[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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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
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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
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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.
Appendix
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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.