[Senate Hearing 106-1133]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1133

                ANTITRUST ISSUES IN THE AIRLINE INDUSTRY

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 27, 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
               Ann Choiniere, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 27, 2000....................................     1
Statement of Senator Bryan.......................................     8
    Prepared statement...........................................     9
Statement of Senator Dorgan......................................    10
Statement of Senator Hollings....................................     2
    Prepared statement...........................................     4
Statement of Senator McCain......................................     1
Statement of Senator Rockefeller.................................     6
Statement of Senator Wyden.......................................     7

                               Witnesses

Kahn Alfred E., Ph.D., Robert Julius Thorne Professor of 
  Political Economy Emeritus, Cornell University.................    22
    Prepared statement...........................................    26
Klein, Hon. Joel I., Assistant Attorney General, Antitrust 
  Division, U.S. Department of Justice...........................    11
     Prepared statement..........................................    13

                                Appendix

Response to written questions submitted to Prof. Alfred Kahn by:
    Hon. Slade Gorton............................................    42
    Hon. John McCain.............................................    41
Response to written questions submitted to Hon. Joel I. Klein by:
    Hon. Max Cleland.............................................    46
    Hon. Slade Gorton............................................    45
    Hon. John McCain.............................................    43

 
                ANTITRUST ISSUES IN THE AIRLINE INDUSTRY

                              ----------                              


                        THURSDAY, JULY 27, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:34 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. Today's hearing will address 
the role that antitrust laws play in keeping the airline 
industry competitive. We are fortunate to have two 
distinguished witnesses with us to discuss these matters, one 
of whom has not arrived yet because, guess what, his plane is 
late. But anyway, there is some irony there.
    Assistant Attorney General Joel Klein is considered an 
activist in terms of antitrust enforcement. His Antitrust 
Division has tackled many challenging and controversial cases 
in the last few years. Professor Alfred Kahn is frequently 
referred to as the ``father'' of airline deregulation. His 
efforts set in motion a dramatic change in the part that air 
transportation plays in our country. He is also one of the most 
thoughtful and well-regarded experts on the airline industry. I 
am grateful that both gentlemen are going to be here.
    The airline industry has reached a critical stage in its 
development. More than 20 years have passed since deregulation, 
and the major airlines have matured into relatively productive 
networks. For all their flaws in areas such as customer 
service, the airlines have helped transform air travel from a 
privilege for the few into a necessity for the many.
    It has not been easy, but most U.S. airlines have become 
strong and efficient. Recent developments in the industry raise 
questions about where the industry will go from here and how it 
will get there. Consolidation is one of the most pressing 
issues. If the proposed United Airlines and US Airways merger 
is approved, most everyone believes that there will be further 
mergers leading to three megacarriers. I cannot think of any 
marketplace that works better for consumers with fewer 
competitors. Apart from the ability of three bigger carriers to 
wield significant market power, especially at hub airports, new 
entry would probably become more difficult in a more 
concentrated industry.
    That statement is validated by numerous Department of 
Transportation and GAO studies that show where there is 
significant hub concentration fares are higher and competition 
is less.
    Senator Gorton and I have introduced a Senate resolution 
expressing our strong reservations about the proposed merger of 
United Airlines and US Airways. Through the deliberations of 
this Committee, we have carefully analyzed the proposed merger 
as well as its long-term consumer effects. We have concluded 
that whatever air travelers stand to gain from the merger is 
outweighed by what they stand to lose.
    Although we felt compelled to make our views known, we are 
fully aware that this issue is now in the hands of the 
Department of Transportation and the Department of Justice. For 
obvious reasons, Assistant Attorney General Klein cannot 
comment on the particulars of the merger or other specific 
matters pending before the Antitrust Division. I want to make 
that clear to all Senators.
    In addition to consolidation concerns, other important 
issues facing the industry include collaborations among major 
airlines and predatory behavior on the part of individual 
carriers. Just last week the Committee held a hearing on how 
the Internet is having an impact on the industry. Much of the 
attention focused on Orbitz, the Internet travel agency formed 
by five major airlines.
    As a general matter, we want the airlines to compete at all 
levels. When they work together on the sale of tickets, it 
harkens back to the abuses of the computer reservation systems. 
But Orbitz may inject competition into the channels of ticket 
distribution, where it has been lacking.
    Predatory behavior is a troubling phenomenon that can be 
difficult to get a hold of. At the risk of stealing some of his 
thunder, I note that Professor Kahn has spoken out on predatory 
behavior by the major carriers. He was quoted last year as 
saying: ``If I had to choose between encouraging low-fare entry 
like the kind that has benefited the public with low prices and 
the unencumbered ability of major airlines to respond to low-
cost competition, I will pick the first every time.'' I tend to 
agree with him.
    Once again, I welcome our witnesses. I look forward to 
continuing our dialog on issues critical to the future of air 
transportation in the United States.
    Senator Hollings.

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

    Senator Hollings. Thank you very much, Mr. Chairman. I 
appreciate your leadership in your calling for this hearing and 
I appreciate the distinguished Assistant Attorney General in 
charge of Antitrust Division being with us.
    First with respect to airline deregulation, if you stay 
around here long enough you meet yourself coming around the 
corner. I voted for airline deregulation. I will never forget. 
At the particular time we were all busied up on our particular 
little disciplines, committee assignments. I was working on the 
oceans, working on communications. Howard Cannon was the 
Chairman of our Committee, and from time to time I could see 
various red flags and different other things that I was worried 
about; ``concerned'' is the word used up here in Washington.
    But I was assured at each turn by Mr. Alfred Kahn, the 
proponent, and the Chairman of the Committee, Senator Cannon, 
that the small, medium sized airports and facilities and 
service would be protected.
    Welcome, Mr. Kahn.
    The Chairman. Professor Kahn, welcome. I understand your 
plane was late.
    Dr. Kahn. I am sorry.
    Senator Bryan. That is another hearing.
    Senator Hollings. I will comment on airline deregulation, 
Mr. Kahn, because you got me to vote for it. There is no 
question about your intellectual acumen, your brilliance. I 
just question your judgment, looking at the result.
    Dr. Kahn. You cannot have everything.
    Senator Hollings. Incidentally, I had always hoped Mr. Kahn 
had gotten his original assignment. He got in the plane, was 
headed to Washington to be the Chairman of the Federal 
Communications Commission. I was working at that time and we 
were about to welcome him as Chairman of the FCC. But it was 
allowed that Speaker O'Neil was extremely disappointed in 
President Reagan. They had rebuffed each other and the only way 
to really make it up was to take Speaker O'Neil's right-hand 
man, Charlie Ferris, and appoint him the Chairman of the FCC.
    So as you were landing to become the Chairman of the FCC, 
Charlie Ferris was appointed. So then to keep this busy mind at 
work, they appointed Dr. Kahn, who had headed up the Public 
Service Commission in New York, to the Civil Aeronautics Board. 
We listened at length about all the joys and pleasures and 
economies of deregulation.
    It is terrible. I mean, everyone agrees. That is the one 
thing Republicans and Democrats can agree on, airline service; 
it is lousy and it is costly.
    I just called and just within the last 20 minutes--you 
never can tell your schedule up here--because as I understood, 
we were going to vote tomorrow. But then I heard a rumor as I 
got to town this morning that: Wait a minute, the Republican 
colleagues all want to get off to the convention, which is 
understandable, so if we can possibly vote, if I do not hold up 
a vote tonight because I am opposed to PNTR, that if I do not 
hold it up we can vote tonight, which I am delighted to do. I 
am always willing to oblige my Chairman, because he has got to 
get that there express, whatever that thing is, the Talking 
Frankly Express or something like that, whatever. He is going 
to fill up that bus and head on down the highway.
    The Chairman. Sir, I had not planned on doing that until 
Saturday.
    Senator Hollings. Excuse me. So I said: Wait a minute; I 
would like to go in the morning. And I get the government rate, 
but I said just get the coach rate round trip. Tomorrow morning 
there is a 9:10 flight, it is not a jet, that goes to 
Charleston, South Carolina, and then get it back up here at 11 
o'clock next Monday, which is usually what I do. You know the 
price of that for my wife in coach? $896. Call it, check it 
yourself.
    Now, I came to the Congress in the sixties and we had 
National Airlines, Piedmont Airlines, Eastern, Delta, all going 
into Charlotte and serving it. At this time, Dr. Kahn, we have 
got one airline and that is US Airways. They have 89% of that 
hub.
    We will ask Mr. Klein and he will tell you, General Klein 
will tell you right now, that that is exactly the experience 
down there in Texas or the experience that they have had up 
there in Philadelphia with Northwest, where we had the 
testimony of Spirit, I think it was, that they tried to go in. 
Northwest immediately lowered the fares and put on even more 
services and then gave you the frequent flyer, which the 
newcomer is unable to do. And so they had to drop it. I mean, 
they have got a roadblock, a monopoly.
    There is not any question in my mind when I can fly. I have 
got another ticket on my desk to fly to Frankfurt from Dulles, 
Frankfurt, Germany, and back for $279. But to go down to 
Charleston, South Carolina, is $896, and then you are lucky if 
you can get there because they will keep you out on the runway, 
it is a struggle to get in a little bus to go out there. You 
have got to carry your own luggage and then drop it yourself 
and then pick it up and come in. I can do that. Sometimes, my 
wife has had knee operations, and it is difficult for her to 
carry her own luggage and that kind of thing--so it is a tough 
goal.
    All kind of delays, as you have just experienced, 
absolutely costly, and it is not working. It is a failure of 
deregulation. The comeuppance and the bottom line is the 
regulated European carriers are buying up the deregulated 
American carriers.
    Other than that, Dr. Klein, General Klein, I would 
apologize to you. I opposed, Mr. Chairman, his nomination 
because a Senator had written him a letter and I thought he 
changed his mind on the letter. I found out that he was of more 
character and abilities than that. I apologized to him 
publicly.
    You have been doing an outstanding job in my opinion. I 
have watched it closely because we have the appropriations on 
the little Subcommittee that I am Ranking Member, State, 
Justice, Commerce, and we have had the experience of those who 
did not like some of your work trying to cut the funds. 
Instead, we have been able to increase them. I hope I can 
increase them even more because of the outstanding job you have 
been doing.
    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 want to thank the Chairman for holding this 
hearing. I also want to thank Mr. Klein and Dr. Kahn for agreeing to 
appear before the Committee today. Dr. Kahn, I know, had legitimate 
concerns about the air fares that almost prevented him from attending.
    Let's start with one fact--deregulation has not given us what we 
wanted, and the conditions it was supposed to rectify are worsening. 
When we passed the Airline Deregulation Act in 1978, we were promised a 
number of results--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--
16 major hubs dominated by one carrier. New entry, real new entry is 
virtually unheard of, and people in small communities now have little 
choice in air fares (which are too high) or carriers. On top of all of 
this, we have carriers seeking to merge, creating further increases in 
industry concentration, and control over more fortress hubs, with 
virtually no promised relief for consumers.
    The proposed United-US Airways merger is supposed to give us 
better, ``seamless'' travel. What it is likely to translate into, 
however, is a shift in revenues from one carrier to another--not better 
service, not lower fares. Even if the United-US Airways deal increases 
revenues 1-2%, it would result in $300-$600 in incremental revenues to 
the merged carrier. One analyst, Goldman Sachs, indicated that ``with 
fewer hub carriers, the airlines should become more disciplined in 
capacity, marketing, and pricing plans . . . [a] reduction in the 
number of network airlines creates a significant opportunity to raise 
connecting fares from medium to large spoke cities''. We know what this 
means, and it is not good news for consumers.
    Interestingly, Goldman Sachs acknowledges that investors are now 
conscious of the fact that airline mergers may ``exacerbate service and 
labor woes''. That is precisely part of our problem here. Not only do 
we see further increases in concentration, but not surprisingly, we see 
less service. There are many risks associated with consolidation, 
including fortress hubs and the use of market power to keep out new 
entry.
    Currently, there are at least 16 hubs where one carrier accounts 
for more than 50% of the traffic. This is where the market power 
resides. For years, we have heard that actual and potential competition 
would keep fares low, and in fact that is what the fathers of airline 
deregulation envisioned. I suspect that Dr. Kahn will tell us why we 
have not gotten what we were promised, but a large part of it has to do 
with the fact that every merger ever considered was approved by the 
government, facilitating fortress hubs. As one system grew bigger, 
other carriers had to respond with their own mergers. That is a trend 
we want to end.
    Pick any hub today. GAO tell us that the hub carrier can 
effectively extract a fare premium. For example, US Airways today has 
almost 90% of the traffic at Charlotte, and the combined carrier would 
have 91%. The deal may give Charlotte better service, and more 
international connections, which I know are important to the people of 
Charlotte. What it does not do, though, is provide new competition for 
those that fly to and from Charlotte.
    We are doing what we can in Congress to encourage new entry. In the 
recently enacted FAA bill, FAIR-21, we have proposed to direct DOT to 
cease funding of mega-fortresses, unless there is some assurance that 
the airports will make every effort to provide facilities for other 
carriers, and thus help address the market power concerns. The European 
Union is considering forcing major airlines to divest up to 5% of their 
slots at Europe's busiest airports to facilitate new entry. The EU, 
however, would go to a buy-sell system for slots. The U.S. did the same 
thing back in 1985, and it was a failure.
    With respect to airports, and barriers to entry, we have asked GAO 
to give us information on the ability to get gates at some of the hubs. 
Gates are available at some hubs (Pittsburgh and Charlotte), but no one 
wants to challenge the incumbent carrier. At other airports 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 
DOT the ability to stop that.
    Mr. Klein and his office must continue to be active. They have 
challenged predatory actions by American, challenged the Northwest-
Continental deal, and now must carefully consider not only the United-
US Airways deal, but also the prospects that it will lead to additional 
deals. The DOT also must carry out its responsibilities, whether it is 
looking at competition policies, consumer policies or international 
deals. DOT has yet to issue a final set of predatory pricing 
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 well aware that we have untoward levels of 
market power--which were granted or obtained in the name of 
efficiency--which must be checked. The United-US Airways deal 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.
    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. As it stands, we are going to be continuously 
beset by the types of problems we know exist, and will continue to 
exist, absent real competition and better service.
    I look forward to the testimony of the witnesses.

    The Chairman. Senator Rockefeller.

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

    Senator Rockefeller. Thank you, Mr. Chairman.
    I listen to both the leaders of this Committee and wish, 
Mr. Klein, that they would bring the same enthusiasm to 
monopolistic, as they see it, behavior to what I call the 
problem of captive shipping with railroads. It does not seem to 
disturb either one of them as thousands and thousands of people 
are put out of work and lose income with monopolistic behavior 
by the railroads under the law, literally breaking the Staggers 
law, proceeds.
    But that is not for this morning. I wish you could get into 
that. I would love it. I would invite you. I would even help 
fund it.
    The Chairman of the Committee said that we had had careful 
deliberations on this matter. Of course we have had one 
hearing. We have not had careful deliberations. I just wanted 
to make two comments.
    One is that I thought that the putting in of the resolution 
by the Chairman and the Ranking Member of the Aviation 
Subcommittee was highly premature and prejudicial in a kind of 
a subtle political way which does not help around here, because 
you have your work to do, sir, and as the Chairman said you 
will not be able to comment on the specifics, but you do not 
even have all the paper yet. So what you will be doing is you 
will be giving your general outlines of behavioral tendencies 
that you look for, this kind of thing, which I respect. But I 
regret the introduction of that sense of the Senate resolution 
just before we take off for a recess in a year in which we have 
basically done nothing.
    Second, my view is different about this merger, and I want 
that to be very clearly understood. I have done my ``careful 
deliberations,'' more carefully than this Committee has because 
I have spent more time at it, in talking with the different 
parties--D.C. Air, United, US Airways. US Airways is in 
extremely bad financial condition. It now--as in South 
Carolina, we pay the same prices to get to Charleston, West 
Virginia, as Senator Hollings does to get to Charleston, South 
Carolina, probably minus $10 or $15.
    I do not like that, but one of the things that this does is 
it brings into some of our markets where US Air has dominated 
two carriers. In other words, we get competition for the first 
time. We get not just United, but we also get a second carrier, 
which would be D.C. Air, which would also be by its own 
definition all-regional jets, which are the salvation of my 
state.
    In this case I am looking at my state. Sometimes in my job 
I have to look at my state and exclusively at my state because 
we have the lowest per capita income and economic development 
is something we have to take pretty seriously. Highways have 
had their day. Aviation is the future. Highways are important, 
but everybody has them. Not everybody has aviation.
    Deregulation killed us, too, and my view is that this 
merger at this point holds substantially more promise for my 
state than our present situation. So that my position is 
different perhaps from some of my colleagues and I want to make 
that very, very clear, at the same time as I make clear that I 
have a thorough and complete obligation to listen to what it is 
that you have to say today and what you will be looking at as 
you get the paperwork and do your work in the months to come. I 
would like to work on it on a systematic basis, rather than 
trying to push things along prematurely.
    I thank the Chairman.
    The Chairman. Before I recognize Senator Wyden, I would--I 
am not surprised that Senator Rockefeller would criticize me. I 
am a little disappointed that he would criticize Senator 
Hollings, who has been a member of this Committee for some 34 
years. The fact is----
    Senator Rockefeller. I did?
    The Chairman. The fact is there have been five hearings 
held by this Committee on captive shipping--or captive 
shippers. The problem is that there is not consensus on the 
issue and that is why legislation has not been passed, not for 
lack of attention on the part of this Member or certainly not 
for lack of attention on the part of the distinguished Senator 
from South Carolina.
    Senator Hollings. We have got a 15-month moratorium. The 
Surface Transportation Administration has instituted a 15-month 
moratorium, upheld by the courts. I would appreciate it if we 
could have a similar situation here at the airline level.
    The Chairman. Senator Wyden is recognized.

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

    Senator Wyden. Thank you, Mr. Chairman. I am going to be 
very brief.
    I think that our country is clearly at a turning point with 
respect to the airline industry. With United looking to merge 
with US Airways, if that goes forward it is widely assumed that 
other major carriers are going to follow suit. So in effect it 
is time for this country to have a real debate about the 
prospect of a consolidated industry with just three major 
airlines serving the United States.
    I am of the view that if government is going to prevent 
consolidation it has to act soon. I think you, Mr. Chairman, 
and Senator Hollings are right on target with respect to your 
comments this morning. I am of the view that if you just have 
three airlines in this country it is hard to see how consumers 
are going to have the choices and the price competition that is 
in the public interest.
    I hope to be able to be here for most of the morning, but I 
am particularly curious about whether Dr. Kahn at the time that 
deregulation was debated, whether he would have accepted some 
version of deregulation had we known that we would be on the 
eve of having just three airlines to serve this country. I do 
not happen to think that the people of this country view three 
airlines, consolidation with just three companies, as an 
acceptable result.
    Having said that, I think we also ought to note the 
Inspector General continues to tell us that the airlines are 
not following through on their voluntary pledges, and I hope 
that very shortly we will be able to take up the legislation 
that was introduced recently to block this merger and also go 
forward and pass a real passenger rights program.
    I yield back, Mr. Chairman.
    The Chairman. Thank you.
    Senator Bryan. By the way, I would like to remind our 
colleagues we do have a vote at 11:30, so we probably would 
like to move on as quickly as we can. I thank you. Senator 
Bryan.

                STATEMENT OF RICHARD H. BRYAN, 
                    U.S. SENATOR FROM NEVADA

    Senator Bryan. Thank you. Thank you very much for holding 
this hearing.
    I was listening to our Ranking Member discuss Senator 
Cannon and the role that he played in deregulation. I occupy 
the seat held by Senator Cannon, as the distinguished Senator 
from South Carolina knows.
    I see both the pluses and the minuses. Las Vegas, which is 
my home town, has benefited enormously as a result of 
deregulation. Fairly, a couple of years ago my little daughter 
moved to Rochester, New York, and we were blessed with a 
grandchild and, as every doting grandparent, we wanted to get 
to Rochester as frequently as possible. The cost of that round 
trip fare from Washington, D.C., to Rochester, New York, which 
is about an hour and 15 minute flight, is more expensive than 
some of the rates that have been quoted from Washington, D.C., 
to Paris and back.
    Now, I do not presume to know a whole lot about the airline 
business, but I do know a little bit about geography. That is 
much, much longer. So clearly the Northeast in my opinion, not 
the area of the country that I represent, has enormously high 
air fares, and that is part of the down side that I see.
    The impact of this proposed merger that brings us here 
today is simply staggering in terms of magnitude. If this 
merger goes through, it will have revenues in excess of $26 
billion and will account for 27.4% of all of the departures 
nationwide. That is more than one out of four. As my colleague 
from Oregon alluded, it has begun to ignite the so-called 
domino effect, where mergers have been discussed between 
American and Northwest, between Delta and Continental, TWA and 
AirTran, and the prospect of being left with just three 
megacarriers I think is a real possibility.
    The impact on the hub system in the country is also 
staggering. There are six hubs in which a United-US Airways 
merger would dominate--69% of Denver's market would be this one 
carrier; in San Francisco, 59%; in Charlotte, 91%; 
Philadelphia, 71%; Pittsburgh, 88%; and at Washington Dulles, 
71%.
    You do not have to be an economist to know that this is 
going to have an enormous impact and what I apprehend, and I 
sense that from a number of my colleagues who have voiced 
opinions on this issue, there is the suspicion that ultimately 
the consumer is going to be the loser in this proposition.
    So I am very interested to hear the comments from our 
distinguished witnesses. Unfortunately, those of us on Finance 
are going to have to go to another meeting shortly. So let me 
ask unanimous consent, Mr. Chairman, that my complete statement 
be made a part of the record.
    The Chairman. Without objection.
    Senator Bryan. Again, thank you for your leadership in 
convening this hearing.
    [The prepared statement of Senator Bryan follows:]

 Prepared Statement of Hon. Richard H. Bryan, U.S. Senator from Nevada

    Mr. Chairman, thank you for holding this hearing today on an issue 
that has a great impact on the airline traveling consumers. The 
proposed merger between United Airlines and U.S. Airways has spawned a 
wave of additional attempted mergers in the airline industry. [Although 
many of these additional proposals have failed, it is extremely 
important and beneficial to the consumers that we examine the impacts 
and potential outcomes here today.]
    The proposed merger that has brought us here today is simply 
enormous. If successful, the combined airline would have revenues in 
excess of $26 billion and account for 27.4% of the departures 
nationwide. This monstrous undertaking has raised some serious 
antitrust issues that need to be addressed.
    In addition to the concerns that this one particular merger raises, 
we must also be ready for the domino effect that will come as a result 
of the United/US Airways merger. Since the announcement, the remaining 
airlines have been scrambling, at a seemingly frantic pace, to 
establish some framework for a merger to compete with this new giant.
    The avalanche of proposed mergers began with American and 
Northwest, then progressed to additional possible mergers between Delta 
and Continental, and TWA and AirTran and various other combinations, 
but none have produced a deal, yet.
    Mr. Chairman, the point is that this merger presents a threat that 
could profoundly change the industry. We are heading towards a major 
consolidation of the airline industry with the consumer getting the 
short end of the stick. To create such dominant giants in such an 
aggressive industry would be like matching up the world champion L.A. 
Lakers against the San Jose boys club basketball team, they just can't 
compete in particular markets.
    These markets that would be dominated to which I refer would be hub 
airports that have over 50% of the market by a single airline. The 
proposed United/US Airways merger would create a dominant market share 
in at least six major hub airports ranging from 59% of the traffic all 
the way up to an incredible 91% at the Charlotte hub. The airlines have 
claimed that the transaction would not result in a large increase in 
route overlap, but we must consider the size and strength of the 
airlines with whom we are dealing with.
    We have heard testimony before this Committee detailing the tactics 
used by some of the major airlines to squash the competition at some of 
these hub dominated airports. In many of the cases, the smaller airline 
who dared to enter the market found themselves competing head to head 
with major airlines only to be pushed out of the market. And the 
result, a huge increase in fares developed once the competitor left the 
market. This activity severely limits consumer choice for consumers 
traveling from or to those hub airports.
    Mr. Chairman, this is a dangerous precedent to set, especially with 
a wave of potential mergers following closely behind the one in 
question. Currently, the Department of Justice is involved in two suits 
involving similar anti-trust issues. The DOJ has challenged the 
Northwest/Continental combination as it has the possibility of 
controlling 87-100% of the market in seven locations. Similarly, the 
DOJ has filed suite against American for its actions out of Dallas-Fort 
Worth for its actions against a number of new entrants because the 
airline has used its 70% market dominance for alleged predatory 
conduct.
    It seems to me, that the United/US Airways merger falls right in 
line with the current actions the DOJ is considering. I am pleased that 
the DOJ has taken such aggressive action and hope that the proposed 
merger warrants the same, if not closer, magnitude of scrutiny in order 
to protect the consumers.
    Mr. Chairman, the proposed wave of airline mergers could result in 
a major consolidation creating just [3 mega-carriers that could wield 
an immense amount of power.] If we are not careful, the only loser in 
this deal can only be the American consumer.

    The Chairman. Thank you, Senator Bryan.
    Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you. I will be brief. 
Let me thank Mr. Klein for being here and for his public 
service.
    Dr. Kahn, I was chairman of the state airline commission in 
North Dakota and met with Alfred Kahn when he was taking the 
CAB apart in the late 1970's and had some interesting 
discussions about deregulation with him at that point.
    Mr. Chairman, I do not support the proposed merger between 
United and US Air, nor would I support a merger between 
Northwest and American that has been rumored, nor would I 
support a merger between Delta and Continental. Monopolies are 
a form of cholesterol to the free market system. They plug the 
arteries of the system. They make the system not work very 
well.
    What we have post-deregulation, I would say to Dr. Kahn, is 
major carriers having retreated into hubs which they can and 
will and do dominate, and major carriers then dominating 
regional hubs, effectively working on regional monopolies in an 
unregulated manner. You have unregulated monopolies in regional 
hubs, that is what we have.
    If you were to leave here, I have indicated to this 
Committee previously, Mr. Chairman, leave here this morning to 
fly to see Mickey Mouse at Disneyland in California, you will 
pay half as much to do that as if you were to leave here to see 
Salem Sue, which is the world's largest cow, sitting on a hill 
outside of New Salem, North Dakota. So if you want to see the 
world's largest cow, you pay twice as much to fly half as far 
as opposed to going to see Mickey Mouse.
    Now what does that say about our system? It says that 
deregulation has meant that where there is an income stream in 
big cities there is robust competition in some cases and where 
there is not an income stream in rural areas of the country you 
just pay through the nose because largely you have one choice 
of carrier and they say: Here is the way we will serve and here 
is the price you pay, and if you do not like it there is not 
much you can do about that.
    So I think this is a hearing that is timely. I appreciate 
your having the hearing. We need to review what is happening. 
We know there is less competition. Startups are hard to come 
by. One other point: You do a startup someplace and guess what 
happens? The dominant carrier goes to the travel agents and 
says: I tell you what, we will pay you to make sure you do not 
have your folks travel on the startup. We will pay you what is 
called an override, which is fundamentally anticompetitive and 
ought not be allowed in this country. You are paying travel 
agents to make sure a startup does not get the business.
    Refuse to code-share with the startup, that is the other 
thing that happens. When you were running the CAB they were 
required to code-share. Of course, that is regulation.
    But we have got a lot of problems. The proposed mergers 
mean that we would be left with three carriers. That in my 
judgment is not progress. That is a retreat on the free market 
system.
    So thanks for being here, Mr. Chairman. Thanks for holding 
these hearings. I am going to be interested to hear the 
testimony.
    The Chairman. Thank you.
    We will begin with you, Mr. Klein. Thank you, sir, for 
coming. Thank you, Professor Kahn.

 STATEMENT OF HON. JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, 
            ANTITRUST DIVISION, U.S. DEPARTMENT OF 
                            JUSTICE

    Mr. Klein. Thank you, Mr. Chairman. I would ask that my 
full remarks be submitted for the record.
    The Chairman. Without objection.
    Mr. Klein. And I will make brief introductory comments. Mr. 
Chairman, Senator Hollings, distinguished members of the 
Committee: It is a distinct pleasure to be here this morning 
and to sit next to one of my heroes from my youth, Fred Kahn, a 
man who has mixed economics and policy and politics as well as 
anybody, who truly always puts the public interest above self-
interest or private interest. We need more like him in our 
country.
    Mr. Chairman, I view this as a continuation of a colloquy 
that you, the Ranking Member, and I started a little over a 
year ago at the airport in Charleston, in fact on March 12th, 
where some of these very issues were raised. I think the fares 
were about the same to get down there as they were in the 
Ranking Member's comments this morning.
    I pledged to you then that, in terms of the Department of 
Justice's priorities, the issue of competition in the airline 
industry would rank very, very high. I think it is fair to say 
that that has been borne out. Since that time we have sued 
American Airlines on an issue that I think is important with 
respect to new startups that enter into the market. One of the 
things we have heard a lot about, obviously, is consolidation, 
but I think a critical issue, a critical issue for this Nation, 
will be new entrants into the market, who will begin to develop 
opportunities that will bring more competition, and 
particularly to some of the less populated parts of the 
country.
    We have seen some of that, for example, with respect to 
Southwest Airlines and the impact that it has had, and other 
startups as well. I want to talk briefly about that this 
morning.
    Second, of course, we did challenge the acquisition of the 
stock in Continental Airlines by Northwest Airlines, and that 
case is scheduled to go to trial later this fall.
    We obviously will pay very close attention--and I 
appreciate your remarks, Senator Rockefeller--to the detailed 
facts with respect to United-US Air. The parties are engaged. 
They will produce the documents in a timely fashion and I 
believe, as in all merger work, we need to scrutinize the 
documents carefully, we need to look at the competitive terrain 
and make sure that we do a thorough and complete analysis. This 
is obviously an important matter and it merits our significant 
and careful attention, which it will get.
    As well, we are looking into the matter with respect to 
Orbitz that some of the Committee members referred to.
    I want to make two preliminary comments and then turn to 
the policy issues. First of all, all these law enforcement 
matters are either under investigation or in court. One should 
not infer from an investigation that we will take action. We 
take action where we believe it is merited. And one should not 
infer from the fact that we are in court that we will 
ultimately prevail. We of course think we will. That is why we 
went to court. But we have distinguished and worthy 
adversaries. American Airlines has conducted itself, I think, 
professionally, as has the Northwest-Continental team, and 
obviously they as well believe in their cause. That is the 
great virtue of the American system. The courts will sort that 
out. We are very confident of the merits, but I am not here to 
talk about the specifics of those litigations today or any 
pending investigation.
    I just want to talk about what I think are a couple of 
policy issues that we need to pay careful attention to. The 
first one is one I am sure Dr. Kahn will speak to as well, the 
one I alluded to on new entry. I am of the strong belief that 
there are underserved populations in the United States that 
could be economically served to both increase the number of 
people traveling and reduce fares throughout the United States; 
and that, unfortunately, a fair number of these opportunities 
have been deterred by either predatory practices or in any case 
practices that make it impossible in the short run to sustain 
new entry and then over the long run can lead to the kind of 
regional monopolies we have heard some of the members of the 
Committee speak of this morning.
    What I wanted to show you, because we talked about this in 
South Carolina, Senator McCain, is the impact of these new 
entrants on the market, to give you something of a short-term 
moving picture. This is meant to be illustrative and it is not 
meant to in any way argue the legal merits of the case, but to 
simply show you what I think the economics of the industry 
could open up for America's public.
    Let me start with the Dallas hub, and I know this data 
simply because we brought this particular lawsuit. If I could, 
you see the three bar graphs over here. These are the fares in 
three cities. They happen to be cities we studied. They are 
illustrative, I think, of the national problem: Colorado 
Springs out of Dallas, Wichita out of Dallas, and Kansas City 
out of Dallas.
    Senator Dorgan, you mentioned this regional hub monopoly. 
This particular hub is an American Airlines hub. Now, let us 
look. Before we had a new entrant into these three markets, the 
average fares, the first in all three, are in the blue graph. 
There in Colorado Springs the average fare that consumers paid, 
business consumers, was $156.
    You had a new entrant come into the market, a new low-cost 
carrier. I believe this was Western Pacific. It drove the fare 
down for all travelers from $156 to $88. Then what happened was 
American flooded that market. They made it impossible--and they 
actually calculated how many people came off the other airline, 
the new carrier, and they made it impossible for that carrier 
economically to survive. Those are the facts we allege in the 
lawsuit. After that exit, the price went back up to $133.
    Same exact pattern in Wichita and in Kansas City. In other 
words, you are talking about prices that were almost twice as 
high both before and after; as a result of the new entry, 
prices come down.
    Now, what is more significant, if we can have the second 
chart, and this to me tells you something about the economics 
in the market and unserved demand. Look at the number of people 
that flew this route in each of the three cities before, 
during, and after the entry. Start with Colorado Springs. We 
had on a monthly basis approximately 3,700 people flying before 
the low-cost carrier entered. After the new entry, that went up 
to 20,000 people a month for Dallas-Colorado Springs. You are 
talking about a vast change in the number of people flying. Of 
course, you saw before that the price goes down. Then it came 
down to somewhere in the neighborhood of about 9,000 after the 
low cost carrier exited the market.
    We see the same kinds of changes in Wichita and Kansas 
City, perhaps not quite so dramatic. In Wichita it went from 
4,000 to 11,000, back down to 8,500. So you are talking about, 
on a monthly basis in and out of that particular hub to that 
city, several thousand people. The same thing again in Kansas 
City, where you are almost talking about a one-third increase 
in output.
    So this is to me a real consumer issue. I mean, the people 
who live in the cities, the businesses that try to flourish in 
these cities, depend upon this, and I think sound policy, as 
Fred Kahn has said, will facilitate entry into the market. I 
think those issues will be litigated in our case, but I do 
think in any event as a matter of sound policy this pattern is 
going to be repeated throughout the United States and we have 
to create the opportunities for appropriate entry.
    Second of all, as I said, we now have a series of major 
airlines that are at least contemplating economic 
reorganization and consolidation. Obviously, in an industry 
that is so vital and sensitive to this Nation, the Department 
of Justice is going to have to give this very careful scrutiny.
    In the 1980's there were two key mergers at a time when the 
Department did not have jurisdiction, but could only make a 
recommendation. There were two key mergers, one in the hub out 
of St. Louis and one in the hub out of Minneapolis, where the 
Department opposed the mergers. Unfortunately, the Department 
of Transportation approved them, and I think that is 
competition we lost in those particular hubs. That was 
unfortunate, and I can assure this Committee, without in any 
way prejudging the merits, that certainly I and my staff are 
fully prepared to engage with the parties. We will give this 
merger and any subsequent mergers in this industry very, very 
careful scrutiny.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Klein follows:]

               Prepared Statement of Hon. Joel I. Klein, 
  Assistant Attorney General, Antitrust Division, U.S. Department of 
                                Justice

    Mr. Chairman and Members of the Committee, I am pleased to appear 
before you today to discuss recent developments affecting competition 
in the airline industry and the role that our antitrust laws play in 
assuring that consumers receive the benefits of competition. Today's 
hearing takes place against a backdrop of recent reports regarding 
proposed or possible mergers involving some of our nation's largest 
airlines. While the Antitrust Division cannot comment on the specifics 
of any matter that it currently has under review, we fully understand 
the Committee's interest in knowing generally how the Division analyzes 
airline mergers and investigates other possible antitrust violations in 
the airline industry.
    In my testimony today, I will review the circumstances that have 
brought us to the present state of competition in the airline industry, 
as it has evolved around the hub-and-spoke system, and identify 
competitive issues that are presented by that system. I will discuss 
the cases the Division has brought in recent years against 
anticompetitive airline practices under the Sherman Act. Then, I will 
explain how the Division evaluates proposed mergers between air 
carriers.

Evolution of Competition in the Airline Industry
    During the first part of the 20th Century, Congress enacted a 
number of statutes that subjected major industries to substantial 
governmental regulation. Building largely upon the statutory regime 
first enacted in 1887 to regulate railroads, various industries, 
including other transportation industries such as trucking and 
airlines, were subjected to restrictions with respect to markets they 
could enter or exit, prices they could charge, and acquisitions they 
could make. In most instances, those decisions were subject to prior 
review and approval by an administrative agency, such as the Interstate 
Commerce Commission or what became the Civil Aeronautics Board 
(``CAB'').
    While the premise of such regulation was that regulatory agencies 
could restrain anticompetitive behavior by regulated industries and 
thereby protect the public interest, regulated industries and the 
public became dissatisfied with regulation. Regulated companies balked 
at having to obtain regulatory approval every time they wanted to 
change service or alter price, and consumers complained that agencies 
often seemed to reflect the views of the industry they regulated, 
rather than the public interest.
    This dissatisfaction culminated in a series of regulatory reform 
initiatives in the 1970s that reflected a congressional determination 
that consumer welfare could be enhanced by reducing regulation and 
allowing consumers--through their buying decisions in the marketplace--
to identify products and services they desired and the price that they 
were willing to pay. Thus, Congress enacted a number of deregulatory 
statutes that curtailed regulation and allowed formerly regulated 
industries far greater latitude in determining markets to serve and 
prices to charge.
    Following on the heels of a number of deregulatory experiments 
conducted by the CAB, Congress enacted the Airline Deregulation Act of 
1978, which moved the domestic air transportation industry from 
government regulation to a new era of competition. Carriers were 
permitted to enter and leave domestic markets without governmental 
authorization and to set prices and conditions of service. Such 
behavior would thereafter be subject to the antitrust laws, while the 
CAB retained jurisdiction over mergers and acquisitions and its 
authority to prohibit unfair practices.
    Industry responses to deregulation were swift. While the prior 
regulatory regime had resulted in carriers largely providing point-to-
point service, with deregulation they began to consolidate their 
operations at airports, forming what came to be known as hubs. With a 
hub system, carriers could combine ``local'' passengers (those 
originating at or destined to the hub) with ``connecting'' passengers 
(those not originating at or destined to the hub but traveling via the 
hub) on the same flight. In this manner, carriers found they could 
serve more cities from their hubs (known as ``spoke'' routes) and offer 
greater frequency of service with their fleet of aircraft than had been 
possible with point-to-point service.

Competitive Issues Presented by the Hub System
    The hub system has become the dominant business model for most of 
the major domestic airlines. Such a hub system provides some important 
benefits for local and connecting passengers. Local passengers benefit 
because the hub carrier will operate many spoke routes, which means 
that passengers will be able to obtain nonstop service to many cities. 
Also, because the hub carrier combines local passengers with a 
substantial number of connecting passengers on its flights, it is 
likely to offer more flights from the hub to any spoke city than other 
carriers (with the possible exception of a spoke city that is another 
carrier's hub). Connecting passengers benefit not only from the 
frequency of flights, but also from the ability to choose among routing 
alternatives offered by various airlines. A passenger seeking to travel 
from Washington to San Diego, for example, may find that service is 
offered by several carriers, each via its own respective hubs.
    Notwithstanding these benefits, the dominance of spoke routes by 
hub carriers gives rise to concerns about the exercise of market power 
by those carriers on those routes. There will usually be at least two 
carriers providing nonstop service on spoke routes that connect two 
carriers' hubs, but on other routes there may well be no carrier 
providing nonstop service other than the hub carrier. Connecting 
service may be a reasonable alternative for some passengers, especially 
for those leisure passengers willing to endure the longer travel time 
that connecting service usually entails, but the absence of competing 
nonstop service can be especially problematic for business passengers, 
who often are in a hurry and generally place a higher value on 
minimizing travel time. Hub carriers can identify such ``time-
sensitive'' passengers and discriminate in the fares they charge them. 
Studies have shown that carriers generally can, and do, charge higher 
fares on hub routes, where they face less competition, than on routes 
that are more competitive.
    Once an airline has established a hub at an airport, several 
structural and strategic factors combine to present high entry barriers 
to any other airline that might try to enter spoke routes emanating 
from that hub. By providing more departures to more destinations, the 
hub carrier can attract a disproportionate share of the hub airport's 
passengers. This happens for several reasons, including the preference 
of many travelers to use the carrier with the most flights in a city 
pair (so that the passenger can change departure times if travel plans 
change), marketing programs (such as frequent flyer programs) that 
create loyalty incentives for consumers to concentrate their travel on 
the dominant airline in their home city, and travel agent commission 
practices that create incentives for travel agents to encourage their 
customers to use the hub carrier. A hub carrier often also enters into 
contracts with local businesses that provide incentives for the 
businesses to concentrate their travel on the hub carrier. All of these 
factors serve to discourage entry into a hub carrier's spoke routes, 
especially by other carriers with similar cost structures.
    There is little dispute that hub carriers dominate service at their 
respective hubs. Today, hub carriers often account for more than 70 
percent and sometimes for more than 80 percent of passengers at their 
respective hubs. There is no reason to think this situation is likely 
to change in the short run.
    Depending on the specific facts involved, there are times when the 
hub system can present competitive issues under either Section 1 or 
Section 2 of the Sherman Act.
    Section 1 of the Sherman Act prohibits contracts, combinations, and 
conspiracies that restrain trade. Price-fixing agreements and market 
allocation agreements are examples of the kinds of collusive conduct 
that are particularly injurious to consumers. One of the most 
significant section 1 cases that the Division has recently brought 
involved the pricing practices of airlines.
    In 1992, the Division sued eight airlines and their tariff 
publishing company for unreasonably restraining trade in violation of 
section 1. The complaint alleged that the carriers had used 
computerized fare dissemination services to negotiate fare changes, to 
trade fare changes in some markets for changes in others, and to 
exchange assurances concerning implementation of those changes.
    Although each of the major domestic carriers offers service in 
thousands of city pair markets, the Division found that carriers had 
varying preferences as to the prices that should be charged in any 
particular city pair. Preferences may differ for any of a number of 
reasons, including the importance of a route to the carrier's hub 
operations. A carrier might be very interested in the fare level in 
city pair A-B if it operated many daily frequencies, and be less 
interested in the fare level in city pair C-D if it operated only one 
or two. Yet, city pair C-D might be very important to another carrier, 
and city pair A-B less so. The Division found that the airlines had 
used computerized fare dissemination systems to work out trades: ``I'll 
go along with an increase in A-B if you go along with an increase in C-
D.'' A consent decree now prohibits certain practices that the airlines 
had used to reach these kinds of agreements on fares.
    Section 2 of the Sherman Act prohibits monopolization and attempts 
to monopolize. Unlike section 1, which requires some form of agreement 
between two or more persons, section 2 focuses on single firm conduct. 
Generally speaking, even a firm with a dominant share of a market does 
not violate section 2 unless it engages in some form of exclusionary 
conduct. The law does not penalize a person for obtaining a monopoly 
through superior skill, foresight, and industry. However, if a person 
seeks to maintain a monopoly through exclusionary conduct, or if there 
is a dangerous probability that a person will obtain a monopoly through 
exclusionary conduct, the Division may sue under section 2.
    In the airline industry, concerns have been expressed that hub 
carriers engage in exclusionary practices to keep low-cost carriers 
(LCCs) out of their hubs. The Division takes these concerns very 
seriously, because LCCs may offer the only realistic prospect of 
competition to hub carriers in precisely the markets that suffer from a 
lack of competition. The Division has found that major carriers are not 
likely to challenge another carrier at its hub by offering point-to-
point service (except on a spoke route from their own hubs). The 
advantages that a hub carrier enjoys at its hub make entry of that sort 
unlikely. But LCCs, with their lower cost structures, may be able to 
offer service on a hub carrier's spoke routes notwithstanding the hub 
carrier's advantages.
    A hub carrier may therefore have a strong incentive to engage in 
predatory practices to drive LCCs out of its hub markets and to send a 
strong signal to others that might consider entry that the same 
response awaits them if they try. The airline industry has 
characteristics that may make such a strategy particularly attractive 
to a hub carrier. If an LCC begins service on a hub carrier's spoke 
route and the hub carrier engages in predatory conduct that drives the 
LCC out, the hub carrier has benefited in many ways. Not only has it 
driven the LCC out of that particular route, but it has also probably 
discouraged that LCC from expanding to serve other cities from that 
hub. And not only has this LCC been driven away, but all other LCCs 
contemplating entering that hub will see what fate awaits them if they 
dare to venture in. Thus, predatory practices directed at a single LCC 
in a single spoke route can protect the hub carrier's ability to charge 
high fares in other spoke routes it dominates.
    The Division has filed suit against American Airlines alleging 
monopolization and attempted monopolization at its Dallas/Ft. Worth hub 
in connection with predatory practices directed at LCCs. The attached 
charts show what happened in some of the markets involved. When the LCC 
entered the market, fares declined, and the number of traveling 
passengers went up substantially. After the LCC exited the market, the 
opposite occurred: fares went up, and the number of traveling 
passengers fell.
    The case is still in discovery, and trial is scheduled for next 
spring. We view this as a very important case, one that can have a 
significant impact on airline competition and on the Nation's 
consumers.



Evaluating Mergers and Acquisitions Among Air Carriers
    Let me now turn to how the Antitrust Division evaluates proposed 
mergers and acquisitions among air carriers, starting with some 
historical background.
    During the first years following deregulation, antitrust 
jurisdiction was divided between the Division and the CAB. The Division 
could--and did--prosecute airlines for price fixing and other 
violations of the Sherman Act, but the CAB retained sole jurisdiction 
to review mergers and acquisitions. The CAB was presented with a number 
of proposed mergers in the late 1970s and into the 1980s. When Congress 
sunset the CAB in 1985, it temporarily transferred merger review 
authority to the Department of Transportation (``DOT''). In ensuing 
years, the Division submitted comments to the DOT in some merger 
proceedings and supported many of the DOT's decisions. But the DOT 
approved two mergers that the Division opposed: the acquisition of 
Ozark by TWA in 1986 and the acquisition of Republic by Northwest in 
the same year. Both of those mergers involved carriers that operated 
hubs at common airports; the carriers involved in each merger provided 
the only nonstop service in many city pairs. The DOT predicted that 
entry or the threat of entry by other carriers into the affected 
markets--potential competition--would prevent non-competitive 
performance by the merged entities. A subsequent study by Division 
economists found that potential competition had not prevented fare 
increases and service reductions.
    The DOT's jurisdiction over mergers terminated effective December 
31, 1988, after which time the Division assumed responsibility for 
airline merger review--although we continue to work closely with the 
DOT, given its substantial expertise with respect to the airline 
industry. Since then, there have been very few mergers proposed among 
the major airlines.
    However, in 1998, Northwest, then the fourth-largest U.S. air 
carrier, sought to acquire a controlling interest in Continental, then 
the fifth-largest U.S. carrier. The Division has challenged the 
acquisition, and trial is scheduled for later this year.
    In addition to challenges to mergers and acquisitions of stock, the 
Division has also challenged acquisitions of assets that it concluded 
would be competitively problematic. The Division has moved to block 
acquisition of gates or slots when it thought such acquisitions would 
lessen competition, as demonstrated by its challenges to Eastern's 
proposal in 1989 to sell gates to USAir at the gate-constrained 
Philadelphia International Airport and Eastern's proposal in 1991 to 
sell slots and gates at Reagan Washington National Airport to United.
    For most of the 1990s, airline acquisition activity centered on 
acquisition of international route authority. Here, the Division shares 
review responsibility with the DOT, which has jurisdiction over 
transfers of international route authority. Such authority is literally 
an ``admission ticket,'' since many international bilateral aviation 
agreements limit the number of U.S. carriers that can provide service 
to a foreign country, and service cannot be provided absent such 
authority. Financially ailing domestic carriers with substantial 
international route authority, such as Pan Am, Eastern, and (at the 
time) TWA, sold route authority to other U.S. carriers. The Division 
reviewed these transactions as well and challenged some of them, such 
as the proposed sale by TWA of its London route authority to American.
    Recently, attention has turned back to the domestic scene, with the 
announcement of a proposed acquisition by United of US Airways and 
speculation about mergers involving other major U.S. carriers. The 
Division has announced that it will review the United-US Airways merger 
carefully, as it will any merger between major U.S. carriers. 
Meanwhile, there are reports of negotiations between other major 
airlines.
    In reviewing airline mergers, the Antitrust Division applies 
Section 7 of the Clayton Act, which prohibits the acquisition of stock 
or assets ``where in any line of commerce or in any activity affecting 
commerce in any section of the country, the effect of such acquisition 
may be substantially to lessen competition, or to tend to create a 
monopoly.'' Section 7 reflects the congressional judgment that merger 
enforcement should be able to arrest anticompetitive mergers in their 
incipiency, to forestall the harm that would otherwise ensue but be 
difficult to undo. Thus, merger enforcement standards are forward 
looking and, while we often consider historic performance in an 
industry, the primary focus is to determine the likely competitive 
effects of a proposed merger in the future.
    A major U.S. carrier seeking to merge with or acquire another 
carrier must provide the Division and the Federal Trade Commission 
(``FTC'') with notice of the proposed transaction pursuant to the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (``HSR''). Although the 
Division and the FTC share merger enforcement responsibility as a 
general matter, the Division is the agency that reviews air carrier 
mergers. The initial HSR filing contains certain basic information, 
which the Division uses to determine whether more extensive review is 
appropriate.
    The initial waiting period under HSR is usually thirty days. If the 
Division concludes during that period that the merger is not 
competitively problematic, the HSR waiting period is allowed to expire 
or may even be terminated early. The parties are then free to proceed, 
subject, of course, to any other required regulatory approvals. 
However, if the Division cannot resolve its competitive concerns within 
that period, it can issue a request for additional information, known 
more commonly as a ``second request,'' which defers the ability of the 
merging parties to consummate their transaction until twenty days after 
they have provided the Division with the requested information. During 
this time, the Division will frequently seek or receive information 
from other persons interested in the merger; these may include 
suppliers, customers, and/or industry specialists. We work closely with 
the DOT, which obviously has substantial expertise with respect to the 
airline industry.
    It is not uncommon during this process for the parties to have 
substantial contact with the Division. The process is confidential and, 
unlike the procedures in some administrative agencies, competitors do 
not have access to the merging parties' submissions. Sometimes parties 
are able to demonstrate that the merger is not competitively 
problematic, in which case the waiting period expires or is terminated 
early; again, the parties may then proceed, subject to other required 
approvals.
    If the Division concludes, however, that the merger violates the 
law, the Division can attempt to stop the merger by filing a complaint 
in federal court and persuading a judge to enter an order prohibiting 
the parties from consummating it. It is not uncommon, however, for the 
parties to make a proposal to address the competitive concerns that the 
Division has identified, in which case some form of agreed-upon relief 
may resolve the problem while still allowing the parties to proceed 
with the overall transaction. In those circumstances, the Division 
ordinarily files a complaint along with a consent decree that embodies 
the relief in the form of an order entered by the court. There are 
times, however, when the competitive problem cannot be cured by any 
form of relief other than outright prohibition, in which case the 
Division is likely to seek a preliminary injunction to prevent 
consummation of the merger pending completion of judicial proceedings 
and then a permanent injunction prohibiting the merger altogether.
    The Division looks for relief that will fully address the 
competitive problems presented by the merger, which almost always means 
seeking some form of divestiture. Parties sometimes propose conduct 
remedies--usually some form of behavioral restrictions--but these are 
generally unsatisfactory for a number of reasons. First, they are often 
difficult to draft with precision. Second, they require continuing 
monitoring by the Division. Third, they cannot be enforced without 
resort to the court on a continuing basis. Finally, they have often 
proven to be insufficient to remedy the anticompetitive problems 
presented by a merger.
    The particular form of divestiture necessary to solve a competitive 
problem will vary from merger to merger and involves many inquiries. 
First, it is essential that the assets to be divested are sufficient to 
allow a purchaser to be an effective competitor over the long term, 
i.e. to replicate the competition that would otherwise be eliminated in 
the markets of concern. Sometimes the necessary assets are easy to 
identify--as, for example, when a party agrees to divest a stand-alone 
business entity such as a subsidiary or a pre-existing operating 
division. In those instances, the sufficiency of the assets can be 
evaluated in light of historical performance of the business unit in 
the marketplace. In other instances, parties propose divestiture of 
specific assets, sometimes even combining some assets from each of the 
parties to the merger. It can be difficult to assess whether such 
assets are sufficient to allow the purchaser to compete on a meaningful 
basis because there is no track-record to gauge the adequacy of the 
asset package. A recent study of antitrust divestitures by the FTC 
``suggests that divestiture of an on-going business is more likely to 
result in a viable operation than divestiture of a more narrowly 
defined package of assets,'' although ``divestitures of selected assets 
can succeed.''
    Second, the Division will look carefully at the prospective 
purchaser. In most instances, the proposed purchaser is not selected 
until after the court has entered an order directing the nature and 
form of the divestiture, but occasionally parties to a merger will 
identify a proposed purchaser to the Division during the course of the 
investigation. In either case, the Division will review the experience, 
financial resources, and business plan of the purchaser, all in an 
effort to determine whether the purchaser is likely to solve the 
competitive problem presented by the original merger.
    In performing this review, the Division considers the terms of the 
proposed contract and any other arrangements between the merged entity 
and the purchaser to determine whether the purchaser will be an 
independent competitor. The Division's form consent decree provides, 
for example, that the merged entity cannot finance the sale to the 
purchaser. Similarly, the Division is generally skeptical about supply 
contracts between the merged entity and the purchaser, as well as any 
other arrangements that tie the purchaser to the merged entity, 
although there may be circumstances in which such arrangements are 
warranted. Our concern is that, if the purchaser is dependent upon the 
merged entity for critical products or services, there are two risks: 
(1) the merged entity may seek to influence the behavior of the 
purchaser by manipulating price or supply of such products or services 
and (2) the purchaser may pull its competitive punches for fear of 
antagonizing the merged entity.
    The Division has, on occasion, refused to approve a purchaser 
unless and until changes have been made in the terms of the divestiture 
to assure that the purchaser will be viable and independent. While the 
Division does not (and should not) seek to ensure the success of a 
purchaser, it must be confident that the divestiture will remedy the 
competitive problem that it is intended to fix.
    The Division and the FTC have jointly developed Merger Guidelines 
that describe the substantive considerations for analyzing mergers. 
``The unifying theme of the Guidelines is that mergers should not be 
permitted to create or enhance market power or to facilitate its 
exercise.'' Merger Guidelines 0.1. As suggested by the language of 
Section 7 itself, we usually start by seeking to define the relevant 
product or service markets (``line of commerce'') and geographic 
markets (``section of the country'') in which the parties to the merger 
compete, and then determine whether the merger would be likely to 
lessen competition in those markets.
    The purpose of this inquiry is to ascertain whether, with respect 
to a product or service offered by the merging parties, there are 
alternative products and services to which customers could reasonably 
turn if it were assumed that the merging parties were the only 
suppliers of the product or service and sought to increase prices. Once 
relevant markets are defined, we look at various factors in order to 
determine whether the merger is likely to have an anticompetitive 
effect.
    In performing this analysis, the Division considers both the post-
merger market concentration and the increase in concentration resulting 
from the merger. As a yardstick for concentration, we utilize the 
Herfindahl-Hirschman Index (``HHI''), which is calculated by summing 
the squares of the individual market shares of all the participants. 
The Division will presume that mergers in highly concentrated 
industries that produce more than a small increase in concentration are 
likely to create or enhance market power or facilitate its exercise, 
unless other factors, such as the prospect of entry by other firms, 
make that unlikely.
    We apply this basic approach to analysis of air carrier mergers. In 
this industry, the definition of product/service market and geographic 
market converge: relevant airline markets are likely to consist of 
scheduled airline service between a point of origin and a point of 
destination, generally referred to as city pairs. This market makes 
intuitive, as well as economic, sense. A passenger desiring to fly from 
Washington to San Francisco for a business meeting or a vacation is 
unlikely to regard a flight from Washington to Minneapolis as a 
reasonable alternative in the event the fare from Washington to San 
Francisco is increased. Thus, we should be concerned about a merger 
that significantly raises concentration levels in city pair markets.
    The relevant market may, however, be narrower than all scheduled 
airline service in a city pair. Carriers can serve a city pair market 
on a connecting basis or a nonstop basis. If the only available service 
offered by carriers in a city pair is connecting service, there may be 
various routes that passengers regard as reasonable alternatives and 
from which they will choose based on fare, elapsed travel time, and 
other factors. However, there are many city pairs that are served by 
some carriers on a nonstop basis and others on a connecting basis, 
which poses the following question: is a passenger who is able to take 
a nonstop flight likely to regard connecting service as a reasonable 
alternative, such that he or she would switch from nonstop service 
offered by one carrier to connecting service offered by another carrier 
if the first carrier raised its fare?
    Chances are that passengers traveling for leisure--on vacation 
perhaps--are more likely to consider switching; their demand is said to 
be more elastic. However, passengers making business trips are 
significantly less likely to regard connecting service as a reasonable 
alternative--they are often in a hurry and may place a higher value on 
getting to their destination in a hurry--so that a carrier offering the 
only nonstop service has power to raise fares without losing these 
passengers to another carrier's connecting service. Thus, there may be 
circumstances in which a merger will be competitively problematic 
because of its impact on nonstop service in city pair markets, even if 
other carriers provide service in those markets on a connecting basis.
    Therefore, in considering the antitrust implications of a 
particular merger, the Division looks at the effect in all city pair 
markets served by both of the carriers involved in terms of (1) nonstop 
service and (2) nonstop and connecting service. We have found--not 
surprisingly, given the operation by carriers of hubs in the post-
deregulation world--that the mergers most likely to be problematic are 
those between carriers with hubs at the same airport or at airports in 
the same metropolitan area. These carriers are likely to serve many of 
the same city pairs and, especially in spoke markets, they may be the 
only two carriers, or two of a very small number of carriers, providing 
service.
    That is not to suggest, however, that mergers between carriers that 
do not have overlapping hubs may not also present problems. Carriers 
with hubs in nearby cities are often the dominant carriers--usually on 
a connecting basis--for a significant number of city pairs in their 
region. And even when carriers' hubs are substantial distances apart, 
it is often the case that they are the only two carriers providing 
nonstop service between their respective hubs.
    The Division has challenged, for example, the acquisition by 
Northwest of a controlling interest in Continental, even though the 
carriers do not operate hubs at the same airports. Our complaint 
alleges that the acquisition would lead to higher ticket prices and 
diminished service for millions of passengers, especially those 
traveling on routes dominated by the two airlines. Northwest and 
Continental are each other's most significant competitors--and 
sometimes the only competitors--for nonstop airline service between 
cities where they operate their hubs.
    Once overlapping city pairs have been identified, the Division 
looks at the number of other carriers serving each of the markets and 
at the nature of that service, often by resorting to data that carriers 
report periodically to the DOT. This allows the Division to calculate 
market shares and focus further analysis on those city pairs in which 
pre-merger concentration levels suggest that the post-merger structure 
would be conducive to the creation or enhancement of market power.
    As the Merger Guidelines indicate, however, the analysis does not 
end there. Pre-merger market shares are a useful tool for predicting 
future market shares of the incumbents in a market, but they do not 
take account of the possibility of entry by additional competitors. The 
prospect of potential competition can constrain the ability of 
incumbents to raise price or reduce output below a competitive level.
    Indeed, the possibility of potential competition was the linchpin 
for many of the DOT's decisions approving mergers between carriers. 
Potential competition, it was said, could be relied upon to discipline 
carriers, even those with dominant market shares: if a dominant carrier 
sought to raise fares above competitive levels or reduce service below 
competitive levels, new carriers could easily enter, especially if they 
already had some operations at the affected airports. Airplanes were 
the quintessential mobile asset, it was said, and ground facilities 
could be easily leased or subleased. Knowing that noncompetitive 
behavior would attract entry, it was claimed that dominant incumbents 
would price competitively and offer competitive levels of service. 
Hence, the DOT reasoned that market shares--and the presumptions of 
market power that accompany them--were of relatively little use in 
airline merger analysis. The airline industry became the poster child 
for contestable market theory.
    The Division does not subscribe to this entry analysis. It simply 
does not conform to the facts in a post-deregulation world consisting 
of hub airports. For all of the reasons I mentioned earlier, hub 
economics are powerful. In these circumstances, carriers with 
comparable cost structures to the hub carrier generally find it 
unattractive to take on the hub carrier head-on. Entry by a major 
carrier on a point-to-point basis into another carrier's hub has become 
very much the exception. Thus, the hub carrier dominates city pairs it 
serves directly from its hub, except routes to cities that are hubs for 
other carriers, in which case the two carriers providing hub service 
dominate. And without substantial actual competition, hub carriers 
charge higher fares to local passengers than they do in more 
competitive markets.
    This does not indicate that entry into a carrier's hub is 
impossible. Carriers with low costs (known as low-cost carriers or 
``LCCs'') may be able to enter profitably, even with point-to-point 
service. But such entry has tended to be gradual and limited. Under our 
Merger Guidelines, the Division considers whether entry into the 
affected markets is so easy--in the sense that it would be timely, 
likely, and sufficient in its magnitude, character, and scope--that it 
will likely deter or counteract the anticompetitive effects. For a 
merger between major air carriers with substantial overlaps in markets 
in which they are the dominant providers of service, it is unrealistic 
to expect that the prospect of potential competition can fully address 
the competitive concerns.
    Finally, the Division will consider and take into account airline-
specific business practices and characteristics that can affect merger 
analysis, especially those that differ from most other industries. 
Airline fare data is available instantaneously not only to consumers, 
but also to the airlines themselves, which can act as a disincentive to 
fare reductions. Airlines frequently propose general or system-wide 
price increases, which may be more likely to ``stick'' as the number of 
major carriers diminishes. Carriers have developed loyalty programs 
that tie passengers and travel agents to them at their hubs, making 
entry into those hubs more difficult. And airlines apply sophisticated 
computer modeling techniques and ticketing restrictions to identify 
passengers to whom they can charge higher fares, a form of price 
discrimination. The Division will consider these and other factors in 
seeking to determine whether any proposed merger threatens to 
substantially lessen competition.

Conclusion
    Mr. Chairman, competition in the airline industry is critical for 
the millions of people who depend on air travel in their business life 
and in their family life. If the Division concludes that hub carriers 
are engaging in collusive or monopolistic conduct, or that any proposed 
air carrier merger threatens to deprive consumers of the benefits of 
competitive air service, I assure you that the Antitrust Division will 
take appropriate enforcement action.
    Mr. Chairman, this concludes my prepared remarks. I will be happy 
to answer any questions that you or other members of the Committee may 
have.

    The Chairman. Thank you, Mr. Klein.
    By the way, I think the competitor Western Pacific later 
went out of business; did they not?
    Mr. Klein. Several of these have gone out of business, 
because what happens is that the dominant carrier essentially 
floods the market and they then sell you a Cadillac for the 
price of a Chevrolet. As soon as they take the Chevrolet out of 
the market, they raise the price back to the prior levels. That 
is what I think the problem is.
    The Chairman. Literally driving them out of business.
    Mr. Klein. In that case specifically, yes, sir. But that is 
not unique. That has happened quite frequently.
    The Chairman. Professor Kahn, we always greet you with 
affection and appreciation and respect. I know that all too 
often this Committee has called on you for advice and counsel, 
and we appreciate the fact that you have made yourself 
available over the years. I thank you for being here today.

   STATEMENT OF ALFRED E. KAHN, PH.D., ROBERT JULIUS THORNE 
  PROFESSOR OF POLITICAL ECONOMY EMERITUS, CORNELL UNIVERSITY

    Dr. Kahn. Thank you, Mr. Chairman.
    The Chairman. Would you pull the mike up.
    Dr. Kahn. Am I audible?
    I am sure of course it is customary for people appearing 
before committees such as these to say that they are honored to 
do so. I am sure half the time they are lying.
    [Laughter.]
    The Chairman. At least.
    Dr. Kahn. I am not lying. I regarded your invitation to 
appear and to appear with Mr. Klein as a command, and of course 
I am delighted to be here.
    I will not spend any time now assessing the results of 
airline deregulation. There may be an opportunity to do that 
later. I do think we should recognize that if a comparison of 
some relatively short distance fares with long distance fares 
produces such results as the $279 to Munich and the $700 to 
South Carolina, remember, we produced the $279 to Munich, too.
    But I will set that aside. There was never any question in 
my mind that as we deregulated the airlines the antitrust laws 
and other policies bearing on competition would become 
progressively more important. I think there have been 
lamentable failures to apply the antitrust laws to mergers in 
the past. I am delighted to see that this Department of Justice 
is going to examine many of those.
    There are at least three headings of major antitrust 
issues, about all of which--well, about two of which I have 
testified at some length. I have sent you a letter. I have 
testified before the antitrust committees and the House 
Judiciary Committee. One is the issue of predatory pricing or 
predatory responses, and I want to use the word also unfairly 
exclusionary responses in order to emphasize that the 
Department of Transportation also has jurisdiction in this 
area, just as the Federal Trade Commission has concurrent 
jurisdiction with the U.S. Department of Justice in the rest of 
the economy.
    So I applaud the efforts of the Department of 
Transportation. I think this is a real problem. Getting rules 
that are both correct and enforceable is extremely difficult. I 
have in fact made some proposals in past testimony to other 
committees and would be happy to put them in the record.*
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    * The information referred to was not available at the time this 
hearing went to press.
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    So number one, predation or exclusionary conduct. Second, 
of course, mergers. I do not have any wisdom to add to the 
letter I sent you about the United Airlines merger. I do think 
in our approaches to these mergers it is important to take into 
account the effect on potential competition, upon which we 
relied very heavily in deregulating and depending upon 
competition. That is particularly with respect to the most 
troublesome aspect of the performance of the airlines, which is 
the 6% of all travel--please bear that in mind; it is 6% of all 
travel--that is at full fares.
    While the average fares have since deregulation, inflation 
adjusted, gone down 40%, full fares, paid by only 6% of the 
travelers, full fares have gone up, inflation adjusted, by 70%. 
So that is why we are particularly concerned, as Mr. Klein has 
said, on entry to challenge those high fares and making sure 
that it is not subject to predatory responses.
    In the case of the United merger, I have not made up my 
mind. I do not know enough of the facts about the merits of the 
merger. But I do, as I emphasized in your letter, point out 
that potential competition, the presence of somebody at one hub 
or another end of a journey but not yet on the particular 
route, is a disciplining factor. To the extent that United's 
union with US Air eliminates that potentiality of competition, 
that has to be taken into account. In particular, if, as I 
understand to be the case, United feels strongly that it needs 
a strong hub in the Northeast, just as American does, well, 
that means to me that it is a potential competitor of US Air 
and that the consumer might be better served by saying: If you 
do not buy the only other hub in the Northeast, build your own. 
So it is that potential competition that is also embraced, or 
should be, by the antitrust laws.
    The third subject has not been mentioned and I have only 
become aware of it, and again I assure you I have not made up 
my mind about it, but I am sure that the Department of Justice 
will be paying attention to it. That is the joint venture of 
all the major airlines to set up their own collaborative web 
site for information and booking of tickets, the Orbitz case.
    Now, it is certainly arguable that only with an 
industrywide agreement to file all the fares, including all 
discount, all available fares, can you get the kind of 
universal useful means to people who are price conscious and 
want to use the Internet, and that as reasonably connected with 
that joint venture it might be argued that the members all have 
to agree then that they will give all their cheap fares to that 
Orbitz venture.
    In terms of the antitrust laws, it might be argued that 
this is a reasonable joint venture and that reasonably 
ancillary to that is an agreement where everybody will supply 
all their fares to it.
    But the other side of that coin that I think has to be 
looked at very carefully is what happens to the willingness of 
major carriers to compete with one another if they must by 
agreement disclose all their secret discounts, because a large 
part of competition consists in big buyers or big distributors, 
like Travelocity and, what is the other, Expedia, making 
special deals with airlines and then pushing their discount 
sales.
    So number one, that is a real question in my mind whether, 
even if their intentions are the best in the world, simply to 
compete with other methods of distribution--and travel agents 
do not deserve protection from competition, so you can say this 
is competitive and provides a more perfect market. But what 
will it do to their willingness to compete with one another 
when they must disclose every discount they give?
    Second, you want to ask the question, what about the 
competition of low-fare carriers? What do they feel about this? 
The organizers of Orbitz say that they will all be able to list 
their flights on equal terms, but that also means that they 
then are required to disclose all discount sales. So I would 
have the Committee, if you look into this, talk to those low-
fare carriers.
    I observe that Southwest is opposed to the venture. Now, 
you may say Southwest is Southwest, it is unique and it uses 
its own web site. But I think there is at least a strong 
possibility that the other small airlines will feel that they 
have to join the venture in order to get their flights listed, 
but it will deny them one of the major methods by which they 
compete, by making special deals with other comprehensive web 
site agencies like Travelocity.
    So we do have these three areas, and of course there are 
others, bearing on the issue of hub dominance, about which we 
are all concerned. I should point out that it has clearly been 
demonstrated that there is a premium on fares in and out of 
hubs on medium flights that originate or terminate at the hub. 
Competition in the longer run, over the longer hauls, is 
between carriers over different hubs.
    Several years ago I looked to see how many carriers a 
traveler in Boston had, how many choices of going to Phoenix. 
It had nothing to do with you. It was just simply that it was 
Phoenix that I looked at. There were nine separate choices. 
That is, you could go via Delta over Cincinnati, Delta over 
Atlanta, American over Dallas, American over Chicago, US Air 
over Pittsburgh, TWA over St. Louis and so on.
    If these consolidations in the industry occur, that nine 
will go down to I think four. So we must be concerned even over 
the long hauls, which are giving us the low fares, which are 
giving us the $279 to Munich, for which I want to take some 
credit while getting beaten over the head that I had to pay 
almost $700 between Ithaca, New York, and Washington, and that 
includes my 10% discount for the advanced state of my 
decrepitude.
    So I think there is a genuine basis for concern. 
Specifically on the override commissions, I went to the 
assistant attorney general in a previous administration and 
said: This seems to me to violate the Clayton Act. It amounts 
marginally to a commission of 35-40% on incremental sales that 
you take away from small carriers, and I said, should you not 
think about applying section 3 of the Clayton Act, which 
prohibits giving people special deals to induce exclusive 
dealing.
    Well, these I think are the major areas. I should mention 
one other one, however, that has a great deal to do with my 
delay today, although my delay was not really so much in the 
air; it was in Washington, D.C.--a taxi driver who did not know 
where Capitol Hill was, and that is genuinely the case, let 
alone the Russell Building.
    But another very important factor bearing on competition 
and the adequacy of it--and I gave speeches back in 1977 and 
1978 about this to DOT--is the insane way in which the 
government provides infrastructure to this industry. It clearly 
has fallen behind technologically. What we clearly have to have 
is some sort of autonomous corporation which can raise its own 
capital.
    It is the shortage of airport capacity and air traffic 
capacity that is one of the problems. You know you can give a 
parrot a Ph.D. in economics by teaching it to say ``supply and 
demand.'' Excessive congestion means that our institutions for 
providing additional supply are defective and it also means 
that we are not controlling demand by pricing correctly. What 
would happen--airplane landings are charged by the pound. Well, 
what would happen if you charged for Old Master paintings by 
the pound? You would sure as hell have a lot of congestion at 
various places where Van Gogh paintings are available.
    We ought to be pricing intelligently so that the people to 
whom it is important to fly to congested airports at peak time 
pay the congestion costs that they are imposing on everybody 
else or the cost of expanding capacity that they necessitate, 
and correspondingly that bargains be made available, negative 
landing fees, if you wish, competition between airports.
    In Europe you are now seeing a great deal of competition by 
underused airports, like Luten and Stansted, attracting low-
fare carriers in order to take business away from the major 
carriers that patronize Heathrow and Gatwick. Well, I think 
that is a fit subject for this Committee to look into, the way 
in which we both supply, increase the supply, and price access 
to the infrastructure.
    With that, I thank you again for the opportunity to appear.

   Prepared Statement of Alfred E. Kahn, Ph.D., Robert Julius Thorne 
      Professor of Political Economy Emeritus, Cornell University

    Before proceeding to a listing of the major antitrust issues in the 
industry, I emphasized the importance of another factor that poses 
severe obstacles to competition in airline markets--the way in which we 
are organized to provide and price access to infrastructure--
specifically air traffic control and airport services.

    I then identified, as the three major current antitrust issues,
        1. the identification and prevention of predation or unfairly 
        exclusionary conduct;
        2. mergers; and
        3. the Orbitz venture.

    All of these, I pointed out, are extremely difficult to resolve, 
even in the context of specific cases; about none of them am I in a 
position to offer firm conclusions; but all clearly deserve intensive 
investigation by the antitrust enforcement agencies and, in the case of 
predation, the Department of Transportation, which has explicit 
statutory authority in that area comparable to that of the FTC in the 
rest of the economy.
    Since I had already presented testimony on the first two issues 
before three committees of Congress during the last few months, I 
proposed to concentrate on the antitrust questions that the Orbitz 
venture seemed to me to raise, with the qualification, once again, that 
I am not in full command of the facts and therefore am not in a 
position to offer a final judgment.
    Orbitz is, as I understand it, a joint venture of all the major 
carriers--assertedly open also to all other airlines on equal terms--to 
provide universally comprehensive, competitively neutral, 
instantaneously available information about all available fares and 
flights (except, I understand, so-called E-fares) in a convenient form 
for immediate access over the Internet to travelers, in direct 
competition with other such Internet booking media as travel agents 
generally and such companies as Travelocity and Expedia, in particular.
    At first blush, this appears to be--and could well be--entirely 
beneficial to consumers, offering travelers comprehensive market 
information in competition with other information--and ticket-
distributing mechanisms, which have no entitlement to protection 
against competition--provided it is efficient and fair.
    Moreover, for such a venture to provide this valuable service, it 
would or might appear necessary for the participants to commit 
themselves to (a) make all their lowest fares and inventories available 
to Orbitz (except, as I understand it, the E-fares offered by the 
carriers on their individual web sites and acceptances of Priceline 
bids, which are not regarded as posted prices), and, as a corollary (b) 
to make no special deals of ticket and seat offerings with other 
booking agencies that are not equally available to Orbitz (i.e., to 
give Orbitz ``most favored nation'' treatment). Such undertakings would 
appear on their face to be essential for the venture to succeed--that 
is to say, in antitrust terminology, reasonably ancillary to the 
success of a legitimate joint venture.
    Orbitz also, however, raises inescapable antitrust questions--
specifically, whether such a collective undertaking by all the major 
carriers, however reasonable on its face, may also be anticompetitive, 
in either intent or likely effect (to use the criteria pertinent to a 
rule of reason evaluation under the antitrust laws--that is, intent or 
effect) it poses threats to competition (a) among the participant 
carriers, (b) by outside, more typically low-cost low-fare non-major 
carriers, who have played a disproportionately important role in 
bestowing on travelers the benefits of price competition, and/or (c) in 
the distribution side of the business--i.e., to competition between 
Orbitz and other Internet booking agencies.

        (a) As for the first, there is the familiar fact that in an 
        oligopolistic industry, the negotiation of special, preferably 
        secret deals with large buyers or distributors in a position to 
        threaten to supply their own needs or take their business 
        elsewhere is a particularly effective form of competition, 
        reflecting an exercise of countervailing power on the buying 
        side of the market, in an oligopoly whose members will 
        typically be reluctant to cut prices openly and across the 
        board; and that the prohibition of any such special deals or a 
        requirement of their full disclosure and equal availability, in 
        advance, to all comers, will discourage it. So the very 
        jointness of the venture and the ancillary commitments of its 
        members (as I understand) not to enter into any special 
        exclusive promotions with independent distribution agencies 
        and/or openly to disclose their lowest available fares (except, 
        as I understand it, E-fares) to their rivals--which may in a 
        sense be essential to the venture--may justify the inference of 
        anticompetitive intent or, whatever the intent, an 
        anticompetitive effect among the partners.
        (b) What about the independent airlines, which typically 
        compete more heavily on the basis of price? Orbitz will 
        evidently be open to them on equal terms, free--as Mr. Katz has 
        testified--of the onerous booking fees charged by CRSs. I urge 
        the Committee to hear their views. I was struck by the fact 
        that Southwest Airlines not only does not want to join but 
        openly opposes the venture. This might be simply because 
        Southwest, being virtually unique in its ability to compete on 
        its own, will not feel it has to join: it points out that its 
        own web site is enormously popular and saves it 80-90 percent 
        of the cost of selling tickets in other ways--and does not want 
        to see its competitors be strengthened in their ability to 
        reach travelers who seek the lowest possible fares. On the 
        other hand, the history of the last 20 years demonstrates that 
        when Southwest speaks, consumers do well to listen.
          I urged the Committee and the antitrust agencies also to 
probe the view of these other, far less well-known low-fare carriers. 
Orbitz claims it will improve their access to the market. On the other 
hand, it seems to me possible that they feel, on the one hand, 
compelled to join Orbitz in order to have equal access to the market 
but also fearful that in so doing they would have to give up the right 
to make special promotional deals with non-carrier-owned Internet 
distribution agencies, and so be impaired in their ability to compete 
effectively.
        (c) As for competition among Internet booking agencies, such 
        as Travelocity and Expedia--they emphatically claim (1) that 
        they will not have full access to Orbitz' low fares and low-
        fare inventories, and (2) that they compete in part precisely 
        by making special, exclusive promotional deals with individual 
        carriers, which the commitments of its members to Orbitz would 
        preclude.

    If these last claims are correct, the Orbitz venture takes on the 
aspect of a group boycott of competitive distribution agencies, which 
should I think be illegal per se under the antitrust laws and flatly 
impermissible. While an individual seller may well have the right to 
resist the ``commoditization'' of its product--as I understand at least 
one of the Orbitz organizers has characterized its purpose--by setting 
up its own distribution system, it is and should be contrary to the 
antitrust laws for carriers to do so collectively. The other Internet 
booking agencies claim that one important way in which they compete--
and, by so doing, put pressure on the carriers to compete as well--is, 
precisely by making special, exclusive promotional deals with 
individual airlines; if indeed the commitments of its several members 
to Orbitz would preclude such deals, the venture would clearly weaken 
competition--not only at the distribution level, but even more 
important, among airlines themselves.
    I concluded by expressing my regret that I have in my testimony on 
these antitrust issues been unable to offer definitive judgments of 
particular cases; I expressed the hope, however, that I had helped the 
Committee understand the essentiality of the antitrust agencies 
investigating them, and of Congress giving them the means to do so.

    The Chairman. I thank you again, Professor Kahn, and we 
appreciate you taking the time and effort to join us this 
morning.
    Mr. Klein, obviously any question that is inappropriate 
given what is taking place in the Justice Department, I fully 
understand any reluctance you might have to respond. When 
evaluating a merger acquisition, do you consider the risk of 
further industry consolidation or is each case considered 
solely on its own merit?
    Mr. Klein. Ultimately, Senator, we consider each case on 
its own merits, and we have found that that is the most 
effective way, that even though you can see industry 
consolidation move across an industry, there are some 
consolidations that raise a different competitive mix of issues 
than others. Actually, we went through this when we saw a six-
to-five merger in the big accounting firms with the prediction 
that it would go to six-to-three, and actually there was a 
second merger that was ultimately abandoned because it raised, 
I believe, different competitive problems.
    Of course, as we look at the industry and we look at the 
strategic arguments that are made, we cannot help but think of 
what the implications will be across the industry. But in the 
end, if we go to court under section 7 of the Clayton Act, it 
will be on the specifics of any particular merger.
    The Chairman. The reason why I ask this is obvious, because 
the concern now is, look, you have got one merger and there is 
concern on consolidation or domination of hubs in the 
Northeast, et cetera. But every analyst that I know of has said 
if this merger goes through there will be the other two and we 
will end up with three instead of six major airlines. The 
implications of that are dramatically more impactful than just 
the United-US Air merger. That is why I ask the question.
    DOJ has taken a very high profile role over the last few 
years in promoting air fare competition. Given the track record 
of the airline industry in opposing most of your Department's 
efforts, are you concerned that ventures such as Orbitz, which 
will be jointly owned and controlled by five of the major 
airlines, would have the effect of limiting competition and 
therefore increasing air fares?
    Mr. Klein. As you know, Senator, we are currently looking 
at that particular venture and I think it would be premature 
for me to comment on the merits. I think you are right, we have 
been very vigilant in this area. When we looked at the airline 
computerized tariff publishing systems several years ago, an 
initiative actually started by Assistant Attorney General Rill 
during President Bush's tenure and then concluded under our 
watch, we did find information-sharing and fare stabilization, 
the kinds of concerns that led us to prosecute an action there.
    As for this one, we will certainly take a hard look and 
evaluate the very kinds of arguments that Professor Kahn made 
in his opening statement. I know the Committee is as well 
concerned about this and I want to assure you that it is high 
on our radar screen. That does not mean we will take action, 
but it means that it will get the serious attention it 
deserves.
    The Chairman. I thank you.
    Professor Kahn, I understand your point about potential 
competition and I think that that is really the crux of the 
matter here. If we ended up with three major airlines, but 
there are new entrants that will be coming in--Western Pacific, 
AirTran and others--then it is one thing. But if they are 
precluded, such as, as I say, unable to compete because of the 
practices of the major airlines, then I think the scenario is 
rather different.
    In your view, is the airline industry too concentrated 
right now?
    Dr. Kahn. Certainly it is uncomfortably concentrated, 
particularly if you realize that markets are individual routes. 
I live in Ithaca. I am concerned about the availability of 
alternatives to me in Ithaca, and my alternatives are limited 
to one. Now, Syracuse is 50 or 60 miles away. When I was quoted 
the fare of over $700 before this discount, I asked my travel 
agent: Well, what if I drove to Syracuse, which is a way of 
escaping sometimes. And the fares there were identical.
    So we do have a problem that most markets cannot support 
more than one or two carriers. The overwhelming majority of 
routes in the United States are served by only one or two 
carriers. That is a degree of competition. What it does mean 
therefore is that we have to place reliance on potential 
competition, and that is the enormous importance of making sure 
that low-fare, low-cost airlines have equal access. They might 
not fly to Ithaca, but they might come to Syracuse and be 
useful to us there. That means access to airport facilities and 
we are back at that problem of the government's management of 
those facilities.
    I would have to admit that we were overly optimistic about 
the efficacy of potential competition. I think we were just 
misled to some extent by the fact that airplanes can move. It 
is not like a steel plant. I remember saying that, that their 
main capital can move from one place to another. But certainly 
several studies of which I am aware show that potential 
competition, while it does exert a disciplining effect, still 
one competitor, actual competitor in the market, is worth three 
potentials in the bush.
    So it means we must do everything we can to strengthen the 
potential of that competition, not only against predation but 
in terms of access to infrastructure, in terms of avoiding 
exclusionary practices such as you mentioned, Senator, and also 
encouraging the use of auxiliary airports for people who are 
price-conscious. That has proved to be really quite important 
in a number of European markets. I have just seen a study that 
is very influential. That is associated with the privatization 
of the airports where they compete with one another.
    The Chairman. Well, we intend to have a hearing concerning 
the ATC. As you know, many in the industry put the 
responsibility on the failure of the ATC to modernize, and I 
think the privatization of the airports should be an issue that 
probably should be explored as well.
    I do not have any further questions except just to make an 
editorial comment. We are hearing more and more from thousands 
of Americans about the delays and the inability to get from one 
place to another and the fact that the fares continue to go up. 
I understand the airlines are experiencing increasing fuel 
costs. I am not without sympathy that there is still a slot-
controlled airport here that could handle much greater capacity 
if it was not for the NIMBY predominance here in Washington, 
D.C., including the continued home-towning on the part of The 
Washington Post. I am always pleased to be mentioned every 
Saturday in their editorial.
    But the fact is that I believe that what we are discussing 
today is of the utmost importance. I think it was well you 
pointed it out, Professor Kahn, that we need more runways and 
we need more concrete, we need more terminals, we need an 
updated and modernized air traffic control system as well.
    But if only three major airlines are flying to those 
places, then I think that all of those efforts may not provide 
as much benefit to the consumer as this issue raises.
    Senator Hollings.
    Senator Hollings. Well, right to the point, I am worried 
about just one airline flying, not three. I have already got 
the problem of one airline. Dr. Kahn, let us get right to the 
expression you just used, whether or not a community would 
support airline service. Now, we started off in the 
Constitution to promote the general welfare, and in accordance 
thereof in telecommunications we have what you call the 
Universal Service Fund. You know communications better than 
anybody else in this room, and it would not support putting a 
communications line to Roundo, South Carolina, or up to another 
little community here, there, or yonder. But we do, because we 
have got that universal service, we put in the REA because it 
ordinarily would not support running a line all the way to get 
electrical services, let us say to Hilton Head, in the original 
days. That is why it is served this minute, the richest place 
in my state, is served by the REA. Of course, the private crowd 
now wants to buy it out. But the REA were willing to serve it.
    The mistake we made, General Klein and Dr. Kahn, is that we 
did away with you, we did away with the CAB [Civil Aeronautics 
Board], Dr. Kahn. We should have maintained it. Now, we have 
maintained the Federal Communications Commission so that they 
can administratively oversee. Right to the point, they go and 
they look at Bell Atlantic taking over Nynex and these other 
mergers and they oversee whether or not they have complied with 
the 14-point checklist, and just about, let us say, 12 and a 
half items, they have got one and a half more to go, they said 
it is in the public interest that we go ahead and approve it 
and not be picky and legalistic. So they are now enforcing that 
particular merger--and that is good, because they can get into 
long distance and everything else.
    But you see, we do not have a CAB overseeing, and you go to 
the Civil Division, more or less, the Justice Department. You 
have got an Assistant Attorney General where he believes it is 
a crime almost. And he does not have that flexibility about the 
public interest. To him it is either categorically, 
monopolistic or predatory, and he does not have that maybe grey 
area about public interest.
    What befalls you, General Klein, is you have got to 
supplant for CAB because you have got right this minute 16 
antitrust cases that you are not enforcing, namely 16 carriers' 
control over 50% at different hubs, the comings and goings at 
those hubs. If I were king for a day and had your position and 
the money, I would immediately tell the staff, let us get all 
16 of them, because there is no question that they have 
predatory practices.
    We have seen it down there in Dallas-Fort Worth. We have 
had it testified before here in Detroit-Philadelphia with 
Northwest. They immediately put Spirit out. They increased 
their flights 15%, met the price, and then quadrupled or raised 
the price ten times after they put them out of business.
    So our frustration is that we just do not have the CAB as 
we have the FCC to carry through on these merger decisions, 
where we do not just have to stand like the police cop, saying 
red or green. There ought to be a caution light for this 
particular industry.
    Otherwise, in addition to the hubs, which we ought to do, 
you are right, Dr. Kahn, there are cheaper prices, but is it in 
the public interest that 85% of the small and medium-sized 
airports in America should subsidize the 15% long hauls? That 
is why it is lower. Nobody is going into the long haul unless 
they have got the subsidization down here in small and medium 
already in force. So there is less and less long haul because 
they do not have the subsidization.
    As to slots, I used to practice before the CAB. The 
community built the airport, put up the tower, paved the 
runway, and then they got Captain Eddie Rickenbacker and said: 
Now, can you bring us service in here? And then we would come 
before the CAB and we would say we would get so many flights 
for so much, generally speaking, and that would be approved, 
and I would have those slots and have that service.
    Now what we have is one of the greatest leaders against 
pork who is now oink-oinking for pork. Namely, he wants slots, 
and we are going to politically assign them around, not on the 
public convenience and necessity, but on the political power. 
You have got this whole thing about deregulation askewed. It is 
a mess. I am a born-again regulator. I wish we could go ahead 
and get back to where we were, because it was working good. It 
was theoretical that we were going to get more and everything 
else like that. Everybody was making money, the flights were 
there, and everybody was happy.
    But we came in with this theory. I go, General Klein, to 
the question that the distinguished Chairman asked. That is the 
problem. If you go ahead and approve the United-US Air, then 
you got to approve all the rest. So it is not just that one. It 
is a precedent-setting job. As Senator Rockefeller says, most 
of us that have looked kindly on that particular merger are 
saying it cannot get worse, until I read in my paper now that 
United is even worse than US Air, and so we will worry about 
it.
    Could either one of you comment? I know that is not a 
question, but I wanted to get those hubs. You have got to 
immediately break up the hubs. That is predatory. We know it is 
predatory. It is antitrust, and we do not have an 
administrative body like the CAB to do it. The Antitrust 
Division has got to do it.
    Second, on these slots and everything else, let us go back 
to the communities rather than having the airlines assume they 
own them and sell them back and forth and everything else like 
that. The ones that we got, the ones that I appeared before the 
CAB to get, ultimately got in the hands of Air Florida. They 
crashed out here on the bridge and they immediately sold them. 
It had nothing to do with the community, nothing to do with 
their success, but their failure.
    I thank you, Mr. Chairman. If anybody wants to comment.
    The Chairman. Thank you very much.
    Any comments?
    Dr. Kahn. Well, it is a little hard to know where to begin, 
sir. One could make in every case a plausible argument for 
retaining regulatory supervision and scrutiny, but as you 
yourself point out, the assignment of slots by an 
administrative agency immediately introduces political 
influences and pressures.
    I have been very critical of the FCC because, apart from 
its correctly enforcing the Telecommunications Act, it does not 
want to take its hands off. It uses the occasion of approving 
mergers to say you have got to do all sorts of good things for 
poor people--the way to take care of poor people is the way 
Congress did--or rural areas.
    I was specifically asked in 1978, what did I think if we 
had an essential air services program that would be taxpayer-
financed and it would provide service so that no community that 
had certificated service before deregulation would lose it. 
That program as I understand it when I checked perhaps ten, 12 
years ago was a complete success in explicitly saying, we have 
an interest in serving rural areas and it will not be done in a 
competitive market, so we, Congress, will set up a system that 
will put it out for bids and we will see that that service 
continues to flow.
    But the idea of a government agency assigning slots--there 
was an interesting case. They assigned slots to Reno Air, which 
was a low-fare, low-cost low-fare carrier. Within two years, 
Reno was bought by American Airlines and now American Airlines 
has those slots. The notion that those slots should belong to 
anybody is ridiculous. The value of those slots is the value of 
the scarcity of the facilities, and we have got to have some 
institution that takes care of the scarcity by increasing 
capacity so the slots get--use the high revenue in order to 
increase capacity. Well, that has got to be under a private 
sort of motivated venture. It is never going to be done under a 
government-controlled aegis.
    So I do not really think more regulation is the solution. I 
think making competition more effective and the government 
doing its job of supplying infrastructure.
    Senator Hollings. But bottom line, the Universal Service 
Fund in airline affairs is in my price of $896. But rather than 
going to serve North Dakota, because I can tell you now, as you 
said, some fields will not support that service, and I do not 
think Senator Dorgan can prove that it will support it. But if 
you had, instead of subsidizing the long hauls so they could 
serve the champagne and movies and filet mignon and all that 
kind of stuff, on the contrary public convenience so we could 
serve Bismarck, North Dakota--the money is being put up by the 
public, but it is being skewed to big moneymaker places, and it 
has gotten so out of kilter now so that Steve Wolf, who comes 
and testifies for this particular merger of United and US Air, 
says: I have either got to go monopolistic or I have got to go 
bankrupt. Now, that is a pretty sorry result of deregulation.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, sir.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Both of you have been excellent. I would like to start, Dr. 
Kahn, with essentially what your goal is at this point in terms 
of competition and antitrust, because my sense is that what 
consumers want in real markets in the real world is a choice of 
carriers and they do not have it. It seems almost as if it is 
not even being articulated as the current goal.
    United CEO James Goodwin came to this Committee recently 
and he said that a particular benefit of the United-US Airways 
merger is that Charlotte would offer a competitive alternative 
to Delta's hub in Atlanta. Now, I am not going to dispute that 
there is some benefit with respect to this hub competition, but 
it seems to me that what consumers want in both Atlanta and 
Charlotte is a real choice of carriers.
    What is your sense about where antitrust really ought to be 
going here?
    Dr. Kahn. Specifically first, I am reluctant to give 
conclusions that I am not in a position to reach about that 
assertion about Charlotte. But Charlotte does compete with 
Atlanta and on longer flights that can go over either Charlotte 
or Atlanta customers do have the benefit of competition.
    I do not at the moment see how United joining with US Air 
in Charlotte increases those alternatives. Now, there may be 
arguments that the combined carrier can provide better service 
in ways that I cannot at the moment see. But second, we inveigh 
against the monopoly power that is conferred by hub dominance, 
but I think we make a great mistake if we think that hubs 
should be broken up, as it was said.
    Hubs are an extremely efficient way of delivering air 
service. If it were not for the Pittsburgh hub, my service at 
Ithaca would be much worse than it is now, because I can go 
from Ithaca to Pittsburgh and go anywhere in the country by 
noon. One of the reasons that hubs are something like natural 
monopolies is that the carrier that offers the greatest number 
of convenient flights to the greatest number of destinations on 
short- and medium-haul flights is the carrier that business 
travelers mostly will want to patronize.
    It is very hard to have two-carrier hubs. Look what 
happened to Continental and previously Frontier at Denver. So 
the hub and spoke system is extraordinarily efficient and there 
are ways of demonstrating that, that you can get--out of the 
same number of planes, you can get a multiple number of origins 
and destinations.
    But clearly, the practices that augment that hub power is 
the function of antitrust laws to get at. Practices that 
discourage competition among carriers, as the Orbitz venture 
may do, are the kind of thing that antitrust could get at. 
Predation, where people come in and can offer a different kind 
of service, they do not pretend to offer the entire range of 
convenient origins and destinations, but they will offer real 
price competition on hubs--there are difficult questions in 
weighing the fact that competition does consist in part in 
responding to competition and you do not want to totally 
prohibit that, against the danger of discouraging real price 
competition.
    But I do not know how to operate at the structural level.
    Senator Wyden. We have got a fair amount of evidence that 
fares can be significantly higher at the fortress hubs, where 
you have got one carrier, for the reasons that we have been 
talking about. Sometimes a ticket to a hub city costs less than 
a ticket that goes through the hub but then continues on to a 
second city. Do you have any problem with this pricing 
practice? Should we, should the Congress, be restricting 
airlines' ability to do this?
    Dr. Kahn. I am sorry, I did not completely follow. Restrict 
their ability to respond to that competition?
    Senator Wyden. Yes. I mean, as we do in our passenger bill 
of rights legislation, we would address this pricing practice 
by allowing the passengers to use tickets as they see fit, 
including using partial tickets. Of course, the airline 
industry is up in arms about that as well.
    Dr. Kahn. Well, I know Harry Truman used to go to bed every 
night praying for a one-handed economist. The practice of price 
discrimination is not in itself bad. For one thing, a lot of it 
is not really discrimination. It is charging more at peak times 
when there is a shortage of seats. If you want to get discount 
seats, you find you can get them when a lot of planes are 
empty. You will not get them when they are full. That is OK 
because that is saying that at the time of peak travel is more 
expensive and you should pay more, and we should offer people 
to whom money is more important than time the opposite 
alternative.
    So price discrimination is not in itself bad. In fact, it 
makes it possible to use bigger planes. If you can sell some of 
the tickets at full fare and then fill the empty seats, that is 
not bad. So to the extent that the airlines have these ``you 
cannot use a half of a ticket'' and so on, to some extent that 
is a way of protecting a structure that benefits both the 
people who get the convenient service, larger planes and more 
frequent flights, and the people who take advantage of the 
discounts.
    I think we have got to do something that is more pinpointed 
at what is really predatory, really destructive of competition. 
My own suggestion has been that--I do not know at what length 
you want to go into this, but the Department of Transportation 
has been trying to develop rules that say if you deliberately 
take losses by foregoing responses where you could make more 
money, then we will assume that that taking of losses is a sign 
that your intention is predatory.
    Now, the idea of a government agency deciding whether the 
carrier had other alternatives and weighing them and saying you 
could have taken this more profitable alternative than that, 
would raise my hair on end if I had any. But I think the thing 
to do is to put it in the hands of the carrier, say to the 
carrier: If you come down and meet competition and the 
competitor is driven out, then you must hold those frequencies 
and those fares for two years. That leaves it to the carrier to 
decide whether the offer of these striking reductions is only 
temporary and is worth it only on the theory that they will 
drive people out or they can live with it.
    Senator Wyden. The only trouble I have with that is what we 
have done in passenger rights. I mean, we have left it to the 
carriers, and what we have seen after their voluntary pledges 
is that complaints are way up and they have really not acted 
meaningfully. That is why a number of us are reluctant to leave 
it to the carriers.
    Dr. Kahn. Well, there is nothing voluntary about my 
suggestion.
    Senator Wyden. Oh, I did not understand that. I heard you 
say leave it up to the carriers, and I appreciate your saying 
it ought to be required.
    The last point I wanted to ask you is, I am very dubious of 
this Orbitz venture. It just strikes me as a sort of glide path 
toward collusion and anti-consumer activity. But I wonder if 
you think there are any safeguards that could be required that 
might make Orbitz a venture that would not be abusive?
    Dr. Kahn. I am really very reluctant to talk in an area in 
which I read the testimony of the proponents of Orbitz, I have 
read some of the objections to it. I think it is inherent in 
the venture itself that all its members must post all their 
fares, all their special discounts and low fares, with Orbitz. 
Otherwise it has no reason for existence. So a provision, an 
obligation undertaken by the members in order for Orbitz to do 
what it wants to do inherently I think involves the danger that 
it cuts off secret discounting, which is the way in which you 
get competition, and inhibits the ability of other big 
independent agencies like Travelocity to drive hard bargains 
and exert countervailing power.
    So at the moment I am not saying I am for it or against it. 
I truly do not know.
    Senator Wyden. A last question, if I might. If someone told 
you back when this whole debate began with Senator Hollings and 
others that we would end up with the significant prospect of 
just three airlines calling the shots in America and dominating 
this critical sector, would that have been acceptable to you?
    Dr. Kahn. No. No, it would not.
    Senator Wyden. Why not?
    Dr. Kahn. Because, first of all, you are talking about 
three airlines nationally. That means that in many local 
markets you would have a reduction in the numbers from two to 
one. I noticed that the complaint of the Department of Justice 
against the Northwest-Continental joining points out that on 
many routes between their respective hubs, Minneapolis-St. Paul 
and Houston for example, they are the only two major carriers. 
So you are talking there on individual routes of going down 
from virtually two to virtually one.
    So it would not be acceptable because it would mean, I 
think, excessive concentration and an even greater barrier to 
competitive entry.
    Senator Wyden. Mr. Chairman, I would wrap up only by saying 
I think that Dr. Kahn's answer is particularly important. It 
certainly in my view strengthens the arguments for passing the 
resolution that has just been introduced. I do not think that 
the American people are aware of the very real possibility that 
we will be left shortly with three airlines in this country. 
Your resolution at least gives us an opportunity to ring a very 
loud kind of warning bell over that prospect.
    Dr. Kahn has now made it clear that he did not envisage or 
desire what we are faced with, and I think it is time to 
recognize that we are on the cusp of having that kind of air 
service in this country and the American people ought to know 
that is what we are facing.
    I thank you.
    The Chairman. Thank you, Senator Wyden. I believe that we 
plan on marking up that resolution through the Committee.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much.
    Again, Mr. Klein, thank you for your service to our 
country. I think there is a lot of action that is needed to 
respond to what is happening in our country today. Someone 
mentioned the Federal Communications Commission. I would only 
say I have been looking at radio issues recently. There is a 
pending merger request that will mean one company will have 
over a thousand radio stations in this country because the 
Congress decided that there will be no limits on the number of 
radio stations you can own. What a foolish thing to do, but 
nonetheless that is where we are.
    Mr. Kahn, I was a little disappointed to hear you suggest 
the hub and the spoke system is such a wonderful system. I am 
not certain that that will be the model in the long term. I 
mean, I am not certain that point to point flying does not work 
in a number of cases.
    Let me just describe to you where we were before you came 
to the Civil Aeronautics Board. Incidentally, I supported much 
of what you did. But let me tell you where it was in North 
Dakota. If you were living in North Dakota prior to you coming 
to Washington, D.C., to serve, we had five companies flying 
jets into North Dakota. We had Northwest, Western, Delta, 
Republic, and Frontier. All of them provided jet service to 
North Dakota communities, connecting us to three hubs, 
Minneapolis, Denver, and Salt Lake City.
    Then we had deregulation and then we had Northwest as the 
dominant carrier. I happen to think Northwest is a good 
carrier. I like Northwest Airlines. They have good equipment. 
But they are a better carrier if they have competition. Every 
carrier is better with competition.
    So we were connected to the Denver hub. You remember 
Western Airlines? Western Airlines used to fly champagne 
flights. All flights leave North Dakota at some awful hour on 
the morning, 5, 6, 7 o'clock in the morning. Well, Western 
would fly to Denver, among other things, and competed with 
Frontier, and they had a champagne flight. They would pour 
champagne in the morning flying to Denver.
    Then after we deregulated, we had a 19-passenger little 
silver cigar with two propellers and no bathroom and no flight 
attendant and Dr. Pepper in a paper cup, and that was four 
stops on the way to Denver. So you can probably understand why 
a North Dakotan, for example, would say, gosh, I am wondering 
whether deregulation has helped us a whole lot. We had five 
different companies flying jets into our state and now we have 
deregulated and we have one jet carrier in North Dakota. Now we 
have just added a second, regional jet.
    But my point is that we have a series of things that have 
happened that have created hubs and spokes with one carrier 
dominating the hub, which means that you will always have one 
carrier dominating the hub. In the old days you had a Denver 
hub, you flew on Frontier or Western to Denver and then got on 
United because there was code-sharing and interlining and then 
flew to Los Angeles, or you flew on Northwest to Minneapolis 
and got on another carrier to fly to New York, United perhaps.
    So you do not inevitably have to have a hub and spoke 
system in which there are dominant carriers in every single 
hub. Yet that is exactly what has happened and what will 
continue, in my judgment, until we decide as a country we want 
something different.
    Now, Mr. Klein has a role in all of this. The question is, 
are scope clauses fundamentally anticompetitive? I am referring 
to the scope clauses by which airlines reach agreement with 
their pilots that they will limit the number of regional jets 
so that a regional startup with a regional jet cannot happen 
because you have a scope clause in a labor contract? Is that 
anticompetitive?
    How about override payments to travel agents? Is that 
anticompetitive? Or how about the screen on which a reservation 
is shown? When Frontier came back to North Dakota, with my 
help, to serve us with a 737 to Denver, they could not make it. 
You know why? Because if you are in Los Angeles trying to plot 
a flight to go back out of Bismarck after a meeting, the fact 
that there was a jet going from Bismarck to Denver showed up on 
the third computer screen on the reservation system, not the 
first screen, not the second screen, the third screen. So guess 
what? The Los Angeles travel agent put them on a 19-passenger 
propeller with four stops going to Denver.
    My point is this. This system is not working for rural 
areas. You know it, I know it, we all know it. It needs some 
fixing and it needs antitrust enforcement.
    I would ask Mr. Klein, do we need to change the Clayton 
Act? Are there other tools you need? I would ask Dr. Kahn, are 
there ways for us to have a system that provides efficiency for 
the air traveling public without having dominance, market 
dominance, in each and every hub in this country? Because 
market dominance by one carrier will never give both the 
quality of service and effective price competition which 
consumers need and deserve in this country.
    So those are the two questions I would ask. Mr. Klein, you 
first.
    Mr. Klein. Sure. Let me say this. I think there are 
obviously serious problems here, and there is no sort of silver 
bullet that is going to solve all of them. I think, in general, 
markets work incredibly well when there is competition, and I 
think there are efficiencies in a hub and spoke system, but one 
of the costs has been that increasingly on point-to-point 
routes, like Ithaca to Washington, there is no competition and 
so then price discrimination can be very effective and can 
extract real rents from the market.
    I believe, Senator--I believe this based on everything I 
have observed in my job in the last five years--that there are 
low-cost new entrants that could be getting into this market 
that would change it and would have a significant impact. I 
have seen this in places where they were not taken out early 
and the markets are now functioning.
    I have a deputy who has practiced antitrust in the 
transportation area for 25 years. He went to the University of 
Michigan Law School. We did not hold that against him; we gave 
him a job. He has got to go back for some meeting this weekend. 
He is going to go to Baltimore and fly there for 200 bucks 
round trip rather than fly from Washington because there is a 
low-cost entrant on that route that enables him to do that.
    That means that there is a service that can be provided at 
that rate that would benefit consumers, and there are a lot of 
consumers who will fly at that rate who will not fly at 700 
bucks.
    Senator Dorgan. Mr. Klein, I would say good for him and 
good for them, but that will never happen in rural states ever. 
You may have some low-cost entrants that come into the urban 
populations, but I guarantee you that is not going to be part 
of our model in rural states.
    Mr. Klein. What I think you will see develop, and I think 
you are seeing this some with the low-cost carriers that have 
become more efficient--you know, it is a funny business. If you 
fly one or two routes it is very hard because you do not have 
the interconnection of passengers. You have got to get bulked 
up.
    The whole strategy I think that the majors are engaged in, 
which I think we will wait and see the outcome of our suit, I 
think the whole strategy is take out the new entrants early, 
because if they bulk up I think they become quite formidable 
and begin to get the benefits.
    Now, there may be at some point, Senator, in northern North 
Dakota the demand-supply curve may be such that it is going to 
be an issue of subsidization. That is the problem that Senator 
Hollings mentioned with respect to universal service. We as a 
country may decide that we need to facilitate increased travel 
in rural areas and we have to address that.
    What I am primarily concerned about is I believe there is 
massive opportunity right now, that there would be capital 
flow, and that if some of these new entrants--a lot of people 
are talking about whether we are going to go in the direction 
of greater concentration. I think if there are some of these 
new entrants, I think that will facilitate some real 
competition and strategic competition.
    Senator Dorgan. My time is about up. Dr. Kahn, what if we 
said that if a new carrier meets certain standards and you are 
going to fly somebody to the Denver hub or some other hub, that 
the other carriers, the major carriers, have to do code-sharing 
and interline agreements with them, period? They had to when 
you ran the CAB, but now they refuse to. That is why when 
Frontier came back to Bismarck they could not make it. The only 
passenger flight they could haul was Bismarck to Denver. 
Passengers would get to Denver and then want to go on United, 
but guess what? They couldn't do a joint fare because United 
would not allow them to do that.
    My point is I think they should be required to allow them.
    Dr. Kahn. We have a division of labor here. Attorney 
General Klein has to be responsible and cautious. I can be 
irresponsible. I find very attractive the notion of mandatory 
interconnection, interlining. I have not yet been able to get 
over the concern that the CAB was able to do it because it 
dictated the terms, and I do not exactly know how, consistently 
with an unregulated system, you can avoid having some ruling 
about the terms of interconnection, just as the FCC is involved 
in having to set the terms at which unbundled network elements 
are made available to competitors.
    Scope clauses, of course they are anticompetitive. And your 
observation that there might be much more possibility of point 
to point non-hub carriage would be enormously increased if 
there were not restrictions on the use of regional jets. It may 
well be that as the market develops we will be going back to 
some more point to point carriage.
    Senator Dorgan. Let me just make the point as I conclude 
that Mr. Klein's notion that you have to bulk up and fly more 
than two city pairs in order to make it would not necessarily 
be the case if you had mandatory interlining or code-sharing. I 
think we have to think about that. I do not think we are going 
to break the dominance at any point soon, but there are ways, I 
think, to give startups the opportunity to pick portions where 
they can come in and provide service, especially in areas that 
are now underserved. That is my concern.
    I did not mean to interrupt you, but I want to also thank 
the Chairman for holding this hearing. I think it is enormously 
timely, given what is in the news these days about where the 
major carriers are thinking of going. There is no question that 
if US Air and United merge the other carriers must for their 
own protection take action. That is why I hope, Mr. Klein, that 
when you are looking at this you look at the downstream effects 
as well, and so does the DOT.
    The Chairman. Thank you, Senator Dorgan.
    Mr. Klein mentioned that we had a meeting in South Carolina 
and twice before this Committee new entrants have mentioned 
that they will not go head to head any more with a major 
carrier. I asked one executive of a new entrant, I said: ``How 
do you account for your success?'' ``I stay away from going 
head to head with the major airlines.''
    Mr. Klein's chart showing what happened before and after a 
new entrant is obviously something that perhaps we did not 
anticipate enough in this deregulation business, and obviously 
that is why we are appreciative of all the work that the 
Department of Justice has done.
    I do not mind a major airline competing head to head, but 
when, as Mr. Klein has testified, they calculate the number of 
seats, they calculate the fare, and then as soon as they are 
driven out, as there has been several documented cases, they 
raise the fares back up again, that is not what we had in mind 
with deregulation. I think Mr. Kahn agrees. So Mr. Klein, I 
think it is hard for you to differentiate where predatory 
activity is and competition. But I think in some of these cases 
any observer would be able to tell.
    Just one additional point, and I hate to keep beating this 
dead horse. But the reason why you can go to Baltimore and get 
a lower fare is because Baltimore is not slot-controlled. The 
highest air fares in America are right here at Reagan National 
Airport. The sooner we get rid of those slot controls, I think 
the more entrants you are going to see. There are fewer 
takeoffs and landings at Reagan National Airport than there was 
in 1986. It is quite a remarkable story, but I will not 
continue to belabor that. I will probably earn another 
editorial in The Washington Post.
    But I want to thank both of you. Could I just put again a 
little perspective on it. We had a very important blue ribbon 
panel report out a couple years ago and they said if we do not 
modernize the air traffic control system, if we do not pour 
more concrete, if we do not do a better job, every day in an 
airport in America--I will never forget; this is their report: 
Every day in America is going to be like the day before 
Thanksgiving, the busiest day of the year.
    That is becoming true. Any one of us who now takes the 
shuttle say to New York or Boston, you had better get there an 
hour earlier than you had planned because it is going to be at 
least an hour delay, and that is on a clear day. Clearly, our 
air traffic control system contributes to this problem. 
Clearly, the fact that there are not enough places to land and 
the NIMBY kind of behavior.
    But at the same time, I do not think we can ignore the 
subject of this hearing. Please correct me if I am wrong, Mr. 
Klein, but I think that some people and I think you testified 
that perhaps a couple of the mergers that took place during the 
1980's in retrospect would not have taken place if the Justice 
Department had had the final decision. Is that true?
    Mr. Klein. That is correct.
    The Chairman. And those were very small mergers as compared 
with what is being contemplated now.
    I do thank you both for taking the time you are two of the 
busiest men I know, and I thank you for being here. We are very 
appreciative of your enormous contributions you make to this 
Committee and to this great debate. I thank you, and this 
hearing is adjourned.
    [Whereupon, at 11:06 a.m., the Committee was adjourned.]

                                APPENDIX

              Response to Written Questions Submitted by 
                 Hon. John McCain to Prof. Alfred Kahn
Question 1. In your opinion, does United's commitment not to increase 
fares over a two year period carry any weight and do you think they 
have been clear as to what this commitment means?
    Answer. In my opinion it does not deserve any weight: the only 
pertinent question is whether the merger does or does not threaten to 
impair the effectiveness of competition.

Question 2. In order to qualify for the discounted CRS booking fee, 
participating air carriers in Orbitz must enter into a so-called ``most 
favored nation'' clause. If an airline sells a low fare elsewhere, the 
MFN clause requires it to offer that fare to Orbitz, as well.

   Please elaborate on your concerns with most favored nation 
        clauses in general.

    Answer. I have, since appearing before the Committee, spelled out 
these concerns in a written summary of my testimony, a copy of which I 
attach. Please see the paragraphs marked (a), (b) and (c), on pp. 3-5.*
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.

   What can or should the government do about the uncompetitive 
---------------------------------------------------------------------------
        aspects of MFN clauses when parties enter into them?

    Answer. If the antitrust authorities find that ``most favored 
nation'' commitments are an essential and inseparable component of the 
Orbitz venture, they should simply prohibit the entire venture; if they 
find that it can be purged of such potentially anti-competitive 
undertakings, they should impose conditions to their approval that 
ensure such a purging.

Question 3. I have heard complaints from the low fare air carrier 
community that the low fare carriers were precluded from the 
opportunity to purchase an equity stake in Orbitz.

   Would it be a cause for concern if all potential 
        participants in an enterprise do not have an opportunity to 
        make an ownership investment in that enterprise on the same 
        terms as other participants?

    Answer. I think it might be a cause for concern; I suspect, 
however, that the greater concern might be the one I mentioned in my 
testimony--namely, that the smaller, low-fare carriers would feel 
compelled to join in order to ensure equal access to the market even 
though they might fear that doing so would undermine their ability to 
make special deals with other agencies and so hamper them in their 
competition with the major carriers. It seems to me urgently important 
to solicit the views of these carriers about the entire venture.

Question 4. I'm interested in your views on Orbitz, the new travel 
website owned by Delta, United, Northwest, Continental and American. 
Last week, this Committee heard some concerns about the potential 
impact of the five largest carriers getting together to control a 
distribution channel. Do you have any concerns about Orbitz?* Would 
your views change if the site were not owned by the air carriers?
    Answer. I refer you, once again, to the attached description of the 
concerns I have about Orbitz. Those would be mitigated if Orbitz were 
not owned by the major air carriers; but it is conceivable that if it 
involved the same commitments, raising the same anti-competitive 
possibilities as I described in my testimony, their not owning it would 
make no difference.

Question 5. Last year you served as a member of the Transportation 
Research Board Committee that investigated ``Entry and Competition in 
the US Airline Industry.'' The Committee's report contained this 
warning: ``Changes in the distribution system should be viewed as 
opportunities to enhance the system's overall benefit to consumers, and 
should not be dissuaded unless the neutrality and completeness of the 
distribution system is fundamentally threatened.''

   What type of activity, in your opinion, would fundamentally 
        threaten the ``neutrality and completeness of this distribution 
        system''? Does Orbitz possibly constitute such a threat?

    Answer. What we had in mind were activities on the part of the 
major carriers--especially if undertaken collectively--that would deny 
alternative methods of ticket distribution an equal opportunity to 
compete with carrier-owned systems. As I explained in the paragraphs 
labeled (c) of my attached statement,* the Orbitz venture might have 
such an effect.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.

Question 6. Last week, the Committee held a hearing on the Internet and 
the airline industry. During that hearing, the DOT Inspector General 
suggested that, as an interim measure, airlines be required to make 
available any fares they provide to Orbitz to any other entity willing 
to offer the same financial terms on booking fees, and that such a 
provision should be predicated on an agreement by these entities to 
abide by the non-bias regulations that apply to CRSs. What do you think 
of that suggestion?
    Answer. The suggestion seems a plausible one, as a possible means 
of eliminating the threat to which I referred in my answer to the 
previous question, but (a) I do not have a sufficiently good feel for 
the Orbitz arrangement to know whether it would be sufficient and (b) 
there would remain the other causes for concern that I described in my 
statement.
                                 ______
                                 
              Response to Written Questions Submitted by 
                 Hon. Slade Gorton to Prof. Alfred Kahn

Question 1. Are there any possible benefits to further consolidation in 
the industry?
    Answer. Travelers typically prefer to make their trips on single 
carriers: the more consolidated the industry, the more they are likely 
to be able to make ``on-line'' rather than ``inter-line'' any changes 
of flights necessary to reach their destinations. This would also have 
the advantage of providing the greatest ``seamlessness'' to inter-line 
travel, with one carrier responsible for all aspects of the service, 
handling of baggage and so on. It is not clear to me to what extent the 
same assurances of service can be provided, without further 
consolidation, by inter-lining arrangements among separate carriers; 
and while I find attractive the possible remedy of requiring the major 
carriers to inter-line with others, on an equal basis, from the point 
of view of providing that same ``seamlessness'' while preserving 
competitive opportunities for more specialized carriers, I am uncertain 
how such a requirement can be enforced without some government agency 
having to regulate the terms of such arrangements--in particular, the 
division of fares between the cooperating airlines--and to what extent 
this would in effect entail reregulation.

Question 2. As you know well, the major airlines have some history when 
it comes to manipulating distribution of their products to affect 
competition. The Computer Reservation System rules were put in place in 
1984 because of the detrimental impact of these activities on 
consumers. Now the airlines are getting together to control a website 
that does not fall within the scope of the CRS rules. Are we looking at 
a sequel to the activities that led to the CRS rules in the first 
place? What lessons can we take from the history of CRSs?
    Answer. I do not see any direct lessons, although there may well be 
some. The abuse of the monopoly power conveyed by carrier ownership of 
CRS was that it deprived non-CRS-owning carriers of an equal 
opportunity to compete and may have imposed monopoly booking charges on 
them. As I explained in my written submission, Orbitz might have the 
same effect on low-fare carriers, although for the different reasons I 
mentioned there; and might in addition threaten efficient competition 
between Orbitz and other, competitive ticket distribution systems.
                                 ______
                                 
              Response to Written Questions Submitted by 
                 Hon. John McCain to Hon. Joel I. Klein

Question 1. The General Accounting Office and other highly regarded 
analysts have found the perimeter rule at Reagan National Airport to be 
an impediment to competition that tends to harm consumers and keep 
airfares relatively high. Are federal laws and regulations that 
prohibit private airlines from flying routes sought by their customers 
warranted in a deregulated industry?
    Answer. As a general matter, restraints that impair the provision 
of goods and services may harm consumers by denying them 
the full benefits of competition. Perimeter rules such as the one at 
Reagan National Airport thus may not be not warranted from a 
competition standpoint. Whether there might be justifications for such 
rules based on other policy concerns would fall outside the purview of 
the Antitrust Division.

Question 2. Can we have a truly competitive industry where some 
competitors, especially new entrants, do not have access to essential 
facilities, such as airport gates?
    Answer. Lack of access to essential facilities, such as airport 
gates, would certainly be a barrier to entry by a new airline. And, as 
I testified, entry by low-cost carriers is an important source of new 
competition in the airline industry.

Question 3. Is the Antitrust Division lacking adequate resources to 
conduct its enforcement activities?
    Answer. We are in a period of very active antitrust enforcement in 
each of our three major programmatic areas. Antitrust enforcers face a 
continuing record wave of mergers and acquisitions throughout our 
economy. We are also addressing important non-merger issues in 
industries adjusting to new technologies, and we remain committed to 
detecting and prosecuting companies engaged in illegal cartel behavior 
that affects U.S. citizens. We are committed to vigorous enforcement of 
the antitrust laws in the airline industry as in other sectors of our 
economy. The President has requested a budget increase from $110 
million in FY 2000 to $134 million in FY 2001 to enable us to continue 
to fulfill that mission.

Question 4. In order to qualify for the discounted CRS booking fee, 
participating air carriers in Orbitz must enter into a so-called ``most 
favored nation'' clause. If an airline sells a low fare elsewhere, the 
MFN clause requires it to offer that fare on Orbitz, as well.

   Please elaborate on the Justice Department's concerns with 
        ``most favored nation'' clauses in general.

    Answer. Although MFN clauses may appear to guarantee the 
availability of discounts to the contracting party, they can in some 
cases have the perverse effect of suppressing discounting. A firm that 
wants to enter a new market, or to attract additional customers to its 
product or service, may consider offering a lower price as an 
incentive. But if it can do so only by offering the same lower price to 
all of its customers, or to a large additional portion of them, it may 
conclude that the ``cost'' of the price reduction outweighs the 
benefits of trying to enter the new market or to attract the additional 
business. In this way, an MFN clause could effectively prevent the firm 
from offering the lower price to anyone, if the amount of the firm's 
business that is subject to the clause is significant enough to make 
the discount unprofitable.

   What can or should the government do about the uncompetitive 
        aspects of MFN clauses when parties enter into them?

    Answer. If the Antitrust Division concludes that an MFN clause is 
likely to have the anticompetitive effect described above, the Division 
can challenge it under the antitrust laws and ask a court to enjoin the 
parties from enforcing it.

Question 5. I have heard complaints from the low-fare air carrier 
community that the low-fare carriers were precluded from the 
opportunity to purchase an equity stake in Orbitz.

   Would it be a cause for concern if all potential 
        participants in an enterprise do not have an opportunity to 
        make an ownership investment in that enterprise on the same 
        terms as other participants?

    Answer. As you know, the Antitrust Division is currently looking at 
Orbitz, and I therefore would prefer not to comment specifically with 
respect to that enterprise. In general, whether there might be cause 
for concern would depend on various factors, such as the anticipated 
market share of the enterprise, the competitive significance of the 
benefits to be gained from equity ownership as opposed to other forms 
of participation, and whether the equity owners brought resources or 
expertise to the enterprise of a special nature that were not generally 
shared by all potential participants.

   Will you look at factors such as this in your investigation 
        of Orbitz?

    Answer. The Division will consider all factors that are relevant to 
determining the likely effects on competition of the enterprise as 
structured.

Question 6. What are the antitrust or competitive implications of a 
situation where a dominant group of producers form a vertically 
integrated enterprise in which other producers are precluded from equal 
participation?
    Answer. As a general matter, the situation you describe could 
potentially raise both horizontal and vertical issues. With respect to 
horizontal issues, because the enterprise involves a collaboration in 
the marketplace among competitors, we would look at whether it would 
likely reduce competition among them to an extent that outweighs any 
procompetitive benefits that can be derived only through the 
enterprise. With respect to vertical issues, we would look at whether 
the enterprise would likely give the producers who formed the 
enterprise control over an essential input into the product or service 
in question, or over an essential avenue for distribution or marketing, 
so as to foreclose other producers from the market. Any particular 
enterprise would be analyzed in light of these concerns according to 
the specific facts involved.

Question 7. Do you anticipate that the Antitrust Division's 
investigation into Orbitz will be completed before this site comes on-
line sometime this fall?
    Answer. It is always difficult to predict in advance how long any 
particular antitrust investigation will take. Attorneys and economists 
in the Division are working actively on this matter and will continue 
to do so until they reach a conclusion as to the joint venture's 
competitive effects. Incidentally, there have been press reports that 
the site will not come on-line until sometime well into next year.

Question 8. The Department of Justice, in its filing with DOT on the 
AA/BA proposed alliance, highlighted the anticompetitive nature of slot 
controls. In those comments, the Department stated:
    [W]here service in a market is constrained by slot availability, a 
hub carrier with access to a large pool of slots has even greater 
ability to respond to entry . . . because the entrant will be unable to 
add capacity on its own. American's president has referred to such 
strategic responses as ``predatory scheduling.'' The net result of 
``predatory scheduling'' is to discourage new entry in the first place, 
or to render it unprofitable where it occurs.

   Aren't these same issues applicable domestically? Are new 
        entrants able to compete for traffic in hub airport and high 
        density airport markets?

    Answer. Yes, the same issues are applicable domestically, and we 
take them into account in our enforcement actions and investigations in 
the domestic airline marketplace.

   As part of your review of the United/US Airways merger, will 
        you take into consideration the need for gates and slots to be 
        available at each of the airports where United and US Airways 
        have a significant presence?

    Answer. While I cannot comment on our pending investigation, in 
general the availability of gates and slots can be an important factor 
in assessing the likely competitive effects of a proposed airline 
merger.

Question 9. United's service in the Northeast and on the East Coast is 
minimal and they would like to increase their service in this part of 
the country. Are we at a stage in the airline industry where it is 
easier for an airline to merge with a competitor rather than investing 
the resources needed to establish a presence in a new region of the 
country?
    Answer. As a general matter, in our free enterprise system a firm 
may choose between entering a new market de novo or acquiring a firm 
that is already in the market. However, there can be circumstances in 
which such an acquisition will tend to substantially lessen competition 
by eliminating a significant potential entrant into the market. Thus, 
the fact that it might be feasible for a firm to enter a new market 
through ``greenfield'' investment would not necessarily preclude it 
from entering the market through acquisition instead, as long as the 
acquisition was not likely to substantially lessen competition. By the 
same token, however, the fact that greenfield investment was considered 
a less feasible means of entry would not excuse an otherwise 
anticompetitive merger from challenge under the antitrust laws.

Question 10. Two years ago, the Congress passed an omnibus budget bill 
that included provisions regarding DOT's competition guidelines. In a 
memo commenting on those provisions, Air Transport Association (ATA) 
President Carol Hallett said, ``[W]e have won a significant victory on 
the competition guidelines. Included in the new law was a provision to 
conduct two studies of DOT's proposed regulations. . . . Following the 
DOT study, a hold of 12 legislative weeks is in place for Congress to 
review and act on the issue.'' She continues, ``DOT is barred from 
implementing any guidelines during the 12 week period. . . . The 
provisions . . . take away DOT's ability to act independently. The 
likelihood of the guidelines being adopted is diminished by this law.'' 
Ms. Hallett also states, ``[W]e are entering the next phase of this 
fight in a vastly strengthened position with the tools and the 
political atmosphere necessary to hopefully relegate DOT's proposal 
where it belongs--in the regulatory scrap heap.'' What do you think of 
DOT's proposed competition guidelines and would you care to respond to 
Ms. Hallett's comments?
    Answer. The Antitrust Division shares the concerns of DOT that 
responses by dominant hub carriers to low-cost carrier entry have had 
the effect of eliminating or limiting competition in airline markets. 
Indeed, our pending lawsuit against American Airlines for conduct at 
its DFW hub reflects this concern. Division lawyers and economists have 
consulted with DOT staff on these issues at various times during DOT's 
consideration of its policy, and we understand that DOT is reviewing 
the numerous public comments that it has received during the course of 
its proceeding in this matter. The ultimate decision on the Guidelines 
will be made by DOT, and I expect that its decision will be a well-
considered one.
                                 ______
                                 
              Response to Written Questions Submitted by 
                Hon. Slade Gorton to Hon. Joel I. Klein

Question 1. Are there any possible benefits to further consolidation in 
the industry?
    Answer. That touches on some of the questions we are focusing on in 
our pending investigation of the United/US Airways merger, on which I 
cannot comment. But as a general matter, there can be potential 
benefits to a merger, that can take various forms. Whether such 
benefits are likely to result from a particular merger, and whether--
even if they are--they will outweigh any likely adverse effects of the 
merger on competition, are questions that must be considered on a case-
by-case basis.

Question 2. In your prepared remarks, you state that airline fare data 
is available instantaneously, which can act as a disincentive to fare 
reductions. Can you please describe circumstances when that would 
happen? Doesn't perfect information lead to a perfect market?
    Answer. It is true that the more information a consumer has about 
the prices and other attributes of the product or service he or she is 
shopping for, the easier it is for the consumer to comparison shop for 
the best possible product or service at the lowest possible price. In 
markets that are highly competitive, such information works to the 
consumer's benefit. However, in a marketplace with relatively few 
competitors, immediate and perfect access by the competitors to each 
other's pricing information can create a disincentive to compete as 
vigorously. Firms often look for ways to increase their profitability, 
and one important way to do this is to entice new customers away from 
competitors. Often, a firm will attempt this by offering price 
discounts targeted at potential new customers. A firm is more likely to 
try this strategy if it believes that it will be able to sell at the 
discount without its competitors discovering the discount immediately 
and responding with matching price discounts of their own--because if 
that occurs, the first firm not only will fail to win additional sales 
to new customers, but also risks having to lower its prices to 
customers who would have bought the product or service at the higher 
price anyway. Knowing this, a firm in such a market will have less 
incentive to offer discounts in the first place.

Question 3. When evaluating airline industry activities, do you take 
into consideration in any way the significant public investment in the 
infrastructure that supports the activities of the industry? Does that 
public investment set the airline industry apart from non-
transportation industries?
    Answer. In one sense, every assessment we make of the competitive 
effects of any airline industry merger or other airline industry 
activity occurs against the backdrop of the significant public 
investment in infrastructure. Those infrastructure investments are 
likely to have an important role in the competitive analysis, because 
they affect many important business decisions, such as the ability of 
carriers to offer service in particular markets or even to expand 
overall service. But it should be noted that many industries rely 
directly or indirectly on some infrastructure supplied by the public or 
by others, and this is one factor among many that antitrust enforcers 
consider in making competitive assessments.

Question 4. In a hearing this past May before the Subcommittee on 
Antitrust, Business Rights and Competition, Roger Ferguson of Midway 
Airlines testified that his airline has ``consciously avoided picking 
fights with the major airlines by flying directly into their hubs.'' Is 
that something that concerns the Antitrust Division? If concentration 
at major hubs continues to grow, isn't this going to impede 
competition? Aren't we likely to see more new entrants avoiding hubs in 
a more consolidated industry?
    Answer. New entrants, no less than hub carriers, should be free to 
compete on the merits for business. New entrants may sometimes decide 
to operate out of underserved airports and may sometimes decide to 
operate out of airports that serve as another carrier's hub. In either 
event, they will have to compete with whatever other carriers are also 
serving the route. The Antitrust Division would be concerned, however, 
if a new entrant is deterred from serving a market because of its fear 
that a dominant incumbent will respond by flooding the route with 
additional capacity and reducing fares in a manner that does not make 
economic sense except for the prospect of driving the new entrant out. 
Indeed, our focus in our pending case against American Airlines is the 
use of predatory conduct to eliminate competition from new entrants. 
Further consolidation in the airline industry could exacerbate such 
concerns.

Question 5. Do you believe code-share relationships between major 
carriers could be more beneficial to consumers, as compared with full 
mergers, or do you think any type of alliance between major air 
carriers may lead to a lessening of competition in the industry?
    Answer. Code-share relationships may enable airlines to achieve 
some, but probably not all, of the benefits that might be available 
from a full merger. A code-share relationship may preserve some ability 
for the carriers to compete, thus preserving some competition that 
would be lost in a merger. But all alliances between horizontal 
competitors, by their very nature, have some potential for 
anticompetitive harm, and the greater the horizontal overlap between 
the alliance partners, the greater is the risk to competition.
                                 ______
                                 
              Response to Written Questions Submitted by 
                 Hon. Max Cleland to Hon. Joel I. Klein

Question 1. Mr. Klein, you have indicated that the Department of 
Justice examines mergers on a case-by-case basis. Could you please 
state for the record whether or not, in the context of the Justice 
Department's review of the proposed United/US Airways merger, the 
Department will examine the likely consequences of the merger, 
including the possible follow-on mergers by other carriers?
    Answer. We will carefully examine each market that may be 
potentially affected by the merger and assess the likely effects of the 
merger on competition in that market. In general, as we look at the 
industry in which a proposed merger is taking place and consider the 
strategic arguments that are made, we cannot help but think of what the 
implications will be across the industry. But in the end, if we go to 
court and challenge a merger under section 7 of the Clayton Act, our 
legal challenge will be on the specifics of the particular merger.

Question 2. There currently is relative equilibrium among the major 
network U.S. carriers in terms of hubs, capacity, schedules, aircraft, 
personnel, and other resources. The size and strength of the rival 
networks are more or less in balance. However, if the United/US Airways 
merger is approved, the combined entity would be about 50 percent 
larger than the next largest U.S. carrier, with more than twice as many 
hubs, aircraft, routes, and personnel. It would seem that the size and 
scope of United's post-merger system would necessarily induce other 
carriers to respond with their own mergers, because if they fail to do 
so, United would have huge competitive advantages over the rest of the 
industry, especially in terms of its ability to capture traffic flows 
over its expanded network hubs. Indeed it has been publicly reported 
that other large carriers are exploring merger options in the aftermath 
of the United/US Airways announcement.

   Do you believe an examination of the follow-on merger 
        consequences of an approval of the United/US Airways merger is 
        essential to fulfill the Department's responsibilities?

    Answer. See answer to Cleland question 1.
   Is there any question in your mind as to whether the 
        Department has the existing authority to examine all of the 
        possible consequences of a United/US Airways merger, including 
        follow-on mergers?

    Answer. The existing antitrust laws provide us with the appropriate 
authority to protect consumers and the economy against anticompetitive 
mergers in the airline industry.

   Do you think it necessary for Congress to clarify your 
        authority in this respect?

    Answer. No.

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