[Senate Hearing 107-681]
[From the U.S. Government Publishing Office]
S. Hrg. 107-681
INTERNATIONAL AVIATION ALLIANCES: MARKET TURMOIL AND THE FUTURE OF
AIRLINE COMPETITION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 7, 2001
__________
Serial No. J-107-48
__________
Printed for the use of the Committee on the Judiciary
U. S. GOVERNMENT PRINTING OFFICE
81-815 WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
------
Subcommittee on Antitrust, Business Rights, and Competition
HERBERT KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont MIKE DeWINE, Ohio
RUSSELL D. FEINGOLD, Wisconsin ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York ARLEN SPECTER, Pennsylvania
MARIA CANTWELL, Washington STROM THURMOND, South Carolina
JOHN EDWARDS, North Carolina SAM BROWNBACK, Kansas
Victoria Bassetti, Majority Chief Counsel
Peter Levitas, Minority Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 3
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 91
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 74
WITNESSES
Anderson, Richard, Chief Executive Officer, Northwest Airlines,
Inc., Eagan, Minnesota......................................... 32
Branson, Richard, Chairman, Virgin Atlantic Airways Limited,
Crawley, West Sussex, United Kingdom........................... 52
Carty, Donald J., Chairman and Chief Executive Officer, American
Airlines, Forth Worth, Texas................................... 5
Kellner, Larry, President, Continental Airlines, Inc.,
Washington, D.C................................................ 63
Maynard, Roger, Director of Alliances and Strategy, British
Airways, Harmondsworth, Middlesex, United Kingdom.............. 55
Mullin, Leo F., Chairman and Chief Executive Officer, Delta Air
Lines, Atlanta, Georgia........................................ 12
SUBMISSIONS FOR THE RECORD
Business Travel Coalition, Kevin P. Mitchell, Chairman, Radnor,
Pennsylvania, statement........................................ 91
FedEx Corporation, Frederick W. Smith, Chairman and Chief
Executive Officer, Memphis, Tennessee, statement............... 94
Inhofe, Hon. James M., a U.S. Senator from the State of Oklahoma,
statement...................................................... 96
United Air Lines, Inc., Jack W. Creighton, Chairman and Chief
Executive Officer, Elk Grove Village, Illinois, statement...... 98
United Kingdom Government, Christopher Meyer, letter and
attachment..................................................... 102
US Airways, Stephen M. Wolf, Chairman, Arlington, Virginia,
letter......................................................... 104
INTERNATIONAL AVIATION ALLIANCES: MARKET TURMOIL AND THE FUTURE OF
AIRLINE COMPETITION
----------
WEDNESDAY, NOVEMBER 7, 2001
United States Senate,
Subcommittee on Antitrust,
Business Rights, and Competition,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 12:39 p.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, DeWine, and Specter.
OPENING STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. The Subcommittee will come to order.
Good afternoon, ladies and gentlemen. I want to welcome
everyone to the hearing and thank you for coming. Our hearing
today is very timely. We are in the process of making decisions
in the next 6 months that likely will reshape the aviation
industry for years to come. From international alliances, to
loan guarantees, to potential mergers or company failures, to
airline security, virtually every aspect of the industry is in
flux. Yet critical decisions about the future of airline
competition are being made in the midst of market turmoil, on
an ad hoc basis, and in a frantic atmosphere. Sometime in the
near future--perhaps in a year--the situation will calm down
and return to something like normalcy. The question is: When
that time comes, will American consumers pay the price for or
reap the rewards of the decisions being made today? We have an
obligation to protect competition in the face of enormous--but
perhaps temporary--pressures on the industry.
And at least three international alliances are currently
awaiting a final decision by the Department of Transportation
on whether to grant them antitrust immunity. Most importantly,
the alliance between American Airlines and British Airways
would create an international aviation giant with its hub at
London's crowded Heathrow Airport. Will this giant compete
against other alliances or prove to be anti-competitive?
But while these competition concerns would ordinarily
occupy almost all of our attention, these are not ordinary
times. The simple fact is, if air travel is not safe and if
passengers do not fly, the entire industry is imperiled. There
can be no meaningful competition unless safety and security in
the airline industry is first assured.
Nearly 2 months after September 11, many Americans question
whether anything substantial has really been done to improve
aviation security in our country. We have all seen the long
lines at check-in gates and armed soldiers patrolling airport
concourses. But it looks like many airport security
enhancements are merely cosmetic. Obvious security weaknesses
remain. For example, nearly 2 months after September 11,
checked bags in the United States are still not routinely
screened for explosives. The machines in place to do so--even
in limited amounts--are not fully utilized. Checked baggage is
not matched to see if the person checking the bag ever really
boards the airplane.
By contrast, in Europe, a checked bag does not get on the
plane unless the passenger boards that plane. And within a year
in Europe, all checked bags will be mechanically screened for
explosives. So many of us do not understand why we should
tolerate this gaping hole in our security system.
In addition, many of those screening passengers' carry-on
baggage at security checkpoints are still poorly trained,
minimum wage employees. Just 2 weeks ago, as we know, it was
still possible for a passenger carrying a gun to board a flight
in New Orleans, and earlier this week, another passenger in
Chicago passed security with several knives and a stun gun.
Meanwhile, airport terminals, from JFK to O'Hare, have been
temporarily shut down due to security lapses.
That these and other important problems remain unanswered
is very troubling to all of us and to all Americans. We are
confident that they trouble each of you here today as much as
us. Any further delay in solving these problems we would like
to feel and we would like to hope you feel is not acceptable.
And cosmetic quick fixes such as people patrolling our
airports--sometimes cosmetic things won't get the job done
either. No system can be made 100 percent safe, but we should
never again tolerate an aviation system so vulnerable to
terrorists as it was on September 11, and we know that you
agree with this. We, therefore, will expect each of you to tell
us, specifically, if you can today, of the steps that your
airline is taking to make flying safe from those who wish to do
harm. And so we would request you to address this issue in your
opening remarks, even if you are ad-libbing in those remarks.
One of the great accomplishments of the 20th century was
building a safe, reliable, and efficient air transportation
system that could transport at high speed and relatively low
cost ordinary citizens from coast to coast and virtually
everywhere in between and beyond. We must act, and we must act
now, to take meaningful and effective steps to strengthen the
aviation security and to assure aviation competition in the
future. And it is you, the leaders of the airline industry who
sit before us today, who have the primary responsibility for
implementing the necessary measures to assure the safety of the
millions of Americans who entrust you with their safety when
they board your airplanes. I thank you very much.
Senator DeWine?
STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF
OHIO
Senator DeWine. Mr. Chairman, thank you very much, and I
thank you for calling this hearing.
Almost 5 years ago, the first hearing that Senator Kohl and
I scheduled as chairman and ranking member of this Committee
was on the proposed alliance between American Airlines and
British Airways. We are back here again to examine this newest
proposal. But as Senator Kohl has so eloquently stated, the
world is different. The situation is different and certainly
the airline industry is different.
Today, our aviation market is far more complicated. The
industry, of course, is reeling, as you all know, from the
devastation of the September 11th terrorist attacks. Most
airlines are suffering huge losses. The market is literally in
turmoil.
All of these factors I believe must be considered in our
analysis of the competitive implications of the American
Airlines/British Airways proposal, as well as two other
alliance proposals that we will consider today: Delta Airlines'
deal with Air France and United's deal with British Midland.
Furthermore, in today's environment, any discussion of
aviation must address, as Senator Kohl has said, the issue of
security. I thank Senator Kohl, the chairman of this Committee,
for his comments on aviation security which I believe have put
our discussion today in its proper perspective. Without strong
security measures in place, the aviation industry will not
survive.
Since this Subcommittee looked at the American Airlines/
British Airways alliance proposal almost 5 years ago, the
Department of Transportation has gathered data on the
competitive impact of immunized international aviation
alliances. The Department of Transportation has concluded that
so far, alliances have increased competition, increased demand,
and lowered prices for consumers.
Now, of course, some have challenged these findings, and I
think it is fair to say that the results of DOT's general
studies cannot replace case-by-case analysis. And I believe
that we must examine each alliance on its own merits. So today
we hope to gather more information on each of the proposed
alliances to help us evaluate the impacts on competition and on
consumers.
Our job today is made more complicated by the fact that the
American Airlines/British Airways alliance is linked so
strongly to the ongoing efforts to negotiate an ``open skies''
agreement between the United States and our friends in the
United Kingdom. In principle, such an agreement has obvious
appeal and could offer many benefits to airlines and consumers
of both countries. However, this Subcommittee has long been
convinced that an ``open skies'' agreement is of little value
in the passenger market unless Heathrow Airport is truly open
to competition from a wide range of airlines.
The importance of Heathrow, specifically, and the London
market, in general, is hard to overstate. The U.S./U.K. market
is more than double the size of the next largest U.S./European
market. Heathrow Airport is far and away London's key airport.
Competition at Heathrow helps set the tone for competition in
the entire U.S./Europe market.
The American Airlines/British Airways deal would join
together two of only four competitors that fly between Heathrow
and the United States. If that competition cannot be replaced,
consumers certainly will suffer the consequences. The only way
for that competition to be replaced is if other airlines have
access to Heathrow and are able to compete effectively with
American Airlines and British Airways, with flights that are
desirable for U.S. travelers. It seems to me that we are back
again to the issue we were most concerned about four and a half
years ago, and that issue, of course, is slots. There continue
to be disputes about slot availability and possible
divestiture, and we need to carefully examine today the details
of the slot allocation.
American Airlines and British Airways both argue strongly
that market conditions have changed significantly since they
last filed for immunity. This is a crucial issue, and I look
forward to hearing your thoughts on this issue today.
Furthermore, many of our witnesses today will make the point
that alliances offer many consumer benefits and provide
competition against each other, both globally and in specific
markets. This is certainly true and will be an important factor
in our examination and in the examination being done by both
the Justice Department and the Department of Transportation.
Before I turn back to Chairman Kohl, there is one
additional point that I think should be made. Most of our focus
to this point has been on the impact of ``open skies'' and the
various alliances on competition in the passenger market. But
the Subcommittee has had a number of discussions with cargo
carriers as well, and I believe it is clear from those
discussions that an ``open skies'' agreement would benefit U.S.
freight carriers by allowing them to compete more vigorously in
the United Kingdom. We were considering having Federal Express
as a witness to discuss this point, but space considerations
made that impossible. So we are going to accept their testimony
for the record. I think that they make an important point,
though, one we should keep in mind as we move forward in
considering these alliances.
Let me thank our witnesses for coming, and we look forward
to hearing your testimony.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator DeWine.
We have six distinguished witnesses from the commercial
airline industry here today. Our first witness is Mr. Donald
Carty, President and Chief Executive Officer of American
Airlines. Mr. Carty has worked for American Airlines since 1978
and has served in his current position since 1998. Mr. Carty
began his career in the commercial airline business in Canada
over 25 years ago.
Also joining us here today is Mr. Leo Mullin. Mr. Mullin
has been the CEO of Delta Air Lines since August of 1997. Prior
to joining Delta, Mr. Mullin served in key management positions
in major industries, including banking and transportation. In
addition, Mr. Mullin also spent a number of years here in
Washington working for a management consulting firm.
From Northwest Airlines, we will hear from Richard
Anderson. Mr. Anderson was named CEO of Northwest in February
of 2001. He joined Northwest in November of 1990 as Vice
President and Deputy General Counsel and later served as
Executive Vice President and Chief Operating Officer.
From Virgin Atlantic, we are joined by Mr. Richard Branson.
Mr. Branson, also known for his role in the music industry via
the Virgin Group's international megastores, is the original
founder and CEO of the Virgin Atlantic Airways. In 1984, Virgin
Atlantic started with a single jumbo jet flying between London
and New York, and currently the airline flies from London to
over 18 destinations worldwide. In 1999, Mr. Branson received
the honor of knighthood from the Queen of England for his many
accomplishments.
Representing British Airways here today is Roger Maynard,
Director of Alliances and Strategy. Mr. Maynard has worked for
British Airways since 1987. In 1991, he was appointed Director
of Corporate Strategy, where he assumed responsibility for the
company's airport policy, fleet planning, and general corporate
strategy, including the development of the company's global
alliance strategy. Prior to his joining British Airways, Mr.
Maynard served the British Embassy in Washington as consular
for aviation and shipping.
Finally, we will hear today from Larry Kellner, President
of Continental Airlines. Mr. Kellner started with Continental
in 1995 as Executive Vice President and Chief Financial
Officer, and he was named President in May of 2001. As
President, Mr. Kellner is responsible for the airlines' sales
and marketing, scheduling, pricing, reservations technology,
financial operations, corporate real estate alliances, and
corporate development. Prior to joining Continental, Mr.
Kellner worked in the banking industry as Executive Vice
President and Chief Financial Officer of American Savings Bank.
Gentlemen, we ask you to limit your testimony to 5 minutes,
if possible. We will hold the record open for one week to allow
for you to submit additional written testimony of any length.
And so right now, Mr. Carty, we start with you.
STATEMENT OF DONALD J. CARTY, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, AMERICAN AIRLINES, FORT WORTH, TEXAS
Mr. Carty. Chairman Kohl, Senator DeWine, I do appreciate
the opportunity to testify again before you. I wish, of course,
it were under better circumstances. The 2 months since the
terrorist attacks of September 11th have been, without any
question, the worst months in the history of our industry.
Indeed, the recent weeks have taken an emotional and a
financial toll on all of us.
Before I begin, I would like to publicly express my
gratitude to the members and staff of this Subcommittee who
worked night and day in the aftermath of the terrorist attack
to assure the airline stabilization legislation contained
provisions to assure adequate compensation for the families of
the victims without bankrupting the airlines. This really was
an essential, essential component of the bill, and the
contribution of this Committee to that effort simply cannot be
understated, and the people of American Airlines are very, very
appreciative of those efforts.
While the stabilization package that you, of course, passed
has prevented an immediate economic disaster in our industry,
we will not be out of the woods until airline traffic returns
to a more robust level. To put the situation in perspective,
even after accounting for our share of the Federal assistance,
we at American lost $414 million in the third quarter, by far
our largest quarterly loss ever.
Clearly, the most painful action we have had to take in
response to the significant challenges we now face was reducing
our workforce. With the drop in demand for air travel, we have
had to reduce our flying by some 20 percent. That in turn has
forced us to eliminate the equivalent of approximately 20,000
jobs. And while clearly this is something we all wish we could
avoid, in the airline business our cost structure just doesn't
permit operating at 100 percent staffing if you only have a
schedule of 80 percent. There is nothing that we want more than
to see traffic pick back up enough for us to allow to begin
rehiring again. And I do hope in that regard the conferees will
act expeditiously to resolve the differences between the House
and Senate on the airport security legislation so that we can
continue to build a system in which the traveling public has
the utmost confidence.
Senator Kohl, you suggest that I ad lib some remarks on
where I think we have made progress, and, indeed, you have
identified some areas where I think progress yet needs to be
made, and hopefully the bill that the conferees will agree on
will provide at least the envelope for us moving forward on
some of those. But I do think we have accomplished a fair bit
in the period since September 11th.
Obviously, with respect to the integrity of the cockpit,
all of the airlines have moved expeditiously to bar the cockpit
from intrusion in a very significant way with these so-called
``Katie'' bars. They are a very effective way of keeping
unwanteds out of the cockpit. We have also at virtually every
airline established procedures by which that door could only be
opened after the pilot and the flight crew in the back of the
airplane resolved any question about the security of the
airplane.
We have as well, of course, enhanced the security of the
checkpoint in a number of ways. It may not be where it needs to
be, but it has been enhanced. It has been enhanced by the way
we check, the way we wand, and the way we pat down people. We
have developed a selectee program with the FAA where, for a
variety of reasons, a customer can be selected and not only
screened more thoroughly at the checkpoint but, perhaps more
importantly, be subjected to a second screening at the
departure point at the gate. And, indeed, by all reports, while
there was a significant security failure in Chicago last week,
there was also a significant security success because the
catching of the first mistake happened because of the selectee
program and the subsequent examination of bags. And I think
while we have to deplore the failure, the enhanced security
that has been put in place by the new FAA regulations actually
served the industry and United Airlines in that instance really
quite well.
All of you know, of course, we and the FAA have put in
place much more disciplined security procedures with respect to
Reagan Airport. So I do think there is a lot that has been
accomplished there as well. And in addition to that, and
perhaps not as evident to the traveling public, is the better
coordination of intelligence between the Federal Government on
the one hand and the airlines, not only through the selectee
program but also through the identification of very specific
names of people for airlines to look for to subject to further
security screening that we might otherwise do.
So while I agree with you there is more to be done, I think
in a relatively short span of time the FAA and the airlines
have worked to put in place a number of things that make air
travel substantially more safe than it was on September 10th.
One of the other questions I was asked to address today was
how the competitive conditions in the industry have changed
post-September 11th, and obviously, given the industry-wide
decline in demand, we simply don't have the resources to fly
the schedule we had before the attack.
Now, not surprisingly, among the hardest hit by the travel
slowdown has been our international routes, forcing us to
significantly reduce our flying to Europe. In addition, two of
our key international partners--SwissAir and Sabena--have been
forced into bankruptcy, leaving American and our customers with
a significantly diminished network to and within continental
Europe.
Now, today there are two mature international airline
alliances operating with antitrust immunity among its key
transatlantic partners: The Star Alliance, obviously, and the
Wings Alliance. A third, the SkyTeam, is on the brink of
approval, and American and British Airways are seeking
antitrust immunity to establish a fourth such alliance. We seek
nothing more than those before us have been granted by the
regulatory authorities.
There can be little doubt that the creation of a strong
fourth alliance is in the public interest. As corporate travel
managers will tell you, it is much easier and much more cost-
effective to negotiate a single global package with a single
alliance representing several airlines than it is to cobble
together a patchwork of deals with multiple airlines.
I think it is very highly significant that the Business
Travel Coalition which represents corporate travel managers,
and does so throughout the country, has reversed its previous
position on our alliance and has filed in strong support with
the Department of Transportation as well as submitting
testimony at this hearing. In addition, the Airline Passengers
Association has also filed in support of the AA/BA alliance,
and the support of these consumer organizations for our
alliance is reflective of the fact that to be truly
competitive, carriers must provide today's international
customers with a seamless air travel network spanning Europe,
the United States, Canada, Latin America, and Asia.
Antitrust immunity with British Airways would not only
allow us to be more efficient and cost-effective in the
delivery of these services, but the evidence shows that
consumers would be winners also. After all, we have seen a
dramatic rise in Northwest and KLM's transatlantic traffic ever
since they were granted antitrust immunity in 1993. Likewise,
we are increasingly seeing a shift in share to the Star
Alliance, which is comprised most notably of United and
Lufthansa, carriers that were granted antitrust immunity in
1996. And since 1996, in fact, Star's combined share of
transatlantic traffic has increased by some 13 percent, where
our One World Alliance has seen its combined share drop by 15
percent.
Now, I understand that some have argued that the regulatory
review of our alliance with BA should be delayed until some
time has passed, presumably to better understand the fallout
from the September 11th attacks. We are pleased that the DOT
has firmly rejected requests for delays. Ironically, the same
companies that are arguing for our alliance to be delayed have
been actively moving forward on their own alliance plans.
Continental Airlines, for instance, recently applied for
authorization to code-share globally with KLM, setting the
stage for Continental to formally join KLM and Northwest in the
Wings Alliance. In fact, in commenting on the post-September
11th airline marketplace, Continental CEO Gordon Bethune last
week stated flatly, ``Alliances are more important today.'' And
for once--and I am sorry he is not here--I wholeheartedly agree
with Gordon.
For its part, Delta is proceeding with its alliance with
Air France. A Delta official recently stated the airline was
``very hopeful and reasonably optimistic.''
I can see that my time has run out and the chairman is
urging me to move on, so I would just like to close by
addressing the biggest myth that is perpetuated by our
opponents, namely, that without massive divestiture of Heathrow
slots, American and British Airways would dominate the London/
U.S. market. To do so, I would like to draw your attention to
another previous witness before this Committee, and that is
Professor Alfred Kahn. Like many others, Professor Kahn has a
new view of the AA/BA alliance that is based on market changes
since 1996. We have requested and received an analysis from
Professor Kahn in which he explicitly states that his own
disposition towards AA/BA has turned positive. And if I could
read briefly from his analysis, and I quote:
```Hub dominance' such as apparently makes possible a hub
premium is rarely, if ever, to my knowledge, defined as flowing
from a 39 percent share of total operations. The addition of
American's slots to those of British Airways, I understand,
would raise the share of the `dominating' entity only from 37
to 39 percent. Although my experience with airline merger cases
under the antitrust laws is far from encyclopedic, I am unaware
of any case in which so small an increment, particularly to a
pre-merger share of 37 percent, was deemed worthy of antitrust
concern, let alone condemnation.''
He concludes, as shall I, with the following observation
which I urge this Committee to consider carefully, and again I
quote:
``Competition in international aviation has increasingly in
recent years been primarily a competition among alliances,
dominating their own respective hubs and competing with one
another worldwide. In these circumstances, posing impediments
to the American Airline/British Airways alliance becomes a
highly objectionable enterprise in competitive handicapping,
such as I have deplored in a large number of contexts.''
With your permission, Mr. Chairman, I would like to submit
a copy of Professor Kahn's statement for the record, and I
would be very happy to be available to answer questions that
the chairman and any members of the Subcommittee might have.
[The prepared statement of Mr. Carty follows:]
Statement of Donald Carty, Chairman and Chief Executive Officer,
American Airlines
Chairman Kohl, Senator DeWine, and Members of the Subcommittee, I
appreciate having the opportunity to testify before you again, although
I wish it were under better circumstances. The two months since the
terrorist attacks of September 11th have been, without
question, the worst months in the history of the airline industry.
Indeed, the recent weeks have taken an emotional and financial toll on
all of us.
While the stabilization package passed by Congress has of course
helped, the airline industry will not be out of the woods until
Americans start flying again. Even after accounting for our share of
the federal assistance, we at American lost $414 million in the third
quarter, our largest quarterly loss ever. Prior to September
11th, we were certainly seeing a softer revenue environment
as the economic slow-down had resulted in a sharp drop in business
travel. However, the events of September 11th eclipsed any
trends that existed previously.
Clearly, the most painful action we have had to take in response to
the significant challenges we now face in the marketplace was reducing
our workforce. In conjunction with our plan to reduce capacity by 20
percent, we have announced that we would be forced to eliminate
approximately 20,000 jobs, or roughly 17 percent of our workforce.
These reductions are across the board, impacting about 15,000 employees
at American, 3,000 at newly acquired TWA, and 1,500 at our commuter
affiliate American Eagle. While clearly this is something we all wished
we could avoid, our cost structure just does not permit operating at
100 percent staffing of a schedule that is 80 percent of pre-September
11th levels.
I should also note that these cuts have been spread across every
department and at every level, with over 2,000 management personnel
being cut as part of the reduction. I am proud, though, to say that
over 1,500 management employees at American have joined me in taking
voluntary salary reductions.
Now, one of the questions I was asked to address today was how the
competitive conditions in the industry have changed post September
11th. Obviously, given the industry-wide decline in demand,
it does not make sense for any of us to fly the schedule we had before
the attacks. Speaking for American, our 20 percent schedule reduction
is, though painful, fairly straightforward.
First, we cut back on the number of trips we flew in high-frequency
markets. Next, we trimmed back our point-to-point flying in areas where
the new demand levels didn't justify nonstop service. Third, we cut out
the last bank of the day at our hubs in Chicago, St. Louis, and Dallas/
Fort Worth. Finally, we reduced our international flying.
Domestically, other large network carriers have been implementing
similar type reductions. Obviously, smaller carriers have not been
immune from the falloff in travel demand and have had to draw down
their schedules too, particularly shaving some frequencies in their
high frequency markets. For instance, Midwest Express Airlines, which I
am proud to say partners with American Eagle in a number of markets,
has drawn down from five to three the number of daily flights between
its Milwaukee hub and New York La Guardia.
While the current conditions are exceedingly challenging for all of
us big and small, I believe that the measures Congress put in place,
including creating $10 billion in loan guarantees and establishing the
Airline Stabilization Board, will serve to bolster those carriers, such
as Alaska Airlines, Midwest Express, and Jet Blue, that were highly
competitive before September 11th. This in turn should
minimize any potential long-term competitive impacts of this period on
the domestic marketplace. Indeed, last week, Frontier Airlines actually
reported a profit in the September quarter of $7.3 million.
Turning to the international sector, it should come as no surprise
that among the hardest hit by the travel slowdown have been our
international routes, forcing us to significantly reduce our flying to
Europe. In addition, one of our key international partners, Swissair,
has been financially crippled. All of this has left American, and our
customers, without a viable alternative network to and within
continental Europe.
As such, what was already an unlevel playing field-with two
international airline alliances having antitrust immunity among its key
transatlantic partners, one whose key partners are about to get it, and
our alliance with British Airways without it--has become an even
greater obstacle to providing our customers with what they demand. For
example, as corporate travel managers will tell you, it is much easier
and more cost effective for them to negotiate a single global package
with one alliance representing several airlines than it is to cobble
together a patchwork of several deals with several airlines to meet
their comprehensive travel needs. From an airline perspective, we want
to provide today's international corporate customers a seamless air
travel network spanning Europe, the United States, Canada, Latin
America, and Asia. Antitrust immunity would not only allow us to be
more efficient and cost effective in the delivery of these services,
but consumers would be big winners also.
Quite simply, in this increasingly global economy, what our
customers are telling us is that they want one-stop shopping. Immunity
allows airline alliances to provide that, while at the same time it
allows allied carriers to offer better and more competitive network
services. This is why, I believe, we have seen a dramatic rise in
Northwest and KLM's transatlantic traffic ever since they were granted
antitrust immunity in 1993 in exchange for open skies with the Dutch.
Likewise, we are increasingly seeing a shift in share to the Star
Alliance, which is comprised, most notably, of United and Lufthansa-
carriers that were granted antitrust immunity in 1996 in exchange for
open skies with the Germans. Since 1996, Star's combined share of
transatlantic traffic has increased by 13 percent, while our oneworld
alliance has seen its combined share drop by 15 percent. Today, Star is
by far the largest international alliance with 15 airlines, spanning
869 destinations, and accounting for 307 million passengers in 2000. By
contrast, oneworld currently has 8 airlines, spanning 561 destinations,
and accounting for 214 million passengers in 2000.
Now, I understand that some have argued that the regulatory review
of our alliance with British Airways should be delayed until some time
has passed, presumably to better understand the fallout from the
September 11th attacks. We are pleased that the Department
of Transportation has firmly rejected such requests for delay.
Ironically, those making this argument are at the same time moving
forward on their own alliance plans. Continental Airlines, for
instance, recently applied for authorization to engage in global code-
sharing with KLM, setting the stage for Continental to formally join
the Wings alliance. In fact, in commenting on the airline marketplace
post September 11th, Continental CEO Gordon Bethune last
week stated flatly, ``Alliances are more important today.'' I agree
with Gordon.
For its part, Delta is proceeding with its alliance with Air
France. In fact, a Delta official recently stated that Delta is ``very
hopeful and reasonably optimistic'' that its application for antitrust
immunity with Air France is on track for approval by December 1.
Indeed, just three weeks ago, the United States concluded an open skies
agreement with France that paves the way for granting Delta/Air France
immunity. The world is clearly moving forward, and so should we.
In fact, the same time pressure that propelled the French to move
forward on open skies by the end of this year exists on the British as
well. It is no secret that the European Union is actively seeking to,
and most likely will, wrest the right to negotiate aviation treaties
away from France, Britain, and the other European nations by the end of
this year. The European Court of Justice is expected to hand down a
decision on this matter as early as January. If the EU prevails, the
current opportunity to open the skies between the U.S. and the U.K.
will be gone. EU officials have made it clear that they will pursue
issues, such as cabotage, that have not heretofore been included in
open skies agreements. Reaching agreement with the United States on
such issues will take the EU years.
I personally think it would be very unfortunate indeed if we as a
nation missed this opportunity to scrap, once and for all, the
anachronistic bilateral agreement that governs air service between the
U.S. and U.K. For three decades, the United States has been trying to
replace the truly restrictive, anti-free market Bermuda 2 accord with
open skies. It is somewhat hard to fathom that the relationship between
the United States and United Kingdom is so close and open on so many
fronts, yet Bermuda 2 still exists. Fortunately, the United States has
never been closer to getting rid of Bermuda 2 than it is today.
As this Subcommittee is well aware, Bermuda 2 limits direct air
service between the United States and London's Heathrow Airport to only
two U.S. airlines, two British airlines, and 12 U.S. communities.
Although there is substantial nonstop service to London's other
principal airport, London Gatwick, cities like Atlanta, Cleveland, and
Pittsburgh are shut out of Heathrow. As a consequence, air travelers
from many small cities have fewer options for getting to Heathrow than
would be the case under open skies. Eliminating Bermuda 2 will change
all that. Cities that could support nonstop service to Heathrow will
finally have the opportunity to receive such service and small
communities will benefit from a plethora of new one-stop options.
For the past decade, the United States has pursued a policy of
exchanging open skies for the granting of antitrust immunity to
alliances. In recent studies, the DOT has found that the policy has
worked well for consumers: competition in those markets is up, fares
are down, and service levels greater. DOT found, for example, that in
open skies markets where immunity for alliances is available, average
fares declined by 20 percent between 1996 and 1999, compared to a 10
percent decline for non-open skies markets.
I have little doubt that the benefits from previous open skies
agreements, though substantial, will pale in comparison to those
produced by a U.S.-U.K. open skies agreement. One recent study by
Professor Jan Brueckner, for example, projects the benefits to
consumers will exceed $40 million annually just from the American-
British Airways alliance alone. The United Kingdom is this country's
largest overseas aviation market. It is also our largest European
aviation market by a factor of two. And, as I described earlier, it is
our most restricted. Once these restrictions are lifted, five new
entrants--Continental, Delta, Northwest, US Airways, and Britain's
second largest carrier bmi british midland-will have the right to fly
to Heathrow, an amount of new entry unparalleled by any other open
skies agreement.
Now clearly our alliance with BA is the catalyst to getting a U.S.-
U.K open skies deal done. We strongly believe that our alliance will
bring consumers the same benefits that other immunized alliances have
produced as well increase competition between alliances. As you know,
American and BA first announced our proposed alliance in 1996 and
applied for immunity shortly thereafter. We predicted back then that
alliances would define the competitive landscape in the future and that
slots would be available at Heathrow to start a substantial number of
new services. Quite frankly, time has proven us right on both counts.
In 1996, alliances were in their embryonic stages. Just three years
later, however, roughly 60 percent of worldwide capacity was accounted
for by five alliances. Today, that figure tops 75 percent. Indeed,
recognizing that U.S. airlines could neither physically nor
economically serve every corner of the globe with their own airplanes,
DOT has actively encouraged the formation of these alliances as it has
sought to deregulate the international marketplace.
Likewise, as we predicted, slots have become available at Heathrow
since 1996. Through the creation of new slots, exchanges between
carriers, and the replenishing of the slot pool as slots were returned
under use-it-or-lose-it rules, enough slots have come available to
allow for a total of 15 new daily roundtrips to be added between
Heathrow and the United States since 1996. This is equivalent to 210
weekly slots, which I might add, approximates American's entire slot
holdings at Heathrow. In this same time period, enough slots and
facilities became available to allow 10 new carriers to begin
operations at Heathrow. But because we failed to grasp the opportunity
to achieve open skies then available, none of the new airlines at
Heathrow are U.S. carriers.
While I will leave it to Roger Maynard to discuss Heathrow in
further depth, I would like to highlight a few important points. First,
most of the U.S.-Heathrow flights started since 1996 have been added by
our competitors United and Virgin in four of the six nonstop markets
where AA and BA overlap, namely Boston, Chicago, Los Angeles, and New
York. Overall, United has increased its number of flights between the
United States and Heathrow by 64 percent and Virgin by 68 percent since
1996. Somewhere, somehow, United and Virgin were able to get Heathrow
slots. As a result, in terms of passengers carried, American is the
smallest of the four airlines flying between the United States and
Heathrow.
Second, bmi british midland holds 14 percent of all Heathrow slots
and has publicly announced that under open skies it will serve a number
of U.S. cities, including Chicago and Miami where AA and BA currently
overlap. Moreover, bmi british midland and its partners in the Star
Alliance, which holds a combined total of 27 percent of all Heathrow
slots, have announced recently that they will invest over $70 million
to develop Heathrow as a hub for Star.
British Airways accounts for just under 37 percent of all Heathrow
slots. American Airlines adds only 2 percent to that total. Indeed, the
combined AA/BA slot total at Heathrow has declined from 42 percent in
1996 to 39 percent in 2001. Importantly, in a statement last week
showing that his own disposition towards AA/BA has turned positive,
Professor Alfred Kahn provided the following observations on this
point:
``1. `Hub dominance' such as apparently makes possible a hub
premium is rarely if ever, to my knowledge, defined as flowing
from a 39 percent share of total operations. 2. The addition of
American's slots to those of British Airways, I understand,
would raise the share of the ``dominating'' entity only from 37
to 39 percent. Although my experience with airline merger cases
under the antitrust laws is far from encyclopedic, I am unaware
of any case in which so small an increment, particularly to a
pre-merger share of 37 percent, was deemed worthy of antitrust
concern, let alone condemnation.''
It sounds to me as if Dr. Kahn would be far more concerned with
Lufthansa and United's 63 percent share of Frankfurt, Air France and
Delta's 57 percent share of Paris De Gaulle, and KLM and Northwest's 56
percent share of Amsterdam, than he is with BA and AA's 39 percent
share of Heathrow.
In closing, I think you can probably tell that I strongly believe
that it is simply unfair to hold AA/BA back while other alliances
continue to move forward. I am gratified that Professor Kahn, as
evidenced in his statement last week, now shares that view:
``Competition in international aviation has increasingly in
recent years been primarily a competition among alliances,
dominating their own respective hubs and competing with one
another worldwide. In these circumstances, posing impediments
to the American Airlines/British Airways alliance becomes a
highly objectionable enterprise in competitive handicapping,
such as I have deplored in a large number of contexts.''
Thank you again for the opportunity to testify today. I would be
happy to answer any questions that the Chairman and Members of the
Subcommittee might have.
Chairman Kohl. Thank you, Mr. Carty.
Mr. Mullin, you are next and, gentlemen, I hope you will
keep your statements down to 5 minutes so we can have time for
an exchange of views.
Mr. Mullin?
STATEMENT OF LEO F. MULLIN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, DELTA AIR LINES, ATLANTA, GEORGIA
Mr. Mullin. Thank you, Senator Kohl, and thank you, Senator
DeWine. I would like to associate myself with comments that
were just made by Don Carty on two points: one, to thank this
Committee for the terrific work that it did in the aftermath of
the tragedy on September 11th. It was both necessary and
extraordinarily commendable. And, secondly, to also join myself
in terms of his comments on security, and in the interest of
time, I won't repeat those, but I would be happy to take
questions on them as well. But I think Mr. Carty has done a
very fine job of stating them, and if I can, I would also like
to commend Don Carty for his leadership of the Air
Transportation Association. He is our chairman, and he has done
an excellent job in leading us during this difficult time.
This morning, then, I would like to focus on two key
points: one, and most importantly, Delta is staunchly in favor
of alliances as long as the competitive balance of the
marketplace is maintained; secondly, however, the grant of
antitrust immunity for British Air and American Airlines raises
serious questions about competitive balance due to lack of
access at London Heathrow, the biggest and most lucrative U.S.-
to-Europe destination.
Beginning with my first point, Delta is a staunch supporter
of alliances. These alliances have enabled airlines to meet the
growing demand of passengers to travel from anywhere to
everywhere. And as part of the SkyTeam Alliance, Delta and
partners Air France, Alitalia, and CSA Czech Airlines currently
compete in the transatlantic marketplace with Star and with KLM
and Northwest, two alliances with antitrust immunity. We are
hopeful that DOT will soon approve SkyTeam's application for
antitrust immunity, bringing that number to three. Combined,
these alliances offer over 110,000 potential transatlantic
markets and give passengers more choices and lower prices.
Mr. Chairman, with one notable exception, which I will
discuss, Delta has not opposed antitrust immunity for any
competing alliance, nor will we, as long as a competitive
marketplace is maintained. That exception is obviously the
proposed American Airlines/British Airways alliance, which
would, without specific alterations, create overwhelming
dominance at London Heathrow.
It is worth noting that while Delta's SkyTeam application
has generated no opposition, the response to American Airlines
and British Airways' application stands in stark contrast. The
key point of difference is the matter of competition and access
at London Heathrow. Heathrow, as Senator DeWine has mentioned,
is Europe's premier airport, serving almost 11 million
passengers each year, twice as many as Frankfurt, twice the
combined 6 million served by both Paris airports, Charles De
Gaulle and Orly.
London passengers continue to prefer Heathrow to London-
Gatwick two to one, and high-yield business travelers prefer it
three to one. Instead of increasing competition at Heathrow,
the proposed alliance would allow the largest two carriers in
the market--American Airlines and British Airways--to fully
dominate the market.
Now, in a time period when much change has been going on in
aviation around the world, with respect to this situation,
nothing has changed. The proposed American Airlines/British
Airways alliance is a repeat of the proposal that was
resoundingly rejected in 1998. At that time, each regulatory
body that reviewed the alliance drew the same conclusion:
Absent a significant divestiture of slots to allow other
carriers to compete at Heathrow, the American/British Airways
alliance was anti-competitive. In the words of the Department
of Justice, ``The competitive losses accompanying approval of
this alliance would be immediate and substantial.''
Mr. Chairman and members of the Subcommittee, nothing has
changed. The key issue continues to be access to Heathrow. The
owners of Heathrow, BAA, and Airport Coordination Limited noted
in filings to the Department of Transportation that they expect
``only a few additional slots to be created at Heathrow, a
small amount of which are expected in the hours that
transatlantic flights are currently being operated. Without
reallocation of current slots, no new meaningful access is
possible.''
Proponents of American/British Airways allege, however,
that three factors have significantly changed the competitive
landscape: first, that Heathrow has lost its competitive
importance; secondly, that an immunized United/British Midland
alliance will remedy competitive concerns; and, third, that
other carriers seeking entry to Heathrow can obtain slots and
facilities from their alliance partners.
Mr. Chairman, these representations are simply not true. As
President John Adams once said, ``Facts are stubborn things.''
So, to the first point, London-Heathrow's importance is
undiminished. To the contrary, Heathrow continues to handle
twice as many passengers as the next largest airport,
Frankfurt.
Secondly, to the second point, that United/British Midland
will remedy competitive concerns, that alliance merely creates
a two-alliance monopoly at Heathrow. AA/BA and United/British
Midland would control 87 percent of the U.S. Heathrow slots.
And the remaining U.S. carriers--Delta, Northwest, Continental,
and US Airways--will have no viable access to this immensely
important market. And since United and BMI already have slots
at Heathrow, competition will simply not increase.
Also, finally, Delta's SkyTeam partners cannot give up
slots at Heathrow. For our partners, these slots allow them to
compete against British Airways and to serve their home markets
such as Paris, Milan, Rome, and Prague. And even if this were
possible, such exchanges would simply shift slots around rather
than increase competition.
Mr. Chairman, again, the problem with this alliance is
Heathrow. If the DOT considers approving this application, it
must ensure: first, significant divestiture of slots from BA
and American to permit other airlines to compete; second,
airport gates and terminal facilities adequate for new
services; and, third, lead time for new competitors to launch
services before implementation of the alliance.
Delta is prepared to launch 11 daily services to Heathrow:
three from Atlanta, two from Cincinnati, two from Boston, and
four from JFK.
Mr. Chairman, Delta understands AA and BA's desire for
antitrust immunity. We welcome that competition. But this
alliance is not about creating network expansion through end-
to-end combination of complementary hub systems, as is the case
for other alliances. This alliance is about allowing two
carriers overwhelming domination of the largest and most
important U.S. international aviation destination--Heathrow.
American and BA must decide if the benefits of an
antitrust-immunized alliance are of sufficient importance to
warrant the essential preliminary step of allowing true and
meaningful competition at London's Heathrow.
Thank you very much.
[The prepared statement of Mr. Mullin follows:]
Statement of Leo Mullin, Chief Executive Officer, Delta Airlines
Introduction
Mr. Chairman and members of the Subcommittee, thank you for this
opportunity to appear before you today to discuss the importance of
international airline alliances and the beneficial role anti-trust
immunity can play in improving those alliances.
At a time when good news in the airline business is increasingly
rare, the subject of alliances is clearly good news.
The evolution of alliances is a compelling story. Beginning with
the ``outside the box'' thinking of KLM and Northwest in being the
first alliance to seek antitrust immunity in the early 1990s, to the
formation of the STAR alliance in the late 1990s to the recent
ascension of our own SkyTeam Alliance (Delta, Air France, Aeromexico,
Alitalia, CSA Czech Airlines and Korean Air Lines), these competitive
partnerships have created a dynamic environment across the Atlantic and
around the globe. The alliance arena has truly gone from a novelty in
its infancy to a mature marketplace fixture in just a few short years.
Alliances evolved as a reflection of a changing global economic
environment. With the end of the cold war, the world opened up for
business and travel. This environment made carriers realize we had to
meet the changing demands of our passengers--demands that increasingly
focused on total global access.
But no carrier could do this on their own. No carrier could reach
every corner of the globe with its own resources in an efficient
manner. The task was too large to accomplish given the geography
involved, the limits of our resources and the need to remain
profitable.
Yet, carriers had to respond to demands of the marketplace or be
relegated to a competitively disadvantaged niche carrier status. How
did we accomplish this?
We responded by forming cooperative networks with strategically
positioned carriers to meet the goal of getting people ``from anywhere
to everywhere.''
And this is where we are today--creating seamless networks that
cover the globe. Atlanta and Paris, Chicago and Frankfurt, Detroit and
Amsterdam are linked through the resources of their respective hub
carriers to create vast end-to-end connecting complexes that give
passengers the ability to easily fly virtually ``from anywhere to
everywhere,'' safely, quickly and more conveniently than ever before.
(Charts 1,2, 3)
Consumers benefit through these combinations by enjoying
increased global access with numerous connecting possibilities
via several hubs;
competitive prices and additional flights
enhanced frequent flyer program access with more mileage and
more awards, and
consistent policies and procedures across various airlines.
SkyTeam Antitrust Immunity
As part of the SkyTeam alliance, Delta and its European partners
Air France, Alitalia and CSA Czech Airlines currently compete in the
transatlantic marketplace with STAR and KLM/Northwest, two alliances
with anti-trust immunity.
SkyTeam's application for antitrust immunity is currently pending
before the DOT.
No carrier has voiced substantive objections to our application, so
we are hopeful that a third immunized alliance--namely SkyTeam--will
soon create an even more competitive transatlantic market.
Combined, these three alliances will offer over 110,000 potential
transatlantic city pair markets--and we will compete for passengers on
the bulk of these city pairs.
This vigorous competitive alliance marketplace across the Atlantic
creates a win-win for carriers and consumers by generating more
flights, more choices, and lower prices for passengers. The Department
of Transportation acknowledged this fact in a recent report entitled
``Transatlantic Deregulation: The Alliance Network Effect.'' In the
report, the Department stated that alliances have ``created a more
competitive transatlantic structure. Thus, new flexibility for carriers
to respond to marketplace demands has led to downward pressures on
price, both due to increased supply and increased competitiveness.''
(Emphasis added)
The Positive Role of the U.S. Government
The Government has played an extremely constructive role in
fostering the development of alliances. The Department of
Transportation and the State Department have been very pro-active in
its pursuit of open skies agreements as a precursor to granting anti-
trust immunity.
Working closely with affected carriers, the U.S. government has
helped ensure that a sound regulatory backdrop of open access to
airports and markets exists so all U.S. carriers enjoy a level playing
field in the alliance environment. To date, we have negotiated over 50
open skies agreements and we know there will be many more.
This partnership between government and industry in deregulating
the global aviation arena is a key by-product of the evolution of
alliances.
I am pleased to say that Delta is taking an active and successful
role in these developments to date.
We are anxious to have the SkyTeam join other alliances in
receiving antitrust immunity and we believe consumers and our airlines
will be better for it.
Summary of Main Points
With that background, I'll focus the remainder of my comments on
two main points:
Delta is staunchly in favor of alliances with anti-trust
immunity as long as the competitive balance of the marketplace
is maintained.
However, granting anti-trust immunity between British Airways
and American Airlines raises serious questions about
competitive balance due to lack of access to London-Heathrow,
the largest and most lucrative U.S.-Europe market.
Delta is a Staunch Supporter of Alliances
Beginning with my first point: Delta is staunchly supportive of
alliances and of anti-trust immunity for those alliances that are pro-
competitive.
We did not oppose formation of the STAR alliance nor its
request for antitrust immunity.
We support the pioneering work by KLM and Northwest as the
first immunized alliance.
We did not oppose American Airlines' application for antitrust
immunity with Swissair and Sabena.
Mr. Chairman, with one notable exception, which I will discuss in a
moment, Delta has not opposed anti-trust immunity for any competing
alliance--nor will we, as long as we can be assured a competitive
marketplace will prevail.
Delta's Concern Over AA/BA
Such a competitive marketplace requires, and our government has
supported, open skies agreements between the U.S. and the associated
carrier's government.
These agreements guarantee unrestricted opportunity for all U.S.
carriers to compete under true--not theoretical--open skies conditions.
Let me explain the difference.
While an open skies agreement removes artificial regulatory
restrictions on U.S. carriers serving the associated country's markets,
the policy is only ``theoretical'' if other barriers to entry remain,
such as slot scarcity and unavailability of gates and other operational
requirements. True open skies exists, for example, in the recent
agreement between the U.S. and France, since any U.S. carrier wishing
to serve any airport in France, including Charles de Gaulle in Paris,
can actually--not just theoretically--do so at any time. The same is
true of Skyteam airports in Milan, Rome and Prague.
This is not the case in the proposed open skies and anti-trust
immunity alliance between American Airlines and British Airways.
Unlike any previously approved alliance, AA and BA would, without
specific alterations, continue to dominate overwhelmingly at London
Heathrow, effectively blocking access by most other U.S. carriers in
this largest of all U.S.-Europe markets.
Heathrow serves almost 11 million U.S/U.K. passengers each
year, roughly twice as many as the 6 million served each year
at Frankfurt airport and twice as many as the combined 6
million served by both Paris airports, Charles de Gaulle and
Orly Heathrow. (Charts 4,5)
What's more, London passengers continue to prefer Heathrow to
London-Gatwick by a margin of 2 to 1, and the lucrative
business travelers prefer it by almost 3 to 1. The marketplace
has repeatedly proven that Gatwick is not an adequate
substitute for Heathrow. (Chart 6, 7)
Instead of increasing competition in this market, which is
closed to most U.S. airlines, the proposed alliance would
reduce competition by allowing two of the largest carriers in
the market, AA and BA, to stop competing with one another.
Nothing has Changed
The proposed AA/BA alliance is a repeat of the proposal that was
resoundingly rejected in 1998, when each regulatory body that reviewed
the alliance drew the same conclusion: absent a significant divestiture
of slots to allow other carriers to compete at Heathrow, the AA/BA
alliance was anti-competitive.
In the words of the DOJ: ``The competitive losses accompanying
approval of this Alliance would be immediate and substantial.''
Mr. Chairman and members of the subcommittee: Nothing has changed.
The potential adverse competitive consequences of an AA/BA alliance
remain as significant today as they were in 1998. In fact, if this
alliance is approved, 80% of U.S.-Heathrow passengers from cities
across the country would have fewer or no choice of airlines. (Chart 8)
Heathrow Access is Essential
The key issue continues to be access to Heathrow access.
Due to the lack of slots and facilities at Heathrow, there are no
current or foreseeable opportunities for non-incumbent Heathrow
carriers, such as Delta, to mount a significant competitive presence
against AA/BA.
The owners of Heathrow, BAA, and Airport Coordination Ltd., the
body that oversees slot allocation at Heathrow, have confirmed this
fact in its filings at the Department of Transportation.
To quote directly, ``. . .it is not possible to increase
Heathrow's runway capacity by more than a minimal amount
without changing the operating protocols. . . .and until
Heathrow's Terminal 5 is approved, built, and opened, there is
relatively little that can be done to relieve the aircraft
parking and terminal capacity restraints.'' (Chart 9)
Proponents of this alliance allege three factors have significantly
changed the competitive landscape and the alliance should therefore be
approved:
1. London's Heathrow does not have the competitive importance
it once had due to the presence of other competing alliances;
2. An immunized United/British Midland (BMI) alliance will
remedy competitive concerns at Heathrow.
3. Other U.S. carriers seeking entry to Heathrow will be able
to obtain slots and facilities from their alliance partners.
Mr. Chairman, these representations simply are not true.
1. London-Heathrow's importance has not been diminished by the
presence of competing alliances.
Heathrow continues to be by far the most important airport in
the U.S.-Europe market, accounting--as I mentioned earlier--for
roughly twice passengers as many as the 6 million served each
year at Europe's second most important airport--Frankfurt--and
twice as many as the combined 6 million served by both Paris
airports, Charles de Gaulle and Orly. (Chart 4)
2. Regarding the second point--that an immunized United/British
Midland alliance would remedy competitive concerns at Heathrow--that
recent alliance merely creates a two-alliance monopoly at Heathrow.
Under this scenario, AA/BA's oneworld alliance and United/
British Midland's Star alliance would control 87% of the U.S.
Heathrow slots. (Chart 10)
The remaining U.S. carriers--Delta, Northwest, Continental and
US Airways--remain locked out of the number one airport in the
number one U.S.--Europe market.
What's more, since United and BMI already have slots and
facilities at Heathrow, the increase to marketplace competition
will be zero.
3. Finally, number three, Delta's SkyTeam partners have already
informed us they can not afford to give up slots at Heathrow.
For our partners, these slots from the foundation of their ability
to compete against British Airways and are the method by which they
serve their home markets such as Paris, Milan, Rome, and Prague.
(Charts 11, 12)
In addition, the sacrifice slots should not be a requirement
for alliance membership.
Mr. Chairman, I cannot stress enough that the problem with this
alliance is access to Heathrow.
Other U.S. carriers must be able to compete with AA and BA in this
crucially important international market.
If the DOT is going to consider approving this application, it must
ensure:
A significant divestiture of takeoff and landing slots from
British Airways and American to permit other airlines to offer
competitive services, (Chart 13)
Airport gates and terminal facilities at London Heathrow to
accommodate the new services
And the opportunity for competitors to initiate their new
services to London Heathrow before implementation of the
alliance.
These steps are essential in order to ensure our ability to compete
effectively with AA and BA in both price and service.
Delta is prepared to launch 11 daily services to Heathrow:
3 from Atlanta
2 from Cincinnati
2 from Boston
4 from JFK--JFK is especially important as AA and BA are
planning to offer a combined 13 daily flights in this market.
Mr. Chairman, Delta understands the desire on the part of AA and BA
to attain anti-trust immunity in order to compete more effectively in
the alliance market.
We welcome that competition.
But this alliance is not about creating network expansion through
the end-to-end combination of complementary hub systems, as is the case
for other alliances.
Rather, this alliance is about allowing two carriers overwhelming
domination of the largest and most important U.S. international
aviation destination--London.
American and British Airways must decide if the benefits of an
anti-trust immunized alliance are of sufficient importance to warrant
the essential preliminary step of allowing true and meaningful
competition at London's Heathrow.
Thank you.
[GRAPHIC] [TIFF OMITTED] 81815.001
[GRAPHIC] [TIFF OMITTED] 81815.002
[GRAPHIC] [TIFF OMITTED] 81815.003
[GRAPHIC] [TIFF OMITTED] 81815.004
[GRAPHIC] [TIFF OMITTED] 81815.005
[GRAPHIC] [TIFF OMITTED] 81815.006
[GRAPHIC] [TIFF OMITTED] 81815.007
[GRAPHIC] [TIFF OMITTED] 81815.008
[GRAPHIC] [TIFF OMITTED] 81815.009
[GRAPHIC] [TIFF OMITTED] 81815.010
[GRAPHIC] [TIFF OMITTED] 81815.011
[GRAPHIC] [TIFF OMITTED] 81815.012
[GRAPHIC] [TIFF OMITTED] 81815.013
Chairman Kohl. Thank you, Mr. Mullin.
Mr. Anderson?
STATEMENT OF RICHARD ANDERSON, CHIEF EXECUTIVE OFFICER,
NORTHWEST AIRLINES, INC., EAGAN, MINNESOTA
Mr. Anderson. Yes, thank you, Senator Kohl, Senator DeWine.
We appreciate the opportunity to be here. I also endorse Don
Carty's statements as chairman of the Executive Committee of
ATA on the issue of security, and I would add one amendment.
The U.S. airlines have worked closely since the events of 9/11
to increase the pay of screeners at checkpoints, to
significantly increase the number of magnometers and X-ray
machines at checkpoints so that we have the resources, both
personnel and equipment, both at the gates, where we have all
bought many more wanding devices, and at the security
checkpoints in airports. So we have all made that a priority in
terms of expenditures at a very difficult time financially in
our industry.
With that I will move to the subject at hand.
Thank you for the invitation to appear before the Committee
today to discuss the proposed alliance of BA and AA and, in
particular, the request that the alliance be granted immunity
from the antitrust laws.
I testify here today as an advocate of international
alliances. Northwest and KLM pioneered the first transatlantic
alliance with immunity from the antitrust laws. The Northwest/
KLM alliance works by connecting the KLM network in Europe with
the Northwest network based in Minneapolis/St. Paul, Detroit,
and Memphis. This network extension allows passengers traveling
from Milwaukee to Warsaw to have more convenient itineraries
and generally cheaper fares. When we formed the alliance, there
was no head-to-head competition, and since then, United, Delta,
US Airways, and Continental have all commenced new competitive
service to Amsterdam's Schiphol Airport.
In contrast, BA and AA are each other's biggest competitors
in U.S.-London markets with substantial overlap. Their alliance
focuses on the elimination of direct competition and not on
creating new benefits by connecting two new networks. London's
Heathrow Airport is closed to new competitive entry by Delta,
Continental, Northwest, and US Airways.
To put it in context, if you analogized the U.S.-Heathrow
market to the U.S. domestic market, an AA/BA merger would be
equivalent to an American/United merger. But only imagine how
much worse an American/United merger would be if Delta,
Continental, and Northwest would be precluded from operating
any flights to O'Hare or DFW, the functional equivalent of
Heathrow in the AA/BA case.
In a recent editorial on the proposed deal, the highly
respected London newspaper, the Financial Times, concluded:
``In any other industry this would be considered a squalid
compromise, clearly contrary to the public interest. It would
create the potential for a cartel with a dominant position at
Heathrow, even though it would have to surrender some of its
existing slots.''
The AA/BA alliance is all about Heathrow. Under Bermuda 2,
only two U.S. airlines are permitted to serve U.S.-Heathrow:
United and American. It is clearly advantageous, it is the
choice of the business traveler, and as Mr. Mullin related to
you, it is clearly the preference both of passengers--which, of
course, is reflected in the higher yields and fares that are
paid for service to Heathrow. I believe our own Justice
Department in the previous proceedings on this subject
concluded that Heathrow was a separate market or purposes of
antitrust analysis.
The AA/BA immunized alliance will create dangerous levels
of market power. Under the proposed deal, the anti-competitive
harm flowing directly from the proposed alliance will be large
and enduring. AA and BA are the largest airlines of each
country and two of only four airlines permitted to operate
between the United States and Heathrow. Today, they are each
other's biggest competitors in the U.S.-London and U.S.-
Heathrow market, and in six U.S.-London city pairs--Boston/
Chicago/Dallas/L.A./Miami and New York-Heathrow--and give U.S.-
Heathrow city pairs--Boston/Chicago/L.A./Miami and New York.
In every case, the AA/BA alliance will increase
concentration in amounts and levels that vastly exceed the
increases and resulting concentration levels deemed tolerable
under the United States Merger Guidelines. If granted antitrust
immunity, instead of being each other's strongest competitor,
American and BA will cease competing with each other at all and
combine their market power to limit capacity and raise prices.
The AA/BA merger will result in increased concentration and
afford the two carriers market power in the U.S.-Heathrow
market of 6 million annual O&D passengers and a U.S.-London
market of almost 10 million O&D passengers. These non-stop
U.S.-Heathrow overlap markets alone account for $4 billion in
annual business. To put this in context, the revenues in the
non-stop U.S.-Heathrow markets where American and BA overlap
are twice as large as the United-US Air overlap markets, which
were just turned down, and 10 times larger than the revenues in
the non-stop overlap markets allegedly affected by Northwest's
ownership in Continental, both of which were opposed by the
DOJ.
Finally, the competition lost by the AA/BA alliance cannot
be replaced by new entry because of slot constraints at London-
Heathrow Airport. BAA, the airport authority, has told us there
are no more gates, and the slot coordinator has said there are
no slots available and there is no real gray market in slots.
American has contended and BA has contended that we can
obtain slots from our alliance partners. Our alliance partner
KLM has said no to that request. They have very few slots that
they serve Amsterdam-London with. And, in fact, those slots are
not for wide-body airplanes and do not coordinate to the times
of day for departures and arrivals for U.S. connecting service.
I appreciate the opportunity to appear before you today and
look forward to questions, either on security or the AA/BA
alliance. Thank you for this opportunity.
[The prepared statement of Mr. Anderson follows:]
Statement of Richard Anderson, Chief Executive Officer, Northwest
Airlines
Mr. Chairman and Members of the Committee, my name is Richard
Anderson and I am Chief Executive Officer of Northwest Airlines. Thank
you for your invitation to appear before the Committee today to discuss
the proposed alliance of British Airways and American Airlines and, in
particular, the request that the alliance be granted immunity from the
antitrust laws of the United States.
I testify here today as an advocate of international alliances.
Northwest and KLM pioneered the initial transatlantic alliance with
immunity from the antitrust laws. The Northwest/KLM immunized alliance
model works by connecting the KLM European network based in Amsterdam
with Northwest's US network with hubs in Minneapolis/St. Paul, Detroit
and Memphis. This network extension allows passengers traveling, for
example, from Milwaukee to Warsaw to have more convenient itineraries
and generally cheaper fares. There was no head-to-head competition when
the Northwest/KLM alliance was formed. Since Northwest and KLM formed
its alliance, United, Delta, US Airways and Continental have all
commenced new competitive service to Amsterdam's Schiphol Airport.
In contrast, British Airways and American are each other's biggest
competitor in US-London markets with substantial overlap. Their
alliance focuses on the elimination of direct competition and not on
creating new public benefits by connecting two networks, and London's
Heathrow Airport is closed to new competitive entry by Delta,
Continental, Northwest and US Airways.
To put this in context, if you analogized the US-Heathrow market to
the US domestic market, an AA/BA ``merger'' would be equivalent to an
American/United merger. But only imagine how much worse an American/
United merger would be if Delta, Continental and Northwest would be
precluded from operating any flights to Chicago O'Hare or Dallas/Fort
Worth airports, the functional equivalent of London Heathrow in the AA/
BA case.
In a recent editorial on the proposed deal, the highly respected
London newspaper the Financial Times concluded: ``In any other industry
this would be considered a squalid compromise, clearly contrary to the
public interest. It would create the potential for a cartel with a
dominant position at Heathrow, even though it would have to surrender
some of its existing slots.'' (October 23, 2001).
I. The AA/BA Alliance Is All About Heathrow
Under Bermuda 2, only two US airlines (American and United) and two
British airlines (BA and Virgin) are permitted to serve the US-Heathrow
market. Heathrow's advantageous central location and superior ground
access make it the preferred airport for a large majority of
passengers, particularly business passengers and others who place a
premium on travel time and convenience. It is not possible for US
carriers to compete effectively with Heathrow service via Gatwick. BA's
public documents acknowledge BA's Heathrow service produces per-
passenger ``unit revenues'' that are 15% higher than its unit revenues
at Gatwick. DOT data show that for the fiscal year 2000, as a result of
the different passenger mix at the two airports, average fares paid in
the US-Heathrow market were 31% higher than in the US-Gatwick market.
II. An AA/BA Immunized Alliance Will Create Dangerous Levels of Market
Power
Under the proposed deal, the anti competitive harm flowing directly
from the proposed AA/BA Alliance will be large and enduring. American
and BA are the largest airlines of each country and two of only four
airlines permitted to operate between the US and Heathrow. Today, they
are each other's biggest competitors in the US-London and US-Heathrow
markets, and in six US-London city-pairs (Boston/Chicago/Dallas/Los
Angeles/Miami and New York-Heathrow) and five US-Heathrow city-pairs
(Boston/Chicago/Los Angeles/Miami and New York-London).
In every case, the AA/BA Alliance will increase concentration in
the relevant markets in amounts and to levels that vastly exceed the
increases and resulting concentration levels that are deemed tolerable
under the U.S. Merger Guidelines. Using the Herfindaho-hirschman Index
of market concentration, the Guidelines state that any market with a
post-merger HHI of greater than 1800 points is deemed to be ``highly
concentrated.'' The Guidelines further state that enforcement agencies
will presume that any merger producing a post-merger HHI greater than
1800 and an HHI increase of more than 100 are likely to create or
enhance market power or facilitate its exercise.\1\
---------------------------------------------------------------------------
\1\ The Guidelines also provide that the presumption may be
overcome by showing that other factors make it unlikely that the merger
will create or enhance market power or facilitate its exercise. As
discussed in Part IV below, those factors are not present here because
of the extraordinarily high entry barriers at London Heathrow.
---------------------------------------------------------------------------
a. u.s.-heathrow
The proposed Alliance will produce exceptionally high levels of
market concentration in the U.S.-Heathrow market, which is already
highly concentrated. In the U.S.-Heathrow market, the proposed alliance
will produce an HHI increase of 1729n points and an HHI level of 4388
points. This increase would be 17 times the threshold level at which
the Merger Guidelines would presume the creation or enhancement of
market power. The ``merged'' alliance, operating 305 weekly
frequencies, would have a market share of 61.0% of all frequencies in
the U.S.-Heathrow market.
b. u.s.-london
Service to Heathrow is a distinct, relevant market and must be
considered on a separate basis from service to ``London'' in all cases.
However, even if London is treated as a single aggregated market
combining service both to Heathrow and Gatwick, the proposed Alliance
will result in exceptionally high levels of concentration. In the U.S.-
``London'' market (which is already ``highly concentrated''), the
proposed alliance will produce an HHI increase of 1287 points and an
HHI level of 3327 points. This increase would be 12 times the threshold
level at which the Merger Guidelines would presume the creation or
enhancement of market power. The ``merged'' alliance would have 53.5%
of the frequencies operated between the U.S. and London. In comparison,
the next largest operator in the U.S.-London market, United, provides
14.6% of the frequencies; the remainder are spread among eight
airlines.
c. aa/ba city-pair overlap markets
American and British Airways today compete head-to-head in five
U.S.-Heathrow city-pair markets: Boston-LHR; Chicago-LHR; Los Angeles-
LHR; Miami-LHR; and New York (including Newark)-LHR.The chart below
sets forth the pre-and post-merger concentration ratios on the Heathrow
overlap markets, which reflects all competitors operating between the
U.S. point and London Heathrow. The chart also shows New York-London
Heathrow separately for JFK as well as combined with Newark. As is
shown in the chart, each of the five Heathrow increase well in excess
of 100 points. In the large New York JFK-London Heathrow market, the
HHI increase is 2,081 points and the post-merger market share is 65.1%.
Even when combined with service from Newark, the results are largely
the same. In Boston-London Heathrow, there is an HHI increase of 3,333
and a resulting market share of 83.3%. And, in the Miami-London
Heathrow market, the merger results in a monopoly.
aa/ba overlap routes (u.s.-lhr) hhis and market shares
based on number of frequencies
september 2001
----------------------------------------------------------------------------------------------------------------
Origin Pre-Merger Post-Merger Increase AA/BA Market share
----------------------------------------------------------------------------------------------------------------
JFK 2,581 4,662 2,081 65.1%
NYC (JFK & EWR) 2,596 4,593 1,997 64.1%
BOS 3,889 7,222 3,333 83.3%
ORD 3,000 4,531 1,531 61.3%
MIA 5,556 10,000 4,444 100.0%
LAX 2,188 2,813 625 37.5%
----------------------------------------------------------------------------------------------------------------
American and British Airways today compete head-to-head in six
U.S.-London city-pair markets, which includes London Heathrow and
Gatwick: Boston-London; Chicago-London; Dallas-London; Los Angeles-
London; Miami-London; and New York (including Newark)-London. The
second chart below sets forth the pre- and post-merger concentration
levels on the U.S.-London overlap markets. As shown in the chart, even
when the market is expanded to include service to London Gatwick, the
increases in concentration levels post-merger are extremely high. Each
route was highly concentrated before the merger, and on each route
their is an HHI increase well in excess of 100 points. In the New York
JFK-London, the increase in the HHI is even higher than in the JFK-
London Heathrow market and the resulting market share is higher as
well. And as the chart reflects, the merger results in a monopoly in
the Dallas-London market.
aa/ba overlap routes (u.s.-london) hhis and market shares
based on number of frequencies
september 2001
----------------------------------------------------------------------------------------------------------------
Origin Pre-Merger Post-Merger Increase AA/BA Market share
----------------------------------------------------------------------------------------------------------------
JFK 2,691 4,831 2,140 66.7%
NYC (JFK & EWR) 2,323 3,980 1,657 59.0%
BOS 2,500 4,375 1,875 62.5%
ORD 3,000 4,531 1,531 61.3%
MIA 3,750 6,250 2,500 75.0%
DFW 5,556 10,000 4,444 100.0%
LAX 2,188 2,813 625 37.5%
----------------------------------------------------------------------------------------------------------------
III. The Potential Harm To Consumers Is Enormous
The potential harm to consumers in this case is enormous. An AA/BA
operating merger will result in increased concentration and presumptive
market power in a US-Heathrow market of 6 million annual O&D passengers
and a US-London market of 9.4 million O&D passengers. The local U.S.-
London market is by far the largest U.S. transatlantic aviation
market--alone it is much larger than the total traffic between the U.S.
and all of Germany and more than twice as large as the entire U.S.-
France market. The U.S.-London market dwarfs the markets that are at
the core of the other transatlantic alliances. It is over three times
the size of the U.S.-Frankfurt market (the core of the STAR alliance),
well over two times the size of the U.S. Paris market (the core of the
SkyTeam alliance), and nearly five times the size of the U.S. Amsterdam
market (the Core of the NW/KLM alliance).
The nonstop U.S.-Heathrow overlap markets alone account for almost
$4 billion in annual business. To put this in context, the nonstop
U.S.-Heathrow markets where American and BA overlap are twice The size
of the United/U.S. Airways nonstop overlap markets, a transaction that
was abandoned in the face of an announced challenge by the Justice
Department. Similarly, the revenues in the nonstop overlap markets
allegedly affected by Northwest's ownership interest in Continental
Airlines, which was challenged by the Justice Department, was much
smaller than what is at stake here. In that case, DOJ valued the
nonstop overlap markets at $350 million in annual review--less than ten
percent of the size of the U.S.-Heathrow nonstop overlap markets at
risk in the AA/BA Alliance.
IV. The Competition Lost By An AA/BA Alliance Cannot Be Replaced By New
Entry Because Of Slot Constraints At London Heathrow
The competition that would be lost as a result of the AA/BA
Alliance will not be replaced by new entry. American and BA will have
you believe that new entry at Heathrow is not a problem. They are
wrong.
The British Airports Authority (``BAA'') and Airport Coordination
Limited (``ACL'') have officially notified DOT that slots and
facilities needed for competitive entry by US carriers at Heathrow are
not available through conventional slot allocation procedures or
through purchase on the grey market, and will not be available for many
years to come. Absent substantial divestitures of slots and facilities
at Heathrow, new entry by U.S. carriers into U.S.-Heathrow city-pair
markets will not happen.
At the outset, it must be understood that the entire universe of
Heathrow slots are not suitable to meet the needs of U.S.carriers
attempting to compete with the AA?BA Alliance. It is the availability
of slots during the time windows for transatlantic service that is
relevant to an analysis of the likelihood of substantial new entry. It
must also be understood that a ``slot'' at Heathrow does not refer only
to a landing or departure time. The slots and associated facilities are
``aircraft specific,'' i.e., a slot for use by narrow body aircraft,
such as an A320, will have an associated parking stand that can handle
such an aircraft and terminal facilities that are geared to carrier
that wants to commence transatlantic operations at Heathrow. According
to ACl, over 72% of the air transport movements at Heathrow are by
narrow body aircraft.
Contrary to assertions by American and BA, it is unlikely that new
entrants will be able to acquire slots through puchse, lease or trade.
First, there is a serious question as to whether purchasing slots from
current Heathrow holders will be legally possible. The European Union
has promulgated a draft regulation that will have the effect of
prohibiting carriers from buying or selling slots at all EU airports,
including Heathrow. Even if slot sales are legal, US carriers would
face a significant problem in obtaining commercially viable slots will
be held by three US-Heathrow operators: AA/BA, United/BMI and Virgin.
Collectively, AA/BA and United/BMI hold 58.2% of the commercially
viable slots. Virgin's share brings the total to 60.7%. Viewed from an
alliance perspective, the Oneworld and Star Alliances together hold a
total of 77.9% of the commercially viable slots at Heathrow. It is
unrealistic to assume that these Department in 1998 reached the same
conclusion: ``Al long as AA and BA can us the slot themselves, there is
no possibility that a US carrier can buy a slot from AA/BA.''
There are only a total of 745 weekly Heathrow slots in the
commercially viable transatlantic window that are not held to US-
Heathrow incumbent carriers or their partners. Of these 745 slots, 528
are linked to facilities that are not suitable for wide body aircraft.
Even if all of the remaining 217 slots held by non US-Heathrow
incumbents were sold or leased to US carriers, this would not come
close to satisfying the slot needs of US carriers. In fact, however, it
is unlikely that any of these slots would be available for acquisition
by new entrant US carriers.
As ACL's filing to DOT demonstrates, ``grey market'' for Heathrow
slots is very small and BA is doing all of the buying. For the summer
2001 season, only 21 slots in the commercially viable transatlantic
window were traded and BA acquired 20 of them. Indeed, even BA acquired
20 of them. Indeed, even BA is not able to acquire the slots it needs
for its own Heathrow operations. BA recently cut its own service
between Heathrow and approximately 15 pints in order to free up needed
slots to implement a strategy of establishing high frequency service in
core Heathrow business markets. In addition, it must be noted that BA
holds significant advantages over other carriers, and in particular new
entrant carriers, when it comes to obtaining slots at Heathrow. BA, for
instance, can add slots from its vast supply of Gatwick slots to any
inducement it may offer to another carrier for Heathrow slots. The
difficulty BA has encountered in obtaining slots is further evidence by
the extraordinary high prices it has been forced to pay. If BA itself
cannot obtain all the Heathrow slots it needs, new entrants certainly
would be even less able to gain access.
American and BA further content that US carriers can obtain all the
slots they need from their foreign carrier alliance partners who serve
Heathrow. This proposition also is untrue. First of all, some US
carriers, such as US Airways, do not have foreign alliance partners
serving Heathrow. Second, alliance partners use their scarce Heathrow
slots to compete with BA, British Midland and other carriers in their
key homeland markets. They are unlikely to trade slots that form an
integral part of their own hub and spoke network. Indeed, if they had
any inclination to give up their Heathrow slots, especially the few
slots usable for wide body service, they would Already have sold them
for the extraordinarily high prices that BA is willing to pay.
In Northwest's case, Northwest's alliance partner, KLM, holds but
71 slots that are usable for transatlantic service from a timing
standpoint. Divesting any of these slots would directly and immediately
compromise KLM's competitive position in the UK market vis-a-vis BA and
other carriers at Heathrow. Even if KLM were legally and commercially
able to part with some of its London Heathrow slots, those slots would
not be suitable for Northwest's transatlantic operations because they
are tied to gates and parking stands that can handle the smaller
aircraft that KLM operates on its intra-Europe routes but cannot handle
the wide body (B-747, DC-10 or A330) aircraft that Northwest would
operate. By the token, the terminal facilities that KLM uses in
connection with these slots are inadequate to handle the greater
passenger volumes that Northwest would generate on its larger
aircraft.In sum, the harm here to competition and to consumers comes
not just from the higher levels of concentration that will result from
immunization of the proposed alliance, but from the combination of high
concentration and the insurmountable barriers to entry at Heathrow that
new entrants would face in a world that includes AA/BA and UA/BMI
alliances. As a result, most US cities would see their hopes for new or
competitive Heathrow service dashed. Continental, Delta, Northwest and
US Airways, which would have commenced Heathrow service from cities
such as Atlanta, Charlotte, Cincinnati, Cleveland, Houston, Memphis,
Minneapolis/St. Paul, Newark, Pittsburgh and potentially other cities,
will not be able to do so. Because these airlines will be locked out of
Heathrow, many US cities will not received the new or competitive
service they desire.
V. The AA/BA Alliance Will Not Produce Any New Public Benefits
The AA/BA Alliance is essentially a horizontal merger the effect of
which will be to control capacity and price in the critical and
lucrative US-Hearthrow markets. It provides no countervailing consumer
benefits to offset these harms. Most particularly, it will not deliver
consumer benefits in the form of end-to-end linkage of complentary
networks, the type of consumer benefits praised by the DOT in its
studies of the existing transatlantic alliances. The DOT has found that
existing alliances, such as Northwest/KLM and United/Lufthansa have
produced thousands of new ``seamless'' connecting services between the
US and Europe, and that these new routing options have dramatically
improved consumer access to markets previously not readily available,
and lowered fares in those markets. American and BA have generously
cited these studies and have claimed that their proposed alliance would
produce similar benefits. However, it is clear that the AA/BA Alliance
is not intended to work as the earlier alliances have worked, and will
not produce the same public benefits.
First, BA has undertaken an aggressive campaign to expand service
in the point-to-point markets while limiting use of London Heathrow for
connecting passengers. To implement this plan, BA has been eliminating
service between Heathrow and numerous European points, revising
schedules in Heathrow-Europe markets to focus on local traffic rather
than transatlantic connections, and replacing its fleet of B-747s with
smaller B-777 aircraft. Since 1999, BA has eliminated 27 Heathrow
destinations. As a Consequence of this de-hubbing strategy, American's
ability to flow connecting passengers over Heathrow will be very
limited.
Second, American already has constructed an effective network-to-
network linkup with five European code-share partners (Iberia, Air
Lingus, Finnair, Swissair (including its affilate Crossair) and
Sabena). Even if an alliance with BA did, in fact, construct connection
opportunities at Heathrow for US passengers, it would not be new or
additional connectivity benefiting US travelers. American's existing
partnerships already extend American's on-line service from the US to
scores of cities throughout Europe, Africa and the Middle East and
provide a more extensive connecting network than would an alliance with
BA. In fact, the actual code share plan that American and BA offer
little new.
This proposed alliance is unique. It would be the first that fails
to construct a connecting complex to open new markets, the first that
fails to create any cognizable public benefits, and the first that has
as its principle objective the elimination of competition in head-to-
head nonstop routes.
VI. A Merger of AA/BA Has less Merit Now Than it Did Three years Ago
American and British Airways argue that the competitive situation
in the U.S.-London market has hanged dramatically in the two years
since the Department dismissed the original AA/BA antitrust immunity
application. In fact, the changes that have occurred since 19980 make
the AA/BA Alliance even less acceptable today than it was when it was
first proposed:
American has acquired TWA and locked up another U.S. gateway,
St. Louis. In 1998, TWA was a potential new competitive entrant
at Heathrow that could have offered new one-stop competition
for the AA/BA Alliance.
Heathrow access is even more closed today than in 1998; slots
and facilities usable for transatlantic flights are even less
available to new entrants.
British Airways' new strategy, be de-hubbing Heathrow, is to
avoid, not enhance, competition with other alliances for U.S.-
Europe traffic. The potential connectivity benefits offered in
1998 no longer exist.
Since 1998 American has developed codesharing alliances with
five other European carriers providing joint services
throughout Europe and beyond; the incremental new connectivity
benefits of an AA/BA Alliance today would be minimal at best.
Other global alliances remain insignificant competitive factors
in the U.S.-London markets due to geography and circuity.
Neither the Northwest/KLM alliance nor a Sky/Team alliance of
Delta, Air France, and Alitalia provide reasonable competitive
alternatives from U.S.-London passengers. The existence of
these alliances, in and of themselves, cannot be a basis for
allowing an AA/BA transatlantic merger.
In sum, to the extent circumstances have changed since the first
AA/BA application was abandoned, they reinforce the reasons why the
Department must reject the current application.
VII. A Divestiture Of A Minimum Of 420 Weekly Slots Would Be Necessary
In Order For New Entrant US Carriers To Compete With AA/BA On A One-
stop Basis
If the DOT were to approve the AA/BA Alliance, it would need to
mandate very substantial slot divestitures as a remedy, and even then
it would be unlikely that new entry by US carriers could completely
offset the competition lost in many AA/BA overlap markets.
Even if Heathrow slots were available, it is unlikely that there
would be significant entry in the nonstop AA/BA overlap markets.
Rather, new entrant US carriers are more likely to launch service from
their main hubs and compete on a one-stop bass.
American and BA argue that one-stop competition over other hubs can
constrain market power. First, it should be recognized that one-stop
service from the US to Heathrow via points in Europe will not be
effective because connections over these gateways entail circuitous
back-hauls, significantly greater elapsed times and the inconvenience
and uncertainty involved in making a connection in a third country.
American and BA also assert that one-stop service from a US point
to Heathrow via another US gateway will be sufficient to constrain
prices for nonstop service. Although one-stop services can constrain
the market behavior of nonstop operators, it cannot do so in the US-
London markets unless the one-stop operators are able to serve Heathrow
with sufficient frequencies to compete with AA/BA. This will only be
possible through a substantial divestiture of slots by American and BA.
This is not a radical. Every government agency on both sides of the
Atlantic that has looked at this issue since an American/British
Airways alliance with first put forward in 1996 has similarly concluded
that very substantial slot divestitures would be necessary if American
and BA were granted antitrust immunity. The Department of Justice
concluded that AA/BA would have to divest well-timed slots sufficient
for at least 24 daily roundtrips (i.e., 48 daily slots or 336 weekly
slots) in order to assure reasonably effective new competition. The
General Accounting office suggested that slots to operate a minimum of
23 daily roundtrip fights (i.e., 46 daily or 322 weekly slots) were
needed. The European Commission found that only the introduction of 20
new daily roundtrips by competitors would maintain minimum necessary
levels of competition. Similarly, the UK regulatory authority, the
Office of Fair Trading, concluded that only with substantial
divestiture of Heathrow slots could new competitive entry actually be
introduced in the critical US-Heathrow markets.
Northwest estimates that divestiture by AA/BA of at least 420
weekly slots (i.e., enough for 30 daily roundtrips) in commercially
viable timeframes and with wide-body capable facilities are necessary
to enable Northwest, Continental, Delta and US Airways to initiate
service to their hubs and important gateways to compete with AA/BA on a
one-stop basis. Northwest will need slots (and related facilities) at
Heathrow sufficient to operate a total of seven daily roundtrip flights
from Detroit, Minneapolis/St. Paul, Memphis and Seattle/Tacoma
combined. Delta has previously estimated that it would require slots
sufficient for 10 daily roundtrips to compete from New York, Atlanta,
and Cincinnati combined. Continental has previously estimated that it
would need slots for 10 daily roundtrips from Newark, Houston, and
Cleveland combined in order to be competitive. US Air ways also would
need slots to operate multiple flights from its hubs at Charlotte,
Philadelphia and Pittsburgh--three daily round trips at a minimum for
the three cities combined. For those four airlines alone that totals at
least 30 round trips per day, or at least 420 slots per week. Any other
US airlines wishing to provide new service and new competition would be
in addition to that number.
These 420 weekly slots constitute the minimum number necessary to
enable new competitors to gain meaningful, competitive access to
Heathrow under Open Skies. Even with this number of slot divestitures,
the anti competitive effects of an AA/BA Alliance could not be entirely
counterbalanced. If American and BA refuse to agree to the timely
divestiture of at least 420 slots and facilities, the United States
must refuse to enter into an Open Skies agreement with the UK that is
linked to approval of an AA/BA Alliance.
Conclusion
In concluding, I wish to reiterate Northwest's view that
international airline alliances, properly structured, can provide very
substantial consumer benefits. But not all alliances are the same, and
the United States cannot have a ``one-size-fits-all'' policy for
approving alliances and conferring antitrust immunity on them. The
proposed AA/BA Alliance will result in a significant loss in
competition in very important international markets without providing
any offsetting new consumer benefits. It should be disapproved.
Northwest appreciates having been given this opportunity to
testify. I would be happy to answer any questions the Members of the
Committee might have.
Thank you.
[GRAPHIC] [TIFF OMITTED] 81815.014
[GRAPHIC] [TIFF OMITTED] 81815.015
[GRAPHIC] [TIFF OMITTED] 81815.016
[GRAPHIC] [TIFF OMITTED] 81815.017
[GRAPHIC] [TIFF OMITTED] 81815.018
[GRAPHIC] [TIFF OMITTED] 81815.019
[GRAPHIC] [TIFF OMITTED] 81815.020
[GRAPHIC] [TIFF OMITTED] 81815.021
[GRAPHIC] [TIFF OMITTED] 81815.022
[GRAPHIC] [TIFF OMITTED] 81815.023
[GRAPHIC] [TIFF OMITTED] 81815.024
Chairman Kohl. We thank you very much. And now that we have
heard from two of American Airlines' best friends, Delta and
Northwest, we will call upon yet another friend, Mr. Richard
Branson.
STATEMENT OF RICHARD BRANSON, CHAIRMAN, VIRGIN ATLANTIC AIRWAYS
LIMITED, CRAWLEY, WEST SUSSEX, UNITED KINGDOM
Mr. Branson. Thank you, Senator Kohl, thank you, Senator
DeWine, for holding this once again. It seems a bit like deja-
vu.
A friend of mine rang me last week and reminded me of
something he had said to me 17 years ago, and that was that the
best way of becoming a millionaire was to start off as a
billionaire and go into the airline business.
Anyway, on a positive note, it is obviously wonderful that
the U.K. and America are holding together in these difficult
times. But we have some concerns that there is some danger for
the airline industry in the long term that could come from
this. And our concern is that American Airlines is called
American Airlines, British Airways is called British Airways,
and there might be some people who feel that this merger should
be pushed through in these patriotic times. And what we would
urge the competition authorities to remember is that 5 years
ago, when we met here, they examined the case of American and
British Airways seeking to merge and the Justice Department
ruled it anti-competitive and so did the EC and so did the
British competition authorities. Nothing has fundamentally
changed. What was anti-competitive 5 years ago is just as anti-
competitive today.
BA and American Airlines together will control over 60
percent of all the takeoff and landing slots to America. They
already do. As far as the transatlantic, they are already over
60 percent dominance in that marketplace. That is dominance.
Don Carty mentioned that he disagreed. Only a short while
ago, Robert Crandall, who used to be President of American
Airlines, said that British Airways has the largest market
share between the United States and the United Kingdom and is
the largest slot holder at Heathrow. The dominant position of
British Airways stifles competition not only for U.S. airlines
but also for other U.K. airlines, resulting in higher prices
and reduced service options for British consumers. And this was
the President of American Airlines only a short time ago.
And British Airways did not come about from the cut-and-
thrust business. It was created by government. It was given
those slots by government. And we cannot get the slots to
replicate the network that British Airways has.
If you put British Airways and American Airlines together,
the clout that they will have over the travel trade would be
absolutely enormous. In fact, the travel trade will have to put
their business with British Airways and American Airlines, and
if they are told they have got to do another 3 or 4 percent
next year, they will have to do it in order to get their
discounts. British Airways already twists arms in this way.
They use their network in order to force people to put all
their business across the Atlantic their way. If you have got
American Airlines in America doing it with them in a pincer
movement, it will be something which will just be impossible to
compete against.
I think if you can compare it to other businesses, it is
like Coke and Pepsi being put together. There would be an
enormous outcry if that happened. It would be the same as
United Airlines and American Airlines being allowed to get
together. And all I can say is that to compete against this
would be almost impossible. You know, what is interesting is
that every single other airline that has been told that they
can get into Heathrow, they are all objecting to it. They know
they can't get slots.
Robert Crandall again said, ``I can't get any slots at
Heathrow. I can't get any gates at Heathrow. British Airways
has all the terminal space tied up in knots.''
British Airways said through testimony to the U.K. Select
Committee, ``We have to operate from two airports in the London
area because Heathrow is full. It is absolutely full.''
When Virgin wanted to fly to Chicago, we had to--we tried
for years to get a slot at Heathrow. We couldn't get a slot. In
the end, we had to move our Miami service out of Heathrow to
Gatwick and swap the slots, and that was how we ended up
getting the Chicago slot. But that was the only way you can get
slots today.
All I would do is urge the Justice Department in this time
of patriotism to look back at what happened 5 years ago. The
reasons they gave to stop this alliance then are exactly the
same reasons they should use to stop this alliance today.
Thank you.
[The prepared statement of Mr. Branson follows:]
Statement of Richard Branson, Chief Executive Officer, Virgin Atlantic
Airlines
Good afternoon Mr Chairman and Members of the Committee. Let me
begin by saying how much I appreciate this opportunity to appear before
you and provide Virgin Atlantic's views on the proposed alliance
between American Airlines and British Airways.
I must say that I do have a sense of deja vu sitting here again
today. We have been here before. Again we have American and BA seeking
immunity for an airline alliance that will dwarf anything that has gone
before it. Again they are seeking to ``operate as if they were single
entity'', across both of their networks. They are their words not mine.
Any attempt by American and BA to pretend that this application is
lesser in scope than their previous anti-trust applications should be
dismissed out of hand. And don't forget, the oneworld alliance extends
far beyond AA and BA \1\--BA for one is seeking to link up with Finnair
and Iberia in Europe, and already has a joint service agreement with
Qantas.
---------------------------------------------------------------------------
\1\ Oneworld includes American Airlines, British Airways, Qantas,
Cathay Pacific, Finnair, Lberia, Lan Chile and Aer Lingus.
---------------------------------------------------------------------------
Our duty here today should be to cut to the truth, and identify
what this alliance truly means for consumers and for competition in the
US-UK market. This alliance will mean less, not more, competition. It
will mean less choice for consumers. It will mean higher fares across
the Atlantic. It will mean increased domination by BA and its oneworld
alliance partners at Heathrow. An AA/BA alliance would be blatantly
anti-consumer and anti-competitive. This will be doubly true when taken
with the proposed Star Alliance immunity application for UK-US
services. As Gordon Bethune of Continental has said these
``transactions are poison for competition. Allowing dominant
participants to operate as single entities would effectively preclude
any real competition on most US-UK services.''
Before going on to look at the AA/BA proposals further, I should
say at the outset that it is beyond me how any competition authority
can conduct a relevant, robust and meaningful competition analysis of
American's and BA's plans given the state of turmoil and constant
change that the airline industry finds itself following the tragic
events of 11 September. Airlines are cutting schedules, grounding
aircraft and making people redundant. Some carriers are very close
indeed to bankruptcy, both in Europe and in the United States. It is
impossible, therefore, to predict with any degree of certainty what the
future competitive landscape will look like. I think the one certainty
that we can rely on is that if AA/BA is allowed to proceed unfettered,
it can only hasten the demise of certain carriers.
At a time when we may be witnessing a forced reduction in
competition among airlines it is madness to actually encourage even
less competition by allowing dominant carriers to collude in setting
prices, agreeing schedules etc.
In fact, let us not lose sight of the fact that the proposition
before the regulators on both sides of the Atlantic is the effective
merger of world's largest airline, American, with Europe's largest
airline (and the largest trans-Atlantic carrier) British Airways.
Acting as one, they will be able to leverage unprecedented control and
influence over the marketplace, especially amongst corporate clients
and travel agencies, not just across the Atlantic but throughout the
world. Indeed, a combined American/BA will be 70% larger than United
Airlines. Allowing this alliance to proceed will create a monster of
proportions never seen before.
I passionately believe that this deal should not be allowed to
proceed.
My main objections to the proposed alliance are:
American and BA will form a dominant force in the trans-
Atlantic market, with over 60% of all Heathrow-US services, and
over 50% of all passengers travelling between the US and the
UK. In 2000, AA and BA between them carried nearly 9 million
passengers between the UK and the United States. The next
largest airline carried less than 3.5 million.
When coupled with their dominance at their respective hubs, AA/
BA will have the effect of eliminating competition. Remember,
AA/BA have nearly 200,000 slots per year at Heathrow. Virgin
Atlantic has less than 11,000.
The sheer scale of this merger will mean that its effect will
not be felt solely in the trans-Atlantic market, but throughout
the globe.
The establishment of an AA/BA alliance, and possibly a United/
bmi british midland alliance, will actually reduce competition
across the Atlantic. American and BA will act as one rather
than competing against each other as they currently do, and bmi
will not compete against United -- something which they have
admitted in their own joint filing to the Department of
Transportation.
The position of joint dominance that oneworld, the BA and
American led alliance, and Star, the alliance involving United
and bmi, enjoy at Heathrow, when coupled with the undeniable
fact that Heathrow is full, means that carriers outside of
these alliances will not be able to mount an effective
competitive challenge unless the regulators require these
groupings, and BA in particular, to give up significant numbers
of slots at Heathrow. Between them oneworld and Star operate
85% of all Heathrow-US services, and control nearly three-
quarters of the slots at Heathrow. Past experience suggests
that this will produce a cost duopoly rather than intense
competition.
American and BA between them have a total monopoly on 13 individual
routes between London and the United States. They operate the majority
of services on a further 5 routes, and have a substantial presence in a
further 6 markets between London and the US. And remember that
individual routes from Heathrow to the US are the key markets here.
Heathrow is the airport of choice for passengers, be they business or
leisure, and for airlines. Given the choice all of the airlines
operating out of Gatwick would move their services to Heathrow --
passenger numbers, revenues and yields are all significantly higher at
Heathrow.
The most important trans-Atlantic market is Heathrow-New York JFK.
This is a market where BA and American will dominant to such an extent
that it will not be worthwhile anyone else even trying to compete in
it. In August 2001, between them BA and American were operating 13
services a day to JFK, even before the resumption of Concorde flights.
The next nearest challengers were Virgin and United with only three
services each. Following 11 September, Virgin has cut back to a double
daily service. If BA and American are allowed to proceed it will be
impossible for us and other carriers to compete against what will
amount to an hourly turn-up-and-ride shuttle.
The key argument in this entire debate is Heathrow access. Open
Skies is being held up as a panacea by American and BA in this respect.
Any form of liberalisation of outdated bilateral agreements should be
welcomed, and no-one has lobbied stronger than Virgin Atlantic to
replace the current restrictive Bermuda II agreement governing air
services between the US and the UK by a truly open competitive regime.
But in respect of Heathrow-US services Open Skies will make no
difference at all. Put simply Heathrow is full and there are no
prospects of capacity increases in the foreseeable future.
In order for Virgin Atlantic and the US carriers to compete
effectively in trans-Atlantic markets more slots are needed at
Heathrow, and the associated terminal facilities that go with the
slots. But the slots are simply not there. Not from the slot pool; not
from partner airlines; and not on the open market. If slots were
available, then Virgin would not have had the struggles that it has had
to obtain more slots in recent years.
The only way that the regulators can ensure access to Heathrow is
to divest American and BA of slots at the airport. And not just any old
slots. They must be slots at the optimal times for trans-Atlantic
travel -- not at the margins of the day.
But slots are not the only issue. Competitors to AA/BA will also
need to have access to their Frequent Flyer Programmes, and must also
be offered interline agreements at terms no less favourable than BA and
AA make available to each other. It is no good having the slots, if
American and BA then stitch up the market in other respects.
Besides, if Open Skies was the answer to all of the competition
concerns that arise from the American and BA alliance, then these
carriers should be willing to see the UK and the US sign an Open Skies
agreement before they get anti-trust immunity rather than seeking to
make one dependent on the other. However, that is the last thing that
they would want. They know that Open Skies will make little if any
difference to the competitive position, but in the meantime they wish
to ensure that their dominant position is further entrenched by
obtaining anti-trust immunity.
All of the evidence suggests that linking anti-trust immunity to
open skies actually has the effect of restricting competition rather
than enhancing it. The combination of an airline dominant at a European
hub, as BA is at Heathrow, and a US carrier which is dominant at
several US hubs, such as American, has by definition removed one
competitor from the marketplace and made it more difficult for others
to compete. Furthermore, evidence from the Germany-US and Netherlands-
US markets shows that the immunised entity grows stronger and more
dominant whilst the competition withers on the vine, and in some cases
disappears altogether.
American and BA point to the significant presence of Star at
Heathrow, and say that this will be a competitive constraint on them.
The prospect of course is of a global carve up between the oneworld and
Star gorillas. Their internal members do not compete with each other,
and as far as services in the largest trans-Atlantic market (accounting
for almost 40% of total US-Europe traffic) are concerned, is it really
healthy to have 85% of services in the hands of just two entities? Bmi
british midland will make no difference to the competitive landscape.
It is on the record as saying that it will only operate Heathrow-US
services as part of a joint venture with United -- and almost
everything that bmi claims it wants to do is already available for
United to do.
The reasons that have led AA and BA to suggest that Star could be a
constraining influence on AA/BA are more likely to lead to a market
structure in which there would be every incentive for AA/BA and Star to
deter new entrants. Most economists will tell you that three healthy
competitors are needed in any market to ensure that competition thrives
for the benefit of consumers.
What is before the regulators today is the future of a competitive
international aviation industry. I firmly believe that allowing
American and BA to proceed with their plans will irrevocably damage an
industry that is already on its knees.
Chairman Kohl. We thank you, Mr. Branson.
Representing British Airways here today is Mr. Roger
Maynard.
STATEMENT OF ROGER MAYNARD, DIRECTOR OF ALLIANCES AND STRATEGY,
BRITISH AIRWAYS, hARMONDSWORTH, MIDDLESEX, UNITED KINGDOM
Mr. Maynard. Thank you, Mr. Chairman and Senator DeWine. I
very much appreciate the opportunity to testify before you
today. Although I have been in the airline business some 14
years, this is my first occasion before a Subcommittee of the
United States Congress. It is a privilege.
Before discussing alliances, allow me to note that today is
a very special day for British Airways and its relationship
with the city of New York. The 7th of November, today, marks
the return of Concorde to commercial service between London and
New York. And I might add our Prime Minster is arriving this
afternoon in Washington on Concorde to meet with your
President.
With respect to alliances, put simply, our grant of
application with American before the U.S. DOT for antitrust
immunity is linked with and the basis for achieving what would
be a truly historic ``open skies'' treaty between our two great
nations. At the same time, our alliance will boost competition
worldwide and establish a level playing field with other global
airline alliances.
Mr. Chairman, we seek only what our competitors already
have. Nearly a decade ago, DOT began granting immunity for
alliances in exchange for ``open skies.'' Northwest/KLM and now
United/Lufthansa, they both have immunity, which allows two
airlines to bring their networks together and serve consumers
seamlessly and more economically.
As a result of that, the share of transatlantic traffic
flown by Northwest and KLM, known as the Wings Alliance, has
tripled since they received immunity. United and Lufthansa have
developed the world's largest global alliance, known as the
Star Alliance, which now has 15 airlines. Today, Star carries
more passengers worldwide than any other alliance.
Not to be outdone, Delta has developed its own six-airline
SkyTeam Alliance, and it is anticipated that Delta will soon be
granted immunity with Air France.
As you will no doubt remember, and as a number of people
around this table have recalled, BA and American first proposed
our alliance in 1996. For a variety of reasons, mostly in
Europe, that effort was frustrated, though I should add that it
was not found against by either the EU or the OFT in the U.K.
Since that time, significant changes have taken place.
Alliances were in their infancy 5 years ago, and the likely
impacts on competition were based on predictions. Today, the
proof is in. DOT's studies have found that alliances benefit
the public through better services and at lower prices. Our
alliance will continue that trend. Passengers and shippers from
any of the 260 cities served by American and its affiliates
will be able to reach with ease any of the 146 cities served by
BA and its affiliates around the world.
In short, competition amongst four global alliances will
provide many more options for consumers than competition
between three alliances.
With the ascendancy of Wings, Star, and SkyTeam, it is
little wonder that BA and American's combined market share
between Europe and the U.S. has declined by 23 percent since
1996. This is also true in the U.S.-U.K. market, with BA and
American's combined share down by 20 percent since 1996.
BA and American now account for only 40 percent of the
passengers in the U.S.-U.K. market. What we have seen, frankly,
is a shift in connecting traffic away from London-Heathrow and
Gatwick towards Frankfurt, Paris, and Amsterdam. Indeed,
whereas not long ago Heathrow served more destinations than any
other European airport, today its 188 destinations is dwarfed
by Frankfurt, with 260; Paris, 214; and Amsterdam, 200. And in
terms of network competition, that is a vital statistic.
Anybody familiar with the London market as I am knows that
both Gatwick and Heathrow effectively serve London.
Nevertheless, our opponents remained obsessed with Heathrow, so
I feel obliged to go into some more detail. I wish to leave you
with four points in that respect.
Point number one, BA has a far smaller share of the total
market at Heathrow and faces more competition than any of our
U.S. and European competitors at their hubs. Contrary to
popular myth, BA is not dominant at Heathrow. We hold just
under 37 percent of the slots at Heathrow compared with U.S.
competitors who have proportions of 80 percent at many of their
hubs.
Nevertheless, our opponents have struggled to make
something of the fact that BA and American currently operate 60
percent of the flights between the U.S. and Heathrow. However,
this is just plain and simple math. Bermuda 2, which everyone
is complaining about, limits U.S.-Heathrow services to two U.S.
airlines and two British airlines. It should come as no
surprise that two of the four operate half the frequencies.
This will no doubt change radically when ``open skies'' comes
in.
Point number two, BA and American are not numbers one and
two in the passenger market in the U.S.-U.K. They are number
one and four. Secondly, access to Heathrow is available. United
and Virgin have increased their flights between the U.S. and
Heathrow by 64 and 68 percent since 1996. And in total, as we
have heard, American accounts for only 2 percent of the slots
at Heathrow. Adding AA's slot total to BA's does not even bring
the combined total to 40 percent.
On the overlap routes, which we hear is a competition
problem, since 1996 the U.S. competitors and the U.K.
competitors have increased service substantially in those
markets. So access to Heathrow has not apparently been a
problem over the past 5 years.
I would like to--and I know I am running out of time, but
just two more points. Sufficient slots. Slots, gates, and
facilities are available at Heathrow. Over the past year, 566
weekly slots have been exchanged in the slot coordination
process. Thirty-five carriers have entered into 99 different
agreements to exchange slots. They are available. Likewise, the
BAA has testified to the Department of Transportation that
facilities at Heathrow, including desks, including check-in
counters, parking bays, will be available immediately for those
carriers that come into the market as a result of ``open
skies.''
I would like to finish by saying the U.S. should be
congratulated for the 56 ``open skies'' agreements it has
reached throughout the world. There is little doubt that ``open
skies'' with the United Kingdom, given our country's geographic
location, the market size, and the volume of trade with U.S.,
would be the most important ``open skies'' agreement reached.
However, there exists only a narrow window of opportunity
for securing a U.S.-U.K. ``open skies'' accord. The European
Union has challenged legally the right of member states to
negotiate individual, bilateral air service agreements. As it
has in most other economic sectors already, the EU assumes the
mandate to negotiate on behalf of all the EU members. If the EU
is successful, as we on our side of the Atlantic expect it to
be, the opportunity for a U.S.-U.K. ``open skies'' agreement
will disappear. Instead, a broader EU-U.S. agenda will emerge,
one that will include such thorny issues as cabotage, foreign
ownership of U.S. airlines. As a result, our view--and it is a
view shared by Her Majesty's Government in their testimony to
this Committee. Our view is that, as a result, it will take
many years for an EU-U.S. agreement to be hammered out. And
putting it bluntly, absent a U.S.-U.K. ``open skies'' accord
before then, a ruling in favor of the EU early next year will
lock Bermuda 2 into place for years to come. And so there will
remain for many years only two U.S. carriers able to access
Heathrow. So we have a window of opportunity to achieve a
genuine opening of the marketplace.
Thank you, Mr. Chairman.
[The prepared statement and attachments of Mr. Maynard
follow:]
Statement of Roger Maynard, Director of Alliances and Strategy, British
Airways
Chairman Kohl, Ranking Member DeWine, and Members of the
Subcommittee, on behalf of the 60,000 employees of British Airways, and
particularly the 2,500 BA employees in the United States, I very much
appreciate the opportunity to testify before you today on international
airline alliances. Although I have been in the airline business for 14
years, this is my first occasion to appear before a subcommittee of the
United States Congress. In a time when the bonds between the United
States and the United Kingdom have never been stronger, I consider it a
privilege.
Mr. Chairman, before discussing airline alliances, allow me to note
that today is a very special day for British Airways and its
relationship with the City of New York. The 7th November marks the
return of Concorde to commercial service between London and New York
after a 14-month hiatus-a period during which, I might add, we worked
closely with regulators to develop enhancements intended to ensure the
highest level of safety. Indeed, today Prime Minister Tony Blair is
flying Concorde to Washington, D.C., for his visit with President
George W. Bush.
Senator Schumer, we at British Airways have been deeply moved by
the spirit, pride, and resolve of New York City. Concorde symbolizes
British Airways' unwavering commitment to America's largest city as it
rebuilds from the unconscionable acts of terror of the 11th September.
I believe Mayor Giuliani said it best when he observed: ``Concorde's
return is symbolic of how all New Yorkers feel about rebuilding this
great city.''
Let me also note that I am grateful to be appearing today along
side Don Carty. Don and his team have worked hard with us to develop
our oneworld alliance in an effort to bring our customers the same
benefits that air travelers flying internationally via other airline
alliances have enjoyed for years. I must say, in these most challenging
of times, Don has been a strong leader for the entire airline industry.
Like you, we in the United Kingdom are determined to get back to
business. To quote Prime Minister Blair, ``In the end this is as much a
matter of confidence as anything else and there really is no reason why
we cannot carry on and be confident in the basic strength of our
economy.'' It is with that in mind that I would like to turn to
international airline alliances and our strong desire to deepen our
relationship with our U.S. partner, American Airlines. Put simply,
grant of our pending joint application before the U.S. Department of
Transportation (US DOT) for antitrust immunity is firmly linked with,
and the basis for achieving, what would be a truly historic open skies
treaty between our two great nations. At the same time, our alliance
will boost competition worldwide, deliver significant benefits for
international air travelers and shippers, and establish a level playing
field with other global airline alliances. The trend toward such
alliances continues unabated, as customers increasingly demand their
many benefits.
To be sure, we seek only what our competitors already have. Nearly
a decade ago, the US DOT granted antitrust immunity to Northwest
Airlines and its partner KLM Royal Dutch Airlines in conjunction with
an open skies accord between the United States and the Netherlands.
Since then, the share of transatlantic traffic flown by Northwest and
KLM, known as the ``Wings'' alliance, has tripled. Quite simply,
antitrust immunity allows the two airlines to bring their networks
together as one, serving consumers seamlessly, more efficiently, and
more economically.
Recognizing the benefits that immunity affords, the US DOT in 1996
granted United and Lufthansa antitrust immunity in concert with a U.S.-
Germany open skies accord. Upon this foundation, United and Lufthansa
have developed the world's largest global alliance, known as the ``Star
Alliance,'' which now includes 15 airlines. Today, Star carries more
passengers worldwide than any other alliance, reaching nearly every
corner of the globe. It also benefits from immunity between United and
several member carriers. Indeed, London Heathrow Airport's second
largest slot holder, bmi british midland, is now part of Star and has
also applied for antitrust immunity with United.
Not to be outdone, Delta Air Lines has developed its own 6-airline
``SkyTeam'' alliance, and it is anticipated that Delta will soon be
granted antitrust immunity with Air France in conjunction with the
recently agreed open skies accord between the United States and France.
As a result, the international marketplace has two alliances in which
the key transatlantic partners have immunity-Star and Wings-one
alliance whose transatlantic partners will likely soon have it-SkyTeam-
and one whose key partners are without immunity, namely our 8-airline
oneworld alliance.
As you will no doubt remember, British Airways and American first
proposed our alliance in 1996 and applied for antitrust immunity
shortly thereafter. For a variety of reasons, mostly in Europe, that
effort was frustrated. Since that time, significant changes have taken
place in the transatlantic aviation marketplace. Transatlantic
alliances were in their infancy five years ago, and likely impacts on
competition were based on predictions. Today, the proof is in-alliances
benefit the public and participating carriers through better service at
lower prices.
Indeed, in an October 2000 report, the US DOT found that
international airline alliances offered consumers combined networks of
seamless service, allowing passengers to travel across the separate
networks of alliance members as if they traveled on one airline, on
average at considerably lower fares. The US DOT has determined:
``Alliance-based networks are the principal driving force behind
transatlantic price reductions and traffic gains. . . .we can expect
greater consumer benefits as alliances continue to evolve and expand.''
Our alliance will continue this trend. Passengers and shippers from
any of the 260 cities served by American Airlines and its affiliates
will be able to reach with ease any of the 146 cities served by British
Airways and its affiliates around the world. In each of these potential
city pairs, passengers and shippers will have one more alliance to
choose from, and oneworld will be able to compete more effectively with
the other immunized alliances. Vigorous competition among four global
alliances will provide many more options for consumers than three
alliances.
With the ascendancy of Wings, Star, and SkyTeam-and the advantage
that immunity affords-it is little wonder that British Airways' and
American's position in the U.S.-Europe market has eroded significantly
since 1996. British Airways' and American's combined market share
between Europe and the United States has declined by 23 percent since
1996 and now accounts for 19.5 percent of the U.S.-Europe market. This
is also true in the U.S.-U.K. market with British Airways' and
American's combined share down by 20 percent since 1996. British
Airways and American now account for only 40 percent of the passengers
in the U.S.-U.K. market.
What we have seen, frankly, is a shift in connecting traffic away
from London's Heathrow and Gatwick airports toward Frankfurt and Paris
De Gaulle. Indeed, connecting traffic on BA and American at Heathrow
has declined 12 percent since 1996, while United and Lufthansa have
seen connecting traffic at Frankfurt rise by 36 percent. No longer is
Heathrow the preeminent hub of Europe. Where as not long ago Heathrow
served more destinations than any other European airport, today its 188
destinations served ranks behind Frankfurt (260), Paris De Gaulle
(214), and Amsterdam (200).
Anybody intimately familiar with the London market as I am knows
that both Gatwick and Heathrow airports effectively serve London.
Nevertheless, our opponents remain obsessed with Heathrow. So I feel
obliged to go into more detail. Fortunately, it is an airport I know
well, so I can dispel some of the myths and outdated perceptions
surrounding Heathrow. In doing so, I wish to leave you with four key
points relative to Heathrow:
1. British Airways has a far smaller share of the total market
at Heathrow, and faces more competition today, than any of our
U.S. and European competitors at their hub airports.
2. Between the United States and Heathrow, British Airways and
American Airlines are not the two dominant carriers as often
suggested. American is in fact fourth in the overall number of
passengers flown and third in the number of business passengers
flown out of the four carriers flying between the United States
and Heathrow.
3. On the six so-called ``overlap'' routes between the U.S. and
London where British Airways and American compete, new entry
has occurred and competition increased on virtually all of the
routes since 1996-a trend that will most assuredly continue,
particularly at Heathrow, under open skies.
4. Sufficient slots, gates, and facilities are available at
Heathrow to accommodate the increase in transatlantic service
that is expected following the initiation of open skies.
First, contrary to popular myth, British Airways is far from
dominant at Heathrow. British Airways holds just under 37 percent of
the slots at Heathrow (Attachment I). In stark contrast, US Airways has
89 percent of the operations at its hub in Charlotte and 86 percent at
Pittsburgh; Delta has 86 percent of the operations at its Cincinnati
hub and 75 percent in Atlanta. Likewise, Continental has 83 percent of
the flights at Houston and 56 percent at Newark; and Northwest has 80
percent of the operations at its hubs in Detroit, Minneapolis/St. Paul
and Memphis. Likewise, Lufthansa accounts for 62 percent of the
operations at Frankfurt, Air France for 56 percent at Paris De Gaulle,
and KLM for 54 percent of the operations at Amsterdam.
Nevertheless, our opponents have struggled to make something of the
fact that British Airways and American currently operate roughly 60
percent of the flights between the United States and Heathrow. However,
this is just plain and simple math. Bermuda 2 limits U.S.-Heathrow
service to two U.S. airlines and two British carriers. It should come
as no surprise that two of the four operate roughly half of the
frequencies. This will no doubt change radically under open skies, as
four additional U.S. carriers and one additional British carrier-bmi
british midland-plan to enter the market on day one.
Second, approval of our application would combine the first and
fourth-not first and second-largest carriers between the United States
and Heathrow (Attachment II). United and Virgin have increased their
flights between the United States and Heathrow by 64 and 68 percent
respectively since 1996. For example, United has increased the number
of daily flights between its Chicago O'Hare hub and Heathrow from 1 in
1996 to 3 in 2001, and, in fact, has received approval to add a fourth
flight. In addition, Continental now has a code-sharing arrangement
with Virgin that allows Continental to independently sell tickets for
service between Heathrow and Boston, Los Angeles, and New York.
In total, American Airlines accounts for only 2 percent of the
slots at Heathrow, fewer than United and roughly the same as Virgin.
Adding AA's total to BA's does not even bring the combined total to 40
percent. At the same time, United and bmi british midland hold 16
percent of the slots at Heathrow, with bmi british midland Heathrow's
second largest slot holder. Moreover, United and bmi's Star Alliance
has announced that it will invest over $70 million U.S. dollars to
develop a hub at Heathrow, thereby making that airport Europe's only
dual hub.
Third, increased competition can be seen in virtually all of the
six nonstop markets where BA and AA overlap-competition that will
further increase significantly under open skies:
Boston: In contrast to 1996 when AA and BA were the only
providers of nonstop service in the Boston-Heathrow market,
there are now four nonstop carriers in the market. United and
Virgin have both recently begun nonstop service between Boston
and Heathrow, and Delta has initiated service to Gatwick-
service that Delta may shift to Heathrow under open skies.
Chicago: As I noted earlier, United has significantly increased
its service level between O'Hare and Heathrow in the past 5
years. As a result of increasing competition, the combined AA/
BA share between O'Hare and Heathrow has fallen from 62 percent
in 1998 to 47 percent in 2000. Going forward, bmi british
midland has stated publicly that it will immediately serve
Chicago nonstop from Heathrow under open skies.
Los Angeles: Both United and Virgin have added flights between
LAX and Heathrow since 1996, causing BA and AA's combined share
to fall by almost 25 percent, from 42 percent in 1996 to only
33 percent in 2000. Under open skies, the number of available
one-stop alternatives to the average 12-hour nonstop flight
between LAX and Heathrow will surely grow, yielding even more
travel options for consumers and downward pressure on fares.
New York: Both United and Virgin have added flights between JFK
and Heathrow, and Continental now has access to Virgin's four
daily flights between New York and Heathrow. Under open skies,
Delta will undoubtedly enter this market as JFK is its key
transatlantic hub; and Continental will likely serve Heathrow
nonstop with its own aircraft via its hub at Newark, which will
complement Continental's current twice daily service to
Gatwick.
Miami: American, British Airways, and Virgin currently compete
in the U.S.-London market, as they did in 1996. Under open
skies, competition will increase as bmi british midland has
announced that it will start service immediately.
As for the final overlap market, Dallas/Fort Worth-London, the
significant new entry that will occur after open skies by U.S. airlines
from their main hubs will afford air travelers a number of new,
competitive one-stop connecting options to Heathrow, such as Delta via
JFK and Continental via Newark.
Which brings me to point number four: while new entry is not
necessary to ameliorate any potential competitive effects of our
alliance, the fact remains that our alliance will open the skies
between London and the United States and thereby allow for the first
time significant new entry. U.S. carriers and bmi british midland will
enter on routes between the United States and Heathrow under open
skies. In the case of bmi british midland, it holds 14 percent of all
Heathrow slots and thus will be able to commence each of its announced
services immediately. As new entrants, the four non-Heathrow U.S.
carriers will be given priority for new slots. Since the summer season
of 1996, an average of 156 weekly slots have been created at Heathrow
each summer season. While these slots are frequently at off peak times,
carriers can and often do exchange them with a carrier that has better
timed slots, many times with compensation.
Likewise, in addition to new capacity, the pool from which new
slots are allocated is continually replenished and expanded as slots
are returned to the pool from carriers failing to meet the 80 percent
use-or-lose requirement at Heathrow. In the summer 2000 season, for
example, 332 weekly slots were returned for reallocation. Again, these
slots are often traded between carriers, which enables new, well-timed
services. All told, for the winter 2000-summer 2001 seasons, 35
carriers entered into 99 different agreements resulting in the exchange
of 566 weekly slots. Moreover, for many of the smaller operators,
selling their peak period Heathrow slots and moving their operations to
Gatwick may be a highly desired alternative for them at this point.
In any event, as alliances continue to grow, airlines will have an
even greater incentive to exchange slots with their alliance partners.
KLM, for example, holds over 190 weekly slots at Heathrow and uses many
for turboprop services to the European continent. Is there any doubt
that once its partner Northwest Airlines is allowed to fly from Detroit
and Minneapolis/St. Paul to Heathrow that the Wings alliance partners
will decide that it is in the best interest of the alliance to maximize
revenue and deploy those slots to enable the more lucrative long-haul
services? Such a decision is a ``no brainer'' as you say here in the
States. The same process will quickly play out among the other
alliances that have antitrust immunity.
Nevertheless, our competitors have suggested publicly that they
would need as many as 600 weekly slots divested from American and
British Airways, even though combined American and BA only operate a
total of 582 slots currently on routes between the United States and
Heathrow. In the words of the U.S. Business Travel Coalition's Chairman
Kevin Mitchell in a letter he recently sent to the Chairman of the
Senate Commerce Committee,
``Demanding the divestiture of 600 slots is reckless posturing
and a shameful example of corporate greed. BTC understands that
Delta, Continental, and Northwest desire to avail themselves of
some free slots at Heathrow. . . .However, through their
demands these carriers are placing at significant risk the
achievement of a quality U.S.-U.K. Open Skies agreement, and
billions of dollars of U.S. consumer benefit that will be
derived from lower airfares.''
I dare say Mr. Mitchell may be on to something here. Similarly, the
recent filing to the US DOT by the independent operator of Heathrow,
the British Airports Authority, puts to rest the myth that slots as
well as gates and facilities are not available at Heathrow. According
to the BAA:
``It is clear that the financial incentive exists for airlines
wishing to operate long haul services to procure slots from
airlines currently operating short haul services. BAA would
expect those US carriers wishing to set up operations from
Heathrow to be able to obtain at least some slots through one
form of slot `trading' or another. If these carriers were able
to obtain runway slot times, even if these were currently
operated by narrow-bodied short haul services, BAA's initial
analysis indicates that terminal and aircraft parking stand
capacity would allow six to ten daily services operated by U.S.
airlines new to Heathrow to be accommodated in the first season
of implementation. . . .In addition to the six-to-ten daily
services identified above, it may also be possible to
accommodate up to a further four daily services in Terminal 4
at some point in the Summer 2003 season.''
In closing, while the US DOT should be congratulated for the 56
open skies accords it has reached throughout the world, including 20 in
Europe, there is little doubt that open skies with the United Kingdom,
given our country's geographic location, market size, and volume of
U.S. trade, will be the most important. In his testimony, Don Carty
outlines the significant benefits that await the U.S. airline industry
and numerous U.S. communities as a result of a U.S.-U.K. open skies
accord. For my part, I would like to wrap-up by focusing on
developments in Europe and why they afford a narrow window of
opportunity for securing a U.S.-U.K. open skies accord.
With the continuing push toward economic integration in Europe,
time is growing short if the United States and United Kingdom wish to
reach a bilateral open skies accord crafted to accommodate their mutual
interests. The European Union (EU) has challenged legally the right of
member states to negotiate individual bilateral air service treaties.
As it has in most other economic sectors already, the EU seeks to
assume the mandate to negotiate on behalf of all EU members as a whole.
Indeed, recent public comments by EU Transport Commissioner Loyola de
Palacio indicate a clear desire for the EU to take over this role as
soon as possible.
If the EU is successful, as most on our side of the Atlantic
believe it will be, the opportunity for U.S. and U.K. negotiators to
sit down and come to agreement will be gone. Instead, a broader EU
agenda will emerge, one that will likely include such thorny issues as
cabotage, dispute resolution, foreign ownership and control of U.S.
airlines, and transatlantic competition standards. To date, these
issues have not been included in the open skies agreements that the
United States has signed. As a result, it would likely be many years
before a EU-U.S. agreement could be hammered out and the skies between
America and London opened up for the many carriers and U.S. communities
currently shut out of Heathrow by Bermuda 2. Put bluntly, absent a
U.S.-U.K. open skies accord before then, a ruling in favor of the EU
early next year will lock Bermuda 2 in place for years to come. For our
part, British Airways is prepared to support the existing U.S. template
for open skies, provided we are allowed to move forward with our
alliance with American Airlines as other airline alliances have been
allowed to do under open skies.
It does seem odd that Americans and the British enjoy a close,
free, and open relationship in virtually every sector of trade and
commerce except aviation. We, the U.S., the U.K., and the airlines,
have the opportunity right now to change all that if we can
collectively look past the myths and self-serving arguments of some,
toward a future that frees airlines in both countries to pursue their
efficiencies and benefits on behalf of passengers and shippers.
Thank you again for the honor of testifying before you today. I
would be happy to answer any questions that the Chairman and Members of
the Subcommittee might have.
Attachment
total number of weekly slots at london's heathrow airport by airline,
summer 2001
------------------------------------------------------------------------
Airline Slots Percentage
------------------------------------------------------------------------
1. British Airways 3,367 36.4
2. British Midland 1,251 13.5
3. Lufthansa 348 3.8
4. Aer Lingus 320 3.5
5. SAS 300 3.2
6. Air France 263 2.8
7. United Airlines 238 2.6
8. American Airlines 224 2.4
9. Virgin Atlantic 214 2.3
10. Iberia 210 2.3
11. KLM 194 2.1
Other.................... 2,332 25.1
Total.................... 9.261 100.0
------------------------------------------------------------------------
Attachment II
total number of passengers between the united states and heathrow by
airline, 2000
------------------------------------------------------------------------
Airline U.S.-Heathrow Passengers, 2000
------------------------------------------------------------------------
1. British Airways 1,994,990
2. United Airlines 1,513,099
3. Virgin Atlantic 1,349,333
4. American Airlines 1,065,084
Source: CONCRS data............
------------------------------------------------------------------------
Chairman Kohl. We thank you.
Before we hear from Senator Specter, I would like to ask
Mr. Kellner to make a brief statement.
STATEMENT OF LARRY KELLNER, PRESIDENT, CONTINENTAL AIRLINES,
INC., WASHINGTON, D.C.
Mr. Kellner. Thank you, Chairman Kohl, and Senators DeWine
and Specter. We appreciate very much the opportunity to be here
this afternoon to share our views. And I join my counterparts
here in thanking you for the leadership you showed during a
time of crisis immediately after the attacks of September 11th
and the help you provided to the industry.
I would also echo their comments, led by Don Carty, with
regard to security and say that we have made a lot of progress;
and while I believe I agree with Don there is more to do,
clearly we are very focused on that issue. We made a lot of
efforts. We greatly appreciate the help given to us by this
Committee and the entire Congress, and we look forward to
working forward on that.
To sum up our views, I think, on American Airlines/British
Airways' request for antitrust immunity under their alliance,
we would say it is the wrong deal at the wrong time.
Continental has been extremely successful offering high-quality
service and a reliable product to its customers, mostly thanks
to the hard work and effort of our 48,000 employees today. We
believe we can compete very fairly in the marketplace, and we
can be very aggressive in doing that. However, we have to get
the chance.
Earlier this year, after extensive review, the Department
of Justice turned down the United Airlines/US Airways deal. And
if you think that deal was bad, the impacts of American
Airlines/British Airways are much worse. It is worse in size.
It is worse in scope. It is worse in market dominance.
As one of the previous members commented, it is the
equivalent of letting American and United, maybe even Delta, in
this country merge; but, in addition, putting it in a position
such that we can't get access to the airports in which they
fly. If you looked at it on a European base, in the European
market it would be like letting seven of the top ten European
carriers get together.
United/US Airways is expected to devastate competition.
This will be the death knell for competition across the
transatlantic. At least in the U.S., we have ``open skies'' and
open access to all major airports. But in London, U.S. airlines
like Continental cannot even, over an ``open skies'' regime, be
able to compete as there are no slots or facilities available
for carriers' use at London-Heathrow. It is interesting as you
hear the comments of Roger Maynard and Don Carty as they talk
about the availability, yet you see this group of Delta,
Northwest, and Continental very strongly saying there is not
availability.
Continental didn't oppose Northwest/KLM. We didn't oppose
United/Lufthansa. We didn't oppose American/SwissAir/Sabena. We
are not opposing Delta/Air France/Alitalia/Czech CSA.
What we are opposing is kind of an alliance that is not an
end-to-end alliance, but is much more driven towards dominating
a market--the United Kingdom, more specifically London, more
specifically Heathrow, to the U.S., and an airport where we
don't have access and we don't have the right to compete, and
that is the main reason we are so opposed to this alliance
while, as Don Carty commented, we are a large supporter of
alliances in general and have not opposed the others.
It is not just us that are concerned or the airlines. In
1997, the antitrust experts at the Department of Justice made
it clear that the proposed alliance will significantly reduce
competition in many U.S.-U.K. city pairs without producing
sufficient efficiencies to outweigh the harm. Hence, if DOJ
were reviewing the alliance under the antitrust laws, we would
oppose it. What the Department of Justice said then is even
more true today.
If you look at the facts and you look at the comparisons,
when you talk about slots--and both American and British
Airways have talked about being under 40 percent--they are
talking about all the slots. The majority of the slots at
Heathrow go to serve intra-Europe markets. When you look at the
slots that are available for wide-body transatlantic flights,
you will quickly see that they have a tremendous dominance in
that market, which is what has brought this reaction. There are
two largest competitors in this crucial market. They are
already, if you look at British Airways, 65 percent larger than
its nearest competitor between the U.S. and U.K. And with the
combination of American Airlines, they would be 300 percent
larger than the nearest competitor.
They are seeking antitrust immunity so that they can
collude in order to fix prices, divide markets, allocate
capacity, and pool revenues on these very important business
markets. Again, we look at Heathrow and do not believe there
are any plans to increase the number of landing slots or even
add facilities until 2007 at the earliest. We believe that it
is a very difficult market, and we believe Virgin's experience
has shown how hard it is to get into Heathrow, as Richard
Branson has just commented.
``open skies'' as the trade? That is a cruel hoax with
regard to--if we have no access to the ground. We don't want to
fly to Heathrow if we can't land there.
Even those travelers who don't fly to London will be
harmed. As American Airlines and British Airways leverage their
dominant position in this market, they will use that on
corporate deals to get increased corporate traffic, which will
clearly have a huge impact on all of our businesses because
this is such a dominant market. Continental needs at least 10
daily round trips to Heathrow to have any chance to compete
against this monopoly. We need six from New York, we need three
from Houston, we need one from Cleveland. That requires 140
weekly slots, something we think in the current market is
impossible to obtain.
Further, we need some kind of mechanism to make sure we
have adequate counter space, club facilities, places to park
aircraft, and all the related facilities we need.
If American Airlines and British Airways are permitted to
jointly dominate London, Continental will face a substantial
loss among its corporate customer base because using that
dominance to force corporations and travel agents to shift
market shares away from competitors and other routes, both
within the U.S. or elsewhere, it will cause them to face the
loss of their coveted discounts and override commissions or
comply. No matter what side you see of this issue, we think it
is important with that added that this be well studied,
especially in light of the events of September 11th, which we
think have caused a dramatic change.
The industry is at a crossroads. September 11th changed
things. Inexplicably, the Department of Transportation is
moving with unseeming haste in consideration of the proposed
AA/BA alliance and antitrust immunity. Four years ago, the
Department provided adequate review time for thousands of pages
of analysis and comment, and they committed to an oral hearing.
This year the Department has arbitrarily cut off access to its
documents, provided inadequate time for review and comment, and
refused to require that applicants provide ongoing memos and
analysis that could be crucial to the review, and has not even
discussed the possibility of holding an oral hearing. The DOT
seems intent on sacrificing competition on the altar of ``open
skies'' and doing so as quickly as possible.
I hope this Committee will express its grave concern about
the inadequacy of this rushed and incomplete review to both
Secretary Mineta and Attorney General Ashcroft.
The proposed AA/BA alliance is the wrong deal at the worst
possible time for both the country and the industry in the most
important aviation market in the world. The combination of AA
and BA is so clearly anti-competitive and the benefits of U.S.-
U.K. ``open skies'' are illusory without the right to land and
the related facilities.
Mr. Chairman, thank you for your attention today, and also
the members of the Committee. We are grateful for your interest
and leadership on the issues. We appreciate Senator DeWine, who
represents our Cleveland hub and its 4,000 employees, and we
are pleased to answer your questions.
[The prepared statement of Mr. Kellner follows:]
Statement of Larry Kellner, President, Continental Airlines
Good afternoon Mr. Chairman and Members of the Subcommittee, I am
Larry Kellner, President of Continental Airlines. Continental is the
fifth largest airline in the United States, offering more than 2000
departures daily to over 200 domestic and international destinations.
Continental's employees have established our airline as an industry
leader by consistently ranking at or near the top of the U.S.
Department of Transportation consumer metrics. As a result of this kind
of consistent quality service, Continental has been recognized as an
industry leader and continues to receive many of the most coveted
awards for airline service. Continental has won the Frequent Flyer/J.D.
Power and Associates award for customer satisfaction four of the past
five years, and has been named the Airline of the Year by Air Transport
World magazine in 1996 and 2001, the first time an airline has won the
award twice in such a short period of time. Continental ranked
eighteenth in the most recent Fortune Magazine list of the 100 best
companies to work for, and was one of only two airlines to appear on
this coveted list.
This kind of recognition and achievement is just one indication of
how qualified and prepared we are to compete with U.S. and foreign flag
carriers -- but we can only compete if we are given the opportunity to
do so. We will only be given the opportunity to do so if the U.S.
Government actively and aggressively protects competition and consumers
on a worldwide basis. For this reason, I applaud this committee's
longstanding interest and concern about mergers and alliances in the
airline industry.
Competition is the reason we are here today. I very much appreciate
this opportunity to testify today on the important topic of the U.S.-
U.K. aviation environment and the very serious and potentially
disastrous impact that the American Airlines/British Airways antitrust
immunized alliance, a virtual merger, would have on competition. The
airline industry is currently facing some of its greatest challenges.
The government's action on the American/British Airways merger will
determine whether the airline industry continues to be competitive or
is dominated worldwide by a few global airlines. Never before has
careful scrutiny and reasoned analysis been more necessary. The timing
of this hearing is indeed propitious and the issue crucial.
Earlier this year, after careful and extensive review, the
antitrust experts at the U.S. Department of Justice decisively turned
down the proposed merger of United Airlines and US Airways--correctly
deciding that the combination of the second and sixth largest carriers
in the U.S. would be nothing less than a catastrophe for consumers.
The proposed American/British Airways ``merger'' is similarly
anticompetitive and, in fundamental respects, is even worse. In fact,
American/British Airways would have an even greater effect on
concentration in the U.S.--U.K. market than would a merger between the
1st, 2nd and 3rd largest carriers in the United States--American,
United and Delta--in the U.S. market. It would produce a level of seat
concentration in the U.S.--U.K. market even greater than that of a
merger between seven of the top ten domestic European airlines in the
intra-European service market. Frankly, it takes enormous chutzpah on
the part of American Airlines and British Airways to even make such a
proposal.
Continental has not opposed earlier applications for antitrust
immunity. We did not oppose Northwest/KLM, United/Lufthansa, or
American/Swissair/Sabena. More recently, we have not opposed Delta/Air
France/Alitalia/CSA Czech. But, those alliances were and are very, very
different. They are what we call ``end-to-end'' alliances that allow
each carrier to extend its network into areas it could not serve on its
own, thereby increasing competition and providing consumer benefits.
But we have opposed the American/British Airways alliance, both when it
was originally proposed in 1996 and again now. The reason for our
opposition is that the American/British Airways alliance is a brutally
anticompetitive horizontal alliance--combining the two biggest
competitors in some of the most important markets in the world and
allowing them to dominate an entire region and control some of the
world's largest and most important gateways. Their combined share in
markets where they currently compete will mean a substantial reduction
in competition. The anticompetitive, anti-consumer effects of the
proposed alliance far outweigh the insignificant end-to-end benefits of
this largely horizontal alliance.
In 1997, the Antitrust Division of the Department of Justice
commented on the then-proposed American/British Airways alliance by
saying,
``The alliance as proposed will significantly reduce competition in
the many U.S.-U.K. city pairs without producing sufficient efficiencies
to outweigh the harm.''
What the Department of Justice said then is just as true today.
While the ultimate decision in this case rests with the Department of
Transportation, it is important that this Subcommittee and the
Department of Justice have the time and the wherewithal to analyze the
proposed antitrust immunized alliance and provide insight into the harm
that approval of this deal will bring. There should be no rush to
sacrifice consumers and competition on the altar of ``open skies''.
Important information regarding competition in the airline industry has
already been gathered in other Justice Department cases (including the
last time that American/British Airways asked for antitrust immunity)
and should be carefully analyzed. This information will (1) prove that
the proposed antitrust immunized alliance between American Airlines and
British Airways is even more anticompetitive in the relevant markets
than the recently rejected United/American/US Airways transaction, and
(2) that meaningful competition to the proposed alliance is impossible.
While the applicants claim that their alliance should be treated
like any other, the plain truth is that it is not the same. The
Department of Justice, in comments submitted to the Department of
Transportation on May 21, 1998 (in the docket from the last American/
British Airways attempt to gain approval for their anticompetitive
alliance), agreed that this alliance is different, stating,
``There are some important differences between the AA/BA
Alliance and earlier alliances reviewed by DOJ. First, the
competitive losses threatened by the transaction affect a far
larger number of passengers than were affected by any of the
other alliances. . .Second, the potential consumer benefits
from this Alliance are more limited than those associated with
the prior alliances.''
What American and British Airways are proposing is different from
prior alliances, and a ``me too'' claim is not appropriate.
Consider the following:
American and British Airways are the two largest carriers in the
world's largest intercontinental market. They are asking for immunity
from antitrust laws in order to fix prices, divide markets, allocate
capacity, and pool revenues in large and important markets where they
currently compete.
American and British Airways already dominate London (Heathrow). By
combining, they will effectively eliminate competition in the U.S.-U.K.
market.
The American/British Airways combination, unconstrained by
antitrust concerns, will crush smaller competitors in the U.S.-U.K.
market. They will be free to manipulate prices, capacity, and
schedules, and use their market power in the most important business
markets in the world to drive their competitors from those and other
markets. Smaller carriers will have no means to respond, even under an
open skies agreement. A combined American/British Airways will have the
market power to discipline those few airlines who are in a position to
compete, and who dare to do so.
Nominal access to London Heathrow--which is all that is
contemplated under open skies--is meaningless given (1) the
overwhelming dominance of American and British Airways in the U.S.-U.K
market, (2) facility constraints at London Heathrow, (3) the
limitations of the London Heathrow slot system, and (4) the inability
of smaller competitors to discipline American/British Airways fares in
the U.S.-London markets.
Elimination of the current barriers to entry at London Heathrow and
London Gatwick is crucial to achieving any benefit whatsoever from an
open skies treaty with the U.K. An open skies treaty will be a hollow
shell if American and British Airways are allowed to control critical
airport slots and facilities and, thereby, to dominate the relevant
U.S.-U.K. markets. Given the size and importance of the relevant
markets and the certainty and significance of the anticompetitive
effects, this unique and troubling alliance requires extraordinary
government scrutiny. With the instability facing the airline industry
as a result of the September 11 terrorist attacks, now is not the time
to allow ourselves to be rushed into a decision with permanent and
potentially devastating consequences.
The U.K. Market is Different and London Heathrow Has No Viable
Alternatives
American and British Airways propose to functionally merge their
transatlantic operations, fix prices, divide markets, allocate
capacity, and pool revenues with complete immunity from the antitrust
laws. This is an astounding proposition in light of their combined size
and position in the world's largest intercontinental market. American
is the largest airline in the U.S. and worldwide. British Airways is
the largest airline in the U.K. These airlines dominate access to the
premier airport in Europe, London Heathrow, a slot and facilities
constrained airport where they control the most valuable slots and
facilities. American and British Airways compete directly with one
another and are the two largest airlines in the U.S.-U.K. market. The
two carriers now propose to combine their large number of overlapping
routes and eliminate direct competition in the largest U.S.-Europe
market. The two carriers will do this by utilizing their dominant
presence at London Heathrow.
The U.S.-U.K. market is different than any other market where
carriers have attempted to gain antitrust immunity. The London market
has been severely restricted by the aviation bilateral in place between
the two nations (Bermuda II). While this bilateral treaty has basically
opened the skies between the U.S. and all U.K. points except London
Heathrow and London Gatwick, the skies remain closed at London Heathrow
and London Gatwick. The bilateral restricts the number of airlines that
can operate to London, the number of U.S. cities from which flights to
London can originate, and the number of actual operations to London
that can take place. American and British Airways have fared
exceedingly well under this bilateral, growing to be the two largest
airlines between the U.S. and London, both having access to London
Heathrow with multiple overlapping flight and gateway opportunities.
The U.S.-U.K. market is also different because of its sheer size.
The U.K. accounts for the largest number of U.S.-Europe passengers--
well over one-third of all U.S.-Europe traffic, nearly the same amount
of U.S. to Europe traffic as Germany, France, and the Netherlands
combined. London accounts for nearly 90% of U.S.-U.K. traffic and,
while fewer carriers serve London Heathrow than London Gatwick, London
Heathrow accounts for nearly 60% of all U.S.-U.K. traffic. London
Heathrow is the primary gateway in the U.K. and by far the largest
European airport for U.S. passengers. London Gatwick, at half the size
of London Heathrow, is about the same size gateway as Frankfurt or
Paris.
Having access to London Heathrow is critical because it is the
preferred gateway for London passengers and consistently receives a
better mix of high fare paying business passengers than other European
hubs. London Heathrow is closer to the center of London, provides
convenient and extensive connections to the rest of Europe and beyond,
and is surrounded by business areas. Even London Gatwick is not a
reasonable alternative to London Heathrow. For example, most U.S.
airlines serve London Gatwick only at points where London Heathrow is
unavailable to them. Even American, as one of only two U.S. carriers
permitted to fly to London Heathrow, serves Dallas/Fort Worth, Raleigh/
Durham, and St. Louis from London Gatwick because London Heathrow is
not available to it from those cities under Bermuda II. Other examples
include Continental at New York/Newark, Houston, and its suspended
Cleveland service, Delta at Atlanta, Boston, and Cincinnati, Northwest
at Detroit and Minneapolis, and US Airways at Charlotte, Philadelphia,
and Pittsburgh. In fact, London Heathrow is such a preferred airport
that over 23% of U.S. carrier passengers in London Gatwick gateways
chose connecting service to London Heathrow over nonstop London Gatwick
service.
Another illustration of how London Heathrow is clearly the
preferred airport is the fact that average fares between the U.S. and
London are almost one-third higher at London Heathrow than at London
Gatwick. Average round trip fares are also consistently higher (20-40%)
between the U.S. and London Heathrow than between the U.S. and other
hub airports in Europe, such as Amsterdam, Paris or Frankfurt.
Additionally, other European gateways are not viable alternatives for
London passengers because of the additional time it would take to make
such a circuitous trip. For the year ending May 2001, minimal numbers
of passengers used these other European gateways as a connect point for
London.
II. American and British Airways Dominate London Heathrow
The fact that London Heathrow is the preferred airport in London
and Europe and other airports do not provide viable and competitive
alternatives is crucial to evaluating the proposed antitrust immunized
alliance between American and British Airways. As I stated earlier,
these carriers are two of only four carriers who currently have access
to London Heathrow under Bermuda II. These carriers already dominate
the market between the U.S. and London Heathrow, operating service to
eleven U.S. gateways with almost three hundred weekly departures (as
compared to zero for other London operators like Continental, Delta,
Northwest, and US Airways). They control over 60% of the seats in the
U.S.-London Heathrow market, over three times the next largest
competitor. After open skies, this dominance will increase, as the
carriers will be free to move their current London Gatwick service to
London Heathrow utilizing their vast London Heathrow slot portfolio,
while new entrant carriers, like Continental, will be unable to begin
any significant operations from London Heathrow as they seek to obtain
commercially viable slots and facilities in order to mount competitive
service. American and British Airways already directly overlap on seven
U.S.-U.K. routes (six involving London Heathrow) and are proposing to
fix prices and allocate capacity on all of these. They already have
combined seat shares ranging from a dominant ``low'' of over 43% in Los
Angeles to a monopolistic high of 100% in Dallas/Ft. Worth and Miami.
In fact, nearly half of American and British Airways' transatlantic
passengers fly on routes where the carriers overlap.
While much of my testimony focuses on London Heathrow, let me
assure you that competition and constraints at London Gatwick are not
much better. London Gatwick, which is not a viable alternative for
London Heathrow, is itself a severely capacity constrained airport
dominated by the proposed American/British Airways alliance. There are
eight London Gatwick gateway routes between the U.S. and U.K. where
American and British Airways control 100% of the market. Proof of
British Airways' attempt to dominate both London airports is the fact
that, even though British Airways has announced a significant pull down
of Gatwick operations, it has stated that it does not intend on
returning any of its slots or facilities at the airport.
To put the American/British Airways dominance in perspective,
consider the following points:
Nearly 9 million passengers per year, or 81% of all London
Heathrow passengers, would have reduced or no competition
following an American/British Airways alliance.
Combined, American and British Airways would be nearly three times
the size of the nearest competitor in the U.S.--London Heathrow and
Gatwick markets.
In the top three U.S.--London Heathrow markets (New York, Los
Angeles, and Chicago), which account for over 60% of all U.S.--London
Heathrow passengers, the antitrust immunized alliance would have more
scheduled flights than their competitors by at least a 3:1 ratio.
III. A U.S.-U.K. Open Skies Agreement is Meaningless Unless a
Significant Number of Competitive and Economically Viable Slots and
Facilities are Given to New Entrant U.S. Carriers
The Department of Transportation has a policy that states that
unless a country has an open skies bilateral with the U.S., carriers
from that country are not eligible for antitrust immunity. American and
British Airways have indicated that the immediate benefit of approval
of their agreement would be the implementation of a new open skies
aviation bilateral between the U.S. and U.K. and have hinted that open
skies will not happen without it. The carriers claim that the benefits
of open skies far outweigh any harm their alliance would cause, and in
fact, open skies would aid the competitive environment even with an
American/British Airways alliance because it would end the restrictions
on carriers, cities, and operations currently included in Bermuda II.
They claim that because an open skies bilateral would allow for non-
incumbent airlines, like Continental, to legally begin service to
London Heathrow, it is pro-competitive and in the best interest of the
U.S. and consumers.
Nothing could be further from the truth. In order for there to be
effective competition following an open skies treaty between the U.S.
and the U.K., a substantial number of competitively viable slots, and
adequate facilities to operate those slots, would have to be allocated
to new entrant U.S. carriers. However, slots and the required
facilities at London Heathrow are not available. The capacity and
infrastructure constraints at London Heathrow make it impossible for a
carrier like Continental to obtain the required slots and facilities
that would be needed to attempt to compete with a dominant American/
British Airways alliance. Without that competition by Continental and
others, consumers would be doomed.It is ironic that British Airways is
now suggesting that open skies will solve the anticompetitive problems
that the proposed alliance would create. One of the main reasons we do
not have open skies today is that in the past British Airways has not
wanted it. For 20 years Bermuda II has afforded British Airways
protection from full and open competition, thereby giving it an
enormous incumbency advantage over new entrants and the ability to
consolidate its position in London, especially regarding slots and
facilities. Now British Airways has changed its tune. As the price for
dropping its opposition to open skies, it wants to proceed with an
obviously anticompetitive alliance that would give it immense market
power and eliminate its principal competition. British Airways wants to
replace the artificial barrier to competition created by bilateral
restrictions with the commercial barrier created by its (and
American's) dominance of the market as well as critical airport slots
and facilities. British Airways' proposed ``cure'' would be even worse
than the current ``disease''.
Continental has estimated that in order to try and compete with
American and British Airways, it would require a minimum of ten new
daily operations at London Heathrow, a total of 140 weekly arrival/
departure slots. These operations would include six daily New York/
Newark-London Heathrow flights, in order to have a prayer of competing
with the 12-16 combined daily New York/Newark-London services offered
by the mega-alliance. It would also include three daily Houston-London
Heathrow flights to compete with American/British Airway's Dallas and
Houston service, and one daily Cleveland-London Heathrow flight in
order to provide needed competition in the mid-west market.
Slots would need to be at competitively viable times (for
transatlantic services) and would need to be accompanied by competitive
facilities. These facilities requirements include ticket counters,
baggage service centers, back office space, transfer desks, airport
club lounges, piers for all arriving and departing aircraft, gates,
adequate parking, and storage facilities. Other U.S. carriers have made
requests for similar numbers of flights, and foreign flag carriers,
most notably Virgin Atlantic, have indicated they would require a
significant number of London Heathrow slots as well. Given the current
constraints at the airport, short of direct transfer of slots and
facilities from American or British Airways, it is not possible to meet
these requirements. Thus, signing an open skies agreement with the U.K.
would do nothing to open access for new entrant U.S. carriers like
Continental. It would, however, guarantee that American and British
Airways raised prices and reduced capacity on the largest business
market in the world. An open skies agreement without significant slot
and facilities transfers would merely substitute slot and facility
restrictions for bilateral restrictions. In short, the skies are not
``open'' if the ground is closed. We have no interest in flying to
London Heathrow if we cannot land there.
IV. Slots and Facilities at London Heathrow are Not Available
American and British Airways argue that they control a smaller
proportion of slots at London Heathrow than many other U.S.-Europe
alliance partners do at their primary European hubs. While this is
technically true, it is wholly irrelevant. What really matters is the
access to slots at the right times of the day and an ability to get the
necessary facilities on commercially reasonable terms at these hubs.
Even British Airways has acknowledged that London Heathrow is full. New
entrant carriers, like Continental, cannot gain access. This has not
been true at other European hubs, and is certainly not true in the U.S.
where the Government has provided slots to all authorized foreign
carriers that have requested them. In fact, the U.S. has taken slots
away from U.S. carriers in order to meet its obligations to foreign
carriers.
There are three constraints that a new entrant would need to
overcome in order to serve London Heathrow: arrival and departure
slots, capacity within a terminal (which is limited by the number of
passengers the terminal can accommodate), and aircraft parking
capacity. All three are significantly constrained at London Heathrow
and there has been very little expansion of capacity at London Heathrow
over the past few years. According to the British Airports Authority
(BAA) and the London Heathrow slot coordinators (ACL) in their
submissions to the Department of Transportation responding to the
Department's questions on access to slots and facilities at London's
airports (submitted October 3, 2001), the number of movements per hour
at London Heathrow increased by less than 1% for the summer of 2001
compared to the summer of 2000, with no new slots created during the
standard transatlantic operating hours. Such a minimal number of new
slots clearly will not satisfy the necessary demand by new entrant and
other carriers trying to compete with the dominance of American/British
Airways. Significant amounts of new airport capacity are not expected
anytime in the foreseeable future and a decision on a new London
Heathrow terminal has not even been made. BAA notes in their
submission:
``. . .it is not possible to increase Heathrow's runway
capacity by more than a minimal amount without changing the
operating protocols. And, until Heathrow's Terminal 5 is
approved, built and opened, there is relatively little that can
be done to relieve the aircraft parking and terminal capacity
constraints. . .BAA currently believes that the earliest
opening date for the first phase of Terminal 5 is Autumn
2007.''
This response from BAA is not new. In April 2001, BAA, responding
to the U.K. Government's ``The Future of Aviation'' Consultation
Document, stated:
``Air Transport demand has been constrained by capacity for
many years and will almost certainly continue to be constrained
at peak times. Slots at Heathrow and Gatwick are significantly
oversubscribed so there is already considerable unfulfilled
demand.''
ACL agrees, and told DOT:
``In ACL's professional judgment the opportunities to
accommodate new entrant US carriers from the allocation of pool
slots in the first two seasons are extremely limited. It may be
possible to accommodate up to one daily service. . .with
arrivals in the late evening and departures mid-afternoon the
next day.''
The admission by the London Heathrow slot coordinator itself that,
at best, only one new non-competitive daily flight will be possible at
London Heathrow is a clear indication that London Heathrow is closed
and that competition to the proposed American/British Airways alliance
will be nonexistent.
Some have claimed that many new entrant airlines have begun
operations at London Heathrow over the past five years, so what is
there to complain about? Plenty. While a small number of new airlines
may be found at London Heathrow, the reality is that since American/
British Airways first requested approval for their immunized alliance
in 1996, virtually no new entrants have gained access to London
Heathrow. The few ``new entrants'' bandied about by American and
British Airways fall within one of three categories: subsidiaries of
existing London Heathrow carriers (i.e. Deutsche BA and KLM City
hopper), carriers that gained slots through the transfer of slots from
an existing flag carrier (i.e. Transaero Russian Airlines), and
carriers that reinstituted service that had been suspended due to the
political environment (i.e. Sudan Airways or Libyan Airways). This is
scarcely what one would rely on to provide effective competition
against a combined American and British Airways in the largest business
markets in the world.
It has also been argued that new entrant carriers can gain access
to London Heathrow through the purchase/trade/lease of slots from
established London Heathrow carriers. Current European Commission slot
regulations prohibit the sale/purchase/lease of slots between carriers
with or without monetary compensation (except carriers that have
corporate links, parents and subsidiaries, and business takeovers). It
is true, however, that ``artificial exchanges'' where carriers
``trade'' slots have been permitted by the Commission. Revisions of the
slot legislation currently under consideration would strengthen the
prohibition on slot transfers and could eliminate even artificial
exchanges of slots as an option. Even artificial exchanges have had
minimal success over the past few years, and any potential ``sellers''
of slots have long ago sold the available slots in their portfolio,
most likely to a U.K. carrier (British Airways or Virgin Atlantic). ACL
notes that in the winter of 2000/2001, 52 weekly slots were transferred
at London Heathrow airport through the use of an artificial exchange,
42 of them going to British Airways. For the summer of 2001, 72 weekly
slots were transferred with 48 going to British Airways and 14 going to
Virgin Atlantic. Finally, for the winter 2001/2002 period only 26
weekly slots were transferred, 12 to British Airways, 14 to Virgin
Atlantic. Keep in mind that Continental alone would required 140 weekly
slots, and U.S. new entrants alone will need over 400 weekly slots to
provide any kind of competition. It should be noted that these
artificial exchanges amount to significantly less than 1% of the total
weekly slots at London Heathrow and were not necessarily (and probably
were not) at competitively viable times for transatlantic services.
Moreover, utilizing artificial exchanges for obtaining slots at
London Heathrow has become nearly nonexistent because the pool of
potential trading partners has dried up. Carriers have absorbed
virtually all commercially viable slots as they became available over
time, leaving little to no room for new carriers who might wish to
begin London Heathrow service. London Heathrow slots are heavily
concentrated in the hands of the oneworld global alliance (of which
American and British Airways are members) and the Star global alliance
(of which United Airlines and its British partner bmi are members).
Combined, these two global alliances hold nearly 75% of all London
Heathrow slots and have no incentive to provide slots to any other new
entrant airline. In fact, all but two of the top ten slot holders at
London Heathrow are in one of the two mentioned global alliances (with
the exceptions being Virgin Atlantic, which itself is desperate for
additional London Heathrow slots, and Air France). Because of the very
small number of competitive slots the remaining slot holders have, it
is not possible for new entrants to obtain a competitively viable slot
portfolio through artificial exchanges.
American and British Airways have argued that new entrant U.S.
carriers can obtain any necessary London Heathrow slots or facilities
from their own European global alliance partners. For starters,
Continental has no immunized alliance with a European airline, so this
avenue would not be open to Continental in any event. Most European
airlines have insufficient slots to transfer to their ``have-not'' U.S.
carrier alliance partners. For example, the largest non-oneworld, non-
Star alliance European airline at London Heathrow is Air France (a
Delta alliance partner), which has less than 3% of slots at the
airport. U.S. carriers would require virtually all of the partner's
slots to operate the required number of flights and create a
competitive London Heathrow market position against American/British
Airways for transatlantic services. European airlines have no economic
incentive to transfer slots to U.S. airlines (even alliance partners)
for transatlantic service, as London Heathrow slots are equally scarce
for them. Just as London Heathrow is critical to the route network of
U.S. carriers, the airport is a critical destination for European
carriers which operate networks at their respective hubs. London
Heathrow is typically the largest international market for European
airlines, and it is a critical spoke to every hub city and airline
network in Europe. A transfer of slots by a European carrier to its
U.S. alliance partner would significantly reduce the European carrier's
ability to compete on London Heathrow-Europe routes. Finally, a number
of U.S. new entrants do not even have a European partner from which
they could try to obtain slots and facilities.
V. The Situation Has Gotten Worse, Not Better, Since the Last Time
American and British Airways Applied for Approval
Just a few years ago American and British Airways attempted to
dominate the skies between the U.S. and U.K. and filed with the
Department of Transportation for an alliance with antitrust immunity.
This Subcommittee held hearings on the subject of this alliance, and
scores of parties weighed in as to the anticompetitive nature of the
alliance.
Less than four years ago the Department of Justice advised the
Department of Transportation on the proposed alliance, filing public
comments. In those comments Justice stated:
``The Alliance as proposed will significantly reduce competition in
many U.S.-U.K. city pairs without producing sufficient efficiencies to
outweigh the harm. Divestiture conditions, primarily slot divestitures
at London Heathrow Airport (``Heathrow'' or ``LHR'') can reduce that
harm, but will not eliminate it. . .Hence, if DOJ were reviewing the
Alliance under the antitrust laws, we would oppose it.''
Justice also contradicted any argument that the potential for open
skies justified approval of American/British Airways by stating
``. . .the potential benefits of open skies are not sufficient
to outweigh the harm of the Alliance as it is currently
proposed, in large part because slot constraints at LHR create
grave doubts that open skies alone will produce significant new
entry and competition in U.S.-London markets.''
The GAO also weighed in the last time American and British Airways
proposed their alliance. In testimony before this very Subcommittee,
GAO stated
``The proposed alliance of American Airlines and British
Airways--the two largest carriers in the U.S.-U.K. markets--
raises significant competition issues.''
Earlier, in testimony before the Senate Subcommittee on Aviation,
the GAO stated
``Barriers exist at Heathrow in the form of a limited number of
takeoff and landing slots and a scarcity of available gates and
facilities that prevent U.S. airlines from having adequate access to
that airport. As a result, action will be necessary to address these
barriers if open skies is to result in increased competition.''
With this second coming of American/British Airways, the applicants
argue that times are different, that they need their alliance for
survival, especially given the growth of the Star alliance. With this
second coming of American/British Airways, the applicants argue that
slots at London Heathrow are available if new entrants were just
willing to work for them. With the second coming of American/British
Airways the applicants argue that the door to open skies may close
forever if quick approval of their alliance is not made. And with the
second coming American and British Airways argue that competition
authorities and experts worldwide were wrong when they opposed the
alliance the first time.
But the Department of Justice was correct in 1997, and its position
then is even more correct now. Just like last time, the proposed
American/British Airways alliance is anticompetitive and should not be
approved. The U.S. should not sign an open skies agreement with the
U.K. unless the substantial London Heathrow access issues are
appropriately addressed. The Departments of Transportation and Justice
should send these clear messages to the applicants so that there never
is a third coming. Nothing has changed to make the situation better. .
.all of the changes have made such an anticompetitive alliance even
worse.
Much has happened in the world since the last time that American
and British Airways proposed their alliance. First, as already
discussed, the already difficult prospect of obtaining slots in London
has gotten worse because of current and long-term airport constraints.
While American and British Airways have strengthened their dominant
market position, they have ensured that new entry competition is
impossible.
Next, market concentration has grown as bmi, the second largest
slot holder at London Heathrow, joined the Star alliance. While
American and British Airways argue that United/bmi create a competitive
balance to their alliance, the true fact is that United/bmi, on top of
an already dominant American/British Airways, does nothing but to
create a duopoly in the U.S.--U.K. market and further assure that new
entry is impossible.
The last time that American and British Airways applied, bmi argued
vigorously that it wanted to be a new entrant in the U.S.-U.K. market
offering low fares and competitive service to the London Heathrow
carriers. bmi's own press releases from mid-1999 frequently stated ``.
. .British Midland has been at the forefront of bringing lower fares
and greater competition'' over and over again. Then, at the end of 1999
bmi announced that it was joining the Star alliance and selling a
significant stake in itself to Star alliance members. A quick
transformation from low cost new entrant to entrenched alliance member
quickly ensued. Today bmi, as part of the Star alliance, cannot be
relied on to bring competition into the market. Today bmi has abandoned
its goal of becoming a low fare new entrant (any new bmi service would
be no different than entrenched incumbent United adding service) and is
focusing solely on the Star alliance, antitrust immunity with United,
and helping to create a U.S.-U.K. duopoly.
In fact, United/bmi compounds the American/British Airways problem.
The two airline groups would control 65% of U.S.-U.K. frequencies and
an astounding 84% of U.S.-London Heathrow frequencies. This is even
before bmi, in conjunction with United, begins new U.S. service
utilizing its existing London Heathrow slot portfolio and before
American and British Airways switch current London Gatwick service to
London Heathrow, utilizing their slot portfolios. The two alliances,
with their current partners, will control 75% of all London Heathrow
slots and effectively reduce all other carriers to non-competitors in
the U.S.-U.K. market. It is clear that American and United are
attempting to divide the U.S.-U.K. market just as they attempted, but
failed, to divide the U.S. domestic market when they tried, and failed,
to divvy up US Airways.
One other significant event has occurred since the last time
American and British Airways attempted to gain antitrust immunity. The
tragic events of September 11, 2001 have changed the world, and the
airline industry has changed in ways that we are just now starting to
understand. In our weakened condition, major carriers have cut capacity
significantly, furloughed valuable employees, and stared at bankruptcy
as a realistic possibility. All airlines have been forced to reevaluate
their networks and competitive strategies. These events have direct
bearing on the proposed American/British Airways alliance and would
make a combined American/British Airways even more dominant and
anticompetitive.
Since September 11, Continental has announced the discontinuation
of New York (Newark)--Stansted service and the suspension of
Cleveland--London (Gatwick) service. Virgin Atlantic, a London Heathrow
incumbent and one of the very carriers expected to significantly
compete with an American/British Airways alliance, has reduced capacity
to New York, Chicago, Los Angeles, San Francisco, and Toronto. Even
American and British Airways have announced reductions in service. The
rapidly changing airline industry is unstable. As the competitive
landscape continues to shift in material and unpredictable ways, it
makes intelligent and reliable analysis of the proposed alliance and
antitrust immunity extremely difficult, if not impossible. Only one
thing remains clear: the dominant position that American and British
Airways would have will be further enhanced.
VI. The Rush to Conclude the Governmental Review of American/British
Airways is Misplaced and Misguided
The Department of Transportation appears to be moving with unseemly
haste in its consideration of the proposed American/British Airways
alliance and antitrust immunity. Four years ago, adequate time was
given to review the tens of thousands of pages of documents filed in
the American and British Airways proceeding so that the Department
could receive the benefit of the analysis of industry experts. Further,
the Department committed to a public oral hearing where the issues
could be debated in full with the participation of all interested
parties. This time around the Department has arbitrarily cut off access
to documents, provided inadequate time for review and comment, refused
to require that the applicants provide ongoing memos and analysis that
could be crucial to the review, and has not even discussed the
possibility of holding an oral hearing. In fact, the Department has
refused even to consider the fact that the tragic events of September
11th have significantly altered the aviation landscape. This unseemly
haste raises serious concern about the objectivity of the Department's
review and suggests that the proposed alliance is so significantly
flawed competitively that it cannot withstand serious and careful
scrutiny.
Some have argued that it is critical for the U.S. and U.K. to rush
to agreement on open skies because it is expected that sometime during
the next few months the European Court of Justice will rule on the
longstanding European Commission case against Member States who signed
open skies agreements with the U.S. The belief is that the Court will
rule that no new Member State can sign such an agreement and that the
European Commission alone has the authority to negotiate with the U.S.
The U.K. would lose its right to negotiate a new U.S. agreement.
The Department of Transportation has used this as an argument
justifying their need to move quickly. In Order 2001-9-12, issued and
served on September 17, 2001, the Department stated,
``We here enjoy a unique opportunity to reach this goal with the
United Kingdom. We understand, however, that the U.K. is likely to be
unwilling to sign an open skies agreement unless and until we have
granted the applicant's request for approval and antitrust immunity.
Because of a pending challenge to the U.K.'s authority to sign a
bilateral aviation services agreement with the United States, we must
act promptly on the application filed here by American and British
Airways.''
But the U.S. should not rush to sign a bad deal and approve an
anticompetitive alliance simply because of this concern. Open skies
without competition gains nothing and materially harms consumers.
Moreover, one would think that the pending European Court of Justice
decision should concern the U.K. negotiators, not the U.S. The U.S.
currently has the leverage in the negotiations since it is the U.K.
that may soon lose its negotiating power. And it is the U.K. that needs
to come forward with a deal that truly meets the needs of the U.S., its
carriers, and consumers on both sides the Atlantic. Such a deal must
include true and full access to London Heathrow. Such a deal does not
need to include approval of an anticompetitive alliance between
American and, British Airways. As I stated earlier, an open skies
agreement is meaningless without open access to London Heathrow and
Gatwick. The threat of losing this ``unique opportunity'' should have
no weight in the Department's decision, and certainly should not cause
the DOT to rush to make a poor judgment that it and American consumers
will soon regret.
Even negotiating with the U.K., as the U.S. did most recently just
two weeks ago (curiously, without the normal presence of industry
observers), will simply increase the pressure to approve the
anticompetitive agreement between American and British Airways. The
Department needs to stop heading down this misguided path.
At the conclusion of these hearings, I urge this Committee to
express its grave concern about the adequacy of this rushed and
incomplete review to Secretary Mineta and Attorney General Ashcroft.
Please urge them to set forth a careful and judicious process that
ensures that the Government has all of the information needed to make
the right decisions on behalf of the traveling public.
VII. Conclusion
The combination of American and British Airways is so clearly
anticompetitive and the benefits of a U.S.-U.K. open skies agreement
(without significant slots and facilities attached) are so illusory
that approval of the alliance cannot possibly serve the public
interest. The Department of Transportation, with guidance from the
Department of Justice, must deny the American/British Airways request
in order to preserve competition in these critical markets.Mr. Chairman
and Members of the Committee, I thank you for giving me the opportunity
to discuss this very important topic with you and for your attention. I
would now be pleased to answer any questions that you may have.
[Additional material is being retained in the Committee
files.]
Chairman Kohl. We thank you, Mr. Kellner, and before we
start questioning, we would like to hear from Senator Specter.
STATEMENT OF HON. ARLEN SPECTER, A U.S SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you very much, Mr. Chairman, and
thank you for convening this important hearing to begin the
process of the Antitrust Subcommittee looking into a great many
very, very complicated issues.
The fundamental question, of course, is competition. When
you have an alliance between American Airlines and British
Airways, which controls now--the two control 61 percent of the
traffic from the United States to Great Britain, there is an
enormous hurdle to overcome.
When you talk about an alliance, you talk about agreements
as to many lines, including fare-sharing. In harsher days, you
call it a conspiracy, or you call it an agreement. It is a
conspiracy if it is against the law. It is an agreement if it
is in accordance with the law. But the impact on the consumer
may be just about the same thing. So that any agreement by the
United States Government, Department of Transportation in
collaboration with the Justice Department, to approve this
alliance I think has to have extraordinarily close scrutiny by
this Subcommittee, and we are starting that process.
It seems a little curious to me that it has taken so long
to have any realistic effort to renegotiate this 25-year
agreement between the United States and Great Britain known as
Bermuda 2. And Mr. Maynard may have put his finger on it when
he talks about the UE in the wings. And with the UE in the
wings, which may supersede Great Britain's ability to
negotiate, perhaps candidly, at long last, there may be some
willingness to give other airlines an opportunity. But the
fundamental concern as a United States Senator is with
competition as it affects the American consumer, the U.S.
consumer.
Then there is the issue of special Pennsylvania interests
with US Airways, and that is an airway which has had very
considerable difficulty, just went through a long process on a
prospective merger with United, where United did not make the
application for an antitrust exemption until the last minute
and time ran out, and that merger did not take place, and
perhaps for the better. But US Air, with some 17,000 employees
in Pennsylvania, prior to the recent cutback, is an obvious
concern for a Pennsylvania Senator. And it seems to me that
there are going to have to be real assurances when Mr. Maynard
talks about slots, and I am sorry I can't stay for the
questioning. We have Secretary of Defense Rumsfeld coming in at
2 o'clock to give us a briefing, and that is a very important
matter. But we need answers to the questions on slots. Are they
meaningful slots? I am advised by staff that the slots are
available at a time which doesn't do the airline much good.
So that if there is to be an approval on immunity, it seems
to me that Great Britain and the United States Governments have
to come up with a package which is meaningful. They are going
to have to be meaningful slots. They are going to be meaningful
lines. They are going to have to be meaningful competition. And
now that the UE is in the wings, maybe the time has come for
that.
But I want to see a lot of these very hard questions
answered before I am prepared to give my agreement as a United
States Senator for all of our consumers and as a Pennsylvania
Senator who has a very special interest in US Airways and the
many jobs which it controls.
Mr. Chairman, I would talk longer, but my voice is at the
very end.
Chairman Kohl. Thank you.
Senator Specter. Everyone is in luck. Thank you.
Chairman Kohl. Thank you very much, Senator Specter.
The first question to you, Mr. Carty. Critics of the deal
between American Airlines and British Airways point out that
the ``open skies'' agreement has little meaning with respect to
London's Heathrow since there are virtually no available
takeoff or landing slots at that airport. Mr. Carty, what good
is an ``open skies'' agreement if the competitive airlines
cannot gain takeoff and landing slots at Heathrow?
For example, you have a very, very large share of the
London market. How could anyone compete against your alliance
when you and British Airways have such a large share? I don't
believe you would do it to yourself, for example, Mr. Carty.
You are not trying today to compete with Delta/Air France at
Charles De Gaulle in Paris or United/Lufthansa at Frankfurt. I
believe that is a matter of fact. So why would you expect your
competitors to see any justice in what you are asking for at
Heathrow?
Mr. Carty. Well, let me respond to that in a couple of
ways. First, let me make the observation that my friends, as
you referred to them as, testified--or their predecessors in
some cases--exactly the same way when this application was
submitted 5 years ago. And since that 5 years has elapsed,
there have been 15 new frequencies a day added between the
United States and the United Kingdom.
The reports that slots weren't available then, absolutely
no slots available--each of these airlines testified to that
effect 5 years ago. Since that time, between ourselves, British
Airways, United, and Virgin Atlantic, who are the only carriers
allowed to participate in this market, we managed to add 15 new
services.
Now, I might add, seven of those were added by the American
carriers. The only reason these gentlemen don't have flights in
Heathrow today is because that agreement wasn't approved 5
years ago. The slots became available.
Now, in addition to that, I think the British Airport
Authority has already testifies that slows to permit an
additional six to ten frequencies would be available
immediately. They have also testified that facilities are
available, as Mr. Maynard has talked about. Mr. Maynard also
referred to the number of transactions that have occurred,
trading and buying slots at Heathrow Airport in the last year.
There are slots available. If there weren't slots
available, United wouldn't have been able to add five flights
in the last 5 years. Virgin Atlantic wouldn't have been able to
increase their number of flights by 50 percent. It is a slot-
controlled airport, but there are slots available.
Secondly, the dominance that exists, the so-called
dominance that exists by British Airways, as Alfred Kahn has
testified, is dramatically less than the presence of so-called
dominance at Frankfurt and Charles De Gaulle and Amsterdam.
Today, I think it is 70 percent of the flights--in excess of 72
percent of the slots at Amsterdam are controlled by the Wings
Alliance. Fifty-four percent of the operations at Charles De
Gaulle are controlled by the SkyTeam. Sixty-nine percent of the
slots at Frankfurt are controlled by the Star Alliance.
So I think you need to put that in perspective, and to your
point whether we would be competitive with them, we have
service to Charles De Gaulle today from Boston, New York,
Dallas, Chicago, Los Angeles, and Miami. We are actively
competitive in that market. Indeed, we have entered that market
and we have entered the Frankfurt market.
So it would be a grave--I mean, if these gentlemen don't
believe they would enter the market, I don't think they would
be here arguing it. The opportunities these gentlemen have
missed is the number of slots that have become available in the
last 5 years, and if we adopt this same position 5 years from
now we will still have Bermuda 2 with British Airways.
American, United, Virgin Atlantic, and British Airways will be
the only operators into Heathrow, and, of course, it is quite
logical to assume that American and British Airways will have
somewhere around 50 percent. When there are four carriers in a
market, that tends to be what happens.
So I think some of the so-called facts that there are no
slots available have been--the facts are found to be wanting on
both bases, historical basis and on the basis of the British
Airport Authority's indication that there would be slots
available for six to ten frequencies.
Chairman Kohl. All right. Mr. Branson, would you like to
respond?
Mr. Branson. I would just like to challenge Don Carty. He
says that--and there are a lot of incredible things coming from
both British Airways and American Airlines on slots. He says
that the British Airport Authority say that there are six to
ten new frequencies available immediately today across the
Atlantic. What I am willing to challenge him on is that if we
tomorrow apply for those six to ten and we don't get them, will
American Airlines hand over six to ten of their slots to us? He
won't take up this challenge because he knows they are not
available. But I will ask him that question.
Will you give us six to ten of your frequencies if we don't
get them?
Mr. Carty. If any become available, will you give them to
us? You, will you give them to us?
Mr. Branson. I am asking you a question. Will you--you are
saying there are six to ten frequencies--
Mr. Carty. I am asking you--
Mr. Branson. --across the Atlantic.
Mr. Carty. All I am doing is reading the British Airport
Authority's submission to this Committee.
Mr. Branson. But you are obviously reading it wrong because
there are not six to ten frequencies available. I mean, if
there were six to ten available, we would be moving our
services from Gatwick to Heathrow. British Airways is moving
their services from Gatwick to Heathrow. There are no services
available, no slots available at all. And I can go through all
the quotes of British Airways and yourself over the last 4
years saying there are none available, if you wish me to, but
you know there are none available.
Chairman Kohl. All right. Mr. Anderson?
Mr. Anderson. Perhaps the best way to resolve this issue is
to go to the horse's mouth, and the horse's mouth is the
Airport Coordination Limited. They have filed comments in this
proceeding: ``And ACL is responsible for coordinating all slots
at this airport.'' They keep the slot directories. They handle
all the exchanges of slots at this airport. They are the
authority on slots. ``In ACL's professional judgment, the
opportunities to accommodate new entrant U.S. carriers from the
allocation of pooled slots in the first two seasons are
extremely limited.''
Second, in general, it is ACL's observation that there is a
general unwillingness on the part of incumbent Heathrow
carriers to divest of slots and the market is illiquid.
Finally, if you go to the time period that Roger Maynard is
talking about, back to the summer 2001 season, ACL states that
there were only 72 weekly slots available, enough for only five
daily round-trip services that were traded for the summer 2001
season. Of those 72 slots, remember, the slot has to be in a
window for a morning arrival and an early afternoon departure
for it to work for a U.S. carrier, and it has to accommodate a
wide-body airplane.
Of the 72 weekly slots that were traded in the summer 2001
season, only 21 of them were commercially viable for a U.S.
carrier for a morning arrival of a wide-body and an afternoon
departure. And of those 21 commercially viable slots traded for
summer 2001 Heathrow operations, guess who bought 20 of them?
British Airways.
Chairman Kohl. All right. Gentlemen, I would like to go on
to security.
You want 30 seconds, Mr. Kellner?
Mr. Kellner. Just one quick point. Don pointed out that the
U.S. carriers have added seven flights over 5 years. That is
1.4 flights a year, which I think makes exactly the opposite
point and shows how unavailable slots are. You look at the
three of us sitting here plus U.S. Airways. We need like lots
of flights, not 1.4 flights a year. We would be arguing among
us who just gets those flights.
Chairman Kohl. Okay. Gentlemen, we all recognize that
without safety and security, there is no airline business going
on into the future. So we are not operating from a different
wavelength here, I would guess that there are no other six
people in the country who are as concerned about safety and
security as you are because your business depends on it.
So let's talk about just a couple things. One is the bag
match and the other is the ability to screen baggage. Bag match
is, as you know, the technique whereby airlines ensure that the
person who checks a bag and purchases a seat is sitting in that
seat when the airplane takes off. In Europe, bag match is or is
going to be very shortly universal. In other words, if you
check a bag through in Europe and you are not sitting in that
seat, that airplane doesn't take off.
I think everybody in this country would like to believe
that we would provide the same security to our customers in
this country.
It is also true in Europe, as you know, that they are or
will be very soon screening all luggage to see to it that the
luggage doesn't have explosives. I think it would be a big
surprise to many people in this country to know, which is a
fact, that a person could very conceivably check through
luggage which has explosives on it, and that luggage would be
loaded onto the plane and the plane would take off. That is
very possible to do in this country.
Now, it seems to me that you want to tell the American
public that you are going to put an end to those two practices
and that you are going to do it quickly, if not immediately.
Certainly bag match is something you can do tomorrow if you
wish, to see to it that nobody checks through luggage which has
explosives on it and then doesn't get on the plane.
Please respond.
Mr. Carty. Let me, if I could, take a crack, and then I
will invite my colleagues to. Bag screening, as you point out,
is a way of ensuring, to varying degrees, depending on what
kind of screening device is used, that there are no explosives
on a plane. An X-ray of capable of seeing some things. It is
not capable of seeing others. The CTX machine is more capable
of detecting explosives.
Logistically, as you probably know, Senator, it is very
difficult for we, the FAA, and the airports in this country to
get that done quickly. The availability of square footage for
X-ray machines, the availability of X-ray machines, and if we
go to CTX machines, certainly the availability of CTX machines
is not something that could get handled very quickly to get us
to 100 percent bag screening.
The bag match issue is a somewhat more complicated question
for us, because in the first instance, we are troubled post-
September 11th that bag match would do nothing to the suicide
terrorist event. If someone is willing to die, it doesn't
matter whether they are on the airplane or not. And the events
of September 11th tell us the terrorism we are facing--
Chairman Kohl. Why not have a bag match? It may not deter
the suicide, but it would deter everyone--I mean, they have bag
match in Europe. Why shouldn't we have bag match in this
country?
Mr. Carty. Again, the logistical challenge of bag match is
it would have a fairly radical effect on the airline system.
That is a matter of public policy. But the consequence is we
can't run the kind of hubs that we run here in the United
States--
Chairman Kohl. Why?
Mr. Carty. Because of the size and dimension of them. What
happens--
Chairman Kohl. Why can't you have bag match on every
airplane?
Mr. Carty. Let me explain what happens, Senator. We bulk-
load narrow-body airplanes; in other words, bags just go on the
airplane. Suddenly a passenger is missing. We have to take
every bag off that airplane.
Chairman Kohl. What do they do in Europe?
Mr. Carty. I don't know precisely what they do in Europe,
but let me just observe that the size and intensity of our bag
structure in the United States is dramatically different in
Europe.
Chairman Kohl. But if you are, it seems to me, as an
industry, gentlemen, if you are sitting here telling the
American public that whereas in Europe we have a bag match
system to ensure that somebody does not check through a bag
with explosives on it and then not get on the airplane, they
can do it in Europe and we are not going to provide that
service, that life-and-death service, potentially, to our
American customers, you are taking a huge risk with your
industry.
Now, I have been in business all my life, as some of you
may know, and I have some sensitivity to customers and their
needs and concerns. And this is a huge risk and a gamble that
you are taking.
Mr. Carty. Let me just articulate--
Chairman Kohl. Does somebody else want to respond to that?
Mr. Mullin, Delta, tell us about it.
Mr. Mullin. Well, first of all, I think every single one
here would endorse that we want to do absolutely everything
possible to ensure the security of the American people. I think
that part of the question on it has to do with cause and effect
with respect to something as dramatic as bag match. It is not
easy, Senator, as Mr. Carty has just explained. The logistical
aspects of this are extremely serious with respect to the
operational aspects of this.
I think that what all of us are trying to do here is we
want to take every conceivable step that we possibly can take
which is going to ensure the security of the American public.
And I think if you look at the range of things that have
happened with respect to the reinforcement of the doors, the
sky marshals on the airplane, the use of the CAP system, the
screenings that we are doing of the airplanes and holding them
overnight, the great increases that we have made in terms of
the intensity with which aviation personnel and travel agents
are looking and screening people going forward, we have an
immensely improved system.
The biggest weakness that we do, in fact, have is in the
baggage-screening area. Everybody agrees with that, and it is
because of the immensity of the processing that is going on.
There are over 1.4 billion bags going through this system in
the United States every year.
And so to take this on is not an easy task. Should we
strive to do it better? Should we, in fact, be improving on
this? I think absolutely. But I think we have to also give
realistic answers to the American public here. The true steps
that we have taken so far with respect to ensuring security are
real and they are addressed at the kind of situation--
Chairman Kohl. Let me ask you this question, Mr. Mullin.
Let me ask--
Mr. Mullin. I think we should work on this, Senator.
Chairman Kohl. Let me ask you this question.
Mr. Mullin. Yes, sir.
Chairman Kohl. If it is important to have a foolproof, if
possible, security system for carry-on luggage, which you
talked about how much you have improved and worked on it--
Mr. Mullin. If it is possible to have a foolproof system--
Chairman Kohl. Yes. It is something you are working on--
Mr. Mullin. Yes.
Chairman Kohl. --and is very important, you want to provide
the American public the assurance that you are doing it, what
about luggage that is checked in and--what is the difference?
Mr. Mullin. I am agreeing with you, Senator. I am saying
that we should, in fact, work over time to have absolutely--
Chairman Kohl. What does over time mean? Six months? Three
months? Two months?
Mr. Mullin. It is longer--
Chairman Kohl. When does it mean?
Mr. Mullin. We are not arguing, Senator. It is longer--
Chairman Kohl. But we have to tell the American--
Mr. Mullin. It is longer than this.
Chairman Kohl. We have to be able to tell the American
people that in terms of urgency and immediacy because they are
flying today and tomorrow--
Mr. Mullin. We need to improve--
Chairman Kohl. --that we are going to get it done by when,
January 1st?
Mr. Mullin. We need to improve the whole--I don't know the
answer to that, sir. I mean, I think that one of the things
that all of us have to do is just to recognize that in the past
8 weeks we have re-made the security system in aviation in
America. All of us are making massive improvements in every
aspect of this, including baggage handling. And I endorse what
you are trying to say here, but we cannot say--and I think I
would echo what Don Carty has said. It would be unrealistic and
untrue for us to say that we could put in a bag match system in
a very short period of time that matches what is done in
Europe. We can work towards that, but we are making massive
improvements throughout the entire process.
Chairman Kohl. Well, bag match is something you could do
next week.
Mr. Carty. Not without changing our airline security
dramatically.
Chairman Kohl. Mr. Anderson, why couldn't--
Mr. Anderson. Well, first, I think the sort of gravamen of
the security system in the United States is centered around two
principles, and the first principle is the authorities give us
a list of passengers which we are to screen every manifest
against, and that list is regularly updated by the authorities.
And without saying any more in a public hearing, that is a very
crucial part of the security process that is brand new since 9/
11.
The second thing is all of aviation security is based upon
the CAP system, and the CAP system is essentially controlled
and the criteria are controlled by the Federal Aviation
Administration. This industry is going to have, if we continue
on the current trajectory, 670 million domestic passengers next
year. That is an enormous number of passengers. And what we
have done is we have used the information we get from the
intelligence community, all the information we have in a
passenger name record, to profile, in essence, 10 percent of
the passengers. And to be certain that we don't dilute our
screening and security resources both as a country and at
airports, we focus on the 10 percent of passengers that are the
passengers that under FAA regulations are the most important in
terms of screening. For those passengers, their luggage either
goes through a CTX machine or it is dump-searched. And their
person is searched both at the security checkpoint and at the
gate.
And without going further into the details, which I don't
think would be appropriate in this environment--perhaps I have
even given more than I should have at this point--I believe
that our system hinges on the CAP system and that we must rely
on the CAP system.
As to the second point, I will be very direct about trying
to do it in a hub-and-spoke system. European airlines are much
smaller, and they run relatively few banks. At major airports
in the United States, we will have 50 to 60 arrivals within an
hour, and those same airplanes will depart within--our minimum
turn time on a narrow-body is 35 minutes. The airplane sits on
the ground a relatively short period of time, and the bags are
transferred tail to tail. And given the logistics of running a
hub operation that has 12 big banks a day spread over 60, 65
gates, the logistics of being able to accomplish that, as you
say, next week I must say are practically impossible.
Chairman Kohl. Well, the machine, yes, but not bag match. I
am going to turn it over to Mr. DeWine, but I just want to make
this point. It is entirely conceivable with the system that we
now have operating in this country that on a given day a group
of saboteurs could load up 12 different airplanes across the
country with explosives, go home, and we would have a disaster,
which would virtually end the airline business for an
indefinite period of time in addition to causing, you know, an
unacceptable occurrence in this country. And as long as that is
possible, I think you all are taking a huge risk.
Mr. DeWine?
Senator DeWine. Senator Kohl, thank you very much.
A recent Wall Street Journal article starts off by saying
that nine major U.S. airlines have blown through most of
Washington's $5 billion cash bailout and their bleeding
continues. The financial carnage is so bad that the industry
could be headed for a major restructuring, et cetera, et
cetera. In fact, Mr. Mullin, you are quoted in the article.
I want to kind of follow up on Senator Kohl's last line of
questioning. Let me just go from my left to your right, and if
each one of you could tell me, as of today, what the loss of
ridership has been as far as passengers and what your loss of
gross revenue has been, two figures for each one of you.
Mr. Carty. Yes. Our loss of passengers is probably today in
the high 20s. It would be higher had we not been price
aggressive, and the consequence is our revenue is more between
35 and 40 percent loss.
Senator DeWine. Okay. Just the figure, and then we will
come back.
Mr. Mullin. Ours is about 35 percent, as well.
Senator DeWine. Thirty-five percent--
Mr. Mullin. Thirty-five percent drop in revenue since
September 11.
Senator DeWine. And passengers?
Mr. Mullin. In passengers, it is less. It is probably the
order of 20 percent.
Mr. Anderson. Our numbers are similar to the numbers that
Leo Mullin just stated for Delta Airlines.
Mr. Branson. We have got about a 20 percent drop in
passengers and about a 35 percent drop in revenue.
Mr. Maynard. Very much the same, 20 percent and 35 percent.
Mr. Kellner. Yes, very much the same for Continental, as
well.
Senator DeWine. Any movement?
Mr. Carty. Little movement on passengers, but very much at
the expense of yield.
Senator DeWine. What happens if this continues for six
months?
Mr. Carty. Well, it varies by carrier. At American, if it
continues for six months, we are probably running off cash at
$10 to $12 million a day, so it would be about $1.8 billion of
cash if it continued for six months.
Mr. Mullin. Senator DeWine, just a fast comment. You
mentioned the cash infusion. I did testify on that subject
before the Senate and the House. That $5 billion essentially
was a cash infusion that put the airlines in the cash position
on roughly October 15 that they were on September 10, and that
is all that that did. From now on, or after October 15, we were
on our own with respect to dealing with the tremendous drop-off
in passenger revenues associated with this, and we are all
running very substantial losses. Delta's current rate of loss
right now is $8.5 million a day.
Senator DeWine. The rest of you do not have to project
anything. If you want to answer, you can.
Mr. Kellner. I would just add, we have seen a slight
improvement in trends over the last three weeks, since kind of
the middle of October, in kind of the three- to five-percent
range, and we are about half of Delta's and we are running
about $4.5 million a day negative in cash.
Senator DeWine. I think the point is, and we all know this,
it is stating the obvious, that unless customers, potential
passengers, feel confident about safety, that certainly is a
prerequisite before any kind of recovery. It may not be the
only issue. There may be a lot of issues out there, some
psychological issues, et cetera. But clearly, safety is an
issue, and I guess it does come down to two things with you
all. One is time and getting changes into place and the other
is money.
I believe it was Mr. Mullin, one of you was outlining some
of the changes that have been made. Do you want to give me the
60-second version of that, because I think it is important that
we get on the record what changes have been made.
Mr. Mullin. I think the--
Senator DeWine. And then I want to talk about some changes
that have not been made, as Senator Kohl did, as well.
Mr. Mullin. I think the changes are really quite massive. I
will just tick them off quickly. One is the reinforcement of
the cockpit doors on all of the airplanes. Secondly, the
inclusion of the sky marshals--
Senator DeWine. Is that done?
Mr. Mullin. It is done, I think, for almost all the
airlines. The inclusion of sky marshals increasingly on more
and more flights. The sweeps of the airplanes overnight and
keeping them under security for that time period. The adding of
security at the airports. Very importantly, as Richard
Anderson--
Senator DeWine. Excuse me. The sweep at night, of course,
is something that the passengers do not see.
Mr. Mullin. Do not see. That passenger does not see a lot
of this.
Senator DeWine. Right.
Mr. Mullin. The passenger does not necessarily pay any
attention to the cockpit door. It does not know who the sky
marshals--
Senator DeWine. Well, they know about that one.
Mr. Mullin. But they also do not know who the sky marshals
are--
Senator DeWine. Right.
Mr. Mullin. --or even if the sky marshals are on the plane.
They do not know about the use of the CAP system, which I would
agree with what Richard Anderson just said, I think, and most
of us agree, is one of the most fundamental improvements in
terms of identifying potential criminals. Then there is the
improvements that have actually been made in terms of the
baggage screening process. The terrible examples of egregious
faults notwithstanding, it is actually being improved.
And then I think the most important of all is awareness.
Remember that this tragedy occurred because our nation was
surprised, and certainly we in aviation were surprised. Well,
the 700,000 people who work in aviation will no longer be
surprised, nor will the 500,000 people in travel who write
tickets and so forth who are supplying information pertaining
to potential terrorists. We have a vastly improved security
system as we speak and we are continuing to improve it now.
Senator DeWine. But taking it to the next level obviously
involves Congress passing legislation, getting it on the
President's desk, getting it signed.
Mr. Mullin. Yes, it does.
Senator DeWine. We all understand that. We are not going to
get into that debate today, but we all know it has to get done
and has to get done very quickly.
The other factor, of course, is, ultimately, it is a
question of money. Mr. Anderson, I had the opportunity to be on
your airline the other day--
Mr. Anderson. Thank you.
Senator DeWine. I will not get the rest of the plugs here.
We have to get a few plugs in here.
[Laughter.]
Senator DeWine. It is a question of money. I was getting
ready to board the plane and they did call off five names and I
happened to be one of the five that they called and they
actually then physically went through my carry-on bag and
literally went through everything in the bag. But if that was
done, and they only did it for five or six passengers getting
on this plane, if you would do that, for example, and I am not
saying that is what should be done, but if you did that for
everybody who gets on that plane, it is simply a function of
money. You would have to have more people to do it.
Mr. Anderson. I think it is more than a function of money.
I think it is a function of not only resource, but it is also a
function of focus and time. The whole principle behind the CAP
system and the reason you were selected was because you were a
selectee.
Senator DeWine. Well, let us not get into why I was
selected.
[Laughter.]
Mr. Anderson. Yes, but you probably--
Senator DeWine. I am on the list, I am sure.
Mr. Anderson. Right.
Senator DeWine. And I do not want to get too far into, in a
public hearing, about how the system works.
Mr. Anderson. Correct. I would submit to you that what we
should do as an industry, and I think the whole focus of the
rapid response team task forces that I served on and Bob Becker
from American served on and Herb Kelleher on behalf of our
industry, our focus really is--the number of passengers
traveling is enormous. I mean, we are going to hit a billion by
2010. The whole idea behind the process is to focus on the
areas that need focus on--
Senator DeWine. Sure, and that is basic security. That is
what we do in our house. That is what we do in buildings.
Anybody who is a security expert will tell you that.
Mr. Anderson. Right.
Senator DeWine. So I do not disagree with you. I will say
this, though, in going back to a question that Senator Kohl had
and an answer that you all gave. I am not sure it is acceptable
to the American people for you to say, well, they can do it in
Europe because there just are not as many people they are
dealing with. That is just not an acceptable answer.
It is not an acceptable answer because, as a layman, I
assume someone is paying for that security and we can pay for
it just as well in the United States as they pay for it in
Europe. There is no reason that you could not duplicate that
service over a period of time. You cannot do it overnight.
Mr. Anderson. Actually, with respect to passenger
screening, and I have--
Senator DeWine. And I am not just talking about passenger
screening.
Mr. Anderson. Okay.
Senator DeWine. I am talking about anything that is done in
Europe.
Mr. Anderson. I was addressing the point you made, which
you were one of probably ten percent of the people on the
flight you spoke of that was searched at the gate.
Senator DeWine. That is right.
Mr. Anderson. In Europe, it is very similar, and we have a
firm--or I should not get into that issue. We have people who
actually take each passenger and do sort of a profiling with
each passenger, and then based upon those discussions--
Senator DeWine. You are making it sound worse and worse for
me now.
[Laughter.]
Mr. Anderson. No, I am saying, but it is no different than
what we do in the United States with the CAP system and the
governments in Europe do the same thing and then they segregate
a certain group, some random and others because of matching
regulation that are subject to further scrutiny, just as you
were one of the ten percent on our flight last week.
Senator DeWine. My only point is, I did hear the answer
earlier, I cannot remember from which one of you, but in regard
to a comment that Senator Kohl made. The comment was, well, we
cannot do that in the United States. We are dealing with so
many more flights. I am just telling you, no one is going to
accept that, folks. You cannot say that in a public--you can
say anything you want to, but no one is going to buy it. I
mean, we are subject to terrorists, obviously, like they are,
we have found out, just like they are in Europe and no one is
going to buy that you cannot handle it because we handle more
bags--you handle more bags and you handle more passengers.
Mr. Carty. Senator, I think--
Senator DeWine. The answer from the public is going to be,
figure it out, guys, and that is what they are saying to us,
and that is what they are saying to you.
Mr. Carty. I think, Senator, if I might, what Richard was
saying when he talked about his bank structure is that we do
not know how to do it and keep the airlines looking like they
look. Now, we could change the airlines dramatically. We could
have those connect times double. Then there will be fewer
banks. Then there will be fewer flights.
And all we want as a matter of social policy is for those
that are going to make these decisions to understand there will
be dramatic impact on our customers when we do that. There will
be dramatic impact on our employment when we do it, as well,
because with fewer flights, we will have fewer employees and we
will downsize again. It is not that we cannot do anything. We
just want, as this debate unfolds, for people to understand all
of the dimensions of the debate.
All Richard meant, I think, was you cannot run a 12-bank
structure in Minneapolis with 50 airplanes a bank and have that
happen with a tail-to-tail transfer and do bag match without
going to ten banks or nine banks, and that is the important
thing.
Mr. Anderson. I accept that.
Senator DeWine. I want to make this point. In my opinion,
you have to be able to assure your customers that you have a
system in place, functioning, that prevents people from loading
explosives on your plane. Now, guys, you know that is true.
And you may say it is very hard to do, and we appreciate
that. That is part of this hearing today. No one is saying you
should have done it yesterday. But I repeat, you have got to
tell your customers that you have a system in place and
functioning that will prevent people from loading explosives on
the plane. Will anybody disagree with that?
Mr. Carty. Absolutely not.
Senator DeWine. Mr. Maynard, is that true? You are from
Europe. Tell us.
Mr. Maynard. Mr. Chairman, after the Lockerbie incident, we
instituted the bag passenger reconciliation and have had that
in place now for a number of years, so there is no possibility
of a passenger getting on a plane without his luggage or vice-
versa.
I have to say, one of the implications of that is we quite
often have delays of an aircraft when that happens and we have
to take all the luggage off to go through it, which is an
inconvenience which our passengers sometimes do not like, but
ultimately understand.
And secondly, a consequence of it, which I think my
colleagues here are referring to, we have much longer connect
times at our airports such as Heathrow and Gatwick because we
are doing that. We are not allowed to do tail-to-tail transfer
of bags because otherwise we cannot do the baggage
reconciliation. That is a consequence of having that level of
security.
Senator DeWine. Mr. Branson?
Mr. Branson. Yes. I think now you do not have to take all
the luggage off. I think we have both introduced new systems
where you can actually get that one bag off very quickly if a
passenger does not turn up, and I think passengers actually
appreciate the fact that there is a five-minute delay while
that bag is taken off. I think all international flights,
anyway, between here and England, that is the system both BA
and Virgin, I think, have.
Mr. Carty. And we do, as well, internationally.
Chairman Kohl. And you do that on international flights?
Mr. Carty. We know how to do an airplane, and we
particularly know how to do a big airplane where we know what
container the bag is in. It is the little airplanes and the 50
of them at a time that cause us to have to somehow change our
structure and be smaller airlines again, I think.
Chairman Kohl. But as you said earlier in this hearing, Mr.
Carty, if we had that machine in place that prevents anybody
from loading on explosives, that would make bag match a little
less important.
Mr. Carty. Yes, sir.
Mr. Anderson. Yes, sir.
Chairman Kohl. I mean, guys, you should do it. Is it not
true that to the extent that those machines are in place today,
the government is paying for them?
Mr. Carty. The CTX machines, that is true. Now, what we do
not know, Senator, until this legislation is finished up is
when the legislation is finished, will it require CTX machines?
Will it require x-ray machines? What is it that Congress wants
us to do? That is why I mentioned earlier, the sooner we get to
that bill and the sooner we can put a plan in place, but as I
think Richard and Leo both testified, it will not be overnight.
We are going to have to go find out from the vendors how fast
they can deliver whatever machines it is that Congress tells us
we need to have.
Chairman Kohl. But you know--to heck with Congress. It is
your business.
Mr. Carty. But if I go buy a whole bunch of x-ray machines
and then you tell me to go buy CTX machines--
Chairman Kohl. And if you want to charge me $5 a ticket
more, guys, to provide that assurance, I am one of 250 million
Americans who will say, okay.
Mr. Anderson. I think the issue on the CTX-5000 is that the
FAA and all of us have participated in the CTX-5000 program and
we are all very supportive of the program and most of us have
those installed in our hubs or are in the process of installing
them in the bag systems in our hubs. I know at Northwest, we
have them now installed in each of our three hubs and it is
just a matter of the time it takes for the manufacturer--I
think there is one or two vendors, one vendor, to be able to
just produce enough of them.
And I think the FAA has a time line for continuing to roll
those out and I think our industry is very supportive of that
effort. I know at Northwest, we undertook significant
investment to modify our bag systems in our hubs to add those
machines into our bag systems. So the industry is enormously
supportive, Mr. Chairman, of the CTX-5000, and I believe all of
us have been adding x-ray machines and magnometers at our
airports throughout the United States and renegotiating our
vendor contracts to be able to add the additional personnel to
provide the heightened scrutiny that our passengers deserve.
Chairman Kohl. Thank you.
Senator DeWine. Well, I bet you never would have thought
you would like to talk about slots.
[Laughter.]
Senator DeWine. I am going to let you talk about slots
again one more time here. I look back on the hearing that we
held four or five years ago and the arguments were the same. I
do not think I have ever seen an issue where people held such
adamant positions or had their own versions of the facts as in
this case, and I do not mean that disrespectfully at all
because I know that each one of you have your own position and
you hold it very dearly. But it does make it difficult, I
think, for someone to try to sort all this out.
It seems to me that one of the issues is there are slots
and there are slots, and maybe this is what Senator Specter was
saying. For U.S.-United Kingdom travel, only certain times do,
in fact, work. Let me ask a question, maybe do it a little
differently.
For all the opponents of this alliance, how many slots do
you need and when do you need them? What do you really need to
be competitive, so that you would look up here and say, okay,
we are okay here? Senator DeWine and Senator Kohl, we can
really compete. We can go at and we can beat these guys on a
level playing field. Mr. Mullin?
Mr. Mullin. You will recall, Senator DeWine, that our
desire would be three daily flights from Atlanta, two from
Cincinnati, two from Boston, and four from JFK. That would
require 154 slots for that service.
Senator DeWine. Mr. Anderson--who is next?
Mr. Kellner. We need 140 weekly slots. We need six from New
York, three from Houston, and one from Cleveland. Those are
daily flights, and it translates to 140 weekly slots, and we
would need those immediately because I think the key is we
cannot wait four or five years to become competitive. We will
be run out of those markets long before those. So we need a
chance to have an ability to compete on day one.
Mr. Branson. I do not actually think it is possible to
compete against this, but if we were to name a number, I would
have thought something like 15 daily flights, or 210 weekly
slots, in the times that we can fly to the States. British
Airways also said that there were slots available from the Slot
Coordination Committee. They can get those for nothing, and I
will then pay them 2.5 million pounds for any slot they can
give us that is capable of flying to America and back, just to
show that they will not be able to pick up any slots to do that
deal with us.
Senator DeWine. Response, Mr. Carty?
Mr. Carty. My only response would be, if you add up those
numbers, it far exceeds, probably by a factor of two,
American's total slots.
Mr. Maynard. And if I could add, Mr. Chairman--
Senator DeWine. Mr. Maynard?
Mr. Maynard. The initial point is that none of those slots
can be used unless we have an open skies agreement because they
do not have access to Heathrow absent an open skies agreement.
And the point we are making is that the opportunity to have an
open skies agreement is going to last for perhaps three months
and no longer, so take it now or you might not get it.
Mr. Branson. I am not going to let him get away with that.
What British Airways is saying is that the negotiation is going
to be handed over to the EC. What British Airways is terrified
of is that the EC will have an open skies agreement with
America for the whole of Europe and the whole of America, but
they will not have this unholy alliance with American Airlines.
That is what they are frightened of. They know that when the EC
gets hold of it, there will be open skies between our two
countries and that is what the EC wants to do and that is what
we are looking forward to.
There will be more competition. You know, hopefully, one
day, Southwest will fly inside Europe, and hopefully one day
Virgin Blue will be allowed to fly inside America and you will
get more competition.
Mr. Maynard. Mr. Chairman, can I be clear? Sir Richard and
I actually agree on that point. British Airways has no problem
about the EU negotiating a complete open skies agreement with
the United States, which would include cabotage, et cetera, et
cetera. However, we have always recognized that some of the
issues there, such as cabotage and investment rules, will be
extremely difficult for the United States to agree to. That is
why it might take five, ten years to agree.
We are prepared to go with U.S. current policy, which is to
say, let us have some more competition by an open skies
agreement bilaterally with a number of countries, including the
U.K. We accept that. We go with the grain. All we are asking
for is it to be a level playing field with the other alliances
that we compete with.
Mr. Mullin. Senator DeWine, may I comment briefly?
Senator DeWine. Mr. Mullin?
Mr. Mullin. Mr. Carty just made the observation about how
this all exceeds the number of slots that American would have
there. I think that in times past, both the U.S. authorities,
Department of Justice, I believe, and the authority, the Trade
Practices Group in Britain, have both come out and put forward
that they felt that 350 slots in total for all of us would, in
fact, be a sufficient number of slots to mount a competitive
service there.
From Delta's perspective, we would certainly be willing to
fit our requirements into something like that and work with the
rest here to figure out a way to put a competitive service
within that. I think that is a reasonable number of slots to be
granted here.
And as we have talked about this, we should also keep in
mind that British Airways itself controls of the order of 3,400
slots in total at Heathrow. So if we were to have 350 slots
granted for international service here, recognizing that a lot
of those slots are not suited for the wide-bodies that
typically fly the Atlantic, this would solve the problem, and
then from our standpoint, it would be fine with us if American
Airlines and British Airways had antitrust immunity within One
World. As I mentioned earlier, we are not opposed to the One
World Alliance at all. It is Heathrow.
Mr. Kellner. Senator, if I could just add on to Leo's
comments there, I think the one thing, we would agree with him
but add that would also mean we need ticket counters, we need
club space, we need facilities for our people, because to have
kind of no counters, no place to check in, no clubs, we would
run a very uncompetitive product. So we think we need the
slots, but in addition, you need the facilities.
Senator DeWine. Mr. Anderson?
Mr. Anderson. Senator, I do not think this is a debatable
point, candidly. I would just reference the filing of the
Airport Coordination Limited, which is the firm at London
Heathrow Airport which is the official repository of all slots,
who owns them, and does all the trading in slots. They have
filed a paper in this. I repeated it for the record and I would
repeat to you again that they are the definitive authority on
this and they have essentially said there are no slots
available.
Second, British Airports Authority owns and operates this
airport. They have told us there are no gates and facilities.
That is definitive on both the subject of slots and facilities.
Senator DeWine. Mr. Carty, Mr. Maynard, can you live with
giving up 350 slots?
Mr. Maynard. No, sir.
Mr. Carty. No, sir.
Mr. Maynard. But can I just come back to this question of
the--
Mr. Carty. Mostly because I do not have 350 slots.
Mr. Maynard. --the British Airports Authority, because I
think there must be a misconception, because the testimony
which the BAA has put in in this case clearly says that initial
analysis indicates that terminal and aircraft park and stand
capacity would allow six to ten daily services operated by U.S.
airlines new to Heathrow to be accommodated in the first season
of implementation. That is a quote from the British Airports
Authority's own testimony. So I do not accept that there are no
facilities available at Heathrow.
Mr. Branson. I am sorry, the British Airport Authority is
not the Slot Coordinating Committee.
Mr. Maynard. I am not talking about slots. The issue was
raised by one of my colleagues here that there are no
facilities at Heathrow. I was not talking about slots.
Senator DeWine. You get the last shot, Mr. Anderson. You
are it.
Mr. Anderson. I would be happy to give you the quote. I
will give you the quote. It is in the exhibits to our brief. It
is conceivable that some new entrant airlines may receive the
slot from the pool from inter-alliance transfers or through
trading, but the BAA would be unable to quickly provide the
range and quality of facilities that an airline might need.
Stand capacity at Terminal Four is a major constraint and is
already at or close to maximum levels for the larger aircraft
categories for peak morning hours. Additional wide-body
aircraft could only be managed in if other services relocated
to another terminal.
I would just ask that you go to the record. We would be
happy to provide it to the Subcommittee.
Senator DeWine. Thank you, Mr. Chairman.
Chairman Kohl. Well, gentlemen, I am not a big fan of
Congressional hearings. I am not sure they are always worth the
time and the effort, but this is truly an exception. This has
been a very good hearing, very informative, educational, and so
we appreciate your coming adn you have done a real service.
Before adjourning, I would like to include in the record a
statement from Senator Leahy.
[The prepared statement of Senator Leahy follows:]
Statement of Hon. Patrick J. Leahy, a U.S. Senator from the State of
Vermont
Mr. Chairman, thank you for holding this hearing on international
airline competition, in particular the proposed alliance between
American Airlines and British Airways. It is important for this
subcommittee to carefully review any potential antitrust complications
arising from such deals.
I also thank this distinguished panel of airline executives for
testifying today. I fully expect this hearing will address the current
state of airline competition, as well as airline safety and security
issues stemming from the events of September 11.
American Airlines and British Airways are seeking antitrust
immunity from the Department of Transportation and clearance from the
United Kingdom and the European Commission for their proposed
international aviation alliance. This is the second attempt in recent
years for American Airlines and British Airways to form an alliance.
These two airlines first filed for antitrust immunity in 1997, but
withdrew their application after it became clear American and European
regulators would deny the application as it was structured.
If the Department of Transportation approves antitrust immunity for
the AA/BA alliance, it will likely condition this immunity upon the
United States and Great Britain entering into an ``Open Skies''
agreement, permitting any United States or British airline to fly
between the United States and any airport in Great Britain.
The AA/BA alliance is an attempt by both airlines to make them
stronger competitors against the other existing airline alliances,
United Airlines/Lufthansa (the Star Alliance), based in Frankfurt,
Germany, and Northwest Airlines/KLM, based in Amsterdam. Another
alliance with an extensive transatlantic routes between the United
States and Europe would clearly benefit competition between these
destinations.
Customers would also benefit from the AA/BA alliance by access to
more destinations, more convenient schedules, greater ticket
interchangeability, greater flexibility and ease of transfer, and new
and improved check-in and luggage facilities.
London-Heathrow is an important gateway to Europe from the United
States. Currently, American Airlines and British Airways are head-to-
head competitors at Heathrow for travel to and from the United States.
While some opponents argue that competition would be lessened if the
AA/BA alliance is approved, it may actually make more slots available
to other airlines at Heathrow. It is also important to review
competition from the entire European perspective. For example,
Northwest/KLM has a 70 percent slot share at its European hub in
Amsterdam. United/Lufthansa has a 69 percent slot share at its European
hub in Frankfurt. And Delta/Air France has a 55 percent slot share at
its European hub in Paris de Gaulle. These are all higher than the 47
percent slot share American/British Airways would have at Heathrow.Mr.
Chairman, thank you again for holding this hearing today. I look
forward to the testimony from all of the witnesses.
Senator DeWine. This hearing is closed.
[Whereupon, at 2:32 p.m., the Subcommittee was adjourned.]
[Submissions for the record follow.]
SUBMISSIONS FOR THE RECORD
Statement of Kevin P. Mitchell, Chairman, Business Travel Coalition
Mr. Chairman, and Members of the Senate Committee on the Judiciary
Subcommittee. on Antitrust, Business Rights, and Competition, my name
is Kevin Mitchell. I am chairman of the Business Travel Coalition
(BTC), which represents the interests of major corporate buyers of air
transportation services.
BTC supports the application of American Airlines (AA) and British
Airways (BA) before the U.S. Department of Transportation (DOT) for
antitrust immunity for their proposed alliance. BTC also supports the
antitrust immunity application of United Airlines and bmi british
midland.
I. POSITION SUMMARY
Specifically, BTC supports the AA-BA application for 3 reasons:
1--A nearly ten-year-old evolution from competition between
international airlines to competition among global, networked
alliances is almost complete. An immunized American and British
Airways alliance would create via the oneworld alliance A
fourth competitive global alliance as an alternative for
corporate buyers of air transportation services, and
considerably strengthen network competition.
2--An immunized AA-BA alliance is the lever DOT requires to
achieve an Open Skies agreement between the United States and
the United Kingdom. There is a finite and fast disappearing
opportunity to liberalize this huge aviation market and drive
billions of dollars in benefits to U.S. and UK consumers
through increased competition and lower airfares.
3--A U.S.-UK Open Skies agreement would likely be a catalyst
for acceleration of efforts to create a fully liberalized trade
zone for air transport between the European Union (EU) and the
U.S., which if successful, could serve as a template for global
air trade agreements.
II. COMPETITION
The current U.S.-UK bilateral agreement, known as Bermuda 11,
restricts access to Heathrow to just 12 U.S. cities served by 2 U.S.
and 2 UK carriers. Some airline opponents of AA-BA immunity make the
argument that AA and BA together have an excessive 60% of U.S.-to-
Heathrow frequencies. If one does the math, one would at least expect
that 2 carriers at 25% each would be 50% of the marketplace.
That AA and BA control only 60% is arguably surprising given the
market-closing nature and intent of Bermuda 11. In 1977, the UK
successfully negotiated access to Heathrow for U.S. cities that were
essentially non-hubs for U.S. carriers in an endeavor to protect BA
from competition. Nevertheless, United Airlines and Virgin Atlantic
were able to grow their frequency between the U.S. and London Heathrow
by 64% and 68% respectively, in just the past several years alone.
The larger point, however, is that with Open Skies, 4 new U.S.
airlines plus bmi british midland--with its 14% slot holdings at
Heathrow--would implement U.S.-to Heathrow services. Moreover, bmi
british midland and its Star alliance partners will hold 27% of
Heathrow slots and have announced their intent to build and invest over
$70 million in a Heathrow hub, which would make London Heathrow the
only two-hub airport in Europe. AA's and BA's combined market shares
can only decrease as these new entrants reshape the competitive
landscape in a battle for the high yield business traveler.
In response to ownership restrictions in bilateral aviation
agreements--that prevent mergers and acquisitions in international air
transport--global alliances were born in the early 1990's as a proxy
for true consolidation. Northwest and KLM (Wings) received antitrust
immunity in 1993 and United, Lufthansa and SAS (Star) received it in
1997. Delta Air Lines and Air France (SkyTeam) are all but certain to
receive antitrust immunity soon as a result of U.S.-France Open Skies.
With a decade-long transition from city-pair and airline-to-airline
competition to competition among globally networked alliances nearly
complete, only oneworld remains without an immunized transatlantic
alliance at its core, and consequently is relatively non-competitive.
This is resulting in artificially higher business airfares as corporate
buyers of global air transportation services on both sides of the
Atlantic have fewer alliance choices than is desirable or possible.
It is a well-voiced concern, for example, among UK and U.S.
corporate travel and purchasing managers that, in terms of negotiating
a truly global air services agreement, there is no close second choice
to the Star alliance with its 15 members and global network reach.
Unfortunately, this reduces a buyer's leverage at the negotiating table
with airlines.
Indeed, the marketplace acceptance of the Wings and Star alliances
has led to an ascendancy of Schiphol and Frankfurt airports vis-a-vis
Heathrow, and a concomitant 23% decline in combined Europe-to-U.S.
market share for AA and BA, since 1996. Likewise, AA's and BA's share
of the UK-to-U.S. market eroded 20% in the same period to a 40% share.
In reality, an immunized AA-BA represents a partnership between the
number 1 and 4 carriers, in the Heath row-to-U. S. market. Today,
United Airlines carries 42% more passengers to London Heathrow than
does American, while Virgin Atlantic carries 26% more than does
American. AA has slipped from the number 2 position to the number 4
position in terms of U.S.-U.K. passenger market share in recent years.
Whether or not and to what extent an AA-BA immunized alliance would
require some measure of regulatory remedy in overlapping markets, or at
Heathrow, is beyond BTC's expertise.
However, BTC is convinced that:
1--the linking up of AA's and BA's two networks would provide
many benefits for customers of the air transportation system;
2--the scope and breadth of the Star alliance have grown
significantly--and would continue to grow with an immunized bmi
british midland arrangement-such that customers need a
competitive counterbalance in the form of a fourth, truly
competitive global alliance; and
3--an immunized AA-BA would be the key enabling factor to reach
Open Skies with the UK.
III. U.S.-UK OPEN SKIES
DOT's strategy to ``surround Heathrow'' with Open Skies agreements
with other countries has worked brilliantly. DOT was right in the late
1990s not to have caved into the UK government's version of ``my-way-
or-the-highway'' Open Skies. Instead of acquiescing to another infamous
win-lose Bermuda 11-type of aviation agreement, the U.S. held fast in
the belief that the UK would come under increasing pressure to
negotiate an equitable Open Skies agreement as Heathrow lost its
dominant market position to other European gateways.
The erosion of Heathrow's preeminence is exactly what has
transpired. Because of DOT's strong leadership, the U.S. is on the cusp
a historic Open Skies agreement with its most important commercial and
political ally, the UK. Moreover, U.S. businesses and consumers are
closer than ever to having 4 networked global alliances in an all out
competition for their business and loyalty.
Adding to the probability, and indeed the urgency, of a
successfully negotiated Open Skies agreement is a pending EU court
ruling with respect to the European Commission's (EC) position that it
alone possesses jurisdiction to negotiate an aviation agreement with
the U.S. on behalf of all EU members.
If as is expected, the EU court rules in favor of the EC position,
all previously existing Open Skies agreements would be grandfathered.
Those countries without such agreements in place would have to wait for
the EC to: 1) gather facts for the development of a negotiating
strategy, 2) consult with European airlines, 3) build consensus among
EU members for a negotiating position, and 4) enter into and conclude
negotiations with the U.S. In short, if an Open Skies agreement with
the UK is not concluded in the next few months, it would likely be 5 to
7 years before Heathrow is opened up to new competition from U.S.
airlines.
The benefits of a U.S.-UK Open Skies agreement are many. In
addition to securing a fourth competitively viable global alliance--
oneworld--some 5 new competitors would have the opportunity to launch
services in the U.S.-UK market. This would bring countless new non-stop
and one-stop air service alternatives to Heathrow to communities across
the country.
U.S. communities of all sizes would have new links to important
business centers in Europe, and around the world. Moreover, new levels
of price competition, because of Open Skies, would deliver billions of
dollars of savings to U.S. consumers. DOT studies have shown that in
markets with Open Skies agreements, average airfares have fallen 20% as
compared with 10% in markets where no such agreements exist.
Unfortunately, some airline competitors are perhaps unwittingly
placing consumer welfare at risk. The September 5th
Financial Times reported that, ``In a motion filed by Continental and
supported by Delta, the airlines said they both would need at least 140
weekly landing and takeoff slots at Heathrow to ensure transatlantic
competition with BA-American, and insisted that more than 600 weekly
slots would be needed to accommodate all potential competitors.''
Together AA and BA possess 582 weekly U.S. to Heathrow slots!
Demanding the divestiture of 600 slots is dangerous posturing. BTC
understands that Delta, Continental and Northwest desire to avail
themselves of some free slots at Heathrow--worth millions of dollars
each--that may become available by way of government-required remedies.
However, through their demands, these carriers are placing at
significant risk the achievement of both a competitive fourth alliance
and a U.S.-UK Open Skies agreement as well as billions of dollars of
U.S. consumer benefit that would be derived from lower airfares. If
such competitor demands frustrate negotiations between the U.S. and UK,
and if the EU court rules in support of the EC's negotiating
jurisdiction, the curtain will have been lowered on new U.S. airline
access to Heathrow for years to come.
IV. EU-U.S. LIBERALIZED TRADE ZONE
Airlines' corporate customers are paying higher business airfares
than necessary due to some 3,500 restrictive, costly bilateral air
trade agreements. The customer has a keen self-interest in encouraging
progress toward a global open trade model wherein costs are taken out
of the system for airlines and entry barriers are reduced for start up
airlines.
If the U.S. and the UK can conclude an Open Skies agreement, then
many experts believe that momentum behind a more comprehensive EU-U.S.
free trade zone for air transport would build. Foreign ownership,
cabatoge and other issues important to the UK, the U.S. and other
countries will not have been addressed by a U.S.-UK Open Skies
agreement. It would make abundant sense to handle these more complex
and contentious issues in the context of EU-U.S. negotiations.
A liberalized air trade arrangement between the U.S. and the EU
could provide a template and be a linchpin for liberalized air trade
agreements around the globe. BTC strongly favors such a liberalized
trade regime for the commercial air transportation sector.
Mr. Chairman, thank you for the opportunity to provide testimony
regarding this issue of strategic importance to customers of the U.S.
and global air transportation systems.
Statement of Frederick W. Smith, Chairman, President and CEO, FedEx
Corporation
A appreciate the opportunity offer'? this statement on behalf of
FedEx Corporation' and its subsidiary, FedEx Express, about the
proposed alliance of British Airways. and American Airlines. At the
present time, FedEx's interest in this alliance is primarily focused on
its unbreakable link to the reform of one of the U.S.'s oldest air
services agreement, the 1978 agreement with the U.K. Commonly known as
``Bermuda If, `` this agreement remains one of the most outmoded
aviation agreements to which the U.S. is a party. In order to
understand where we are today, it might be helpful to see this
agreement in its historic context.
It begins in 1994, in the midst of World War IL The venerable DC-3
is-the mainstay of the U.S. airline industry. The first military jet
aircraft have only recently taken to the skies, and the inaugural
flights of the first commercially successful jet aircraft--the DC-8 and
the 707--are still 15 years away. This is. what the world looked like
when delegates met in Chicago to develop a framework for facilitating
international passenger transportation.
It should come as no surprise then that the 1944 Chicago
Conventior4 and the subsequent bilateral agreements framed by national
governments to facilitate point- to-point passenger transportation,
continue to inhibit the development of efficient, world-wide, hub-and-
spoke networks utilized today by all-cargo carriers for the rapid
movement of high-value goods. The Convention's framers could never have
dreamed that one day hundreds of wide bodied jets would crisscross the
skies each day, carrying millions of tons of cargo over thousands of
miles.
Bermuda 11 continues these types- of restrictions, allowing
bilateral services but ham stringing today's all cargo networks with
its restrictions on traffic rights beyond the U.K. For all-cargo
services unlike for combination, the transatlantic rights were
liberalized in 1980, but the restrictions on U.S. third-country traffic
rights that impact today's cargo network remain to this day.
Meanwhile, on April 17, 1973, however, Federal Express
revolutionized all-cargo services by introducing the first integrated
air/ground express operations. On that first night, our 389 employees
delivered 186 packages to 25 U.S. cities using 14 Falcon jets. Today,
FedEx Express is one of six independent operating companies that make
up FedEx Corporation. Collectively, our more than 215,000 employees and
contractors deliver nearly 5 million shipments every business day to
211 countries. We operate 662 aircraft, the largest all-cargo fleet in
the world and second largest overall. In 24 hours, those aircraft
travel more than 450,000 miles, a distance of about 17 trips around the
equator.
As a leader in the aviation industry, it might be useful to examine
what has allowed FedEx to grow from 186 packages a night to 5 million,
or from 14 aircraft to 662, or from 389 employees to more than 215,000
employees and contractors. The answer is in two parts.
First, we have followed the advice enunciated by Walt Kelly's great
comic strip character, Pogo: ``If you want to be a great leader, find a
big parade and ran in front of it.'' Since its inception, our company
and our industry have been doing exactly that. We have been running in
front of the parade of four powerful trends shaping the world economy:
(1) the increase in high-tech and high-value-added products as a
percentage of all economic activity; (2) globalization; (3) fast-cycle
logistics; and (4) electronic commerce.
The second, and equally important, part of the answer to the
question of FedEx's phenomena] growth is deregulation. Had the U.S.
Congress not had the good sense and foresight to deregulate both
domestic aviation and trucking, the express industry would never have
grown to be the engine of world trade that it is today. More
importantly, the U.S. economy would have been deprived of the benefits
provided by our industry. For example, in 1977, prior to deregulation,
the United States spent approximately 17% of its GDP on logistics.
Today, that figure has fallen to 10%. That seven percentage points of
GDP productivity increase since 1977 undoubtedly contributed to all of
the social improvements this country has enjoyed over those 25-odd
years, including improved Medicare.and Social Security benefits. Absent
deregulation, those improvements would not and could not have taken
place.
As a direct result of the United States' successful Open Skies
policy, much progress has also been made over the past decade in the
struggle to achieve similar deregulation of international aircargo
transportation. Indeed, the U.S. has now negotiated more than fifty
Open Skies agreements in every region of the world. The U.S.-U.K.
agreement remains an unfortunate exception to that trend.
Today, more than 50 years after the Chicago Convention, global
aviation has undergone a radical transformation, yet the ability of
U.S. all-cargo carriers to respond to the needs of shippers and
consumers continues to be hampered by restrictive bilaterals such as
the Bermuda H agreement. Its restrictions on beyond traffic rights,
change of gauge and routing flexibility makes it a formidable obstacle
to the efficient operation of US express operations serving the U.K.
Reviewing that ``big parade: those same four macroeconomic forces--
(1) hightech and high-value-added products, (2) globalization, (3)
fast-cycle logistics, and (4) electronic commerce--keep marching along.
While goods moved by air account for less than 2% of all tonnage moved
in international trade, they now represent over 40% of its value. As
recently as 1970, international trade accounted for only 10% of U.S.
GDP. In 2000, it was approximately 25%. That means about a quarter of
every dollar produced by our economy is now related to international
trade, and this figure will increase in coming years. McKenzie and
Company estimates that today, a little over 20% of all manufactured
goods are moved across borders, but by 2025, that number may be in
excess of 80%.
The current aviation bilateral system, originally designed for
point-to-point passenger operations, continues to be used as a sword-
and-shield by the U.K. government on behalf of its carriers to resist
meeting true market demands in the express and cargo markets. This
forces both U.S. and U.K. exporters and importers of goods by air to
accept less efficient less desirable services. Numerous independent
studies around the world have verified this finding in economies with
restrictive international aviation regimes.
We at FedEx strongly believe that all-cargo services are commerce-
enablers and should be fully and fairly liberalized, whether in
conjunction with or separately from combination services. In that
regard, we applaud the U.S. Government's successful efforts to include
7th freedom rights for all-cargo carriers in its recent Open
Skies bilaterals such as the recent agreement with France.
It is important to remember that the cargo business is not
bilateral in nature, so the very foundation of a bilateral aviation
treaty is at odds with the flow of goods around the world. In the same
vein, the 5th and 6th freedom rights should be -
treated exactly the same, which was the original interpretation in the
1944 Chicago Conference. Because this has not been the case, British
carriers now enjoy a competitive advantage over U.S. carriers based
purely on the geography of their home countries. Accordingly, we urge
the U.S. Government, in negotiating with countries around the world, to
require as a matter of course direct equality of 6th freedom
rights to 5th freedom rights, at least as applied to all-
cargo operations. This can best be achieved by an open skies agreement
with no limitation on fifth freedom operations.
The U.S. Government must also strive to ensure that rights granted
U.S. carriers under our bilaterals, including our Open Skies
agreements, are fully useable. U.S. carriers are increasingly
confronted with capacity and envirom-nental restrictions at airports
around the world, These defacto restrictions on our operations often
effectively trump our dejure rights under the bilaterals.
Some passenger carriers have attempted to use this concept of
``fully-useable rights to insist that an agreement with the United
Kingdom that does not falfill all their desires for slots at London's
Heathrow Airport does not achieve true liberalization. It is important
for this Committee to understand that Heathrow is one of three London
airports. While it is historically prized by combination ' carriers for
its status as a connecting airport, that role is being significantly
challenged by the growth of powerful alliance hubs on the European
continent. We should not let the issue of access to a single airport
stop the effort for open skies in this long restricted market, Instead
we should be pressing our European and British counterparts to reform
the slot trading system in Europe, so that U.S. and other carriers
seeking access to a slot-resuicted airport can in fact use self-help to
gain access rather than continuing to rely on governmental
intervention. Also, we should continue to urge an increase in capacity
as well as the most effective use of that capacity at British airports.
FedEx has been actively advocating this position in the U.S.
Department of Transportation proceedings on the alliance, a position
that FedEx. has put forward for at least ten years of debate over U.S.-
U.K. open skies. This is a great opportunity to move forward toward
open opportunities for all carriers in the important transatlantic
corridor linking the U.S. and the U.K. We should not let it slip away.
Statement of Hon. James M. Inhofe, a U.S. Senator from the State of
Oklahoma
Chairman Kohl and Senator DeWine, thank you for the opportunity to
appear before your Subcommittee. Much of the hearing today will focus
on issues relating to the United Kingdom. As you know, I sit on the
Armed Services Committee, and I can tell you that now more than ever,
Great Britain is this country's staunchest ally and closest friend.
Consistent with this bond, virtually every aspect of commerce
between our two great countries is open and unrestricted, as it should
be. Every aspect, that is, except commercial air travel. I have watched
for many years as we have tried to renegotiate with the British the
three decades old, highly restrictive, anti-free market bilateral
treaty, known as Bermuda 2. It has been a difficult and unproductive
process.
However, today we have a window of opportunity to scrap Bermuda 2
and open up the skies between the U.S. and U.K., which will lead to
lower airfares and more service. Great Britain's largest airline,
British Airways, would like to secure U.S. approval for its proposed
alliance with American Airlines. Similarly, Britain's second largest
carrier, British Midland, would like to start flying to the U.S. from
London's Heathrow Airport for the first time ever as well as gain U.S.
approval of its proposed alliance with United Airlines. Overarching
these commercial desires is the fact that the European Union is
actively seeking to wrest the right to negotiate such accords away from
the British and other European nations by the end of this year. Once
this occurs, the opportunity to open the skies between the U.S. and the
U.K. will be gone for many years to come, as the EU will surely develop
and pursue its own aviation agenda.
Let's not squander the opportunity before us. The American
Airlines/British Airways alliance is the catalyst for open skies, and I
fully support the regulatory approval of that alliance. United has its
alliance with Lufthansa, Delta has its alliance with Air France, and
Northwest has its alliance with KLM. So should American have its
alliance with British Airways. I ask that a letter sent today to
Secretary of Transportation Mineta and Secretary of State Powell by
myself and Senators Harkin, Durbin, Carnahan, Boxer, Ben Nelson and
Allard supporting the AA/BA alliance and open skies with the British be
included in the record.
In closing, I understand that several airlines, having already
gotten their alliances approved, are lining up to block American.
Indeed, like pigs at the trough, they are throwing around their wish
lists for slots at Heathrow, to be presumably divested by BA and
American. They do this without identifying any justifiable competition
grounds. Quite simply, they either want to get lots of free slots or to
cause the ANBA deal to fail.
I hope you and the DOT can see through all that. The time is ripe
for finally concluding a U.S.-U.K. open skies accord that will be good
for air travelers on both sides of the Atlantic and will serve to bring
two strong allies even closer together in these most trying of times.
Thank you.
United States Senate
Washington, DC 20510
November 2, 2001
The Honorable Colin L. Powell
Secretary
Department of State
Harry S. Truman Building
2201 C Street, N.W., Room 7226
Washington, D.C. 20520
The Honorable Norman Y. Mineta
Secretary
U.S. Department of Transportation
400 Seventh Street, S.W., Room 10200
Washington, D.C. 20590
Dear Secretary Powell and Secretary Mineta:
The United Kingdom, now more than ever, is this country's
staunchest ally and closest friend. Consistent with this enduring bond,
virtually every aspect of commerce between the two countries is
generally open and unrestricted. Every aspect, that is, except
commercial air travel.
As you are aware, the United States and United Kingdom have been
negotiating to replace the three decades old, highly restrictive
bilateral air service accord, known as Bermuda 11, with an ``open
skies'' accord. Bermuda 11 limits direct air service from the United
States to the premier overseas airport, London Heathrow, to only 2 U.S.
airlines and 12 U.S. communities. As has been the track record with
open skies accords that our country has signed with many other nations,
the removal of such restrictions produces more service, increased
competition, and lower airfares. Indeed, in this case, the benefits of
an open skies accord will be overwhelming, as four additional U.S.
airlines and many U.S. communities will be allowed direct access to
Heathrow for the first time. Among other avenues to secure take off and
landing slots, U.S. carriers as ``new entrants'' will receive priority
in obtaining new slots at Heathrow thereby bringing about these
benefits. In addition, some U.S. carriers with existing partners are
likely to be able to immediately redistribute slots in their European
partner's hands, this being clearly advantageous to those partnerships.
Accordingly, we respectfully urge you to press forward with this
effort.
The window of opportunity for securing an open skies accord with
the British is clear but narrow. The United Kingdom's largest airline,
British Airways, would like to secure U.S. approval for its proposed
alliance with American Airlines.
Similarly, Britain's second largest carrier, British Midland, would
like to start flying to the United States from Heathrow for the first
time ever as well as gain U.S. approval of its proposed alliance with
United Airlines. Overarching these commercial desires is the fact that
the European Union is actively seeking to and most likely will, wrest
the right to negotiate such accords away from the British and other
European nations by the end of this year. Once this occurs, the
opportunity to open the skies between the United States and the United
Kingdom will be gone for many years to come, as the EU will surely
develop and pursue its own aviation agenda.
As such, the time is truly ripe for these two great nations to come
together to achieve what has been the goal of the previous three U.S.
Administrations. Without question, the proposed American Airlines/
British Airways alliance is the catalyst that has enabled this historic
opportunity to arise. American Airlines and British Airways seek only
what their main transatlantic competitors were granted years ago. In
conjunction with the signing of open skies accords, the United States
in 1993 granted antitrust immunity to the alliance of Northwest
Airlines and the Dutch carrier KLM and in 1997 to the alliance of
United and the German carrier Lufthansa. Moreover, all indications are
that Delta Air Lines and Air France will be granted immunity for their
proposed alliance by the end of this year in concert with a U.S.-France
open skies agreement.
Indeed, over the past decade, the U.S. government has actively
encouraged the formation of such international airline alliances as it
has sought to deregulate the international marketplace. The resulting
positive benefits for consumers in terms of more service and lower
fares have been well documented by the Department of Transportation.
Going forward, adding more immunized alliances to the mix will increase
alliance-versus-alliance competition and further the success of U.S.
policy.
Accordingly, approving the proposed American/British Airways and
United/British Midland alliances in conjunction with concluding a U.S.-
U.K. open skies accord will be good for air travelers on both sides of
the Atlantic and will serve to bring two strong allies even closer
together in these most trying of times.
Thank you for considering our views. We are sincerely,
Senator Inholf and Senator Harkin
Statement of Jack W. Creighton, Chairman and Chief Executive Officer,
United Air Lines, Inc.
I. Introduction
Mr. Chairman, Ranking Member DeWine, and other distinguished
members of the Subcommittee, United appreciates the opportunity to
provide these written comments on the important subject of global
airline alliances.
At present, the Department of Transportation has pending before it
three applications that airline alliances have filed for antitrust
immunity: United, Lufthansa, SAS and the Austrian Group seek to add bmi
british midland to their existing antitrust immunity; Delta, Air
France, Alitalia and Czech Airlines have filed for quadrilateral
immunity; and American Airlines and British Airways have renewed
efforts to secure immunity for an alliance that regulatory authorities
on both sides of the Atlantic rejected three years ago. As requested by
the Subcommittee, these written comments seek to examine the effect
that the grant of the pending applications for antitrust immunity would
have on global airline competition.
As a preliminary matter, United would like to provide some general
comments on the positive contributions that open skies, airline
alliances and antitrust immunity have made to competition in the
airline industry and to overall consumer welfare. We will then analyze
each of the proposed alliances in turn.
II. Open Skies, Airline Alliances and Antitrust Immunity
United has been a vocal advocate of the liberalization of air
service markets for many years. United was alone among U.S. combination
carriers to support deregulation of the U.S. domestic market in the
late 1970s. United has also consistently supported the open skies
initiative conceived by DOT in the early 1990s. To date, the U.S. has
concluded some 50 open skies agreements. Most recently, the U.S. scored
a notable success when it agreed in principle to an open skies
agreement with France, thereby finally opening one of the largest
markets in the world to unfettered competition. It also appears that
after years of patience and perseverance, the U.S. may be close to
concluding an open skies agreement with the U.K.
The empirical evidence amply demonstrates the wisdom of DOT's open
skies philosophy. In its October 2000 report entitled ``International
Aviation Developments: Transatlantic Deregulation, The Alliance Network
Effect (Second Report),'' at p. 3, DOT found that average fares to open
skies countries in 1999 had declined by twenty percent overall when
compared with 1996. Fares to non-open skies countries had also
declined, but at ``significantly lower rates.'' Id.
Open skies also amplify the benefits that flow from airline
alliances. Alliance benefits depend upon the existence of truly open
aviation markets - markets free not only of formal bilateral
restrictions but also free of sovereign protectionism and government
efforts to ``manage'' or artificially manipulate the market for
aviation services.
The benefits of alliance networks are realized through the
rationalization and harmonization of two or more formerly separate
airline networks. In an airline alliance, two or more disparate route
networks are blended, extracting efficiencies, eliminating
redundancies, reallocating capacity and streamlining services.
Rationalized and harmonized alliance networks often result in new
services to behind and beyond citypairs, as well as enhanced
frequencies to existing city-pairs. Alliance networks are also
generally credited with stimulating growth in traffic demand.
Rationalized alliance networks, especially those designed around
the various hubs of the parties, are also able to realize substantial
economies of scope and scale. Economies of scope arise from the fact
that the more spokes a carrier serves from a hub, the greater its
ability, with a given number of aircraft, to transport passengers from
many origin points over its hub to many destination points. Economies
of scale arise because by expanding the number of spokes, the number of
city-pair combinations that can be served increases exponentially.
These efficiencies are amplified by integrating international hub-and-
spoke systems between and among air carriers in a network. By linking
hub systems, the networks also connect all of the spokes at either end
of the system into unified air service systems.
The growth of global alliances has created competition for
passengers in a large number of city-pairs that airlines, acting alone,
could not economically serve. As alliances continue to expand, so too
do the markets and consumers that benefit from competitive service. In
its October 2000 study, DOT estimated that by the third quarter of
1998, ``two or more. . .alliances carried almost 800,000 passengers in
over 3,000 overlap [US-Europe] city pair markets, representing strong
evidence that the alliances are developing a more competitive industry
structure.'' Id. at p. 9.
Antitrust immunity permits airline alliances to maximize
efficiencies by fully integrating and coordinating operations in areas
including service capacity, planning, pricing and marketing. These
greater efficiencies directly benefit passengers. A recent econometric
study reveals that passengers traveling over an immunized alliance
network enjoy deep discounts over the fares offered under traditional
interlining arrangements. Professor Jan K. Brueckner, ``The Benefits of
Codesharing and Antitrust Immunity for International Passengers, with
an Application to the Star Alliance'' (July 2000). Using data from
DOT's Passenger Origin Destination Survey, the study focused on three
measures of airline co-operation: code sharing, alliance membership and
antitrust immunity. The results show that, together, these three forms
of co-operation lead to a substantial 27 percent reduction over
traditional interline fares. Of this 27 percent, code sharing itself
accounts for 7 percent, alliance membership for 4 percent and antitrust
immunity for a full 16 percent. This conclusion shows that, in addition
to enjoying the convenience gains made possible by airline co-
operation, passengers reap substantial benefits in the realm of
pricing, paying substantially lower fares as a result of cooperative
behavior, particularly where the co-operative behavior takes place
under the umbrella of antitrust immunity.
It is clear that the importance of alliances will further increase
in the new market conditions that prevail post September 11, 2001. As
each individual carrier re-assesses the services it operates and seeks
to rationalize the number of destinations served, there will be greater
dependency on alliances to enable the individual carriers to carry out
the necessary rationalization, while at the same time ensuring that
they are still able to offer their customers a large network. On the
expenditure side, alliance carriers can reduce their combined costs
through joint purchasing of aircraft, spare parts, and other supplies
and services. On the revenue side, airlines will depend more than ever
on their ability to market the tickets of their partners to attract
additional passenger flows.
The competing applications for immunity and their effect on
competition in the transatlantic market must therefore be seen in the
context of inter-alliance network competition. Currently, five
alliances compete for transatlantic traffic. Some have already secured,
and others are currently seeking, antitrust immunity. They are:
United/bmi/Austrian Group/Lufthansa/SAS;
Delta/Air France/Alitalia/Czech Airlines;
American Airlines/British Airways;
Northwest/KLM; and
American/Swissair/Sabena.
The first three alliances on this have pending antirust immunity
applications with the DOT. The last two alliances already have such
immunity. An examination of the seat share of each alliance
demonstrates that vigorous inter-alliance competition exists on the
transatlantic. The American Airlines/British Airways alliance is the
largest alliance in the transatlantic with a 21.9 percent seat share.
United/bmi/Lufthansa/SAS/Austrian Group has a 20 percent seat share,
Delta/Air France/Alitalia/Czech Airlines 17.8 percent, American/
Swissair/Sabena 13.2 percent and Northwest/KLM 7.9 percent. OAG,
September 2001. This competition will continue, and will likely
intensify, should DOT grant the pending applications for antitrust
immunity.
It is important to recognize, however, that not all alliances
contribute equally to the enhancement of competition. Indeed, alliances
can harm competition where the networks of their individual members are
overlapping rather than complementary. Thus in its public comments on
American/BA's earlier attempts to secure immunity, DOJ voiced
opposition to the alliance in large part because American and BA were
the largest carriers in the U.S.-U.K. market and offered overlapping
nonstop services on six U.S.-London city pairs that accounted for more
than half of total U.S.-London traffic. Comments of the Department of
Justice, OST-97-2058 (May 21, 1998), at p. 4. By contrast, in approving
the application to add the Austrian Group to the then existing United/
Lufthansa/SAS immunity earlier this year, DOT emphasized that none of
the four carriers operated overlapping nonstop services in the U.S.-
Austria market and thus the integration of the Austrian Group would not
lead to a reduction in nonstop competition in the U.S.-Austria market.
OST-2000-7828 (January 26, 2001), at p. 7.
Thus DOT must examine closely each immunity application on its own
merits. Special attention should be given to the question of remedies.
The remedies imposed should seek to accomplish two goals: to cure the
anti-competitive effects of any proposed arrangement and to ensure that
all alliances are accorded equal treatment so that they can compete on
a level playing field.
III. Unitedlbmi/Austrian Group/Lufthansa/SAS
The application to add bmi british midland to the existing United/
Lufthansa/SAS/Austrian Group antitrust immunity presents no competition
problems because bmi does not operate nonstop services on any
transatlantic city-pair that is served nonstop by the other applicants.
Thus, the proposed alliance does not present problems that DOT and DOJ
have associated with overlapping carrier networks and sought to address
through remedies in prior immunity proceedings. Indeed, the restrictive
terms of the current bilateral air services agreement between the U.S.
and U.K. (Bermuda II) prohibit bmi from operating nonstop services to
the U.S. from its main base of operations in Heathrow. Because United
operates in the U.K. to/from Heathrow only, the networks that United
and bmi seek to combine are complementary and have no overlaps.
Nor can United and bmi be considered even potential competitors.
While it is true that bmi could operate from Heathrow under an open
skies regime, bmi is not commercially or practically capable of
operating any transatlantic services independently. bmi is a relatively
small carrier with only three long-haul aircraft in its fleet suitable
for transatlantic service. In terms of size, bmi is comparable to other
small European airlines such as Czech Airlines and Finnair that, like
bmi, have sought to enter into alliances in order to compete on the
transatlantic. Additionally, bmi is without a meaningful market
presence, corporate identity and operational infrastructure in the U.S.
Without the substantial sales, marketing support and network feed
afforded by United, bmi would be unable to bear the considerable risks
and costs associated with entering the transatlantic market. Finally,
bmi lacks the long-haul slots and facilities at Heathrow, which are
necessary to launch services to the U.S. in large part because Bermuda
II prohibits it from operating to the U.S. from Heathrow.
Even if bmi could commercially enter the transatlantic market
independently, its elimination as a potential competitor on any of the
six U.S.-London city pairs where United currently operates nonstop
service (London-Boston, Chicago, Los Angeles, New York, San Francisco
and Washington, DC) would not lead to a substantial reduction in
competition. In each of these city pairs, United faces vigorous nonstop
competition from at least two and, in one case, five other carriers. An
analysis of the CRS booking shares on each of the city pairs for the 12
months ending August 2001 shows that on none of the six city-pairs does
United currently have a share of total CRS bookings greater than 31.4
per cent, on four of the six city-pairs United has a share of total
bookings below 21.3 per cent and on three of the six city-pairs its
share is 18.1 per cent or lower. Thus, the addition of bmi to the
existing immunity will have no negative impact upon competition in the
U.S.-U.K. market. Instead, as described more fully below, the addition
of bmiwould create an alliance hub at Heathrow that has the potential
to offset some of the anticompetitive consequences of the proposed
American/BA alliance.
Therefore, the grant of immunity to the proposed bmi alliance
should be made effective with the conclusion of the U.S.-U.K. open
skies agreement, even if immunity for American/BA alliance is deferred.
IV. Delta/Air France/Alitalia/Czech Airlines
United does not object to the grant of antitrust immunity to this
alliance. Indeed, United believes that approval of the proposed
alliance will increase inter-alliance competition for transatlantic
passengers. United's support is not without qualification, however.
First, DOT must subject the alliance to the traditional remedies that
it has imposed on prior alliances, including carve-outs on overlapping
nonstop routes. Second, United believes that the Delta alliance enjoys
an unfair competitive advantage over other alliances at Charles de
Gaulle airport. The Delta alliance is housed in Terminal 2 which boasts
state-of-the-art facilities and plays host to the modern intermodal
transportation available at the airport. DOT and the Department of
State have requested the French Government to level the competitive
playing field by providing a high-speed rail link between Terminal 2
and Terminal 1, where United and some of its alliance partners are
housed.
V. American Airlines/British Airways
In United's view the American/BA application raises more
significant competition issues than the other two pending applications.
Indeed, in its May 1998 comments, the DOJ also recommended that the
alliance be subject to considerable remedies to cure its anti-
competitive effects, including the forfeiture of over 300 slots at
Heathrow.
An examination of the existing competitive landscape at Heathrow
amply justifies the concerns expressed by DOJ three years ago. The
U.S.-UK market is the largest intercontinental market in the world,
with over 18 million passengers traveling annually on flights between
the UK and the U.S. To put the importance of the U.S.-UK market in
perspective, U.S.-UK bookings account for approximately 27 percent of
all U.S.-Europe bookings.
American and BA have a combined share of 40 percent of all U.S.-UK
local traffic. Together, they have a combined share of 43 percent of
all U.S.-London local traffic. American/BA's leading alliance
competitor in the U.S.-UK market, the Star Alliance, has 16 percent of
all U.S.-UK traffic and 17 percent of U.S.-London traffic. The
shortfall between the two alliances in the U.S.-U.K. and U.S.-London
markets runs counter to the argument advanced by American and BA that
they need immunity to compete effectively against United and its
alliance partners.
Presently, American and/or BA are the only non-stop operators in
eleven U.S.-UK city pairs. In six of these city pairs, American and BA
offer nonstop overlapping services. Additionally, BA has a rich
portfolio of slots and facilities at Heathrow that could be rededicated
easily to the lucrative transatlantic market once open skies are in
place and the restrictions enshrined in Bermuda II removed.
United does not oppose the proposed American/BA alliance. However,
we consider that the U.S. government should take three very important
steps to preserve competition in the U.S.-U.K. market in the wake of
the proposed American/BA alliance.
First, the U.S. government should reach an immediate and full open
skies agreement with the U.K. rather than a transitional arrangement
that is linked to the commercial needs of American/BA. A full open
skies agreement will immediately inject muchneeded competition into one
of the most important, yet one of the most restrictive, aviation
markets in the world.
Second, the U.S. government should ensure that any approval of the
American/BA alliance is accompanied by reasonable access to Heathrow
and Gatwick airports so that all transatlantic alliances are given the
opportunity to fully integrate London into their networks and to
compete for the large local passenger base. As noted earlier, the
formation of global alliances has created global network competition
between alliance hub and spoke networks. To promote this inter-alliance
network competition, and to avoid the possibility that the American/BA
alliance is free to price unilaterally in the U.S.-U.K. market, it is
essential that alliance partners be able to connect their networks at
London.
Third, the bmi immunity should be implemented at the same time as
American/BA, or earlier, if American/BA immunity is artificially
delayed or phased in. In any event, bmi immunity should be made
effective with the conclusion of the U.S.U.K. open skies agreement.
Indeed, approval of the proposed United/bmi alliance is the most
effective means available to ensure that American/BA faces meaningful
competition in the U.S.-London market. Because U.S.-London traffic
lacks convenient competitive one-stop alternatives over EU hubs, it is
critically important that there be a viable competitive alliance in
London. In its May 1998 comments, DOJ expressed grave doubts that ``a
patchwork of replacement carriers will replicate the rivalry that
currently exists between AA and BA across a large number of U.S.-U.K.
city pairs.'' DOJ Comments, at p. 4. Subsequent to DOJ's comments, bmi
joined the Star alliance. As a result of bmi's hub at Heathrow, the
United/bmi alliance is more likely to replicate existing competition
between American and BA for the large London passenger base than
alliances that lack a developed hub at Heathrow. Thus, with the
appropriate slots and facilities at Heathrow, United and bmi could
potentially offer American/BA strong network, as opposed to
``patchwork,'' competition in the U.S.-London market.
Mr. Chairman, let me conclude by saying that for airlines like
United and other network industries, global alliances are a consumer-
driven response to demand for efficient and competitively priced
worldwide services. Given the importance of air transportation in our
increasingly interdependent global economy, it is imperative that
competition policies, both here and abroad, not undermine the
globalization of air services through alliances that clearly serve the
needs of the world's consumers. At United, we believe that the proposed
alliances currently under DOT review will intensify inter-alliance
competition in the transatlantic and enhance consumer welfare provided
that DOT takes the steps necessary to cure any anti-competitive effects
and to ensure that all alliances are allowed to compete on an equal
footing.
5 November 2001
The Honorable Herbert Kohl
Chairman
Sub-Committee on Anti-trust, Business Rights & Competition
Committee on the Judiciary
308 Hart Senate Office Building
Washington DC 20510
The Senate Sub-Committee on Anti-trust, Business Rights and
Competition has scheduled hearings on international airline alliances
and aviation competition for 7 November. I understand that the hearing
will look at the issue of airline alliances, antitrust immunity and
``Open Skies'' air services agreements.
The UK has a strong interest in this issue. Two UK airlines (BA and
bmi British midland) are currently seeking anti-trust immunity for
alliances with US airlines (American Airlines and United respectively),
and the UK Government is intent on concluding negotiations with the US
Government to secure a new, liberalised UK/US air services agreement.
The UK Government therefore very much welcomes the opportunity to
set out its position, and I enclose a copy of our written testimony.
I am sending a copy of this letter to the Secretary of State, the
Honorable Norman Mineta, the Honorable Pat Leahy, the Honorable Orrin
Hatch and the Honorable Mike DeWine.
Christopher Meyer
Statement of UK Government
Introduction
1. The UK Government is grateful for this opportunity to set out
its position on, and reaffirm its commitment to, the liberalisation of
the UK/US aviation market, in the context of the SubCommittee's hearing
on international airline alliances and aviation competition.
2. The UK has a strong interest in this issue, given that two of
its airlines (British Airways and bmi British midland) are currently
seeking anti-trust immunity for alliances with US airlines (American
Airlines and United respectively), and that the UK Government is intent
on concluding negotiations with the US Government to secure a new,
liberalised UK/US air services agreement. Recent events have made it
more urgent than ever to conclude these negotiations swiftly and
successfully.
UK/US air services
background
3. The UK Government is firmly committed to liberalising air
services between the UK and the US. Throughout negotiations on the
revision of the current air services agreement Bermuda II--we have made
it clear that we are willing to envisage a wide-ranging liberalisation
that would open the UK/US market to the carriers of both sides and
increase competition to the benefit of consumers. Our only
precondition--and it is a precondition which the Sub-Committee will
doubtless both understand and support--is that the newly liberalised
market should embrace the principles of fair competition and provide
equal opportunities for the carriers of each side.
4. The domestic market for UK carriers is effectively the whole of
the European Economic Area (the 15 member States of the European Union
and Iceland and Norway). The UK Government has no wish to exclude US
carriers from its domestic market. On the contrary, we view vigorous
competition as something to be striven for, for the benefit of
consumers, the health of competing airlines and the greater good of our
respective economies. However, we note that the US Government's ``Open
Skies'' proposals provide US carriers with access to that market
without providing reciprocal access to the US domestic market to UK
carriers. It is difficult to reconcile such a one-sided arrangement
with the principles of fair competition, nor is it easy to see why
consumers--be they US or UK--should be burdened in perpetuity with the
consequences of a regime which protects some carriers from the
disciplines of fair competition.
5. This is far more than a partisan debating point. In competing
for traffic on transatlantic routes US carriers have the distinct
advantage of protected access to feed traffic from their large domestic
market, with UK carriers being at a particular competitive disadvantage
on routes to US hub airports where a very large proportion of traffic
is carried by a single US carrier (BA are responsible for only 37% of
the air transport movement at Heathrow, whereas many US carriers
operate over 80% of the services to and from their hubs e.g. Atlanta,
Cincinnati, Houston, and Minneapolis).
6. If US carriers are to have unrestricted access to the UK's
international and intra-European market, the principles of fair
competition demand that UK carriers must also have effective access to
the US domestic market. In negotiations throughout the 1990s the UK
Government has put forward a number of options for achieving this and
thereby allowing a wide-ranging, balanced liberalisation of UK/US
services--to the benefit of both consumers and carriers:
(a) alliances, such as those proposed between British Airways
and American Airlines, and now, additionally, between bmi
British midland and United;
(b) a liberalised inward investment regime, which would allow
UK carriers to buy a controlling interest in a US carrier
(foreign ownership is currently limited to 25%);
(c) the grant of cabotage rights.
7. To allow time for the enactment of the necessary legislation in
the US, the UK Government also put forward proposals for phasing in
full liberalisation. Unfortunately, none of the options outlined above
has so far proved acceptable to the US Government. It has not,
therefore, been possible to make the progress which the UK Government
had hoped for in revising Bermuda II.
the recent past
8. The UK Government believes, however, that the prospects for
achieving liberalisation are now better than they have ever been.
9. Two UK airlines, British Airways and bmi British midland, have
applied to the competition authorities for immunisation of their
proposed alliances with US carriers, and the competition authorities on
both sides of the Atlantic are making progress with their examination
of the competition effects. It would not be proper for the UK
Government to comment on the remedies that might be appropriate. That
is for the competition authorities to decide. But we are aware that BA
and American Airlines have argued to the competition authorities that
the remedies should be less stringent than those previously recommended
because BA's and AA's market position is less strong than previously as
a result of recent market developments, in particular the direct
competition offered at Heathrow by The Star Alliance now that bmi
British midland is a member. Members of The Star Alliance account for
27% of Heathrow slots. We are also aware that, in the case of other
alliances, the US Department of Transportation has recognised that
alliances can produce important consumer benefits, in terms of improved
quality of service--for example, through improved scheduling of
connecting journeys--and through fare reductions;\1\ and will take
account of these benefits when considering the competition remedies
required to offset market concentration in certain point-to-point
markets. The aftermath of the events of 11 September in the US have
made the airlines' market even more competitive and given further
advantage to those airlines already in alliances.
---------------------------------------------------------------------------
\1\ US DoT October 2000 report entitled ``Transatlantic
Deregulation: The Alliance Network Effect'': ``Alliance based networks
are the principal driving force behind transatlantic price reductions
and traffic gains. . .we can expect greater consumer benefits as
alliances continue to evolve and expand.''
---------------------------------------------------------------------------
10. The UK Government recognises that if the UK airlines--BA and
bmi British midland--are able to accept the remedies proposed by the
competition authorities, and their alliances with US carriers are
immunised against anti-trust actions, that would secure for two of the
UK's transatlantic carriers effective access to the US domestic market,
the principal condition for the UK agreeing to liberalisation of the
UK/US market.
timing
11. Other bilateral issues remain but, for its part, the UK
Government sees no impediment of substance to the resolution of these
issues in bilateral negotiations before the end of 2001. There is
therefore a very good prospect of achieving within weeks the
liberalisation of the UK/US aviation market that has long been the
declared objective of both Governments, and the UK Government views
with dismay the efforts of those who would defer sine die the benefits
to consumers of such a development simply to protect their own
commercial interests, or those of their alliance partners. The UK
Government notes the sentiments underlying the filings of both the US
Air Travelers Association and Professor Darryl Jenkins of the Aviation
Institute of the George Washington University in the BA/AA case.\2\
---------------------------------------------------------------------------
\2\ Docket number OST-2001-10387-91 dated 29 October and Docket
number OST-2001-10387-94 dated 31 October.
---------------------------------------------------------------------------
12. It is reinforced in this view by the fact that all parties
recognise that the next few months may prove to be the last chance to
conclude a liberalised bilateral agreement. That is because the
European Court of Justice is expected to deliver its verdict in early
2002 in the case of the European Commission's contention that other
member States' ``Open Skies'' agreements with the US are not in
accordance with EU law. That verdict could make it impossible for EU
Member States to conclude further bilateral agreements with the US.
conclusion
13. The UK Government attaches great importance to securing early
decisions on the antitrust applications for AA's alliance with BA, and
United's alliance with bmi British midland, thereby facilitating a
significant liberalisation of the UK/US air services market. These
alliances, and a new liberalised air services agreement, are if
anything more important and urgent, not less so, as a result of the
events of 11 September.\3\
---------------------------------------------------------------------------
\3\ Continental Airlines Chairman Gordon Bethune appears to agree.
He is quoted in the PioneerPlanet/St Paul (Minnesota) Pioneer Press on
2 November as saying that ``alliances are more important today. . .our
alliance with Northwest is an important part of our profitability''.
---------------------------------------------------------------------------
14. At Camp David in February both President Bush and Tony Blair,
the UK Prime Minister, confirmed the importance they attached to
achieving further liberalisation of UK/US air services. The events of
11 September have reinforced the case for this, not weakened it, and
the UK Government does not believe that the events of 11 September
ought to delay the timetable. The US Department of Transportation
appears to agree.\4\
---------------------------------------------------------------------------
\4\ US DoT Order 2001-10-13 dated 26 October 2001, in denying a
petition of Continental Airlines: ``We are not at this point convinced,
however, that these effects have been so imponderable that no reasoned
analysis of the issue relevant here remains possible. The commercial
aviation industry has always been fluid, complex, and unpredictable. .
.Moreover, all carriers are striving to return to as normal an
operating environment as is possible since September 11. To the extent
that they believe that the competitive landscape has changed, the
parties may address the nature and consequences of those changes in
their answers and replies. . .We are aware of the burden on the parties
of continuing with regulatory proceedings in the present difficult
circumstances, and we have tried to reduce that burden by extending
procedural dates. However, the responsibilities of government continue.
We are committed to carrying on the business of government, and this
includes processing applications for antitrust immunity.''.
---------------------------------------------------------------------------
15. We must therefore seize the last opportunity to resolve one of
the longest-running irritants in UK/US bilateral relations, and to
deliver on the commitment the President and Prime Minister made in
February, when they undertook to intensify their efforts to liberalise
fully the bilateral civil aviation relationship. Two allies, united in
so much else, should be able to reach agreement on something that would
be greatly to their mutual benefit.
Statement of Stephen M. Wolf, Chairman, US Airways Group
Dear Chairman Kohl:
Thank you for your invitation to testify on the proposed alliance
between American Airlines and British Airways. While I will be unable
to attend the hearing, I have prepared a few brief comments which I
hope will be of some value to you and members of this Subcommittee as
you seek to ensure meaningful access for U.S. carriers to the U.S.-U.K.
aviation market- the largest and most vital intercontinental a`iation
market in the world. I would appreciate your making this letter part of
the official hearing record.
At the outset, I want to clearly state that US Airways does not
oppose alliances. International alliances have proven to create
substantial benefits for consumers in the form of lower fares and more
efficient services. Moreover, I do not advocate that the U.S.
Government should refuse to negotiate with the British. I donot
advocate that we reach no agreement with them. I donot advocate that
this government set out on a course with a blind eye to the legitimate
needs and concerns of our counterparts across the ocean. But, what I do
advocate is that it is imperative, now, for our government to conclude
an agreement that opens Heathrow to vigorous competition, which in turn
will drive down artificially high fares in the U.S.-London aviation
market.
For almost 25 years, U.S. consumers and U.S. carriers have suffered
under Bermuda II and its capacity constraints, route limitations,
pricing controls, and limited access to Heathrow Airport. This
Subcommittee certainly does not need a detailed review of Bermuda II.
Its origins and shortcomings have been catalogued by interested parties
and commentators on both sides of the Atlantic for decades. Yet
incredibly, Bermuda 11--an anachronism that obstructs progress and
denies travelers the true benefits of competition--survives into the
21th century.
Almost three years ago, I expressed the sentiments of other
industry officials, business leaders, and consumer advocates about the
anti-competitive and anti-consumer nature of the Bermuda II agreement.
I wrote then President Clinton encouraging him to renounce Bermuda II.
Subsequently, the United States Government engaged in protracted
negotiations with the British designed to open London's Heathrow
Airport to vigorous competition that would result in meaningful
benefits for consurners on both sides of the Atlantic. In the end,
however, as in years past, the British rejected these liberalizing
proposals, keeping in place Bermuda II and the cartel that has deterred
competition and maintained its dominance over the U.S.-U.K. market.
Now, the United States and United Kingdom are, once again, planning
negotiations about Bermuda II in conjunction with requests for
antitrust immunity for U.S.-U.K. airline alliances. The U.K. is our
strongest and closest ally. Since the horrific events of September
11th, the U.K. has proven to be an invaluable partner in the
global fight against terrorism. However, when it comes to replacing the
anachronistic Bermuda II regime, there are barriers that keep us far
apart and prevent us from reaching a fair and equitable agreement. For
example, having declined liberalized access for U.S. carriers at
Heathrow Airport, it is my understanding that the British now seek to
offer only limited entry to U.S. carriers and insist on antitrust
immunity for their alliances, believing that if a new agreement cannot
be reached on their conditions, the current Bermuda II regime will
continue to work for the benefit of British Airways as it has done for
the last 25 years.
I am concerned that the United States is lowering the bar by
seeking to achieve a new aviation agreement with the British that will
provide only minimal access and do little to rectify the lack of
vigorous competition in the U.S.-Heathrow market while granting
antitrust immunity to U.S.-U.K. alliances. This is not the way to
proceed. Approval of an alliance on terms that continue to place U.S.
carriers at a disadvantage and perpetuate the anticompetitive
restrictions of Bermuda II should not, and indeed must not, be a policy
option for the U.S. Government. For the benefit of U.S. communities and
consumers, the international aviation policy of the United States for
the world's most important international aviation market must be to
open this market to vigorous and lasting competition. For US Airways,
which has a sizable East Coast network, this means, at a minimum,
commercially viable, competitive slots and groundside facilities at
Heathrow from day one for four daily roundtrips from our three
transatlantic gateways at Philadelphia, Pittsburgh, and Charlotte. And,
it is a commercial reality that as a earner that operates only four
daily roundtrips to London, US Airways cannot split its operations
between Heathrow and Gatwick.
If such an agreement cannot be reached, this Subcommittee and this
Congress must be prepared to take essential measures to protect the
rights of U.S. consumers and communities. The U.S. Government must make
clear that without a truly liberalized agreement, Bermuda Il will not
survive. Only when the British recognize this reality will they
understand that it is in their own economic interests to reach a fair
agreement providing open access to Heathrow.
Mr. Chairman, I firmly believe that the competitive access required
to open the U.S.-Heathrow market will not be achieved, unless and until
the U.S. Government impresses upon the British that continuation of the
anticompetitive Bermuda 11 regime will not be an option.
Thank you for allowing me to share my thoughts with you.
-