[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






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                       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.
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    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.
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    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.

                                   - 
