from this new 
carrier. In fact, most markets will lose seat capacity as a 
result, so where is the public benefit?
    The new carrier will reduce capacity in key East Coast 
cities in accordance with their own schedule, but not add 
significant capacity in United's megahubs, such as Charlotte, 
Pittsburgh, or Chicago. The new carrier will not provide 
effective remedy to the lack of competition in the Northeast.
    Real competition comes from low cost carriers with quality 
service. AirTran Airways has been competing in Atlanta, and 
last year saved the consumers in that marketplace $700 million. 
Unlike most low fare carriers, we choose to compete in what 
would otherwise be a dominant hub, Atlanta, and while Delta 
still maintains a 72-percent market share versus our 8.5, the 
resulting price competition has made Atlanta the busiest 
airport in the world.
    Air fares in the market that we serve are 40 to 60 percent 
lower than other monopoly hub markets. In 1997, the DOT wisely 
granted AirTran exemptions to fly into La Guardia Airport, New 
York, and last year alone we saved New Yorkers $175 million as 
a result.
    One of the most significant markets not benefiting from low 
cost competition is Reagan National Airport. While nearly every 
airport in the country is seeing record boardings, Reagan 
National is actually shrinking. That is the result of lack of 
competition.
    Clearly there is no lack of demand for travel to 
Washington, but the outrageously high fares are suppressing 
that demand. Given the opportunity to compete at Reagan 
National with a network similar to that proposed by DC Air, we 
estimate the consumer benefit of a low fare network would 
easily exceed $600 million in the first year.
    The conditions of approval of this acquisition I believe 
must have provisions for real competition by independent new 
entry carriers. It will not surprise you that AirTran has some 
ideas about how to do that. We have included in our material a 
detailed plan to operate a network in Washington and up and 
down the East Coast. These are not back-of-the-envelope 
computations, but are reflective and well-documented, and show 
the impact of AirTran Airways competition has had on prices and 
passenger demand in similar routes.
    Typically when we enter a new route, fares drop 40 to 60 
percent, and passenger demand increases by 50 percent. We 
stimulate market. AirTran has successfully demonstrated its 
ability to operate the type of low fare hub network envisioned 
by the DC Air proposal. We have competed profitably with Delta 
and other major carriers in Atlanta and other large and small 
cities in the eastern half of the United States. We are 
prepared to expand our low fare quality brand of service from 
Washington National to all the markets outlined.
    I applaud Congress for the attention it has given to 
airline competition issues. It is clear to me without your 
vigilance the gains the new entrants have made, the consumer 
benefits resulting from those would be impossible. The 
provision in AIR 21, which requires large airports to file 
competition plans, clearly and wisely recognizes the need for 
low fare new entrant carriers to create beneficial competition. 
However, in terms of the overall trend in low fare competition, 
Government policy is very much like the weather. Everyone talks 
about it, but no one does much about it.
    AirTran is uniquely positioned to provide the type of 
competition that is called for in the US Air-United merger. We 
are prepared to offer significant low fare service at Reagan 
National and all along the eastern seaboard. This is an 
opportunity to act to restore real competition in the airline 
industry, the type of competition that will mitigate the hub 
concentration of the majors, the type of competition that is 
viable in the long term and has a lasting public benefit.
    Mr. Chairman, thank you for the opportunity to be here this 
morning.
    [The prepared statement of Mr. Leonard follows:]

        Prepared Statement of Joseph Leonard, Chairman and CEO, 
                         AirTran Airways, Inc.

Mr. Chairman and Members of the Committee:

    As you go about the difficult work of considering the implications 
of the proposed United and US Airways merger, here are the key points 
that I think you should consider:

    1) The merger of United and US Airways would NOT alter the already 
desperate condition of competition in the airline industry, and it 
WOULD strengthen both airlines.

    2) The key element in the merger proposal is the structure of the 
divestiture of US Airways slots at Washington's Reagan National 
Airport. Does the divestiture create an effective remedy for the 
competitive problem it was designed to address?

    3) The disposition of those slots through the proposed creation of 
DC Air would NOT provide meaningful competition, and it WOULD sharply 
curtail service in many communities currently served by US Airways. It 
also will almost certainly lead to fare increases in those markets.

    4) Finally, and most important, this merger has opened the door to 
what I believe is a historic opportunity to expand service and lower 
fares in the most heavily protected bastion of the major airlines--
Reagan National. The Executive Branch and the Congress are now facing 
the best and perhaps the last meaningful chance to stimulate service 
and lower fares at Reagan National for years to come.

    Mr. Chairman, members of the Committee, I appreciate the 
opportunity to address you today on competition in the airline 
industry. Similar to Mr. Wolf and Mr. Goodwin, I have more than 30 
years experience in aviation, having spent all of my adult life in this 
industry. My experience includes running maintenance operations for 
Northwest and American Airlines, COO and President of Eastern Airlines, 
President and CEO of Allied Signal's aerospace division, and for the 
past year-and-a-half, Chairman and CEO of AirTran Airways.
    In that time I have experienced the highs and lows of the industry 
and have learned a thing or two about competition.
    The state of competition in the airline industry is at best poor. 
In terms of the type of competition that is most beneficial to 
consumers--price competition--it is limited to those relatively few 
markets where a low fare carrier, like AirTran Airways and Southwest, 
provide competition. The fact of the matter is the big six carriers do 
not compete on price. And the combination of United and US Airways will 
not change that fact or significantly worsen an already struggling 
situation. The big six carriers are already combined as a result of 
marketing and code share alliances into three distinct camps; this 
proposed merger will only formalize the relationships and change some 
of the dance partners--but the dance will go on. I say this from the 
perspective of someone who has been struggling against the anti-
competitive practices of the major airlines for some time, and with 
some success.
    Over the past week, several members of congress have expressed 
concern about the concentration of the airline industry, particularly 
hub concentration. Unlike most low fare carriers, AirTran Airways 
chooses to compete in what would otherwise be a dominate hub--Atlanta--
and while Delta still maintains 72% of the market to our 8.5%, the 
resulting price competition has made Atlanta the busiest airport in the 
world. Airfares in the markets we serve are 40 to 60% lower than other 
monopoly hub markets. The impact, however, goes beyond Atlanta. AirTran 
Airways' low fares create competition in connecting markets as well, as 
evidenced by lower average fares in markets like Buffalo to Dallas-Ft. 
Worth or Biloxi to Boston. Our low fare network provides the type of 
price competition that creates discipline among the major carriers and 
maintains the consumer benefits envisioned by deregulation.
    I applaud Congress for the attention it has given to airline 
competition issues. It is clear to me without your vigilance, the few 
gains that new entrant carriers have made, and the consumer benefits 
resulting from those gains, would not have been possible. The provision 
within ``Air 21'' which requires large airports to file competition 
plans clearly and wisely recognizes the need for low fare, new entrant 
carriers to create beneficial competition. However, in terms of the 
overall trend in low fare competition, government policy on this is 
very much like the weather, everyone talks about it, but no one is 
doing anything about it.
    I am proud to say that I have presided over the turnaround and 
return to profits of AirTran Airways. We have established a profitable 
low fare network by focusing on maintaining low costs and providing a 
safe, quality product with affordable fares. We have taken delivery of 
11 brand new Boeing 717's and have orders for another 39 aircraft that 
will be delivered one per month over the next three years. This puts us 
in the enviable position to regulate our growth based on economic 
conditions and market opportunities. We can expand at a high rate by 
deferring aircraft retirements or increase retirements and maintain a 
steady state.
    AirTran Airways is uniquely positioned to provide the type of 
competition that is called for in the merger of United and US Airways.
    As you know, both United and US Airways acknowledge the need to 
divest of assets at Reagan National Airport as a condition of approval. 
Without this divestiture, the combined United would control two-thirds 
of all flights from the Washington metropolitan area.
    The question then, is whether the proposed creation of DC Air is a 
divestiture that will result in meaningful competition or in any way be 
in the public interest? The answer, quite simply, is ``no''.
    Even a cursory review of the business plan clearly indicates that 
DC Air will not be an independent carrier. DC Air will lease United 
aircraft and flight crews, adopt the United pilot contract terms, use 
United maintenance and ground facilities, participate in the United 
frequent traveler program, all under the direction of a current US 
Airways Vice President. To affirm this control, United placed strict 
limitations on the sale and control of the DCA slots--the primary asset 
of the new carrier--which is a clever means to keep any real 
competition from entering the Washington metropolitan marketplace.
    Given the structure of the proposed new airline, DC Air would have 
some of the highest costs in the industry. (See appendix pages 4-5) 
High costs and the extensive use of smaller aircraft are not a 
realistic formula for low cost service. Clearly no real competition and 
no consumer benefits will result from the new carrier. In fact, several 
markets would lose service as a result. (See appendix page 6) For 
example, upstate New York communities will have 48% to 56% fewer seats 
post-merger; Louisville will have 69% fewer seats while Greensboro and 
Raleigh-Durham will each lose more than 50% of current capacity. Where 
is the public benefit? The new carrier will reduce capacity in key East 
Coast cities, but not add significant capacity in any of United's mega-
hubs--such as Charlotte or Pittsburgh, and no service to Chicago 
O'Hare.
    Real competition comes from carriers with quality low fare service. 
AirTran Airways competition in Atlanta resulted in consumer savings of 
$700 million last year. In 1997 the DOT wisely granted AirTran Airways 
exemption slots to serve New York LaGuardia, the resulting competition 
saved New York consumers more than $175 million last year. One of the 
most significant markets not benefiting from low fare competition is 
Reagan National Airport--and while nearly every major airport in the 
United States is reporting record boardings, Reagan National is 
actually shrinking. This is a direct result of a lack of competition--
clearly there is not a lack of demand for travel to Washington, but 
rather outrageously high fares suppressing demand. Given the 
opportunity to compete at Reagan National with a network similar to 
that proposed for DC Air, we estimate the consumer benefit of a low 
fare network would easily exceed $690 million in the first year. (See 
appendix pages 12-14)
    The conditions for approval of this acquisition--and we believe it 
should be approved--must include provisions for real competition by 
independent, new entrant carriers.
    This is the key part of the merger equation--if the DC Air 
proposition is brushed aside, how will slots be reallocated? How that 
question is answered will have far more impact on passengers and fares 
than the merger itself.
    If those slots become available, the Congress and the Executive 
branch can follow the traditional ineffective path of distributing them 
one by one to selected communities. I would call that the ``let's feed 
all our children'' scenario. Or you can do what the merger partners 
declined to do for obvious and self-serving reasons--reallocate the 
slots to one or two low fare carriers who would be required to network 
them to many cities, and in doing so break open the Reagan National 
monopoly. Reallocation of slots to AirTran Airways, either by voluntary 
divestiture or withdrawal, will clearly result in a level of 
competition never experienced at Washington's primary airport. Similar 
measures must be taken at other airports to ensure facilities are 
available for new entrant competition and to prevent the public harm 
that will result from increased monopolies.
    If I was planning the legislative and regulatory tactics of the 
merger airlines, this would be my strategy: put DC Air on the table, 
knowing that it would be the best possible outcome for the merger 
airlines. If it runs into heavy flak, I'd fight the fight as long as I 
could, and then unveil a plan to disburse those Reagan National slots 
piecemeal, and to as many airlines as possible. That would be the way 
to guarantee that the slots could not hurt me--if they were fragmented, 
there would be no consolidated market power leveraged against me.
    It will not surprise you that AirTran Airways has ideas about how 
to carry out what I describe, and in the back of the handout that 
accompanies my statement you will see exactly what I describe along 
with the fare impact. These are not back-of-the-envelope computations--
they are reflective of the well-documented impact AirTran Airways 
competition has had on prices and passenger demand in similar routes.
    AirTran Airways has successfully demonstrated its ability to 
operate the type of low fare hub network envisioned by the DC Air 
proposal. We have competed profitably with Delta and other major 
carriers in Atlanta and other large and small markets throughout the 
Eastern United States. We are prepared to expand our low fare, quality 
brand of service from Washington National to markets such as Akron-
Canton, Bloomington, Buffalo and other upstate New York markets, 
Greensboro, Charleston and Savannah as well the major markets we serve 
today, including Chicago and Minneapolis. AirTran Airways has 
repeatedly demonstrated in small and large markets that low fares and 
quality service significantly increase demand and consumer benefits. 
Ronald Reagan Washington National is one of the few markets on the East 
Coast not to experience this benefit. We are seeking the opportunity to 
provide significant low fare service in this market--this is a unique 
opportunity to act to create real competition.
    But the point, of course, is not whether AirTran Airways receives 
these slots--the point is what real, low-fare competition could do in 
this market place--be it AirTran Airways or another new entrant, low 
fare carrier.
    Mr. Chairman, this concludes my prepared statement. I would be glad 
to respond to any question that you or any Members of the Committee may 
have.

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    The Chairman. Thank you, Mr. Leonard.
    Mr. Goodwin, you and Mr. Wolf and I had a helpful meeting 
and following that meeting you sent a letter with regard to the 
fare premiums at hubs, disputing the General Accounting Office 
and the Department of Transportation findings that higher fares 
exist where one airline dominates a hub, particularly in 
reference to O'Hare, and you said, quote, ``we think it is 
significant that the GAO identified the presence of Government-
imposed take-off and landing slots as a principal cause of 
higher fares there.''
    As you may or may not recall, I tried to address the slots 
contribution to high fares by recommending new entrants at 
O'Hare have access to more slots, including here at Reagan 
National, so let me just refer to the fact that the highest 
fares in the country exist at Reagan National because of slot 
restrictions.
    And yet it was United that opposed the increase in slots at 
O'Hare. It was United that vociferously opposed the elimination 
of slot restrictions at Reagan Airport, and you were largely 
successful at Reagan National Airport because we won frankly 
what is a pyrrhic victory. In 1997, former United chairman 
Jerry Greenwald stated, United does not advocate removal of the 
high density rule.
    So let me get this straight. Your position is to disclaim 
that there are relatively high fares at your hub, then claim 
that the Government is responsible for high fares because of 
slots at O'Hare, and then finally to oppose Government efforts 
to mitigate high fares that may be caused by Government-
sponsored slots.
    Mr. Goodwin. Mr. Chairman, maybe we can clarify those all 
at one time. As far as O'Hare is concerned, United Airlines as 
part of the AIR 21 project was an active supporter of the 
removal of high density rule slot constraints at O'Hare. We 
worked actively with members of this Committee and members of 
the House Transportation Committee to see that slots were 
removed. In fact, we would like to have seen them removed much 
quicker than the bill called for.
    The Chairman. In other words, it was a change in policy 
from when Mr. Greenwald testified in 1997 and later on, or was 
Mr. Greenwald wrong in his testimony?
    Mr. Goodwin. I cannot speculate on what Mr. Greenwald 
testified.
    The Chairman. He reflected the position of United Airlines. 
Quote, United does not advocate removal of the high density 
rule.
    Mr. Goodwin. Under my leadership, I did advocate the 
removal of the high density rule at O'Hare, and we were 
successful at getting the 2-year removal on the O'Hare high 
density rule. The first new carrier slots were put out for bid. 
As a result of that removal six airlines filed for new service 
to O'Hare, not one to a small city or medium-sized city, I 
might add, basically to Los Angeles and Minneapolis and other 
major travel centers.
    As a result of that, I did see rule removal at O'Hare. 
There were also numerous slots created for small cities, and 
there were a lot of comments made here this morning by members 
of this Committee relative to service to small cities, and I am 
happy to say that as part of our commitment of what we as a 
company would do at O'Hare should the high density rule be 
relaxed was to add service to small cities, and that is exactly 
what we have done, Senator.
    With respect to your question about Reagan National, I 
agree with your point of view that we did have a different 
point of view on the lifting of the perimeter rule and the 
addition of slots at Reagan National.
    The Chairman. In fact, there was an intense lobbying effort 
on your part, which again was largely successful.
    Mr. Wolf, I would like to read a few excerpts from a 
January 6, 1999 letter that you wrote to Secretary Slater 
regarding United Airlines announced increase in service at 
Dulles Airport, and I quote from your letter.
    ``In the domestic arena, the threat to unobstructed 
competition continues to grow. The most recent visible sign of 
dominant carrier predatory action is United Airlines' newly 
announced 60 percent service increase at Dulles Airport. This 
action follows US Airways announcement of its expanded 
operations at Dulles, as reported in today's edition of USA 
Today. US Airways is the target.''
    In today's Wall Street Journal, and you were talking about 
a January 6, 1999 Wall Street Journal article, Sam Buttrick of 
Paine Weber was quick to point out that United's expansion, 
quote, ``is about beating US Airways out of Dulles, not about 
maximizing profits.'' He said that because United intends to 
put too much capacity too quickly into these markets its new 
flying is unlikely to be profitable, and you go on to say, as 
you well know, predatory actions often sacrifice short-term 
profits to protect dominance.
    Anticipating the unmasking of United's intent, its senior 
vice president Rono Dutta attempted to deflect attention from 
the obvious by stating that United's actions may appear to 
respond to Washington area expansion plans by Southwest and US 
Airways, but growing Dulles has been part of our long-term 
plan. No one, however, can be found who believes in the tooth 
fairy.
    And you go on to say, the unrelenting attempts of the major 
trunk carriers to undermine the operations and expansion of 
smaller carriers both domestically and internationally is a 
clear and present danger to free market competition. If 
successful, this will ultimately deny price and service options 
that have grown passenger traffic enormously, and have been 
made available to a broad spectrum of consumers, and you go on 
to ask the Department of Transportation, to say, quote, ``your 
vigilant intervention into this type of destructive activities 
is required in order to provide the public benefits of two 
decades of deregulation.''
    Is it your position, Mr. Wolf, that United Airlines carried 
out predatory activities against US Airways at Dulles?
    Mr. Wolf. It was my view then, and it is my view today that 
with US Airways having the highest unit cost in the industry, 
something I am not particularly proud of, but is a fact, we are 
not interested in seeing any incremental competition at all, 
because all of our competitors have lower costs than we have, 
the mature big carriers and the low cost carriers like AirTran, 
and the only way in which we can address that is to get 
substantially larger, and that is what we are trying to do 
here.
    The Chairman. Mr. Leonard, Mr. Johnson said in his 
testimony that he is paying fair market value for the assets 
that will go to compose his airline. This purchase price, I 
figure of $141 million for DC Air, that puts a per-slot value 
at about $636,000 each. Does that price surprise you?
    Mr. Leonard. No, sir, it does not. I think it is pretty 
low, and I think if those slots were bid out they would go at a 
much higher rate than that.
    The Chairman. At a 1997 hearing before the Commerce 
Committee, former United Airlines President John Edwardson 
stated that 100 slots at O'Hare would have a market value of up 
to $200 million. By the same calculations, 222 slots at Reagan 
National would have a market value of about $444 million. Mr. 
Johnson, is that fair market value that you are paying for 
these slots?
    Mr. Johnson. Yes, Senator, it is fair market value, because 
I am acquiring these slots with the full intent of continuing 
to serve the 43 cities that I believe if they were to go out 
at, quote, fair market value, would not be served, places in 
West Virginia, places in South Carolina and North Carolina.
    These communities have been having service for over 50 
years, and I am sure that these communities want to continue to 
have service, and by selling these slots intact to a hometown 
carrier whose sole focus is to serve Reagan National Airport 
from these 43 communities, in my opinion is absolute highest 
and best use of these slots.
    The Chairman. I appreciate your opinion. Do you have any 
analysis or anyone's calculations that this is fair market 
value, no matter where the destination of these routes are?
    Mr. Johnson. Based on the market analysis that has been 
reported to me, the slots that have been sold prior at Reagan 
National have gone for these kind of market rates.
    The Chairman. Who reported that to you, Mr. Johnson?
    Mr. Johnson. That was reported to me by the analysis that 
was done by US Air and United when they priced the slots.
    The Chairman. So would you be willing, then, to allow these 
slots to be put up for open bidding?
    Mr. Johnson. No, Senator. I would only invest in this if I 
am able to acquire all of the slots, because all of the slots 
are necessary. Keep in mind we have got slots with great times 
for arrival time and not so great times for arrival. The value 
of these slots is getting all 222 to continue to serve the 43 
communities that DC Air is committed to serve.
    The Chairman. Suppose someone else wanted to bid on all of 
the slots. Would you agree to openly competing for all of the 
slots?
    Mr. Johnson. Senator, to me, this is an opportunity that 
was presented to me by the sellers, and as a buyer I am going 
to take advantage of this opportunity because my goal is to run 
a focused airline from Reagan National to these 43 communities.
    It is not to bid with the idea that I can increase the 
profitability on some slots by flying to Los Angeles, or flying 
to another big city, or trying to create additional hub sites. 
It is to try to keep focused on serving these 43 communities. 
That is the value of this business to me, and that is where I 
think we can get the maximum return, and that is why I would 
only acquire these slots as a full, intact, 222 slots to serve 
these 43 communities.
    The Chairman. I think your point is well-made, Mr. Johnson. 
I have some difference of view, particularly since these slots 
are owned by the American taxpayer. These airlines acquired 
them for free, without paying for them, at least the vast 
majority of them, and I believe that the taxpayers, like 
spectrum and other public property, the American taxpayer 
should accrue maximum value from them.
    Obviously, you wanted to say something, Mr. Wolf, about 
that.
    Mr. Wolf. Yes, Senator. I just wanted to clarify the price. 
We indeed did a detailed analysis of the value of these slots. 
Individually, these slots come in two buckets. They are express 
carrier slots, prop airplane slots, and main line slots.
    Express carrier slots go for dramatically less, $200,000, 
$300,000, at prime time maybe more. Main line jet slots go for 
substantially more, maybe $2 million for a 5:00 p.m. slot, 
maybe $1.2 million, $900,000 for a 2:30 in the afternoon slot. 
They were all priced individually. These were fair market 
values based upon what they had been selling for over the past 
couple of years.
    The Chairman. Again, Mr. Johnson, I have no problem with 
you getting the best deal you possibly can as a buyer. My 
obligation is to the American taxpayer as well, to see that 
they receive maximum value for an asset which they own, and I 
dispute the value placed on those assets, which therefore makes 
me skeptical about your statement about, quote, fair market 
value.
    Mr. Leonard, did you have any comment on this?
    Mr. Leonard. No. Obviously, I agree with Mr. Johnson about 
the network value. I think if these slots were parceled out a 
few here and a few there, the outcome would be a loss of 
service to the smaller communities.
    I think the network nature of these slots is important, and 
I think that is why we would argue that they should be disposed 
of in a network fashion to assure that that service continues, 
but to do it in a more realistic forum to somebody like 
AirTran. Obviously we would like it to be AirTran, but if not 
us, somebody else.
    But the transition period that we are looking at here is 
going to be years. Using smaller airplanes is going to increase 
cost. As proposed, it is virtually impossible to fly regional 
jets at the types of cost you fly mainline jet aircraft, and 
they will either have to raise prices, or they will withdraw 
from markets because they will not be able to make money.
    The Chairman. I thank the witnesses. We would like to 
submit, and I think all of the Committee members would probably 
like to submit, questions in writing, and if I could indulge my 
colleagues, it looks like all witnesses wanted to make a final 
comment on my comment, and so I would like to allow that to 
happen. Could we just begin with Mr. Goodwin and go across? Did 
you have any additional comment?
    Mr. Goodwin. Senator, the only thing I would like to state 
from United's perspective is the point that Mr. Leonard just 
emphasized. When we looked at the concentration issue in 
Washington and recognized that we were going to have to divest 
a portion of the US Airways activities in the Washington 
Metropolitan area in order to satisfy that concentration issue 
with the Justice Department we were very concerned about 
service to small communities, and we were very concerned about 
being able to protect the service and benefits that those 
communities have had for a long time. That is why we looked at 
packaging the transactions there.
    The Chairman. Mr. Wolf.
    Mr. Wolf. Yes, two comments, Senator, and thank you.
    One, very briefly, is the perspective of this transaction 
from our board of directors, a group of individuals who are 
selling the company, who have spent a lot of time on this, they 
felt that it met the needs of our three constituents in a very 
significant fashion. One, of value to our shareholders, that it 
was a fair price and the shareholders would vote overwhelmingly 
for it. Two, it protected the jobs of all of our employees, 
which is a rather unprecedented 2-year job guarantee, which Mr. 
Goodwin has now extended. No one gets laid off.
    And three, it preserves and enhances dramatically the 
service in communities we serve. You think of Charlotte, or 
Charleston, South Carolina, if you just take the US Airways 
name off it and put United on, you are part of a much bigger 
system, a much more attractive network, and it brings all sorts 
of economic advantage.
    Two, I feel somewhat guilty in letting this DC Air thing 
go. We spent long and hard talking about the fact that we were 
going to divest 222 slots to somebody. Some of these 
communities we have served for over 50 years.
    Could we have done something more economically attractive 
with the slots in serving those communities? The answer is yes, 
and we felt very strongly about continuance of those patterns 
of service, and we found somebody who would assure us that they 
would continue to fly the routes, and what he is going to do is 
take all the regional prop aircraft off and put on regional 
jets as well as full-size jets in many of these communities.
    Mr. Leonard, you could not fly a 717 and make it work, 
because there just is not the population to do that, although 
indeed, Mr. Johnson is going to have active discussions with 
Boeing about flying the 717 to serve some of the larger ones. 
It is a case of matching the equipment type with the size of 
the market.
    Most importantly, Mr. Johnson is committing to continue to 
serve the market, big aircraft or small aircraft, as a new 
startup carrier with dramatically lower costs than we have, and 
that should benefit the consumer with lower fares.
    Thank you, Mr. Chairman.
    Mr. Johnson. Mr. Chairman, I think to respond to the points 
Mr. Leonard raised, first of all I think there is a decline in 
passenger traffic at Reagan National Airport, but it is 
primarily due to the competition that Southwest Airlines has 
brought to the region both at BWI and at Dulles, and we will be 
flying against Southwest in those regions, and that will impact 
on our cost, which will make us that much more competitive.
    Let me go to the issue of, as Mr. Leonard said, someone 
should get them, but not DC Air. At one point AirTran was a new 
entrant, or ValuJet, the predecessor airline, was a new 
entrant, and the argument is that this should go to some other, 
quote, new entrant. I am here today telling you that DC Air is 
a new entrant. The fact that we are leasing 10 planes from 
United and some facilities is to provide for a seamless 
transition to these 3 million passengers.
    We are also leasing 19 aircraft, regional jets, from Mesa. 
Mesa provides this service, which is customary and standard 
throughout the industry, to other airlines and they will 
provide that service to us.
    We will also have our own eight aircraft, and we will 
quickly, as anyone in this business knows we will quickly bring 
on your own pilots wearing your own uniforms, your own flight 
attendants wearing your own uniforms, working for you at your 
cost structure, and that is exactly what we intend to do, and I 
expect that if I have to I could find the kind of talent that 
Mr. Leonard has in his operation to give us that low cost 
structure, because we are a focused airline.
    We are not a publicly traded company. We do not expect to 
be worried about quarter-to-quarter earnings. All I expect to 
be focused on is serving the 43 communities we serve.
    And so in my opinion we are absolutely a new entrant, 
absolutely deserving, absolutely capable, and will be 
independent and competitive in providing a lower cost structure 
and a competitive price.
    The Chairman. Thank you. I thank the witnesses.
    Senator Hollings.
    Senator Hollings. Well, there are so many questions. Mr. 
Johnson, you just stated that the reason for the diminuation in 
traffic at Reagan National Airport was the infusion of 
competition by Southwest at Dulles and BWI.
    Now, you are going to solve that problem by owning US 
Airways, or now to be named DC Air, but you have been a member 
of the board for 2 years over there, during these past 2 years 
that Southwest has been in there. Why have you not all met the 
competition as US Airways, and why wait until DC Air comes in 
to do it? I mean, that is a logical question to me. It seems 
like you are reflecting on Mr. Wolf.
    Mr. Johnson. No. I am reflecting on the operation that Mr. 
Wolf had to run. Mr. Wolf had to run a vastly different airline 
than I am going to be running. He had a mature operation with a 
mature cost structure and expenses that would not flow through 
to DC Air. DC Air is not going to be flying to London and to 
Europe as part of US Air's current operations.
    Senator Hollings. Some of those expenses are flowing 
through to DC Air. What you are saying is that I have been 
subsidizing all those other long distance flights on my flight 
to Charleston, is that right?
    Mr. Johnson. I am going to let Mr. Wolf, who is the CEO of 
US Air, answer that question, but I will say though, Senator--
--
    Senator Hollings. Well, you are on the board at US Air. 
Come on. This is sort of an inside deal, so don't act like you 
are all just getting together for the first time.
    [Laughter.]
    Senator Hollings. Well, let me let you think that question 
over.
    Now, Mr. Wolf, let me qualify, all of you witnesses talk 
about 30 years in the airline business. I have been in the 
airline passenger business for 50 years.
    [Laughter.]
    Senator Hollings. And I worked as an attorney. I served 47 
years ago with Captain Eddie Rickenbacker and helped him before 
the old Civil Aeronautics Board to get the carrying rights from 
Charleston to Bermuda, and so I have had oversight of those 
airlines here for the last 33, almost 34 years, and I know of 
the public convenience and necessity that we used to have where 
the community provided the facilities.
    The community went out and built an airport, put up the 
towers, the runways, everything else, and then they got a Steve 
Wolf or a Mr. Goodwin and said, now we need service into 
Washington, D.C., and you all would come before the Civil 
Aeronautics Board on the basis of public convenience and 
necessity to that particular community.
    One of the barest things, in addition to the hubs, is you 
all have thrown public convenience and necessity out the 
window, and now, for example, the airlines act like they own 
the slots, and they bargain around and sell them for hundreds 
of millions of dollars. They really were promoted and paid for 
by the communities.
    That is another problem for me to solve, but when you come 
and say for nominally competitive, Mr. Wolf, that does not 
reconcile with the statement that the distinguished Chairman 
gave, reading your letter to the Secretary of Transportation 
here earlier this year about predatory pricing.
    You said, well, yes, United is still competitive as a high 
cost carrier, or Mr. Leonard would be competitive as a low cost 
carrier, because US Air has the highest per-unit cost, and so 
all of it is competition to you, is that correct?
    Mr. Wolf. That is effectively correct.
    Senator Hollings. And so the way to solve that is to 
become--you said bigger.
    Mr. Wolf. I said what?
    Senator Hollings. Bigger. In other words, more 
monopolistic. Good Lord, can you imagine that, to come here 
before the Committee and say, now, the only way I can get 
competitive is to get monopolistic. Did I hear you correctly? 
That is what I understand you to say.
    Mr. Wolf. I am not quite sure that I wove that word in, 
Senator.
    Senator Hollings. Well, now you have got 85 percent of the 
traffic at Charlotte, North Carolina. You see, I started in 
there when we had Delta, Eastern, National, and Piedmont. In 
fact, what you say for Governor Hunt, I got that 15 years ahead 
of time, ahead of when you got it, because I helped you get it. 
I brought as much pressure as I possibly could, threatening all 
these secretaries on their confirmation and everything else 
like that, because I studied my humility under Mendel Rivers.
    [Laughter.]
    Senator Hollings. So I happened to go before the CAB and 
help them get, Piedmont get years ahead of any kind of 
acquisition by US Air. Piedmont had that carrying right, and 
then you all lost it.
    So you now are going to become competitive by becoming 
monopolistic.
    Mr. Wolf. I do not think I would characterize it that way, 
but you are absolutely correct in saying there has been a 
massive economic paradigm shift from being a social state----
    Senator Hollings. Oh, my Lord, we do not understand large 
words like paradigm.
    [Laughter.]
    Senator Hollings. Let me just ask outright, if you have got 
a high price problem, would you consider selling Mr. Johnson, 
DC Air, all of those small carrying rights and not have the 
merger? Is there some way we could get that approved, because I 
am like Senator Rockefeller, anything would improve the service 
of US Air that we are receiving now.
    I want Mr. Johnson to get it, because I know him, and I do 
not know what the competitor would get. Would you just sell it 
to him? Would US Air just go ahead and just sell him those 
rights, those slots, the maintenance, the planes, the 
equipment, everything?
    Mr. Wolf. Senator, the overriding problem US Airways has is 
that it is not a low cost carrier and never will be.
    Senator Hollings. Never will be?
    Mr. Wolf. Never will be, unless we file for bankruptcy. 
Never will be.
    Senator Hollings. That is astounding.
    Mr. Wolf. And thus we have to become larger in order to 
average our costs down to compete with the larger competitors 
in the country. We are the only pony left. All the rest of them 
died or have gone through bankruptcy, and I do not find either 
of those two attractive. By becoming larger, we can spread our 
cost over a larger base and average down our unit cost rather 
dramatically.
    Senator Hollings. So your reason, then, that you are 
selling this to Mr. Johnson is that you are recognizing the 
original instance that the requested merger is anticompetitive 
without it? In other words, you could foresee that both the DOT 
and, of course, the Justice Department would not approve it 
unless you did divest DC Air?
    Mr. Wolf. The answer to that is effectively yes, although 
United and US Airways has very, very little route overlap. We 
do have large concentration in the Washington Metropolitan 
Area.
    United is the largest at Dulles, we are the largest at 
National, and we thought the intelligent way to address that 
would be to carve out a substantial portion of the US Airways 
existing pattern of service at National and sell it to another 
operator, as long as that operator would assure us that it 
would continue to serve small communities. That is what we are 
doing.
    Senator Hollings. Well, you are known as a very successful 
operator, and I have to take the statement for what it says. 
You are either going bankrupt or you are going to get 
monopolistic, one of the two, so you have chosen the monopoly 
route, and let me, by the way, tell your staff to get on the 
ball.
    I mean, when you say that you have got eight flights from 
Charleston, South Carolina to Charlotte, North Carolina a day, 
and 34 people wanting that flight, or an average of four per 
flight, that is outrageously, really ridiculously inaccurate. I 
mean, they are standing in line to get on that thing, and they 
are full flights. I can guarantee you that. You do not have a 
plane that is flying with four going to Charlotte. That thing 
is crowded every time.
    And just to the point, Mr. Chairman, the airlines' 
computers sort of have a lock-in. Like, I had last Friday, a 
3:00 flight, Washington to Charleston, seat 10A, and so when I 
got to seat 10A this charming lady was already seated in 10A, 
and I said, here is my ticket. I have got 10A, and she said, 
well, I have got 10A.
    Can't we get some kind of computer that once a seat is 
assigned, it cannot be reassigned or duplicated like that? I 
mean, that is the kind of thing that we passengers who have 
been in it for 50 years are worried about.
    Mr. Wolf. On the former point, in fact there are 34 human 
beings on the face of the earth who want to fly between 
Charleston, South Carolina and Charlotte daily. There are a 
large number of others who fly from Charleston----
    Senator Hollings. Not human beings?
    [Laughter.]
    Mr. Wolf. There are a substantial number----
    Senator Hollings. You have got 34 human beings, and then 
you have got what? Look, I fly down there every week.
    Mr. Wolf.--who want to fly between those two cities. We 
have a substantially larger number of folks in that glorious 
city and State of Charleston, South Carolina who go to 
Charlotte who connect and go beyond.
    The point is----
    Senator Hollings. Sure. The only way to get anywhere is to 
go to Charlotte, which is a hub. You are now testifying to the 
monopolistic control of 85 percent of the flights through 
Charlotte.
    Mr. Wolf. Well, I guess I could cut the flights in half and 
only have a 50-percent monopoly, but I do not think that is 
what the people of Charleston, South Carolina want us to do.
    Senator Hollings. Now, I want to help. Mr. Johnson, how do 
you get those costs down? You had the gentleman himself say it 
is the highest cost, per-unit cost, and you are taking the 
planes and you are taking the pilots. What are you going to do 
that Mr. Wolf has failed to do to bring those costs down?
    Mr. Johnson. I am only taking the planes and the pilots 
under lease for a transition period.
    Senator Hollings. And then you take those pilots with the 
same agreement that they have?
    Mr. Johnson. No. I have completely negotiated a different 
agreement with the pilots, because they are flying different 
equipment. We will negotiate completely.
    Senator Hollings. Wait a minute, different equipment? I 
thought you were taking the same equipment and leasing it.
    Mr. Johnson. I am leasing 10 737 200's from United, I am 
leasing 19 regional jets from Mesa, and I am getting eight 
turbo props as part of the acquisition, so the goal is to move 
out of the 737 200's into another jet type configuration, lower 
cost, and at the same time to take the 19 leases from Mesa, 
turn those into DC-owned aircraft that we will acquire as we go 
out and talk to the airplane manufacturers.
    We have already started talking to Boeing. Boeing makes a 
717 that seats approximately 100 passengers, and we are looking 
at the configuration. We have not made any decisions, but our 
goal, Senator Hollings, is to get out of those mature costs of 
US Air-United into lower cost DC Air operations, focused 
airline, focused only on serving the 43 communities, and 
employing a staff that is DC Air staff with terms and 
contractual agreements with the unions based on DC Air's 
operational cost and not on US Air or United.
    Senator Hollings. But you are saying as soon as you take 
that over you have got the equipment. You are going to give at 
least the same service. That is your testimony, and with that 
same service you are going to immediately lower costs.
    Mr. Johnson. What I am saying, Senator, is that with the 
same service we are going to have the cost associated with the 
leases, but we will have a lower cost----
    Senator Hollings. I want to talk about the costs associated 
with the passenger. Am I going to get the same service at a 
lower cost immediately?
    Mr. Johnson. In some cities, we believe, and I am not an 
expert in cost analysis.
    Senator Hollings. Wait a minute now, come on. You told us 
you are worth $1.6 billion and you knew how to get costs down. 
I mean, you know all about money. I am not worried about that.
    Mr. Johnson. I am not an expert in airline cost tweaking, 
but I can assure you that our goal is, our goal is to get the 
cost of the flying public, who flies from South Carolina to 
D.C. Reagan National Airport--that is the only place we fly. We 
are not going to try to fly to other places.
    Senator Hollings. You said you are going to fly the same 
routes, but I am concerned about the cost.
    Mr. Johnson. I believe that in a short time from transition 
we will get those costs down, absolutely.
    Senator Hollings. Finally, one question Mr. Chairman. In a 
short time, what do you mean, in a year?
    Mr. Johnson. I think within a year some of those prices 
will definitely come down, Senator, yes, because what we are 
going from, we needed to go from 66 percent jet aircraft to 75 
percent jet aircraft. Our load factors will go up. Our costs 
will go down.
    Senator Hollings. Thank you, Mr. Chairman.
    The Chairman. Senator Gorton.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. Mr. Chairman, first I would just like to 
put a written opening statement in the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Gorton follows:]

 Prepared Statement of Hon. Slade Gorton, U.S. Senator from Washington
    Deregulation of the airline industry has been a boon to hundreds of 
millions of travelers over the last 20 years. Numerous studies have 
demonstrated the widespread benefits of market forces governing 
economic decisions in the industry. Although there are some members of 
Congress who believe that deregulation was a mistake, it is quite 
unlikely that we will take steps to re-regulate the industry in any 
meaningful manner, and that is as it should be. Many more Americans are 
flying now than before deregulation. The social and economic benefits 
of more affordable air travel go without saying.
    Although the free market environment has yielded great benefits, it 
is not without areas of concern. One such area is industry 
consolidation. It is rare for any market to thrive with fewer 
competitors. If the United-US Airways merger goes forward, there is the 
real possibility that the remaining four airlines among the top six 
will seek merger opportunities of their own. Recent media reports of 
talks among the other big carriers bear out the widely held view that a 
United-US Airways merger could lead other mergers.
    Additional concentration in the industry might be a negative 
development. While some airports and regions enjoy the presence of many 
competitors, there are more than a few markets served only by one or 
two airlines. Single-carrier routes are likely to have higher airfares. 
There are certainly efficiencies and benefits to be derived from one or 
more large air carriers that can offer their customers extensive 
networks of routes. But there is also the possibility that an oligopoly 
or cartel will form, where certain regions or airports are dominated by 
a single carrier and competition is diminished in many ways.
    In addition to the prospect of further consolidation, another 
aspect of this merger that deserves close scrutiny is the creation of 
DC Air. New entry is supposed to provide market discipline. Even the 
potential for new entry can have a positive impact in a market. A new 
entrant must be independent of its competitors, however, for market 
discipline to take effect. Given that DC Air will be leasing United 
aircraft and crews, it will be closely tied to an airline that it is 
supposed to compete against. I understand that the leasing and other 
arrangements are meant to be a temporary situation as DC Air gets up 
and flying, but it does raise questions about the independence of the 
airline.
    There is an old joke that begins by asking someone whether he or 
she knows how to make a million dollars running an airline. The punch 
line is that you start with a hundred million dollars. Many wealthy 
individuals have lost fortunes trying to operate an airline. While I 
appreciate the fact that Mr. Johnson is putting up a considerable sum 
of his own money to start DC Air, the long-term viability of his new 
airline is far from certain. If creating DC Air paves the way for the 
merger going forward, and DC Air does not survive as a fully 
independent carrier, there will be no way to undo this merger or any 
other that may follow.
    As with Alfred Kahn, the so-called ``Father of Deregulation,'' I 
approach the problems associated with airline deregulation within the 
philosophical constraints of the beneficial competition that 
deregulation unleashed. I do not want to re-regulate the industry. But 
the federal government should be cautious about any development in the 
industry that may curtail meaningful competition. It may be that 
consolidation of the largest carriers would enhance competition. A few 
high cost airlines might create an opening for more low cost 
competitors. A wave of mergers may, however, lead to a public outcry 
for tighter control over the airlines. I think that would be a 
regrettable turn of events.

    Senator Gorton. Second, I would like to say that it seems 
to me, as it does to the Chairman, that the duty of, the goal 
of the people up there is to enable the private sector to run 
an air transportation system that is safe and fast and 
frequent, and low cost, through the ability to create 
competitive markets and provide incentives to do what each of 
you is talking about doing, run highly competitive, efficient 
airlines.
    I believe that the deregulation of air transportation was 
one of the great steps ever taken in the transportation system 
of the United States, and is fundamentally the reason you are 
here, and that clearly in a competitive world means that change 
is a constant, and our comfort with the status quo is illusory.
    Having said all of that, with those goals I can also say 
that I do not have a tremendous number of parochial concerns as 
the Senator from the State of Washington. I do not think that 
this proposed merger is likely to have a profound effect on the 
way that people get back and forth to cities that I represent.
    But I also have to say publicly, as I have to two of you at 
least privately, that in the proper definition of that term I 
am a skeptic. I do not believe that we here should be 
considering this merger in isolation.
    I am strongly inclined to believe that it will force other 
large competitors into similar mergers, and it is 
counterintuitive to believe that where there are now six major 
airlines in the United States, in one sense that when that 
turns into three major airlines, that that will increase 
competition. Maybe it will, but it is certainly 
counterintuitive.
    I listened with great interest and with a certain degree of 
optimism to what Mr. Johnson has said about running a low cost 
airline out of Reagan National, but it is counterintuitive at 
least to think that someone making a purchase from what Mr. 
Wolf delightfully describes as a mid-size mature cost carrier, 
which to me means a high cost inefficient carrier, that within 
a relatively short period of time its successor in a market 
like this is going to be a highly efficient low cost carrier.
    It may be so, but it is clearly counterintuitive to come to 
that kind of conclusion, so it seems to me that while you have 
made a good case, you have an extremely high burden of proof in 
this connection, and our considerations have got to go beyond 
this merger and say, well, what happens when the next four in 
line, the Continentals and Northwests and Americans and Deltas 
respond, as they must, to this proposal, to the way in which 
air transportation is highly competitive and highly passenger-
oriented in the United States?
    I leave that with you, because it is a matter of concern 
that you have obviously attempted to deal with here but have 
not dealt with successfully to this point.
    Now, I would really like to ask a few questions and be 
silent enough for long enough to get the answer, and I will 
start with you, Mr. Goodwin. Your testimony says that you have 
relatively little East Coast North-South traffic, and that it 
would not be practical to grow incrementally. Why not?
    Mr. Goodwin. Senator, when you look at a mature network 
carrier, as United is, we have a lot of opportunities to 
continue to fill out our franchise. When you start looking at 
incrementally growing in a marketplace where you have less than 
1 percent of the traffic in a market, it is going to take a 
horrifically long time, an horrifically large amount of money 
to be able to make a commitment to provide any meaningful 
competition into a market like that.
    400 airplanes that US Airways is currently operating to 
replicate their East Coast operations would be in excess of $12 
billion in today's marketplace. Then we would have to go find 
people, facilities, and infrastructure which we all know is the 
subject of great concern in this industry, and I do not believe 
that you are going to be able to realistically look at that as 
a way to make a significant----
    Senator Gorton. But from the point of view of your 
customers, at least, and their convenience, wouldn't you do 
just as good a job by a code-sharing arrangement? You would get 
your passengers where they want to go.
    Mr. Goodwin. A code-sharing arrangement with US Airways 
would perhaps provide display opportunities so that the 
customer would be able to see service in purchasing. That is a 
seamless product, but it still suffers from the problems of any 
code-share operation, with separate terminals, separate 
computer systems, separate personnel, in many cases separate 
policies that are not consistent from air carrier to air 
carrier.
    And Senator, despite all of our efforts over the last 3 
years, from the Star Alliance to try to be able to build 
consistency for our customers worldwide in a code-sharing 
environment, we still struggle with the inconsistencies because 
of the unique requirements.
    Senator Gorton. You tell me you are going to be more 
efficient, but you also say you are not going to lay off any 
employees and you are going to operate all of the hubs. How are 
you going to become lower cost doing that?
    Mr. Wolf. Senator, it is our commitment that we are not 
going to have any employees impacted by this transaction. We 
believe that is a very positive part of this merger, because 
all the labor agreements will be honored, all the employees 
will be ensured a job.
    The ability to lower costs in the current US Airways 
network comes from being able to blend their route network with 
ours. A lot of the overhead, the significant costs that go with 
that are going to be spread over a worldwide network versus a 
North-South network that US Airways currently has to distribute 
their costs over.
    Senator Gorton. Finally, and I have more--as the Chairman 
said we will submit some of these questions in writing--you 
said the acquisition of US Airways will provide, I think it is 
93 destinations and one carrier service for 540 or 560 new city 
pairs. Are those destinations and pairs a matter of public 
record? Are you going to submit them to us?
    Mr. Goodwin. Yes, Senator, they are a matter of public 
record. They have been in all of the materials we have used. 
There are 64 domestic markets that we are adding, including 
some to the city of Seattle, as well as international 
locations.
    Senator Gorton. Do we have them here for this Committee?
    Mr. Goodwin. Senator, we will make sure you have a copy 
before the day is out.
    Senator Gorton. Thank you. Mr. Wolf, what if DOJ turns you 
down? What is the future of US Airways?
    Mr. Wolf. We will continue to manage the business as 
aggressively as we can and try to find the answers someplace 
else.
    Senator Gorton, I might add that selling our company and 
watching the name disappear was a big decision for our board. 
Before we ever got to that decision, quite frankly, we looked 
at buying every airline in the western world ourselves in order 
to increase our size, and for one reason or another, not being 
able to get the financing, not being realistic, not being able 
to buy United's 55 percent employee-owned, et cetera, et 
cetera, we never found a fit that we could legitimately hope 
that we could finance and conclude.
    When I met with Mr. Goodwin some number of months ago, it 
was a conversation dealing with our participating, US Airways 
participating in the Star Alliance, and he brought the subject 
up, and the more we looked at it, and the more we wrung our 
hands about it, the more we finally concluded, it works for our 
three constituencies.
    That is why we are going forward and doing it, but if it is 
not allowed, we will tend to our knitting and try to run the 
best airline in the world and try to find the answer someplace 
else.
    Senator Gorton. Well, now I do have a parochial question 
for you, Mr. Wolf. What happens to your Airbus Industries 
orders if this purchase goes through?
    Mr. Wolf. United Airlines would be obligated, and in fact 
has agreed, to honor all of our contractual commitments, be it 
airport leases or gates or aircraft purchases, et cetera.
    Senator Gorton. That is not much of an advertisement for 
me.
    Mr. Wolf. It is a free market, Senator.
    Senator Gorton. Yes, it is. One other question for you.
    You stated in a document submitted to the Department of 
Transportation with 519 current daily departures at Pittsburgh, 
483 at Charlotte, 402 at Philadelphia, we operate the most 
pervasive route network in the Northeast and Mid-Atlantic 
regions of the United States, where almost 40 percent of all 
Transatlantic passengers begin or end their international 
journey. US Airways ranks first in 44 of the 56 major airports 
in the Eastern United States, end quote.
    Now, you will be combined with United, and it dominates 
Dulles as the largest domestic carrier. If US Airways had the 
most pervasive network before the merger, what would your 
description be after the merger?
    Mr. Wolf. I think we will have a network that we will now 
be able to serve, because we are not doing that today. We are 
going to provide an array of services to folks on the East 
Coast of the United States. What was the old US Airways system, 
now the new United system, that will far exceed anything that 
we could do.
    Senator Gorton. Will it be more or less pervasive?
    Mr. Wolf. It is going to be patterns of service we could 
never get to. I think I should add one other point. If you look 
at all of the international passengers US Airways carried last 
year and United Airlines carried last year, that is 13 million 
international passengers. In the global marketplace we are not 
even scratching the surface. British Airways carried over 30 
million, Lufthansa 27, Air France 24, American Airlines carried 
17\1/2\ million international passengers last year.
    We are going to put a very strong football team onto the 
field to compete globally and succeed, in my opinion, 
significantly by having United's backing of US Airways. As we 
effectively disappear and become them, we are going to have 
international patterns of service that are going to dwarf 
anything we ever thought about before.
    I mean, out of Philadelphia alone they are going to add 
Brussels and Amsterdam immediately. We recently started flying 
from Pittsburgh to Frankfurt. They are going to add another 
trip immediately. Our three trips are going out of Charlotte, 
which we are exceedingly proud of, to Paris, Frankfurt, and 
London. We upgrade to bigger aircraft almost immediately. This 
is going to be a very vibrant network, bringing all sorts of 
consumer benefits to all of those communities up and down the 
East Coast of the United States.
    Senator Gorton. One more question, if I may be indulged, 
for Mr. Johnson. If you add up DC Air's proposed schedule and 
plans to operate 22 jet round-trips to eight markets, how can a 
carrier operate a low fare operation with this many 
destinations with so few round trips?
    Southwest, as I understand, does six or seven round trips 
in each of its markets. How is DC going to be low fare with two 
round trips per market?
    Mr. Johnson. Well, Senator, I think the advantage of DC 
Air, it flies to a very desirable close-in airport, Reagan 
National Airport. It is a slot-restrained airport, and people 
choose to fly there because they like the convenience of it. 
The way we will be able to lower our cost is that we will be 
operating lower cost aircraft and will have lower cost 
personnel, and those costs will be passed on to the customer.
    Senator Gorton. Well, why? If it is all this good a deal, 
and you are low cost, don't you want to maximize your profits?
    Mr. Johnson. Well, Senator, I think we have a very 
profitable airline now, and I think the objective is to keep it 
profitable by being competitive, and we will be flying against 
other competitive carriers, so we will not be able to maximize 
profits, so to speak, when you have got Southwest Airlines 
flying into Dulles Airport or BWI. There will be some 
pressures. We will be flying in competition against United, so 
there will be competition to keep our costs down, and we will 
do that.
    Senator Gorton. Fritz, is Southwest flying to Charleston?
    Senator Hollings. No. We would love to get them.
    Mr. Johnson. They are certainly free to do so. There is no 
restriction on them doing so.
    Our position is from day one, we will get out of many of 
the high costs of US Air, for example, leasing jets from a 
company like Mesa or others at a lower cost than the 
operational cost of US Air and United, and moving away from 
having the costs associated with what Mr. Wolf was talking 
about, flying to Europe and marketing costs associated with 
trying to get people to fly to Europe on US Air.
    Even, I dare say, changing the compensation structure of 
this company is going to have a huge impact on our ability to 
lower costs, so I am confident that we, with the desirable 
close-in Reagan National Airport, continuing to focus on 
serving these 3 million passengers with better service and 
lower cost service--the routes are profitable today, Senator. 
They are profitable today. Under lower cost they will be more 
profitable, but we also believe we can pass some of this on to 
the customer in the form of competitive prices.
    Senator Gorton. Thank you, Mr. Chairman.
    The Chairman. Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman. I just want 
to get one little thing out of the way here that has kind of 
been nagging at me a little bit.
    Comments are made from time to time that if you have not 
been in the airline business as a chief executive, then 
therefore somehow you are not going to be able to do a decent 
job, and I would suggest that we have got four CEO's before us, 
and I think that probably Bob Johnson has been by far the most 
successful in terms of running his business, and has made the 
most money in terms of running his business, and has the most 
experience in terms of running his business.
    Now, you can argue, if you want, that, well, he has not 
been in the airline business, which is an extremely competitive 
business. It is very hard to compete and make a lot of money in 
the airline business because of all that is going on, but this 
belief that those who have not been in the airline business 
before will not be able to be successful in it is bothersome to 
me, especially when you are dealing with somebody who has been 
so absolutely and totally successful in the corporate world.
    So we do not have two CEO's here today. We have four CEO's, 
and my guess is that Mr. Johnson has probably been the most 
successful of them, and I wanted to make that point.
    Second, a question to Jim Goodwin and Bob Johnson. You 
promised to carry your service on to every market you are 
servicing now, and that is very reassuring. On the other hand, 
when you put forward a merger proposition, that is the kind of 
thing you say.
    It is like saying you are not going to lay people off, and 
I have talked with you, Jim Goodwin, and I believe that you 
mean that, but often circumstances are just such that it 
becomes very difficult not to do that in the reality of the 
marketplace as opposed to the rhetoric of a committee hearing 
room, and I would just like to hear you say it again. I guess 
this is more to you, Mr. Goodwin, than to Mr. Johnson.
    Mr. Goodwin. Senator, as I said to you several weeks ago, 
we view this transaction as very consumer friendly. We believe 
it brings a lot of connecting benefits to small and midsize 
cities, to a global network that today they do not have access 
to.
    I also firmly believe that providing that access is a great 
economic development engine. We have seen it in a lot of 
places. We have seen more and more of our customers, our 
important business customers, moving to smaller cities. They 
are demanding more air service. They are demanding more access 
to a global network. We are committed to that.
    That is the foundation of the hub-and-spoke carrier, the 
ability to bring small numbers of people to a collecting point 
and disperse them onto a larger network is what provides access 
to global businesses, global travelers, global leisure 
travelers, shippers, et cetera.
    Our company has demonstrated that commitment, and we are 
committed to it in this transaction, Senator.
    Mr. Johnson. Senator, if I could add to the question of 
serving the 43 cities, I can state without equivocation that my 
goal is to provide service to these 43 cities and these 43 
cities only. With DC Air that is my purpose of making the 
acquisition.
    And to the question about people who are coming into the 
airline industry from the outside, I think I am correct in 
pointing out that the current CEO of Delta did not have an 
airline background, and Jerry Greenwald, who formerly ran 
United Airlines, came out of Chrysler Corporation, I believe, 
and of course everybody knows Richard Branson, who has given 
competitive fits to British Airways all across the Atlantic, 
came from Virgin Records, the entertainment business.
    And so, Senator, you are absolutely right, I think what it 
takes to be a successful CEO in any business is the ability to 
have a vision about your business, to motivate people to pursue 
that vision, to provide quality customer service to your 
customers, and to run an operation that reflects the values 
that you have in that business, and that is what I have done 
with my company, and that is what I would do with DC Air, and I 
do not see any impediment at all to hiring good talent.
    Now, Mr. Leonard mentioned that I hired Bruce Ashby to 
serve as my acting president, and he comes from United and US 
Air. I mean, you cannot have it both ways. On the one hand, 
gee, the guy has no experience. He goes out and hires somebody 
with experience. Well, the experienced guy comes from--Bruce 
also worked for United, US Air, and Delta. Bruce is a very 
experienced airline executive, and I am going to hire a lot of 
other airline executives. I may try to hire a couple from Mr. 
Leonard. I can sort of dip into my pocketbook and be 
competitive.
    So my point is, I am going to hire the best and brightest 
talent to run this airline, with my vision and with my 
commitment to service.
    Senator Rockefeller. Mr. Johnson, the point has been made 
about you providing lower cost service, and I am not sure that 
the point has been adequately made that one of the reasons that 
you would be able to do that were the merger successful is that 
your desire is to have a so-called simplified fleet--a fleet 
with all the same planes, the same maintenance programs, the 
same training programs--which becomes a major cost advantage.
    Mr. Johnson. Senator, you are absolutely correct. Among the 
things I have learned by serving as a director of US Airways is 
understanding the cost structure of airlines, and those costs 
come in about three or four categories. The first one is 
obviously the cost of acquiring aircraft. The second is the 
cost of personnel, union costs. The third is fuel costs, and 
then the others are the overall operations in particular 
markets that you operate in.
    I believe the most important thing to do in DC Air is to 
rationalize the fleet, to get a fleet rationalization that will 
allow you to have pilots who fly the same plane whether they 
are flying from Portland, Maine, or whether they are flying to 
West Virginia. They will move from one plane to another without 
any scope clauses or any restrictions.
    I think the other thing to do is to get union agreements 
that reflect your goal of being a low cost carrier and I 
believe we can do that on the personnel.
    Fuel cost, we will do like everybody else. We will be able 
to buy fuel as part of a consortium of independent airlines, 
and we will be able to buy fuel at other kinds of market costs, 
and so I think on the areas that we can be competitive where 
the costs are, we can absolutely become competitive right away.
    But in addition to that, I think US Air and United will 
have huge cost, overhead cost, just in terms of senior 
executives, just in terms of facilities, and just in terms of 
marketing costs that we will not have, and as a result of that 
we believe we will be able to pass those reduced costs along to 
the customer in the form of competitive prices and better 
service.
    Senator Rockefeller. Thank you, Mr. Johnson.
    The Chairman. May I just make one brief announcement? 
Members will be leaving because of the time, and I do not think 
that if we went to panel 2 at this time, that they would get 
the attention they deserve, and so therefore I am going to ask 
Hon. Nancy McFadden and Mr. Bert Foer to come tomorrow morning 
at 9:30, and we will reconvene this hearing at that time, 
rather than have them speak to an empty committee.
    So we will complete the questioning from Senator Kerry and 
Senator Wyden with this panel, and we will reconvene tomorrow 
morning at 9:30 with panel number 2, and I apologize to Ms. 
McFadden and to Mr. Foer because of the length of this hearing, 
and I want to get their input, and so we will reschedule the 
rest of the hearing for tomorrow morning, after the completion 
of the questioning of this panel.
    Senator Rockefeller.
    Senator Rockefeller. I will forego my final question.
    The Chairman. No, there is no reason to do that.
    Senator Rockefeller. I choose to do so.
    The Chairman. Thank you.
    Senator Kerry.
    Senator Kerry. I thank my colleague for his courtesy. It is 
an interesting discussion.
    Let met begin by saying, Mr. Goodwin, I am surprised at 
your statement about the inability to ``predict'' what might 
happen here with respect to the consolidation merger down the 
road. I was in business privately for a very short period of 
time when I was also practicing law.
    And I have learned enough about business in the 16 years I 
have been here and particularly this industry to say to a 
virtual certainty--virtual certainty--that there is no way that 
Delta, American and others are not going to be pursuing very 
rapidly for the very reasons that were contained in your 
letter, Mr. Wolf.
    You cannot write a letter like that to the CEO of US Air 
and then come in with a new posture as a seller to United that 
suddenly erases that market pressure on anybody to be 
competitive. I think Mr. Leonard would agree. I mean, they are 
already talking. We all know this.
    So our obligation is not just to look at the impact of your 
merger, but to look at the impact of what we know is going to 
happen here, what is going to happen to the marketplace.
    Now, you raised a very good point. We also have an 
obligation not just to look domestically, but we cannot talk 
about globalization and the impact of the global arena without 
also making some judgments about that. And the capacity of 
single state airlines, what began as single state airlines and 
are now pretty much dominant. British Air, Lufthansa, for 
instance, they carry a lot more. And that has a global impact, 
et cetera. So I think we need to think about that. I just want 
to put that on the table.
    Second, with respect to Mr. Johnson and the discussion that 
my good friend Fritz had, without becoming rhetorical about it, 
I understand completely where Mr. Johnson is coming from. I 
think it is a great deal for him. He would be crazy not to look 
at it and to want to try to do it. It has been a very 
profitable arena, those particular slots and that network. And 
there are rational reasons for you folks to divest of that in 
the context of this overall possibility.
    And I completely understand the differential and the slots. 
It makes sense to keep it as a package. We have a public 
interest in making sure that those particular areas currently 
served continue to be served. That is an important guarantee 
that that would happen.
    And clearly, there is a variation in value on those slots 
according to time, size of carrier, type of carrier, market 
served. Whether your assessment as the seller is the definitive 
of price, I do not know the answer to that question.
    But I would assume answering to your board as a public 
transaction, that is going to be highly scrutinized, you have a 
serious interest in making certain that that does meet market 
value.
    So, I think we can look at that carefully. And I am not as 
disturbed by that. I also see the transitional aspects of this. 
And I think there are great virtues to that in terms of the new 
aircraft that will be purchased, the new network setup. And 
there is a transitional capacity.
    Here is what I am more concerned about still. And I am 
trying to figure it out. Mr. Goodwin, I know this is a very 
tough business, nothing easy about it. And the profits are not 
enormous at all. Your profits--what is the profit margin of 
United currently?
    Mr. Goodwin. Oh, about 7 percent, Senator.
    Senator Kerry. And US Air is more hard pressed at this 
point in time. Would you share with us these current--you have 
labeled them mature--structural difficulties that make life so 
difficult for US Air particularly?
    Mr. Wolf: Sure. I would be happy to do so. We had for a 
good number of years labor agreements that were woefully 
uncompetitive. And that is not because anybody was dumb or 
inattentive.
    It really goes back to the days of Allegheny. In the 
regulated environment, you would settle a labor contract on 
terms that you knew were not necessarily justifiable 
economically, but what difference did it make? You flew to 
Washington the next day. You saw the Civil Aeronautics Board. 
You proved to them your costs went up--and they surely did--and 
they let you raise fares.
    And you knew in your heart of hearts that labor agreement 
was going to be the floor for your competitors some 6 months 
later. And we had this sort of a spiral.
    We then, Allegheny got into a merger syndrome with Piedmont 
and PSA. And as we did that and we put the labor agreements 
together, they became substantially more attractive quite 
frankly.
    And then we got into the early part of the 1990s. We had a 
difficult economy. Fuel prices were going up, et cetera. And we 
started encountering staggering losses. In the end of the end, 
last year, starting with our pilots 2 years ago, and last year, 
we negotiated all new labor agreements with our labor unions 
and all of our employees. Not below competitive levels, but at 
precisely competitive levels. We were not asking them to give 
us a concessionary agreement. We wanted competitive levels. We 
now have those.
    But in order to take advantage of them, we have got to 
substantially increase the size of our company. Because our 
unit costs are still the highest in the industry. It is because 
on average we fly a small airplane on a short stage length and 
we have to get substantially bigger. We need big airplanes 
flying international missions, transcon missions and that will 
average down our unit cost.
    Now, the question is can we do it? Do we have the time to 
do it?
    Senator Kerry. So the principal component of your current 
structural difficulty is the labor contracts that are the 
hangover from the regulated era?
    Mr. Wolf. No, no. Because we have now concluded competitive 
labor agreements with all of our employees. Our remaining 
principal difficulty is that we are a mature cost carrier and 
the only one left that does not have a large operational base. 
United has mature costs. American has; Northwest, Delta have. 
But they are airlines that are substantially larger than us and 
they spread their cost over a much bigger base and then average 
them down.
    Senator Kerry. Now, the theory is then that with this 
merger by virtue of the economies of scale, you are going to 
produce that cost.
    Mr. Wolf. Yes.
    Senator Kerry. But United is essentially going to assume 
the larger--I mean, they are going to be subsuming that 
maturity premium into their current profit which reduces your 
margin I assume, unless you raise prices.
    Mr. Goodwin. Senator, if I may, our labor cost structure 
today is quite comparable to the labor cost structure of US 
Airways. The ability to leverage their cost structure into our 
cost structure comes in the form of a lot of other things 
besides labor costs, facility utilization, maintenance 
facilities, parts opportunities, which in our industry add up 
to a significant amount of dollars.
    Because of the quantity of fuel we buy, we buy fuel 
cheaper. Our underwritten liability insurance is lower because 
of our claims records. So his cost structure gets leveraged 
over a much larger global base. It is not going to show up as a 
labor cost savings per se.
    Senator Kerry. No, I did not insinuate it would show up as 
a labor cost savings. But what I am saying is that if he is 
complaining of costs that make it difficult for him to compete 
and you are assuming those costs, you are going to have 
additional costs above and beyond what you have today. It is 
just that you are going to spread them around in a bigger 
network and hopefully have some economies that come through 
that, correct? And the benefits of having your larger route 
connectedness and so forth. And so big is better.
    Mr. Goodwin. In terms of absorbing the US Airways 
transaction, we are going to be able to spread his cost over a 
larger network. And too, by providing additional service and 
connectivity to his customer base, we are going to bring 
additional customers to the party as well. And at the end of 
the day, we believe our company will be as well off, but 
hopefully better off.
    Senator Kerry. And you are going to do that for 2 years 
without raising fares?
    Mr. Goodwin. We have committed as part of this transaction 
that during 2 years following the completion of the 
transaction, we will not increase structured fares. That is 
correct.
    Senator Kerry. Structured fares. There is a big difference 
between saying we will not increase structured fares and we 
will not increase fares. You could wipe out all the discount 
fares and leave people at the high level and not have increased 
fares under that statement.
    Mr. Goodwin. I do not believe we could do that, sir. First 
of all, structured fares include some discount fares. 
Structured fares are not only the standard first class coach 
fare structure, but they are also 14-day, 21-day advance 
purchase some markets, 7-day advance purchase markets, that 
consumers buy.
    Senator Kerry. The vast majority of your fares are outside 
that. They are in the discount, are they not? I mean, you 
talked about 8,000 changes yesterday. None of those are 
structured. Those are discounts.
    Mr. Wolf. We had 8,000 yesterday. The industry had 68,000 
yesterday.
    Senator Kerry. Those are not structured fares.
    Mr. Wolf. I would suspect some of them are. As a result of 
Southwest announcing they are going to Buffalo, I would 
anticipate that had an effect on structured fares.
    Senator Kerry. What I am saying is the vast majority are 
not.
    Mr. Wolf. I do not know the answer.
    Senator Kerry. Let us face it. The greater flexibility here 
is that you are going to have this huge arena up there that you 
have more opportunity not to change.
    Mr. Goodwin. The base fare structure is used also to price 
off for all the sales that go on in this industry. So if there 
were 8,000 sale fares out there yesterday, they were all based 
off of that 21-day fare.
    Senator Kerry. Well, let me get to the heart of this. 
Obviously, Mr. Leonard has been a little bit left out of the 
discussion. I thought he made some very important and 
provocative comments which are also contained in your letter, 
Steve. I think it is important to explain that.
    The heart of your letter is this assertion that in the 
domestic arena, the threat to unobstructed competition 
continues to grow. And you talk about a predatory practice by 
United's quick expansion effectively trying to target you.
    Now, if all of a sudden, you have got 6,400 plus routes and 
AirTran and Southwest and all these others are struggling to 
get in the market and Delta--just take Delta and American, the 
closest competitor is going to be around 3,000 at that point, 
2,700 routes.
    I mean, that is a fairly dominant imbalance is it not? And 
I just want to put that into context. I am just trying to work 
through this. I do not have a conclusion. I just want to work 
through it. Mr. Leonard mentioned predatory practices, dominant 
problems already existent for people to be able to get in and 
compete. And in fairness, most of the entrants you talked 
about--JetBlue, Southwest, et cetera--are not competing in the 
major terminals. Do you want to comment on that, Mr. Leonard? 
And then you guys respond.
    Mr. Leonard. We have an example, literally as we speak, we 
had planned on going from Atlanta to Minneapolis. Very large 
market. Very, very high prices in that marketplace. We were 
going to add four trips, a fifth one later on. Northwest got 
wind of that fact. And 2 days, 3 days before we announced or 
were intending to announce that service, they added 40 percent 
capacity that took our route from about a half a million, to 
three quarters of a million dollar profit, to a $3.5 to $4 
million loss.
    Now, for Northwest, that is nothing. That is a very, very 
small rounding error at the end of their profitability. For us, 
it is an enormous amount and has a significant impact on our 
ability.
    So as a result, we announced that instead of the fact that 
we were coming to Minneapolis, that we were not coming to 
Minneapolis. We subsequently reviewed that and added service 
through Midway which we think is a safer way for us to go. But 
we have run into that at Richmond against Delta and Mobile. We 
have documented six cases with the DOT of Delta's behavior. We 
announce we are going into a market. They add 28, 30, 35 
percent capacity.
    Senator Kerry. Why does that not qualify just as good old-
fashioned American competition?
    Mr. Leonard. I think it goes to intent. We certainly expect 
people to match our fares. And we expect people to compete with 
us. But they do not compete. If they competed that way with 
each other, you would say it is good old-fashioned competition. 
They do not compete that way when Northwest moves into United's 
routes or American moves into Delta's route. But when a low 
cost carrier comes in and they do it because they know they 
have the market clout to take us out of the market and they 
view it as an investment to eliminate the competition. They are 
not looking to compete fairly. They are looking to eliminate 
it.
    Senator Kerry. Steve, that was essentially your argument 
when you were fending only for the competitive interests of US 
Air, not the merged interest. How do you respond to the notion 
that in several markets where you have this kind of competition 
from Southwest, AirTran, JetBlue, et cetera, you have got a 40-
60 percent reduction in the air fares in that particular 
market.
    Mr. Wolf. A two point question. First, I want to clarify a 
quote in my letter. What I said in the letter was that United's 
significant expansion at Dulles Airport to feed its 
transcontinental and international flights, and these are 
routes that we fly out of National or to a smaller degree out 
of Dulles, was categorically not in US Airways' best interest. 
I mean simply stated: we got more competition. We did not want 
that at all. We did not want more competition.
    It is, however, absolutely logical for United to do that, 
and, two, it certainly is in the best interest of the consumer. 
It was not in little old US Airways' best interest.
    Let me go to the second point. There is no question what 
Southwest has done and continues to do, and carriers like 
AirTran and other low cost carriers do, as a result of their 
low startup costs.
    Southwest provides point to point service. Only four 
airlines now carry more passengers. It is a very low cost 
carrier and it sells one thing. It sells price. I mean, it 
certainly has a safety orientation and it does a very good job. 
But it takes those low costs and turns them into low fares. 
That is what they do.
    The rest of us do all sorts of other things if you will. 
And quite frankly, we are saddled with costs that go back some 
number of multiple decades which we are never going to shake. 
But we can put into place network patterns of service that are 
also very much in the consumer's best interest, carriers like 
AirTran and JetBlue and Southwest and National and others are 
going to continue to come and will continue to police the big 
guys. They will simply do it because the consumer does want low 
fares. And no one will allow themselves to pay more. Kodak will 
not allow its controller to pay more than its travel budget. 
And the consumer does not want to pay more either.
    It is a nice mix. A big carrier with the big networks can 
serve the entire globe. And the low cost carrier is pushing 
them all the time in terms of price. I mean, it is a very nice 
mix. I think it works.
    Mr. Goodwin. Senator, just one other comment on Southwest. 
I think there are two points I would like to make that have not 
already been made. Number one, Southwest has built a network 
today that gives them access to 90 percent of the United States 
population base as a point-to-point carrier which is how they 
have started their business and have grown their business.
    They now realize that in order to continue to sustain the 
service they are creating and to reach into new communities 
that did not have the mass, they are now becoming a connecting 
airline. And in fact, they have 13 connecting complexes on 
their airline today. Now they do not call them hubs. They call 
them focus cities. But 31 percent of their traffic today is now 
connecting online on Southwest which is a new phenomenon for 
them.
    The other thing they do is Southwest has chosen to avoid 
the bigger airports, not necessarily because they do not want 
to be there. It gives them better operational reliability which 
they need in their low cost, high frequency turn around 
business. They cannot afford to have an airplane sit on a 
taxiway for 40 minutes to get in the air, when they have 20 
minute turn arounds.
    Mr. Leonard. May I comment on that? Southwest reported 
yesterday that they cannot go to Minneapolis because they 
cannot get gates. That was in the newspaper yesterday. 
Southwest took 27 years to build. And it was highly protected 
in its early days at Love Field to give it a starting point. We 
could not start AirTran today. It would be virtually impossible 
for us to start AirTran today. Because we ended up with 22 
gates in Atlanta as a result of Eastern's demise. Had we not 
had that gate position in Atlanta, and we were trying to start 
today in Atlanta. I can assure you there would not be one gate 
available for us. Or if there was one gate, it would only be 
one. You could not build a 22-level complex like we have today.
    I was told yesterday that the carriers had just gotten 
slots at Chicago O'Hare. New entrants that are going into 
Chicago O'Hare. They got the slots as a result of AIR 21. But 
they cannot get any gates. The only gates they can get are at 
the international terminal where they have to pay 17 dollars a 
passenger.
    So the barriers to entry are significant for new carriers. 
And it is gates, slots, predatory behavior.
    Senator Kerry. Well, that is a difficult balance for us. 
Obviously I need to end up here. But the infrastructure is way 
behind. We all know that. But we have to be careful not to 
penalize some of these larger issues as we take the time to 
build out in the way that most airports, most states, most 
capital cities and others are now investing seriously to do. 
And that was the purpose of the move we made with Air 21. So I 
think we have to balance that. I do not want to abuse my time.
    Yes, Mr. Goodwin? You wanted to respond.
    Mr. Goodwin. Senator Kerry, just to follow up on one of 
your opening comments about what will happen consolidation wise 
and that you find it difficult that I cannot state for a fact 
that American or Delta or Northwest will do something.
    I also read the papers. I know they are talking to each 
other. At least, that is what I read. But I do not know whether 
there is a transaction that can be put together that does what 
this transaction does. This transaction puts together two 
networks that are highly complementary. It protects labor. It 
has got a lot of common benefits that most other combinations 
do not have.
    And while there may be a lot of discussion going on and a 
lot of gnashing of the teeth, at the end of the day, I do not 
know whether they will be able to bring a product to the table 
that provides the consumer benefits that we have identified in 
this transaction.
    Senator Kerry. Well, that is an interesting observation 
obviously. That is part of what has piqued our curiosity as we 
met with you. And I have sort of been agnostic about it and 
trying to understand it better. I mean, it is hard to imagine 
that they are not going to be able to find a way to be able to 
do that, one or the other.
    Senator Rockefeller. Senator Wyden.
    Senator Wyden. Thank you. I thank my colleague. Mr. Wolf, 
on April 11th--and you are not going to be able to see the 
headline. But the Washington Post ran a story that said airline 
service dips in three of four categories. And they go on in 
this article to single out one airline in this country for poor 
service and deteriorating service, and that is your airline.
    The article states--and I want to quote here--that with 
respect to Arlington-based US Airways, and I quote, your 
airline ``showed poor performance in all service categories,'' 
every single one. And your spokesman, and I will quote here 
again, was Richard Weintraub. And he said: ``We've acknowledged 
the issues. The numbers speak for themselves.''
    So this was the article on April 11th. And I listened very 
carefully to your statement this morning where you said there 
were not any real problems with service. In fact, you said 
essentially your service is terrific, that you move enormous 
numbers of people constantly. I think I would like to begin by 
asking you what happened between April 11th, when your airline 
was singled out for deteriorating service, acknowledged by your 
spokesman in that article in the Washington Post, and this day 
just several months later where you say the service is so good.
    Mr. Wolf. Clearly, an insightful observation which needs a 
distinct answer. I believe we are in the service business. We 
do not have a hard product. We do not have a television set or 
a refrigerator or a widget. We are in the service business. It 
has been my long held view that if you lose a passenger's bag, 
he or she only remembers it for the balance of his or her 
natural life and tells everybody about it in the world. It is 
the last thing you want to do.
    In 1997 and 1998, having joined the company in the early 
part of 1996, we talked to all of our employees about what we 
wanted to do going forward. We had a five point business plan. 
The business plan lead to actions we were going to take to 
become the carrier of choice.
    And in 1998 and in 1999--excuse me, in 1997 and 1998, we 
compared ourselves monthly to the big four: United, American, 
Delta and Northwest. And for the entire years of 1997 and 1998, 
our composite ranking was No. 1.
    In 1999, we had two significant external events. One, we 
cut over to an entirely new information technology system. It 
was the largest 1-day cutover in the history of the world. We 
could not do it piecemeal. It is like going from the left lane 
to the right lane in the U.K. You cannot do half the cars today 
and half of them tomorrow.
    As much as we put months and months into planning it, it 
was disruptive. And it was disruptive for some period of time. 
It effected our departure dependability and other key 
measurements.
    And, two, in 1999, we negotiated ten labor agreements which 
were significant. And the sum of those two things had a fairly 
significant impact on our service for calendar year 1999, 
which, in our eyes, was abysmal. Not the worst in the industry, 
but abysmal.
    We are back on track this year. In March of this year, we 
had the best arrival dependability performance in the history 
of the company. And our quality this year is back to where it 
was in 1997 and 1998. But the article is correct. 1999 was most 
unsatisfactory.
    Senator Wyden. But, excuse me, sir. In April, your 
spokesman is acknowledging that you had problems. You just said 
you corrected it in March.
    Mr. Wolf. Oh, no, no. I think he is talking about the 
period of time in which the technology migration took place. We 
had significant problems. We had tremendous problems. And we 
got through it.
    Senator Wyden. Well, again, I am mystified by so much of 
what you all in this industry say. And I think this is why 
passengers are gnashing their teeth at airports across the 
country. I mean, here I pointed out in April that you are 
singled out for deteriorating service.
    You have given me this explanation about how somehow 
between April and June, everything seemed to get better. This 
question about structured fares that Senator Kerry asked, I can 
tell you passengers are not going to be able to make any sense 
out of that answer at all. And as you know, there is enormous 
anger on this fare question.
    And I can tell you when the Inspector General puts out his 
report in a couple of weeks, we are going to see that this 
industry once again is not being straight with the public on 
the question of making available the lowest information fare at 
a time that they have the information.
    So I think you heard me say at the beginning I am going to 
do everything I can to keep Congress from voicing approval for 
this particular merger until we have looked at all of the 
implications of this for airline service, and heard about 
copycat mergers which my colleagues have talked about.
    I have just a couple of other questions, again reflecting 
my interest in trying to turn this customer service matter 
around. Let me begin on this, Mr. Wolf, by saying that if the 
industry does consolidate further, what does that do to the 
incentives to put real resources into improving customer 
service? I mean, with fewer competitors and less competition, 
where is the pressure to improve service in order to retain 
customers? You have got them.
    Mr. Wolf. Senator, I think the industry has a history of 
making huge capital investments on an annualized basis. I mean, 
little US Airways is going to take 58 new aircraft this year. 
The sticker price on these things are $48 million to $110 
million apiece. We pay less than that because we buy in 
quantity.
    We are adding gates in Boston. We are adding gates in 
Philadelphia. We are doing all the things that we can do to 
make the shoebox a little tiny bit bigger. Are we doing an 
adequate job comprehensively? We are doing an absolutely 
terrible job. During our natural life, the United States of 
America has built one new airport. And in doing that, it took 
one out of service simultaneously.
    We add a few runways now and then. A little taxiway 
improvement. And we put some money into ATC. Does any of us 
think that the air traffic control system is what it should be? 
And I am not throwing any rocks at them. I am not sure they are 
even adequately funded.
    We were talking a minute ago about some additional gates. I 
mean, we have to make a massive expenditure in infrastructure 
to accommodate the traveling public who is going to be knocking 
on 700 million trips taken by Americans this year. You have the 
same box that it was 10 years ago.
    Senator Wyden. But if you will excuse me, that is saying it 
is somebody else's problem. Senator Rockefeller in my view has 
done extraordinary work in terms of trying to get the funds to 
improve air traffic control. He has been out on the Senate 
floor again and again.
    My concern is that you all in the private sector are not 
doing your share and are not following through, particularly in 
areas like these customer service commitments. We are going to 
see that when the Inspector General comes in with his reports. 
I will wait for that.
    And I will wrap up by asking you to outline what exactly 
are the customer service commitments that you all are making as 
part of this merger? As far as I can tell, we have got 
something on the table involving fares. However, it is going to 
take me a while to decipher what your analysis of structured 
fares mean.
    But tell me, if you would, what customer service 
commitments are being made on this merger specifically.
    Mr. Wolf. We are making, in the personage of United, the 
surviving carrier, we are making two large commitments. One is 
not to raise structured fares for a 2-year period of time. And 
by the way, if they do that, it means the industry cannot raise 
structured fares for a 2-year period of time also. Because no 
one is going to give us an advantage of a lower fare.
    The complexity comes into being, well, what do you do about 
the sales fares, of which there are thousands of them on a 
daily basis? Well, logically I think it says they are going to 
continue because we want to fill our seats. And even though we 
run stronger load factors today than we have in the past, 25 
percent of the seats are empty on average every single day. And 
we want to put somebody in those seats. So we are going to have 
sales that go on into the indefinite future.
    In terms of service, which is your question, we are going 
to be left with United's service levels, their established 
corporate levels as to how many seconds you answer telephone 
reservations, as to whether or not the aircraft did push back 
within 5 minutes or not, how many bags are delayed per 100,000 
passengers on an annualized basis. How many consumer complaints 
do you get? We will continue to report those things to the 
Department of Transportation.
    It is going to be, in many ways, the consumers from the 
small cities that we serve who benefit the most. Rather than 
connecting their bags onto another airline with two different 
employee groups involved in the transfer, the bags will remain 
on one airline.
    Senator Wyden. I am pretty sure the Inspector General is 
going to find that delays are increasing and that we have got a 
serious problem with delays. Are you all making any commitment 
with respect to delays?
    Mr. Wolf. If you look at this week, Senator, I mean, our 
cancellation rate over the past 4 or 5 days has been horrendous 
for air traffic control delays. Our delays are absolutely 
outrageous, which is true of the industry. But it is our 
responsibility to get the airplane out on time. I am not saying 
it is anybody else's. The biggest thing we could do to correct 
delays----
    Senator Wyden. So what are you committing, as part of this 
merger, to do about it? I mean, I thank you for your candor and 
I appreciate it.
    Mr. Wolf. Thank you.
    Senator Wyden. But I would like to know what is being done 
to turn this around. I mean, I sat in this Committee about a 
year ago and I got my head handed to me. We had a vote on the 
passenger bill of rights. It was 19-to-1. And I had all these 
colleagues that I respect tremendously say that we ought to 
have some more time. And I got shellacked. I respect all their 
wisdom and their seniority. But I would like to know what 
exactly is going to be different. You are acknowledging there 
is a problem and I appreciate it. But what I am looking for is 
to actually see something that commits you to doing something 
about the problems of delays. I think the Inspector General is 
going to come in again to illustrate the problem of 
overbooking. He is going to say that people are not being told 
and we are now finding a new legal distinction between what 
constitutes something that is overbooked and what is oversold. 
I am trying to figure out what that means as well. And people 
still are having trouble figuring out what the lowest fare is. 
And I do not get the feeling they would be able to understand 
what was told Senator Kerry about structured fares.
    So I am going to let my friend Senator Cleland get his 
questions. But I wanted to give you one last chance to tell me 
on any of these areas like delays, like the overbooking, are 
you all making any commitments to deal with what you have even 
acknowledged this morning is a serious problem. Either of you 
gentlemen.
    Mr. Goodwin. Senator, there are probably no two people, 
maybe the three of us for sure, that are in the airline 
industry today that are frustrated by the delays that this 
industry is now experiencing and putting their customers 
through. And since deregulation, we have had 125 percent 
increase in consumers using the domestic air transportation 
system, 125 percent. As Chairman Wolf just said a minute ago, 
there has been one new airport constructed in this country.
    Second, there are 70 percent more departures in the air 
today than there were 20 years ago, 70 percent. I do not know 
specifically how many air traffic controllers there are in 
towers today, but I would suspect that it is nowhere near 70 
percent more than there was back in 1980. And I suspect it 
might even be less in that timeframe.
    We are trying in the service business to provide more 
service in more crowded terminals and more crowded airplanes 
with an infrastructure that we have neglected for a long time. 
This Congress, this Committee, the House Transportation 
Committee worked hard to get AIR 21 passed. And for that, this 
industry is extremely grateful. Those funds are vital for us to 
begin the process of putting in place an infrastructure that we 
can even hope to improve our lot in life.
    In the interim, what we are faced with is reducing service 
in order to avoid delays which today is being forced upon us by 
the system itself. United Airlines has had a thousand flights 
canceled this year over and above what was canceled last year 
in the first 5 months as a result of air traffic delays and 
weather--1,000 more. In the first 5 months, we have canceled 
almost three full days of productive product in the marketplace 
as a result of air traffic and weather. That is a significant 
impact.
    The other thing we as an industry have to do is we need to 
build more gates. Chairman Leonard mentioned the problem in 
Minneapolis. That problem exists all over the country. But when 
we tried to build more gates, we are continually faced with the 
challenges of getting local communities and local governmental 
agencies to support those initiatives. People do not 
necessarily want more gates at airports. They view more gates 
at airports as more flights, more flights meaning more traffic 
congestion on the highway, more noise in the sky. But it also 
brings more competition and better service.
    So there are a lot of things we want to do to help. But we 
are all going to have to work together in order to really truly 
improve the level of service that our customers deserve in this 
business.
    Senator Wyden. I am going to wrap up. I would only say that 
I do not question for a minute how important it is to deal with 
these infrastructure issues. And that is why I single out 
Senator Rockefeller who has been out there on air traffic 
control and asking questions.
    But I will tell you and you still have not dealt with it 
today. It is why you fought the passenger bill of rights is 
that your industry will not commit in an enforceable way to 
give the consumer objective, straightforward information that 
you have in your possession and it would simplify their lives 
and improve their travel choices.
    We are not calling for a constitutional right to a fluffy 
pillow here. We are saying that folks ought to get good 
objective information. And I hope after the Inspector General 
gives us this new report your industry will commit to doing 
your share on this customer service question. And that is to 
support an enforceable set of protections for the passengers on 
customer service. And I thank you, Senator.
    Senator Rockefeller. Thank you.
    Senator Cleland.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. I am lobbying for the fluffy pillow. I do 
not know about anybody else. But let me just thank you 
gentlemen for coming down and being here. Mr. Goodwin, I 
appreciate your statement. Just for the record, the solution in 
terms of infrastructure improvements is to build gates, not 
Bill Gates.
    Mr. Goodwin. Thank you for correcting the record, Senator.
    Senator Cleland. Thank you all for coming.
    Mr. Leonard.
    Mr. Leonard. Yes, sir.
    Senator Cleland. AirTran has had a very positive impact on 
air traffic for the consumers in Georgia and Atlanta and the 
Southeast. I understand you have saved some several hundred 
million dollars for consumers there and lower air fares in 
Atlanta.
    Mr. Leonard. Yes, sir.
    Senator Cleland. Would you like to tell us a little bit 
about that story?
    Mr. Leonard. Well, we run a 22 gate complex in Atlanta. We 
are running about 140 flights a day. We think we will get that 
up to about 200. But if you take a look at the markets that we 
go into, fares typically drop 40 to 60 percent. The load 
increases by 50 percent. So we take people out of cars and off 
trains and buses and actually provide affordable transportation 
to people who otherwise would not be able to do it. The net 
effect of that is about $700 million in savings to the consumer 
in the Atlanta marketplace.
    Senator Cleland. That is a powerful impact. Now, tell me a 
little bit about your belief about the proposed merger of 
United and US Airways. How would that affect price competition 
in your opinion?
    Mr. Leonard. We believe that the United and US Air merger, 
the impact will not be significant. We believe there will be 
slight increase in pricing. But it will not be significant 
because the top six airlines behave like the top three today 
and they do not compete on pricing in any event. We believe 
that if we were able to provide a network system at Washington 
National, we could bring $600 million of savings to the 
consumer in that marketplace as well in the first year.
    Senator Cleland. And you have testified that the slots 
being given to DC Air under this merger should instead be given 
to other carriers and that such a relocation of the slots would 
have actually far more impact on passengers and fares than the 
merger itself. Favorably if other carriers were allowed into 
D.C. National, is that correct?
    Mr. Leonard. Yes, sir. We would respectfully disagree with 
DC Air's cost estimates. When we look at a carrier like ComAir, 
who is the largest regional jet carrier, I believe, in the 
country, if not the largest, one of the largest, their costs, 
unit costs, are considerably higher than ours. And they have a 
huge network.
    So--I cannot explain how somebody would be operating a 
small number of jets could have cost advantages better than 
ComAir's. And even if they had costs equal to ComAir's, they 
would certainly be nowhere close to ours.
    We have done an analysis on a 500 mile flight of the $75 
fare, which is about our average fare. A regional jet would 
lose about $164 a flight. And we would make about $548 a 
flight. And that is all wrapped around the size of the airplane 
and the cost of operating smaller airplanes versus larger ones.
    Senator Cleland. And you have estimated you can save 
consumers an additional $600 million with a network at Reagan 
National. Is that correct?
    Mr. Leonard. That is correct.
    Senator Cleland. Is that because you are using the 
smaller--what is it? Boeing 717?
    Mr. Leonard. Boeing 717 which is the cleanest airplane in 
the sky today and also the quietest airplane in the sky today.
    Senator Cleland. Of course, noise is a big concern at 
National, and in any neighborhood in America. But you feel that 
your flying the 717 into National could not only save money, 
but deal with the noise problem there?
    Mr. Leonard. Absolutely. As I said, today it meets all the 
noise requirements. It is really the quietest airplane on both 
takeoff and landing certified today, much, much quieter than a 
CRJ.
    Senator Cleland. Thank you, very much for those 
observations. And I thank you very much for your service to 
Georgia and other parts of the country. Thank you, Mr. 
Chairman.
    Mr. Leonard. Thank you, Senator.
    Senator Rockefeller. I wish to thank all of our panelists 
for their patience and courtesy. And this hearing is adjourned.
    [Whereupon, at 12:35 p.m. the hearing was adjourned.]


                   UNITED AIRLINES/US AIRWAYS MERGER

                              ----------                              


                        THURSDAY, JUNE 22, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:45 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. We reconvene today for round 2 
of the Commerce Committee hearing on the proposed merger of 
United Airlines and US Airways. With the merger pending, the 
Department of Transportation General Counsel, Nancy McFadden, 
is restricted in her ability to comment specifically on the 
merger. We look forward, however, to her description of the 
transportation review process and the extent of the 
Department's role in preserving competition in the United 
States airline industry.
    For the same reasons, Justice Department officials are 
unable to comment specifically on the merger. Albert Foer, 
president of the American Antitrust Institute, has graciously 
agreed to outline some of the key issues that the Antitrust 
Division should focus on in its review of the proposed merger.
    Do any of the Members wish to make any comments before we 
proceed?
    [No response.]
    The Chairman. Thank you. Ms. McFadden, we will begin with 
you. Thank you for being here.

     STATEMENT OF HON. NANCY E. McFADDEN, GENERAL COUNSEL, 
                  DEPARTMENT OF TRANSPORTATION

    Ms. McFadden. Thank you, Mr. Chairman, and distinguished 
members of the Committee. I appreciate the opportunity to come 
before the Committee this morning to discuss the state of 
airline competition and to describe the Department of 
Transportation's role in reviewing airline mergers and 
acquisitions. I have submitted a written statement and ask that 
it be made a part of the record, Mr. Chairman, and I will 
briefly summarize that testimony for you this morning.
    At the outset, let me assure you that the proposed United 
Airlines/US Airways transaction, indeed, any major transaction 
will be thoroughly examined by the Department of Transportation 
with the goal of preserving competition in the airline 
industry.
    As the Chairman noted, and I thank you for that, we cannot, 
of course, discuss the specifics of the proposed transaction, 
but we understand the Committee's great interest in this matter 
and so let me briefly touch on the matter before you.
    The structure of the airline business today reflects 
Congress' decision to deregulate the industry in 1978. As was 
discussed a lot yesterday, airlines have literally reshaped 
their point-to-point route systems into hub-and-spoke systems. 
Operating at a hub creates efficiency advantages for the 
carrier and service advantages for many travelers, but it also 
creates competitive disadvantages for nonhubbing airlines.
    The resulting lack of competition in many hub routes 
usually causes fares in hub markets to be higher than fares in 
comparable nonhub markets and, as you noted yesterday, Mr. 
Chairman, for this reason it is the Department of 
Transportation's view that low fare airlines are the best hope 
for competition at the major airlines' hubs.
    My written testimony describes a number of other 
developments since deregulation which have reshaped the 
industry: the wave of airline mergers in the 1980s, increasing 
globalization, and the development of international alliances, 
and the more recent phenomenon of domestic alliances.
    In addition, in the 1990s we saw increased focus on the 
value of new airline entrants, especially in dominated hub 
markets, and the difficulties faced by those new entering 
carriers. Congress has addressed this issue most recently in 
several procompetition provision in AIR 21 and, as you know, 
the Department of Transportation has taken a number of other 
steps to promote competition and protect against 
anticompetitive practices.
    Now, I paint this backdrop to give a sense of the state of 
airline competition, but also to make two points. First, we 
have learned a lot about the airline industry over the past 15 
to 20 years. We simply have a greater understanding today than 
we did 15 years ago about how airlines act and react in a 
deregulated environment.
    The second point I would like to make is the Justice 
Department and the Department of Transportation, particularly 
over the last 7 or so years, have shown the ability and will to 
work to preserve airline competition, often working hand-in-
hand with Congress. We will bring to bear, as we closely 
scrutinize the proposed merger, the experience and expertise 
and hard lessons that we have learned over the past 15 to 20 
years, as well as the will to act to preserve competition.
    Let me turn briefly to the role that the Department of 
Transportation plays in the review of mergers and acquisitions. 
As has been noted, the Justice Department is, of course, 
responsible for enforcing the antitrust laws and determining 
whether to challenge any merger under those laws. The 
Department of Transportation will conduct its own analysis of 
the merger and submit its views to the Justice Department, as 
we have done in past cases. This process is confidential. In 
addition, the Department has separate regulatory authority and 
must grant its approval before some parts of the transaction 
may go forward.
    First, as was discussed yesterday, the parties have 
announced plans to spin off most of US Airways operations at 
Washington Reagan National Airport to a new airline. This new 
airline must obtain economic operating authority from the 
Department of Transportation as well as safety authority from 
the FAA.
    In determining whether to grant economic operating 
authority, we must determine whether the firm is fit, willing, 
and able to perform air transportation and comply with 
applicable legal requirements. In determining fitness, we 
review an airline's financial resources, managerial 
capabilities, and compliance disposition. The FAA, under its 
safety authority, conducts a separate comprehensive safety 
fitness analysis of the new carrier.
    Now, second, the proposed acquisition will also involve the 
transfer of US Airways international route authority in some 
limited entry markets. Here, too, the Department must first 
approve the transfer. We may approve a transfer only if we find 
that it is consistent with the public interest.
    And third, the Department has the obligation to protect 
consumers from unfair and deceptive practices by airlines. In 
carrying out that responsibility, we will review the merger's 
arrangements to ensure that the rights of consumers are 
protected. For example, the merger may well affect the existing 
reciprocity benefits available to members of United and US 
Airways frequent flier programs. We will look at whether the 
airlines will give consumers reasonable notice and an 
opportunity to adjust to any changes in such programs.
    Finally, let me briefly outline the factors we consider in 
our competitive analysis of our proposed airline merger. We 
look at the merger's likely impact on competition in all 
relevant markets. We will examine whether the acquisition will 
substantially reduce competition in relevant markets, and a key 
question will be whether the proposed spin-off of US Airways 
operations at Reagan National to DC Air will create an 
effective competitor in the Washington, D.C. markets affected 
by the merger.
    We will additionally investigate whether the relatively 
large size of the airline created by combining United and US 
Airways will make entry into the industry by new airlines more 
difficult, and we will also examine the potential competitive 
reactions of other airlines.
    In conclusion, let me reaffirm our commitment to continuing 
our efforts to ensure that consumers throughout the United 
States benefit from airline deregulation, not suffer from it. 
The need to ensure competition will guide our review of the 
United/US Airways transaction.
    Thank you, Mr. Chairman. That completes my statement. I of 
course would be happy to answer any questions you or the 
members might have.
    [The prepared statement of Ms. McFadden follows:]

    Prepared Statement of Hon. Nancy E. McFadden, General Counsel, 
                      Department of Transportation

Mr. Chairman, Ranking Member Hollings, and Members of the Committee:

    I appreciate the opportunity to come before the Committee to 
discuss the state of airline competition and to describe the Department 
of Transportation's role in reviewing airline mergers and acquisitions. 
The hearing today is precipitated by the announcement by United 
Airlines and US Airways of a major merger proposal.
    On behalf of Secretary Slater, I want to assure the Committee that 
we will maintain our commitment to preserving airline competition in 
order to ensure that consumers through the United States continue to 
benefit from airline deregulation, and that this proposed transaction, 
indeed any major transaction, will be thoroughly examined by the 
Department of Transportation with the goal of preserving competition in 
the airline industry.
    We cannot, of course, discuss the specifics of any individual 
transaction. However, we understand the Committee's great interest in 
this matter, and so I would like to describe generally how the 
Department examines any such transaction.
    My testimony today will cover three subjects: some background to 
the current state of competition in the airline industry, the 
Department's role in reviewing airline mergers and acquisitions, and 
the factors that we will look at in analyzing a merger or acquisition.
    The structure of the airline business today reflects Congress' 
decision to deregulate the industry in 1978. Congress correctly 
determined that the public would obtain better service and fares if 
airlines had to respond to consumer demands and competition. Congress 
therefore phased out the economic regulatory regime that had long 
authorized the Civil Aeronautics Board to dictate where airlines could 
fly and what they could charge.
    In responding to market demands and the need to improve their 
efficiency, airlines literally reshaped their point-to-point route 
systems into hub-and-spoke systems. Hub-and-spoke systems enable 
airlines to serve the maximum number of city-pair markets with a 
minimum number of airplanes and to maximize traffic flow by 
consolidating connecting passengers with different destinations on each 
flight. Operating at a hub creates service advantages for many 
travelers, since it gives travelers at hub cities many more flights and 
enables airlines to offer more service in markets that do not have 
enough traffic to sustain non-stop service. On the other hand, an 
airline operating a hub gains such great competitive advantages on the 
spoke routes at its hub that other airlines without a hub at one end 
point of such a spoke route find it hard to compete with the hubbing 
airline. The resulting lack of competition in many hub routes usually 
causes fares in hub markets to be higher than fares in comparable non-
hub markets.
    Another development in the first years after deregulation was new 
entry--quite a few firms entered the airline business (or began 
interstate service for the first time). Relatively few survived the 
1980s, but one of those that did--Southwest Airlines--has since 
expanded its low-fare operating strategy throughout most of the 
country. Two other entrants of that era--America West and Midwest 
Express--are also operating successfully today.
    The 1980s saw a wave of airline mergers. At that time, federal law 
still required all such transactions to obtain the prior approval of 
the Department of Transportation. The Department approved almost all of 
the merger proposals submitted to it before the complete phasing-in of 
deregulation ended the Department's approval authority over airline 
mergers and acquisitions. Since the end of 1988, the Department of 
Justice has been responsible for determining whether mergers and 
acquisitions in the airline business should be challenged as 
anticompetitive.
    In the 1990s, airlines developed new strategies for delivering 
their services. They viewed the ability to offer a broader network of 
services as critical. This led to the creation of alliances in both 
domestic and international markets that included code-sharing 
arrangements and frequent flyer program reciprocity.
    The development of international alliances has been part of the 
larger process of globalization. Responding to this increasing 
globalization, the Clinton-Gore Administration has worked hard to open 
up international markets to competition and entry by U.S. airlines. In 
the last seven-and-one-half years, the United States has reached open 
skies agreements with forty-six countries that allow any U.S. airline 
to serve points in those countries from any U.S. point and to set fares 
free of government regulation. As a result of these successful efforts, 
we have seen the development of global airline alliances that have 
promoted competition in thousands of city-pair markets throughout the 
world.
    More recently, major U.S. airlines began forming alliances with one 
another. In 1998, United planned an alliance with Delta, Northwest with 
Continental, and American with US Airways. These domestic alliances 
were different from the international alliances. The latter usually 
created new networks by linking route systems of U.S. and foreign 
airlines on an end-to-end basis and involved airlines that could not 
enter each other's domestic markets due to the constraints of bilateral 
aviation agreements. The alliances between U.S. airlines, on the other 
hand, involved airlines that already had the authority to enter any 
domestic market. These alliances were potentially more problematic.
    In the face of these proposed domestic alliances, Congress enacted 
legislation requiring the major airlines to submit to the Department of 
Transportation any joint venture agreements between them that covered 
frequent flyer programs, code-sharing, and wet leases. The Department 
has used that authority to obtain modifications that eliminated 
potentially anticompetitive features in joint venture agreements. In 
addition, the Justice Department filed suit against Northwest's 
acquisition of the major block of Continental stock. The other two 
alliances--the United/Delta and American/US Airways alliances--have not 
gone beyond frequent flyer reciprocity arrangements and provisions for 
the reciprocal access to airport executive lounges.
    In the 1990s, we also saw increased focus on the value of new 
airline entrants, especially their presence in dominated-hub markets, 
and the difficulties faced by those new entrant carriers. This 
Committee has spent much time over the past few years looking into 
airline competition and impediments to new entry. You have addressed 
this issue most recently in several pro-competition provisions in AIR 
21, the FAA reauthorization act signed into law in April of this year. 
As you know, for example, the bill included a provision that airports 
dominated by one or two carriers must file a competition plan with the 
Department before raising passenger facility charges. And the DOT has 
taken a number of steps to promote competition and protect against 
anticompetitive practices. For example, the Department has focused on 
the possibility that the joint travel website being created by five 
major airlines might operate in a way that may reduce competition in 
the airline industry and the airline distribution business. The 
Committee has also had questions about the website and intends to hold 
a hearing on the subject. The Department has begun a study of the 
website firm, Orbitz, originally called T2, and recently asked Orbitz 
to provide detailed information on its organizational and operational 
plans and to provide copies of relevant documents.
    As a result of all these developments, we have an industry that, 
for the most part, has proven deregulation to be a success. But 
deregulation can only be successful for the consumers it was meant to 
benefit if there is adequate competition in the airline industry. That 
is why close scrutiny of the proposed merger between United and US 
Airways is critical for the country's airline travelers.
    I paint this backdrop to give a sense of the state of airline 
competition, but also to make two points. First, we have learned a lot 
about the airline industry over the past 15 years from these 
developments. We simply have a greater understanding of how airlines 
act and react in a deregulated environment. And second, the Justice 
Department and the Department of Transportation, particularly over the 
past seven-and-a-half years, have shown the ability and will to work to 
preserve airline competition, often working hand in hand with Congress. 
We will bring to bear, as we closely scrutinize any proposed merger, 
the experience and expertise we have honed over the past 15-20 years, 
as well as the will and ability to act to preserve competition.
    Let me now address the role the Department of Transportation plays 
in the review of airline mergers and acquisitions. Both the Department 
of Justice and the Department of Transportation have responsibilities 
for reviewing the proposed transaction between United and US Airways.
    The Justice Department is responsible for enforcing the antitrust 
laws and determining whether mergers and acquisitions in the airline 
industry should be challenged on competitive grounds. The statute now 
governing airline mergers, section 7 of the Clayton Act, prohibits 
mergers and acquisitions that may substantially lessen competition in 
any relevant market or tend to create a monopoly.
    The Department of Transportation will conduct its own analysis of 
the merger and submit its views and any relevant information in its 
possession to the Justice Department, as we have done in past cases. 
This process is confidential. We have asked United and US Airways to 
provide us all the information necessary to thoroughly analyze the 
transaction. In doing that analysis, we will also rely on the fare and 
traffic data periodically reported to us by the airlines.
    In addition, the Department has separate regulatory authority and 
must grant its approval before some parts of the transaction may go 
forward. First, the parties have announced plans to spin off most of US 
Airways' operations at Washington Reagan National Airport to a new 
airline. This new airline must obtain economic operating authority from 
the Department as well as safety authority from the FAA. In determining 
whether to grant economic operating authority, we will determine 
whether the firm is ``fit, willing, and able'' to perform air 
transportation and comply with applicable legal requirements. In making 
fitness determinations, we review an airline's financial resources, 
managerial capabilities, and compliance disposition. The FAA, under its 
safety authority, conducts a separate, comprehensive safety fitness 
analysis of the new carrier before issuing the Air Carrier Certificate 
and Operations Specifications.
    Second, the proposed acquisition will also involve the transfer of 
US Airways' international route authority in some limited-entry 
markets. Here too, the Department must first approve the transfer of US 
Airways' certificate authority, under 49 U.S.C. 41105. We may approve a 
transfer only if we find that it is consistent with the public 
interest. The Department by statute must specifically consider the 
transfer's impact on the viability of the parties to the transaction, 
on competition in the domestic airline industry, and on the trade 
position of the United States in the international air transportation 
market. The Department will also examine any other public interest 
issue raised by the transfer.
    The Department will only decide whether to approve the transfer of 
the international route authority after it has established a formal 
record and given all interested persons the opportunity to comment on 
the proposed transfer. The Department's discussions with the Justice 
Department on the overall merger will include a discussion of the 
competitive effects of the transfer of US Airways' international 
routes. If the Department determines that the transfer would be 
contrary to the public interest on competitive grounds or for another 
reason, the Department may disapprove the transfer in whole or part. 
Alternatively, the Department may condition its approval on 
requirements that would protect the public interest.
    Third, the Department additionally has the obligation to protect 
consumers from unfair and deceptive practices by airlines. In carrying 
out that responsibility, we will review the merger's arrangements to 
protect the rights of consumers. For example, the merger may well 
affect the existing reciprocity benefits available to members of the 
United and US Airways frequent flyer programs. We will look at whether 
the airlines will give consumers reasonable notice and an opportunity 
to adjust to any changes in such programs. If we find that the 
provisions in their frequent flyer agreements fail to provide adequate 
notice and an opportunity to obtain award travel, we will ask the 
airlines to modify the agreements. Accordingly, we have asked United 
and US Airways to provide us with their relevant frequent flyer program 
reciprocity agreements, and their plans for accommodating their members 
concerning any potential changes.
    Finally, I would like to outline the factors we will consider in 
our competitive analysis of the proposed United/US Airways merger. We 
will be looking at the merger's likely impact on competition in all 
relevant markets. We will examine such issues as whether the 
acquisition will substantially reduce competition in relevant markets 
because other airlines either do not offer effective competition now or 
will be unlikely to enter if United raises fares or reduces service. A 
key question will be whether the proposed spin-off of US Airways' 
operations at Reagan National to DC Air will create an effective 
competitor in the Washington, D.C. markets affected by the merger.
    The relevant markets include city-pair markets, both those served 
by the parties with nonstop flights and those served with connecting 
flights. In examining the markets affected by the merger, we may well 
consider flights operated by United from one airport in the same 
metropolitan area as competing with flights operated by US Airways from 
a different airport in the same area. If a significant number of 
travelers strongly prefer to use one airport, the relevant markets may 
also include routes between specific airports. In analyzing whether 
entry by other airlines into markets served by the combined airlines is 
likely, the Department will examine whether the combined market share 
of the merging airlines will become large enough at individual cities 
to discourage entry by other airlines. We must also consider whether 
airport facilities will be available to airlines wishing to enter 
markets served by United and US Airways.
    We will additionally investigate whether the relatively large size 
of the airline created by combining United and US Airways will make 
entry into the industry by new airlines more difficult. We will also 
examine the potential competitive reactions of other airlines.
    Looking at the merger's competitive effects will carry out 
Congress' judgment that market forces, not government regulators, 
should determine the routes flown by airlines and the fares charged by 
airlines. But market forces will enable consumers to obtain the best 
service at the best price only as long as the airline industry is 
competitive.
    Members of Congress and local communities have understandably 
expressed concern about whether the service now provided by US Airways 
will be maintained after its acquisition by United. For example, some 
communities have questioned whether they will continue to have access 
to nonstop flights to Reagan National. We cannot directly answer these 
questions, since we cannot predict United's long-term plans for 
operating the combined business, and we have no way to guarantee that 
United or DC Air would maintain existing levels of service. Nor can we 
know whether other airlines--existing or new--might choose to 
inaugurate new services to these communities. Under deregulation, each 
airline decides for itself which routes it will fly and what fares it 
will charge. However, together with the Justice Department, we will 
seek to ensure that the proposed merger does not diminish competition 
and prevent other airlines from entering and competing in markets where 
United may reduce service or raise fares. The key question in 
determining whether the United/US Airways acquisition will lead to 
better or worse service and fares for consumers is whether the combined 
airline will face competition and therefore must meet the demands of 
consumers. The Justice Department will address that question by 
applying the antitrust laws. We at the Department of Transportation 
will provide the Justice Department with the results of our own 
analysis of that question.
    Because of the Committee's longstanding interest in airline 
consumer protection issues, I would like to provide a brief status 
report on some of the actions the Department has already taken to 
implement the passenger rights provisions contained in AIR 21, the 
Wendell H. Ford Aviation Investment and Reform Act for the 21st 
Century. For example--

   We have notified foreign carriers of their new obligations 
        under the law to comply with the Air Carrier Access Act.

   We issued rules to implement the new smoking prohibitions 
        that apply, for the first time, to foreign carriers flying to 
        and from the U.S.

   We have notified all U.S. and foreign carriers of their new 
        statutory obligations to add additional assurances for 
        survivors and families of victims of aircraft accidents in 
        airline family assistance plans on file with DOT and the NTSB.

   We have implemented procedures to enable us to investigate 
        each Air Carrier Access Act complaint received by DOT.

   We will be meeting shortly with the Justice Department, 
        National Council on Disability, and the Access Board to develop 
        an outreach plan to provide information and technical 
        assistance to air carriers and members of the disability 
        community regarding Air Carrier Access Act requirements.

   An advisory Committee will soon be established to assist us 
        in complying with the AIR 21 provision requiring the reporting 
        of the nature and causes of flight delays.

   In the next month or two, we will begin to report complaints 
        regarding the death, injury and loss of animals in air 
        transportation as a separate category in our monthly Air Travel 
        Consumer Report.

   We have already reported to Congress on the filing of 
        voluntary customer service plans by the Air Transport 
        Association carriers.

    I would also note that, before AIR 21 was signed into law, we had 
doubled the minimum baggage liability limit imposed on domestic 
carriers and had begun to list Air Carrier Access Act complaints 
separately in our Air Travel Consumer Report. We will continue to treat 
airline consumer protection issues, in general, and the implementation 
of the AIR 21 mandated passenger rights provisions, in particular, with 
the highest priority. I must point out to the Committee, however, that 
without the additional funding provided by AIR 21 for consumer 
protection compliance and enforcement activities, the benefits to 
passengers of AIR 21 will largely be lost. Notably, the Senate-passed 
appropriations bill for the Department contains no additional funds for 
airline consumer protection activities, and the House-passed bill 
contains only an additional $300,000 for this purpose, far short of the 
$1.4 million requested by the Administration. We hope that this 
Committee will work to ensure the needed funding in the upcoming fiscal 
year.
    In conclusion, I wish to reaffirm our commitment to ensuring that 
consumers throughout the United States continue to benefit from airline 
deregulation. That will require us to continue our efforts to promote 
airline competition. The need to ensure competition will both guide our 
review of the United/US Airways transaction and guarantee that we will 
carefully examine its potential impact, and it will underpin the use of 
our other economic regulatory authority over the airline industry.
    Thank you Mr. Chairman. This completes my prepared statement, and I 
would be pleased to respond to your questions and those of the 
Committee.

    The Chairman. Thank you very much, and again I want to 
thank you, Mr. Foer, for your patience yesterday, and I hope 
you understand why I did not think it would be a good idea to 
continue the hearing at that time.
    Mr. Foer.

            STATEMENT OF ALBERT A. FOER, PRESIDENT, 
                  AMERICAN ANTITRUST INSTITUTE

    Mr. Foer. Thank you, Mr. Chairman. The American Antitrust 
Institute is an independent education, research, and advocacy 
organization and in my remarks I will focus on three questions: 
how well is airline competition working currently, what effect 
will this merger have on the industry and on consumers, and is 
there a viable remedy, short of blocking the merger?
    Although at first glance the industry appears to be 
structured in a reasonably competitive way, one must also take 
into account other factors that reduce the intensity of 
rivalry: alliances that undermine the degree of competitive 
threat that an airline represents in regard to its allies, a 
hub-and-spoke system that results in elimination of most 
competition from most hubs and permits prices at such hubs to 
rise to high levels, high entry barriers, and other forms of 
collaboration, such as the T2 joint venture, that can reduce 
the intensity of competition.
    Price discrimination, which depends on the presence of 
market power and also complicates the task of comparison 
shopping, has reached new levels of sophistication in the 
airline industry. So our summary view is that we have an air 
transportation system that contains important elements of both 
rivalry and collaboration in which rivals are constantly 
seeking ways to reduce the intensity of competition. The 
implication is that the United/US Airways merger must be 
scrutinized with great care in order to weigh the facts and 
reach a firm conclusion on its ramifications.
    What effect will this merger have on this industry and on 
consumers? Perhaps the most critical issue is whether other 
mergers will be triggered in strategic response to the United/
US Airways merger. Now, the Clayton Act requires consideration 
of trends to concentration. The US Airways merger should be 
considered not in the abstract, but in the context of what is 
likely to occur. Whether the decision is to stop the merger or 
to permit it, difficult predictions about the future of the 
industry have to be made.
    Mr. Goodwin yesterday indicated that he could not make a 
prediction with absolute certainty about whether further 
mergers will occur. That is not the right standard. It is not 
absolute certainty. It is a prediction that is something less 
than speculation, but based on the best facts available. That 
prediction is going to have to be made one way or the other, 
because it is going to be necessary to ask the question, at 
what point will there be too little competition. If the line is 
not to be drawn here, where will it be drawn?
    Whatever the decision, the public will have a right to 
expect a full explanation of what predictions were made and on 
what basis.
    Is there a viable remedy short of blocking the merger? If 
the merger is permitted, there must be conditions that will 
ensure against loss of competition. The Antitrust Division 
should use its bargaining power to do more than assure that the 
recipient of divested assets is viable.
    Divested assets must also be employed so that they pose the 
same threat to coordinated interaction and the same level of 
consumer choice as is now provided by US Airways. It is against 
this standard that United's proposal to spin off assets at 
Reagan National Airport must be measured and any additional 
terms or conditions for other overlap situations must be 
evaluated.
    With respect to United's offer of a 2-year price freeze, we 
think great skepticism is appropriate, because such a freeze in 
the context of yield management techniques that continually 
change the mix of seats available at any particular price will 
be no more than a gimmick. Moreover, this is not a temporary 
merger but, like a diamond, is intended to be forever.
    Determining whether this merger is legal, or how it can be 
made legal through various conditions that might be imposed 
requires the Antitrust Division to undertake a detailed 
evaluation of facts and to make sophisticated predictions. A 
thorough analysis in our opinion requires consideration of US 
Airways' ability to survive as a competitive airline, its role 
as a potential competitor, United's role as a potential 
competitor, and the likelihood that this merger will trigger 
additional mergers.
    Ultimately, what is required is a vision of how 
concentrated we will allow the market for domestic air 
transportation to become. This can be established in the course 
of antitrust analysis, or it can become established by a 
specific Act of Congress, but once an industry becomes as 
concentrated as air transportation, it makes no sense to treat 
each merger on an ad hoc basis without a larger vision of where 
we are headed.
    Thank you, Mr. Chairman, Members of the Committee.
    [The prepared statement of Mr. Foer follows:]

           Prepared Statement of Albert A. Foer, President, 
                      American Antitrust Institute

Mr. Chairman and Members of the Committee:
    Thank you for this opportunity to present this statement on behalf 
of the American Antitrust Institute regarding the proposed acquisition 
of US Airways by United Airlines. I am Albert A. Foer, President of the 
American Antitrust Institute. The American Antitrust Institute is an 
independent non-profit education, research and advocacy organization. 
We are generally centrist and pro-competition in orientation and 
operate with the assistance of an advisory board composed of many of 
the leaders of the antitrust community, including academicians and 
practitioners in the fields of law, economics, and business.
    It is always difficult for an outsider to comment on the impact of 
a particular merger. The Department of Justice, investigating whether 
the proposed acquisition of US Airways by United Airlines violates 
Section 7 of the Clayton Act, will have the advantage of proprietary 
information, strategic planning documents, commentary of industry 
experts, and detailed economic analysis to which we are not privy. 
Nevertheless, a transaction of this size, creating a single airline 
with over one-quarter of the national market and a dramatically larger 
share for many city pairs, naturally raises a variety of questions for 
consumers of air transportation. We will focus on three questions: How 
well is airline competition working currently? What effect will this 
merger have on competition and consumers? And is there a viable remedy 
short of blocking the merger?
1. How well is airline competition working currently?
    The deregulation of air transportation that has occurred since 1978 
has had mixed results. On the one hand, prices are relatively low for 
many routes and consumers are flying far more than they were in 1978. 
On the other hand, for city pairs where there is little, if any, 
competition, rates are inordinately high. Consumers often report that 
they do not feel very sovereign. The airlines have mastered the art of 
price discrimination, in an attempt to charge each customer the highest 
price that customer is willing to pay. Ironically, this price is 
called, in economics, the consumer's ``reservation price.'' Price 
discrimination is only possible where there is market power and the 
unusually large role that price discrimination plays in air 
transportation reflects that the airlines do have a high degree of 
market power.
    Where does this market power come from? On a national level, there 
are three dominant airlines of approximate parity (United, American, 
and Delta) but there are additional major players like US Airways, 
Northwestern, and Continental, which bring real competition to certain 
regions and routes. In addition, Southwestern has a significant impact 
as the low price maverick in those markets where it has a presence, and 
a modest number of small carriers also provide the consumer with a 
degree of choice. From this industrial structure alone, one might 
anticipate that the market would be performing in a reasonably 
competitive manner. But one must also look at several other factors, 
which may work to reduce the intensity of rivalry.
    These include:

          a) A system of alliances that may enhance the seamlessness of 
        travel for many consumers but may also undermine the degree of 
        competitive threat that an airline represents in regard to its 
        allies. On the latter interpretation, we have only three truly 
        separate major air systems.
          b) A hub-and-spoke system that in conjunction with practices 
        which are either aggressively competitive or illegally 
        exclusionary efforts to maintain hub monopolies, depending on 
        your perspective, eliminate most competition from most hubs and 
        permit prices at such hubs to rise to high levels.
          c) Other collaborative practices, such as the T-2 joint 
        venture now being constructed by the major airlines for the 
        purpose of either enhancing efficiency in the marketing of 
        airplane seats or for destroying independent ticket agencies 
        and electronic alternatives, again depending on your 
        perspective.

    Each of these features of the airline market has either been 
subjected to investigation by the Justice Department or is currently 
under scrutiny, as is the partial acquisition of Continental by 
Northwest. You can tell the story in two different ways: either we have 
a competitively structured air system that is continually finding new 
ways to enhance efficiency and better serve consumers; or we have a 
system that is in reality far less competitive than it appears to be.
    If the former view is correct, then a merger of the 1st and the 6th 
airlines might not be terribly threatening to competition. If the 
latter view is correct, then this merger can only make a bad situation 
worse.
    My own view is that the industry is somewhere in between, closer to 
the pessimistic end of the spectrum. In this case, we need to ask 
additional questions.
2. What effect will this merger have on the industry and on consumers?
    The Clayton Act is an incipiency statute. The Congressional intent 
was for the law to stop mergers whose effect substantially ``may'' be 
to lessen competition. Congress did not want law enforcement to wait 
until the damage has already been done and it did not want a standard 
of absolute certainty. Congress understood that prediction is inherent 
in the process of merger evaluation.
    The Clayton Act invites the Antitrust Division to take into account 
all of the likely effects of a merger. For example, if the United/US 
Airways deal were likely to trigger additional deals, it would be 
relevant to the determination of whether the United acquisition should 
be permitted. Recall that United, Delta, and American are currently 
more or less equals. News reports strongly suggest that American and 
Delta are already investigating mergers, both with others and with each 
other, in response to the dramatic expansion of United that will be 
accomplished if the merger is permitted. If American and Delta believe 
that they must maintain some rough size parity in order to maintain 
competitive parity, then additional mergers are reasonably likely. This 
presents a difficult problem for the Antitrust Division. It should not 
stop the United merger based on mere speculation about the future; but 
it should not close its eyes to reasonably strong evidence that other 
mergers will quickly follow. The confounding fact is, to let the merger 
go through represents as much a prediction as a decision to stop it.
    The impact of this merger on consumers will depend on many factors. 
Those most immediately at risk, of course, are those dependent on 
airports that are currently served by both United and US Airways and 
who will find themselves deprived of one of what had already been a 
limited number of choices. Choice is what competition is all about. 
Price is often a workable proxy for choice, but even if it were taken 
off the table in this transaction through a meaningful promise not to 
raise prices, consumers would still be impacted in a negative way by 
the reduction of options. Why is it that when an airplane lands and 
taxies toward the terminal, the steward or stewardess so often says, 
``Thank you for flying with ABC Airline. We know you have a choice and 
we want you to choose us again next time you fly.'' I think this is a 
recognition by the airline that consumers are aware that in fact they 
really have few choices, but that choice is important to them. If we 
were to go from six major airlines to five, an important element of 
choice would be lost. But how often does a given consumer booking a 
given trip actually have six airlines to choose among? And if this 
merger triggers others, how much choice will be lost?
    My point is that Justice cannot hide from the need to make 
predictions. It must collect as much information as possible that will 
help it to make the best predictions it can and then it must boldly 
make a judgment. Some of its information will not be public and cannot 
be made public, but the public will be owed an explanation of what 
prediction Justice ultimately relied upon and the reasoning by which 
Justice reached its judgment.
3. Is there a viable remedy short of blocking the merger?
    Most mergers today are either permitted to be consummated or are 
conditionally approved, subject to the divestiture of overlapping 
assets. It is reported that United has proposed two concessions in 
order to take antitrust issues off the table. First, it will hold 
prices in place for two years. Second, it will spin off certain assets 
at Reagan National Airport in order to create a new regional carrier to 
be based there.
    Before asking questions about these proposed concessions, it is 
necessary to put the matter in perspective. The Clayton Act is violated 
whenever competition may be substantially lessened in any line of 
commerce or in any geographic market. If there is one geographic market 
where the illegal effect may occur, the merger is technically illegal. 
Now, the agencies don't act on this severe interpretation because it 
would be wasteful of everyone's resources. If there were a minor 
overlap in one small market, and the whole merger were blocked, this 
would be easy to fix by selling off an offending asset and starting the 
merger all over again. To avoid this inefficient process, the antitrust 
agencies routinely negotiate with merging parties to fix the identified 
problem areas, without sending the parties back to square one. The 
agencies have substantial bargaining power, however, since they do have 
the right to go to court to stop a merger. They must use this power to 
keep the merger from the likelihood that its consummation will lessen 
competition. This is the standard against which United's proposals 
should be measured.
    With respect to the two-year moratorium on price increases, the 
Justice Department should be skeptical. The merger, like a diamond, may 
be forever. If this merger makes it possible for United to raise prices 
in year three, as a result of increased market power, then it should be 
blocked and the two-year concession rejected. If there is not a 
likelihood of a price increase, one wonders why United raised the 
issue?
    But in an industry where price discrimination is so sophisticated 
and widespread, it is also necessary to ask, what is meant by a price 
freeze? The mix of seats sold at different prices changes daily, 
sometimes hourly. To hold one seat at a low price while selling many 
more at a higher price, albeit no higher than the current highest 
price, would be a gimmick of no substantive value to consumers.
    What about spinning off assets to a new airline that can fly in and 
out of Reagan National? The relevant questions appear to be: (a) will 
this new airline have enough assets to survive? (b) will the assets be 
sufficiently independent of United so that they can be used in direct 
competition against United? (c) will the assets include enough valuable 
routes so that the carrier can survive? (d) will the carrier have 
sufficiently competent and air-expert management to survive in a market 
place that will probably quickly come to include more competition from 
low-price Southwestern and from new regional jets? Or, put another way, 
from the viewpoint of the consumer, will this start-up realistically be 
able to step into US Airways' much larger shoes?
    This question in itself subsumes another: what would be the fate of 
US Airways in the absence of this merger? Clearly, it has not always 
flown in calm skies and there has been speculation about its future. 
Justice will again have to make a prediction and the public will again 
be entitled to an explanation of the prediction. If US Airways in 
effect has no future, antitrust policy will have less reason to seek 
the continuity of its franchise. This is not to suggest the presence of 
a ``failing company'' defense, which is well-recognized in the 
antitrust law but is apparently not being claimed here. It is, rather, 
to say that the evaluation of a remedy must take into account the role 
that US Airways would likely have played, against which can be compared 
the de facto substitute player or players expected to replace US 
Airways.
    Indeed, if there is good reason to believe that US Airways could 
have remained independent and healthy, one can ask whether US Airways 
might have been one of a small number of potential competitors that 
could enter the concentrated markets of other large carriers. It may 
have an impact on competition as a potential competitor, and if so, it 
is doubtful that a smaller newcomer will be able to play a similar role 
for many years. Conversely, United claims that it needs to expand into 
the northeast so that it can better serve consumers. This may establish 
United as an important potential entrant whose ability to enter from 
outside, without a merger, plays a role that should not be easily 
dismissed.
    There is a final question we would pose: if the merger is to be 
allowed to go through, what are the best means for assuring that 
divestitures result in no loss of competition? Is it by allowing United 
to spin off selected assets to a hand-chosen competitor? Is it by 
auction of slots? And of course this question must be asked with regard 
to each route in which there the merger will raise concentration to 
unhealthy levels.
Conclusion
    Determining whether this merger is legal or how it can be made 
legal through various conditions that might be imposed, requires the 
Justice Department to undertake a detailed evaluation of facts and to 
make sophisticated predictions. A thorough analysis, in our opinion, 
requires consideration of US Airways' ability to survive as a 
competitive airline, its role as a potential competitor, United's role 
as a potential competitor, and the likelihood that this merger will 
trigger additional mergers. Ultimately, what is required is a vision of 
how concentrated we will allow the market for domestic air 
transportation to become. This can be established in the course of 
antitrust analysis or it can become established by specific act of 
Congress. But once an industry becomes as concentrated as air 
transportation, it makes no sense to treat each merger on an ad hoc 
basis without a larger vision of where we are headed.

    The Chairman. Thank you very much.
    Mr. Foer, first of all, in your written testimony you 
talked more at length about this business of holding fares down 
for 2 years, and I agree with you, and I hope Ms. McFadden 
would agree, too, that sophistication and the complexities of 
the fare system today make it nearly impossible to know whether 
fares were held down over a 2-year period or not, and I do not 
mean to indict the would-be mergerers, but it is just such an 
incredibly complex system.
    Ms. McFadden, I was a bit puzzled yesterday when Mr. 
Johnson testified that by acquiring regional jets to operate on 
the routes that he contemplates operating on and replacing 
other aircraft with the 717 that he would be able to lower 
prices when in fact the cost of operating the newer jet 
aircraft in a reasonable fashion are more expensive. I do not 
understand that computation. Do you have any view on that?
    Ms. McFadden. I am not sure I do, Mr. Chairman. I know that 
at least initially we did hear that the business plan for DC 
Air was to be a low fare competitor, but yesterday I think the 
answer was less clear to your questions about how, in fact, 
that was going to be done, but I cannot give you any specific 
answer in terms of the business plan, or how they can manage 
the economics of that.
    The Chairman. I guess my point is, if you are going to have 
a low fare airline, and you acquire equipment that is more 
expensive to operate per passenger mile, it is hard to see how 
you are going to do that successfully over time.
    I hope that both of you would have a chance to read Mr. 
Kahn's letter to me. I think it is a very important statement, 
just because he is viewed, appropriately, I think, as the, 
quote, father of airline deregulation, and I will not go 
through his entire letter, but he does make two, I think, 
important points, or he makes a lot of important points, but 
two of them are very important.
    He talks about the likelihood that the merger would result 
in suppression of potential competition, and I quote, `` would 
seem to be enhanced by what I take it would be United's 
explanation and justification, namely its need for a strong hub 
in the Northeast, but if United really does feel a need for a 
big hub in the Northeast, this suggests that it is, indeed, an 
important potential competitor for US Airways, and that denied 
the ability to acquire the hub in the easiest noncompetitive 
fashion, by acquisition, it might instead feel impelled to 
construct a hub of its own in direct competition with US Air.''
    The other point that he makes that I think is important 
that should be taken into account is that upon acquisition, the 
first claim on traffic feed does increase the pressure on other 
carriers. In other words both of you alluded to what is the 
ripple effect here. Does this mean we are now going to 
experience several other mergers within the airline industry, 
and we now get down to quote, big three airlines?
    I would like to have your comments on both of those, and 
any other comments on Mr. Kahn's letter that you might have.
    Ms. McFadden.
    Ms. McFadden. Well, I think, as you know, we have talked 
about Dr. Kahn in a number of contexts when we dealt with 
airline competition. We have great respect for him at the 
Department of Transportation, and the kinds of questions and 
concerns that he raises in the letter are exactly the kinds of 
questions and concerns that both the Justice Department and the 
Department of Transportation will be looking at in our 
competitive analysis, and they are valid questions and 
concerns.
    The Chairman. Mr. Foer.
    Mr. Foer. Dr. Kahn is on my advisory board. I had the 
opportunity to have lunch with him about a week ago and talk 
about some of this. I agree with him.
    United yesterday said, well, we could not go incrementally 
to a new hub because that is too expensive and would take too 
long. How did they get the hubs where they are? Of course they 
can expand incrementally if there is enough demand and they 
really feel that they can operate a hub successfully in New 
England, so I think it is a good point, and one worth taking.
    The contrary point is, if US Airways is still a viable 
competitor, and I know there are questions about that, but if 
they are, perhaps they should be considered a potential entrant 
into some of the markets dominated by other large carriers. 
Once they are gone, they are gone. There is not going to be 
anybody else that can step into that role as a potential 
entrant.
    Now, the second point about strategic reactions is one that 
I think the Justice Department should look at extremely 
carefully. They will have the benefit of being able to 
interview competitors and perhaps seek out strategic documents 
within the industry, things that you can do in a nonpublic 
investigation. They can talk to securities analysts and others, 
and they will have to make a determination: will other mergers 
follow?
    A number of Senators yesterday made explanations of why 
they think it is likely to happen. I think it is likely to 
happen, and it seems to me that Justice and also Congress have 
to take into account right now, if this one goes through and 
the next one is announced, how do you react then? Do you say, 
well, we have just closed the barn door and you guys are too 
late? Is that unfair?
    I think we need to take the whole kit and caboodle into 
consideration right now and figure out, where do we want it to 
go?
    The Chairman. Mr. Foer, if I could just add, we have 
notoriously short memories, but for a long time around here we 
believed that the previous administration should have not 
allowed the last round of mergers, or there was a strong 
argument that the previous administration, the Bush 
administration should not have allowed the last round of 
mergers because of the anticompetitive outcome of it, and so if 
we are staring at a potential round of mergers which certainly 
dwarfed those in size, when you are looking at the magnitude of 
them, I--let me just ask one more question. I have taken too 
much time.
    And I understand the position you are in, Ms. McFadden, but 
studies by the GAO and by the Department of Transportation, 
which are very credible to me, clearly indicate--clearly 
indicate, and understandably, I mean, Economics 101--that where 
one airline dominates a hub then fares are measurably higher, 
and I think that is uniform, and we could do a snap study 
tomorrow and come up with the same conclusions.
    So here we are, with the inescapable result of this merger 
being for more hubs, particularly in the Northeast, to have one 
airline dominate, which then means if you accept those studies, 
and I see no reason why anyone would reject those studies, that 
therefore there is going to be higher fares in more hubs, 
particularly in the Northeast part of America, does that make 
sense?
    Ms. McFadden. Well, let me answer your question this way, 
Mr. Chairman. First of all, we agree, and I thought that you 
did a terrific job in asking Mr. Goodwin the question about hub 
fare premiums yesterday. We agreed, and you are right, GAO 
agrees, and the Transportation Research Board last year agreed 
that at dominated hubs there are higher fares, and it is not 
just in slot controlled hubs. It is all hubs.
    We have also seen at hubs where there is low fare 
competition that in fact the fares go down and service 
increases, and so you are exactly right, and I think that that 
is also going to be a question in the competitive analysis of 
this merger. Will the competitive environment, if this 
transaction is consummated, be such that entry into those hubs 
by low fare competitors is possible, because we do think that 
is a very, very important disciplining factor in the airline 
industry and really one of the only left at dominated hubs.
    The Chairman. Mr. Foer.
    Mr. Foer. I would agree.
    The Chairman. Thank you.
    Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. 
Following up on that question, how many dominated hubs are 
there in the United States?
    Ms. McFadden. Senator, I should know the answer to that 
question.
    Senator Dorgan. First of all, how many hubs are there, as 
you define dominated hubs? My understanding is that--well, let 
me withdraw the question.
    Ms. McFadden. About 10 to 12.
    Senator Dorgan. My understanding is that there were 20 to 
25 hubs of which 16 were dominated by carriers with more than 
50 percent of the service at the hub.
    Ms. McFadden. I think that is roughly right.
    Senator Dorgan. If that is the case, and you say, and I 
agree with you, that with respect to dominated hubs you have 
higher prices, it is the case, then, that in most hubs in 
America you have airlines that have retreated into dominant 
positions to control traffic at the hub and therefore extract 
higher prices. Is that the case?
    Ms. McFadden. I think that is the phenomenon we see, yes.
    Senator Dorgan. I talked to a couple of airline executives 
yesterday, and almost everyone in the airline industry says 
that where this is heading is not just national, it is 
international. International alliances, where the big are going 
to get bigger, because if they do not get bigger they are going 
to lose. The big are going to win. The small are going to lose 
in this international system.
    And I said, well, that might be your vision of things, but 
it may not be what this country chooses for its aviation 
system. I mean, we may choose to decide that we want to develop 
something different.
    Now, back in the 1980s the chairman is quite correct that 
when the Civil Aeronautics Board under Dr. Kahn was eliminated 
and we moved down the deregulation road, the authority for the 
approval of mergers was temporarily given to the Department of 
Transportation. A couple of mergers were approved at DOT that 
the Department of Justice specifically opposed, and so we went 
through a wave--and this is about politics, just about how the 
bureaucracy works. We went through a wave that probably should 
not have happened.
    Now, the question, of course, today is, while we have seen 
this aviation system reduced to a very few carriers, shall we 
approve a merger, shall the Department of Justice approve a 
merger that will allow one carrier to end up with 28 percent of 
the traffic, or perhaps more, and what does that do to 
consumers? What does that mean to our system? Is our system 
competitive after that?
    Now, the New York Times today quotes an analyst who 
responds to the question, or the assertion by some that fewer 
carriers means more competition. One of the analysts in the New 
York Times says that is borderline lunacy. I would share that 
view. Do you share the view that fewer airline carriers will 
mean more competition? You do not share that view, do you, Ms. 
McFadden?
    Ms. McFadden. Not as a general proposition, though I would 
say that there are--and we have seen, for example, in 
international alliances there are benefits to creating 
networks, but I think that is the very question of ``what line 
do you draw'' in terms of concentration in an industry? When 
does the industry become noncompetitive? And that is the very 
question that is before us.
    Senator Dorgan. It is true there are benefits, there would 
be benefits to having just one airline carrier. They would 
probably be less likely to lose your luggage transferring 
between carriers, so you could make the case hypothetically 
there are benefits to having no competition at all, just one 
carrier. That is the ultimate seamless transportation, is it 
not?
    But that benefit is largely irrelevant, and is antithetical 
to the kind of system we have, the free market system that 
relies on competition to be the regulator in this market 
system, and now the clogged arteries in the system are coming, 
of course, from mergers and acquisitions in which you reduce 
this to very few companies, and they retreat to monopoly hubs 
in which they are unregulated, so you have unregulated monopoly 
hubs extracting prices that are higher than are justified.
    Mr. Foer, let me say to you that it is the Lord's work to 
be working on antitrust issues. Almost nobody cares about them. 
All the big money is on the other side of the issue, and you 
are a very lonely voice but a very important one for this 
country, because all of us who believe in this market system 
also have to believe that it is our job to protect the market 
system, to be able to work the way it was expected to work. A 
free market means just that, a free marketplace in which prices 
are unregulated and robust competition works to everybody's 
advantage, so I just want to thank you for the work you are 
doing.
    Let me just ask a couple of very brief questions. I know my 
time is short. The Clayton Act--Mr. Foer, you referred to the 
Clayton Act in your testimony. The Clayton Act, as anticipated 
by Congress, at least as you read it and as I read it, would 
suggest that defensive mergers that will inevitably come if 
this merger is approved also should be considered with respect 
to whether this merger should be approved. That is, what does 
this merger do in terms of other potential mergers in the 
future?
    Mr. Foer. Section 7 of the Clayton Act is known as an 
incipiency statute. The reason for that is, it contains words 
like ``may,'' ``may have the effect of substantially lessening 
competition.'' It does not say it has to have the effect, and 
Congress passed the legislation in order to get at situations 
that had not yet ripened into monopoly but had the potential 
for reducing competition substantially.
    That means you have got to look at the trends. You have got 
to look at not only what has already happened, but what you 
feel reasonably certain, not absolutely certain, is going to 
happen, and that is why I think it is entirely appropriate to 
take into account good, solid evidence that additional mergers 
are likely to occur.
    Senator Dorgan. The testimony yesterday was interesting, 
because the CEOs of both companies said, in effect, we don't 
know what is going to happen if this merger is approved. We 
cannot and you cannot really evaluate what might happen with 
other mergers.
    I am wondering, I doubt whether there is anybody in this 
room who believes that there will not be dramatic and almost 
immediate announcements of additional mergers in the airline 
industry. I would ask the two of you if you have some notion of 
that as well.
    Mr. Foer. Well, you know, we could be wrong. All the press 
accounts and everything else could be wrong. Maybe they will 
not occur, but we have to look at what is likely, and we have 
to base it on evidence which can be obtained. If everybody knew 
the future, we would all make a fortune in the stock market, 
but we can make educated guesses, and we have to realize that 
to not do anything is also to make a prediction about how 
things are going to happen. You just cannot avoid making 
predictions here.
    Senator Dorgan. The companies will behave in their self-
interest. That is what they should do, and every company among 
the remaining companies in this country will believe they are 
at a disadvantage unless they bulk up, develop some additional 
muscle with which to compete with this new larger carrier. 
Would you not agree, Ms. McFadden?
    Ms. McFadden. Well, certainly we have heard the same 
speculation, and I think there is some logic to that, I would 
agree, and we have said that our competitive analysis has got 
to be forward-looking and not just on the pure contours of this 
merger, but what is the competitive landscape going to be, and 
that includes looking at the potential competitive reactions of 
what other competitors will, in fact, be compelled to do, not 
just speculation, but what do we think competition will really 
force them to do?
    Mr. Foer. May I say one more thing to that? We are also 
hearing claims about efficiencies and consumer benefits. Fine, 
but those are speculations. Those are predictions. They may be 
wrong also, so this is the nature of the game we are in. We are 
all talking about the future, and nobody is going to know for 
certain, but we have to do the best we can.
    Senator Dorgan. Mr. Chairman, might I ask one additional 
question? I will be brief.
    Ms. McFadden, the allegation by some is that there is a lot 
of competition in this industry. In fact, I think the larger 
carriers have retreated into circumstances where they have 
avoided a lot of competition, but they say look, there are a 
lot of new startup companies. There are a lot of new airline 
companies starting up out there. What percent of the traffic in 
America today is carried by the new startup companies vis-a-vis 
the large five or six carriers?
    Ms. McFadden. Senator, I do not have an exact figure. We 
will get that, but it is very small. We have seen some new 
startup carriers. We have been glad about that. We think that 
the Congress and the Department of Transportation have worked 
hard to try to foster an environment where that is possible, 
but it is not a complete wave of new entrant carriers.
    Senator Dorgan. It is a fewer percent than on one hand I 
would expect.
    Ms. McFadden. I would expect that is true.
    Senator Dorgan. When a new startup does attempt to come 
into a marketplace, the common carrier uses overrides for 
travel agents saying, we will pay you a premium if you do not 
have your passengers go on this new airline. The new airline 
immediately reduces fares to match the competition, eliminates 
the Saturday night stay, pays overrides, does a whole series of 
things and squashes the new carrier like a bug, quickly and 
easily, and that is what has happened with respect to the 
aviation industry in this country.
    All of us want, I think, an aviation industry, an airline 
industry that works, that is profitable, that is safe, and that 
is competitive, and that offers consumers multiple choices at 
decent prices. We all want that, and just as I conclude I would 
say that I think the last thing we need with respect to the 
current system in this country is more concentration. We need 
more competition. We need more choices, and better prices for 
the American consumer. That is what we need in this industry.
    Mr. Chairman, you have been indulgent. Thank you very much.
    The Chairman. Thank you. Senator Gorton.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. First, Mr. Chairman, a comment for you and 
for our staff, if I may.
    You will remember yesterday I asked the United Airlines CEO 
about the 96 new routes and the 540 or whatever it was new 
pairs, and he responded very promptly. We got that answer in my 
office last night.
    Now, I immediately turned to the market I know best, 
Seattle, and it was my impression, and I do not know whether 
this is true or not, but it was my impression that all or most 
of the new United flights were flights that are going right now 
under the US Airways logo, rather than being some new service, 
and that those hundreds of pairings, when they listed many 
small cities, would simply mean that you would go and you would 
always have a United decal on the back of your plane, but today 
you could make exactly the same destination with the same 
number of stops, but you would change from United to US 
Airways.
    Since I guess the Committee has that, it would seem to me 
appropriate if we could learn whether that impression is true, 
whether there was new service as opposed to just service under 
one flag that is now under two flags. That could be covered by 
a code-sharing arrangement and not a merger. It sounded like a 
whole lot of new service. It did not look to me like it was a 
whole lot of new service, at least initially.
    And now for Mr. Foer, you say, I think quite correctly, 
that the most critical issue is whether other mergers will be 
triggered in strategic response to this merger, something, of 
course, the witnesses we have had before us declined to 
speculate on. I think you may have answered this. Am I correct, 
is it your view that it is more likely than not that each of 
the other four members of the big six would feel strongly 
impelled to merge to roughly match in size the new United/US 
Airways airline?
    Mr. Foer. This would be my guess, based on public 
information, but there is a lot of other information available 
to be obtained by the Justice Department and analyzed, and I 
think we should rely to some extent at least on what they are 
able to find out about this.
    It seems as a logical thing--you have got three major 
airlines that are more or less in parity in size. If one of 
them suddenly becomes much, much larger than the other two, I 
do not think the other two are going to sit there and take it. 
I think--Senator Wyden talks about the copy cat factor. It is 
pretty well established, that there are many reasons that 
companies merge, and only one of them that occasionally is 
really verifiable is to gain efficiencies and serve the public 
better.
    This is always the reason put out in public, but there are 
a lot of other things going on, and it is very difficult for 
any of us to know what all those other things might be in this 
case. I think Justice is in a position, and DOT is in a 
position, to ferret this out, and importantly to explain to you 
and to the public what their reasoning is when they reach some 
conclusions.
    Senator Gorton. But it is reasonable for us to at least be 
apprehensive, if not to predict that relatively soon six majors 
would be three majors.
    Mr. Foer. I think that is something that almost should be a 
presumption to be overcome by evidence to the contrary.
    Senator Gorton. Well, I want to tell you I certainly agree 
with that answer.
    You have another point that you made that I would like you 
to amplify on. One of the other things the DOT should consider 
is US Airways' ability to survive as a competitive airline if 
this merger does not take place, and Mr. Wolf is eloquent in 
stating that he is the only medium sized, I think mature cost--
that was a marvelous phrase--airline left. Does your crystal 
ball tell you anything about the survival of US Airways on its 
own?
    Mr. Foer. Well, he did say that if the merger were turned 
down, that he would continue to plug along and find 
alternatives, but that he would be operating at a disadvantage 
as a high cost carrier. I do not have a crystal ball on this. I 
think it is the type of information that needs to be analyzed 
by the Departments when they do their review.
    In the antitrust laws, we have a failing company doctrine. 
If you can prove that the acquired company is about to fail, 
then the merger goes through even if it is anticompetitive. 
That is not at issue here. They have not raised that.
    There is also something called ``the floundering company'' 
doctrine, which does not exist, and has never been recognized. 
If a company is merely floundering, that is not an excuse to 
permit an anticompetitive merger to go through.
    On the other hand, in a realistic assessment of what is 
going on and what a proper remedy might be if they decide to 
let the merger go through, US Air's abilities would be 
something relevant to take into account.
    Senator Gorton. Well, Mr. Wolf in a sense was rather proud 
of the fact that he was alone in this category, because, as he 
pointed out, two of the other airlines that were in that 
category no longer are, because they went through bankruptcy 
proceedings.
    Would you agree--my observation in that connection is that 
that may have been tough on the shareholders, but it was not at 
all bad for the traveling public. Continental, it seems to me, 
is much more competitive now that it chucked off that high cost 
in that fashion. Should it matter in the slightest to us 
whether US Airways becomes a more efficient airline by 
management efficiencies or going through bankruptcy?
    Mr. Foer. We would hope it would be through efficiencies 
Bankruptcy creates a lot of problems in itself, and it is hard 
to predict where you come out, whether the same airline 
continues in existence, whether routes are canceled, and where 
the assets go. It is hard to predict at this point. We are 
always better off, I think, if the airline can learn from its 
past and make changes and not only remain a competitor but 
perhaps become a more viable competitor. That would be the 
optimal result for the public.
    Senator Gorton. It does seem clear to this Senator at least 
that US Airways has tried as hard as it possibly could to do 
that, without necessarily notable success, but Senator Dorgan, 
one way we predict the future is to study the past, and while 
we have had some airlines simply go out of business because 
they could not meet competition, and just disappeared, we have 
also had, say in the last 10 years, a number of airline 
mergers.
    Can you comment, or maybe Ms. McFadden can comment on what 
has been the actual impact on the mergers that have taken place 
in the last 10 years, in your view? Have they lessened 
competition and the quality of service, or have they increased 
competition and the quality of service, either in general terms 
or with a specific answer as to specific mergers? That seems to 
me to be the best way to predict the future. What has happened 
when airlines have merged in the last 10 years?
    Mr. Foer. I am not a sufficient historian of the industry 
to feel comfortable answering. My seat-of-the-pants answer is 
that we have fewer airlines, and that in itself might not be 
bad except for the way the industry has become structured. It 
is honeycombed with things that are not very competitive.
    The alliances, some would argue, have already reduced the 
number of domestic carriers to three. Those alliances are not 
mergers, but they are partial mergers, and they have reduced 
the incentive of one airline to do something that might harm 
one of its allies, because at risk, then, is the alliance.
    You have to take that into account. You have to take the 
hub system into account. You have to take the predatory 
practices that allegedly are occurring at the hubs, you have to 
take all of this price discrimination and what that does, and 
how it makes it difficult for the consumer to shop. There are 
so many aspects to the industry I do not know that we can tie 
our current observation to any particular merger. The overall 
trend, though, has been toward consolidation, and I do not 
think it has worked very well for the consumer.
    Ms. McFadden. Senator, I would only add that I do not think 
I am sufficiently equipped to answer in terms of a historical 
perspective that much, other than to say that I think it 
depends. I think that, for example, both the Department of 
Transportation and the Department of Justice saw competitive 
benefits to a number of the mergers that we saw in the 1980s.
    There were two that the Department of Justice disagreed 
with the Department of Transportation on, and I think the 
Department of Transportation now has probably learned a lot 
from what has happened with respect to those two mergers.
    The difference, with respect to those two mergers, was that 
they were airlines that shared a hub, and so I think there are 
questions of whether or not those have produced competitive 
benefits that the Department of Transportation anticipated at 
the time. There are at least questions about that, but I think 
there have been a number of mergers that have really been good 
for the industry and have produced competitive benefits.
    Senator Gorton. Where they did not share hubs.
    Ms. McFadden. Where they did not share hubs, yes, sir.
    Senator Gorton. This one, there is no hub-sharing, is 
there?
    Ms. McFadden. Not directly. The Washington, D.C. area, 
viewed as a single market, has both present, and this is one of 
the reasons why they have proposed the spin-off.
    Senator Gorton. I guess the Chairman is not here. I think 
Senator Wyden was next. Thank you both.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. I thank my colleague. I can tell you I am 
now on my fourth hour of listening to testimony on this issue 
over 2 days, and my sense is that the only way you can justify 
approving this merger is if you are willing to send a message 
that this country will tolerate an airline industry with just 
three major carriers, and I am not prepared to send that 
message at this point, and I have a couple of questions that I 
want to ask.
    Now, Ms. McFadden, you said that the ramifications for the 
industry overall would be a factor in your judgment here. That 
is really not the test I am looking for, so I do not want to 
get into something you cannot talk about, but I want to examine 
a couple of very specific theories here.
    First, what I am interested in on this merger is that 
central to your analysis here will be the ramifications for the 
overall industry. Can you make a commitment this morning that 
central to your analysis, not just a factor, but central to 
your analysis will be what this means for the industry at 
large?
    Ms. McFadden. Senator--and let me just make sure I am 
careful about saying we will be doing a competitive analysis 
and we will be sharing that with the Justice Department. It is 
the Justice Department that will make the judgment here, but in 
terms of looking at the industry and what the competitive 
environment will be if this transaction is consummated, that 
is, in fact, what we will be looking at, and we will share our 
views with the Justice Department.
    Senator Wyden. Will you use the word central rather than it 
is just a factor? I am looking for how important this will be. 
That is why I am using the word central. My colleagues have 
asked about this as well. Can you commit now that central to 
your analysis will be the question of how this is going to 
affect the industry at large?
    Ms. McFadden. Senator, I think that I can say that it is 
going to be very important, central to our analysis we will 
share with the Justice Department, yes.
    Senator Wyden. Good. That is what I was looking for.
    The second question, and again the abstract is, at this 
point, if you approve a big merger what arguments in theory 
would you make to block subsequent mergers of comparable size? 
Again, set aside this one, but if you approve a big merger, 
what arguments would you make to block others?
    Ms. McFadden. Well, I think in terms of the analysis, you 
have to look at so many different factors, in terms of the 
benefits that allegedly accrue from the combination and weigh 
those with the competitive disadvantages, that each merger in 
some ways has got to be judged on its own. It is possible, and 
the Justice Department has discussed situations in other 
industries in which they have approved a large merger and then 
said no to the next one, and so I think there are some 
instances in which that is possible.
    Senator Wyden. Can you supply us some information in the 
airline sector where that might be the case, and again, I want 
to allow you to do your job, because you all need to be 
objective on this, but it just seems to me that once you allow 
one of these, so you have got somebody out there who is bigger 
than everybody else on the block, the competitors come in and 
say, look, we cannot match this scale and reach, and you have 
got to let us go as well.
    Mr. Foer. Senator, if I might, I was in the room of another 
committee after the merger between British Petroleum and Amoco, 
and the chairman of Exxon was asked about why he was now trying 
to merge with Mobil, and his answer was, well, we just 
permitted this other merger and now they are a lot larger than 
we are, and it would be unfair and put us at a competitive 
disadvantage if our merger is not approved, and sure enough, it 
was approved.
    Senator Wyden. I think the transportation inspector general 
is going to come in in a few days and he is going to say that 
these airline commitments with respect to voluntary protection 
of passengers and customer service are not worth a whole lot 
more than the paper that they are written on, and we had a vote 
last year, and I basically got my head handed to me on this, 
and I am hopeful that we will be able to take a fresh look at 
it after we get this information from the transportation 
inspector general, and the reason that this is topical right 
now, my sense is that mergers, and particularly this one, is 
going to push customer service issues even lower down the list 
of airlines' priorities.
    In fact, in the situation we are talking about, we have got 
carriers that made commitments last year on customer service 
improvements, and you saw yesterday, I held up the Washington 
Post, and they singled out US Airways as falling down in the 
last year in every single area of customer service, every one, 
and now what are you all prepared to do, as you look at these 
mergers, to try to turn this situation around and make customer 
service a bigger priority when you are looking at mergers?
    Ms. McFadden. Senator, I think we are going to try to do as 
much as we can within the constraints of the authority that we 
have. We do have authority, the Department of Transportation 
has authority to protect against unfair and deceptive practices 
with respect to consumers.
    That is really our only consumer protection authority, and 
we try to use that as much as we can, and as I noted in my 
testimony, we are going to apply that authority to our look at 
this merger. What promises, what commitments are these carriers 
making with respect to their accommodation to consumers, but 
this is going to be judged on a competitive analysis.
    Now, I will say that competition, when there is 
competition, there usually is better service. I think they are 
linked, but in terms of our authority to really include 
customer service in terms of the specific kinds of commitments 
they made in their customer service plans as a central part of 
the analysis that we will do here, we have got limited 
authority.
    Senator Wyden. Well, my understanding is, the authority is 
very limited, and if all we have got to hang our hat on is the 
deceptive practices provisions we are not going to be able to 
do much for consumers there. What would be wrong with changing 
the law and specifically stipulating that customer service 
ought to be a criteria in reviewing mergers? What is wrong with 
that?
    Ms. McFadden. Senator, I do not think I have off the top of 
my head a view in terms of what is wrong with that. Certainly 
there are some examples. The Surface Transportation Board 
judges railroad mergers on a broader standard than just 
antitrust laws. They judge mergers on a public interest 
standard, so there is some room in there.
    Senator Wyden. Would you be for that? Would you be for 
changing the law at this point and saying that customers and 
their ability to get decent service ought to count for more 
when we review mergers?
    Ms. McFadden. Senator, I am not sure I would be prepared to 
answer that right now. I would like to consult with my 
colleagues.
    Senator Wyden. Well, I am not going to belabor this any 
further, but I will tell you that just from the standpoint of 
integrating these various systems and procedures alone, I am 
convinced that we are going to see customer service face 
additional problems.
    We have got airlines that have not followed through on the 
pledges that they made last year, and I hope that you all will 
use every ounce of your existing authority, and hopefully we 
will get some recommendations that we ought to change the law.
    Thank you, Mr. Chairman.
    The Chairman. Senator Cleland.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Thank you very much, Mr. Chairman.
    Mr. Chairman, I think we have a real issue here, a very 
fundamental key question about quo vadis, which way, which way 
is this industry going?
    I think it was Justice Oliver Wendell Holmes that said it 
is not so much that we are moving, but in which direction are 
we moving, and that to me is one of the fundamental questions 
that I would like you all to comment on.
    I was in Washington as head of the Veterans Administration 
some 20 years ago, when deregulation was the fad, and Alfred 
Kahn was the chief apostle of that. He headed the CAB, the 
Civil Aeronautics Board, which had been created in the late 
1930s to promote domestic aviation, but all of a sudden there 
was a fad in the early 1980s to deregulate, the airline 
industry in particular.
    The Chairman wrote Mr. Kahn and Mr. Kahn has responded in a 
letter about what he thought about this merger particularly. It 
is interesting that the last sentence that Mr. Kahn indicates 
in his letter is this. He said, we may be confronting a very 
radical consolidation of the industry, which cannot be a matter 
of indifference to people like you and me who have regarded 
deregulation as a striking success thus far, close quote.
    It does seem to me, Mr. Foer, that over a period of time an 
absolutely deregulated industry or an absolutely deregulated 
economy tends to monopoly. That is the direction that it 
naturally, inherently goes.
    I mean, Adam Smith in 1776, in the Wealth of Nations, 
talked about an invisible hand in a completely open 
marketplace. The truth of the matter is, the invisible hand 
tends to monopoly, and monopoly means less choices, higher 
prices for the consumer, and so when we talk about an industry 
consolidating, whether it is trucking or telecommunications or 
the airline industry, it does seem to me that we are moving in 
the wrong direction.
    The Government has to be, as maybe Galbraith has said, a 
countervailing power. Well, there are countervailing agencies, 
the Department of Transportation, and Ms. McFadden, the Justice 
Department, this Committee in terms of oversight.
    But Mr. Foer, I would like to ask you the question, if this 
merger goes through, what does that say to you in terms of the 
direction we are moving, and is that healthy for competition? 
Is that healthy for prices out there available to the American 
flying public?
    Mr. Foer. Well, I agree, Senator, with the general way in 
which you have stated the question. Deregulation was a bargain 
with the American public, and the bargain was, we are going to 
take away the heavy hand of Government, which was setting 
prices and entry conditions and approving routes and so forth, 
but in return we are going to have a competitive market system 
in which competition, where the airlines strive for the custom 
of the consumer, will be a sufficient regulator.
    That meant a lot of antitrust oversight. The reality is 
that antitrust has not done a sufficient job with this 
industry, so half of the bargain has not been kept.
    I do not think we are at the point where we should give up 
on the bargain. I think we are at the point where we have to 
say we want more antitrust resources available to the Federal 
Government. We want to take a look at our laws and make sure 
they are working satisfactorily in terms of antitrust, and we 
want to keep the pressure on the antitrust agencies to deliver 
the type of industry that we have a right to expect.
    Now, I do not want to prejudge the merger totally. I am 
very skeptical about it, and I have set out my reasons. I would 
like to see the Justice Department and the Department of 
Transportation give it the most careful scrutiny, and do it in 
a transparent way so that we understand what their logic is, 
what their reasoning is, what kind of evidence, recognizing we 
cannot see all of the evidence, but give us a chance to 
understand what their reasoning is.
    I think that the law today is sufficiently flexible that if 
there is a will to stop this merger, and there are good 
arguments for stopping it, that it can be stopped, and that is 
sort of my presumption, is that it ought to be stopped, but I 
am still open-minded enough to see what develops.
    Senator Cleland. Is your presumption that other members of 
the big six--there are about six major airlines. It is 
interesting that over the last 20 years with the elimination of 
the ICC and the assumption of the Interstate Commerce 
Commission's role for surface transportation, particularly 
railroads, into the Surface Transportation Board at DOT, now, 
with deregulation of the railroads, now there are only six 
major railroads, so we are down now to about six major 
airlines.
    If two of the top six, whoever they are, merge and increase 
the hubs--and the Chairman has mentioned, I think, something 
that is painfully obvious. If you have a hub, the high prices, 
and you dominate that market over 50 percent, your prices are 
going to be higher for the consumer. I mean, we just see that.
    If two of the big six merge, increase the hubs, and they 
have not pledged to this Committee that they are going to hold 
down prices for consumers for more than 2 years, does that not 
say to you that maybe this might be something that might not be 
in the interest of consumers and the traveling public, and 
particularly in terms of pricing?
    Mr. Foer. Actually, two of the six are already merging, 
Northwest and Continental, which are being challenged in court 
by Justice, but that is already a long way down the road, so we 
are already moving in the direction that you are speaking of.
    I think three airlines would be a very dangerous situation, 
if we had a strong sense that we were moving toward three, and 
I think we are partly there already, both because of Northwest, 
Continental, and because of the alliance system. Then we would 
be in a dangerous position, because three airlines nationally, 
but that does not mean you are going to have three available on 
any given route. A lot of routes will be strictly monopolized.
    Senator Cleland. I rest my case. I mean, we just started 
off, it tends to monopoly.
    It is interesting that at the turn of the 20th Century 
there were more than 20 car manufacturers. Those cars are 
relatively unknown now, and by the 1930s there were only three 
major manufacturers of cars, and that is what we have today. 
One of those three is the largest corporation in the world, 
General Motors.
    In the telecommunications world we see massive mergers 
going on at this moment, and we have this potential merger 
before us in the airline industry. I just wonder if that is not 
where we are going.
    Unless there is strong antitrust enforcement, unless we all 
pay attention to the positive role that Government can play in 
enhancing competition and keeping competition, then we will see 
in the telecommunications industry, in the surface 
transportation industry, in the airline industry and in other 
industries in terms of American commerce an incredible tendency 
toward monopoly, higher prices, domination of the market, and 
something that is not necessarily in the interest of our 
consumers.
    One point about pricing, in Atlanta, Delta has Atlanta as 
the hub. It is the major carrier there. AirTran comes in and 
the chairman just testified yesterday that with AirTran even 
not competing for Delta's particular market has, in effect, 
saved hundreds of millions of dollars for the traveling public 
there.
    Now, Joe Leonard and AirTran would like to have the 
opportunity to come into National. It is interesting that this 
merger would automatically create a virtual airline, DC Air, 
that takes over 222 slots at National. There have not been any 
new slots approved at National in new carriers for 15 years, 
and all of a sudden, boom, you hand this golden goose to a 
virtual airline that does not even exist yet.
    Would it not make more sense, even if this merger went 
through, that you just opened up those available slots for real 
competition for other new entrants, particularly at National?
    Mr. Foer. Well, I think that is an issue, again, that 
requires a lot of analysis, but getting the standard right is 
the first thing, and the standard is, if you are going to let 
the merger go through, and you are going to condition it on 
some divestitures, those divestitures have to retain the same 
level of competition that was there before.
    It would be nice if it could make it more competitive, but 
at least legally I think the legal standard is it has to 
maintain the same level of competition, and so there are a lot 
of reasons to look at this particular proposal of the spin-off 
to see whether it really can work, and also whether there are 
other alternatives that might do the job better for the public.
    But this is a very detailed and sophisticated analysis that 
has to be made. I have my mind open on that. I think I pointed 
out in my written statement that the agencies have been 
focusing more on divestitures.
    In the last year the FTC issued a report last August that 
looked at previous divestitures and concluded that a lot of 
them did not work so well, and as a result they have been 
taking a stronger position in many of the cases that come 
before them, insisting that if there is a divestiture, that the 
party acquiring the divested assets be identified up-front, 
that the divestiture take place fairly quickly, that the 
acquiring company actually can provide a high level of 
competition.
    They are doing a better job on that, and I think the 
Congress ought to be encouraging them to continue in that very 
important direction, and this is a good case where you can do 
that.
    Senator Cleland. Ms. McFadden, just one final question. In 
your analysis of the way the airline industry in America is 
evolving, and your understanding of the fact that we are in a 
global environment, and that whether you are in 
telecommunications, transportation, aviation, or whatever, one 
has to compete globally, and therefore one seeks new routes and 
new alliances and so forth.
    Given that reality, is it your feeling that we are going to 
maybe end up with three or four, I do not know how many, major 
global carriers that reach out to the far corners of the globe, 
and then maybe with another subset of carriers, basically a 
network, that network the continental United States and maybe 
Mexico or the Caribbean, but that you have got the big global 
ones that do all of the nonstops to Frankfurt and China and 
Africa and so forth, and then you have the network carriers 
that move people from L.A. to New York or Chicago or Atlanta? 
Do you have that fear at all that that is where we are going?
    Ms. McFadden. I am not a great prognosticator on the 
industry, but I would say there are a number of industry 
analysts that say that is where the industry is going, a few 
number of global airlines and then other kinds of regional 
domestic airlines to feed those.
    I do not have a good sense of that. I think it is certainly 
a possibility and, as you have said, partly the globalization 
of our economy is partly a driving force for that, and it is 
something that we do think is important, and we have got to 
support our industries. That is why we have been so strong in 
trying to open up markets and get open skies agreements and 
that kind of thing. It is a reality, the increasing 
globalization of our economy.
    Senator Cleland. A fascinating subject, Mr. Chairman.
    The Chairman. Thank you very much, Senator Cleland.
    I want to thank the witnesses. I do not want to open a 
whole new line of questioning, but there is also the question 
of the economic viability of US Airways if this merger is not 
allowed, which is another aspect of this equation which I am 
sure you will be considering, Ms. McFadden.
    I thank all of you for your incredible patience for 2 days 
now. We do not usually subject you to that. I thank you. You 
have been very helpful to this Committee, and I think that 
without reaching any conclusions, that this may be a very 
important watershed as far as the future of consolidations and 
mergers within the airline industry is concerned. I thank you 
very much.
    Ms. McFadden. Thank you, Mr. Chairman.
    The Chairman. This hearing is adjourned.
    [Whereupon, at 10:55 a.m., the Committee adjourned.]

                            A P P E N D I X

     Response to Written Questions Submitted by Hon. Slade Gorton 
                               to DC Air

Question 1. Are there any limitations on the fares DC Air can charge? 
Can DC Air close markets and put frequency into other markets?
    Answer. Although there is no legal limit or cap governing DC Air's 
fares or its schedule (other than restrictions imposed by slot 
controls, the perimeter rule, and EAS requirements at Washington DCA), 
competition and market forces will discipline fares and influence our 
schedule. Like other carriers, we will retain the flexibility to refine 
our schedule as we see fit to best serve our customers and to respond 
to changing market demand. DC Air has also made a strong commitment to 
continue service to all of the small and mid-sized communities 
currently served by US Airways from DCA.

Question 2. Under your agreement with United and US Airways, please 
describe market and fare limitations for DC Air at Reagan National. 
Could you pull service from the smaller markets and go to Chicago and 
Miami? Are you required to serve the small markets that have been 
listed in your airline's proposed schedule?
    Answer. There are no market or fare limitations for DC Air at 
Reagan National, or any other airport, under the agreement. However, 
competition and market forces will discipline fares and influence our 
schedule. As with other airlines in a competitive market, DC Air will 
retain the flexibility to refine our schedule as we see fit to best 
serve our customers and to respond to changing market demand.
    DC Air has also made a strong commitment to continue service from 
DCA to the small and mid-sized communities currently served by US 
Airways. This commitment reflects both a recognition of the importance 
of Washington DCA service to these communities and the expectation that 
the service has been, and will remain, profitable. Unlike a major 
carrier whose primary interest in Washington DCA would be to increase 
service between Washington DCA and its hubs, our sole business is 
Washington, DC. The route system is a profitable and efficient network 
for a DC-based carrier, and DC Air has no economic motivation to 
withdraw service from well developed, profitable markets.
    The regional jets that we plan to operate will also provide added 
flexibility in matching frequencies to consumer demand in the various 
small and mid-sized markets. In the event that market conditions change 
dramatically, DC Air will have--and must have--the capability to refine 
our route system to respond to changing market demand, as would any 
airline faced with similar conditions.

Question 3. You say that DC Air will serve Philadelphia and Pittsburgh 
with turboprops. Will your turboprop operations be low-fare? Are there 
limitations on what aircraft you can operate? Will you code-share at 
that market? Are there restrictions on who you can code-share with at 
any airport? Which frequent flyer program are you going to use? Can you 
use any frequent flyer program?
    Answer. Although DC Air has announced our intention to become an 
all-jet carrier, the timing of delivery of new jets is subject to the 
availability of delivery positions from the manufacturer of the 
aircraft selected. In the interim period, we will operate turboprops in 
some markets, including Philadelphia and Pittsburgh. There are no 
limitations on the aircraft that DC Air can operate.
    There is no plan, commitment, understanding, restriction, or 
obligation for DC Air to code-share in any of its markets. However, DC 
Air will enter into discussions with all major carriers about 
partnering opportunities that may arise, including code-share and/or 
frequent flyer arrangements.
    DC Air will be an attractive frequent flyer partner for a number of 
airlines due to our desirable route structure, and we see opportunities 
to enter into multiple relationships to the mutual benefit of all 
carriers involved, as well as to our passengers, who would be able to 
select from a number of frequent flyer program alternatives when flying 
DC Air. Such relationships have precedent in the industry.

Question 4. Could you add service at BWI and Dulles to other points?
    Answer. DC Air will have the ability to add service anytime, 
anywhere. However, we have no immediate plans to expand beyond the 
route network discussed in the hearing.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                               to DC Air
Question 1. How will DC Air be able to sustain a low fare operation 
with regional jets and turboprops? The economics seem to suggest that 
you would need to sell more seats at low fares than you have with these 
aircraft, in order to cover the plane's cost.
    Answer. DC Air's costs are estimated to be significantly below US 
Airways' costs for the same operations, because we will have a focused 
fleet of aircraft and lower overhead and labor costs as a regional 
carrier. This will allow DC Air to pass some savings along to its 
customers. Because DC Air will serve many small and mid-sized markets, 
we cannot profitably support large jet service on every route.

Question 2. I have information showing that US Airways has some of the 
highest operational costs in the industry. How are you planning to 
sustain a low fare operation if you take on US Airways' cost structure 
through a wet lease arrangement?
    Answer. DC Air will not inherit US Airways' cost structure. Rather, 
we will have the same costs that any other regional carrier would have, 
with the exception of the 10 wet-leased aircraft and a few other 
temporary transition and startup-related costs. These temporary, 
transition costs will be phased out over time.

Question 3. Does DC Air contemplate a codeshare arrangement with United 
at any point? If so, on all or only some of its routes?
    Answer. DC Air plans to enter into discussions with all airlines 
interested in partnering relationships as we build our franchise. DC 
Air has no commitment, obligation, or understanding with United with 
respect to code-share arrangements.
    DC Air will be an attractive frequent flyer partner for a number of 
airlines due to our desirable route structure, and we see opportunities 
to enter into multiple relationships to the mutual benefit of all 
carriers involved, as well as to our passengers, who would be able to 
select from a number of frequent flyer program alternatives when flying 
DC Air.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. Max Cleland 
                          to James E. Goodwin
Question 1. If the merger is approved, I have heard that the combined 
airline would be largest in the world and 50 percent larger than your 
nearest competitor. How do you respond to critics' charges that your 
new market power and substantial hub dominance would lead to monopoly 
airfares for consumers?
    Answer. After the merger, United would be the largest airline by a 
few percentage points, but its overall share will not be that high 
(certainly compared to other industries) and the airline industry 
itself is not concentrated. With regard to market power, the merger can 
only lead to market power if the two airlines have significant 
competitive overlaps and the United and US Airways networks are 
complementary, meaning few overlaps exist. One area of overlap was 
Washington D.C. and United has addressed that concern by proposing to 
divest US Airways' operations at Reagan National to DC Air. United 
plans to work with the Justice Department to address any other 
significant competitive overlap that might exist. With regard to hub 
presence, United and US Airways have little presence at each other's 
hubs, so the merger will have little effect in terms of shares at the 
carriers' eight hubs. The DC Air divestiture will address the only hub 
airport at which the merger could have been viewed as arguably having a 
significant effect at a hub airport.

Question 2. In recent years the railroad industry has consolidated 
aggressively, and today only six large railroads remain in the U.S. and 
Canada. Some critics of your proposed merger fear that it would create 
tremendous pressure for the kind of consolidation in the airline 
industry that we have witnessed in the rail industry--to the detriment 
of competition and consumer choice. How would you respond?
    Answer. It is impossible for me to speculate what other carriers 
may or may not do in response to our proposed merger. However, I can 
say several things with certainty. First, the airline industry is 
highly competitive with network carriers and low-cost carriers 
competing vigorously against one another. I expect such competition to 
remain robust in the wake of our merger. Second, I believe our merger 
will uniquely produce significant consumer benefits due to the highly 
complementary nature of our two networks. Finally, United believes that 
when the facts of our proposed merger are carefully reviewed by the 
Justice Department and the Department of Transportation, they will 
agree that the transaction produces significant consumer benefits and 
is in the public interest.

Question 3. Some charge that the gates at Reagan National are being 
sold to DC Air well below wholesale prices. What is your response to 
this charge? How should your shareholders make sense of this, if true?
    Answer. DC Air, an independent carrier, is purchasing these assets 
from us at what we believe to be fair market price. The price was 
agreed upon during the give-and-take of on an arm's length negotiation.

Question 4. US Airways is a high cost carrier. How will the merger 
enable United to reduce costs? When will such cost reductions be 
achieved? How can we be certain that consumers will reap the benefit of 
these cost reductions through reduced fares?
    Answer. The greatest benefits for United will come from increased 
revenues generated as United provides new nonstop and connecting 
service worldwide. However, United does believe it will also achieve 
cost savings by combining the two companies' operations. For example, 
US Airways' costs will now be spread over a much larger system. Also, 
United and US Airways own duplicative assets at many airports such as 
ramps and the merger will allow United to lower costs by more 
efficiently using assets for both carriers' operations. United also 
anticipates significant savings in terms of maintenance costs, 
advertising costs, and liability insurance costs because of the merger.
    United believes these cost savings will begin accruing soon after 
the merger closes and will be achieved on an ongoing basis over time. 
Given the possibility of changing market conditions, United cannot 
commit with certainty that the merger will necessarily result in more 
competitive fares. However, it seems quite possible that the merger 
could lead to lower industry fares. Hub and spoke networks exhibit what 
are called ``economies of density,'' meaning that the cost of providing 
service throughout a network falls as the number of endpoints served by 
the network increases. Because an airline with a larger network can 
offer more destinations to travelers at each endpoint within its 
network, a larger network increases traffic on the airline's spoke 
routes. This increase in traffic allows the airline to take advantage 
of scale economies in terms of larger aircraft to lower costs. Hence, 
United expects that the merger will facilitate increasing traffic 
throughout its network, which will lead to lower costs and competitive 
fares.

Question 5. You have agreed not to raise fares for two years, except 
for fuel price fluctuations and inflation. Does this cap include all 
fares, including your restricted fare categories? Would you consider 
keeping the number of low-fare tickets on a flight the same for this 
two-year period?
    Answer. As part of the proposed merger, United has committed that 
it will not increase point to point structure fares (except for 
increases in fuel cost and CPI) for two years following the merger.
    ``Point to point'' is intended to communicate the significance of 
United's commitment in terms of the number of markets and avoid 
confusion that might result from the more technical term (origin 
destination city pair). For every point that United serves, we usually 
publish fares to every other point in our route system, regardless of 
whether our service is non-stop or requires a connection. Thus, from 
Allentown, PA we offer service and publish fares not just to Chicago & 
Washington (non-stop), but also for cities ranging from Albuquerque, NM 
to Yakima, WA. Counting all of the cities that United serves 
domestically, our commitment extends to more than 18,000 current United 
markets.
    The structure fares exist in each and every market served by 
mainline United in the 48 states (not West Coast Shuttle). Structure 
fares are commonly understood within the industry as certain fare codes 
which exist in every market. Included in structure fares are--

  Structure First Class (Fare codes prefixed by FUA-)
  Structure Business Class (where available) (Fare codes prefixed by 
        CUA-)
  Structure Unrestricted Economy Class (Fare codes prefixed by YUA- or 
        BUA-)
  Structure 14 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with ME14-)
  Structure 14 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with MOE14-)
  Structure 21 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with HIE21-)
  Structure 21 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with HOE21-)

    In making this voluntary commitment, United chose to focus on the 
structure fares because these will be easy to monitor. Other types of 
fares would be very difficult to monitor and are not part of the 
commitment. At any given time, United has approximately 750,000 fares 
in its domestic 48 states tariffs and many of these fares change 
often--averaging approximately 56,000 fare changes each weekday. Many 
of these changes involve short term promotional fare sales which are 
filed to build traffic.
    All of the structure fares are available for purchase through 
United's web site and other internet channels. However, internet sites 
also contain many other kinds of promotional and other discount 
products which are not covered by the commitment.
    United plans to monitor this commitment itself through internal 
policies, controls and reporting. Beyond our own internal compliance 
efforts, our commitment is structured in a way that ensures the ease of 
oversight by consumers and government officials. First, the fares 
covered by the commitment are clearly and easily identified (by fare 
code) so that they can easily be monitored over time. Second, fare 
information is so readily available that, if United were to increase 
any of the structure fares other than for CPI or fuel, it would be very 
easily and quickly detected. Fares are publicly available and easily 
accessed through any of several means--Airline Tariff Publishing Co. 
(an electronic publisher or clearinghouse of fare information), 
thousands of professional travel agents (through their computer 
reservations systems), and inquiry to United's own telephone 
reservations. All of these sources contain the prices for each of the 
various fare codes and make it easy for anyone to monitor fares over 
time.
    In response to the second part of your question, the number of 
discount seats that we have available on particular flights is 
constantly changing. This is because revenue management's basic purpose 
is to balance the number of discount seats sold far in advance with 
those seats sold close to departure. Once the airplane departs, the 
opportunity to sell empty seats is forever lost. We only get one chance 
to get the right mix of discount seats and full fare seats in order to 
fill the airplane. Over the two-year period alluded to your question, 
it is impossible to accurately determine in advance the optimum mix of 
full fare and discount seats on particular flights due to market 
conditions which constantly change. To the extent we were to set that 
mix in advance as the question suggests, that could be detrimental to 
consumers since the number of discount seats determined by the 
marketplace at any particular time could be greater than the artificial 
level set in advance. Importantly, to maximize the revenue from each 
flight, we will continue to be forced by the marketplace to offer 
discount fares to fill as many seats as possible on each airplane. We 
believe consumers will benefit most if the marketplace determines the 
optimum number of such discounted seats.

Question 6. How will United insure the maintenance of low fare 
competition in the Washington, D.C. area?
    Answer. The benefits of the DC Air divestiture are that it will 
create a new low cost competitor with a substantial number of slots at 
Reagan National where none exists today. Hence, the merger and 
divestiture will create low cost competition that will lead to lower 
fares. Beyond creating a new low cost carrier presence at Reagan 
National, DC Air will step in the shoes of US Airways at that airport 
and maintain the competition that exists between United and US Airways 
today. Moreover, in the case of routes between Reagan National and 
three cities--Pittsburgh, Philadelphia and Charlotte--United will enter 
those routes and compete with DC Air in providing service to Reagan 
National. Today, only US Airways provides any service to Charlotte from 
a Washington airport and only US Airways provides service to Reagan 
National from Philadelphia or Pittsburgh.

Question 7. You are currently negotiating a new contract with your 
pilots and have been doing so for some time. Why is it in their best 
interest to accept this merger proposal?
    Answer. It is in our pilots best interest to accept this merger 
proposal due to the greater job security and promise encompassed by a 
more durable, stable and comprehensive airline which United will 
certainly be after the merger.

Question 8. What are your plans for US Airways' wholly-owned feeder 
airlines: Allegheny; Piedmont and PSA?
    Answer. We have not yet made a final decision on the ownership 
structure of US Airways' wholly-owned commuter partners after the 
merger. However, we have a commercial need to retain the passenger feed 
that these regional carriers provide to the current US Airways hubs. 
Accordingly, we intend to conclude agreements that will allow us to 
fully maintain that passenger feed in the future.

Question 9. Could you comment on why it would be more advantageous for 
United to subsidize the start-up of an entirely new airline as opposed 
to having an existing airline pay market prices for assets like slots 
and gates?
    United is not ``subsidizing'' DC Air; it is entering into an arm's 
length relationship to divest assets to a third party to create a new 
airline that will have low costs and provide a new competitive force in 
Washington D.C. It would have been possible to address issues of 
competitive overlap in Washington D.C. by divesting these assets to 
another airline. But United believes that DC Air, because of its low 
costs and regional focus, will have a unique ability to maintain and 
enhance competition in Washington D.C., and that the Justice Department 
would therefore prefer such a divestiture to divesting these assets to 
another airline.

                                 ______
                                 
     Response to Written Questions Submitted by Hon. Slade Gorton 
                          to James E. Goodwin
Question 1. Over the past several years, the Congress has increased the 
amount of funds authorized for the Essential Air Service program, which 
ensures that small communities continue to receive scheduled air 
service. One of United's affiliates, Great Lakes Aviation, is an EAS 
carrier. Great Lakes has recently told the General Accounting Office 
that United is not particularly committed to continue serving those 
communities, as they are not profitable operations. While much of your 
testimony has addressed the millions of people who stand to benefit 
from this merger, what can you tell us about United's commitment to 
continuing to serve small communities?
    Answer. United is strongly committed to serving small city markets. 
Currently, we are the largest EAS carrier in the US. We also offer more 
small city air service in the Midwest than any other carrier. United is 
already delivering on its promise to expand our service to communities 
like these. Thanks to this Committee and this Congress, the easing of 
High Density Rule at Chicago O'Hare has allowed us to add flights from 
O'Hare to a number of small and medium-sized communities. Within the 
last few months, United Express introduced service to Bloomington and 
Springfield, Ill. And by September, we will be offering 21 new daily 
United Express flights--mostly on regional jets--to destinations that 
will also include Tulsa, Okla., Columbia, S.C., and Little Rock, Ark.
    We believe the network efficiencies resulting from the merger will 
better position United to fully capitalize on opportunities in small 
city markets. Bangor, Maine is just one of many examples. As a result 
of the merger, consumers in Bangor will have far greater choice of 
convenient single-carrier service throughout the US. In addition, they 
will gain new one-stop, single-carrier service to important 
international destinations such as Tokyo. Simply put, as our network 
expands and strengthens, our ability to serve small city markets 
improves.

Question 2. United has a fairly extensive hub network in the US, with 
large operations in Chicago and Denver. In addition, Washington Dulles, 
San Francisco, and Los Angeles provide some domestic hub service, as 
well as providing international gateway service to Europe and Asia. US 
Airways operates large hubs at Pittsburgh and Charlotte, with smaller 
hub operations in Philadelphia and, to a lesser extent, BWI.

    a. Why would United want to run three European gateways (excluding 
Chicago) at Washington Dulles, Charlotte and Philadelphia? What 
economic advantage does that provide the company? Doesn't it make sense 
economically to consolidate those operations at one, or at most two, 
locations?
    Answer. We believe that using Dulles, Charlotte and Philadelphia in 
combination as transatlantic gateway hubs will provide added 
convenience for customers. We also believe it is a commercially sound 
decision that will enable us to more efficiently serve the growing 
transatlantic market.
    First, all three airports have strong local traffic bases for our 
transatlantic flights. In other words, there already is strong demand 
for transatlantic service originating in each of these markets. We 
anticipate local traffic will continue to grow in each of these markets 
and our decision will position us well to respond to customer demand.
    Second, working in unison, these three transatlantic gateway hubs 
are needed to better position us to capitalize on growing opportunities 
in European travel. Revenue growth in many of these hub markets has 
been very impressive. For instance, between the third quarter of 1994 
and 1999, revenue in the Charlotte-London market has grown 187 percent. 
During this same period, Dulles-London revenue has grown 96 percent and 
Philadelphia-Munich revenue has risen 1,232 percent. We want to serve 
these growing markets as effectively as possible and to participate 
fully in growing transatlantic opportunities. We believe this 
operational strategy will position us to do so.
    Finally, this operational strategy will provide commercial 
flexibility as we integrate our two networks. In some cases, it may be 
more direct and convenient for passengers if they connect through 
Charlotte. In other cases, it may be more convenient for passengers if 
we route them through Dulles or Philadelphia. The key, however, is that 
we will have the flexibility to craft a connecting travel agenda that 
is most convenient for our transatlantic customers. At the same time, 
this strategy will afford us important flexibility to respond to 
facility constraints at each airport thereby enabling us to run the 
most efficient transatlantic network operations possible.

    b. What benefit does the Pittsburgh operation provide United that 
it does not or would reap at Chicago or Dulles?
    Answer. We are very pleased by the prospect of adding Pittsburgh to 
family of hub airports which form the backbone of our global network.
    Pittsburgh has a sizable and growing local market of traffic. For 
the year ending the third quarter of 1999, that local market alone was 
approximately $1.1 billion. We look forward to having the chance to 
serve these passengers and expect that Pittsburgh local traffic will 
continue to grow.
    Also, Pittsburgh will give us an ideally located hub to serve 
regional traffic on the East Coast. Regrettably, United has been 
historically weak in servicing local communities on the East Coast, 
especially north-south passenger traffic. Our recent expansion at 
Dulles has helped to a limited extent. However, it became very clear to 
us that our passengers' demand for better and more efficient service in 
the Northeast and along the East Coast could not be met absent the 
addition of a new hub airport such as Pittsburgh. With the addition of 
a Pittsburgh hub to our network, we believe United will be ideally 
positioned to respond fully to our customers' demand for better single-
carrier service to large and small communities along the East Coast and 
throughout the Northeast.

Question 3. What routes are United and DC Air likely to compete on? 
Will they compete at Denver, Philadelphia, Pittsburgh, O'Hare or 
Chicago? What price competition is there in those markets now?
    Answer. Since DC Air largely will be providing service on origin 
and destination routes via Reagan National while such service for 
United is focussed at Washington Dulles, passengers on hundreds of 
routes to and from the Nation's Capitol will have the competitive 
choice between DC Air's Reagan National service or our Dulles service. 
In addition to this competitive choice between Reagan National and 
Dulles, we intend to compete vigorously with DC Air from Reagan 
National to Charlotte, Philadelphia and Pittsburgh. Important to 
consumers, this service will inject a new competitive option in these 
markets. Currently, passengers flying between Reagan National and 
either Charlotte, Philadelphia or Pittsburgh have only one commercial 
option. As a result of the merger, consumers now will have a 
competitive choice between DC Air or United to these cities via Reagan 
National.

Question 4. Does United compete with other large carriers at their 
hubs? If so, please explain how?
    Answer. United competes vigorously with other airlines at their 
hubs and we are continuing to add service to other airlines' hubs. We 
generally provide service from other airlines' hubs to our hubs and 
from there, passengers can use connecting flights to reach the wide 
choice of destinations that the United network offers. In the last 
year, United has added service from Los Angeles to Continental's hub at 
Houston and American's hub at Dallas-Fort Worth and in September we 
will be adding serving from Los Angeles to Delta's Salt Lake City hub. 
All these routes provide access to United's extensive network to Hawaii 
and the South Pacific and as an example, a customer can fly on United 
from Dallas-Fort Worth to Los Angeles to Honolulu which provides 
competition to American's Dallas-Fort Worth to Honolulu nonstop 
service. Nationwide, United flies to every hub operated by another 
airline in the United States.
    The following list shows how extensive United's service to other 
airlines' hubs is:

American Airlines
Dallas-Fort Worth: UA flies from Chicago, Washington Dulles, Denver, 
    San Francisco and Los Angeles
Miami: UA flies from Chicago, Reagan Washington National, Washington 
    Dulles, Denver, San Francisco and Los Angeles, as well as New York, 
    Atlanta, Orlando, Santiago, Sao Paulo, Caracas, Buenos Aires and 
    Rio de Janeiro
San Juan: UA flies from Chicago and Washington Dulles
Delta Air Lines
Atlanta: UA flies from Chicago, Washington, Denver, San Francisco and 
    Los Angeles
Cincinnati: UA flies from Chicago
Salt Lake City: UA flies from Chicago, Denver, San Francisco and Los 
    Angeles (beginning September 2000)
Northwest Airlines
Detroit: UA flies from Chicago, Denver and Washington
Minneapolis: UA flies from Chicago and Denver
Memphis: UA flies from Chicago and Denver
Continental Airlines
Newark: UA flies from Chicago, Denver, Los Angeles and San Francisco, 
    United Express flies from Washington Dulles
Cleveland: UA flies from Chicago and Denver, United Express flies from 
    Washington Dulles
Houston: UA flies from Chicago, Denver, Los Angeles and San Francisco
TWA
St. Louis: UA flies from Chicago and Denver
America West Airlines
Las Vegas: United flies from Chicago, Washington Dulles, Denver, San 
    Francisco and Los Angeles
Phoenix: United flies from Chicago, Washington Dulles, Denver, San 
    Francisco and Los Angeles

    In addition to this competition that United directly provides at 
the hubs of other network carriers, United's hubs vigorously compete 
with other hub airports for connecting traffic. Such inter-hub 
competition is a source of important indirect competition that 
significantly benefits consumers. For instance, United intends for the 
proposed merger to strengthen Charlotte's ability to act as a 
competitive counterbalance to Atlanta in the Southeast. While this is 
not a case of United directly adding more service to Delta's hub in 
Atlanta, from the standpoint of consumers, it is an important addition 
of new competitive choice in the Southeast.

                                 ______
                                 
  Response to Written Questions Submitted by Hon. Ernest F. Hollings 
                          to James E. Goodwin

Question 1. You are divesting US Airways operations at Reagan, knowing 
that DOJ would have an antitrust problem with your deal, particularly 
in the Washington area, given United's dominance at Dulles and US 
Airways dominance at Reagan. At other hubs where you will likewise 
dominate the area, why shouldn't we see, as a precondition to 
permitting this deal to go through, that United divest a substantial 
portion of its gates at the 8 hubs you will control?
    Answer. The DC Air divestiture is based on the Justice Department's 
likely concerns about nonstop overlaps between the two airlines from 
Washington D.C., i.e., United from Washington Dulles and US Airways 
from Reagan National. Such nonstop overlaps occur because both airlines 
have substantial operations in Washington D.C.: United has a hub at 
Dulles and US Airways has a significant base of operations at Reagan 
National. In the other hub cities, there are virtually no nonstop 
overlaps because only one airline or the other has a significant base 
of operations at the airport. Because there are no significant overlaps 
at the other hubs, no divestitures such as DC Air are needed to address 
potential anticompetitive concerns resulting from the merger.

Question 2. According to SalomonSmithBarney, the transaction will 
provide significant revenue benefits to the combined carrier (report of 
May 31). Can you explain the rationale for these benefits, and also 
explain if these benefits are primarily derived from passengers 
choosing the combined carrier over another carrier?
    Answer. Broadly speaking, there are three categories of revenue 
benefits from the merger. First, the merger will lead to greatly 
improved overall connectivity, as US Airways' East Coast network is 
combined with United's network. This greater connectivity will allow 
United to provide service on 560 city pair routes along with providing 
new connecting options and more frequencies on city pair routes served 
by one airline or the other today. United's new and improved 
competitive presence on these routes will enhance competition, improve 
the quality of service on these routes for passengers, and lead to 
additional sales and revenues for United. Second, the merger will 
greatly improve United's overall network service, making United a more 
attractive option for frequent flyers and business travelers seeking 
greater travel flexibility. A higher quality airline network means 
improved consumer welfare and more sales and revenues for United. 
Third, the merger's synergies will allow United to redeploy aircraft 
and other assets from unprofitable routes to city pair routes that are 
underserved today. Hence, United will provide nonstop service on many 
city pairs where no nonstop service is available today. This new 
service will lead to a more efficient allocation of aircraft, generate 
significant consumer welfare benefits, and lead to revenue synergies as 
United replaces unprofitable routes with routes where it can offer a 
profitable new service. Overall, these revenue benefits reflect both 
stimulation from improved quality of service and taking passenger share 
from other airlines that cannot match United's improved service.

Question 3. Pilot Contracts--are there clauses in the UA-ALPA contract 
that may present issues for the transaction, and if so, what are those 
provisions. Please submit the relevant excerpts.
    Answer. The United pilot contract contains a typical provision 
requiring that it be applied to the combined pilot workforce after the 
closing of a merger. The US Airways pilot contract contains a similar 
provision calling for it to remain in effect after the closing of a 
merger. Because this is a common situation for pilot agreements in a 
merger, the pilots union, of which both groups are members, has a 
Merger Policy that reconciles this conflict. This Policy calls for a 
fence agreement that keeps the pilot operations separate until an 
integrated seniority list can be agreed to (or arbitrated if necessary) 
and the pilots and United have reached agreement in a single collective 
bargaining agreement. United has advised both pilot groups that it is 
agreeable to the application of the union's Merger Policy in this 
transaction.

Question 4. According to the SEC information provided by you, the 
combined carrier will be the largest carrier in 5 of the 6 biggest 
metropolitan areas. Why do you believe that from a competition policy 
stand point such concentrations should rest in one carrier's hands?
    Answer. United may become the largest airline in five of the six 
largest metropolitan areas, but that does not mean that these markets 
are concentrated in any meaningful sense. Competition in these 
metropolitan areas is fierce. For example, in Chicago, two airlines 
have hubs at Chicago O'Hare (United and American) and two other low 
cost airlines have major bases of operations at Chicago Midway 
(Southwest and American Trans Air). In New York, United would not have 
a hub, while Continental would have a hub at Newark, and Delta and 
American have major operations at New York LaGuardia and JFK. In Los 
Angeles, United does have a hub, but it competes fiercely with 
American, Delta, and Southwest, among others, at Los Angeles 
International, not to mention competition from other airlines serving 
other proximate airports in the area. In San Francisco, United has a 
hub, but Southwest is the #1 carrier at nearby Oakland and American is 
the #1 carrier at nearby San Jose. United faces strong competition 
throughout the Bay Area. In short, the six largest metropolitan areas 
are fiercely competitive, not concentrated.
    United's concentration across these six airports will simply 
parallel its market position across the country. After the merger, 
United would have the largest airline by a few percentage points, but 
its overall share will not be that high (certainly compared to other 
industries) and the airline industry itself is not concentrated.

Question 5. One of the reasons cited in your SEC document details how 
an inter-line connection today would be on the 8th screen of a CRS 
display, but that the combined carrier's flight would now show up on 
the first screen. What are the revenue benefit estimates of the change 
in screen placement?
    Answer. United has not quantified the specific revenue benefits of 
CRS display separate from the overall improved connectivity of the 
combined network. That reflects the fact that revenue benefits from CRS 
screen display placement are simply a reflection of the overall 
improvement in quality of service that will result from the merger. A 
flight itinerary's ordering on a CRS display is based in part on the 
quality of service of the flight. Hence, because passengers do not like 
interline flights, these flights are unlikely to show up early in the 
CRS screen displays. The merger will allow United to greatly improve 
the on-line connectivity of the combined network, leading to 
itineraries of higher quality for passengers. Naturally, because CRS 
screen display order is a function of the quality of a flight 
itinerary, the merger's improvement of the combined network's quality 
of service leads to improved CRS screen display placement.

Question 6. Why is ``seamless service'' so important in this day and 
age of alliances, interlining and shared frequent flyer programs?
    Answer. Consumer demand for convenient, hassle free travel 
continues to evolve. When customers told the airline industry they did 
not like the inconvenience of having to check-in multiple times when 
they connected with another carrier, the industry responded with 
interline agreements that made single check-in possible for connecting 
travel on different carriers. Similarly, as passengers began demanding 
seamless global travel, the customer-driven response has been global 
network alliances such as the Star Alliance which provide consumers 
with seamless travel options worldwide. These improvements in service 
have been welcomed by our customers, especially our international 
passengers who rely on the Star Alliance.
    Most recently, consumers have increasingly told us that they want 
us to take an additional step forward by creating a truly national 
airline that offers single-carrier service to as many domestic city-
pairs as possible. We listened to the marketplace and concluded our 
proposed merger with US Airways to be the most economical and practical 
way to quickly respond to consumer preference for hassle-free, single-
carrier service. Responding fully to the travel preferences of 
consumers is an evolutionary process. Our proposed merger builds on the 
progress we made through interline agreements and alliances.

Question 7. It has been rumored that US Airways got a good deal from 
Airbus in acquiring a fleet of new planes. The US-US SEC document, 
slide 47 suggests that the US Airways-Airbus contract is ``one of 
kind''. How valuable was the Airbus deal to United, and what is meant 
by that phrase, and please describe the contract.
    Answer. In considering the transaction, United did not specifically 
value the aircraft contract between US Airways and Airbus. While we 
wish to be as helpful as possible in responding to any specific 
questions you may have about that contract, such questions are better 
addressed to US Airways which has far greater knowledge of it than 
United.

Question 8. The European Commission has indicated that it will review 
the transaction. When do you anticipate filing notification with them? 
Do you anticipate that the EC review will be limited to flights into 
and out of Europe, or do you expect that other issues will be 
considered?
    Answer. We anticipate that we will formally notify the merger to 
the EU, after close consultation with the EU Merger Task Force, in 
early or mid-September. In its review of the merger, we understand the 
Commission will primarily concentrate on the effect of the merger on 
transatlantic competition. It is important to note that United and US 
Airways do not provide the same US-EU city pairs with non-stop service. 
In addition, the effect of the merger in the transatlantic market will 
be minimal. United operates 8.1 percent of the seats available between 
the U.S. and Europe, while US Airways' transatlantic operations account 
for just under 3 percent. Even when taking into account Lufthansa's and 
SAS's shares of capacity--7.1 percent and 1.7 percent, respectively--
the proposed transaction results in only a minimal increase of the 
transatlantic alliance share of seats between the U.S. and EU of less 
than 3 percent, from 16.9 percent to 19.8 percent. By comparison, BA 
and AA alone have 20.6 percent (13.1 percent and 7.5 percent 
respectively).
    The Commission has indicated that it may also consider 
transatlantic service provided by United's alliance partner, Lufthansa. 
Both US Airways and Lufthansa provide non-stop service in only one city 
pair--FRA-PHL. The Commission may seek to impose conditions in this 
market. Otherwise, we expect that the Commission will conclude that the 
merger does not lead to a reduction in competition in the transatlantic 
market.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                          to James E. Goodwin

Question 1. Does United plan to offer service from Reagan National 
(DCA) to any markets that DC Air proposes to serve from Reagan 
National? If so, what markets, with what frequency, and with what type 
of aircraft.
    Answer. Yes, we intend to compete vigorously with DC Air from DCA 
to Charlotte, Philadelphia and Pittsburgh. Important to consumers, this 
service will inject a new competitive option in these markets. 
Currently, passengers flying between Reagan National and either 
Charlotte, Philadelphia or Pittsburgh have only one commercial option. 
As a result of the merger, consumers now will have a competitive choice 
between DC Air or United. In the DCA-Charlotte market, we intend to 
offer 10 all-jet daily frequencies. In the DCA-Philadelphia market, we 
will offer nine daily frequencies using a combination of jet and 
turboprop service. Finally, in the DCA-Pittsburgh market, we will offer 
six all-jet daily frequencies.

Question 2. One of the purported benefits of your merger proposal is a 
commitment not to increase fares for two years. It appears to me, 
however, that this commitment may result in no real benefits for 
consumers.
    a. First, you have reserved the ability to increase prices to 
reflect inflation and fuel cost increases. Haven't fare increases 
traditionally lagged behind Consumer Price Index and fuel cost 
increases?
    Answer. Viewed over any period of several years, airline yield 
(revenue per seat mile) trends have lagged CPI increases and fuel cost 
increases. However, the results for any individual year are mixed.
    Industry data for years 1980-1999 shows that in 5 of the last 20 
years, airline yields have increased by more than CPI. During the other 
15 years, airline yields have lagged CPI. (Source: Air Transport 
Association, http://www.air-transport.org/public/industry/27.asp)
    Looking at fuel, airline yields have increased by more than fuel in 
13 of the past 20 years. Fuel prices have proven to be more volatile 
than CPI. (Source: Comparison of above Air Transport Association data 
with United's average jet fuel cost reported in UAL Annual Reports).
    Attachment 1* to my answers is a graph showing trends in industry 
yields, CPI trends and United's annual jet fuel cost.
---------------------------------------------------------------------------
    * Attachment 1 has been retained in the Committee's files.

    b. Second, won't yield management techniques effectively give 
United the ability to continue to increase fares by simply offering 
fewer seats at discounted fares, or by placing other restrictions on 
the availability of discounted fares?
    Answer. Revenue management's basic purpose is to balance the number 
of discount seats sold far in advance with those seats sold close to 
departure. Once the airplane departs, the opportunity to sell empty 
seats is forever lost. We only get one chance to get the right mix of 
discount seats and full fare seats in order to fill the airplane. 
Accordingly, it would not be in the interest of United and its 
employee-owners to simply eliminate discount seats as the question 
suggests. Today, we estimate revenue demand for every individual 
flight. We save enough seats to meet the needs of last minute, on-
demand travelers. The rest of the seats are available to leisure 
customers at discounted fares. These discounted seats are necessary to 
help fill up airplanes by stimulating additional customer demand. To 
maximize the revenue from each flight, we will continue to be forced by 
the marketplace to offer discount seats to fill as many seats as 
possible on each airplane.

Question 3. According to information released on the proposed merger, 
United has promised not to raise fares for the next two years except in 
response to changes in the price of fuel and to cover inflation.

        Could you explain whether that pledge covers all fares or only 
        certain fares?

        What does it mean that the pledge applies to ``point to point 
        structural'' fares? What are such fares? Do these fares include 
        discount fares such as Internet specials and corporate 
        discounts?

        How can the public be assured that United has held to this 
        pledge?

    Answer. As part of the proposed merger, United has committed that 
it will not increase point to point structure fares (except for 
increases in fuel cost and CPI) for two years following the merger.
    ``Point to point'' is intended to communicate the significance of 
United's commitment in terms of the number of markets and avoid 
confusion that might result from the more technical term (origin 
destination city pair). For every point that United serves, we usually 
publish fares to every other point in our route system, regardless of 
whether our service is non-stop or requires a connection. Thus, from 
Allentown, PA we offer service and publish fares not just to Chicago & 
Washington (non-stop), but also for cities ranging from Albuquerque, NM 
to Yakima, WA. Counting all of the cities that United serves 
domestically, our commitment extends to more than 18,000 current United 
markets.
    The structure fares exist in each and every market served by 
mainline United in the 48 states (not West Coast Shuttle). Structure 
fares are commonly understood within the industry as certain fare codes 
which exist in every market. Included in structure fares are--

  Structure First Class (Fare codes prefixed by FUA-)
  Structure Business Class (where available) (Fare codes prefixed by 
        CUA-)
  Structure Unrestricted Economy Class (Fare codes prefixed by YUA- or 
        BUA-)
  Structure 14 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with ME14-)
  Structure 14 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with MOE14-)
  Structure 21 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with HE21-)
  Structure 21 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with HOE21-)

    In making this voluntary commitment, United chose to focus on the 
structure fares because these will be easy to monitor. Other types of 
fares would be very difficult to monitor and are not part of the 
commitment. At any given time, United has approximately 750,000 fares 
in its domestic 48 states tariffs and many of these fares change 
often--averaging approximately 56,000 fare changes each weekday. Many 
of these changes involve short term promotional fare sales which are 
filed to build traffic.
    Corporate discounts exist where large corporations negotiate volume 
discounts. Corporations that commit to certain sales volume goals 
negotiate for a percentage discount off of published fares. Since these 
are individually negotiated discounts and not part of our regular 
tariffs, these corporate discounts are not included in the commitment. 
However, many of the fare codes most often purchased by these corporate 
customers are covered by the commitment. The structure unrestricted 
economy fares (YUA- or BUA-) are the types of unrestricted fare most 
frequently used by business travelers who book trips on short notice 
and demand schedule flexibility.
    All of the structure fares are available for purchase through 
United's web site and other internet channels. However, internet sites 
also contain many other kinds of promotional and other discount 
products which are not covered by the commitment.
    United plans to monitor this commitment itself through internal 
policies, controls and reporting. Beyond our own internal compliance 
efforts, our commitment is structured in a way that ensures the ease of 
oversight by consumers and government officials. First, the fares 
covered by the commitment are clearly and easily identified (by fare 
code) so that they can easily be monitored over time. Second, fare 
information is so readily available that, if United were to increase 
any of the structure fares other than for CPI or fuel, it would be very 
easily and quickly detected. Fares are publicly available and easily 
accessed through any of several means--Airline Tariff Publishing Co. 
(an electronic publisher or clearinghouse of fare information), 
thousands of professional travel agents (through their computer 
reservations systems), and inquiry to United's own telephone 
reservations. All of these sources contain the prices for each of the 
various fare codes and make it easy for anyone to monitor fares over 
time.

Question 4. In what origin and destination markets do United and US 
Airways currently overlap, on both non-stop and one-stop flights?
    Answer. Of the many origin and destination markets that United and 
US Airways currently serve separately, our highly complementary 
networks overlap on very few routes. Attachment 2 * to my answers shows 
the limited overlap markets in non-stop and direct, one-stop service 
that does not involve a change of aircraft.
---------------------------------------------------------------------------
    * Attachments have been retained in the Committee's files.

Question 5. If United and US Airways merge as currently planned, what 
origin and destination markets will be entirely new? In other words, 
what service will be offered after the merger that is not offered by 
either carrier today?
    Answer. As I told the Committee in my oral testimony, the hallmark 
of this proposed merger is expanded consumer choice for single-carrier 
service. Unlike previous mergers which reduced service, the proposed 
United-US Airways merger will immediately expand both point-to-point 
and connecting service. Over time, we anticipate service options to 
expand even further to respond fully to passenger demand. In total, we 
plan to immediately offer new service in 560 city-pair markets. Of 
these, there will be new service offered in 303 domestic city-pair 
markets and 257 international city-pair markets. Attachment 3 * to my 
answers shows the new non-stop service we plan to initiate once the 
merger is finalized. Attachment 4 * identifies all North American 
cities with planned new one-stop or two-stop service to points in the 
US, Canada and Mexico.

Question 6. Which markets does United intend to serve from Reagan 
National after the merger? How many frequencies and what types of 
aircraft will be operated in each of those markets?
    Answer. We intend to offer 16 all-jet frequencies to New York 
LaGuardia, 16 all-jet frequencies to Chicago O'Hare, 15 all-jet 
frequencies to Boston, 10 all-jet frequencies to Charlotte, nine 
frequencies to Philadelphia offering a combination of jet and turboprop 
service, six all-jet frequencies to Pittsburgh and one jet frequency to 
Miami. As I mentioned in response to question 1, our service to 
Charlotte, Philadelphia and Pittsburgh will give consumers a 
competitive alternative in those markets that passengers currently do 
not have.

                                 ______
                                 
Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                          to James E. Goodwin

Question 1. In addition to being the world's largest airline, United is 
also the world's largest employee owned airline. I believe the pilots 
own 25% of the stock and that overall, employees own 55%. What happens 
to the ESOP if the transaction goes forward? Will US Airways employees 
be allowed to participate? If so, will it dilute the value of the 
stock? Will the employee groups continue to be represented on the UA 
Board?
    Answer. Under the terms of the ESOP, all ESOP stock will be 
allocated by the end of 2000. After that, there is no more stock for 
allocation to participants. Under the structure of the ESOP, no new 
participants have been added since April 2000. Based on this, no new 
employees of United or US Airways will be added to the ESOP. The ALPA, 
JAM and management/salaried employees will continue to have 
representation on the Board of Directors.

Question 2. United has stated that no jobs will be lost for two years. 
When US Airways closed its reservation centers in Nashville, Reno and 
Utica, hundreds of workers lost their jobs. There will have to be some 
sort of redeployment of people to make the combined carrier more 
efficient. Your pledge on jobs--first, does it include jobs at the 
reservation centers? Second--while no jobs may be lost, will transfers 
or retraining be provided if shifts are necessary?
    Answer. First, our two-year job protection pledge applies to US 
Airways employees at reservation centers. Second, since the hallmark of 
our proposed merger is to expand service not reduce it, we do not 
anticipate that any positions at reservation centers will be lost 
during the two-year period following completion of the merger. United 
stands firmly behind our pledge to provide two years of job protection 
for all US Airways employees.

Question 3. United has stated that it will impose a freeze on airfares 
(``structural fares''). According to Travel Weekly, United is only 
pledging to maintain its standard, unrestricted walkup fares: its 
standard first class, its standard 14 and 21 day advance fares. 
Consumer price and fuel adjustments are not covered. United, however, 
did not say it would not change the mix of seats offered at various 
prices. What does this mean in practice, and how will it be monitored?
    Answer. As part of the proposed merger, United has committed that 
it will not increase point to point structure fares (except for 
increases in fuel cost and CPI) for two years following the merger.
    ``Point to point'' is intended to communicate the significance of 
United's commitment in terms of the number of markets and avoid 
confusion that might result from the more technical term (origin 
destination city pair). For every point that United serves, we usually 
publish fares to every other point in our route system, regardless of 
whether our service is non-stop or requires a connection. Thus, from 
Allentown, PA we offer service and publish fares not just to Chicago & 
Washington (non-stop), but also for cities ranging from Albuquerque, NM 
to Yakima, WA. Counting all of the cities that United serves 
domestically, our commitment extends to more than 18,000 current United 
markets.
    The structure fares exist in each and every market served by 
mainline United in the 48 states (not West Coast Shuttle). Structure 
fares are commonly understood within the industry as certain fare codes 
which exist in every market. Included in structure fares are--

  Structure First Class (Fare codes prefixed by FUA-)
  Structure Business Class (where available) (Fare codes prefixed by 
        CUA-)
  Structure Unrestricted Economy Class (Fare codes prefixed by YUA- or 
        BUA-)
  Structure 14 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with ML14-)
  Structure 14 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with MOE14-)
  Structure 21 Day Advance Purchase Excursion Fares (Fare codes 
        prefixed with HE21-)
  Structure 21 Day Advance Purchase Excursion Fares for Off-Peak Days 
        (Fare codes prefixed with HOE21-)

    In making this voluntary commitment, United chose to focus on the 
structure fares because these will be easy to monitor. Other types of 
fares would be very difficult to monitor and are not part of the 
commitment. At any given time, United has approximately 750,000 fares 
in its domestic 48 states tariffs and many of these fares change 
often--averaging approximately 56,000 fare changes each weekday. Many 
of these changes involve short term promotional fare sales which are 
filed to build traffic.
    Corporate discounts exist where large corporations negotiate volume 
discounts. Corporations that commit to certain sales volume goals 
negotiate for a percentage discount off of published fares. Since these 
are individually negotiated discounts and not part of our regular 
tariffs, these corporate discounts are not included in the commitment. 
However, many of the fare codes most often purchased by these corporate 
customers are covered by the commitment. The structure unrestricted 
economy fares (YUA- or BUA-) are the types of unrestricted fare most 
frequently used by business travelers who book trips on short notice 
and demand schedule flexibility.
    All of the structure fares are available for purchase through 
United's web site and other internet channels. However, internet sites 
also contain many other kinds of promotional and other discount 
products which are not covered by the commitment.
    United plans to monitor this commitment itself through internal 
policies, controls and reporting. Beyond our own internal compliance 
efforts, our commitment is structured in a way that ensures the ease of 
oversight by consumers and government officials. First, the fares 
covered by the commitment are clearly and easily identified (by fare 
code) so that they can easily be monitored over time. Second, fare 
information is so readily available that, if United were to increase 
any of the structure fares other than for CPI or fuel, it would be very 
easily and quickly detected. Fares are publicly available and easily 
accessed through any of several means--Airline Tariff Publishing Co. 
(an electronic publisher or clearinghouse of fare information), 
thousands of professional travel agents (through their computer 
reservations systems), and inquiry to United's own telephone 
reservations. All of these sources contain the prices for each of the 
various fare codes and make it easy for anyone to monitor fares over 
time.

Question 4. United, according to your SEC documents, has indicated that 
unprofitable routes ultimately will be closed. Right now, United's cost 
structure is lower than US Airways, 9.78 cents compared to 13.39 cents. 
What do you estimate the new cost will be? How will that affect your 
costs vis-a-vis the term ``Unprofitable''?
    Answer. We do not have an exact cost estimate for the combined 
carrier. The difference in costs is driven by a difference in the stage 
length of the average operations at the respective companies. For 1999, 
United's average system stage length was longer compared with that of 
US Airways. Accordingly, we were able to average down our costs more 
effectively than US Airways due to their low stage length operations.
    There will be some cost savings achieved by combining the two 
companies' operations. For example, US Airways' costs will now be 
spread over a much larger system. Also, United and US Airways own 
duplicative assets at many airports such as ramps and the merger will 
allow United to lower costs by more efficiently using assets for both 
carriers' operations. United also anticipates significant savings in 
terms of maintenance costs, advertising costs, and liability insurance 
costs because of the merger. As a result of these savings, we estimate 
that had our stage length been the same as US Airways, our unit cost 
would have been somewhat lower than theirs. We will base decisions on 
the profitability of flying particular routes after the merger on 
financial data for such routes, including the extent to which 
efficiencies from the merger lower operating costs.

Question 5. You claim that the merger will provide new opportunities 
for many cities, opening up areas formerly served by US Airways to 
United's more extensive international operations, for example. I 
fought, and will continue to fight, to make sure that carriers improve 
their customer service. Right now, according to DOT statistics, United 
is last (10th) in on time service and US Airways is 7th (April 2000). 
In the rail area, we had a merger creating the largest railroad in the 
country. There were service problems for months on end. How will you be 
able to treat the customers to better service if the deal is approved? 
How long will it take to integrate the two operations and how long will 
it take you to sort out the delay situation for each of you, if the 
merger does not go through?
    Answer. At the outset, let me assure you that there is no one more 
concerned about customer service challenges at United than me. We are a 
customer service business. We can and must do a better job serving our 
valued passengers. Be assured that improving the level of service we 
provide on a sustained basis is a key priority for United and one in 
which I am personally engaged.
    In addition to addressing current customer service issues, this 
commitment to improved customer service is a key focus as we begin 
planning to integrate the United and US Airways operations. Our goal is 
a seamless transition where customer service will not just remain 
unharmed, but in fact will improve. That is our goal. As I have said, 
the genesis of this merger is the demand of our customers for improved 
and expanded single-carrier service in as many city-pairs as possible. 
Accordingly, we believe the merger itself will create improved customer 
satisfaction with the product we offer. However, we fully realize that 
we must improve the service that accompanies our flight offerings. I am 
committed to that goal.
    In terms of the length of time needed to integrate our operations, 
we are hopeful it can be accomplished quickly. However, we realize the 
challenges we face. That is why we already are holding extensive 
internal discussions on integration tactics and strategies. As I said, 
our goal will be a seamless transition that will be transparent to 
customers and one that will result in an overall improvement in 
customer service.

Question 6. Why is ``seamless service'' so important in this day and 
age of alliances, interlining and shared frequent flyer programs?
    Answer. Consumer demand for convenient, hassle-free travel 
continues to evolve. When customers told the airline industry they did 
not like the inconvenience of having to check-in multiple times when 
they connected with another carrier, the industry responded with 
interline agreements that made single check-in possible for connecting 
travel on different carriers. Similarly, as passengers began demanding 
seamless global travel, the customer-driven response has been global 
network alliances such as the Star Alliance which provide consumers 
with seamless travel options worldwide. These improvements in service 
have been welcomed by our customers, especially our international 
passengers who rely on the Star Alliance.
    Most recently, consumers have increasingly told us that they want 
us to take an additional step forward by creating a truly national 
airline that offers single-carrier service to as many domestic city-
pairs as possible. We listened to the marketplace and concluded our 
proposed merger with US Airways to be the most economical and practical 
way to quickly respond to consumer preference for hassle-free, single-
carrier service. Responding fully to the travel preferences of 
consumers is an evolutionary process. Our proposed merger builds on the 
progress we made through interline agreements and alliances.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. Max Cleland 
                           to Joseph Leonard

Question 1. How do you believe the proposed merger of United-US Airways 
would affect price competition?
    Answer. Major carriers do not compete on price today--they instead 
compete using scheduled flights and frequent traveler programs. To that 
end, the six largest carriers already have formed three marketing 
alliances that are largely focused on expanding and exploiting the 
strengths of the frequent traveler programs. United-Delta, Northwest-
Continental and American-US Airways have all consolidated their loyalty 
programs with each other as well as with various International 
carriers. These global alliances have a tremendous impact on consumer 
choice and competition.
    We do not believe that the formal consolidation of these alliances, 
albeit with changes in the principle partners, will significantly 
change price competition. True price competition only occurs when low 
cost, low fare airlines enter a market. This merger underscores the 
importance of the need for vigilance against anti-competitive and 
predatory practices in the industry by DOT as well as DOJ. It also 
underscores the importance of ensuring that no airports are closed to 
new entrants. Deregulation can only exist if there are open markets and 
a level playing field. This need exists with or without this merger. 
Unfortunately, the DOT has failed to exercise its regulatory authority 
to promote competition in the industry. In fact, they have taken no 
enforcement action or initiated any formal investigation of complaints 
regarding anti-competitive behavior.

Answer 2. You have testified that the slots being given to DC Air under 
the merger agreement should instead be given to other, new entrant 
carriers and that such a reallocation of the slots would have far more 
impact on passengers and fares than the merger itself. Could you please 
elaborate on your statement? The slot issue aside, what is it about 
this merger that is of concern to your airline?
    Answer. AirTran Airways believes that this merger presents a unique 
opportunity to significantly improve competition in the airline 
industry. As you are well aware, AirTran Airways has had a tremendous 
impact on airfares and created huge public benefit with our low fare 
network at Atlanta Hartsfield. Hartsfield is now the busiest airport in 
the world in terms of passengers enplaned. The economic benefit to 
travelers to and from Atlanta was approximately $700 million last year 
and the benefits are not limited to the Atlanta markets. Passengers 
traveling from the Midwest to the Southeast benefit from the 
competitive pricing and service we provide via Atlanta. The city of 
Atlanta and state of Georgia have repeatedly documented the beneficial 
impact of healthy low fare competition in terms of economic 
development, corporate relocations and job creation. Kodak moved their 
marketing division to Atlanta, citing low fare air service as a 
principal reason. These benefits are a direct result of the opportunity 
AirTran Airways had to create a low fare network at Hartsfield--
specifically the availability of 18 gates--as well as dedication and 
focus on providing quality low fare service and maintaining low costs.
    The United-US Airways merger will not significantly change 
competition or concentration in Western or Midwest U.S., it will 
however increase hub and regional concentration along the Eastern 
seaboard and into the Midwest. This concentration presents a 
potentially anti-competitive concern that even the merging carriers 
recognized and plan the Reagan National divestiture to address. The 
question is will this divestiture satisfy the requirement to create 
effective competition. The answer is not as planned by the merging 
carriers.
    The hub concentration resulting from the merger is the most 
significant competitive issue, it is critical that the divestiture of 
the Reagan National slots occur and more critical that it is done in a 
way that results in effective competition. This competition needs to 
address not only the Washington area, but also the entire eastern 
seaboard. Without an effective low fare network to counter balance this 
hub concentration consumers will be harmed. In the long run, new 
entrant service will not survive in this part of the country.
    The Reagan National slots should be reallocated as a whole in order 
to not only continue service to existing communities, but to provide an 
effective low fare network that can compete with the merged carriers. 
This network must be provided by a carrier with a demonstrated ability 
to profitably compete and maintain low fare service. True competition 
will not result from a virtual airline that will for a long period time 
be reliant on it's largest competitor and which may never be able to 
achieve a competitive cost structure. A dominant carrier in a market 
should not be able to identify its only ``competitor.''
    AirTran Airways is uniquely positioned to provide this competitive 
service. The public benefit and competitive impact is well documented 
by DOT, DOJ, GAO and others. We have a fleet of 51 aircraft with 
options and orders to 88 new Boeing 717s. We have the experience, 
dedication and ability to create a competitive low cost network at 
Reagan National airport that will provide an effective counter balance 
to the consolidation of major carriers that has already occurred.
    Another less apparent benefit of low cost competition is the impact 
it has on the efficiency of the incumbent carriers. It is clear that 
Delta is a much stronger, more efficient carrier as a result of 
competing with AirTran Airways. They have focused on their own costs 
and now have the lowest cost among major carriers and have recently 
reported record profits.

Question 3. You have stated you will save consumers an additional $600 
million with a network at Reagan National. How are you estimating your 
savings?
    Answer. The methodology we used to estimate savings is the same 
process used by DOT and GAO in calculating the impact of low fare 
competition. All major carriers and industry experts also use this 
methodology to forecast demand and market impact of new entry.
    Our savings estimates are based on Industry O&D passenger and fare 
information as reported to DOT. Traditionally when we enter a market 
industry average fares decrease by at least 40% in direct markets and 
10% to 40% in connect markets. For example, fares from Washington 
Dulles, where AirTran Airways competes are less than half of those at 
Reagan National. Passenger demand in markets we enter increases up to 
50% or more. Upon resuming service to New York LaGuardia in the first 
quarter of 1998, passenger traffic increased by 62% versus the year 
earlier quarter. The savings estimate is based on the decrease in 
average fares and the forecasted passengers in impacted city-pair 
markets. For example:


------------------------------------------------------------------------
                                         Savings w/
                             Savings w/  Stimulated            Estimated
                               Current                Sample    Savings
  Passenger traveling in:    Passengers  Passengers   Market      (in
                                 (in         (in               millions)
                              millions)   millions)
------------------------------------------------------------------------
Nonstop DCA Markets          $182.3      $273.5      DCA--Buf  $6.3
                                                      falo
Connections via Atlanta      $87.7       $131.6      DCA--Gul  $1.3
                                                      fport/
                                                      Biloxi
Connections via DCA          $52.0       $293.9      Rocheste  $2.9
                                                      r--Rale
                                                      igh/
                                                     Durham
------------------------------------------------------------------------
Total Estimated              $322.0      $699.0
  Annual Savings
------------------------------------------------------------------------


    There are three types of markets that would be impacted by a low 
fare AirTran network a Reagan National airport, 1) Nonstop city-pairs 
from DCA, such as Buffalo, 2) markets with new low fare access to DCA 
from our Atlanta network, such as Gulfport-Biloxi and 3) market that 
would have new low fare connect service as part of a Reagan National 
hub network, such as Rochester-Raleigh/Durham.

Question 4. Critics of the merger charge that it will jump start other 
mergers in the industry. How would low-cost carriers, such as AirTran, 
fair in a consolidated market?
    Answer. As noted earlier, the major carriers are already aligned in 
marketing alliances. While the partnerships may change and realign the 
competitive environment for new entrant and low cost carriers will not 
change. The lack of enforcement of existing DOT regulatory authority is 
the biggest threat to fair and reasonable competition. Further 
consolidation will enable majors to more easily shift capacity and 
target new entrant competition, but given the current lack of 
vigilance, there is little impediment to those sort of anti-competitive 
practices today. Mergers will however allow carriers to further control 
corporate customers, travel agencies, an airport facilities.

                                 ______
                                 
      Response to Written Question Submitted by Hon. Slade Gorton 
                           to Joseph Leonard

Question. What is the status AirTran's complaint regarding anti-
competitive practices that was filed at DOT last July?
    Answer. At this point, there has been no formal investigation of 
the issues raised in AirTran Airways' filings with DOT last year. Last 
month, the DOT General Counsel advised us that an informal 
investigation was being initiated. We have received no other 
information or details.

                                 ______
                                 
  Response to Written Questions Submitted by Hon. Ernest F. Hollings 
                           to Joseph Leonard

Question 1. Would AirTran Airways move into, for example, Philadelphia, 
if a substantial number of gates were available, and be able to provide 
competitive service to the combined carrier?
    Answer. AirTran Airways has been tremendously successful in 
creating a low fare network at Atlanta, competing with Delta airlines 
in local markets, as well as creating competition and price discipline 
throughout the Eastern United States. Our recent success, including six 
consecutive quarterly profits, has been hard fought. There are several 
key components to our success.
    We have maintained our focus on creating consumer value by keeping 
costs low, providing a quality product and low fares. Careful planning 
and reasonable growth has allowed us to build a network that appeals to 
both business and leisure passengers. We offer the amenities of major 
carriers, such as seat assignments, business class and a frequent 
traveler program, but with affordable fares that never include 
roundtrip purchase or a Saturday night stay.
    We have persevered against the most extreme anti-competitive 
practices of the major carriers, most notably Delta and Northwest. This 
predatory behavior has been outlined in filings made last year to both 
the Department of Justice and Department of Transportation, but has not 
resulted in formal investigations or enforcement action. In fact, 
without congressional intervention, the DOT has made no progress in 
promoting fair and reasonable competition in the industry.
    Most importantly, AirTran Airways was created based on the 
opportunity to acquire 18 gates at Atlanta Hartsfield International 
Airport--which we have expanded to 22 gates. This allowed us to build 
the network that we operate today and that has been cited by the GAO, 
DOT, DOJ and others as having such a tremendous impact on competition 
in the airline industry. As I testified before your Committee, 
passengers traveling to and from Atlanta saved $700 million last year 
as a result of the competition we bring to the market. Since our 
inception, Atlanta has outgrown the industry and is now the busiest 
airport in the world in terms of passengers served.
    In order to effectively compete in a hub city like Atlanta or 
Philadelphia, it is necessary to have a network that can withstand the 
competitive forces the incumbent carrier will bring to the table. We 
currently have 1 gate at Philadelphia, which we sublease from United, 
versus the combined carrier's 43 gates. By contrast in Atlanta we have 
22 gates versus Delta's more than 100. We have explored the possibility 
of expanding Philadelphia service. The airport has plans to construct 
four new gates at the airport. If we could obtain those gates, we would 
have the ability to create a small focus city. This would be 
significantly smaller than our Atlanta operation or even the DC Air 
spinoff for National Airport. Four gates would allow about 32 to 40 
departures per day (between 8 to 10 per gate) and service to 10 or 11 
city-pairs. This would clearly be beneficial to the consumers in those 
markets, and would have some limited effect on regional competition. It 
will not however, create the competitive impact and market discipline 
that we could provide with the potential gates and slots at Reagan 
National. We estimate the benefit to consumers of an AirTran Airways 
low fare network at Reagan National would easily exceed $690 million 
per year. AirTran Airways has a demonstrated ability to profitably 
compete with major carriers and provide the type of quality, low fare 
service that was envisioned by Congress in the deregulation act.

Question 2. You are now operating about 8-9% of the flights out of 
Atlanta. You do not serve the Charleston-Atlanta market. Can you 
explain why you would not enter a market of that size?
    Answer. We have held discussions with the Charleston airport and 
continue to evaluate the potential for entering the market. This past 
year we did initiate service to Myrtle Beach and have served Hilton 
Head / Savannah for several years. In order to expand to small and 
medium markets, it is essential that you also enter major markets. Our 
inability to serve National Airport has hindered our ability to expand 
to markets such as Charleston.
    If we are given the opportunity to compete at Reagan National, we 
will not only serve Charleston from Reagan National, but would be much 
better positioned to add service to our Atlanta network and create low 
fare competition not only to the Northeast but to all the Eastern 
United States as well as Texas and the upper Midwest.

Question 3. Should we condition this merger on DOT issuing final rules 
on predatory pricing?

Question 4. With the combined carriers' market power, is it 
unreasonable to require the carriers to agree on a definition of 
predatory fares--and then hold them accountable?
    Answer. We agree that some enforcement of competition to limit 
predatory activity is necessary. However, predatory pricing is too 
narrow a scope to effectively limit anti-competitive behavior in the 
airline industry. The economic arguments for predatory pricing are 
exceptionally difficult to prove and generally are applied post-mortem 
to competition. Roger Fones, Chief Transportation, Energy, and 
Agricultural Section of the Antitrust Division at DOJ very effectively 
outlined the issue in a speech to the American Bar Association:

        The claims of predation that we find most credible involve not 
        only price cuts, but also significant capacity expansion by 
        incumbents. Our starting presumption is that Incumbent's pre-
        entry schedules are optimal for efficiently operating its 
        network. And if the existing network is optimal, the added cost 
        of carrying an additional passenger on the existing network can 
        be quite small. Thus, in the absence of additional reasons to 
        be suspicious, we are unlikely to pursue a predation complaint 
        where Incumbent made few or no changes to its network 
        operations post-entry, even if it cut fares significantly.

        Claims of predation are more credible when they involve not 
        only price cuts, but also significant capacity increases or 
        other changes in network operations by Incumbent. Entry by 
        Incumbent into a route it was not currently serving would 
        seldom be a normal competitive response to a rival. If the 
        route were not profitable for Incumbent before Upstart entered, 
        why would it be profitable afterwards?

                [Remarks before the American Bar Association Forum on 
                Air and Space Law, June 12, 1997.]

    We recently outlined to DOT and DOJ AirTran Airways' experience in 
attempting to add competitive service to Minneapolis-St. Paul--a hub 
that is often cited as the most expensive in the nation. While 
negotiating with Metropolitan Airport Authority in the twin cities, 
Northwest became aware of our intent to serve the Atlanta-Minneapolis-
St. Paul market and just two weeks prior to our public announcement 
increased capacity by an unprecedented 40%. This anti-competitive 
action effectively blocked our entry in this market. We modified our 
plans and added service between Minneapolis and Chicago-Midway, which 
was beneficial to travelers in that market, but limited the full public 
benefit of low fare competition directly to our Atlanta hub network.
    The scope of predatory activity is not limited to scheduled 
capacity and pricing, but includes the effects of frequent traveler 
program, marketing promotions specifically targeted at new entrant 
carriers, travel agency overrides and incentives which punish 
corporations/travel agencies for supporting competition as well as the 
unavailability of airport facilities in hub markets.
    Under the Deregulation Act the DOT was given the authority to 
enforce competition on a much broader scale than traditional antitrust 
laws. DOT General Counsel Nancy McFadden testified to this fact before 
the House Aviation Subcommittee on Aviation, Committee on 
Transportation and Infrastructure:

        Section 41712 of our organic statute (formerly section 411) 
        task the Secretary, when he or she considers it to be in the 
        public interest, to ``decide whether an air carrier . . . is 
        engaged in an unfair or deceptive practice or an unfair method 
        of competition'' and to take appropriate action to end any 
        abuse. Nothing in the terms of that section excludes and type 
        of unfair competitive conduct from its reach.

        In addition, other provisions of the statute make it clear that 
        Congress expected us to take action when major airlines engage 
        in conduct that unreasonably threatens competition in airline 
        markets. The statute's policy section specifically directs the 
        Secretary, in carrying out his responsibilities, to consider 
        that the public interest requires ``preventing unfair, 
        deceptive, predatory, or anti-competitive practices.'' The 
        statue also directs him or her to consider in the public 
        interest ``avoiding unreasonable industry concentration, 
        excessive market domination, monopoly powers, and other 
        conditions that would tend to allow [a carrier] unreasonably to 
        increase prices, reduce services, or exclude competition . . 
        .'' 49 U.S.C. 40101(a)(9) and (13)

        [Testimony before the House Subcommittee on Aviation, April 23, 
        1998]

    Clearly, Congress intended DOT to maintain regulatory authority and 
to actively pursue fair and reasonable competition in the industry. The 
fact remains however, that DOT has not acted on a single complaint or 
initiated any formal investigations of predatory activity or unfair 
competitive practices despite being presented with overwhelming 
evidence.
    DOT has the authority and the ability to actively monitor and take 
enforcement action to ensure a competitive industry. Doing so is 
clearly in the public interest. Congress should require the DOT to move 
quickly to investigate existing complaints and to take appropriate 
enforcement action. Unless the Department states that it will address 
these issues, actions against new entrants will increase. As mergers 
occur, the large carriers increase their ability to engage in such 
behavior.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                           to Joseph Leonard

Question 1. As a low fare carrier, and being as objective as you can be 
as a potential competitor, what do you think of DC Air's business plan?
    Answer. The divestiture of the Reagan National service by United is 
required in order to reduce the valid antitrust concern over 
monopolization of not only the Washington Metropolitan area, but also 
the hub concentration on the Eastern seaboard. Therefore, the carrier 
that ultimately assumes that network operation must be able to provide 
and sustain true competition in the marketplace.
    We do not believe that the proposed DC Air can remedy the 
competitive situation that would exist following the United-US Airways 
merger. The infrastructure required to operate a 222 flight network is 
large and exceptionally complex. Systems, manuals and procedure 
including ground operations, maintenance, dispatch, training, safety 
and regulatory compliance, as well as facilities, marketing, 
reservations and accounting all must be in place and approved by DOT 
prior to the first operation. In addition to that, station personnel 
and flight crews must undergo background checks and extensive training 
prior to employment. All of these factors must be considered in the 
certification process by FAA as well as a fitness review by DOT.
    DC Air's plan is to lease facilities, personnel and systems from 
United airlines and United affiliate carriers to either expedite or 
bypass the normal new entrant requirements which have historically 
taken several years. Even if this unusual process is approved, the 
resulting carrier will be exceptionally dependent on the carrier it is 
theoretically formed to compete with.
    The key issue is can DC Air be an effective competitor to the 
merged United-US Airways?
    First, will DC Air have a competitive cost structure? The answer to 
that question is clearly no. Given that DC Air will lease United 
aircraft, flight crews, maintenance, and facilities and be reliant on 
United for reservations, distribution and accounting support, it will 
have a very high cost structure. It is logical that leasing services 
from a high cost carrier will come at a high cost and result in a small 
airline with higher than average costs.
    DC Air has publicly stated it will offer ``competitive'' fares 
rather than low fares, which is a recognition of higher operating 
costs. It is safe to presume that ``competitive'' means the same high 
fares as are currently available in these markets, since there is no 
direct competition at Reagan National and no low fare competition in 
the same city pairs.
    Second, will DC Air provide significant capacity along the eastern 
United States to compete with the combined United-US Airways? Again, 
the answer is no. DC Air has repeatedly stated an interest in smaller 
regional jet aircraft. The plan as detailed in United's SEC filing 
indicates competitive seats in the network would decline by 30 to 60 
percent in most markets. Smaller aircraft and reduced capacity adds 
pressure on fares; as supply goes down, price comes up.
    In summary, the business plan for DC Air does not satisfy the 
requirement to create competition, nor does it remedy the competitive 
issues created by the proposed merger. AirTran Airways is a low fare 
carrier with a demonstrated ability to profitably compete against major 
carriers and operate a low fare network. AirTran Airways is prepared to 
create the type of competitive network at Washington Reagan National 
called for in the proposed merger of United and US Airways.

Question 2. JetBlue has announced its intent to seek 10 to 15 slots at 
Reagan National in the context of the proposed merger. How can JetBlue 
make a go of it with so few slots, when you maintain that a carrier 
would need between 50 and 100 slots a Reagan National?
    Answer. JetBlue's proposal is to add service between Reagan 
National and New York's JFK airport. While this would create a new type 
of competition to the Shuttle services operated by US Airways (United) 
and Delta, it would create competition in only a single route (this new 
competition would be at the expense of smaller communities). AirTran 
Airways' proposal is to establish a low fare network at Reagan National 
that will maintain service to the 43 communities currently served by US 
Airways, but stimulate new demand with significantly lower fares.
    The public benefits of low fare competition has been well 
documented by the DOT and GAO, among others, and the estimated impact 
of a low fare network at Reagan National would save consumers 
approximately $700 million per year. The consumer benefit would not be 
limited to the local Washington markets. For example, consumers flying 
from upstate New York to the Southeast would get new low fare service 
via DCA as well. This is particularly important in terms of the merger 
due to the hub concentration in the eastern U.S. with United hubs at 
Charlotte, Philadelphia, Pittsburgh and Washington-Dulles.

                                 ______
                                 
 Response to Written Question Submitted by Hon. John D. Rockefeller IV 
                           to Joseph Leonard

Question 1. Other than the question of the independence of DC Air--
which I assume the DOJ will look at carefully--why should we give you 
the Reagan slots? Would you give the same assurances that Mr. Johnson 
is willing to do, with the same commitment to Washington that he has 
demonstrated over the years?
    Answer. AirTran Airways has a demonstrated ability to profitably 
operate a low fare network under the most intense competitive pressure. 
The benefit of the competition created by AirTran has been well 
documented by the DOT and GAO--as I mentioned in my testimony before 
your Committee, the value to passengers to and from Atlanta last year 
was $700 million. By our estimation the low fare competition we would 
bring to the Washington Metropolitan area would result in savings of 
over $400 million per year, with an additional $230 million in savings 
for passengers making connections at Reagan National.
    With the increased hub concentration resulting from the merged 
carrier, a low fare network, provided by a low cost carrier, is in the 
public interest in that it would create the type of price discipline 
necessary to limit potential market domination along the eastern 
seaboard. A viable low cost network is the only effective counter 
measure to hub concentration--major carriers do not compete on price 
today and will not following this merger.
    AirTran Airways is committed to expanding our network. We have 
orders or options for 88 new Boeing 717 aircraft and will receive at 
least 1 per month for the next thirty-nine months. We can regulate our 
growth by staging retirements based on market opportunities. We are 
uniquely positioned to provide continuing service to the 43 communities 
currently served by US Airways and are committed to not only serving 
these cities, but doing so with our brand of quality low fare service.
    In addition to the well documented public benefits created by 
AirTran Airways service and the hub competition we would provide, 
improving our network strength will give us the ability to not only 
maintain service in markets like Charleston, but significantly improve 
our ability to add these cities to our Atlanta network. Thus, by 
entering the DCA market, AirTran would create direct low fare service 
for West Virginia residents not only to Reagan National and Atlanta, 
but to connecting cities throughout the Eastern United States.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. Max Cleland 
                           to Stephen M. Wolf

Question 1. In a document submitted to the Department of 
Transportation, you stated:

        With 519 current daily departures at Pittsburgh, 483 at 
        Charlotte, and 402 at Philadelphia, we operate the most 
        pervasive route network in the northeast and mid-Atlantic 
        regions of the United States, where almost 40 percent of all 
        transatlantic passengers begin or end in their international 
        journey. . . . US Airways ranks first in 44 of the 56 major 
        airports in the eastern United States.

    If US Airways had the ``most pervasive network'' in the northeast 
before the merger, how would you describe it after the merger? Do you 
believe this should cause the consumer concern?
    Answer. This merger brings together two route structures that have 
little overlap United's east-west routes and western presence and US 
Airways' north-south network in the eastern United States. Indeed, with 
respect to the Northeast where US Airways has a large and longstanding 
presence, United has a relatively modest presence. Thus, the 
combination of United with US Airways will not measurably increase 
United's presence in the Northeast beyond US Airways' current 
operations. In addition, competition from new entrant carriers in the 
Northeast is growing immeasurably. Southwest, JetBlue, and AirTran have 
all recently increased their presence in the Northeast. Southwest alone 
has over 200 additional aircraft on order, which it has publicly 
announced are to be targeted for East Coast expansion.
    Furthermore, the benefits of the merger are overwhelming for the 
consumers of both airlines and the many communities across the country 
that US Airways and United serve. Importantly, while US Airways today 
has an extensive presence in the Northeast, it lacks critical access to 
transcontinental and global markets. The result is that US Airways' 
passengers lack the convenient service to markets on the West Coast, 
Latin America, and Asia that they demand and deserve. This merger will 
link US Airways' predominantly eastern network to United's global 
system resulting in a truly national carrier that efficiently serves 
all four corners of this country, as well as international markets. The 
combined United will provide on-line service for the first time to over 
4,000 city-pairs. The merged carrier will also offer 64 new daily 
nonstop flights in the United States and 29 new daily international 
flights. United has also publicly committed to a two-year freeze on 
structure fares, except for CPI and fuel cost adjustments. And, the 
proposed merger expressly provides for the creation of an independent, 
new entrant carrier, DC Air, based at Ronald Reagan Washington National 
Airport. For these reasons, among many others, consumers will benefit 
greatly from this merger.

Question 2. Consider last year's United/US Airways combined market 
share at the following airports.

        Charlotte--70.1%
        Chicago O'Hare--50.4%
        Denver--57.5%
        Philadelphia--59. 5%
        Pittsburgh--72.4%
        San Francisco--51.8%
        Washington (Dulles)--56.4%
        Washington (National)--35.5%

    Given these figures, do you believe the merger will foster 
competition and low fares, and as Mr. Goodwin maintains, expand 
customer choice? If so, how?
    Answer. The proposed United-US Airways merger will foster 
competition, greater consumer choice, and low fares. The combined 
carrier's route network will inject new competition into more than 500 
city-pairs currently served by only one carrier. It will create first-
time on-line service to over 4,000 city-pairs, and 93 new nonstop 
flights to international and domestic destinations. The combined 
carrier will also provide consumers with new single-carrier service in 
approximately 560 new city-pair markets, thereby further providing 
consumers with expanded service options.
    Of the airports listed above, only Washington National Airport and 
Chicago O'Hare currently have slot constraints, and O'Hare's slot 
regime will be eliminated in 2002. Accordingly, access for new entrants 
and expanded opportunities for other more established carriers are 
available at the airports listed above. Even at slot-constrained 
Washington National, new entrants (e.g., National, Frontier, Spirit) 
have recently obtained access under AIR 21. Importantly, this merger 
specifically provides for the creation of an independent, new entrant 
air carrier based at Washington National Airport with nonstop service 
to 43 communities.

Question 3. What do you say to critics who express concern that the 
merger will combine the number one and number two carriers in five 
northeast airports?
    Answer. This concern is misplaced. US Airways and United have very 
little overlap in their route structures. They similarly have little 
overlapping operations at their respective hubs. As such, this merger 
will not measurably increase concentration. Where there was a potential 
concentration issue, namely Washington, D.C., because of United's 
presence at Dulles and US Airways' operations at Washington National, 
we addressed the issue head-on with the creation of an independent, new 
entrant carrier, DC Air. By bringing together two complementary route 
structures that have little overlap, this merger will expand consumer 
choices and enhance, not diminish, competition. Moreover, competition 
is intense in the Northeast. Not only do the major carriers compete 
vigorously for traffic over their domestic and international networks, 
but low-cost carriers such as Southwest and JetBlue are undergoing 
significant expansion into northeastern markets, transforming East 
Coast markets with the introduction of point-to-point service at lower 
fares.

                                 ______
                                 
     Response to Written Questions Submitted by Hon. Slade Gorton 
                           to Stephen M. Wolf

Question 1. For the past several years, while the airline industry has 
been making record profits, US Airways has continued to struggle making 
money. It has been generally unable to secure global alliances that 
have benefited other major airlines, has not succeeded in securing wide 
entry to Great Britain, and continues to labor under a heavy cost 
structure. If DOJ approves the merger and the economy drops into a 
downturn, how will the merged carrier be able to continue its 
operations at all its newly acquired hubs?
    Answer. We are confident that the merged carrier will be able to 
continue operations at Charlotte, Pittsburgh, and Philadelphia during 
an economic downturn for several reasons. First, by combining the 
complementary route structures of United and US Airways, this merger 
will create more growth, more jobs, and greater service opportunities. 
This is evident in the 93 new non-stop flights, many of which are being 
added at Philadelphia, Pittsburgh, and Charlotte, that will be 
initiated as a result of the merger. Second, by maintaining these 
network hubs, United will continue to serve the substantial connecting 
traffic that US Airways has long flowed through its hubs. Third, United 
is connecting these new hubs to its global system, including the STAR 
alliance. This will increase traffic flows from the cities served today 
by US Airways by opening up hundreds of new single carrier one-stop 
city pair connections.

Question 2. As is well known, the proposed arrangement between United 
and US Airways includes the creation of a new corporate airline, DC 
Air. This operation would, at first, rely completely on aircraft and 
personnel wet-leased from the merged entity. How did you decide what 
routes that DC Air would operate, and which ones might be retained by 
the merged United?
    Answer. When we recognized the possible concentration in the 
Washington, D.C. area resulting from this merger, it was determined to 
divest certain assets at slot-constrained Washington National Airport. 
Rather than pick and choose, we agreed to divest every route operated 
by US Airways at Reagan Washington National Airport--so that a new 
entrant carrier would have a strong, viable basis for operation and so 
that all cities currently receiving service by US Airways would 
continue to be served. The lone exceptions were splitting the slots for 
flights to the three US Airways hubs (Philadelphia, Pittsburgh, and 
Charlotte), so that passengers would not lose access to the broad 
competitive United network from those cities, and the operations 
currently known as the US Airways Shuttle.
    To sell or otherwise divest our National Airport assets (e.g., 
slots, facilities) on a piecemeal basis would practically ensure that 
many of the small and mid-sized communities that, over the last 50 
years, have come to rely on US Airways and US Airways Express would 
lose their non-stop service. Other carriers, including low-cost 
competitors, would utilize these slots and facilities to strengthen or 
otherwise enhance their most profitable current services--services to 
their hubs or to their other focus cities. Other carriers would not be 
willing to use these assets to operate flights to the 43 small and mid-
sized communities to which DC Air has committed that it will continue 
service.

Question 3. Clearly, the proposed arrangement seems like a good deal 
for US Airways' frequent flyers, who would gain access to a larger 
number of destinations than that currently offered by its own program. 
Yet United has begun converting its fleet into an ``economy plus'' 
configuration, in which it has removed one row of seats to provide 
additional legroom for some passengers. Because the merged airline will 
now be serving roughly 50 percent more frequent flyers but restricting 
its capacity, could you explain how those frequent flyers are going to 
be able to redeem their award travel?
    Answer. US Airways passengers will benefit greatly by gaining 
access to the worldwide reach of United's frequent flyer program. 
United has developed an outstanding frequent flyer program and is fully 
committed to providing all of the benefits associated with its program 
to US Airways passengers. The decision by United to address customer 
concerns about cramped passenger cabins and a lack of legroom will not 
preclude frequent flyer members from redeeming their mileage for award 
travel. While United's frequent flyer program will grow with the 
addition of US Airways' Dividend Miles program, United will also be 
obtaining all of the aircraft in US Airways' fleet as well as US 
Airways' options for many more such aircraft in the near future. Not 
only will aircraft capacity be substantially increased, but the merged 
carrier will have greater flexibility in allocating appropriately sized 
aircraft to specific routes.

                                 ______
                                 
  Response to Written Questions Submitted by Hon. Ernest F. Hollings 
                           to Stephen M. Wolf

Question 1. US Airways has an agreement with SABRE to provide its 
computer reservation system services. What are the terms of that 
agreement if US Airways chooses to change to the Galileo system 
(assuming that once the deal is approved, the CRS services will be 
provided by Galileo)?
    Answer. US Airways' agreement with Sabre, which after lengthy 
negotiations was consummated on December 15, 1997, is subject to a 
strict confidentiality provision which prohibits US Airways from 
disclosing the terms of that agreement under circumstances such as 
this. Accordingly, US Airways is not at liberty to describe what would 
result, if anything, should US Airways terminate its relationship with 
Sabre. US Airways, however, has no intention of altering this 
relationship. After the merger is finalized, any decision to change the 
Sabre agreement would be made by United as the surviving earner.

Question 2. Pilot Contracts--it has been rumored that the US Airways 
pilots' contract has a clause that will give them $250 million if there 
is a change in ownership. Please explain the impact of such a 
provision, or similar provisions that could affect the proposed deal.
    Answer. The US Airways pilots' contract includes a Letter Agreement 
that requires, under certain specific circumstances, a $250 million 
payment to the pilots in the event of an acquisition. This payment, 
however, is not required merely upon a change in ownership, and thus 
the closing of the proposed transaction will not trigger such a 
payment.

Question 3. According to SalomonSmithBarney, the transaction will 
provide significant revenue benefits to the combined carrier (report on 
May 31). Can you explain the rationale for those benefits, and also 
explain if those benefits are primarily derived from passengers 
choosing the combined carrier over another carrier?
    Answer. The revenue benefits that United anticipates as a result of 
the merger stem from the hundreds of new city-pair routes that United 
will offer by integrating US Airways' route network into its own. 
Because the route networks of US Airways and United cover largely 
different areas of the country and have little overlap, their 
combination will result in a truly efficient nationwide carrier, 
providing passengers for both airlines hundreds of new travel options 
that simply were unavailable before. This expanded network will make 
United a much more attractive option for travelers, resulting not only 
in existing passengers choosing United over another carrier but also 
stimulating new demand.

Question 4. According to SEC information provided by you, the combined 
carrier will be the largest carrier in 5 of the 6 biggest metropolitan 
areas. Why do you believe that from a competition policy standpoint 
such concentrations should rest in one carrier's hands?
    Answer. While the combined carrier will be the largest carrier in 5 
of the 6 biggest metropolitan areas after the merger, this does not 
mean that there will be less competition. To the contrary, because US 
Airways and United have very little overlap, this merger will bring 
together two complementary route systems producing significant benefits 
for passengers and enhancing what is already an intensely competitive 
marketplace. For example:

   The combined carrier's route network will continue to 
        compete vigorously with the hub-based networks of other 
        carriers (e.g., American at Chicago O'Hare, Delta and 
        Continental at New York). It will inject new competition into 
        more than 500 city-pairs currently served by only one carrier. 
        The combined carrier will also offer one-airline, seamless 
        service in approximately 560 new city-pairs.

   Overall services offered by the combined carrier will be 
        greatly expanded, including new, first-time on-line service to 
        over 4,000 city-pairs, and 93 new nonstop flights to 
        international and domestic destinations.

   The merger will also greatly enhance the ability of US 
        Airways' existing hubs in Pittsburgh, Philadelphia, and 
        Charlotte to compete with other hubs and international 
        gateways, such as Newark, Atlanta, Cleveland, and Detroit.

   With respect to fares or pricing, United has publicly 
        committed to an unprecedented, and easily monitored, two-year 
        freeze on structure fares (except for CPI and fuel cost 
        adjustments).

    Competition is and will remain intense in each of the six largest 
metropolitan areas of the country. The major network carriers will 
continue to compete with each other in each area for domestic and 
international traffic over their respective networks, while low cost 
carriers, such as Southwest and JetBlue, will continue to offer lower 
fares in regional markets.

Question 5. Should we condition this merger on DOT issuing final rules 
on predatory pricing?
    Answer. This merger will bring unprecedented benefits to the 
traveling public by creating a truly nationwide network and enhancing 
competition. United has also publicly committed to an unprecedented, 
and easily monitored, two-year freeze on structure fares (excluding CPI 
and fuel cost adjustments). It is on these grounds that the merger 
should be approved.
    The Department of Transportation has issued its proposed rules on 
predatory pricing and currently is reviewing the hundreds of comments 
that it received in response to its proposal. This process is not 
related to the evaluation of the merger currently being conducted by 
the Department of Justice.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                           to Stephen M. Wolf

Question 1. Mr. Wolf, did the merger parties consider proposing to 
divest the carriers' hub-to-hub routes, such as Charlotte to Denver, or 
Pittsburgh to San Francisco, for instance? If so, who did you 
anticipate would operate those hub-to-hub routes?
    Answer. Because there is very little overlap in the networks of the 
two carriers, there are only four routes where US Airways and United 
currently are the only carriers providing scheduled non-stop service: 
Charlotte to Chicago (O'Hare), Philadelphia to Denver, Philadelphia to 
San Francisco, and Philadelphia to Los Angeles. Although we never 
considered elimination of service on these or any other hub-to-hub 
routes, we did consider divestiture of such assets as may be 
appropriate to stimulate new entry by other carriers. Any such 
divestiture would vary by route depending on local competition and 
could include such things as gates, ticket counter space, and other 
similar facilities.
    We believe there are several existing carriers that could 
successfully operate service in these markets. Because there are no 
slots or other restrictions at the affected airports except O'Hare 
(where slots will be eliminated in 2002), this kind of entry is not 
only possible, but likely.

Question 2. Early reports following your merger announcement were that 
Metrojet will go away, which could further reduce competition in the 
Washington metropolitan area. Tell me as much as you can about what 
will happen to Metrojet as a result of the merger.
    Answer. United operates a west coast service similar to MetroJet 
which is called Shuttle by United. Mr. Goodwin testified before the 
House Transportation and Infrastructure Committee on June 13, 2000, 
that post-merger United may introduce Shuttle by United to the east 
coast, which would effectively continue to offer a low fare product 
similar to US Airways' MetroJet.

Question 3. My sense is that wet leases are common in the airline 
industry. Do you know of another instance, however, where a major air 
carrier has entered into a wet lease agreement with one of its low fare 
competitors?
    Answer. Wet leases are common in the airline industry, both in the 
domestic context as well as the international arena. However, because 
we are not privy to the lease agreements of other carriers, we cannot 
confirm another instance where a major carrier has entered into a wet 
lease agreement with one of its low fare competitors. Based on 
published news reports, however, we do know that such wet lease 
arrangements have been contemplated. These instances include possible 
agreements between America West and Midway and between America West and 
American Trans Air.

Question 4. In your testimony, you made much of the fact that only one 
new airport has been built in the U.S. in recent memory, and that 
airport merely replaced an old one. You also discussed how constrained 
the aviation system is. Why then do the major airlines oppose the 
construction of a third airport in the Chicago area at Peotone? How do 
you reconcile your testimony with any proposal to expand capacity by 
building a new airport?
    US Airways has a very limited presence in the Chicago area. It thus 
makes little sense for us to spread our operations across three 
different airports in the Chicago area. Accordingly, if a new airport 
were to be built at Peotone or elsewhere in the Chicago area, it might 
not be economically or operationally sensible for US Airways to serve 
the airport. Nonetheless, there is little question that the aviation 
infrastructure of this country has been pushed to its limits and is in 
dire need of improvements. There are more people traveling today at 
cheaper fares to more destinations than ever before. This Committee has 
taken steps under the recently enacted reauthorization legislation to 
address the situation, and for that we are grateful. But this should 
only be the beginning. We look forward to working further with the 
Committee so that our airports have the capacity to provide the 
traveling public with the frequency and quality of service it deserves.

                                 ______
                                 
       Prepared Statement of Kent G. George, Executive Director, 
                   Allegheny County Airport Authority

    Good morning, Mr. Chairman and Committee Members. My name is Kent 
George and I am the Executive Director of the Allegheny County Airport 
Authority. I would like to thank the Committee for this opportunity to 
present our region's views on United Airlines' $11.6 billion 
acquisition of US Airways.
    In the early 1980s unemployment in Pittsburgh was at its height 
following the closure of virtually all the major steel mills. The 
region suffered the largest job loss per capita in our country's 
history. By the early 1990s, the city was only reporting half the job 
growth of the national average.
    We have been working diligently to recover, and finally our region 
is beginning to grow. 120,000 people are employed in the technology 
field. That represents 12% of the workforce and 18% of the payroll. Our 
colleges and universities are world-renowned and we stand among the top 
ten centers in medical research.
    Today, Pittsburgh is the corporate headquarters of many Fortune 500 
companies. We have numerous business parks nurturing both U.S. and 
foreign investment. Multinational companies like Sony and Bayer have 
located in the region and many local corporations like H.J. Heinz, 
Alcoa and PPG continue to succeed in the global marketplace.
    Pittsburgh International Airport (PIT) is the world's gateway for 
Pittsburgh, southwestern Pennsylvania, northern West Virginia, and 
eastern Ohio. It is an integral part of the economic fabric of its 
serving area, creating over 18,000 direct airport-related jobs and over 
$3.5 billion a year in economic impact.
    PIT has received worldwide recognition for its now famous 
Airmall', featuring over 100 retail, specialty services and 
food and beverage stores all at guaranteed street prices. Its 
distinctive 900-acre X-shaped terminal is designed to give connecting 
passengers easy access to all 75 gates without ever changing levels or 
terminals.
    And just last year, because of it's traveler-friendly design, the 
readers of Conde Nast Traveler magazine voted Pittsburgh International 
Airport the best airport in North America and the third best airport in 
the world.
    Pittsburgh International is an expanding airport with a significant 
list of development projects. Next month, we will open a Hyatt airport 
hotel and conference center. We also plan to more than double the cargo 
ramp and building capacity, and we are creating a Business Aviation 
Center and a 300,000 square foot Airside Business Park.
    PIT covers more than 12,000 acres, making it the third-largest 
airport complex in the U.S., so large that you could fit Atlanta and 
Chicago O'Hare airports within its boundaries. The huge amount of space 
we have available gives us many advantages. The apron is large enough 
for one aircraft to pull back from the gate while another is pulling 
into the same space. The system of taxiways surrounding the entire 
airside building allows aircraft to exit the runways at a greater 
speed, taxi in either direction and avoid delays. And we have excess 
airspace and airfield capacity to accommodate future growth.
    Located roughly midway between New York and Chicago, Pittsburgh 
lies within one hour's flying time of nearly 50 percent of the U.S. and 
Canadian populations or 71.3 million people, and 63 percent of U.S. 
manufacturing output.
    And don't worry about the weather. Smooth operations regardless of 
the weather make PIT North America's airport of choice for reliability.
    Clearly, Pittsburgh International Airport is one of the 
Southwestern Pennsylvania region's most significant assets. Presently, 
US Airways has a major hub agreement at Pittsburgh International 
Airport generating 515 flights per day both domestically and 
internationally. With United Airlines and US Airways announcement on 
May 23, 2000, I am deeply concerned not only about the continued 
presence of a major hub at Pittsburgh International Airport, but also 
for the continued employment of the approximately 11,700 employees of 
US Airways in southwestern Pennsylvania.
    With the announced acquisition by United of US Airways, it is 
imperative that a number of matters that affect our region are 
contained in any Conditions of Approval, which the Department of 
Justice and Department of Transportation would make, if they should 
decide to grant approval for this merger.
    While the discussions I have had with James Goodwin of United 
Airlines and Stephen Wolf of US Airways have been very positive, 
contracts between parties often do not turn out as contemplated. 
Therefore, I request that this Committee urge the Department of Justice 
to ensure the following items are addressed in their Order:
    1. With the hardship endured by our region in the 1970s and 1980s, 
one of our foremost concerns is for the approximately 11,700 
individuals currently employed by US Airways in Southwestern 
Pennsylvania, eastern Ohio and northern West Virginia. We need an 
absolute commitment contained in the Conditions of Approval of this 
merger that these jobs will be maintained in our region beyond United's 
two-year pledge.
    2. The taxpayers of Allegheny County provided the financial vehicle 
through bonds to fund the construction of the $800-million Midfield 
Terminal Complex at Pittsburgh International Airport. US Airways is the 
principal guarantor on those bonds. US Airways presently uses nearly 90 
percent of the midfield terminal and pays the majority of the 
outstanding debt, which totals over $700 million. We need written 
assurances that United Airlines will assume US Airways existing lease 
and guarantee payment of all future obligations of US Airways.
    3. With significant federal support and the expectation that it 
would be a major hub, Pittsburgh International Airport opened in 1992. 
US Airways currently operates approximately 515 flights a day to 110 
non-stop destinations throughout the U.S. and Europe from Pittsburgh 
International Airport. The Airport is the economic engine of the region 
and provides us access to the world and the world access to our region. 
While United flies mostly east-west domestic flights and international 
routes, and US Airways strength is in its north-south routes on the 
East Coast, we must be certain that the existing level of service is 
maintained and included in the Conditions of Approval of the merger. On 
a long-term basis, Pittsburgh must remain a significant US domestic 
hub.
    4. By year's end, US Airways and United Airlines will have an 
extensive fleet of Airbus aircraft with numerous new aircraft on order. 
Both airlines have indicated a need for a new maintenance facility to 
perform maintenance and safety checks on these aircraft. An excellent, 
trained workforce is available right now in southwestern Pennsylvania 
to perform these tasks and the needed facilities have already been 
designed for construction at Pittsburgh International Airport. We ask 
your help in urging United Airlines to follow through with US Airways 
plans to construct this facility, and commit to do so within the next 
two years.
    Pittsburgh International Airport is strategically located in North 
America to reach much of the population of the United States and Canada 
within in 1-hour flying time. National and international travelers give 
Pittsburgh International Airport an A+ rating. Our workforce and work 
ethic are second to none. We are capable of handling any aircraft used 
today and our facilities are easily expandable.
    Not only is Pittsburgh International Airport an economic generator 
in terms of jobs, but it serves as a major connection hub, linking 
Pittsburgh businesses, passengers and cargo with cities around the 
world. It is extremely well located in every sense and its physical 
structure is flexible, functional, attractive and expandable.
    Mr. Chairman and Committee members, I ask your assistance to 
strongly convey to the Departments of Justice and Transportation our 
need for guarantees to preserve the economic future of a region rich in 
resources. Pittsburgh is poised for takeoff. Thank you for the 
opportunity to present this information to you today.

                                 ______
                                 
    Prepared Statement of David Neeleman, Chief Executive Officer, 
                      JetBlue Airways Corporation

Mr. Chairman, Ranking Member Hollings and Other distinguished members:

    Please accept this written submittal on behalf of JetBlue Airway's 
more than 600 employees.
    JetBlue Airways is New York's low fare hometown airline. This is 
more than a marketing slogan, its really who we are.
    As a new entrant, low fare carrier, I am convinced that the only 
way to always offer the traveling public affordable airfares is to 
remain a low cost company. In order for JetBlue to remain a low cost 
company, we needed: unprecedented financing, $130 million; a fleet of 
brand new modern jets, the Airbus A320; a sound business plan, offering 
low fares and great service to the world's busiest travel market New 
York City; and finally an experienced and exceptional management team. 
I believe we have all four of these ingredients and thus far, the 
traveling public seems to agree.
    These cornerstones of our business, coupled with a focus on 
productivity and efficiency, have allowed us to hire at above market 
wages and to deliver ``the JetBlue Experience'' to more than 200,000 
customers.
    Having inaugurated service in February of this year with flights 
between New York City and Buffalo, we just took delivery of our fourth 
new aircraft last week. After the live satellite television screens are 
installed at each of its 162 leather seats, it will enter low fare 
service next week to and from Orlando. Shortly after launching Orlando, 
JetBlue will serve Rochester, New York and Burlington, Vermont, two of 
the highest priced travel destinations in America. By the end of the 
year, we will have ten brand new aircraft in ten cities and this growth 
pace will continue for at least four years and forty aircraft.
    Importantly, even at this pace, I know that in four years JetBlue 
will still be a very small regional carrier. This is precisely why 
certain aspects of the proposed merger, and its potential consequences 
for the entire industry, are of concern to JetBlue.
    From a macro perspective, if this deal is approved, I believe other 
large carriers will feel the need gain additional market strength in 
order to keep pace with United. Whether or not such moves are 
economically justified or in the best interest of their shareholders or 
customers, I still believe this will occur.
    This industry consolidation could conceivably result in three or 
four major carriers carrying upwards of 85 percent of all US domestic 
traffic. As an entrepreneur who has started and then sold companies, 
including an airline, I am not against airline mergers per se nor am I 
against the concept of this merger. However, industry consolidation 
such as would occur through this merger, and others, absent protection 
for smaller carriers trying to compete fairly in the domestic 
marketplace, can only be seen as harmful to the American consumer.
    When there are fewer companies competing in a market, any market, 
prices tend to rise. Small carriers, whether low fare in nature like 
JetBlue or otherwise, must be assured a level playing field and the 
ability to compete. To ensure the consumer's continued access to 
multiple carriers and low fares as the industry consolidates, small 
airlines must be afforded access into concentrated airports as well as 
access to commercially viable facilities such as gates and counter 
space at these airports. While some carriers claim airspace is the most 
pressing issue facing the U.S. airline industry, I believe the ability 
of small carriers to access concentrated airports and obtain adequate 
facilities is the most critical issue facing new entrant carriers.
    Also, as carriers consolidate their systems and pare down 
overlapping or inconsistent routes, lessening consumer choices, they 
will be in a far stronger position to utilize their suddenly available 
excess equipment to the disadvantage of their competitors, especially 
smaller carriers and new entrants.
    As this deal is reviewed, I believe Congress and the Departments of 
Justice and Transportation should carefully examine these negative 
ramifications and consider ways for United and US Airways to eliminate 
these and similar problems. One approach which may prove to be a good 
starting point would be to strengthen and enact the Department of 
Transportation's Competition Guidelines while also increasing the use 
of the its unfair practices enforcement powers. I suspect the need for 
the Guidelines may prove greater than ever as the industry 
consolidates.
    On a micro perspective, this deal presents several areas that I 
believe need to be addressed. Included here are specific airport access 
and facilities issues as well as specific city-pair routings where the 
only carrier in several large markets will be the new United. Also, in 
this regard, I believe that the proposed DC Air presents an unworkable 
attempt to solve the obvious hub domination issue that will exist in 
the Washington DC-Baltimore metropolitan area.
    From the press accounts I have read, DC Air is poised to become 
Washington DC's new low fare airline; and it is suggested that it will 
be profitable too. I have a tremendous amount of respect for its 
potential new CEO, Robert Johnson. He is one of America's premier 
entrepreneurs with a stellar track record.
    Yet the deal itself is not only bad for consumers in the entire 
Washington metropolitan region, it is bad for consumers throughout the 
eastern United States who visit Washington on business or leisure 
travel.
    United Airlines is by far the dominant carrier today at Dulles 
Airport. After the merger, its dominance will increase. After the 
merger, United will also become the dominant carrier at BWI. And right 
in the middle, at Reagan National Airport, DC Air will supposedly 
eliminate that new regional dominance.
    DC Air will be flying a fleet of jets, most of which will have 50 
or fewer seats. Its costs, as a so-called ``virtual airline'' that wet-
leases the vast majority of its operational assets and personnel from 
United, will be high, as will its own operating costs given its 
equipment type and proposed route structure. In fact, with the proposed 
route system as I have seen it, most of DC Air's markets will have far 
less capacity than those markets receive today with US Airways.
    With a decreased supply, and even a steady demand, prices for 
consumers in all DC Air's markets will likely increase. Since the 
deregulation of the domestic airline industry in 1978, passenger 
traffic at Washington's National Airport has actually decreased by 
360,000, a drop of more than five percent. Operations at National have 
also decreased during this period by more than 10 percent. Under DC 
Air's proposal, not only will the daily capacity further decrease at 
National Airport, by 16 percent, but so too will the number of daily 
operations, by 8 percent. With less supply into slot-controlled 
National Airport, leisure travelers seeking lower fares will likely 
find them unavailable and be forced to utilize the two remaining United 
dominated airports in the region.
    I do not believe the DC Air proposal, which will significantly 
reduce capacity at the already under utilized and artificially slot-
controlled National Airport, should be rubber-stamped by the regulatory 
authorities.
    National is a unique airport. New entrants have effectively been 
barred since 1986 as slots cannot be purchased at any price and lease 
prices are prohibitive. Even with the new FAA Reauthorization law, 
there is no end in sight to National Airport's slot regime which has 
yielded less than a one percent growth rate in passenger traffic over 
the past twenty-five years while total domestic enplanements have grown 
by more than 200 percent in this same period. This is clearly not the 
most efficient utilization of the taxpayer's most scarce aviation 
resource. Given the new competitive landscape that will be painted by 
this deal, coupled with National Airport's unique attributes, I believe 
the Department of Justice should insist that a portion of the slots 
that DC Air seeks to purchase at a below market price be returned to 
the government, from whence they came at no cost, and be allocated to 
qualified new entrant carriers who will legitimately spur competition.
    Mr. Chairman, in the end, the post-deregulation domestic airline 
landscape is littered with many start-up carriers that have failed due 
to a combination of weak management, an inability to achieve low costs 
and/or a poor business plan. JetBlue is not, nor will it become, this 
type of carrier. We have performed our due diligence and have 
successfully begun to implement our business plan in the largest travel 
market in the nation. All that we seek from those reviewing this merger 
is to correct some of its negative aspects and afford us a fair chance 
to grow our franchise and create further opportunities for customers to 
enjoy the JetBlue Experience.
    In closing, I am reminded of a forward-looking statement recently 
made by the President of United Airlines. He said that with this deal, 
for domestic purposes, United would become a ``finished network.'' 
Possibly speculating on others in the industry, he added that consumers 
would benefit most from the competition of but three or four national 
carriers and dozens of smaller regional carriers. Frankly, with but one 
reservation, I cannot altogether disagree with his prognostication. 
However, my reservation is simply that these dozens of smaller regional 
carriers he refers to have a fair opportunity to compete in every 
market they so choose. This is JetBlue's chief concern.
    Thank you.
                                                         Attachment

------------------------------------------------------------------------
   STATE       ROUTE         TODAY @ DCA         DC AIR         DULLES
------------------------------------------------------------------------
NY          DC-ALB       US x 3 jets = 378   3 RJ = 150      6 US Exp*
            $379 1w       seats               seats          3 US Exp

            DC-BUF       US x 3 jets = 361   3 RJ = 150      8 UA Exp
            $379 1w       seats               seats          3 US Exp

            DCA-SYR      US x 3 jets = 323   3 RJ = 150      6 UA Exp
            $386 1w       seats               seats          3 US Exp

            DCA-ROC      US x 3 jets = 362   3 RJ = 150      7 UA Exp***
            $346 1w       seats               seats          4 US Exp

OH          DCA-DAY      US x 3 jets = 326   3 RJ = 150      3 UA Exp
            $393 1w       seats               seats          3 US Exp

            DCA-CMH      US x 3 jets = 320   3 RJ = 150      7 UA Exp*
            $439 1w       seats               seats          3 US Exp

VT          DCA-BTV      US x 3 prop = 96    2 RJ = 100      4 UA Exp**
            $400 1w       seats               seats

SC          DCA-CHS      US x 3 mix = 196    3 RJ = 150      5 UA Exp*
            $449 1w       seats               seats

TN          DCA-TYS      US x 4 mix = 164    3 RJ = 150      3 UA Exp
            $380 1w       seats               seats
------------------------------------------------------------------------
All fares are full fare, one-way fares as of June 13, 2000
RJ = 50 seat regional jet
Exp = commuter affiliate at IAD utilizing turboprops
* = includes both regional jets and turboprops
** = all flights operated with 50 seat regional jets
*** =all flights operate with turboprop, except one 737

                                 ______
                                 
         Prepared Statement of Ed Perkins, Consumer Advocate, 
              The American Society of Travel Agents, Inc.

    My name is Ed Perkins, and I currently serve as the Consumer 
Advocate for the American Society of Travel Agents (ASTA). I am also a 
nationally syndicated travel columnist and author of several travel 
buying guides. I was Founding Editor of Consumer Reports Travel Letter, 
from which I retired in 1998. In addressing you today, I am focused 
solely on the interests of American consumers, not on those of the 
travel industry or any of its components.
    In my view, we can't view a proposed merger of United Airlines and 
US Airways in isolation. Instead, we must look at it in the broader 
context of concentration in the US airline marketplace. And in that 
context, I submit that the merger of United and US Airways--or any 
other merger between any of the six giant lines--would be highly 
inimical to the general public interest and the interests of travel 
consumers. I base that conclusion on two sets of issues: pricing and 
labor. Let's look at each.
    You've already seen and heard lots of claims about the merger's 
possible impact on prices. Many of the industry's most celebrated 
economists have published learned treatises, and they generally seem to 
agree: fares would either go up, go down, or stay about the same. Not 
to disparage those economists--I used to be one, myself--but we all 
know that, depending on how they structure an issue and the assumptions 
they make, capable economists can come to diametrically opposite 
conclusions about almost any issue. Certainly this one. More to the 
point: If we get bogged down in the details of relative costs, 
overlapping routes, hub consolidations, differential wage rates, and 
such, we'll quickly lose sight of the basic principles that should 
really govern the decision.
    Instead of looking at all those murky details, we should focus on 
how one or more mergers would impact the process by which the giant 
airlines raise and lower prices--specifically, how they would affect 
the pricing dynamic in a commodity market, which is the way today's 
airline market behaves.
    Price increases happen when one giant airline decides an increase 
would be a good thing. Immediately, the other giant lines study the 
increase and determine if they would also like to see higher prices. 
One by one, those that agree announce their own hikes--sometimes 
following the originator, sometimes with adjustments. As in the old 
saying, one airline runs the fare hike up the flagpole, and the others 
start saluting it.
    What's critically important here is that it now only takes one of 
the six giant lines to reverse the hike. In effect, each of those six 
lines has veto power over price hikes in the entire national airline 
marketplace. If any one of them doesn't salute, the hike is quickly run 
back down the flagpole and returned to the closet.
    Clearly, the fewer the number of giant lines, the less chance that 
any given price hike will be vetoed. And, in a worst-case scenario, a 
concentration down to only three super-giants would make it far easier 
for any one of them to make price hikes stick.
    The fare-cutting process works the same way. It takes only one of 
the six giants to kick off a nationwide fare war. And, as you probably 
know, that's when a lot of ordinary consumers buy their tickets. When 
it comes to starting a fare war, six chances for a price cut are far 
better than five, four, or three.
    Labor issues, too, militate against further concentration. With the 
largest U.S. line owning no more than about a 17% share of the domestic 
market, the nation's economy can survive the complete shutdown of any 
one giant airline. But only barely: The last American shutdown showed 
us how much disruption resulted from a loss of just 11% of the domestic 
lift, as measured in passengers.
    If you liked that strike, you'd love a shutdown of a merged United-
US Airways system. That would represent just about twice the American 
share. Even worse, of course, would be a merged American and Delta, 
with a staggering 28% share of total passengers.
    We made it through the American stoppage as well as we did, at 
least in part, because other five giant airlines--plus the smaller 
players--managed to absorb most of American's travelers, over an 
extended period. But could fewer other airlines absorb twice as many 
displaced passengers without far more serious disruption? Or, in the 
worst case, could two remaining super-giant lines absorb 28% of the 
passengers? I don't think so. Instead, the effects of a super-giant 
strike would be devastating to the economy, and certainly to the travel 
plans of millions of consumers. As with pricing, for labor reasons 
alone, we just can't risk more market concentration.
    One more point: let's not forget the largely negative effects of an 
earlier wave of mergers and acquisitions. How such user-friendly lines 
as Air California, New York Air, PSA, Piedmont, and Republic 
disappeared in the black hole of mergers? Don't take my word for it; 
ask someone from Charlotte or Detroit.
    ``It needs more study'' is the classic way of evading a tough-
minded decision. Or, in Carleton Green's construct, it's a way of 
handling a tough question by ``dissolving it in a weak solution.'' I 
would submit that we don't need any more study on the merger question. 
We can't afford a weak solution. This is one of those cases that should 
be decided by basic principles and common sense, not statistical 
models.
    And those basic principles come in with a clear message: No more 
concentration by merger. No more buying out potential competitors 
rather than competing with them. We should take merger and acquisition 
among any of the six giant lines completely off the table, starting 
now. If any one of those lines is desperate to increase its market 
share anywhere in the US, let that line do it the old-fashioned way: 
earn it, with better service and lower fares.
    Thanks for your attention.

                                 ______
                                 
           Prepared Statement of America West Airlines, Inc.

    America West Airlines, Inc. offers these comments in conjunction 
with the Committee's evaluation of the public interest impact on 
competition of the proposed merger between United Airlines and US 
Airways and the sale of Washington Reagan National Airport slots to a 
proposed new airline DC Air. America West is very concerned that 
already serious competitive barriers, particularly at airports where 
United and US Airways have dominant or strong positions, will only be 
exacerbated should the merger be approved in its proposed form.
    For America West and other post deregulation carriers, government 
imposed or sanctioned competitive barriers including the perimeter 
rules at Reagan National and LaGuardia airports, continuing slot 
constraints at National, LaGuardia and Kennedy, and the unavailability 
of economically usable gates at many metropolitan airports including 
National, LaGuardia, Newark, Logan and O'Hare, make it virtually 
impossible for new post deregulation carriers to launch meaningful 
competition at these airports. America West appreciates the positive 
changes to the slot rules enacted by Air 21. However, the proposed 
merger highlights the immediate need, before any merger which 
contributes to these constraints goes forward, for more expansive 
Congressional action to induce badly needed new competition to key 
airports in the East and in Chicago.
Background
    In 1977, Alfred Kahn, chairman of the Civil Aeronautics Board, 
noted that ``Whenever competition is feasible it is, for all its 
imperfections, superior to regulation as a means of serving the public 
interest.'' The following year, the Airline Deregulation Act was 
implemented, phasing out government control over fares and service. 
From that point on, Congress intended that market forces would dictate 
the price, quantity and quality of domestic air service. In the 
deregulated environment, consumers would reap the benefits of open 
competition in a free marketplace.
    America West Airlines provides the model for post-deregulation 
success. It initiated service on Aug. 1, 1983, with three aircraft, 280 
employees and a route system consisting of five destinations. As a 
small start-up carrier competing head-to-head against much larger and 
better-established airlines, its potential for success would be defined 
by its ability to effectively distinguish itself from the competition 
and build a solid base of loyal customers. Today, America West, the 
nation's ninth largest commercial airline, is the only post 
deregulation airline to achieve major carrier status. It has 
established an effective marketing and operational niche as the only 
major network airline to offer a combination of full-service and low 
fares. Its customers enjoy the same full range of services provided by 
larger airlines, including advance seat assignments, First Class cabins 
in every aircraft, a competitive frequent-flyer program, an airport 
lounge club, electronic and online booking, onboard audiovisual 
entertainment systems and inflight meal service. America West's 1999 
unit cost of 7.52 cents per available seat mile was, for the sixth 
consecutive year, the lowest unit cost of all full-service major 
carriers. These low costs enable America West to deliver upon 
deregulation's promise of expanding the reach of commercial air service 
by developing new markets to smaller communities not otherwise served 
by major earners. America West's East Coast to West Coast ``walk up'' 
fares and average fares are substantially below those of the largest 
incumbent carriers.
    America West has achieved this success while weathering the storms 
of the marketplace. Mergers, bankruptcies, severe increases in the 
price of fuel, and deep traffic losses caused by war and recession have 
all been overcome. America West is committed to bringing more East-West 
competition to key Eastern airports like Logan, LaGuardia, Newark and 
Reagan National, and to expand at O'Hare. To provide viable competition 
for business travelers, America West must offer a total of at least 
five roundtrips a day to its hubs. Slots, perimeter rules and lack of 
gates prevent the full development of this service and deprive the 
public of the benefits of competition by America West and other lower 
cost carriers. These barriers to competition remain as a result of 
government inaction. Without Congressional action, regardless of the 
outcome of the pending merger these barriers will remain. Further 
consolidation of the industry without government action to alleviate 
these barriers to entry will doom the competitive environment. Congress 
must act to ensure complete and unfettered access to the marketplace by 
eliminating archaic slot and perimeter rules while ensuring all 
competitors have access to gates and associated facilities at federally 
funded airports.
Slots
    Congress recently made some additional new entrant slots available 
at O'Hare, LaGuardia and Kennedy airports and repealed the High Density 
Rule (HDR) governing Chicago's O'Hare to be fully effective in 2001 and 
New York's LaGuardia and Kennedy airports in 2007. While this action 
was important, LaGuardia and JFK will remain subject to slot rules for 
seven more years. At these airports, slots will continue to hinder 
competitive entry. Moreover Air 21 did very little to stimulate 
competition at Reagan National Airport where the HDR restricts the 
number of hourly slots allocated for commercial takeoffs and landings 
to 37 for jets and 11 for commuter aircraft which total to 
approximately 760 commercial operations per day. The 24 daily exemption 
slots provided under Air 21 constitute only a three percent increase in 
slots. America West hopes to stimulate competition to the West at 
Reagan National with the slot exemptions it received under Air 21. 
However, its ability to do so is limited by the fact that it can 
operate only three daily round trips rather than the five it requested 
from the Department of Transportation. As a result of slot 
restrictions, DCA is one of the highest cost airports in the country, 
with virtually no ability to expand capacity or otherwise improve the 
competitive environment.
    As America West has pointed out over the last decade, DOT/FAA 
attempts to increase competition at slot-controlled airports in general 
and at DCA in particular have been woefully inadequate. See Government 
Accounting Office, Airline Deregulation: Barriers to Entry Continue to 
Limit Competition in Several Key Domestic Markets, Letter 3 (Letter 
Report, 10.18/96, GAO/RCED-9704) (hereafter, ``GAO Airline Deregulation 
Report''). According to the GAO, the trend toward market concentration 
at slot-controlled airports has continued throughout the past decade:

        Since the early 1990s, a few established carriers have 
        continued to build upon the favorable positions they inherited 
        as a result of grandfathering. By contrast, the share held by 
        the airlines that started after deregulation has remained low.

        Because the number of slots is largely fixed and the holding of 
        those slots is concentrated among a few established carriers, a 
        seller's market has emerged, and slots have become very 
        expensive.... Moreover, in order to mount competitive service 
        in a market, an airline generally needs about six slots, with 
        at least three slots falling during the peak periods so that 
        the airline can offer a flight schedule that is attractive to 
        business travelers. As a result, for the airlines that started 
        after deregulation, the cost of purchasing the slots necessary 
        to compete effectively may be prohibitive.

        Even if financing can be arranged, buying slots is extremely 
        difficult for newer airlines because the established carriers 
        rarely sell their slots, and when they do, the buyer is usually 
        an airline that already holds a large number of slots at the 
        airport.

    GAO Airline Deregulation Report, Letter 3:1. The net result, 
according to the GAO: ``[L]ittle or no entry has occurred at'' Reagan 
National and other slot-controlled airports. GAO Airline Deregulation 
Report, Letter 3. America West urges Congress to advance the date for 
the termination of slots at LaGuardia and JFK, and to also act to 
abolish slots at Reagan National.
    If the High Density Rule at Reagan National cannot be repealed, 
then slots must be added. In its 1995 slot study the Department of 
Transportation reported that DCA could easily handle an additional 7 
slots an hour or 126 flights per day. Given the Stage 3 noise 
requirement, these slots could be added with no significant impact on 
noise or increase in delays. If Congress added 100 slots (50 additional 
round trips) for either inside or outside perimeter flights, to post 
deregulation carriers operating large aircraft, it would generate 
substantial new competition. Since 50 additional round trips by post 
deregulation carriers like America West could have a substantial 
competitive impact in many markets, the competitive concerns associated 
with the proposed transfer of slots to DC Air would be lessened. 
However, without a substantial increase in slots, any approval of the 
proposed merger should require the transfer of the proposed DC Air 
slots to post deregulation carriers that can maximize competition.
Perimeter Rules
Washington Reagan National
    The perimeter rule at Reagan National limits non-stop flights to a 
distance of 1,250 miles. The perimeter rule never served any safety 
purpose. It was a tool created to divert traffic to the fledgling 
Washington Dulles International Airport. However, the primary effect of 
the rule has been to bolster the ability of the large incumbent 
carriers to flow East-West traffic through their primary hubs by 
offering multiple daily connecting flights and preventing new low fare 
competition. A recent GAO study shows that unrestrained access to 
Dulles and BWI by low-fare carriers has had little or no impact on 
fares at Reagan National, primarily because, for reasons of 
convenience, air travelers in the Baltimore Washington region 
(particularly business travelers) are unlikely to switch airports. GAO 
Letter Report, Reagan National Airport: Capacity to Handle Additional 
Flights and Impact on Other Area Airports, Letters 1 and 5 (GAO/RCED-
99-234, Sept. 1999). This situation would only be exacerbated if the 
proposed merger were permitted to go forward while the perimeter rule 
remains in effect.
    Moreover, there is no longer any need to protect Dulles, which has 
established itself as a significant domestic and international 
destination. The airport's emplacements are already comparable to those 
at DCA. In addition much of the area's growing high tech enterprises 
and new residential development are located near Dulles which is the 
fastest growing airport in the United States as reflected in the 
recently announced a six year $3.4 billion building plan that includes 
a new runway. Dulles to Undergo Major Expansion, The Washington Post, 
July 20, 2000 at A-1. The pending transaction demonstrates the 
importance of Dulles and United's commitment to it. When faced with the 
perceived need to divest overlapping routes involving the Washington, 
D.C. area, United and US Airways voluntarily chose to retain Dulles and 
substantially reduce service to National. Today, the perimeter rule 
simply distorts the market while conferring no consumer benefits.
New York LaGuardia
    The perimeter rule governing LaGuardia was imposed decades ago 
primarily to control ground congestion at and around the facility and 
to generate service at the newly developed JFK. Subsequent changes at 
LGA and JFK as well as aircraft technology over the intervening years 
makes the rule a superfluous barrier to entry that deprives New York 
travelers the full range of options that should be available at all 
three airports serving the New York metropolitan area. The Department 
of Transportation has found LaGuardia constitutes a unique market apart 
from these other airports. Barring action by the Port Authority of New 
York and New Jersey, only Congress is in a position to enact 
legislation to preempt the locally imposed perimeter rule--a 
significant barrier to competition at this critically important New 
York airport. The proposed merger would likely further restricted East-
West competition from LaGuardia unless the perimeter rule is abolished.
Gates
    Lack of adequate gate access and related facilities has hindered 
new entrants at many major Airport. Inability to obtain gates has hurt 
America West's ability to compete at major airports and remains a 
serious problem at eleven major airports including Newark, LaGuardia 
Philadelphia, Hartford, Baltimore-Washington, O'Hare, Atlanta and San 
Francisco. America West believes consumers would reap a high benefit 
from improved access by America West and other post deregulation 
carriers if gates at these airports were available. The gate and 
airport facilities problem will only be exacerbated by regulatory 
approval and closure of United--U.S. Airways merger, which consolidates 
gate holdings of United and US Airways at many of these airports. 
Without reasonable access to adequate gates and related facilities, new 
entry at key airports is effectively blocked. See Department of 
Transportation, FAA/OST Task Force Study, Airport Business Practices 
and Their Impact on Airline Competition, October 1999. Congress has 
responded to the Task Force Study by including in Air 21 a requirement 
for major airports to prepare a competition plan and requiring the 
Secretary of Transportation to ``ensure that gates and other facilities 
are made available at costs that are fair and reasonable.'' America 
West applauds this action but believes Congress needs to take more 
aggressive action in this area.
    Airport officials at Newark where 84 percent of the gates are 
subject to exclusive-use leases recently confirmed there are currently 
no gates available at that airport. At LaGuardia and O'Hare, 83 percent 
and 85 percent respectively of the gates are the subject of exclusive 
use agreements. According to the Metropolitan Washington Airports 
Authority (MWAA), all 42 gates available for jet operations at Reagan 
National are leased to the incumbent tenant airlines until 2014. Reagan 
National Airport: Capacity to Handle Additional Flights and Impact on 
Other Area Airports (Letter Report, 09/17/99, GAO/RCED-99-234). 
Although MWAA officials are committed to addressing gate access, a 
recent GAO report remains decidedly pessimistic:

        MWAA may make a gate available to another airline when it is 
        not needed to support the tenant airline's scheduled 
        operations. While a tenant airline cannot prevent another 
        airline from using the gate when it does not need it, the only 
        effective opportunity for a new entrant to initiate service at 
        key business times of the day or for an incumbent to expand 
        service is through a contractual arrangement with the tenant 
        airline. To date, this is how new entrants have gained access 
        to the airports.

    These arrangements have been generally inadequate for new entrants 
and today the incumbents are withdrawing gates they have made available 
in the past. While incumbents may not use some gates and under utilize 
other gates at these airports, America West has been unable to obtain 
its own gates and is forced to enter into short term handling 
agreements with incumbents subject to 30 or 60 day termination clauses 
to operate at these facilities. For example, at O'Hare America West 
uses Continental gates under a master handling agreement. However, if 
as expected, Continental expands its O'Hare service, America West may 
be forced out of the airport. In this connection, the rapid growth of 
regional jets will soon put additional pressure on gate availability 
and post deregulation carriers will likely be squeezed out of many key 
airports if action to protect access is not taken soon. In addition, at 
O'Hare where America West has attempted unsuccessfully for over a year 
to obtain its own gates, it pays an annual fuel surcharge of between 
$250,000 and $300,000 because it is not a signatory airline. These 
additional charges place America West at a competitive disadvantage to 
incumbent carriers. At BWI, America West's short term agreement with 
Continental was recently terminated forcing America West to relocate to 
the International terminal, where it is the only domestic airline using 
international gates for domestic service. Moreover, BWI officials have 
stated that if it obtains additional international flights America West 
must give up these gates. If America West cannot locate gates with 
another incumbent it will be forced out of this important airport. 
Finally at San Francisco, another United stronghold, America West 
currently is handled by TWA. America West has requested two own gate 
from the airport. However, despite the renovation of the airport and 
Congressional concern that airports be pro-active in providing access 
for new entrants, America West's request will be considered only if 
Delta, which as a signatory airline has a preference does not take 
these gates.
    America West's experience confirms the findings of the Department 
of Transportation and the GAO that exclusive use leases and majority in 
interest agreements to be barriers to entry. Task Force Study at 38. 
America West believes Congress should direct DOT to take immediate 
action to compel airports to provide reasonable gate access and other 
facilities to new entrant carriers where exclusive use or other 
agreements that are vestiges of the pre-deregulation system block 
competitive new entry. It is clear from the Task Force Study that 
current federal law--including Section 155 of Air 21, airport grant 
agreements with the FAA, and DOT's authority to prevent unfair trade 
practices by airlines--is sufficient to enable DOT to act aggressively 
to ensure new entrants gain reasonable access to gates. Should the 
Department of Justice consider approval of the merger, it must require 
United and US Airways to make available a reasonable number of gates at 
Reagan National, LaGuardia, Boston Logan, O'Hare and Newark to permit 
needed competition to be introduced by post deregulation carriers.
DC Air
    Like many of the witnesses who testified on the proposed merger at 
the Committee hearings, America West questions whether DC Air 
represents a real competitive force at Reagan National. Certainly, DC 
Air will not be independent of United and this lack of independence 
means there will not be real competition against the merged carrier. DC 
Air will wet-lease ten 737-200 aircraft from United for at least two 
years. United will provide gates to DC Air, which as emphasized above, 
it is not prepared to do for other new entrants at Reagan National that 
could compete against it. United will also provide maintenance services 
and DC Air will participate in United's frequent flyer program. Such 
dependence, as members of this Committee have pointed out, does not 
create the true independence required to provide meaningful competition 
to the combined United/US Airways in any market.
    America West and other post deregulation carriers have been 
essentially excluded from serving Reagan National. In this light, it 
would be unconscionable to permit United and US Airways to determine 
that a single start-up airline serving predominately short-haul routes, 
dependent on United for aircraft and support and linked to United's 
frequent flyer program and international alliance will solve any 
competitive concerns at the airport. In essence this would be like 
allowing American and British Airways to spin off a ``new'' airline at 
Heathrow that uses BA aircraft and crews and is a member of their 
oneworld alliance, to provide new competition at that airport.
Conclusion
    Regardless of any conditions the Department of Justice may propose 
to United and US Airways to find this merger acceptable, America West 
believes additional Congressional action is necessary to eliminate 
those vestiges of the pre-1978 regulatory environment that continues to 
inhibit competition at key airports. Specifically, America West 
believes Congress should immediately:

   Advance the date for abolishing the slot restrictions at 
        LaGuardia and Kennedy airports.

   Abolish slot restrictions at Reagan National or in the 
        alternative provide 100 additional slots at to be made 
        available to post deregulation earners.

   Abolish the perimeter rules at Reagan National and LaGuardia 
        airports.

   Instruct the Secretary of Transportation to take the 
        necessary steps to ensure that any post deregulation carrier 
        can obtain sufficient gates and related facilities at major 
        airports to operate up to five round trips a day to that 
        carrier's primary hub airports.

    By taking these steps, Congress will bring the benefits of 
deregulation to key airports in the East and Midwest where government 
policies and the historic dominance of the pre-deregulation carriers 
has prevented meaningful competition and unfairly tilted the playing 
field in favor of the major high fare carriers. Congress took an 
important first step in Air 21 to open up slots, and by permitting a 
few beyond perimeter flights at Reagan National. Now is the time for 
Congress to complete the process of deregulation and level the playing 
field so America West and other low cost highly competitive carriers 
can serve these important markets that remain subject to restraints 
that serve no purpose but to protect the largest incumbent airlines.

                                 ______
                                 
      Response to Written Question Submitted by Hon. Max Cleland 
                           to Albert A. Foer

Question. Today we are down to about 6 major carriers. If two of the 
top six--whoever they are--merge, and we see as a result more hubs and 
higher prices, does this say to you that this direction is something 
that might not be in the best interest of the consumer?
    Answer. I don't think we should necessarily associate more hubs 
with higher prices. The question is whether these hubs will be 
dominated by one carrier or be open to a reasonable amount of 
competition. More hubs that compete with other hubs by offering 
consumers alternative ways to go from A to B could also benefit 
consumers. My concerns are that (a) we have not yet established a 
policy that assures hubs will operate competitively and (b) there is a 
strong possibility that if two of the top six merge, a tipping effect 
will be set off, leading to not five airlines but some smaller number. 
(Recall, in fact, that Northwest and Continental are already in the 
process of merging, pending a court decision.)

                                 ______
                                 
     Response to Written Questions Submitted by Hon. Slade Gorton 
                           to Albert A. Foer

Question 1. One of the outcomes of airline deregulation has been the 
development of hub airports. In some of these cases, the hubs have been 
described as ``fortress'' hubs where new carriers have been unable to 
obtain market entry for a variety of reasons. The possible merger of 
United and US Airways has created a situation where two large U.S. 
airlines would have majority market positions at a number of airports. 
For example, at Philadelphia, where US Airways already has 
approximately 65 percent of the local market, that share would increase 
to about 72 percent following the merger. At Charlotte, where US 
Airways is virtually the only carrier, carrying about 90 percent of 
total traffic, the combination with United would add only incrementally 
to that share.
    Do the antitrust laws allow for any sort of remedy that would 
address such market dominance?
    Answer. The antitrust laws require the Justice Department to look 
at the impact of the merger in every individual market that is served 
by both airlines. Where it concludes that the merger ``may'' 
substantially reduce competition, it must take action, either to block 
the merger or to negotiate conditions that ``fix'' the anticompetitive 
problem. Thus, in specific hubs where the merged carrier will have a 
high market share, it may be necessary to require the carrier to spin 
off assets, such as gate privileges, in order to permit additional 
competitors to participate. If the market was already highly 
concentrated, as in the Charlotte example, prior to the merger, even an 
incremental addition as a result of the merger can create the basis of 
illegality.

Question 2. Can gates be made available to new entrants at these 
dominated airports?
    Answer. Gates can be made available to new entrants at these 
dominated airports, as part of a settlement. It is important that the 
locations of such gates as well as their prices be reasonable. The 
Department of Transportation may be able to do more than it has in this 
area.

Question 3. Even if physical access is made available at an airport, 
how can the antitrust laws address sales and marketing issues (e.g., 
corporate discounts, frequent flyer programs, etc.) that would more 
effectively open those markets to new competition?
    Answer. Sales and marketing tactics have been employed by dominant 
carriers at various hubs, when fighting against new entrants. It must 
be recognized that such tactics (e.g., reducing fares, increasing the 
number of seats, giving extra frequent flyer credits) may be effective 
means for destroying a new entrant. If they are being employed as part 
of a predatory scheme, they must be declared illegal. The difficulty 
comes, of course, because these may be also be perfectly legitimate 
business tactics under conditions where competition is aggressive but 
non-abusive, and may be useful to a new entrant trying to build market 
share. While recognizing the difficulty in drawing lines, the situation 
is currently at square one: trying to deal with several Supreme Court 
precedents that currently make it extremely difficult to base any case 
on a theory of predation. The American Airlines litigation might 
eventually lead to a useful precedent. Otherwise, Congress could 
consider legislation that would clarify the circumstances under which 
predation is to be deemed illegal.

                                 ______
                                 
  Response to Written Questions Submitted by Hon. Ernest F. Hollings 
                           to Albert A. Foer

Question 1. Should we require as a condition of any other merger that 
is likely to be proposed (American, Delta, Continental and Northwest at 
various times have all been rumored to be talking about several 
different combinations), that it also be conditioned on a divestiture 
of significant gates and facilities to enable some other carrier to 
come in and compete?
    Answer. I do not understand why we would want to focus on gates 
when we should be focusing on the overall structure of the industry. If 
we have only three major airlines, who will be in a position to take 
over divested gates and operate on a large and efficient scale? The 
only realistic answer to that is, foreign airlines--and permitting them 
to compete will require legislation. Far better would be for the 
Justice Department to act now to prevent this rush to consolidation. 
And if Congress is not satisfied with how Justice handles the case, it 
could institute a moratorium on further growth by merger, much as the 
Surface Transportation Board has done on a temporary basis with respect 
to railroads.

Question 2. Can you explain the role of predation at hubs dominated by 
one carrier?
    Answer. There is substantial evidence that hub-dominant air 
carriers frequently pursue business strategies aimed at keeping low 
cost entrants from competing at their hubs. The technique has generally 
been to reduce prices and increase the number of seats available, often 
accompanied by heavy advertising and even frequent flyer bonus miles, 
making it impossible for the new entrant to gain a toehold in the 
market. Once the entrant waves the white flag of surrender, the 
dominant incumbent reduces the availability of seats and raises prices 
to prior levels (or higher). Consumers gain from a short-term price 
war, but ultimately lose as prices go back up. Indeed, now that the 
dominant carrier has successfully delivered a message about how it 
deals with low cost entrants, it is less likely that either the same 
entrant or any other will try again in the future at this hub or any 
other where the particular carrier operates. This may give the dominant 
carrier even more flexibility to raise prices than it had at an earlier 
time when it might have worried about the possibility of a new entrant 
attacking the market. Thus, despite those neo-classical economists who 
doubt that predation ever takes place and who argue that it should not 
be subject to the antitrust laws, predation is a reality that helps 
maintain market power and high prices at many of our largest airports.

Question 3. Should we demand that DOT issue those guidelines and why 
hasn't DOT issued them yet?
    Answer. DOT has proposed guidelines for dealing with predation at 
hubs. While not perfect, these guidelines would make it clear that 
predatory behavior is indeed an antitrust violation and that the 
government will fight it in order to encourage new entrants. It would 
be useful if Congress demanded the guidelines be issued, but one could 
suspect that Congress' apparent previous lack of support may be one 
reason DOT has delayed. It is also possible that DOT is awaiting the 
outcome of the DOJ predation case against American Airlines, which will 
help establish whether the courts will uphold a claim based on 
predation.

Question 4. If we are left with three mega-carriers, should Congress 
consider some form of price controls on flights out of hubs?
    Answer. Airline deregulation was premised on the idea that 
competition could protect consumers better than regulation. This 
assumed that there would be ample competition. (In those days, true 
believers adhered to the ``contestable markets'' theory that indicated 
it would be very easy for carriers to enter a market that was not 
operating competitively.) Antitrust was to ensure that there would be 
enough competition. What happened was not entirely consistent with the 
plan. There was not enough antitrust. Mergers reduced the number of 
competitors. Alliances reduced the intensity of competition. Predatory 
practices precluded entry. So, if the bargain that underlay 
deregulation is not kept, it would be appropriate to ask whether we 
need to return to some degree of price regulation. Keeping the industry 
as competitive as possible would be a more desirable option.

Question 5. Should we seek to have the shuttle included in the DC Air 
agreement, or sold off to another carrier?
    Answer. The question is, if we decide to let the merger take place, 
what conditions will ensure the continuation of the same level of 
competition in specific markets such as Washington, DC? The incumbent 
operates a shuttle that is supposed to be very profitable. Can a 
successor company be equally successful as a competitor without this 
asset? Indeed, can it be, even with this asset?

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                           to Albert A. Foer

Question 1. Will the Justice Department review of the proposed merger 
take into account the fact that governmental slot controls and 
perimeter rules on the east coast will only decrease the likelihood of 
competition against the combined United-US Airways on the east coast? 
Don't the Department of Transportation and the Department of Justice 
have every responsibility to take significant action to mitigate any 
government-sponsored impediments to competition, such as slot controls 
and perimeter rules, which will advantage the merging parties?
    Answer. I believe that the Justice Department's review of the 
proposed merger should take into account the fact that governmental 
slot controls and perimeter rules on the east coast will decrease the 
likelihood of competition against the combined company, in that this is 
one element of the analysis that must be made of entry conditions in 
the industry. It should be a major priority for the Department of 
Transportation and the Department of Justice to mitigate government-
sponsored impediments to competition, such as slot controls and 
perimeter rules--with or without this merger. Given the current level 
of concentration in this industry, the government should be working to 
create possibilities for new entrants.

Question 2. The clear beneficiaries of the proposed merger transaction 
are the citizens in relatively small communities who have been promised 
continued service to Reagan National by DC Air. Do you believe it is 
likely that this preeminent feature of the merger helps guarantee the 
merger's success with the antitrust regulatory authorities?
    Answer. I do not believe that promises to serve small communities 
by DC Air should help guarantee the merger's success with the antitrust 
authorities. If the merger is allowed, it must be conditioned on terms 
(including divestitures) that will guarantee that competition is not 
diminished. The question with respect to Reagan National is far more 
complex than simply a promise to continue service. Will DC Air really 
have the capacity to provide the same level of competition as US 
Airways? If US Airways was not making a profit on small community 
routes, then why would we expect DC Air to operate profitably? And if 
it does not operate profitably, how long will it continue serving 
unprofitable routes? It seems that US Airways' exit strategy was not to 
stop service, but to merge into United and get rid of the difficult 
routes while retaining the most profitable ones.

Question 3.  Won't DC Air's transition period, during which time it 
will maintain a high cost airline at Reagan National, just serve as a 
multi-year grace period for United and US Airways to resolve their 
integration problems without any real competition? Is this a factor 
that the Justice Department is likely to take into account I its review 
of the merger?
    Answer. I think the description in your question makes a lot of 
sense. Unless DC Air is likely to survive for an indefinite period and 
provide a comparable level of competition, the Justice Department 
should not consider it a viable stand-in.

Question 4. I have seen one of the earlier iterations of the Reagan 
National divestiture plan that I believe accompanied the SEC filings. 
It indicated that the merger parties considered proposing to divest the 
carriers' hub-to-hub routes, such as Charlotte to O'Hare, or 
Philadelphia to Denver. Do you think this condition would be a good one 
for the Justice Department to impose on the merger? If so, who would 
operate these routes?
    Answer. The question of who would want to operate on a major hub-
to-hub route recognizes that the dominant airlines have had outstanding 
success in killing off challenges by new entrants. Despite the D.O.T.'s 
proposed guidelines on exclusionary practices, and despite the Justice 
Department's pending litigation against American for predatory behavior 
at a hub, it is not clear that the situation for entrants has improved. 
Before investors will sanction much new entry on hub-to-hub routes, it 
will have to be a lot clearer that predatory practices will not be 
permitted. In theory, however, if the merger is to be permitted, any 
conditions the Justice Department is able to negotiate that will 
deconcentrate fortress hubs would likely be in the public's interest.

                                 ______
                                 
     Response to Written Questions Submitted by Hon. Slade Gorton 
                          to Nancy E. McFadden

Question 1. Since the DOT instituted the Buy-Sell rule for slots, how 
many new entrants have been able to enter National Airport? On what 
percentage of routes at National Airport have competitive service? On 
routes where there is more than one carrier, is there price 
competition? For example, do Delta and American compete on fares 
between National and DFW? Do American and United compete on fares 
between National and O'Hare? Do Delta and US Airways compete on fares 
between National and Atlanta? Do these airlines offer lower fares to 
Dulles from Atlanta than from National to Atlanta? Why?
    Answer. Since DOT instituted the Buy-Sell rule, the following 
carriers have started service to National: Air Atlanta, Air Canada, Air 
Wisconsin, America West, AmericanTrans Air, Braniff II, Jet America, 
Midway/Jet Express, Midwest Express, PanAmerican, Pan American Shuttle, 
Trump Shuttle, and Western.
    Twelve of 70 routes that have nonstop service out of National, or 
17 percent, have competitive service. Among the 70 nonstop routes out 
of National, 56 have nonstop service from Dulles. The factor that 
primarily affects price is not whether a competitor is present, or 
whether the service is to DCA or Dulles, but whether or not a low-fare 
competitor serves the market. For example, although American and Delta 
both provide nonstop service between Dallas and Washington, average 
fares are relatively high. But between Atlanta and Washington average 
fares are relatively low because a low-fare carrier, AirTran provides 
service between Atlanta and Dulles. Fares to Dulles tend to be lower 
than fares to DCA, and the principal reason appears to be that more 
low-fare service is available to Dulles than to DCA.

Question 2. In a May 2, 2000 hearing before the Senate Subcommittee on 
Antitrust, Business Rights and Competition, Roger Ferguson of Midway 
Airlines testified that they ``have consciously avoided picking fights 
with the major airlines by flying directly into their hubs.'' Isn't 
this alarming? If concentration at major hubs continues to grow, isn't 
this going to make it more difficult for new entrants to compete? 
Aren't we likely to see more new entrants avoiding hubs?
    Answer. The Department believes that entry by new entrants at major 
airlines' hubs is very important. Our ongoing review of the fare 
information that carriers file with the Department shows that major 
carriers do not tend to enter each other's hubs except to link them to 
their own, that major carriers are not aggressive price competitors at 
each other's hubs, but that entry by low-fare airlines tends to result 
in vigorous price competition. If new entrants were to avoid major 
carrier hubs the result would be continued high prices for consumers. 
New entrants have entered major carrier hubs, such as AirTran at 
Delta's hub in Atlanta, and Sun Country at Northwest's hub at 
Minneapolis/St. Paul. Other low-fare new entrants compete at major 
carrier hubs by serving alternate airports, such as Vanguard at Midway 
Airport in Chicago and Legend at Love Field in Dallas. While some 
progress has been made, much more entry at major carrier hubs is needed 
to bring the benefits of price competition to passengers in many city-
pair markets.
    If concentration at major carrier hubs increases we believe that 
this will probably make it more difficult for new entrants to enter and 
successfully compete.

Question 3. Does the Department have legislative authority to withdraw 
slots at National Airport from incumbent carriers and allocate these 
slots to new entrants?
    Answer. The Department's authority to withdraw and reallocate 
``slots'' (instrument flight rule takeoffs and landings) at a slot-
controlled airport such as Washington National is limited by the terms 
of the High Density Rule (14 CFR 93.221, et seq.).
    The High Density Rule (HDR) authorizes air carriers to buy, sell, 
lease or trade slots, subject to FAA approval. In adopting the ``buy-
sell rule'' in 1986, the Department determined that market forces would 
lead to the most efficient allocation of slots. The transfer-approval 
process is generally ministerial in nature but includes a determination 
by the Secretary that a proposed transfer will not injure the Essential 
Air Service program (14 CFR 93.221(a)(6)).
    Under the High Density Rule (HDR), the FAA retains the right to 
withdraw slots to ``fulfill the Department's operational needs, such as 
providing slots for international or essential service operations or 
eliminating slots.'' The HDR sets forth the process that applies in 
withdrawing slots for operational need. All slots are assigned, by 
random lottery, a withdrawal priority number for recall purposes at 
each airport. This process does not provide for slots to be withdrawn 
for operational reasons from a specific carrier. Separately, the HDR 
dictates that the FAA shall withdraw slots from a carrier for failure 
to meet the minimum slot usage requirement.

Question 4. Under the FAA Regulations, available slots at National 
Airport are supposed to be periodically allocated through a lottery. 
When was the last such lottery? Who holds temporary slots and how long 
have they held them? Why hasn't the Department used its authority to 
reallocate these slots?
    Answer. The last lottery for slots at Reagan National Airport was 
held in 1986. The Department's authority to withdraw and reallocate 
slots at a slot-controlled airport is limited by the terms of the High 
Density Rule, as revised in 1986.
    In 1992, in order to increase slot efficiency, the FAA increased 
the required utilization rates to 80 percent under the use-it-or-lose 
provisions of the High Density Rule. This resulted in the periodic 
return of a few slots in the late evening slot period. The FAA has made 
these available for redistribution on a temporary basis to interested 
air carriers. Until recently, the number of these available late 
evening temporary slots has exceeded demand and therefore a lottery has 
not been necessary, and this category of slots has been distributed on 
an ``as requested'' basis. American, Delta, Midwest Express, Midway, 
Northwest, and United currently hold slots in this temporary, late 
evening category. The table below shows the dates of allocation. 
Although there are not any requests from new entrant air carriers 
indicating how they would actually schedule these late evening slot 
times, interest in these temporary slots has recently increased, and 
the Department may consider conducting a lottery in the future for 
carriers that have a serious interest in operating these slots at the 
available times.
    The Department has addressed the issue of a future slot lottery 
recently in orders Order 99-11-4 and Order 2000-2-26. In the first 
order we noted, ``Pursuant to 14 CFR Sec. 93.225, the FAA reserves the 
right to determine when a sufficient pool of slots is available for 
lottery.'' In the latter order we found that FAA's decision not to hold 
a lottery at that time (February 2000) was well-supported. We also 
noted, however, that we would be closely monitoring DCA slot 
availability and, when a sufficient number of DCA slots became 
available, we would consider holding a DCA slot lottery (as currently 
requested by some low-fare airlines).

                 Table I--DCA LATE EVENING (2100) SLOTS
------------------------------------------------------------------------
             Holder                              Allocated
------------------------------------------------------------------------
American                          1/4/93

Northwest                         5/1/93 (originally NWA slot-returned
                                   to FAA 11/1/92)

Northwest                         4/7/96 (originally NWA slot-returned
                                   to FAA 11/1/92)

Delta                             7/15/96

United                            4/5/97

Midway                            6/15/95

Midwest Express                   2/1/2000 (moved by ``slide'' to
                                   earlier hour)

Midwest Express                   2/1/2000 (moved by ``slide'' to
                                   earlier hour)
------------------------------------------------------------------------


Question 5. At an American Bar Association Forum on Air and Space Law 
in 1998, the Secretary stated, ``Our responsibility at the Department 
of Transportation is to ensure that every airline--large or small, new 
or established--has the opportunity to compete freely. That is what 
deregulation is supposed to be about--a fair chance to compete.''
    What steps has the Department taken to provide access to new 
entrants at National?
    Answer. Before the passage and enactment of the Wendell H. Ford 
Aviation Investment and Reform Act for the 21st Century (AIR 21) on 
April 5, 2000, the Department was explicitly prohibited under 49 U.S.C. 
41714(c)(1) from granting slot exemption relief to new entrants at 
Reagan National. The Department was able to grant slot exemption relief 
to new entrants at the other slot controlled airports, and under our 
pre-AIR 21 statutory authority, we granted 30 slot exemptions at 
LaGuardia, 60 slot exemptions at O'Hare, and 75 slot exemptions at JFK 
to new entrant or limited incumbent carriers.
    On July 5, 2000, as required by AIR 21 the Department awarded a 
total of 24 slot exemptions (for 12 round trip flights) for new air 
services at Reagan National Airport. The Department issued two separate 
orders, the first granting 12 slot exemptions for service outside the 
1,250 mile perimeter established for civil aircraft operations at 
Reagan National and the second granting 12 slot exemptions for services 
inside the perimeter.
    Outside the perimeter carrier awardees included America West 
Airlines at Phoenix (four slot exemptions or two roundtrips) and Las 
Vegas (two slot exemptions or one roundtrip); National Airlines at Las 
Vegas (two slot exemptions or one roundtrip); Frontier Airlines at 
Denver (two slot exemptions or one roundtrip) and Trans World Airlines 
at Los Angeles (two slot exemptions or one roundtrip). The Department 
received applications from nine air carriers requesting 44 slot 
exemptions for outside perimeter service. National and Frontier were 
true new entrants at Reagan National with no prior operations, and 
America West and TWA had only a limited presence at Reagan National 
prior to the awards. This shows that the Department gave substantial 
weight to an applicant's presence at Reagan National in making its 
selection decisions.
    Inside the perimeter carrier awardees included American Trans Air 
at Chicago-Midway (four slot exemptions or two roundtrips ); Midway 
Airlines at Raleigh/Durham (two slot exemptions or one roundtrip); 
Midwest Express Airlines at Des Moines (two slot exemptions or one 
roundtrip); and Spirit Airlines at Melbourne, FL or Myrtle Beach, SC 
(two slot exemptions or one roundtrip) and another community in Florida 
or South Carolina proposed by Spirit (two slot exemptions or one 
roundtrip). For inside perimeter service, the Department received 
applications from 11 air carriers requesting 60 slot exemptions. All of 
the above carriers also have had only a limited presence at Reagan 
National.
    Under the very specific and restricted conditions of 49 U.S.C. 
Sec. 41714(d), in a few instances, the Department has also allowed new 
entrant air carriers to retime flights (or ``slide slots'') to and from 
Reagan National in order to improve their service offerings.

Question 6. Over two years ago, the Department issued its proposed 
anti-competitive guidelines. What is the status of these guidelines? 
Doesn't the proposed merger make the playing field more uneven? Some of 
the carriers looking to merge are being examined by the Department for 
engaging in anti-competitive behavior. If these carriers merge, 
wouldn't the threat of anti-competitive behavior increase?
    Answer. The Secretary determined that the Department should publish 
its proposed competition policy in order to obtain public comment, 
since he wished to begin a debate on the issues and be in a position to 
adopt the best possible policy. We have received over 5,000 comments on 
the proposed policy. In addition, as directed by Congress, the 
Transportation Research Board of the National Research Council issued a 
report on airline competition that included an assessment of the 
Department's proposed policy. We continue to work on our proposed 
policy statement. We felt it necessary to proceed deliberately on this 
important and contentious issue. We plan to make a final decision soon 
on our proposed policy.
    We are fully aware that, if any consolidation occurs between the 
major airlines, preventing anticompetitive conduct by incumbent 
airlines will become even more important.

Question 7. Where do you stand on your investigations of anti-
competitive behavior? How many anti-competitive complaints does DOT 
have? How long have these investigations been going on? What formal 
actions have you taken?
    Answer. The Department has undertaken a preliminary review of each 
of the informal complaints alleging that a major airline has engaged in 
anti-competitive conduct. In most cases the Department has asked the 
airline to explain the rationale for its conduct and to provide 
additional information on its competitive practices. In the case of 
Orbitz, which has been the subject of several informal complaints, the 
Department has asked Orbitz to provide information and documents 
relevant to the questions concerning its organization and operational 
plans.
    The Department has been reviewing the information submitted in 
Response to its requests involving informal complaints and Orbitz to 
see whether further action should be taken. We have not as yet taken 
formal action on any complaint.
    Low-fare airlines have told the Department that its past actions in 
pursuing the informal complaints and in stating the seriousness of the 
issue presented by those complaints, together with the Justice 
Department's suit against American, have caused major airlines to 
respond to entry in ways that are less unfairly aggressive than in 
earlier years. The Department intends to build on that success by 
continuing to investigate the complaints to see whether the incumbent 
airline seems to have engaged in unfair methods of competition.
    There are six informal complaints currently under active 
investigation by the Department (counting all complaints filed against 
one airline or firm based on common facts as a single complaint). These 
complaints were all filed within the past fifteen months, including 
some within the last several months.
    In addition, travel agency groups have filed formal enforcement 
complaints against major airlines based on claims that the airlines' 
changes in distribution practices, such as their reduced commission 
rates, constitute unfair methods of competition and unfair and 
deceptive practices that violate 49 U.S.C. 41712, formerly section 411 
of the Federal Aviation Act. The enforcement office is determining 
whether formal enforcement proceedings should be begun in any of these 
cases.

                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                          to Nancy E. McFadden

Question 1. I have a recent letter from United Chairman Jim Goodwin 
disputing that a hub fare premium exists. As I recall, the Department 
of Transportation and the General Accounting Office studied and 
concluded that indeed there is a hub fare premium. Am I right and, if 
so, would you please elaborate?
    Answer. As the Transportation Research Board pointed out in its 
report last year, most studies of hub fares have found that fares in 
hub markets are significantly higher than fares in non-hub markets. We 
agree with this assessment, and would note that fares at O'Hare are not 
typical of those in most hub markets for several reasons--O'Hare has 
had slot controls, it has two hubbing airlines, and the substantial 
amount of low-fare airline service offered at nearby Midway causes 
O'Hare fares to be lower than they would otherwise be. We find that 
fares in hub markets with low-fare airline service are much lower than 
fares in other hub markets.

Question 2. I understand that DC Air, in terms of the number of its 
operations it plans to conduct on day one, is the biggest airline that 
the Department of Transportation or the FAA has ever certified. How 
long will it take for the Office of Secretary and the FAA to certify DC 
Air from an economic fitness and a safety standpoint?
    Answer. It is difficult to say until the Department actually 
receives DC Air's application and can determine precisely how its 
operations and organization will be structured, and what issues this 
presents from a regulatory standpoint. It typically takes 3 to 9 months 
to process an ``economic fitness'' application of a company ``starting 
from scratch'', depending on the completeness of the application and 
the complexity of issues presented. The FAA process usually takes about 
the same amount of time, but can take longer, again depending on how 
prepared the applicant is. Representatives of DC Air recently met with 
the Department's staff to discuss its plans.

Question 3. The Justice Department could impose a condition on the 
merger that would require the parties to divest the carriers' hub-to-
hub routes, such as San Francisco to Charlotte, or Philadelphia to 
O'Hare. If that happened, from a practical standpoint, what carrier 
would operate these routes?
    Answer. When the Justice Department determines that a merger or 
acquisition should be challenged because it may substantially reduce 
competition, the Justice Department may agree not to challenge the 
transaction if the parties can remedy the competitive problems that 
would otherwise be created by the transaction. One possible remedy is a 
divestiture of part of the combined businesses. If a transaction's 
problems are to remedied by a divestiture, the Justice Department will 
insist that the assets being divested are sufficient to enable the 
purchaser to be an effective competitor over the long term. Usually the 
parties to the merger or acquisition suggest a purchaser. The Justice 
Department will review the purchaser to ensure that the purchaser's 
operation of the assets will remedy the transaction's competitive 
problems. The Justice Department will also wish to be certain that the 
purchaser will be independent.
    At this point we do not know whether the Justice Department will 
conclude that United's merger with US Airways is likely to reduce 
competition in any market and which, if any, markets will be likely in 
the Justice Department's opinion to lose competition as result of the 
merger. It is therefore premature to predict what assets should be 
divested and which firm might acquire the assets.

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