[Senate Hearing 107-1094]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 107-1094

  EFFECTS OF THE AMERICAN AIRLINES/TWA TRANSACTION AND OTHER AIRLINE 
         INDUSTRY CONSOLIDATION ON COMPETITION AND THE CONSUMER

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 1, 2001

                               __________

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




                      U.S. Government Printing Office
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  MAX CLELAND, Georgia
GEORGE ALLEN, Virginia               BARBARA BOXER, California
                                     JOHN EDWARDS, North Carolina
                                     JEAN CARNAHAN, Missouri
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 1, 2001.................................     1
Statement of Senator Allen.......................................    67
    Prepared statement...........................................    89
Statement of Senator Boxer.......................................    78
Statement of Senator Carnahan....................................    83
    Prepared statement...........................................    84
Statement of Senator Dorgan......................................    70
Statement of Senator Fitzgerald..................................    74
Statement of Senator Hollings....................................     3
    Prepared statement...........................................     3
Statement of Senator Hutchison...................................    80
Statement of Senator McCain......................................     1
    Prepared statement...........................................     2
Statement of Senator Rockefeller.................................    88
    Prepared statement...........................................    90
Statement of Senator Smith.......................................    63
Statement of Senator Snowe.......................................    85
Statement of Senator Wyden.......................................    65

                               Witnesses

Bond, Hon. Christopher S., U.S. Senator from Missouri............     5
    Prepared statement...........................................     7
Carty, Donald, Chairman, President, and CEO, American Airlines...    17
    Prepared statement...........................................    20
Compton, William F., President and CEO, Trans World Airlines.....    23
    Prepared statement...........................................    26
DeWine, Hon. Mike, U.S. Senator from Ohio........................     9
Hecker, JayEtta Z., Director, Physical Infrastructure Issues, 
  U.S. General Accounting Office.................................    44
    Prepared statement...........................................    47
Holden, Hon. Bob, Governor, State of Missouri....................    11
    Prepared statement...........................................    13
Johnson, Robert L., Chairman and CEO, DC Air.....................    28
    Prepared statement...........................................    30
Leonard, Joe, Chairman and CEO, AirTran Airways..................    32
    Prepared statement...........................................    33
Levine, Michael E., Adjunct Professor of Law, Harvard Law School.    36
    Prepared statement...........................................    38
Meeks, Hon. Gregory W., U.S. Representative from New York........    14
    Prepared statement...........................................    16
Slaughter, Hon. Louise McIntosh, U.S. Representative from New 
  York...........................................................     4

                                Appendix

Air Line Pilots Association, TWA Master Executive Council, 
  prepared statement.............................................    99
Bidwell, Richard, St. Louis Convention and Visitors Commission, 
  prepared statement.............................................   105
Brownback, Hon. Sam, U.S. Senator from Kansas, prepared statement    95
Copland, Richard M., President and CEO, American Society of 
  Travel Agents, letter dated February 7, 2001, to Hon. John 
  McCain.........................................................   107
Fleming, Richard C.D., President and CEO, St. Louis Regional 
  Chamber and Growth Association, letter dated January 31, 2001, 
  to John M. Nannes..............................................   106
Griggs, Jr., Leonard L., Director of Airports--City of St. Louis, 
  MI, prepared statement.........................................   104
McCarthy, Karen, U.S. Representative from Missouri, letter dated 
  February 7, 2001, to Hon. John McCain..........................    96
Reynolds, Hon. Thomas M., Congressman from New York State, 
  prepared statement.............................................    97
Santorum, Hon. Rick, U.S. Senator from Pennsylvania, prepared 
  statement......................................................    95
Wytkind, Edward, Executive Director, Transportation Trades 
  Department, AFL-CIO, letter dated February 1, 2001 to Hon. John 
  McCain.........................................................   100

 
  EFFECTS OF THE AMERICAN AIRLINES/TWA TRANSACTION AND OTHER AIRLINE 
                       INDUSTRY CONSOLIDATION ON 
                      COMPETITION AND THE CONSUMER

                              ----------                              


                       THURSDAY, FEBRUARY 1, 2001

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:32 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

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

    The Chairman. Good morning.
    Eight months ago, United Airlines announced its intention 
to merge with US Airways, potentially creating the largest 
airline in the world. At that time I expressed my strong 
reservations about the proposal. I was concerned that the 
proposed transaction would lead to further industry 
consolidation, which would have a detrimental effect on 
competition and in turn the consumer. As a result, this 
Committee passed a resolution disapproving the United-US 
Airways merger.
    Four months ago, the chairmen of the second and third 
largest airlines in the U.S., American and Delta Airlines 
respectively, sat in front of this Committee and warned that 
they would be forced to react to the proposed United-US Airways 
mergers, if approved, to remain competitive. Today, one of 
them, American, is here to discuss its proposed actions that 
would make American comparable in size to United if the 
currently proposed transactions are approved. This would result 
in two airlines controlling approximately 50 percent of the 
U.S. market.
    It comes as no surprise that current news reports indicate 
that Delta is involved in negotiations with both Northwest and 
Continental in order to remain competitive in light of these 
proposals. The move by Delta could result in three major 
airlines controlling an estimated 75 percent to 85 percent of 
the U.S. airline market, the very situation that I and others 
predicted 8 months ago.
    I do not know of any one other than the airlines who thinks 
that a ``big three'' industry is good for the consumer. The 
airlines tout network benefits and seamless travel as a benefit 
to the consumer. Maybe I am mistaken, but I thought it was 
competition that was good for the consumer. That is something 
that there would be little of if these transactions all come to 
fruition.
    These big three will control markets, gates, and access to 
facilities. They will have the pricing power to slowly force 
out or severely constrict the growth of new entrants. The 
consumer is the one who will pay the price.
    A ``big three'' industry also gives labor increased 
leverage to disrupt service. We need only to look at United's 
problems last summer and Delta's and Northwest's current 
problems. If labor disruptions occur at a consolidated United 
or American, the rest of the system will not be able to absorb 
the displaced passengers and the system will grind to a halt.
    I believe that the issue before us this morning, before the 
Committee, is an important one. I believe that if we continue 
these mergers and consolidations that the consumer will suffer. 
I do not fault CEO's of the airlines for seeking these mergers 
and consolidations. That is their business. But it is the 
business of the Congress to see that the consumer is not left 
out and that the consumer is able to enjoy the benefits of the 
promise of airline deregulation, which was less regulation, 
more entrants into the markets, and consequently lower prices 
to the consumer.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    Eight months ago, United Airlines announced its intention to merge 
with US Airways, potentially creating the largest airline in the world. 
At that time, I expressed my strong reservations about the proposal. I 
was concerned that the proposed transaction would lead to further 
industry consolidation which would have a detrimental effect on 
competition and, in turn, the consumer. As a result, this Committee 
passed a resolution disapproving the United/US Airways merger.
    Four months ago, the Chairmen of the second and third largest 
airlines in the U.S., American and Delta Airlines respectively, sat in 
front of this Committee and warned that they would be forced to react 
to the proposed United US Airways merger, if approved, to remain 
competitive. Today one of them, American, is here to discuss its 
proposed actions that would make American comparable in size to United 
if the currently proposed transactions are approved. This would result 
in two airlines controlling approximately 50 percent of the U.S. 
market.
    It comes as no surprise that current news reports indicate that 
Delta is involved in negotiations with both Northwest and Continental 
in order to remain competitive in light of these proposals. A move by 
Delta would result in three major airlines controlling an estimated 75 
to 85 percent of the U.S. airline market, the very situation that I and 
others predicted eight months ago. I don't know of anyone, other than 
the airlines, who thinks that a ``big 3'' industry is good for the 
consumer.
    The airlines tout network benefits and ``seamless travel'' as a 
benefit to the consumer. Maybe I am mistaken, but I thought it was 
competition that was good for the consumer. And that is something that 
there will be little of if these transactions all come to fruition. 
These ``big 3'' will control markets, gates and access to facilities. 
They will have the pricing power to slowly force out or severely 
constrict the growth of new entrants. The consumer is the one who will 
pay the price.
    A ``big 3'' industry also gives labor increased leverage to disrupt 
service. We need only to look at United's problems last summer and 
Delta's and Northwest's current problems. If labor disruptions occur at 
a consolidated United or American, the rest of the system will not be 
able to absorb the displaced passengers and the system will grind to a 
halt.
    Mr. Compton, I recognize the benefit of this acquisition to your 
company and employees. Senator Carnahan, I also recognize the benefit 
to your state and the city of St. Louis. However, the airline industry 
is facing a crisis right now. The report authored by our current 
Secretary of Transportation, Secretary Mineta, sets out some good ideas 
to fix the system. I personally believe the answer is to pour more 
concrete, increase competition and fix the air traffic control problem. 
We are at a crossroads and have a tremendous opportunity to take steps 
to address these issues. I cannot help but believe that a ``big 2'' or 
``big 3'' consolidated airline industry will limit this opportunity and 
make the current situation even worse.
    I thank the witnesses for their time and look forward to their 
testimony.

    The Chairman. Senator Hollings.

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

    Senator Hollings. Thank you, Mr. Chairman. I will just ask 
that my statement be filed.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Good morning. Last year, we held two days of hearings alone on the 
proposed United-US Airways merger to examine its market implications. 
Testimony was received from industry and government officials as well 
as industry experts. The main concern was that the acquisition would 
open the floodgates, and set off a host of other massive mergers. Well 
that concern has become a reality. We all knew that the United-US 
Airways-DC-Air transaction would lead to other deals. We have them 
today. Just yesterday the Wall Street Journal noted the current 
negotiations involving Northwest, Continental and Delta. No doubt we're 
going to end up with three carriers controlling fortress hubs across 
the country.
    What we do not have is anyone looking out for the public interest. 
The Department of Justice will review these deals market by market, 
inch by inch. Without any notion of the big picture. The fact is that 
we need competition at each of the fortress hubs. Why should we 
continue to allow a carrier with 60, or 70 percent of the traffic at a 
major city to stifle entry, control gates and other assets needed to 
provide meaningful competition. In other critical sectors of our 
economy, telecommunications, for example, we have limits on media 
ownership enabling others to provide information and services. I want 
the Department of Transportation to have that ability--to be able to 
say ``we need more service, more competition in specific markets, less 
hub domination, less slot domination''. It simply is time that the 
traveling public got its say.
    We also have had study after study telling us that there are real, 
and serious, competitive problems within the air transportation system. 
Fortress hubs, market domination, predatory pricing--these are the 
terms we see and read about in the studies. I know there are benefits 
to the hub system as some communities, particularly the smaller ones, 
get more service than they otherwise would, but it comes at a price--a 
very high price. I have said that I do not like deregulation, and that 
the regulated are taking over the regulated, as the European carriers 
attempted to buy into the U.S. market, but that has slowed down in 
recent years. Northwest has its arrangement with KLM, for example. What 
we see today is the deregulated taking over the deregulated, and the 
top 3 looking to get even bigger.
    Today, though, we will focus on the deregulated merging and 
consolidating. Network efficiencies, we are told will provide us bigger 
and better service. The GAO and Mr. Levine, supported by Department of 
Transportation's studies, can tell us that bigger is not better. DOT in 
fact has found that fares are 41 percent higher in markets without 
competition, and even higher for smaller, shorter haul markets (54 
percent).
    I should note that American has come to TWA's rescue, which I 
support. It will save jobs, and protect consumers who would have lost 
service. I have heard from pilots at TWA that they support American's 
bid.
    The rest of the proposed mergers, however, fall or succeed 
together. United's deal with US Airways clearly ran into DOJ 
concerns,--regarding United's relationship with DC Air, in addition to 
its, hub to hub routes, and the shuttle operations. American has now 
been invited to come along and correct these problems. But should it be 
American, and not a low cost carrier? Unfortunately, DOJ is likely to 
decide that hub to hub competition is great and possibly clear these 
transactions. The key, but unanswered question, however, is what 
happens to consumers. American and DC Air, with their marketing 
arrangement, jointly will control 51 percent of the slots at Washington 
National Airport. United will operate and dominate hubs at Dulles, 
Pittsburgh, Philadelphia, Charlotte, Denver, and San Francisco. United 
today derives a large percentage of its revenues from the East Coast, 
almost 35 percent of its total revenues. Thus, while they assert that 
they need to purchase US Airways to gain a foothold, they downplay that 
they already have an enormous presence in the East.
    What they get out of the arrangement is control, not an increase in 
hub domination, but control of more hubs. Ultimately, the more hubs you 
control, the more you can control the number of seats in the markets 
and the prices. Is this what deregulation was suppose to give us? I 
hope not. It is clear that the word ``competition'' is lacking. Look at 
the Wall Street analyst reports. One report noted in discussing the 
United-American-US Airways merger that ``This reminds us of a funny 
story about how fewer, but bigger national airline networks will 
compete even more vigorously with each other than they do today.'' Is 
this the type of market we want for the American people?
    Regarding TWA. It clearly was a pretty good airline. It leased new 
planes, had a good on-time performance rating and provided good 
service. Without American's efforts, TWA would have been forced to 
close its doors, leaving thousands of employees out of work, and more 
important, thousands of travelers without service. The point is that we 
are not losing a competitor that would not have been lost anyway.
    What we need to ensure is that other carriers have the ability to 
get into the fortress hubs. Barriers to entry must be torn down, with 
limits on a carrier's ability to own or control assets at our major 
hubs. We should no longer permit airline contracts that inhibit entry 
at airports. We also ensure that no more airport grant monies or 
passenger facility charges be allowed unless the fortress hubs agree to 
expand to accommodate competition. All of these elements should be part 
of the public interest. It is our job, and we will make it the job of 
DOT, to protect the travelers.
    Alfred Kahn testified in 1998 before this Committee that 
``Deregulation makes sense and can only continue in the presence of 
effective competition as the protector of consumers''. We need that 
competition now more than ever. I will listen carefully to the 
witnesses attempts to explain how less equals more.

    The Chairman. Thank you.
    We welcome our colleagues this morning. Can we begin with 
Congresswoman Slaughter if that is agreeable, since she came 
all the way across the Capitol to be with us this morning. 
Thank you.

         STATEMENT OF HON. LOUISE McINTOSH SLAUGHTER, 
               U.S. REPRESENTATIVE FROM NEW YORK

    Ms. Slaughter. Thank you. Thank you, Mr. Chairman. I was 
delighted to do it, and I want to thank you again for your 
hospitality. This is the second time I have appeared before 
your Committee on this same issue.
    These hearings particularly come at a critical time, and I 
do praise your leadership on this issue. I want to say good 
morning to the other Members of your Committee.
    Mr. Chairman, today we are seeing the end game, I think, to 
an experiment that began 20 years ago when Congress voted to 
deregulate the airline industry. These mergers are the final 
act and, should they go forward, it will mean the death knell 
for an ambitious plan that failed to deliver the promised 
benefits of more airlines, better service, and cheaper prices 
that Congress promised to all the American people, not just 
those living in the popular destinations.
    The GAO report that I, along with my colleague James 
Oberstar of Minnesota, requested made clear in December that 
the proposed US Airways-United merger would trigger further 
consolidation of the industry, thereby reducing the industry to 
as few as three major carriers. That prediction has come true 
faster than any of us had imagined.
    It appears that the mere possibility of a United-US Airways 
merger has prompted American airlines to buy Trans World 
Airlines, and now press reports indicate that Delta, 
Continental, and Northwest are also exploring a strategic 
alliance.
    Mr. Chairman, I am here to urge you to send a clear signal 
to the Administration that Congress does not want these mergers 
to go forward. We all sympathize with TWA's workers and we 
understand their fear of job loss, and we should work together 
to mitigate any labor disruption. But my district of Rochester, 
New York, has already seen thousands of jobs lost because 
businesses move out when they cannot afford our high air fares. 
We have the fourth highest fares in the United States even 
though we have many Fortune 500 companies and export more from 
our region than all but nine of the United States.
    Our source of price competition has been jetBlue Airways, a 
low fare airline which we managed to attract to Rochester last 
year. But the low-cost carriers like jetBlue, Southwest, or 
AirTran will find themselves at the mercy of these megacarriers 
should they take over the domestic aviation market.
    Every independent analysis has concluded that these mergers 
will erode what little competition remains in the aviation 
industry. With fewer airlines competing against each other, 
passengers can expect higher prices, fewer flights, and even 
worse service than they endured over the recent holiday season.
    Generations of American taxpayers have poured their hard-
earned tax dollars into building our nation's aviation 
infrastructure and they deserve better. These same taxpayers 
now find themselves at the mercy of the marketing department of 
megacarriers who can decide with impunity which regions of the 
country will live or die based on their access to air service.
    I have testified before your Committee in recent years and 
spoken to you individually about problems facing the flying 
public. But the public is fed up. They are fed up with both the 
airlines and Congress' willingness to play the role of 
handmaiden to major carriers. Let us be frank. The industry 
gave $6.5 million to members during this election cycle. A 
pattern has now developed that does not reflect well on 
Congress. Legislation is proposed, hearings are held, dueling 
press conferences emerge, and at the end of the day the 
leadership backs away from any real action, promising further 
study and delivering hollow promises.
    Mr. Chairman, we have studied this issue to death. The time 
we have wasted has brought us to a point where three carriers 
are poised to dominate the entire domestic aviation market. If 
we do not act, the public will rightly view this institution as 
part of the problem, rather than the solution.
    I thank the Committee for their time and attention, and I 
appreciate your great concern, Mr. Chairman, on this issue.
    The Chairman. Thank you very much, Congresswoman Slaughter. 
You are always welcome here and we appreciate all of your 
efforts.
    Senator Bond, welcome.

            STATEMENT OF HON. CHRISTOPHER S. BOND, 
                   U.S. SENATOR FROM MISSOURI

    Senator Bond. Thank you very much, Mr. Chairman, Senator 
Hollings, Members of the Committee.
    I ask unanimous consent that the full statement be included 
in the record.
    The Chairman. Without objection.
    Senator Bond. I just want to tell you a couple things. I 
want to tell you a little story about my friends at TWA. Number 
1, I commend you for your efforts to assure competition in 
airlines. The failure of competition where there has been 
deregulation has been a problem in many other areas, and I 
commend you for your efforts.
    But let us make one thing clear. This is not about 
maintaining competition by preventing merger between two viable 
carriers. This is a matter of life and death for the people 
that are served by TWA, the communities who are served by TWA, 
and the people who work for TWA.
    TWA has a long and proud tradition. It started off as 
Western Air in 1925, in 1930 became Transcontinental and they 
started running a mail route through St. Louis. I have not been 
flying with them since 1930, but I have been flying with them 
since about 1950, and they are the essential carrier, the major 
dominant carrier in St. Louis.
    They have been through some tough times. Back in 1985 and 
1986 when I was out of office before I came to the Senate, I 
was approached by employees of TWA who wanted to take over the 
airline, which was up for sale, and prevent it from being 
stripped. Well, we fought some good battles. The employees did 
not get funding at the time, so my law firm did not get paid, 
but it was a good battle.
    It was taken over by a man who sold off routes and put some 
real financial burdens on it. In 1992 the airline almost did 
not come out of bankruptcy because the Pension Benefit Guaranty 
Corporation wanted a huge sum to cover the pension costs. I 
asked the PBGC members to review the impact of putting out of 
business at that point a 28,000-person airline. I said: You 
ought to make that a more reasonable cost. They came up with a 
reasonable plan.
    They got TWA out, but they did not get it out in condition 
to survive financially. We have watched as the new president, a 
pilot, Bill Compton, has made this one of the finest, most 
consumer or flyer-friendly airlines around. J.D. Power said it 
is a great airline. The problem is they did not have the cash 
behind it. They have to pay 150 percent of what other airlines 
pay for leases because their credit was not good. They had an 
arrangement with a prior owner who could sell discount tickets, 
so the airline was always full, but they were not always 
getting the money from it. Then the cost of fuel rose.
    Well, we had probably the last hurrah of TWA, when it 
brought back the world champion St. Louis Rams to the TWA Dome 
after last year's Superbowl. But then things started going 
downhill. We're now in a position where TWA either goes into 
bankruptcy, ends its service, splits up and gets picked off by 
more vultures what want to pick and choose little pieces of it, 
or whether we go through with the arrangement proposed by 
American Airlines that will keep the airline flying and keep 
the service that is needed for me and the other hundreds of 
thousands of flyers who use the 1,000 flights a day out of St. 
Louis.
    We need to keep the 9,000 employees of TWA working in St. 
Louis, the 3500 who work in Kansas City. This is an opportunity 
for the bankruptcy courts to make good service available and 
serve consumers. It is not going to have any harm, it is not 
going to cause any harm to Rochester or Schenectady or any 
other place. This is an airline that is going to go under and 
go out of business unless the bankruptcy court can approve the 
sale.
    Right now TWA is a debtor-in-possession and had it not been 
for the infusion of cash they would have been out of business. 
The airline industry, the airline consumers, and certainly the 
State of Missouri do not need to go through another disaster 
wiping out another airline altogether. We have seen that in 
Kansas City with Braniff and with Eastern. The results have 
been disastrous.
    We have here today an opportunity for a shining knight on a 
white steed to come in and keep airline service going that is 
important not only for the hub, but for the many smaller 
communities in the Midwest served by TWA. It may not be TWA any 
longer, but at least the service will be there, the communities 
will have the economic opportunities of good air service, and 
the employees will be able to continue to do the excellent job 
they have done of serving the nation's airline travelers.
    I thank the chair.
    [The prepared statement of Senator Bond follows:]

            Prepared Statement of Hon. Christopher S. Bond, 
                       U.S. Senator from Missouri
    Good morning, Mr. Chairman, Senator Hollings, and fellow 
colleagues. I thank the Chairman and the Committee for holding this 
hearing, and am pleased to appear before you to discuss the potential 
acquisition of Trans World Airlines by American Airlines, the impact on 
my home State of Missouri, and issues related to airline competition.
History of TWA
    Let me start by providing some brief history of one of the most 
famous names in aviation and the longest-flying carrier in American 
commercial aviation, Trans World Airlines or TWA. For years TWA was 
associated with the big names, big planes, and great service. It is sad 
to see those days come to an end.
    TWA's beginnings go back to 1925 when it was known as Western Air 
Express. It quickly evolved into Transcontinental Air Transport or the 
``Lindbergh Line'' due to Charles Lindbergh's involvement with the 
airline. It was Transcontinental, that was headquartered in Kansas 
City, Missouri, that laid out the first coast to coast air and rail 
route in 1929.
    A year later, in 1930, the federal government decided that airlines 
could and should carry more people than mail and the transcontinental 
lines emerged with what would become United, American, TWA, and 
Eastern. TWA had the central route through St. Louis, Missouri and TWA 
has had a major airline presence in St. Louis, Missouri ever since.
    Another interesting airline fact, and one that I like, is that St. 
Louis is the birthplace of one of today's leading airlines. It is not 
TWA, but American Airlines, whose earliest predecessor company--
Robertson Aircraft Corporation--launched its first airmail flight from 
St. Louis to Chicago on April 15, 1926.
TWA Has Been A Survivor
    Throughout the history of TWA, the airline has had its major ups 
and downs. A TWA plane crash in Kirksville, Missouri in 1935 killed 
U.S. Senator Bronson Cutting of New Mexico which served as the catalyst 
for the creation of the Civil Aeronautics Board. Howard Hughes was 
brought in the late thirties to help address the growing financial 
needs. By 1940, Hughes owned the company which lasted until 1965. Even 
though Hughes increased the name recognition of TWA, throughout his 
years of ownership he created a fair amount of difficulties that led to 
a financial drain on TWA. TWA was able to weather that storm and often 
led the airline industry in profits in the 1960s.
    In the 1970s, along came deregulation and TWA was not prepared. The 
good `ole days of TWA disappeared. The constant struggle of survival 
began.
    Mr. Chairman, I have been through the struggles of TWA for many 
years now. As a Governor, a lawyer, and here in the United States 
Senate, I have answered TWA's calls for assistance. I was involved 
during the Icahn era which left TWA gasping for breath. I have been 
through two previous bankruptcies questioning day to day whether or not 
TWA would be in the air. We all listened in horror about the TWA Flight 
800 crash.
    The newspaper headlines over the years give an example of the tense 
situation TWA was under.

     ``TWA Unveils Plan to Halve Its Debt''--December, 1994
     ``TWA Bailout 10 Times Bigger Than Announced''--March, 1995
     ``For Trans World Airlines, It's Chapter 11 Again''--June, 1995
     ``Auditors Gloomy on TWA's Prospects''--March, 1997
     ``TWA Juggles Top Executives After Treading in Read Ink for a 10th 
Straight Year''--March 1999

    Time after time, TWA pulled it through. Time after time, TWA was a 
survivor.
    Those days are no longer. Unfortunately, despite the heroic efforts 
of TWA's employees and current management team, it is now clear that 
the airline can no longer survive.
TWA's Importance to Missouri
    Mr. Chairman, if I could have my way, TWA would continue to be a 
survivor and once again be on top leading the way for other airlines to 
follow. Unfortunately, as is the case too often, I am not getting my 
way. The loss of the TWA name in the airline industry is disappointing, 
but more specifically, the loss of TWA and its operations to my home 
state of Missouri, would be huge.
    TWA has approximately 20,000 employees today. Approximately 9,000 
of those employees live and work in the St. Louis, Missouri 
metropolitan area making TWA the seventh-largest employer in the St. 
Louis area. At St. Louis Lambert International Airport, TWA operates 
almost 1000 flights (departures and arrivals) per day.
    In Kansas City, Missouri, TWA offers 10 daily flights to St. Louis. 
TWA employs 3,500 people in Kansas City, including 2,500 at the Kansas 
City overhaul base.
    TWA's headquarters are in St. Louis, Missouri. TWA's support in the 
community has been apparent by the financial assistance provided 
locally. Having TWA's St. Louis hub has proven to be a tremendous 
economic benefit for the St. Louis metropolitan area and the entire 
State of Missouri.
American Airlines Acquisition
    I am not going to deny it. Almost everyone involved with TWA looks 
at the acquisition of TWA by American Airlines as the knight in shining 
armor riding in on his white horse rescuing the damsel in distress. For 
TWA, for TWA employees, for St. Louis, for Kansas City, for the entire 
State of Missouri, and for the traveling public--this is the only 
option for us.
    American Airlines is offering TWA, the TWA employees, Missouri, and 
the traveling public a ``global'' solution. American Airlines has an 
acquisition plan that will keep TWA flying in the short-term, protect 
almost all of the 20,000 jobs, maintains the St. Louis hub, maintains 
the Kansas City overhaul base, and maintains a competitive airline 
presence in St. Louis into the future. Obviously, this is good news for 
us--the State of Missouri simply has too much at stake to lose those 
economic engines.
    American Airlines, in my view, has presented the best possible 
option. In fact, had American not provided immediate financing to TWA 
in early January, the carrier would have had to shut down, 
precipitating an economic crisis in Missouri. Likewise, air service 
from St. Louis to small and mid-sized cities throughout the Midwest 
would have been disrupted. Indeed, the loss of the St. Louis hub would 
in the long run, I believe, do significant harm to the airline industry 
and the hundreds of thousands of air travelers who depend on St. Louis 
Lambert as their connecting airport.
    American Airlines wants the whole pie, not just a slice. That is 
imperative for TWA, TWA employees, Missouri, and the traveling public.
The Final Chapter
    Let's be honest. There are some other airlines who are not happy 
with this American acquisition of TWA. Almost all of those airlines 
have considered at one time or another, the purchase of TWA, including 
US Airways, Northwest, Continental, and Delta. They all passed the 
opportunity by. At one time, acquiring TWA would have only been a 
liability. That is not the case today. Captain Bill Compton and his 
team, including the 20,000 employees, have led the turnaround of TWA, 
from an airline that nobody wanted to one that they now want to 
squabble over.
    In the past four years the employees of TWA have built their 
airline into an industry-leading operator--going from last in on-time 
performance to first, winning numerous customer service awards. In 
addition, TWA undertook an ambitious program of fleet renewal leaving 
behind one of the newest fleet's in the industry.
    Unfortunately, despite the sterling success of the operational 
turnaround, continuing financial problems have overwhelmed TWA. Let me 
be clear. TWA is not crying wolf! Because of the inability to overcome 
the financial woes which were further burdened by high fuel costs, TWA 
would have ceased operations mid-January. This is where the knight on 
the white horse came in.
    Mr. Chairman, I understand and share many of the concerns of my 
colleagues with regard to increased consolidation in the airline 
industry. The proposed deals between United, US Airways, American, and 
DC Air raise significant questions in that regard and should be very 
carefully scrutinized. However, I urge my colleagues not to mix those 
larger, more complex deals with the American transaction with TWA. To 
do so will only cause delay and put thousands of jobs at risk in the 
State of Missouri.
    One final point I should make about the proposed arrangement 
between American Airlines and TWA is its effect on competition, or more 
particularly the antitrust laws. I confess to having been an antitrust 
lawyer in my private life; it was the practice of that law that drove 
me into politics. I do recall, however, some of the main principles of 
antitrust law, and I am particularly drawn in this situation to the 
failing company doctrine. This is not an instance where competition is 
going to be decreased by the transaction between American Airlines and 
TWA; it is one which will enable the service provided by TWA to 
continue. Mr. Chairman, this is a glorified estate sale.
    Indeed, the on-going bankruptcy proceeding as well as TWA's 
relatively small size (only 3.9 percent market share) make the 
American/TWA transaction fundamentally different from the larger deals. 
It must be resolved swiftly through the bankruptcy court and cleared by 
the Justice Department to ensure the continued, long-term employment of 
the thousands of TWA employees in my State of Missouri and those 
elsewhere in the country.
    I hope and trust that the reviewing authorities will not inhibit 
this transaction from going forward, and I would strongly urge my 
colleagues not to take any steps that might interfere with this effort 
to save the service and the jobs of TWA.
    Thank you for the opportunity to be here today. I look forward to 
working with you on this and many other issues.

    The Chairman. Thank you very much, Senator Bond. Thank you 
for being here this morning.
    Senator DeWine.

                STATEMENT OF HON. MIKE DeWINE, 
                     U.S. SENATOR FROM OHIO

    Senator DeWine. Mr. Chairman, thank you very much. Let me 
congratulate and thank you and Senator Hollings for your 
leadership in this whole area of competition.
    I concur, Mr. Chairman, in your opening statement and I 
would say that you were, in fact, unfortunately, the prophet a 
few months ago with regard to what was going to happen in the 
airline industry. As you and this Committee very well know, a 
vibrant domestic aviation industry is essential to our nation's 
economy, and vigorous competition is required to ensure that it 
remains healthy. Right now, though, I fear that competition in 
the aviation industry is at risk.
    If the mergers among United, US Airways, American Airlines, 
and TWA go forward as proposed, other major carriers likely 
will be forced to merge in order to remain viable competitors. 
Such consolidation could leave us with three, maybe four, 
megacarriers, each with extensive national networks that would 
make it very difficult for regional and startup carriers to 
compete.
    Mr. Chairman, as we have learned through experience, when 
airlines are able to dominate a hub city they are likely to 
raise prices in that market, and therefore consumers can expect 
more of the same if several airlines are able to dominate large 
sections of our entire country.
    Additionally, Mr. Chairman, I believe the nation as a whole 
would be at risk if we were to be forced to rely upon only a 
few megacarriers, as you say, three, maybe four, for the bulk 
of our air transportation needs. Mr. Chairman, we already have 
seen the terrible congestion and delays that passengers face 
when one of the major airlines has labor difficulties. I 
shudder to think of the impact on the flying public if a merged 
United-US Airways should ever face a work stoppage or other 
labor problems.
    Before such a significant competition shift is allowed, Mr. 
Chairman, I believe we must examine thoroughly each of the 
related transactions to ensure that competition and consumers 
will not be harmed. That responsibility, of course, rests with 
the Justice Department and the Department of Transportation. 
But the Congress does and must play a role. To that extent, I 
believe that this Committee, as well as the Judiciary 
Committee, must examine these issues.
    Accordingly, as Chairman of the Judiciary Committee's 
Antitrust Subcommittee, Ranking Minority Member Kohl and I have 
scheduled a hearing next Wednesday to examine the competitive 
impact of the proposed airline mergers. Based on what we have 
learned so far, it does not appear that these deals are good 
for the domestic aviation market nor for the American flying 
public as a whole. Instead, Mr. Chairman, it appears that the 
results of this consolidation will be to improve the fortunes 
of one or two giant airlines at the expense of the American 
consumer.
    For that reason, a number of members of the Judiciary 
Committee have signed a letter to the Justice Department asking 
the Department to take special care to examine these proposed 
mergers in the aviation industry and focus specifically on the 
impact of such consolidation on passengers. With your 
permission, Mr. Chairman, I would like to offer that letter as 
a part of the record at this time.
    The Chairman. Without objection.
    [The material referred to follows:]

                                                   February 1, 2001
Hon. John Nannes,
Acting Assistant Attorney General for Antitrust,
United States Department of Justice,
Washington, DC.

Dear Mr. Nannes:

    We write to you to express our shared concern regarding increasing 
consolidation in the domestic aviation market. As you know, the airline 
industry plays a vital role in the American economy, and vigorous 
competition must be maintained to protect consumers and ensure a 
healthy aviation system. The proposed transactions among United 
Airlines, US Airways and American Airlines raise serious competition 
concerns, and we urge you to closely examine these transactions to 
ensure that consumers are protected.
    When United Airlines and US Airways announced their merger, many 
expressed concern that such a merger would cause a chain-reaction of 
other mergers that would lead to massive consolidation within the 
industry. The recent deal announced by American Airlines makes it clear 
that such concerns are justified. If all pending transactions are 
approved, American Airlines and United Airlines will grow significantly 
larger than their nearest competitors. forcing the remaining ``large'' 
airlines to expand via merger in order to compete effectively. We fear 
that the long term effects of such consolidation will be a decrease in 
competition, higher fares, and less focus on passenger satisfaction. In 
an industry already struggling with customer service, we cannot afford 
any further deterioration in this area.
    Accordingly, we ask that you continue to examine the mergers 
pending in the aviation industry, with a special focus on the impact 
that such consolidation will have on competition and consumers.
        Sincerely,
                                               Mike DeWine,
                                                 Herb Kohl,
                                             Patrick Leahy,
                                           Charles Schumer,
                                            Chuck Grassley,
                                             Russ Feingold,
                                             Arlen Specter,
                                            Strom Thurmond,

    Senator DeWine. Again, Mr. Chairman, I want to thank you 
for the opportunity to testify on this important issue. I look 
forward to working with all the Members of the Commerce 
Committee as we examine these mergers and as we try to 
determine how best to protect the interests of consumers and of 
competition in our domestic aviation market.
    I thank the chair.
    The Chairman. Thank you, Senator DeWine, and we look 
forward to working with you and your Subcommittee on this 
issue. Obviously from your statement, we are in agreement that 
there is a lot more to come on this issue.
    Governor Holden, welcome to the Committee. Congratulations 
on your recent election and we appreciate you taking time to be 
with us this morning.

                 STATEMENT OF HON. BOB HOLDEN, 
                  GOVERNOR, STATE OF MISSOURI

    Governor Holden: Thank you very much, Mr. Chairman.
    Let me first of all just second our Senator's comments. I 
appreciate those remarks very much, Senator Bond.
    Senator Hollings, other Members of the Committee: My name 
is Bob Holden, Governor of Missouri. I appreciate the 
opportunity to speak to you today regarding the proposed buyout 
of TWA by American Airlines on behalf of the State of Missouri. 
I am particularly pleased to see that Jean Carnahan, the new 
Senator from Missouri, is a Member of this Committee, and I 
look forward to working with her also on this effort, because I 
know that she and Senator Bond recognize, as I do, that this 
consolidation is critical if a healthy Missouri economy is to 
survive.
    I share this Committee's conviction that competition must 
be fostered if the best interests of our consumers are to be 
served. I would respectfully submit that an American-TWA merger 
is fundamentally different than some of the other airline 
consolidations that have been considered. The primary 
difference is that in this case TWA cannot be saved without 
American's help. To our knowledge, American's proposal is the 
only offer, the only offer, that will allow Missouri to enjoy 
the same comprehensive airline service and economic benefits 
that TWA has provided in the past, and Senator Bond gave a rich 
history of that effort.
    If TWA dies, the loss of this major employer would not only 
devastate Missouri's economy, but produce negative ripples 
throughout the world economy as well. TWA employs more than 
12,000 Missourians at wages exceeding $604 million. Its flight 
and corporate headquarters in St. Louis, with 350 flights a day 
all over the world, make Lambert Airport an international 
transportation hub. Its Kansas City overhaul base and the 
administrative center, as well as ten daily flights connecting 
Kansas City and St. Louis, make TWA a major employment force in 
the area and a key transportation link within our state.
    Yet, until American came forward, the only viable option 
for TWA was bankruptcy and the piecemeal sale of its assets. If 
this were to occur, Missouri would not only lose the jobs and 
transportation benefits created by TWA, but also the numerous 
other jobs interrelated to the airline industry. We believe 
that if this merger were prevented, Missouri would lose 
approximately 33,000 jobs and $876 million in annual wages, a 
devastating blow to our state's economic future.
    Without the infusion of American's capital that has taken 
place, TWA would not be flying today as I speak to you. 
American has given us every assurance that its operations will 
ensure the continued employment of our citizens and the 
accessibility of airline travel that is so important to our 
economy. In fact, American envisions an enhanced future for TWA 
employees and this important Missouri transportation system.
    As a public official, I join you in my concern for what the 
impact of increased consolidation in the aviation industry 
might mean for our country's future. However, I am far more 
concerned about the economic destruction, especially the loss 
of jobs, that would be wreaked on the State of Missouri if this 
acquisition does not take place.
    Mr. Chairman, I hope that you and the other Members of the 
Committee will understand the differences between American's 
rescue of TWA and the other instances of airline consolidation. 
It is very, very different. I hope you will support this 
acquisition. Missouri's future will be dramatically affected by 
the decision that is made on this issue.
    For the record, Mr. Chairman, I am also submitting 
statements from St. Louis Mayor Clarence Harmon [not provided], 
Lambert Airport Director Leonard Griggs [see Appendix], St. 
Louis County Executive Buzz Westfall [not provided], St. Louis 
Executive Dick Fleming of the RCGA [see Appendix], and Richard 
Bidwell of the St. Louis Visitors and Convention Bureau [see 
Appendix]. These people along with many others are very, very 
concerned about what happens with the American-TWA acquisition. 
This will truly have a significant impact on the State of 
Missouri.
    I again want to say I applaud Senator Bond for his efforts 
on this issue that is so important for Missouri. We appreciate 
it very, very much.
    [The prepared statement of Governor Holden follows:]

   Prepared Statement of Hon. Bob Holden, Governor, State of Missouri
    Chairman McCain, Ranking Member Hollings and Members of the 
Committee, on behalf of the State of Missouri, I appreciate the 
opportunity to speak to you today regarding the proposed acquisition of 
TWA by American Airlines.
    I'm particularly happy to see my friend Senator Jean Carnahan, 
former First Lady of Missouri, here today on the Committee. I know she 
shares my concerns about the effects the failure of this proposed 
acquisition will have on the people of our state. Numerous jobs and the 
competitiveness of Missouri hang in the balance.
    Mr. Chairman, I know that there is a great deal of concern among 
your colleagues on both sides of the aisle, and in the previous 
Congress, regarding consolidation in the airline industry. The industry 
was deregulated to promote competition, and that action met with some 
measure of success. We have new airlines such as Southwest Airlines, 
Midwest Express and America West. For some routes, the competition led 
to better service and decreased fares. The other end of the spectrum, 
however, is the concern that a few airlines will become so dominant as 
to avoid true competition. This has been the focus of this Committee's 
attention in recent years. At the core of all of this is the common 
concern for the people--the consumers of airline services.
    Mr. Chairman, I share with you and the Members of this Committee 
the desire for better service and lower fares for our citizens, which 
are achieved through open competition, and I appreciate this 
Committee's role to ensure that open competition continues. The balance 
of interests that must be struck in any proposed merger or acquisition 
is no small feat, and I do not suggest that I am an expert on airline 
mergers or can explain to this Committee the details of the numerous 
effects of this proposed acquisition as it affects the various airports 
nationwide and internationally. What I am here to affirm is that the 
State of Missouri is excited about the probable results of this 
acquisition. We are also concerned about the effects a failure of this 
acquisition will have on the state of Missouri.
    TWA and its corporate predecessors have a long history with the 
state of Missouri. TWA has had a presence in St. Louis since the 1920s. 
After deregulation, Lambert Airfield became a hub for TWA and has been 
ever since--a period of a quarter of a century. TWA currently has 
nearly 8,000 jobs tied to the technical operations of the airline in 
St. Louis, with annual wages of over 390 million dollars.
    The corporate headquarters were relocated to St. Louis, Missouri, 
in 1994. Currently, TWA employs nearly 2,000 people in its corporate 
and administrative offices in St. Louis and Kansas City, with annual 
wages of 77 million dollars.
    The maintenance and overhaul base in Kansas City has existed for 
over 40 years. It actually was the first entity to be located where 
Kansas City International Airport is now located. The facility 
currently employs over 2,600 Missourians with annual wages exceeding 
132 million dollars.
    Mr. Chairman, TWA employs more than 12,000 Missourians at wages 
exceeding 604 million dollars. TWA offers 350 flights a day from St. 
Louis' Lambert Airport. The airline serves 83 cities around the world 
and 38 states, Mexico, Canada and the Caribbean. TWA's presence has 
been felt in Missouri and its recent financial difficulties have been 
felt as well. TWA filed for bankruptcy twice in the 1990s. State 
assistance was authorized in 1993 to help the financial condition of 
the company. We have been acutely aware of the company's ups and downs 
and would be devastated were the company's operations to simply fold.
    At this juncture, TWA was facing a disturbing future as its only 
option--bankruptcy and piecemeal sale of its assets. Were this to 
happen, Missouri would lose not only the jobs directly created by TWA, 
but numerous other jobs due to the indirect effects of closing. Nearly 
33,000 jobs and $876 million annually in wages would be lost, a 
devastating blow from which the state would not recover in the 
foreseeable future. Its closure would have produced negative ripples 
throughout the world economy.
    The company was in dire straits and was forced to make a very 
difficult decision. American Airlines made an offer to acquire TWA. The 
choice lay between letting the venerable airline die quickly, which 
would have meant near certain economic chaos for Missouri's economy, or 
seeking a transfusion that would let it live on as a stronger entity. 
The acquisition was the best solution.
    The deal struck between the parties, including the debtor in 
possession status, saves over 12,000 jobs in Missouri and ensures the 
continuation of hundreds of flights daily from the St. Louis hub 
serving the United States and beyond. Time is of the essence. If 
American had not infused capital into TWA, flights would not be taking 
place as we speak. If the company has to be dissolved and only its 
prime assets sold bit by bit, Missouri will be devastated. American's 
proposed solution is currently the only viable offer.
    Through its ongoing infusion of operating capital and proposed 
acquisition of TWA, Missourians may no longer have the cherished 
moniker of ``TWA'' to refer to our longtime partner in the airline 
industry, but, more importantly, we will be ensured continued 
employment of our citizens and the accessibility of airline travel that 
is so important to the region's economy.
    American has resuscitated everything that TWA provides to Missouri; 
we also envision that it will enhance the future of both the employees 
and the region's transportation system. American has reassured the 
state that the airline's hub will be maintained and most likely 
improved in the future. Lambert Airport is critical to Missouri's 
transportation system and economy. Lambert carries an economic impact 
of $5 billion on its region. Its maintenance and future expansion are 
vital to the region and state's efforts to take full advantage of 
future global economic opportunities in the new economy.
    We need to recognize a fundamental difference between the American/
TWA merger and some of the other airline consolidations that have been 
under consideration. The primary difference in the TWA/American deal is 
that TWA cannot be saved without help from American. Without American's 
help, TWA was going to die, with terrible consequences for the economy.
    The current economic slowdown has caused the loss of companies such 
as Montgomery Ward's and numerous layoffs in companies across the state 
and the nation. The loss of a major employer such as TWA would be 
particularly devastating to Missouri's economy.
    As a public official, I, too, am concerned about the impact of 
increased consolidation in the aviation industry. However, I am far 
more concerned about the economic damage, especially the loss of jobs, 
that would be inflicted on my state and the nation if this acquisition 
does not take place.
    Mr. Chairman, I hope that you and the other Members of the 
Committee will understand the differences between America's 
resuscitation of TWA and the other instances of airline consolidation, 
and I hope that you will support this acquisition.
    Mr. Chairman, I thank you once again for the opportunity to speak 
on behalf of this issue, which is of vital interest to our state and 
nation.
    For the record, Mr. Chairman, I am submitting documents that will 
help to show the significance of this decision. In addition, I am 
submitting statements of support for the record from St. Louis Mayor 
Clarence Harmon and Lambert Airport Director Leonard Griggs; St. Louis 
County Executive Buzz Westfall; Richard Fleming, of the Regional 
Chamber and Growth Association; and Robert Bidell, of the St. Louis 
Visitors and Convention Bureau.

    The Chairman. Thank you, Governor Holden.
    Congressman Meeks, welcome.

              STATEMENT OF HON. GREGORY W. MEEKS, 
               U.S. REPRESENTATIVE FROM NEW YORK

    Mr. Meeks. Thank you, Mr. Chairman and Senator Hollings and 
the other distinguished Members of the Committee. I want to 
thank you for the opportunity to testify today.
    Quite simply, I am here today because this issue has a 
profound significance for my district's current and future 
economic welfare. At a time when major corporations are 
reducing their workforce by the thousands and our economy 
continues to show signs of weakness, the bankruptcy court and 
the Justice Department have the opportunity to preserve 
thousands of jobs by immediately approving the acquisition of 
TWA's assets by American Airlines.
    By doing so, it will preserve more than 4,000 jobs at John 
F. Kennedy International Airport, which lies in the heart of my 
Congressional district, and more than 20,000 jobs nationwide. 
Furthermore, this deal also provides the much needed financial 
stability of American Airlines' balance sheet to TWA's 
employees, creditors, and other stakeholders, who have been 
wandering in the financial desert since 1988.
    As Missouri Senator Jean Carnahan commented last week, I 
too view this not as a merger proposal, but as a rescue mission 
for TWA. Let me be very clear. Without American's intervention, 
TWA would have shut down around January 10th. A TWA shutdown 
would have meant not only thousands of employees out of work, 
but it would have resulted in the elimination of air service to 
communities in the Northeast and throughout the Midwest.
    It is also important for you to recognize the economic 
impact of having an airline go out of business. My district 
still suffers from the devastating economic losses of Eastern 
Airlines and Pan American Airlines. In both cases the court 
allowed the airline's assets to be liquidated to the highest 
bidder. It resulted in the two airlines' competitors acquiring 
Eastern and Pan Am's most prized routes only, and resulted in 
thousands of permanent displaced workers, who in many cases 
were employed by one of the carriers for more than 30 years.
    This action by the bankruptcy court left those Americans 
without a job and no benefits after a lifetime of service and 
dedication to Eastern or Pan Am. Clearly, we must not repeat 
that mistake.
    As such, the proposed American-TWA transaction must be 
quickly resolved through the bankruptcy court and by the 
Justice Department to ensure the continued long-term employment 
of thousands of New York residents who either work for TWA or 
whose companies provide services for TWA. I ask you to 
recognize the immediate urgency of this situation and that it 
represents a truly exceptional circumstance.
    This deal is about preserving jobs and the retirement 
security of TWA's retirees, thousands of jobs and thousands of 
retirees' benefits. Any delay in the review process of the 
American-TWA transaction only serves to harm TWA's employees 
and their families and jeopardize the air service now provided 
by TWA.
    At this time I would also like to express my strong support 
for the DC Air transaction. The partnership DC Air has entered 
into with American Airlines gives DC Air the capacity to 
provide a higher level of service at a lower cost upon its 
initial operations that it would otherwise have not been able 
to provide. By doing so, it gives Mr. Bob Johnson and DC Air 
the opportunity to succeed as a new entrant in the very 
competitive airline industry.
    The strategic partnership between DC Air and American 
Airlines addresses the competition issues, and provides an 
infusion of capital from the 49 percent stake being purchased 
by American and DC Air and ensures that DC Air will have the 
airplanes and crews available to serve its 45 communities from 
its inception.
    The DC Air and American Airlines partnership enables DC Air 
to move from a virtual airline, which it must remain until the 
United-US Airways merger is approved, to a fully operational 
airline serving some 45 communities from Washington National 
Airport overnight. It ensures that the commitment which DC Air 
has made to uninterrupted service to these communities will be 
kept and that DC Air will be a strong competitor to United 
Airlines at National Airport.
    The DC Air-American Airlines partnership ensures the 
initial success of DC Air as an independent entity with a lower 
cost structure which can now be translated into lower fares for 
the consumers which it will serve on the 45 routes by DC Air.
    Mr. Chairman, let me conclude by thanking you for the 
opportunity to testify, and I hope that this distinguished 
Committee sees the many public interest benefits of DC Air as 
well as the American-TWA transaction. Thank you.
    [The prepared statement of Representative Meeks follows:]

             Prepared Statement of Hon. Gregory W. Meeks, 
                   U.S. Representative from New York
    Chairman McCain, Ranking Member Hollings, and other distinguished 
Members of the Committee, thank you for the opportunity to testify 
today. Quite simply, I am here today because this issue has a profound 
significance for my district's current and future economic welfare.
    At a time when major corporations are reducing their workforce by 
the thousands and our economy continues to show signs of weakness, the 
bankruptcy court and Justice Department have the opportunity to 
preserve thousands of jobs by immediately approving the acquisition of 
TWA's assets by American Airlines. By doing this, it will preserve more 
than 4,000 jobs at John F. Kennedy International Airport, which lies in 
the center of my congressional district, and more than 20,000 jobs 
nationwide. Furthermore, this deal also provides the much-needed 
financial stability of American Airlines' balance sheet to TWA's 
employees, creditors and other stakeholders who have been wandering in 
the financial desert since 1988.
    As Missouri Senator Jean Carnahan commented last week, I too view 
American Airlines' proposal as a rescue mission for TWA. Let me be very 
clear: without American's intervention, TWA would have shut down around 
January 10th. A TWA shut down would have meant not only the thousands 
of employees out of work, but it would have resulted in the elimination 
of air service to communities in the northeast and throughout the 
midwest.
    It is also important for you to recognize the economic impact of 
having an airline go out of business. My district still suffers from 
the devastating economic losses of Eastern Airlines and Pan American 
Airways. In both cases, the court allowed the airlines' assets to be 
liquidated to the highest bidder. It resulted in the two airlines' 
competitors acquiring Eastern and Pan Am's most prized routes. However, 
it also resulted in thousands of permanent displaced workers, who, in 
many cases, were employed by one of the carriers for more than 30 
years. This action by the bankruptcy court left those Americans without 
any job and no benefits after a lifetime of service and dedication to 
Eastern or Pan Am. Clearly, we must not repeat that mistake again.
    As such, the proposed American/TWA transaction must be quickly 
resolved through the bankruptcy court and by the Justice Department to 
ensure the continued, long-term employment of thousands of New York 
residents who either work for TWA or whose companies provide services 
for TWA. I ask you to recognize the immediate urgency of this situation 
and that it represents, a truly exceptional circumstance. This deal is 
about preserving jobs and the retirement security of TWA's retirees--
thousands of jobs and thousands of retirees' benefits. Any delay in the 
review process of the American/TWA transaction only serves to harm 
TWA's employees and their families, and jeopardize the air service now 
provided by TWA.
    I would also like to express my strong support for the DC Air 
transaction. The partnership which DC Air has entered into with 
American Airlines gives DC Air the capacity to provide a higher level 
of service at a lower cost upon its initial operations than it would 
otherwise have been able to provide. By doing so, it gives Bob Johnson 
and DC Air the opportunity to succeed as a new entrant in the very 
competitive airline industry.
    The strategic partnership between DC Air and American Airlines 
addresses the competition issues, provides an infusion of capital from 
the 49 percent stake being purchased by American in DC Air, and ensures 
that DC Air will have the airplanes and crews available to serve its 45 
communities from its inception.
    The DC Air/American Airlines partnership enables DC Air to move 
from a virtual airlines which it must remain until the United/US 
Airways merger is approved, to a fully operational airline serving some 
45 communities from Washington National Airport overnight. It ensures 
that the commitment which DC Air has made to uninterrupted service to 
these communities will be kept and that DC Air will be a strong 
competitor to United Airlines at National Airport.
    The DC Air/American Airlines partnership ensures the initial 
success of DC Air as an independent entity with a lower cost structure 
which can now be translated into lower fares for the consumers which 
will be served on the 45 routes by DC Air.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify. I hope that this distinguished Committee sees 
the many public interest benefits of DC Air as well as the American/TWA 
transaction.

    The Chairman. Thank you very much, Congressman Meeks.
    I want to thank all of you for testifying this morning. We 
appreciate you taking the time from your busy schedule. 
Governor, we especially appreciate your presence here as well. 
Thank you very much.
    Our next panel is: Mr. Donald Carty, who is Chairman, 
President, and CEO of American Airlines; Mr. William F. 
Compton, President and CEO of Trans World Airlines; Mr. Robert 
L. Johnson, who is the Chairman and CEO of DC Air; Mr. Joe 
Leonard, who is the Chairman and CEO of AirTran; Professor 
Michael E. Levine, Adjunct Professor of Law at the Harvard Law 
School; and Ms. JayEtta Z. Hecker, Director of Physical 
Infrastructure Issues at the U.S. General Accounting Office.
    As the witnesses are taking their seats, I would like to 
conduct a little Committee business and ask unanimous consent 
for the rules of the Committee, which Senator Hollings and I 
have agreed on, including an agreement that half of the 
witnesses will be chosen by either side, as well as half the 
staffing, as well as half the budget. Is there objection?
    [No response.]
    The Chairman. If not, the rules of the Committee are 
adopted.
    Did you want to say anything?
    Senator Hollings. No. That is good. Thank you.
    The Chairman. Mr. Carty, it is very rare that you have been 
described as a white knight, a shining knight on a white horse.

             STATEMENT OF DONALD CARTY, CHAIRMAN, 
             PRESIDENT, AND CEO, AMERICAN AIRLINES

    Mr. Carty. My children do frequently, Senator.
    The Chairman. Quite remarkably. I guess we are deeply 
honored to have you here. Thank you and welcome back before the 
Committee, Mr. Carty.
    Mr. Carty. Thank you, Chairman McCain, Senator Hollings and 
other Members of the Committee. I appreciate the opportunity to 
appear again before this Committee and testify on consolidation 
in the airline industry.
    Ever since United Airlines proposed acquiring US Airways 
last May, airline consolidation has clearly been on the 
Committee's radar screen, and appropriately so. Members of this 
Committee and industry observers have expressed strong concerns 
about the potential impact of United's proposal. Likewise, many 
have warned that its approval would inevitably spark more 
mergers and more acquisitions.
    As you may recall, I testified before this Committee last 
September that United's proposed merger with US Airways had 
triggered us at American to think long and hard about a 
defensive response. That examination, of course, resulted in 
our announcement last month of an agreement that directly 
addresses many of our concerns about the size and the scope of 
the United-US Airways merger while I think positioning American 
as a much more vigorous competitor in the Northeast.
    Now, coincidentally--and it was largely coincidentally--an 
opportunity arose for us to enter into a completely separate 
and unrelated transaction. Coincident with TWA's bankruptcy 
filing on January 9th, we agreed, as has already been said this 
morning, to acquire substantially all of TWA's assets and 
provide it $200 million in financing so that the airline could 
continue to operate while in bankruptcy.
    Now, the immediacy of TWA's situation, as well as the 
carrier's significantly smaller size, clearly I think dictates 
that this transaction be treated differently and swiftly. Let 
me begin, however, by addressing the broader question of 
airline consolidation. In an increasingly globalized business 
such as ours, network size and scope are very important 
competitive issues for airlines. The original United-US Airways 
proposal presented a very serious competitive challenge. Had 
its initial proposal been approved, United would have become 50 
percent bigger than its nearest competitor, namely us of 
course.
    As you might imagine, for a company like ours that is 
determined to create a network that is second to none, this 
clearly got our attention. The ultimate size of United's route 
network was not the only cause of concern. High market 
concentration on routes to and from the nation's capital led 
United and US Airways to propose creating a new entrant at 
Reagan National Airport named DC Air. While I tip my hat to 
both carriers for being able to persuade such an accomplished 
businessman as Bob Johnson to join this crazy industry, I think 
that the relationship originally articulated and envisioned 
between United and DC Air caused many of us to be somewhat 
skeptical.
    The potential effect on competition in the Northeast and on 
routes between United's hubs and US Airways's hubs was also 
problematic. American has a relatively small share of the key 
business of routes between Boston, New York, and Washington, 
and our fear was that the proposed merger would entrench 
United, complete with its new vastly larger transcontinental 
network, in an effective duopoly with Delta in those shuttle 
markets.
    But of course, as everyone knows now, in the closing months 
of last year I think it became apparent that the original 
United-US Airways proposal simply would not stand. That 
prompted American--and I might add, a number of our other 
competitors--to enter into discussions with the merger parties 
regarding proposals of asset sales. As everyone now knows, in 
early January we agreed to acquire from US Airways 14 gates, 36 
slots, 66 owned aircraft, and an additional 20 leased aircraft, 
as well as the gates and slots necessary for us to operate half 
of what is today the US Airways shuttle.
    In addition, to introduce immediate new competition on 
United Airways hub to hub routes, we agreed to guarantee 
competition on five such routes. As for DC Air, we agreed to 
take a 49 percent stake in the carrier and entertain an 
exclusive marketing arrangement with it in which DC Air will 
participate in American's frequent flyer program and we will 
provide DC Air with some 11 aircraft worth of flying.
    Now, taken together, we believe these transactions relieve 
many of the competitive issues associated with imbalance in the 
Northeast. They are going to increase competition by making DC 
Air a real competitor to United with a significant independent 
backing, while affording us, American, for the first time a 
significant presence in Washington, D.C., and the Northeast.
    Our expanded presence throughout the upper East Coast is 
going to ensure there are at least three major carriers of 
comparable size on the shuttle routes and at least two 
competitors on the hub to hub routes. Passengers traveling 
along the East Coast are also going to benefit by our 
establishing another source of connecting service to compete 
with the service offered by United, Delta, Continental, and a 
number of other East Coast competitors.
    Now, obviously we have given the Justice Department and 
Congress a lot to digest, and American looks forward to working 
both with Justice and with this Committee as you attempt to 
determine whether what we have put on the table sufficiently 
remedies the United-US Airways merger and ultimately benefits 
the flying public.
    On a more personal note, regardless of Justice's 
disposition of the transaction before it, I must say that I 
have gotten to know Bob Johnson over these past few months. He 
is a take-charge executive who knows how to provide consumers a 
service. He has proven that. Let there be no mistake, Bob 
Johnson and his team are going to run DC Air. He is going to be 
the majority owner and he will make the decisions.
    We will obviously be his marketing partner and we are going 
to work very closely together to add value to our respective 
networks. DC Air is going to be a very valuable addition to our 
industry and bring to it, as has already been said, one of the 
first minority-owned airlines. We at American are very proud to 
be affiliated with it.
    Now let me turn to TWA, a story of a beleaguered airline 
that, after 12 consecutive years of heavy losses and three 
bankruptcies, has, in spite of valiant efforts by my associate 
Bill Compton and his team, simply run out of money, time, and 
options. Carl Icahn has stripped this company over a period of 
years, selling assets to pay the bills. Going into this winter, 
with the price of fuel soaring, TWA had nothing left to sell or 
mortgage that was not already encumbered.
    It also had a debt of $100 million coming due on January 
15th. Unable to secure or justify additional financing from 
traditional sources, with no one willing to purchase the 
airline, TWA in early January faced the very real likelihood 
that it would have to shut down and liquidate.
    Now, as has already been said, at that point we stepped in 
to provide, when no one else would, the $200 million TWA had to 
have to keep operating. We are proposing to acquire 
substantially all of TWA's assets, to hire all of TWA's 
employees, and to continue a hub operation in St. Louis. Now, 
obviously this transaction, which excludes certain TWA 
contracts such as Mr. Icahn's deal, is going to be contingent 
on the bankruptcy court's approval.
    In closing, permit me to be very blunt. Time is of the 
essence with respect to TWA. The carrier has already consumed 
more than three-quarters of the cash provided on January 11th. 
We at American cannot commit our shareholders' money to keep 
TWA afloat indefinitely. There is simply not enough collateral 
for further debtor-in-possession financing. Also, I fear--and I 
think Bill shares this fear--that uncertainty is only going to 
serve to accelerate TWA's collapse because, as inevitably 
happens, customers and travel agents eventually book away from 
uncertainty.
    As for the Justice Department review of the transaction, I 
think it is fairly evident that there is a failed firm here, 
which in itself should serve to expedite that review process. 
Even so, the transaction gives rise to very few competition 
issues. Indeed, the market share of this one-time giant of the 
skies has now fallen to less than 4 percent in the year 2000.
    The bottom line is that TWA's situation represents a truly 
unique and a truly exceptional circumstance. Indeed, our 
acquisition of its assets is not contingent on the approval of 
any other deal. As such, it is truly a stretch of the 
imagination to believe that the American-TWA transaction could 
in any way trigger the merger of far larger airlines. Instead, 
in this instance what is before this Committee is our taking on 
a financial risk that no other airline was willing to take and 
commitments to the 20,000 TWA employees and their families that 
no one else would make.
    Mr. Chairman, that concludes my statement and I would be 
happy to answer any questions at the appropriate time.
    [The prepared statement of Mr. Carty follows:]

             Prepared Statement of Donald Carty, Chairman, 
                 President, and CEO, American Airlines
    Good morning. Thank you for the opportunity to appear again before 
this Committee and testify on consolidation in the airline industry. 
Ever since United Airlines proposed acquiring US Airways last May, 
airline consolidation has clearly been on this Committee's radar 
screen. And rightly so.
    Members of this Committee and industry observers have expressed 
strong concerns about the potential impact of United's proposal. 
Likewise, many have warned that its approval would inevitably spark 
more mergers or acquisitions. As you may recall, I testified before 
this Committee last September that United's proposed merger with US 
Airways had triggered us at American Airlines to think long and hard 
about a defensive response. That examination resulted in our 
announcement last month of an agreement that directly addresses many of 
our concerns about the size and scope of the United/US Airways merger 
while positioning American as a much more vigorous competitor in the 
Northeast.
    Coincidentally, an opportunity arose for us to enter into a 
completely separate and unrelated transaction. Quite simply, TWA's 
continuing downward financial spiral had finally reached a point of no 
return, threatening the jobs of its 20,000 employees and air service to 
communities throughout the nation's heartland. With only $20 million in 
the bank and needing $40 million to meet its obligations necessary for 
operating a normal schedule, TWA filed bankruptcy on January 9. We 
agreed to acquire substantially all of TWA's assets and have provided 
it $200 million in financing so that the airline can continue to fly 
during bankruptcy. As I will discuss in more detail later, the 
immediacy of TWA's situation as well as the carrier's significantly 
smaller size clearly dictates that this transaction be treated swiftly.
    Let me begin, however, by addressing the broader question of 
airline consolidation. In an increasingly globalized business such as 
ours, competition will suffer if one network is allowed to dwarf all 
other networks. From a customer perspective, the benefits of a much 
broader network are clear. Our customers--both leisure and business 
travelers--increasingly expect their airline of choice to be able to 
take them everywhere they want to go. Accordingly, if one airline is 
able to grow its route network significantly larger than its 
competitors, that airline would have a competitive advantage.
    The original United/US Airways proposal presented just such a 
scenario. Had its initial proposal been approved, United would have 
become 50 percent bigger than its nearest competitor, namely us. As you 
might imagine, for a company like ours that is determined to create a 
domestic and international network that is second to none, this got our 
attention. For air travelers, the unbalanced landscape caused by the 
lack of one or more competing networks of similar size and breadth 
would have surely led, I believe, to an eventual reduction in overall 
competition.
    The ultimate size of United's route network was not the only cause 
for concern. As we all know, high market concentration on routes to and 
from the nation's capital led United and US Airways to propose creating 
a new entrant at Reagan National Airport named DC Air. While I tip my 
hat to both carriers for being able to persuade such an accomplished 
businessman as Robert Johnson to get mixed up in our industry--where 
margins are thin and headaches plenty--I think the relationship 
envisioned between United and DC Air caused most everyone, both inside 
government and out, to be somewhat skeptical. Simply put, it was hard 
to see any competitive benefit coming from the transaction given that 
DC Air's aircraft, flight crews, operational support, and management 
staff were mostly being supplied by either United or US Airways.
    The potential effect on competition in the Northeast and on routes 
between United's hubs and US Airways' hubs was also problematic. 
American has a relatively small share of the key business routes 
between Boston, New York, and Washington, D.C. Our fear was that the 
proposed merger would entrench United, complete with its new, vastly 
larger transcontinental network, in an effective duopoloy with Delta in 
these shuttle markets, an outcome that rightly alarmed outside 
observers as well.
    In the closing months of last year, it became apparent that the 
original United/USAirways proposal would not stand. This prompted 
American--and a number of other competitors--to enter into discussions 
with the merger parties regarding proposals of asset sales.
    In early January, we agreed to acquire certain key strategic assets 
from US Airways and to acquire a substantial stake in DC Air--both 
contingent upon the reconstituted United/US Airways merger receiving 
regulatory approval. In a nutshell, we would acquire from US Airways 14 
gates, 36 slots, 66 owned aircraft and an additional 20 leased 
aircraft, as well as the gates and slots necessary for us to operate 
half of the US Airways Shuttle. In addition, to introduce immediate new 
competition on United/US Airways hub-to-hub routes, we agreed to 
guarantee that the following routes would be served by at least two 
roundtrips a day for the next 10 years: Philadelphia-Los Angeles, 
Philadelphia-San Jose, Philadelphia-Denver, Charlotte-Chicago, and 
Washington, DC.-Pittsburgh.
    As for DC Air, we agreed to take a 49 percent stake in the carrier 
and enter an exclusive marketing arrangement with it in which DC Air 
will participate in American's frequent flyer program. We will also 
provide DC Air with 11 100-seat Fokker 100 aircraft in an arrangement 
by which American Airlines personnel will be flying and maintaining AA 
aircraft marketed as DC Air service. American will also have the right 
of first refusal on the acquisition of the remaining 51 percent of DC 
Air.
    Taken together, we believe these transactions relieve the 
competitive imbalance in the Northeast. They will also increase 
competition by making DC Air a real competitor with significant 
independent backing while affording us, for the first time, a 
significant presence in Washington, D.C. and the Northeast. American, 
for example, now accounts for roughly 13 percent of passenger boardings 
at Reagan National and far less than that at Washington Dulles and BWI. 
As in the Washington area, our expanded presence throughout the upper 
East Coast will ensure that there are at least three major competitors 
of comparable size on the Shuttle routes and at least two competitors 
on the hub-to-hub routes. And, passengers travelling along the East 
Coast will also benefit by our establishing another source of 
connecting service to compete with the service offered by United, 
Delta, Continental and other East Coast competitors.
    Obviously, we have given the Justice Department and the Congress a 
lot to digest. American looks forward to working with both Justice and 
this Committee as you attempt to determine whether what we have put on 
the table sufficiently remedies the United/US Airways merger and, 
ultimately benefits the flying public.
    On a more personal note, regardless of Justice's disposition of the 
transactions before it, I must say that I have gotten to know Robert 
Johnson over these past few months and am most impressed. He is a take-
charge executive who knows how to provide consumers a service, and 
quite frankly, how to make money. Let there be no mistake, Robert 
Johnson and his team will run DC Air. He will be the majority owner and 
he will make the decisions. He has already begun recruiting a seasoned 
management team. American will be his marketing partner, and we will 
work closely together to add value to our respective networks. DC Air 
will be a valuable addition to our industry and bring to it the first 
minority-owned airline. I know that I speak for each and every one of 
American's 103,000 employees when I say that it has taken our industry 
far too long to reach this milestone and that we at American are proud 
to be affiliated with it.
    As for the impact of American's entry into this equation, Jim 
Wilding, the president of the Metropolitan Washington Airports 
Authority, was recently quoted as being highly enthusiastic about the 
vigorous competition that American's affiliation with DC Air will bring 
to the Washington market in comparison with the original proposal. In 
Mr. Wilding's words: ``If American and United are anything, they're 
competitors. They're like the cobra and the mongoose wherever they 
go.''
    Now let me turn to TWA--a storied but beleaguered airline that 
after 12 consecutive years of heavy losses and 3 bankruptcies has, in 
spite of valiant efforts by Bill Compton and his team, simply run out 
of money, time, and options. Carl Icahn has stripped this company over 
a period of years, selling assets, such as the prized route rights to 
London's Heathrow Airport, just to pay the bills. Going into this 
winter, typically the leanest months in the airline business, with the 
price of fuel soaring, TWA had nothing left to sell or mortgage that 
wasn't already encumbered. It also had a debt of $100 million coming 
due on January 15. Unable to secure or justify additional financing 
from traditional sources and with no one willing to purchase the 
airline, TWA in early January faced the very real likelihood that it 
would have to shut down and liquidate.
    From time to time, we at American had looked at TWA as a possible 
merger candidate. Indeed, its centrally located St. Louis hub provides 
a nice complement to our operations at capacity constrained Chicago 
O'Hare. In addition, TWA's current management team had--in the face of 
some formidable obstacles--done a very good job of improving the 
airline's operation, and in particular, of modernizing its fleet. 
Unfortunately, very high ownership costs on TWA's new fleet and an 
unusual arrangement that allows an entity owned by Carl Icahn to sell 
TWA's ticket inventory at a substantial discount, made a potential AA/
TWA merger a non-starter.
    TWA's bankruptcy filing and looming collapse three weeks ago, 
however, presented a far different set of circumstances. We stepped in 
to provide--when no one else would--the cash TWA had to have to keep 
operating. We are proposing to acquire substantially all of TWA's 
assets, to hire all of TWA's employees and to continue a hub operation 
in St. Louis. Obviously, this transaction, which excludes certain TWA 
contracts such as Mr. Icahn's deal, is contingent on bankruptcy court 
approval.
    Senator Carnahan, let me say to you in particular that we look 
forward to adding TWA's 20,000 employees to the American Airlines 
family. We are keenly aware of TWA's illustrious history and know that 
were it not for the hard work and great performance of the people 
throughout TWA, they would not be the perfect fit for American that we 
believe they are. We also recognize what a good corporate citizen TWA 
has been in the state of Missouri and I can assure you that our company 
will be as well.
    In closing, permit me to be blunt. Time is of the essence with 
regard to TWA. We at American cannot commit our shareholders' money to 
keep TWA afloat indefinitely. There is simply not enough collateral for 
debtor in possession financing. Also, I fear, uncertainty will only 
serve to accelerate TWA's collapse as travel agents will likely book 
away from TWA, as was the case with the demise of Eastern Air Lines a 
decade ago. Similarly, consumer uncertainty will eventually cause 
travelers to not advance book flights on TWA, effectively shutting off 
the airline's already severely limited cash flow.
    As for the Justice Department review of this transaction, I think 
it is fairly evident that there is a failed firm here, which in itself 
should serve to expedite the review process. Even so, the transaction 
gives rise to very few competition issues. Indeed, the market share of 
this one-time giant of the skies has now fallen to only 3.9 percent in 
2000. Finally, even if TWA were not failing and therefore unable to 
compete on a going-forward basis, there are only two hub-to-hub routes 
where American and TWA both offer non-stop service. In the case of St. 
Louis-Chicago, for example, Southwest Airlines, which has 12 gates at 
St. Louis Lambert, provides 15 daily nonstop roundtrips between St. 
Louis and Chicago Midway, while United provides 4 daily nonstops 
between St. Louis and Chicago O'Hare.
    The bottom line is that TWA's situation presents a truly unique and 
exceptional circumstance. Indeed, our acquisition of its assets is not 
contingent on approval of the other deals. As such, it is truly a 
stretch of the imagination to believe that the American/TWA transaction 
could in any way trigger the merger of far larger airlines. Instead, 
what is before you is our taking on a financial risk that no other 
airline was willing to take and commitments to the 20,000 TWA employees 
and their families that no one else would make.
    Mr. Chairman, that concludes my statement. I would be happy to 
answer any questions you or the Members of this Committee may have.

    The Chairman. Thank you, Mr. Carty.
    Mr. Compton, welcome.

               STATEMENT OF WILLIAM F. COMPTON, 
            PRESIDENT AND CEO, TRANS WORLD AIRLINES

    Mr. Compton. Thank you, Chairman McCain and Ranking Member 
Hollings and other Members of this distinguished Committee. On 
behalf of TWA's 20,000 employees, I thank you for the 
opportunity to testify here today. I appreciate the chance to 
explain why our decision to pursue an asset purchase agreement 
with American Airlines should be approved and why this 
transaction is a good global solution for TWA's customers, our 
employees, our retirees, and other stakeholders, as well as the 
communities served by both carriers.
    I would like to begin by giving you my personal perspective 
on TWA on why in my view the proposed transaction is the only 
comprehensive solution that adequately serves the consumers in 
light of the harsh realities facing TWA, its employees, and 
retirees. Since the late 1960's when I became a pilot with TWA, 
the airline industry and the economy have changed dramatically. 
It has been an uphill battle for TWA, particularly over the 
last 15 years, simply to survive.
    In 1985 TWA, during the height of the Wall Street-driven 
mergers and acquisitions, was acquired by Carl Icahn. 
Subsequently, TWA was stripped of its most valuable assets. 
Through the efforts and commitment of its employees, TWA 
eventually was able to secure a change in corporate ownership. 
At that point, however, TWA was saddled with enormous debt, an 
aging fleet, a pension fund that had been deemed to be 
seriously underfunded, and the loss through sale of many of its 
most valuable routes.
    The fact that TWA survived in those circumstances is due to 
the sheer dedication of its employees. They gave concessions 
and survived not one, but two bankruptcies, to ensure the 
continuation of the airline to the present time. In fact, 
notwithstanding the financial predicament, TWA has made a 
remarkable operational turnaround over the last 4 years. TWA 
has been ranked at or near the No. 1 spot for on-time 
performance since 1997. In 1998 and 1999 customers voted us the 
winner of the J.D. Power award for customer satisfaction. In 
2000 we finished second amongst all airline in both J.D. Power 
award categories.
    We replaced most of our entire fleet, with the result that 
it is now on average one of the more younger fleets in the 
airline industry. We made these improvements without huge 
capital outlays or marketing campaigns. We did it with 
dedication, professionalism, and pride--hallmarks of TWA 
throughout its 75 years.
    But TWA's financial predicament continues and we can no 
longer afford to operate, let alone sustain these advances. 
Despite TWA's many accomplishments, profitability remained 
elusive. The events of the 1980's had made it virtually 
impossible to compete effectively. Due to its financial 
condition, TWA is still paying a premium for aircraft leases, 
paying nearly twice the industry average. The need to provide 
long-overdue wage increases for TWA employees and the recent 
staggering increases in the price of jet fuel have further 
drained TWA's reserves. TWA remains essentially a single-hub 
operation, putting us at a schedule disadvantage to the 
multiple-hub carriers.
    Finally, this winter we ran out of time. In fact, by 
January 10th of 2001 TWA had cash on hand of only $20 million 
and needed significantly more than that just to operate through 
the next day. With our cash reserves nearly depleted and a 
major financial commitment to lenders coming due, our backs 
were squarely against the wall.
    The financial crisis that hit TWA this winter did not 
materialize overnight. A year ago we could see problems looming 
on the horizon that culminated in our recent bankruptcy filing 
and we tried very hard to do something dramatic about it. We 
recognized that the viability of our airline was at stake and 
we went knocking on doors to find a solution. There is not an 
airline of any size in America that we did not approach. There 
is not an airline of any size in America that did not have the 
opportunity to step in and join with us.
    No one was interested in TWA as a going concern. In my 
view, most recognized that they would benefit from TWA's demise 
and they were willing at best to stand back and watch it 
happen.
    Only American Airlines saw fit this winter to come forward 
with a proposal that was not merely an offer to cherry-pick a 
prized asset here and a prized asset there. American proposed a 
comprehensive solution that will realize for our creditors the 
value of TWA as a going concern, that will preserve jobs for 
our employees and medical benefits for our retirees. It will 
maintain hub service in St. Louis and will safeguard TWA's 
major economic presence in additional communities around our 
system, most notably Kansas City, New York, and Los Angeles, 
where we employ thousands.
    The transaction with American Airlines offers a 
comprehensive solution to the problems facing TWA. It addresses 
the varying needs of the TWA employees, retirees, creditors, 
and consumers and the communities served by TWA. This 
transaction offers protection for TWA's 20,000 employees and 
many thousands of our retirees and dependents. American has 
made a bedrock commitment to retain the vast majority of TWA 
employees and to absorb responsibility for TWA retirees' 
medical and dental insurance benefits. Not only does this speak 
volumes about American's integrity, it achieves TWA's goal of 
protecting its skilled and dedicated work force.
    It is here that American is gaining TWA's greatest asset, 
its employees. American will find that it has acquired 
motivated employees who carry out their work with the highest 
level of quality and commitment.
    The consumers and communities served by TWA also will be 
better served by the American transaction than by liquidation. 
Liquidation of TWA's assets without a commitment to maintaining 
TWA's jobs would result in vast reductions of service to many 
communities. Certainly, other carriers would benefit from such 
a reduction in competition, but consumers would pay the price.
    The price to be paid in a TWA liquidation would be highest 
in our home State of Missouri and our hub city of St. Louis. In 
a court hearing last weekend, attorneys for the City of St. 
Louis stated that the economic contribution of Lambert-St. 
Louis International Airport to the local economy is $8 billion 
per year. TWA and its regional alliance partners offer 
approximately 75 percent of the departures at Lambert. It is 
not difficult to envision the benefit of a continuation of this 
service under the auspices of American Airlines.
    The communities would also be harmed by the liquidation 
alternative. TWA's 187 aircraft would cease to be in service. 
Air service to more than 100 communities would be negatively 
impacted. The result would be lower capacity, higher prices, 
less service for the traveling public, and a diminished 
business development capacity for dozens of communities.
    An acquisition of TWA's assets as a total operation best 
serves to protect the traveling public and the communities that 
rely heavily on TWA. American has committed to retain the St. 
Louis hub operations. With additional aircraft from TWA in its 
system, American will be able to support TWA's route structure.
    Several of our competitors are now suddenly saying, out of 
an apparent desire to avoid the enhancement of American, that 
TWA could be maintained as a stand-alone enterprise or its 
assets parceled out among various carriers to protect the 
interests of creditors. These claims, in addition to being 
disingenuous and self-serving, ignore the realities of the 
aircraft industry. They also disregard the needs of TWA 
consumers, employees, and retirees. In fact, they also do not 
represent the best options for TWA's largest creditors.
    On balance, TWA believes that the American transaction 
presents the best protection for all TWA creditors. The 
American Airlines plan is the only global solution on the table 
and to us clearly offers the most benefit to the greatest 
number of TWA stakeholders.
    As I look to the future of aviation, there are many 
chapters yet to be written. I believe, however, that the nature 
of TWA's final chapter will be viewed in the years to come as 
having provided major benefits to the aviation industry. Among 
the ranks of our current employees there are many young and 
talented people who have benefited from their apprenticeships 
under seasoned TWA veterans. They can take with them to 
American and to every corner of the aviation world knowledge 
and experience that is invaluable.
    When I consider this possibility becoming a reality for so 
many of our workers through this transaction, I know that all 
of our efforts will have been worthwhile. Indeed, TWA's legacy, 
if not its grand name, will be carried forward by its people. 
Just as important, consumers will continue to see the same 
level of service, without the dislocation that would have 
otherwise occurred in a bankruptcy with a parceling out of 
assets. Indeed, this is the only way the public interest will 
be served in the long run.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify today. As I have said, we strongly 
believe this transaction should go forward and promptly. It is 
in the best interest of TWA's employees, retirees, creditors, 
consumers, and the communities served by both carriers.
    I would be pleased to respond to questions. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Compton follows:]

               Prepared Statement of William F. Compton, 
                President and CEO, Trans World Airlines
    Chairman McCain, Ranking Member Hollings, and other Members of this 
distinguished Committee, on behalf of TWA's more than 20,000 employees, 
thank you for the opportunity to testify today. I appreciate the chance 
to explain why our decision to pursue an asset purchase agreement with 
American Airlines should be approved and why this transaction is a good 
global solution for TWA customers, employees, retirees, and other 
stakeholders as well as the communities served by both carriers.
    In response to your letter of January 25th, Mr. Chairman, my 
statement will address the impact that the American acquisition of TWA 
will have on airline passengers, communities now served by TWA, TWA's 
creditors and TWA's employees and retirees. I would like to begin by 
giving you my personal perspective on TWA and why, in my view, the 
proposed transaction is the only comprehensive solution that adequately 
serves consumers in light of the harsh realities facing TWA, its 
employees and retirees.
I. How We Got Here
     Since the late 1960s, when I became a pilot with TWA, the airline 
industry, and the economy have changed dramatically. It has been an 
uphill battle for TWA, particularly over the last 15 years, to simply 
survive. In 1985, TWA, during the height of Wall Street-driven mergers 
and acquisitions, was acquired by Carl Icahn. Subsequently, TWA was 
stripped of many of its most valuable assets.
    Through the efforts and commitment of its employees, TWA eventually 
was able to secure a change in corporate ownership. At that point, 
however, TWA was saddled with enormous debt, an aging fleet, a pension 
fund that had been deemed to be seriously underfunded, and the loss 
through sale of many of its most valuable routes. The fact that TWA 
survived in those circumstances is due to the sheer dedication of its 
employees. They gave concessions and survived not one, but two, 
bankruptcies to ensure the continuation of the airline to the present 
time.
    In fact, not withstanding its financial predicament, TWA has made a 
remarkable operational turnaround over the last four years. TWA has 
been ranked at or near the #1 spot for on-time arrivals since 1997. In 
1998 and 1999, customers voted us the winner of the J.D. Power award 
for customer satisfaction. In 2000, we finished second among all of the 
airlines in both J.D. Power award categories. We replaced almost our 
entire fleet, with the result that it is now, on average, one of the 
youngest in the airline industry.
    We made these improvements without huge capital outlays or 
marketing campaigns. We did it with dedication, professionalism, and 
pride--hallmarks of TWA throughout its 75 years. But, TWA's financial 
predicament continues and we can no longer afford to operate, let alone 
sustain these advances.
II. TWA's Many Successes Have Not Been Enough
    Despite TWA's many accomplishments , profitability remained 
elusive. The events of the 1980s had made it virtually impossible to 
compete effectively. Due to its fragile financial condition, TWA is 
paying premium lease prices for its aircraft--almost twice the industry 
average. The need to provide long-overdue wage increases for TWA 
employees and the recent, staggering increases in the price of jet fuel 
have further drained TWA's reserves. TWA remains essentially a single 
hub operation, putting us at a schedule disadvantage to multiple hub 
carriers. Finally, this winter we ran out of time. In fact, by January 
10, 2001, TWA had cash on hand of only $20 million and needed 
significantly more just to make it through the next day. With our cash 
reserves nearly depleted and a major financial commitment to lenders 
coming due, our backs were squarely against the wall.
    The financial crisis that hit TWA this winter did not materialize 
overnight. A year ago we could see problems looming on the horizon that 
culminated in our recent bankruptcy filing, and we tried very hard to 
do something dramatic about it. We recognized that the viability of our 
airline was at stake and we went knocking on doors to find a solution. 
There is not an airline of any size in America that we did not 
approach. There is not an airline of any size in America that did not 
have an opportunity to step in and join with us. No one was interested 
in TWA as a going concern. In my view, most recognized that they would 
benefit from TWA's demise, and they were willing, at best, to stand 
back and watch it happen.
    Only American Airlines saw fit this winter to come forward with a 
proposal that was not merely an offer to cherry-pick a prized asset 
here or there. American proposed a comprehensive solution that will 
realize for our creditors the value of TWA as a going concern. It will 
preserve jobs for our employees and medical benefits for our retirees. 
It will maintain hub service for St. Louis and will safeguard TWA's 
major economic presence in additional communities around our system--
most notably Kansas City, New York and Los Angeles where we employ 
thousands.
III. American Airlines Transaction Offers Comprehensive Solution
    The transaction proposed with American Airlines offers a 
comprehensive solution to the problems facing TWA. It addresses the 
varying needs of TWA employees, retirees, creditors, and consumers and 
the communities served by TWA.
    This transaction offers protection for TWA's 20,000 employees and 
many thousands of our retirees and dependents. American has made a 
bedrock commitment to retain the vast majority of TWA employees and to 
absorb responsibility for TWA retirees' medical and dental insurance 
benefits. Not only does this speak volumes about American's integrity, 
it achieves TWA's goal of protecting its skilled and dedicated work 
force. It is here that American is gaining TWA's greatest asset--its 
employees. American will find that it has acquired motivated employees 
who carry out their work with the highest level of quality and 
commitment.
    The consumers and the communities served by TWA also will be better 
served by the American transaction than by liquidation. Liquidation of 
TWA assets without a commitment to maintaining TWA jobs would result in 
vast reductions of service to many communities. Certainly other 
carriers would benefit from such a reduction in competition, but 
consumers would pay the price.
    The price to be paid in a TWA liquidation would be highest in our 
home state of Missouri and our hub city St. Louis. In a court hearing 
last weekend, attorneys for the City of St. Louis stated that the 
economic contribution of Lambert-St. Louis International Airport to the 
local economy is $8 billion a year. TWA and its regional airline 
partners offer approximately 75 percent of the departures from Lambert. 
It is not difficult to envision the benefit of a continuation of this 
service under the auspices of American Airlines (or, for that matter, 
any other carrier that is willing to come forward in the auction 
process and commit to an acquisition of the TWA operation).
    Other communities also would be harmed by the liquidation 
alternative. TWA's 187 aircraft could cease to be in service. Air 
service to more than 100 communities would be negatively impacted. The 
result could be lower capacity, higher prices, and less service for the 
traveling public and a diminished business development capacity for 
dozens of communities.
    An acquisition of TWA assets as a total operation best serves to 
protect the traveling public and the communities that rely heavily on 
TWA. American has committed to retain the St. Louis hub operations. 
With additional aircraft from TWA in its system, American will be able 
to support TWA's route structure.
    Several of our competitors are now suddenly saying, out of an 
apparent desire to avoid the enhancement of American, that TWA could be 
maintained as a stand-alone enterprise or its assets parceled out among 
various carriers to ``protect the interest of the creditors.'' These 
claims, in addition to being disingenuous and self-serving, ignore the 
realities of the airline industry. They also disregard the needs of TWA 
consumers, employees and retirees. In fact, they also do not present 
the best options for TWA's largest creditors.
    On balance, TWA believes that the American transaction presents the 
best protection for all TWA creditors. At present the offer from 
American is the only offer for the acquisition of TWA's assets actually 
on the table. Proposals put forth by others in the bankruptcy court 
will be evaluated and given serious consideration if and when they come 
forward. Our assets will be sold through a bankruptcy auction process 
and we remain open to higher and better offers. But, so far, the 
American Airlines plan is the only global solution on the table and to 
us clearly offers the most benefit to the greatest number of TWA 
stakeholders.
IV. TWA's Final Chapter Ends on a Positive Note
    As I look to the future of aviation, there are many chapters yet to 
be written. I believe, however, that the nature of TWA's final chapter 
will be viewed in years to come as having provided major benefits to 
the aviation industry. Among the ranks of our current employees, there 
are many young and talented people who have benefited from their 
apprenticeships under seasoned TWA veterans. They can take with them to 
American, and to every corner of the aviation world, knowledge and 
experience that is invaluable. When I consider this possibility 
becoming a reality for so many of our workers through this transaction, 
I know that all of our efforts will have been worthwhile. Indeed, TWA's 
legacy, if not its grand name, will be carried forward by its people.
    Just as important, consumers will continue to see the same levels 
of service without the dislocation that would have otherwise occurred 
if a bankruptcy with a parceling out of assets had occurred. Indeed, 
this is the only way that public interest will be served in the long 
run.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify today. As I have said, we strongly believe this 
transaction should go forward. It is in the best interest of TWA 
employees, retirees, creditors, consumers, and communities served by 
both carriers. I would be pleased to respond to any questions.

    The Chairman. Thank you very much.
    Mr. Johnson, Chairman Johnson, welcome back before the 
Committee.

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

    Mr. Johnson. Thank you, Mr. Chairman, Senator Hollings and 
Members of the Committee. I am delighted to appear here before 
you again today to talk about DC Air.
    From the day that we announced the creation of DC Air, my 
vision for this ground-breaking company has remained intact: to 
build on the well-established service from 44 communities 
throughout the mid-Atlantic region to Washington's National 
Airport that approximately 3 million passengers a year have 
come to rely on; to provide safe, reliable, high quality 
service at competitive prices to customers and communities in 
the regions we serve; to compete vigorously on price and 
service in the communities that we serve; to facilitate the 
growth and economic development that accompanies air service; 
and to develop and maintain an airline that the Washington 
region will be proud to call its home town carrier.
    In addition, as Chairman, CEO, and majority owner of DC 
Air, I pledged from my very first day to spend millions of 
dollars to create, own, and operate this new airline, America's 
first minority-owned air carrier in over 30 years.
    Mr. Chairman, Members of the Committee, I am proud and 
happy to report today that we have made a number of significant 
strides forward in realizing the full scope of this vision. As 
you are well aware, from the first discussions of DC Air 
critics speculated that its proposed agreement with United for 
transition period resources, however brief and arm's length 
these may have been, might have compromised our goal of 
establishing DC Air as a viable independent carrier. This has 
all changed with our announced partnership with American 
Airlines.
    American's recently announced agreement to invest in DC Air 
and to provide these transition resources proves that these 
theories could not be further from the truth. Make no mistake 
about it, the resources that American Airlines is bringing to 
DC Air--expertise, capital, and infrastructure--as it grows its 
operations here and throughout the eastern United States will 
go a long way toward making DC Air a powerful competitive and 
independent airline on day one of our operation.
    By far the most important outcome of the DC Air-American 
Airlines partnership is the benefits it will afford our 
customers. Of prime importance will be the consumer benefits 
associated with the 20-year marketing alliance between our two 
companies. This will allow passengers traveling on DC Air to 
earn American AAdvantage frequent flyer miles which they can 
redeem on DC Air or anywhere in American's national network or 
its global route system. Thus, passengers flying on DC Air will 
reap the benefits of what many consider to be the premium 
frequent flyer program in the industry. In addition, DC Air 
passengers may enroll in American's airport lounge program, 
accessing facilities at National Airport, and indeed worldwide.
    By adding its relationship with DC Air to its internal 
growth and announced acquisitions, American will become a major 
competitor for north-south traffic flows along the eastern 
United States.
    Now, some of you may ask, why did DC Air choose to partner 
with American. We had received expressions of interest from a 
number of carriers regarding a partnership and entered into 
very detailed negotiations with several. While we could have 
chosen any of several different paths, I had the opportunity at 
a critical point to meet and get to know Don Carty, the 
Chairman of AMR, American's parent company. It became clear to 
me in that meeting and throughout our subsequent discussions 
that not only were the economic terms of the arrangement 
favorable to DC Air and the benefits to our passengers 
outstanding, but--and this was most important to me--but also 
that Don Carty and the American team truly understand what DC 
Air and minority ownership is all about and they are looking 
forward to being true partners with DC Air.
    First and foremost, under the alliance with American I am 
the CEO of DC Air, and under my leadership DC Air will be an 
independent company. Let me be clear. DC Air has no obligation 
whatsoever to sell additional shares to American Airlines. 
American has purchased a minority equity stake of DC Air, 
ensuring that the airline will follow the vision I have set out 
for DC Air.
    Under this alliance, American has stepped in to provide 
between 11 and 14 jet aircraft that will clearly help DC Air 
provide quality service to more destinations each day and has 
agreed to provide ground handling and other services to DC Air.
    I have received some queries about the cost structure of DC 
Air under the arrangement with American. American will benefit 
from the success of DC Air through its equity investment and 
providing services at very competitive rates to DC Air. In 
addition, American has significant economies of scale in 
various areas that can be passed along beneficially to DC Air. 
Therefore, our costs will be fully competitive and our vision 
of competing aggressively in both service and fares is not only 
intact, but also greatly enhanced.
    With the new support provided by American Airlines, DC Air 
will have all the resources necessary to be fully operational 
on day one, pending the closing of the merger.
    Finally, as the majority owner of DC Air I believe it is 
critical to sustain and enhance the existing US Airways 
network, which has provided affordable, safe, reliable service 
to cities in the Northeast for so many years. Nothing in the 
American agreement changes my long-term commitment to these 
small and mid-sized communities.
    Mr. Chairman and Members of the Committee, thank you for 
the opportunity to testify before you today.
    [The prepared statement of Mr. Johnson follows:]

   Prepared Statement of Robert L. Johnson, Chairman and CEO, DC Air
    Mr. Chairman, Senator Hollings and Members of the Committee, from 
the day that we announced the creation of DC Air, my vision for this 
groundbreaking company has remained intact:

   To build on the well established service from 44 communities 
        throughout the mid-Atlantic region to Washington's National 
        Airport that approximately 3 million passengers a year have 
        come to rely on;

   To provide safe reliable, high quality service, at 
        competitive prices to customers and communities in the region 
        we will serve;

   To compete vigorously on price and service in the 
        communities we serve;

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

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

    In addition, as Chairman, Chief Executive Officer and majority 
owner of DC Air, I pledged from our very first day to create, own, and 
operate this new airline--America's first minority-owned air carrier in 
over 30 years--because in my heart I believed it would be good for 
consumers, ensure competitiveness in air travel, and do right by the 44 
communities we will serve.
    Mr. Chairman, I am proud and happy to report today that we have 
made a number of significant strides forward in realizing the full 
scope of this vision.
    As you are well aware, from the first discussions of DC Air, 
critics speculated that its proposed agreements with United Airlines 
for transition period resources, however brief and arms-length these 
may have been, might have compromised our goal of establishing DC Air 
as a viable, independent airline. This has all changed with our 
announced partnership with American Airlines. American's recently 
announced agreement to invest in DC Air and to provide these transition 
resources proves that these theories could not be further from the 
truth.
    Make no mistake about it, the resources that American Airlines is 
bringing to Washington D.C.--an experienced staff, capital, and 
infrastructure--as it grows its operations here and throughout the 
Eastern United States will go a long way toward making DC Air a 
powerful, competitive, and independent airline on day one of our 
operations.
    By far the most important outcome of the DC Air-American Airlines 
partnership is the benefits it will afford our customers. Of prime 
importance will be the consumer benefits associated with the 20-year 
marketing alliance between our two companies. This will allow 
passengers traveling on DC Air to earn American AAdvantage frequent 
flyer miles which they can redeem on DC Air, or anywhere in American's 
national network or its global system. Thus, passengers flying on DC 
Air will reap the benefits of what many consider to be the premium 
frequent flyer program in the industry. In addition, DC Air passengers 
may enroll in American's airport lounge program, accessing facilities 
in National Airport and worldwide.
    Through the alliance with American, DC Air's customers will also 
have access to a vast network of new destinations. For example, our 
passengers will be able to fly from Richmond to National on DC Air, and 
then from National to New York or Boston on American Airlines' Shuttle 
service. Additionally, DC Air passengers will have direct access to the 
rest of American's network, which includes service to Chicago, Dallas 
and Miami. And, should American's proposed acquisition of TWA be 
consummated, passengers could also take advantage of convenient 
connections over Reagan National to St. Louis and Los Angeles.
    The alliance with American will expand DC Air's reach from point-
to-point service to and from Washington and connections up and down the 
East Coast, into an established network that spans the globe. In turn, 
American Airlines will get a strategic partner with a significant 
network in the east, operating out of Reagan National Airport, to 
complement its planned growth within the east. By adding its 
relationship with DC Air to its internal growth and announced 
acquisitions, American will become a major competitor for North-South 
traffic flows along the Eastern U.S.
    While the benefits to passengers bode well for the success of DC 
Air, many of the operational aspects of the DC Air-American alliance 
will go a long way toward addressing of the broader public policy 
concerns raised about DC Air's viability as a stand-alone entity and 
our ability to enhance the competitive landscape on the East Coast.
    As you may recall, our original plan for DC Air had been to manage 
a rapid transition into a network of 44 cities using 37 aircraft on our 
first day of operations. We had arms-length arrangements with United 
Airlines to provide 10 wet-leased jet aircraft, as well as services 
including ground handling and other items, to ensure that DC Air had 
full access to all needed services on ``day one'' of operations.
    Still, some observers of the process appeared concerned that any 
form of ongoing relationship with United Airlines, no matter what it 
was, somehow called into question DC Air's independence--in part, 
because United would be one of our major competitors in this region.
    In response to those concerns, we at DC Air accelerated the process 
of entering into relationships with carriers other than United to 
provide these services. We had received expressions of interest from a 
number of carriers regarding a partnership and entered into very 
detailed negotiations with several. While we could have chosen any of 
several different paths, I had the opportunity at a critical point to 
meet and get to know Don Carty, the Chairman of AMR, American's parent 
company. It became clear to me in that meeting, and through our 
subsequent discussions, that not only were the economic terms of the 
arrangement favorable to DC Air, and the benefits to our passengers 
outstanding, but also that Don Carty and the American team truly 
understand what DC Air is all about and that they are looking forward 
to being our partner.
    First and foremost, under the alliance with American, I am the 
Chairman of DC Air and under my leadership DC Air will be an 
independent company. American has purchased a minority equity stake, 49 
percent, of DC Air, ensuring that the airline will follow the vision we 
previously have so clearly set out for DC Air.
    Under this alliance, American Airlines has stepped in to provide 
between 11 and 14 jet aircraft that will clearly help DC Air provide 
quality service to more destinations each day and has agreed to provide 
ground handling and other services to DC Air during its transition 
period.
    Although I believe most of you view our independence from United in 
a positive light, I want to underscore to you that our alliance with 
American will only ensure that we will be able to compete aggressively 
in both service and fares with other airlines. United will no longer 
help to provide transition services. United is our rival, our foe, our 
adversary. And, we will face our competitors, including United, with 
the support of American Airlines behind us as we go into battle.
    I have received some queries about the cost structure of DC Air 
under the arrangement with American. American will benefit from the 
success of DC Air through its equity investment, and is providing 
services at very competitive rates to DC Air. In addition, American has 
significant economies of scale in various areas that can be passed 
along beneficially to DC Air. Therefore, our costs will be fully 
competitive and our vision of competing aggressively in both service 
and fares is not only intact, but enhanced.
    The American Airlines-DC Air alliance will ensure vibrant 
competition throughout the Washington area. Without this alliance, the 
metropolitan area would have one primary traditional carrier--United 
Airlines--offering nonstop service to a variety of destinations and 
connections to worldwide destinations from its hub at Dulles 
International Airport. Of course, other airlines, notably Air Tran, 
Delta Air Lines and Southwest Airlines, would continue to serve the 
metropolitan area, but each of these airlines offers a more limited 
scope of nonstop destinations to Washington passengers. Instead, this 
alliance will bring into this region a significant new competitor, DC 
Air, with the support of a traditional carrier, American, which in 
combination will become the largest presence at Ronald Reagan 
Washington National Airport. This will provide for intense competition 
for both East Coast and worldwide passengers that will keep prices down 
and help ensure high quality service for area travelers.
    And, with the new resources provided by American Airlines, DC Air 
will have all the resources necessary to be fully operational on ``day 
one,'' pending the closing of the merger. When it is operational, DC 
Air will provide competitive air service to 44 communities--cities 
that, for the most part, currently enjoy direct access to the 
Washington area. As the majority owner of DC Air, I believe it is 
critical to sustain and enhance the existing US Airways network, which 
has provided affordable, safe, reliable service to cities in the 
Northeast for so many years. Nothing in the American agreement changes 
my long-term commitment to these communities.
    When I agreed to build and run DC Air, I strongly believed it would 
prove to be a strong, independent airline. The new alliance between DC 
Air and American Airlines brings us closer to achieving the goals I set 
out when I agreed to build and run DC Air--to provide high quality, 
safe, reliable air travel, to help preserve competition in the airline 
industry, and to make air travel affordable.
    Thank you for the opportunity to testify before you today.

    The Chairman. Thank you very much, Mr. Johnson. Thank you 
for coming back before the Committee again.
    Mr. Leonard, welcome.

                   STATEMENT OF JOE LEONARD, 
               CHAIRMAN AND CEO, AIRTRAN AIRWAYS

    Mr. Leonard. Thank you, Mr. Chairman and Senator Hollings 
and Members of the Committee. Thanks for the opportunity to be 
here again. You know, the last time I was here was about 6 
months ago and we were talking about the United-US Air merger. 
I did not believe at that time that it would be approved in the 
form that it was presented. But I can tell you, I never in my 
wildest imagination dreamed that the solution to that problem 
would be American Airlines and United Airlines replacing the 
Civil Aeronautics Board.
    At that time I was concerned about industry consolidation, 
higher fares, poorer service, failure of more low-cost 
carriers. Unfortunately, all of those predictions have come 
true since I was here last.
    We were talking last night, you know, if the situation 
continues unchecked I will soon be running the fifth or sixth 
largest airline in the country, but I will only have 1 percent 
of the market share.
    I would like to make a prediction about what will happen if 
nothing is done. If the government sits by and takes no 
decisive action soon, then the ultimate consolidation will take 
place before the end of this year, and consumers had better 
fasten their seatbelts and hang onto their wallets.
    The United-American-US Air agreements cannot be separated 
from American-TWA. American is the bridge that links all of 
these deals together.
    Let us also understand that this will be the biggest 
consolidation in the history of American aviation. It involves 
the two largest carriers in the world carving up the U.S. 
market. Delta will have no choice whatsoever but to acquire 
pieces of Continental or Northwest, thus leaving 80 percent of 
the passenger seats in this country in the hands of three 
companies.
    Look at a couple of the elements of the agreement between 
American and United. They are fixing fares and schedules in the 
shuttle market. They agree to limit each other's growth. They 
agreed to code-share in competitive markets. Do you think that 
is going to be real competition? I do not think so. From the 
consumers' perspective, they will pay much higher fares and 
have poorer service and no choice or little choice.
    AirTran is a survivor that demonstrates what a strong new 
entrant can do for the consumer when we have access to markets. 
Each year AirTran saves consumers in the Atlanta marketplace 
$700 million in air fares because we have critical mass in 
Atlanta.
    I hear a lot about the Southwest effect: You do not really 
need to worry about competition because Southwest is around. 
And Southwest does discipline fares in about 6 percent of the 
markets, but let us look at a couple of examples of the 
Southwest effect. From Baltimore to Hartford the fare is $120 
round trip. How about from DCA to Hartford? The fare there is 
$628. Where is the Southwest effect in DCA to Hartford? It does 
not exist.
    Let us take a look at a couple of fares where American and 
United go head to head, really battling out, really competing 
strong. Chicago to Washington National, the fare is $1439. What 
about Chicago to DFW, two hubs, head to head competition, lots 
of frequency? Guess what, the fare is $1439 last week, exactly 
the same as the Washington market. If the government permits 
the American-United combination in this form, the public can 
expect the kinds of fares that they see in those two markets 
all over the country.
    Size matters, as Mr. Carty said, in this business, and that 
UAL and American are willing to pay so much for these vital 
assets, by doing so they block competitors' ability to develop 
a network on the East Coast, which is the end product of the 
United-American agreements as they are currently structured
    AirTran and other low-fare carriers need access to gates 
and slots in order to discipline the fares and to benefit the 
consumers and the communities up and down the East Coast. We 
need enough to generate a network. There are certainly enough 
to go around. American and United will control over 1,000 slots 
at Washington National and LaGuardia if this deal goes through, 
or in other words 65 percent of all the slots at those two 
airports.
    With a meaningful number of slots and gates at Washington 
National and other key airports, low-fare airlines like 
ourselves could bring $600 million of benefit to the consumers 
and the East Coast and in particular in the smaller cities.
    Deregulation was supposed to provide a level playing field 
for healthy competition. At stake right now is the wellbeing to 
the American public for the generation to come. At stake is 
hundreds of millions of dollars in savings that can be put in 
the pockets of consumers. At stake is whether small- and 
medium-sized cities can revive their economies with the new 
business opportunities that come with low-fare competition and 
service.
    Mr. Chairman, I urge you to give the consumer some hope for 
a better day by using your authority to urge the Department of 
Justice and the Department of Transportation to make open 
access the hallmark of decision making in these matters. We 
cannot win the battle of competition if we are not permitted on 
the battlefield.
    I also would like to add that we are not opposed to mergers 
and acquisitions. We think they are going to happen either 
through an orderly process or through bankruptcy. But 
consolidation must come with the award of a large block of 
gates and slots and other public assets to low-cost competitors 
so that we can keep the marketplace honest.
    Mr. Chairman, thank you very much for the opportunity to be 
here this morning.
    [The prepared statement of Mr. Leonard follows:]

  Prepared Statement of Joe Leonard, Chairman and CEO, AirTran Airways
    Mr. Chairman and Member of the Committee, I thank you for your 
invitation to appear today. I will come straight to the point.
    Since I last had the privilege of testifying before the Committee 
some six months ago, I believe most of the things I warned about have 
taken place, or are taking place: increased momentum for industry 
consolidation, higher fares, poorer service, and the failure of more 
low-fare carriers.
    Permit me to make a new prediction: unless the Congress and/or the 
Executive Branch takes decisive action soon, then by the end of the 
year this party will be over. The consolidation agreements will be 
virtually complete in a legal sense, labor agreements for merging 
carriers will be under negotiation, and consumers had better fasten 
their seat belts--they will be in for a very rough ride and a very hard 
landing.
    That would be a tragic failure of public policy, and it will be as 
significant to the consumer as was the deregulation of the airline 
industry more than 20 years ago--but with a much different and 
unfavorable impact.
    Let me remind the Committee that with one important qualification, 
I do not oppose airline mergers and consolidations. I recognize that 
the jobs and the service provided by the men and women who work in the 
airline industry in St. Louis or Pittsburgh or Washington are just as 
important as AirTran jobs in Atlanta or Orlando.
    I also recognize that without consolidation, there will be 
bankruptcies, service disruptions, job losses, and, in the end, the 
major carriers will have picked the bones of the failed carriers. We 
would end up with the same anti-consumer landscape we can expect if all 
the mergers and acquisitions on the books today are carried forward, 
except worse. However, this consolidation cannot proceed without 
accommodation for low-cost competition.
    Let me take a moment to talk about the specific proposals before 
the Committee this morning.
    From a public policy perspective, the United/American/US Airways 
agreements cannot be separated from the American/TWA acquisition.
    American is the bridge that links all of the proposals.
    Let us also understand that this is the biggest consolidation in 
the history of american aviation. It involves two of the largest 
airlines in the world carving up the U.S. market. If these series of 
transactions go forward there will be no basis for stopping Delta from 
acquiring Northwest and/or Continental and leaving 75 percent of the 
passenger seats in the nation in the hands of three airlines.
    That level of concentration leaves no room to even pretend that 
there will be price competition. History tells us that the major 
carriers support price maintenance not price competition.
    Look for just a moment at the elements of some of these agreements.
    The fixing of fares and schedules in the shuttle market--clearly 
identified as one the terms of the American/United agreement--is 
unprecedented as is the level of cooperation that the government is 
being asked to endorse. It takes the concept of ``trust me'' to new 
heights.
    All of this is taking place when competition is at the lowest point 
in twenty years.
    From the consumers' perspective it will not matter how American got 
to control the slots at Reagan Washington National Airport or how 
United and American got to set fares and schedules on the shuttle. The 
only thing that will matter is why they are paying so much for airplane 
tickets with so little choice of airlines.
    American and United are trying to grow through the acquisition of 
weaker competitors.
    Mass matters. The single carrier service American and United tell 
us provide benefits to the consumer also means that each carrier 
controls 25 percent or more of all seats sold in the nation.
    Mass means they control gates and through slots the airways.
    Unless the government acts aggressively now to protect the consumer 
and to provide to low cost carriers like AirTran access to scarce basic 
facilities--gates and slots--competition will suffer and prices will 
rise.
    The airline marketplace belongs to those airlines that have 
critical mass.
    That is marketplace reality.
    The government must not allow the major airlines to effectively 
block the ability of low fare carriers like AirTran to gain critical 
mass .
    Mass means networks--the ability to flow passengers over a hub to 
multiple destinations--whether that hub is a traditional one or an 
effective one as is the case with the somewhat linear Southwest 
structure.
    Southwest and new entrants are the only carriers that offer 
effective fare competition, yet the number of new entrants is at an all 
time low just as the major carriers are consolidating even more to 
protect their franchise.
    AirTran is a survivor that demonstrates what a strong new entrant 
can do for the consumer when it has access to markets.
    AirTran each year saves the Atlanta consumers more than $700 
million dollars in airfares because we have critical mass in Atlanta--
mass that we got only because Eastern Airlines went bankrupt and freed 
up 22 gates. That does not happen very often and the American consumer 
should not have to depend on happenstance to have access to low fare 
airlines.
    Southwest disciplines fares in some markets because it has a 
network that immediately allows it to enter a market and provide 
consumers with destinations all across its system. Its network gives 
Southwest its strength--it can compete across a broad spectrum of 
routes.
    JetBlue is providing relief to small communities because the DOT 
awarded them 75 slots at JFK. That type of access is critical. Does 
anyone believe that American or United will bring this same kind of 
cost savings if they are allowed to control these hundreds of 
additional slots?
    Blocking competitors ability to develop a network is the end 
product of the United/American agreements as they are presently 
structured.
    Throughout the northeast, american and united would effectively 
control access to gates and slots. At no place is that more evident 
than at Reagan Washington National Airport.
    Consumers traveling out of national pay premium prices because 
access to gates and slots is tightly controlled.
    Southwest may sell ``walk-up'' roundtrip tickets out of Baltimore 
to a city like Hartford for $120, but Southwest's fares have in no way 
stopped US Airways from charging $628.50 for that same ticket. That 
$500 dollar plus premium reflects the importance of National as a 
unique facility precisely because access is controlled by reason of 
government licensing of access--slots.
    If the government--whether it be the Department of Justice in its 
antitrust review or the Department of Transportation deciding to sit on 
its rights and do nothing--permits the American/United combination in 
the form proposed, those kind of premium fares will be the name of the 
game in the northeast.
    Those premium fares explain why both airlines are prepared to pay 
so much for these assets and put up with all of the labor and 
operational problems that will follow--in the current form of the 
mergers--the major airlines win and the consumer loses big time.
    That is marketplace reality.
    That is the effect of government decision making in these cases.
    AirTran and other low fare carriers need access to gates and slots 
to discipline fares for the benefit of consumers and communites up and 
down the east coast.
    The AirTran business model works as well in Washington as it does 
in Atlanta.
    With a meaningful number of slots at Washington National, AirTran 
would bring no less than $600 million dollars in savings to consumers 
traveling through and to Washington National Airport whether they 
originate in Charleston West Virginia or Rochester New York. 
Significant access to LaGuardia slots or gates in Philadelphia allows 
us to provide savings up and down the east coast but without access we 
can only stand outside and watch the major airlines extract premium 
prices from captive consumers.
    We believe that the choice for the government is simple, let 
American and United create fortress northeast or let consolidation go 
forward with meaningful protections for the consumer.
    That is marketplace reality.
    Deregulation was supposed to provide a level playing field and 
healthy competition. The deregulation act charges the Department of 
Transportation with responsibility for facilitating new entry and 
competition in the airline industry. While this is the mandate, in 
reality DOT has done virtually nothing to help domestic competition and 
new entry except acting under the mandate of the Congress.
    At stake right now is the well-being of the American flying public 
for a generation to come.
    At stake is hundreds of millions of dollars in savings that can be 
put in the pockets of the consumer.
    At stake is whether small and medium sized cities can revive their 
economies with the new business opportunities that come with 
competitive, low fare service.
    I urge you to give the consumer some hope for a better day by using 
your authority to urge the Department of Justice and the Department of 
Transportation to make open access the hallmark of decision making in 
these matters. We cannot win the battle for competition if we cannot 
get on the battlefield.
    Thank you.

    The Chairman. Thank you very much, Mr. Leonard.
    Mr. Levine.

                STATEMENT OF MICHAEL E. LEVINE, 
          ADJUNCT PROFESSOR OF LAW, HARVARD LAW SCHOOL

    Mr. Levine. Mr. Chairman, thank you very much.
    The Chairman. Would you take the microphone, please.
    Mr. Levine. Sorry.
    The Chairman. Thank you.
    Mr. Levine. Mr. Chairman, Members of the Committee: Thank 
you very, very much for inviting me. I think this is a very 
important subject and I appreciate the chance to speak to the 
Committee about it.
    I am here as a Committee witness. I have not been paid for 
or coordinated my testimony with anyone. I am here because I 
have a lifetime commitment to airline deregulation.
    I have a longer statement for the record, which I will not 
read. It includes information on my background that you may 
find interesting.
    The Chairman. Does that include the work with the CAB on 
airline deregulation?
    Mr. Levine. It does indeed. I was one of the early academic 
writers urging airline deregulation. I was effectively the 
chief of staff at the Civil Aeronautics Board during Fred 
Kahn's and Marvin Cohn's transition through deregulation, and I 
have been in a sense a practitioner because I have been at 
three different airlines: one of the transitional network 
carriers; a new entrant, New York Air; and later at the fourth 
largest network carrier.
    I am here because I think that the American-United-US Air 
deal essentially threatens airline deregulation and the results 
of deregulation. I ought to make clear: I have no particular 
problem with the American-TWA deal. I do not think it 
eliminates competition in a meaningful way because I think TWA 
is, in fact, a failing company. I do not think it is a 
particularly good deal for American and its shareholders for 
reasons that are in my testimony and that I will be happy to 
answer questions about.
    But my concerns about whether it is a bad deal, which 
otherwise I would leave to the marketplace, largely lie in the 
evidence this deal may provide for understanding American's 
motivation for working with United in the US Airways deal. I 
think the TWA deal, as I say, does not make a lot of sense on 
its own. American wants TWA's assets partly because, as Mr. 
Carty has already told you this morning, network size and scope 
matter and American would like to grow a little bit, to move up 
on United.
    The East Coast assets and slots and gates of TWA are 
particularly important to American, for reasons I will come 
back to. But I think that in addition and perhaps even more so, 
American conceives the TWA deal as something that can be used 
to cast a sort of ``failing company'' halo over the larger US 
Airways deal. I do not think that the larger deal should be 
seen that way at all.
    I have a different interpretation of what is going on. I 
think this is meant to be the end of the airline ubiquity arms 
race that started after deregulation and that basically was 
continued by American and United as the survivors of the pre-
deregulation Big Four. These also included Eastern, now gone to 
its reward, and TWA, about to go to its reward. American and 
United engaged in a race for unilateral rivalry in the 1980's 
that almost bankrupted the industry, because the industry 
agreed with Mr. Carty that network size mattered and did not 
feel it could be left far behind. Everyone engaged in a race 
for ubiquity. That was ended when the recession of 1990 through 
1992 brought near financial ruin on the industry as a result of 
this expansion race.
    United through its offer for US Airways made a unilateral 
move to try to win the ubiquity sweepstakes in a way that would 
end the game. That effort has run into difficulties due to 
competition concerns which are entirely justified. American has 
now countered, in effect, by offering an armistice. They want 
both airlines to use the East Coast assets of US Airways, which 
they will divide between them, and the split monopoly over 
Washington to build a fortress wall around the East Coast, 
which is a very important national source of traffic and a very 
important element of any network. Traffic from the big 
Northeast cities creates volume, which can be used to increase 
the size and frequency of a hub system, so as to gain an 
advantage on your competitors. An airline with a larger network 
can get more corporate contracts. It can have more effective 
travel agency commission override system and its frequent flyer 
program becomes more important than those who have finished in 
the dust.
    More importantly, this deal is designed to accomplish this 
permanently, because once the East Coast has been divided 
between American and United in the way that this deal proposes 
to divide it, I believe that Delta and Northwest and 
Continental will not be able to construct a network that will 
be comparable in power. The existing situation, in which the 
big airlines in effect operate as kind of super-regionals, in 
which they have large areas of regional strength and then reach 
to the East Coast and compete vigorously, will have gone away.
    You can ask, ``what evidence do we have that this 
interpretation is correct?'' I think there are three important 
pieces of proof that are in the deal: One is the prices which 
are being paid by both American and United, plus the transition 
costs, the service disruption, the systems integration costs 
that are going to be involved in these deals. It is clear to me 
that these airline expect to get revenue premiums, which means 
they hope for monopoly profits that come from customers, to 
finance these payments that they are making.
    Two, it is interesting to me that United would rather let 
its so-called arch-rival, American, provide competition at 
Washington, D.C., than it would Continental, which has offered 
to do so (which would allow it to gain on this Big Two that is 
being created) or AirTran, which as Joe Leonard has suggested 
would provide price competition, or any of the several other 
airlines that I have reason to believe have expressed interest 
behind the scene and which Mr. Johnson referred to in his 
discussions.
    Three, United has offered to share the shuttle with 
American. That is one of the keys to getting control of the 
Northeast because the folks who fly the shuttle are business 
people what buy tickets to other places and it is very 
important to have them in your frequent flyer program. It is 
interesting to me that United would be willing to share one of 
the crown jewels of the US Airways acquisition. This suggests 
that they expect something less than an all out competitive 
war.
    I think it is important to note that they have offered to 
share the crown jewel conditionally, only if American does not 
get bigger than United as a result of some subsequent 
acquisition that it might make. If that happens, then, 
interestingly enough, the shuttle and other acquired assets go 
back to United to have for its own. To me, this whole thing 
just clearly represents a kind of, as I say, an end to the 
ubiquity war.
    As my friend Joe Leonard suggested, I do not think you can 
count on Southwest Airlines to provide discipline to this Big 
Two that is going to be constructed. Southwest is a great 
airline, there is no question about it. It provides a service 
that is very important to a lot of people. But first it is not 
a perfect substitute for a network airline. There are a lot of 
places it does not fly to. It expects its customers to drive to 
it to get its low fares. For many business men and women that 
is not a very convenient way to do business.
    Southwest does not provide very convenient connections. It 
does not provide some of the services that network airlines 
provide. There is room in the system, important room in the 
system, for Southwest Airlines. But no one should regard it as 
a perfect substitute for network air service.
    Second, it should be pointed out that, although Herb 
Kelleher is a man of legendary benevolence, I think he is still 
running his airline to make a profit, and if a price umbrella 
is provided him by a duopoly in the airline business his prices 
are likely to go up because he can still maintain his 
competitive advantage if he does so and he will make more 
money.
    Ultimately, I do not think you can count on Southwest as 
the answer to the antitrust problems that this deal presents.
    So I think consummation of this deal should be prevented 
under the antitrust laws. If Justice is unwilling or feels 
itself unable to do it, I think Congress should do it. I think 
this is a very serious threat to deregulation. I invite this 
Committee to take a further interest in it. I congratulate you 
for holding this hearing.
    I thank you for inviting me and I will be happy to answer 
any questions you might have.
    [The prepared statement of Mr. Levine follows:]

  Prepared Statement of Michael E. Levine, Adjunct Professor of Law, 
                           Harvard Law School
    Mr. Chairman and Members of the Senate Commerce Committee: Thank 
you for giving me the opportunity to testify before you today at what I 
believe is a critical point in the development of the deregulated 
airline industry. I testify at the invitation of the Committee as a 
private citizen and not on behalf of any airline, industry group or 
other organized interest. My reason for testifying is simple: I have 
dedicated most of my career first to bringing about a competitive 
deregulated airline industry and then to demonstrating through my own 
personal efforts that it is possible for a well-managed airline to 
survive and prosper in a competitive environment. I see a threat to the 
continued success of airline deregulation, and I hope to play some part 
in countering that threat.
    I am at present a member of the faculty of the Harvard Law School, 
teaching courses in regulation and international joint ventures. I have 
attached a detailed biography to this testimony for your information, 
but let me say briefly that I have had the unusual opportunity to 
study, to regulate and to work in the airline industry. This experience 
has included work as a dean and scholar who has advocated and continues 
to advocate deregulation at USC, Caltech, Yale and Harvard. It also 
included a position as the senior staff member at the Civil Aeronautics 
Board under Alfred Kahn and then Marvin Cohen during the most pivotal 
deregulation period. And I also have had the opportunity to participate 
in the industry as a CEO or senior executive of a transitional network 
airline (Continental), a new entrant airline (New York Air) and finally 
at the fourth largest airline in the United States (Northwest).
    I am very concerned about the consequences for industry competition 
and ultimately for consumers of the proposed division of USAirways 
between United Air Lines and American Airlines.
    Before I discuss that transaction I should make clear that the 
``companion'' merger between American and TWA on its own presents no 
serious competition problems. That TWA is a failing company seems 
beyond doubt. The TWA deal may present difficulties for American in 
terms of labor, fleet and systems integration. Those problems may 
present service problems for the traveling public but if they 
materialize, the public can deal with them by avoiding American. They 
will still have that choice because the American-TWA transaction will 
not change the structure of the industry and does not present a threat 
to the competition that is necessary for deregulation to succeed as a 
public policy. This matter should be left to the marketplace and the 
bankruptcy courts.
    American has justified its merger with TWA on its own merits at the 
same time that it has presented it as part of a strategic package that 
includes American's agreement with United to divide USAirways. It seems 
clear to me that the most important purpose of the TWA deal is to help 
give a ``failing-company'' cast to the whole four-airline transaction, 
and to provide political cover (preserving 20,000 jobs and a large-
airline hub presence at St. Louis) to politicians and government 
officials as they consider a total transaction much more difficult to 
justify on competition grounds. The second major benefit to American is 
not the chance to operate a St. Louis hub, but rather to use TWA's 
slots and facilities at congested East Coast airports to bolster 
American's New York and East Coast strategic position and to use TWA 
aircraft to achieve market share parity with United as part of the Big 
Two strategy discussed below.
    The significance of the TWA transaction is that a closer look at it 
raises suspicions about American's strategic motives. On its own, the 
TWA transaction is difficult to justify commercially. TWA has been 
carefully examined as an acquisition candidate by every major airline 
(more than once, in many cases), and I believe that those studies all 
came to the same conclusion: while St. Louis is well-located and can 
support a hub of some size, it would be very difficult for a ``normal'' 
network airline to make any significant profit there.
    First and most important, operating a hub on top of Southwest 
Airlines means that normal hub economics are impaired by the inability 
to charge normal hub fares to short-to-medium haul business travelers, 
and as Southwest's system continues to evolve out of its previous 
short-haul, point-to-point mode, that effect becomes more and more 
severe. Just ask America West, which has had considerable difficulty 
maintaining at Phoenix a revenue base adequate to support a 
significantly profitable hub operation, even at its very low costs. 
When you add into this equation American's labor costs and the 
transition costs of labor, systems and fleet integration, it's 
difficult to believe that American's better credit and better fuel 
purchase position and the overhead savings from eliminating TWA's 
management infrastructure make this transaction taken by itself 
additive to American's earnings or worth the risk. I know these numbers 
didn't work for anyone else, and would be surprised to learn that they 
suddenly make sense on their own for American.
    Second, this is clearly a case where American is acting in concert 
with United to achieve jointly-shared strategic goals. If United was 
only interested in solving the Washington, DC part of the antitrust 
problem presented by its own USAirways deal, any number of other 
airlines would have been willing to help them out. But rather than 
Continental or AirTran, who have publicly indicated a willingness to 
work with Robert Johnson to produce a DC Air that would be a full-
blooded competitor to United (or rather than the couple of other 
airlines who are rumored to have expressed serious interest), United 
has chosen to work with the airline that is its supposed arch-rival and 
that should be its most difficult competitor from the standpoint of 
network coverage (``scope''). In fact, when the transaction is taken as 
a whole United has cooperated in fashioning a deal that represents a 
giant step forward for American in achieving its stated goal of network 
ubiquity even as it impairs United's attempt to build a uniquely 
ubiquitous position. Why would United do this? To understand, I think 
we need to look at a bit of history.
    American and United are what remain of the prederegulation ``Big 
Four''. Eastern has gone to its reward and TWA, shrunk to a shadow of 
its former self, is about to follow. Both were victims not only of 
their own managements' strategic mistakes, but also of their inability 
to persuade their own labor forces to adapt proactively to the changed 
circumstances of deregulation. United and American, facing the same 
concerns about their ability to survive deregulation given their high 
costs, adopted a different management strategy: they persuaded their 
labor forces in the postderegulation period to reach accommodations 
that lowered marginal labor costs (``B''-scales, ESOP, periodic scope 
relief, etc.) and allowed fleet and system flexibility in return for 
assurances of growth, producing more job security and richer lifetime 
career paths for employees. They coupled this with adoption of a 
``ubiquity'' strategy, in which the size and reach of their networks 
would allow them to meet almost every air transportation need of every 
airline customer. This ubiquity would be used to differentiate 
themselves from new entrants for business travelers and to gain a 
revenue advantage over other network competitors. United announced 
shortly after deregulation that it had become the first airline to 
serve all 50 states. American moved to Dallas so that it could serve a 
very large, centrally located, facility-unconstrained O&D market as a 
national hub. The idea for both American and United was that they would 
ultimately overwhelm smaller network competitors as customers and 
travel agents chose to sign contracts with and use the frequent flyer 
benefits of the airline that could satisfy the largest portion of their 
needs.
    On their way to unchallenged ubiquity, two things happened. Other 
network competitors saw what was happening and refused to roll over 
quietly. First Texas Air, then Delta, Northwest, Allegheny/USAir 
(remember the Piedmont merger and the name change?) and Continental on 
its own attempted expansions designed to enhance their own ubiquity and 
thus survivability. A sort of ubiquity arms race ensued, which caused 
severe self-damage to more than one participant and nearly destroyed 
the entire industry when the economic expansion of the 1980s segued 
into the recession of the early 1990s. In the process, Delta became 
large enough to approach American and United in size, but more 
important, the recession-induced stunting of the growth process evolved 
the industry into an ``almost-national'' mode, with each successful 
network airline building and defending regional core positions that 
supported a large but incomplete national hub system. The traveling 
public benefited hugely from this process (shareholders benefited 
less!). The almost-national systems were very large and provided many 
of the benefits of complete network scope. People in spoke cities often 
had a choice of as many as half a dozen competing hub carriers that 
could meet a particular trip need, hub-located travelers could get 
nonstop service to 80 or more destinations comprising most of their 
travel needs and most travelers could meet virtually all their needs by 
concentrating their business on two systems, for which they were 
rewarded with frequent flyer benefits they valued greatly.
    But from United's and American's perspective, this was not such a 
splendid state of affairs. They had built their labor strategies around 
paying labor for growth and the ability to use their network strength 
to capture revenue premiums (monopolistic rents). Growth was slowing as 
it had become clear that capacity expansion would be defensively 
matched and there was not enough new business to support profitable 
expansion for American and United relative to the rest of the industry. 
The national market became more concentrated among the top five network 
airlines and Southwest, but almost all of the incremental share went to 
Southwest, Delta, Northwest and Continental. The development of 
alliances by smaller airlines as a way to achieve many of the benefits 
of network size without the risks of overcapacity further eroded their 
revenue premiums. The net result of twenty years of deregulation was 
NOT that American and United had become uniquely ubiquitous airlines, 
but rather that they had come to share the network industry with 
several competitors that not only wouldn't go away, but which 
constrained the possibility of further share expansion. For American 
and United, the strategic question became: how can we (either American 
or United or both) gain a network size advantage that can't be 
duplicated and eroded and which will yield monopoly rents to support 
our very high costs?
    Both airlines came to the conclusion that the key was the East 
Coast: United already dominated network service on the West Coast, but 
the West Coast has relatively few cities and while those cities 
wouldn't support more than one network (as American repeatedly found 
out through expensive tests--the Air Cal and Reno acquisitions and the 
San Jose north-south hub), its relatively uncongested, separated 
airports were ideal for expansion by Southwest. Further competitive 
shifts toward American/United were unlikely there. Delta's Atlanta hub 
operation along with expansion by Southwest and AirTran made the 
Southeast unpromising. The midline of the country provided as many 
opportunities to Continental and Northwest as to American and United, 
especially given the constraints at Chicago-O'Hare.
    By contrast, the East Coast has a variety of interesting features 
which might allow it to underpin a sustainable network size and scope 
advantage which could be leveraged into a dominant position: a large 
part of the nation's population and travel origin is located there. 
Airports are congested and facilities tight, making substantial 
matching expansion by network competitors difficult and substantial 
discount competition at the primary business airports nearly 
impossible. Four major population concentrations are the focus of much 
of the business traffic: Boston, New York City, Philadelphia and 
Washington. Northwest has no presence there except through the 
Continental alliance. Continental's and Delta's strength is largely 
limited to Newark (Continental) and north-south and transatlantic 
service (Delta). Transcontinental business is already dominated by 
American and United. Continental has only been able to build a 
significant transcontinental business from its Newark hub using 
narrowbody aircraft and Delta has been unable to make a significant 
dent in these markets. United has built a hub at Dulles and American 
has made a significant effort to build its presence at Boston, but 
neither of these efforts have produced a sufficient increment in East 
Coast presence to allow unduplicable network expansion that could cast 
a halo over the entire United States system.
    American started to build an alliance with USAirways, the only 
airline with strategically-located sufficient mass that could make a 
difference to its network strength. The alliance involved codesharing, 
a frequent flyer deal and computer systems integration which lowered 
American's costs. Northwest and Continental built an alliance which 
made Northwest a much stronger competitor to United in the Midwest and 
over the Pacific and strengthened Continental's position in New York. 
These developments concerned United greatly. United was offered the 
opportunity to do something decisive in response by USAirways 
management's conclusion that its structural and cost problems couldn't 
be overcome without major flexibility by its unions, and its consequent 
decision to save its shareholders by bailing out after an attempt to 
reach union accommodation failed. The result was the United/USAirways 
deal.
    What United expected to get out of the deal was an effective 
monopoly in Washington and Philadelphia, a greatly enhanced position in 
Boston and New York, and a major frequent flyer presence in the very 
important Shuttle markets. It hoped simultaneously to strengthen its 
revenue position vis-a-vis American, achieving through system market 
power what it had never been able to achieve through service and 
operations and to finally separate itself from the increasing 
competition offered by Delta, Continental and Northwest. That United 
paid too much is a tribute to Stephen Wolf's bargaining skills. That it 
did the deal without getting the union consents that would have helped 
manage transition costs is a confirmation of the priority that United's 
management gave the deal and how much impact on competition they 
expected it to have. There are many who think that this transaction 
might have in the end cost so much that it wouldn't have made a profit 
for United. That the costs of integrating the two airlines might have 
been such that its shareholders might not ultimately have benefited 
does not mean that there were no monopoly profits to be made, but only 
that the monopoly profits would be distributed among USAirways 
shareholders, United's labor force and Robert Johnson.
    The only problem with all this is that the United/USAirways deal, 
despite its beautifully prepared political campaign, appeared to be in 
danger of failing. The DC Air ``cure'' to the Washington problem was 
not passing the laugh test. No one seriously believed that a United-
supported DC Air with a large commuter component was likely to provide 
significant stand-alone competition to United in Washington. Offers of 
``help'' by Continental and Airtran put United between the devil and 
the deep blue sea with respect to its transaction goals. Giving 
Continental a strong Washington position was the opposite from what 
United was trying to achieve in redistributing network system strength 
away from its pesky pursuers. And allowing a discount airline like 
Airtran to operate from the business revenue heart of its East Coast 
hub strength (bad enough to have Southwest at BWI!) would be very 
damaging to United's Washington economics and would make the 
transaction even more expensive by a substantial margin (in much the 
way that Southwest's presence at St. Louis makes the TWA transaction 
expensive for American).
    American, with the prospect of losing its USAirways relationship 
and of seeing its United rival get a structural lock on a superior 
network position, offered United a brilliantly-conceived truce that was 
much more valuable to United than a failed deal and a continued war 
with Delta, Continental and Northwest. In effect, it offered to jointly 
share ubiquity, establishing a Big Two protected from imitation by East 
Coast facilities constraints and antitrust barriers to further merger. 
With the TWA deal and the deal as American and United have structured 
it, American and United would be almost exactly the same size at about 
25 percent of the national market. Each of the Big Two could sustain a 
revenue premium relative to Delta, Continental and Northwest and 
generate network monopoly premiums to help stave off the economic 
impact of Southwest. Neither would have the incentive to erode those 
rents through price competition with the other (because little relative 
share gain would be possible), so pricing discipline would be 
maintained without collusion. While there would be a possibility that 
Delta or Continental might try to defend itself by combining with 
Northwest, none was a failing company and the Justice Department could 
be expected to be hostile, given its record in the Northwest/
Continental control case. Paradoxically enough, the United/American 
joint monopoly position could be defended with the antitrust laws!
    Even if their rivals could merge, no one would have the combination 
of Boston, Philadelphia and Washington strength available to the Big 
Two and could achieve the same system leverage. American could make 
itself stronger in New York through the TWA deal, achieve near-parity 
in Washington and Boston, and concede Philadelphia. It could make 
excellent network use of the Washington and other Northeast slots and 
gates it gets in this deal because of its success in using regional 
jets to maintain presence on mainline routes. Its ability to sustain a 
network advantage over ``the others'' would be assured. United would 
strengthen its position in Washington, Boston and New York, gain 
control of key facilities and slots, and build an East Coast North/
South system. For both American and United, rivalry with each other 
along nonprice dimensions while each had market power relative to the 
rest was an attractive alternative to the status quo.
    The Big Two position that these transactions would create is likely 
to last a very long time. The large pool of customers available in the 
Northeast and the ability to use the scarcity of slots and gates at its 
congested airports to lock them up will make it impossible to duplicate 
the Big Two position that American and United will share. No comparable 
opportunity will be available to other big network airlines and 
therefore no other network airline will be able to match United's and 
American's ability to offer corporate contracts, travel agency and 
internet incentives and frequent flyer benefits. Over time, Delta, 
Northwest and Continental will find it increasingly difficult to 
capture East Coast business passengers, providing less flow at their 
hubs and supporting less service than American and United will be able 
to sustain. The gap between American and United and the ``others'' will 
grow.
    Among the strongest pieces of evidence that this narrative captures 
what the participants predict and intend in this deal is the treatment 
of the USAirways Shuttle, which is a crown jewel in any network scope 
strategy. The Shuttle is used primarily by a group of business 
travelers who are also the ones most likely to buy high-priced tickets 
to elsewhere from Boston, New York and Washington. In Delta's hands, 
the other shuttle is one of the assets most valuable in its efforts to 
move toward network parity with American and United. As a potential 
source of monopoly dominance, the USAirways shuttle is wasted in 
USAirways' hands because USAirways doesn't have the complementary 
system strength to take advantage of it. In fact, the Shuttle doesn't 
even serve Philadelphia, which is USAirways focus for much of its 
valuable business flying! American had a temporary advantage over 
United through its alliance with USAirways. United grabbed it back. 
United's giving up exclusive control of the network value of this 
Shuttle only makes sense in the context of a shared-dominance strategy 
in which both airlines see its principal value as enhancing their 
ability to suppress competition on the rest of their networks. This 
view of the transaction is confirmed by the fact that United gets to 
keep all of the Shuttle if American concludes an acquisition that makes 
it bigger than United!
    This discussion doesn't deal with all of the potential objections 
to this transaction, some of which are common to the United/USAirways 
transaction as well. For example, public vulnerability to labor 
disruption is increased as more of the system falls into fewer hands. 
The public consequences of a job action on an airline so big that the 
rest of the system simply cannot absorb its business are very serious, 
as are the consequences of the associated imbalance in bargaining 
power. I have tried instead to focus on the subtle and complex 
competitive dynamics that underlie this transaction in an attempt to 
explain why this is not just another merger and just another rescue of 
some threatened airline jobs. (On that subject, I should say that the 
notion that USAirways is, like TWA, a failing company is entirely 
wrong. Faced with no alternative, management and labor could work 
together at USAirways to achieve costs and revenues that would enable 
it to survive, although some surgery might be necessary. But that's 
another story for another time.)
    What can be said in favor of this transaction? Only that if 
consumers prefer to concentrate their business on one very large 
system, we should accommodate them. And there is no doubt that some 
consumers would prefer to do so, especially if all other things were 
equal. But all other things will not remain equal. This convenience 
will come at the price of choice and long-term competition. There are 
often conveniences to monopoly, as anyone who used to have only one 
number to call when they wanted to discuss their phone service will 
attest. But there are benefits from competition which have generally 
been judged superior as a matter of public policy. If one compares the 
utility to consumers of having competitive choices among airlines, 
almost any two of which can satisfy almost all their needs, with the 
``convenience'' of one-stop shopping in a duopoly, I believe that most 
consumers would prefer competition. That comparison is reflected not 
only in our antitrust laws, but in the regulatory policies of the past 
twenty-five years.
    It has been urged by at least one observer that we need not be 
concerned about loss of competitive pressure in the network business 
because Southwest in particular and other low-cost airlines in general 
represent a large enough share of the business to discipline United and 
American. I suppose that the first rebuttal is American and United 
clearly don't agree with him. It's difficult to justify the cost 
commitments and vulnerabilities which this transaction entails for 
American and United without assuming that they believe that they will 
earn substantial monopoly benefits from the transaction.
    There are good reasons for thinking they may be right, even if in 
the end the transition and labor costs of the deal are so large that it 
ultimately doesn't benefit their shareholders:
    First, although Southwest and its ilk offer a valuable service to 
their passengers, it is not a service equally valuable to all 
passengers. These airlines do not have significant presence (indeed, 
Southwest has no presence) at the very congested and constrained 
airports that are the principal focus of this transaction. Business 
travelers value and will pay for airport convenience, which is why, for 
example, business fares are much higher from Boston to Reagan National 
than they are from Providence to Baltimore-Washington International.
    Second, these discount airlines do not maintain networks that are 
easy to use for complicated itineraries or which afford easy access to 
airports close to smaller cities. They rely on the willingness of a 
traveler to drive to reach an airport where fares are low. For many 
travelers, this is an excellent tradeoff, but for a substantial number 
of business travelers, it is not.
    Third, Southwest may be second in the nation in the number of 
passengers it carries, as some are fond of noting, but it is much 
smaller in terms of its overall volume of business, which is ultimately 
how economic impact is measured. Southwest is seventh in the number of 
Revenue Passenger Miles (the standard measure of output) and even if it 
grows as rapidly as analysts assure us it will, it will still be 
responsible for a substantially smaller share of industry total revenue 
or industry total output than its large network rivals, not to mention 
the Big Two.
    Finally, Southwest itself is not a charitable organization, fully 
conceding Herb Kelleher's legendary benevolence and charm. Its pricing 
is constrained by network carriers, just as network carriers constrain 
it. If the pricing umbrella is set higher by the Big Two, Southwest 
itself can charge more. Southwest claims that its main competition is 
the car, but that is only true in the short-haul, point-to-point 
markets that are no longer the mainstay of its system or the source of 
its growth. In fact, the car has become much more a complement for 
travel on Southwest than a substitute. Its customers drive significant 
distances to get to its uncongested airports. If the Big Two price 
higher, Southwest can charge more and still make it worthwhile for its 
customers to drive to its flights. Each rise in Southwest's price level 
would cost the public a very great deal. Southwest and its brethren are 
a very valuable part of the U.S. airline system, but its existence is 
certainly not a substitute for strong competition among network 
airlines.
    In conclusion, this is not just another merger and not just another 
bailout of a failing airline. The American/United/USAirways transaction 
is an attempt to undermine the competition created by deregulation. It 
will do this by building a wall of scarce East Coast infrastructure 
around a fortress occupied by a Big Two, who will use the protection of 
that fortress to attack their pursuers. With all its imperfections, 
deregulated airline competition has served the United States well. The 
Big Four of the CAB, protected from each other by regulation, is now a 
group of six highly rivalrous network airlines in which at least three 
of the smaller players are gaining on the larger two, supplemented and 
disciplined by a large and growing discount system. Congress and the 
Administration should not allow those who have the most to lose from 
this evolution to put a halt to it.

    The Chairman. Thank you very much.
    Ms. Hecker.

      STATEMENT OF JayEtta Z. HECKER, DIRECTOR, PHYSICAL 
        INFRASTRUCTURE ISSUES, U.S. GENERAL ACCOUNTING 
                             OFFICE

    Ms. Hecker. Good morning, Mr. Chairman. I am very pleased 
to be here.--on your screen?
    [Screen.]
    The Chairman. Yes.
    Ms. Hecker. I am here representing GAO. We will bring to 
bear 20 years of work that GAO has been doing following airline 
deregulation and supporting Congress on the impacts of 
deregulation.
    What I want to do here is three things. These are to focus 
on some of the data on the actual shifts in competition, that 
might be a unique contribution. We have not really had that on 
the table yet. Second, what we think are some of the key 
elements of the American Airlines proposal; and finally, what 
the key critical policy issues are.
    [Screen.]
    Now, on the data, what I have here is a chart that has two 
scales. On the left is number of markets, on the right are the 
passengers affected. Then there are three clusters of airline 
mergers or consolidations. The American Airlines-TWA is on the 
left, in the middle is the United Airlines-US Airways, and then 
on the right for comparison purposes is the Northwest Airlines-
Continental stock acquisition and alliance that occurred 
several years ago.
    Now, as you see, this is focusing on markets where there 
would be a decrease of competition. So this is where one of the 
merging carriers will no longer be an independent competitor. 
From the American Airlines-TWA agreement, there would be a 
reduction of competition in 367 city pairs markets, that is 
from one city origin to a destination. Eleven million 
passengers traveled in those markets in 1999. I should 
emphasize, this data is 1999. It is the only complete useful 
data for doing this kind of analysis. We recognize there may 
have been some shifts in passengers and markets that occur, but 
these data are highly sufficient to illustrate orders of 
magnitude of competitive impacts.
    In the middle are the competitive impacts of the United 
Airlines-US Airways deal. That has 290 markets or city pairs 
where competition would be reduced; 16 million passengers 
traveled in those markets.
    What is interesting here is the basis of comparison with 
the competitive effects of the Northwest Airlines-Continental 
deal. As you see, only 63 markets were affected by that, with 2 
million passengers. This was a deal that 2 years ago the 
Justice Department opposed on the basis of severe constraints 
on competition. So clearly we are looking at an order of 
magnitude far more significant and far more pervasive in terms 
of numbers of markets and numbers of passengers affected.
    The Chairman. Ms. Hecker, what percent of the market do 
both of those represent on the left, roughly?
    Ms. Hecker. The universe of markets here is 5,000 markets. 
About 330 million passengers traveled in those markets in 1999. 
So 11 million is not a massive share, but it is on those 
markets, obviously.
    In addition, we actually can give you the number of 
markets--it is kind of a subset of this--not just where 
competition is reduced, but where the new merging carriers 
would become dominant. Of the 367 markets in which the 
American-TWA merger would decrease competition, the merged 
carriers would dominate 161. So in a little less than half of 
the 367 markets, the new American-TWA would have over a 50 
percent share in those markets and that would affect almost 5 
million passengers. The United agreement would decrease 
competition in 290 markets, and the new carrier would have 
domination, over a 50 percent share of the market--in 126.
    [Screen.]
    Now again, what I want to do, though, is turn to the fact 
that there are some increases in competition that result from 
these mergers. DOT defines an effective competitor as a carrier 
that has at least 10 percent of the market. So these markets 
are where, for example in the American-TWA example, each of the 
carriers had less than a 10 percent share, so they were not 
really an effective competitor in 1999, and by joining, there 
would be 150 markets where American and TWA combined would be a 
more effective competitor. As you see, there are quite a number 
of passengers in those 150 markets, affecting 15 million 
passengers.
    The United Airlines-US Airways deal has 65 markets where 
there would be an increase in competition, affecting 2.9 
million passengers. Interestingly, again the comparison with 
the Northwest-Continental deal is very informative and 
enlightening. You see massive increases in competition from 
that deal, and yet it did not pass DOJ muster.
    Now, just to go back to the prior slide, from the American 
deal we are looking at decreases in competition in 367 markets, 
increases in 150 markets.
    The second point I wanted to share was what we think are 
the really key issues raised by the American proposal. I think, 
as several people have said here, one of the most important 
things to do is recognize the distinct elements of the American 
Airlines proposal. TWA is a separate proposal and we are very 
pleased to hear that it is entirely separate and not contingent 
on the aspects of the agreement that relate to United Airlines.
    TWA clearly is in severe financial straits. Even though a 
significant number of markets may be affected, those are 
markets that would otherwise lose the service, and the 
antitrust laws provide a very different perspective for a 
failed firm. So there are less anticompetitive effects that are 
raised by the part of the American agreement with TWA and 
clearly present more benefits, many of which you have heard 
today from the various speakers.
    The parts of the agreement that raise the most significant 
issues--and I think you have begun to hear some of those--are 
the elements of the agreement that have to do with the unique 
and distinct arrangements with United Airlines, the new United 
Airlines. There are three areas that you see we have 
highlighted: the sharing of the shuttle, 50 percent; acquiring 
the 49 percent share of DC Air; and agreeing to compete at 
select US Airways hubs.
    The key question is how competition would be affected by 
these agreements--that is, whether you would get vigorous, 
effective competition between these two major massive carriers 
that probably cannot be matched by any subsequent merger or 
whether it may signal some period of cooperation and 
recognition of mutual interdependence. That is a well-
established theory in economics that has empirical evidence, 
that when there are few firms in a market and they meet in many 
markets, in this case 1106 markets in which the new United and 
the new American would meet, they quickly recognize their 
mutual interdependence and compete less vigorously.
    I think that is one of the factors that one would clearly 
want to take into account in terms of what kind of competition 
might occur given some of these transfers.
    I also want to highlight a provision of the agreement that 
has not been researched or discussed, but would appear to be 
extraordinarily unusual. It basically continues a tied 
relationship between United and American. This is not an 
agreement where American buys some assets from United and they 
each go their own way and then compete using those assets. 
There is a provision in this agreement that basically ties 
American not to grow more than 7.5 percent. If American grows, 
if they enter into an agreement with another major carrier that 
would have them grow bigger than that, United can take back the 
shuttle and undo every bit of the assets that they have 
transferred to them.
    This deal would be in effect for 4 years and it is an 
extraordinary agreement, something that we have never seen. The 
experienced people in the field we have talked to have also 
never seen such a unique agreement.
    This brings me to the last point, which is basically a 
framing of the larger issue. So we hone in on what we think are 
the critical issues of the American proposal and its 
relationship to United, which relate to the fundamental 
restructuring that is represented by these proposals. There are 
three issues that we think are critical.
    The first one I have already alluded to, that is the extent 
to which there would be vigorous competition between American 
and United. We think the unique nature of this arrangement and 
the interdependence of the airlines would be very apparent and 
we think this raises some serious questions that Congress and 
clearly the Department of Justice would be wise to further 
explore.
    The second is not really second in my view. I think you 
have heard it somewhat before. The cornerstone of effective 
competition in any industry is open access. That is the source 
of lifeblood for competition, particularly if you have a 
relatively concentrated industry. Barriers to entry in this 
industry already exist. They are significant and they are 
already impeding the entry of new carriers, as we can see by 
the pending Justice Department complaint against American's 
behavior in Dallas-Fort Worth against three new low-cost 
carriers.
    So barriers to entry already exist. I cannot tell you how 
much they might increase or ways they might increase by these 
broad consolidation areas, but it is probably the single most 
important factor to understand, combined with the first one. It 
is also important that if you are going to have 50 percent of 
the market, two huge carriers are not competing. But in 
essence, this really combines with the second point, because if 
the two huge carriers are not competing and recognize their 
interdependence, their assets could potentially be used 
collectively to impede further entry.
    My final point is one that I know is of interest to many 
members of this Committee, the Congress and the flying public, 
and that is what happens to small community service. It is very 
important. It has been well documented that the benefits of 
deregulation have not been experienced equally by smaller 
communities. We are actually doing some work right now for 
Senator Snowe looking at the placement of regional jets and how 
that has been affecting small communities.
    Overall, small community service remains a very important 
equity issue in deregulation. The core question really is 
whether small communities are better off in the hands of a 
concentrated, highly networked community which perhaps promises 
tremendous interlining--where you can be in the smallest city, 
but if there is service in your town, then you can get anywhere 
in the world on line, and not have to change carriers. That is 
one of the big benefits United and American outline as a 
benefit of their plans for communities--that you do not have to 
change planes, you can be on us everywhere in the world. So 
that is one side of it, saying that you are better off going 
with that kind of concentration and vast interconnected global 
networks.
    Or are you better off putting your hat in with a more 
competitive industry? I think you have heard Ms. Slaughter's 
answer about that. There is a different view on this and I 
think that is one of the fundamental assessments needed at the 
end of the day to evaluate the direction of industry 
consolidation.
    I appreciate the opportunity to be here and put some of 
these issues on the table and would be pleased to take any 
questions. Thank you, Mr. Chairman and Members of the 
Committee.
    [The prepared statement of Ms. Hecker follows:]

      Prepared Statement of JayEtta Z. Hecker, Director, Physical 
         Infrastructure Issues, U.S. General Accounting Office
    Mr. Chairman and Members of the Committee:
    We appreciate the opportunity to testify on the potential 
implications of merger proposals recently announced by major airlines. 
In May 2000, United Airlines (United) proposed to acquire US Airways 
and divest part of those assets to create a new airline to be called DC 
Air. More recently, American Airlines (American) has proposed to 
purchase Trans World Airlines (TWA), along with certain assets from 
United. These proposals have raised questions about how such 
consolidation within the airline industry could affect competition in 
general and consumers in particular.
    Extensive research and the experience of millions of Americans 
underscore the benefits that have flowed to most consumers from the 
1978 deregulation of the airline industry, including dramatic 
reductions in fares and expansion of service. These benefits are 
largely attributable to increased competition--by the entry of both new 
airlines into the industry and established airlines into new markets. 
At the same time, however, airline deregulation has not benefited 
everyone; some communities have suffered from relatively high airfares 
and a loss of service due in part to a lack of competition. GAO has 
been analyzing aviation competition issues since enactment of the 
Airline Deregulation Act. Our work over the last decade has focused on 
challenges to competition and industry performance, including various 
mergers, the Department of Transportation's (DOT) role, concentration 
in select airports, key airline operating and marketing practices, 
barriers to entry, small community service, and fares in dominated 
markets.\1\
---------------------------------------------------------------------------
    \1\ See list of related GAO products attached to this statement.
---------------------------------------------------------------------------
    The potential shifts in industry structure that would be brought 
about from the proposed mergers represent a crossroads for the 
structure of the airline industry and the state of competition and 
industry performance.\2\ These proposed mergers raise numerous public 
policy issues that require reasoned responses. Ultimately, the 
Department of Justice (DOJ) has the primary responsibility to evaluate 
these mergers. In its review, Justice considers a number of factors, 
including increases in market concentration; potential adverse effects 
on competition; the likelihood of new entry; possible efficiencies or 
other benefits; whether one of the airlines would fail and exit the 
market if the merger failed to occur; and whether a less 
anticompetitive alternative exists.
---------------------------------------------------------------------------
    \2\ Technically, American has proposed to acquire the assets of 
TWA, which declared bankruptcy. For presentation purposes in this 
statement, however, we will refer to the transaction as a merger.
---------------------------------------------------------------------------
    We recently issued a report on the potential effects of the 
proposed merger between United and US Airways.\3\ That review, using 
the most recently available data from DOT on the top 5,000 domestic 
airline markets, generally focused on changes in market structures and 
not on other issues that DOJ might take in consideration.\4\ Our 
statement today is based on that report and our earlier work on airline 
competition issues, along with initial analyses of the potential 
effects of the various proposed transactions between American, TWA, 
United, and US Airways. We will: (1) present an overview of potential 
shifts in industry structure and markets associated with both the 
American and United proposals; (2) identify key issues associated with 
American's proposed transactions; and (3) identify some critical public 
policy issues associated with the potential consolidation in the 
industry.
---------------------------------------------------------------------------
    \3\ Aviation Competition: Issues Related to the Proposed United 
Airlines--US Airways Merger (GAO-01-212, Dec. 15, 2000).
    \4\ We analyzed the most recent data available from DOT on the top 
5,000 city-pair markets, which covered calendar year 1999. For this 
statement, we applied the same methodology, using the same data, as we 
did in our December 2000 report on the proposed United-US Airways 
merger. We recognize that competition or service in particular markets 
is likely to change over time with the entry or exit of different 
carriers. Carriers may add or reduce service in markets. These data 
illustrate the approximate orders of magnitude of the various 
transactions. We have not subtracted passengers or markets that may be 
affected by DC Air markets or the proposed agreement between United and 
American to share the current US Airways shuttle from the data for new 
United.
---------------------------------------------------------------------------
In summary:
   If both the United-US Airways merger and American-TWA 
        acquisition are consummated, new United would have the largest 
        market share of any U.S. carrier--over 27 percent--and new 
        American would have a 22.6 percent share. Each proposal could 
        have both harmful and beneficial effects on consumers. The 
        United and American proposals would each reduce competition in 
        approximately 300 markets, with each affecting over 10 million 
        passengers. Each proposal would allow the new larger carrier to 
        dominate (i.e., obtain a greater than 50-percent market share) 
        more than 100 new markets. However, the mergers would also each 
        create new competitors where, previously, each of the merging 
        carriers had less than a 10-percent market share. Each would 
        provide other benefits to consumers as well, such as creating 
        new online service in certain markets and possible new routings 
        allowing passengers to connect over different cities.

   American's proposed arrangements with TWA, United, US 
        Airways, and DC Air raise a number of significant questions 
        that cannot be answered now, in part because many of the 
        details of these arrangements are still unknown. Although TWA 
        has been in poor financial condition for years, the question 
        remains whether American's purchase of TWA represents the least 
        anticompetitive means to preserve its assets. Other questions 
        arise about how the agreements that American has tentatively 
        made with United (regarding the future of the US Airways 
        Shuttle between Washington, New York, and Boston and the assets 
        associated with the proposed DC Air) would affect competition.

   The consolidation in the industry that might result from 
        both the proposed American and United transactions raises major 
        public policy issues. These include, but are not limited to, 
        questions about how a more consolidated industry might further 
        raise barriers to market entry by new airlines, how the two 
        merged airlines might compete in key markets, whether the 
        merged carriers would expose the public to greater risks of 
        travel disruptions, and how service to small communities might 
        be affected.
Background
    On May 24, 2000, United and US Airways agreed to merge their 
operations. Under the terms of the proposed merger, United would 
acquire US Airways in a transaction valued at $11.6 billion. 
Specifically, United would pay $60 for each share of common US Airways 
stock for a total of $4.3 billion and would assume $1.5 billion in US 
Airways net debt and $5.8 billion in aircraft operating leases. 
According to information from United, the combined company (``new 
United'') would have approximately 145,000 employees. It would operate 
eight hubs in six states and serve a total of 380 airports throughout 
the country, reaching communities in every state.
    Under the terms of the proposed merger, United plans to divest some 
of the assets US Airways possesses at Ronald Reagan Washington National 
Airport (Reagan National). These assets would be used to create a new 
airline known as DC Air. They include 222 departure and arrival 
slots,\5\ several gates and related airport facilities, and the 
operations of an existing commuter airline.
---------------------------------------------------------------------------
    \5\ The Federal Aviation Administration limits the number of 
operations (takeoffs and landings) that can occur during certain 
periods of the day at four congested airports--O'Hare in Chicago; 
Reagan National in Washington, D.C.; and Kennedy and LaGuardia in New 
York. The authority to conduct a single operation during these periods 
at these four airports is commonly referred to as a ``slot.''
---------------------------------------------------------------------------
    In January 2001, American proposed acquiring TWA (which declared 
bankruptcy) for approximately $3.5 billion, including $500 million in 
cash, $3.0 billion in estimated lease assumptions, and $200 million in 
other financing. In addition, American also announced that it had 
agreed with United to purchase certain assets from United and US 
Airways, including half of the US Airways Shuttle between Washington, 
New York, and Boston, and a 49-percent share of DC Air. According to 
information from American, the combined company (``new American'') 
would have approximately 120,000 employees. It would operate five hubs, 
nearly 1,000 aircraft, and gain a large number of slot and gate 
resources at key airports in the eastern United States.
    The consummation of the proposed mergers are subject to approvals 
by various regulatory bodies. Both DOJ and DOT have responsibilities 
for reviewing airline mergers and acquisitions.\6\ DOJ has the 
authority to review mergers or stock acquisitions before they take 
place to determine whether they violate antitrust laws. Under the Hart-
Scott-Rodino Act, an acquisition of voting securities above a set 
monetary amount must be reported to DOJ for prior review. DOJ has the 
authority to institute judicial proceedings under the Clayton Act if it 
determines that a merger or acquisition may substantially lessen 
competition in a relevant market or if it tends to create a 
monopoly.\7\ If DOJ believes any agreement is anticompetitive in whole 
or in part, it may seek to block the agreement in federal court. TWA's 
bankruptcy proceeding is now before the U.S. Bankruptcy Court for the 
District of Delaware. DOT conducts its own analysis of airline mergers 
and acquisitions and submits its views and any relevant information it 
has to DOJ. In addition, when transactions involve the transfer of 
international route authority, DOT is responsible for approving such 
matters to ensure that they are consistent with the public interest.
---------------------------------------------------------------------------
    \6\ The merger may also be reviewed by the European Commission and 
state attorneys general.
    \7\ Justice's Horizontal Merger Guidelines (United States 
Department of Justice and Federal Trade Commission Revision to the 
Horizontal Merger Guidelines (Apr. 8, 1997)) describe the process used 
to analyze the potential effect of a merger under the Clayton Act. 
Under the Hart-Scott-Rodino Act, an acquisition of voting securities 
above a set monetary amount must be reported to Justice for prior 
review. Justice has the authority to institute judicial proceedings 
under the Clayton Act if it determines that a merger or acquisition may 
substantially lessen competition in a relevant market or if it tends to 
create a monopoly.
---------------------------------------------------------------------------
Highlights of Potential Changes in Industry Structure
    Although the proposed acquisition of TWA by American would not 
affect as many passengers as the merger between United and US Airways, 
the transaction itself has the potential for preserving assets in the 
market. If both the United-US Airways merger and the American-TWA 
acquisition are consummated, new United would have the largest market 
share of any U.S. carrier--27.2 percent--and new American would have a 
22.6 percent share (based on revenue passenger miles, a recognized 
measure of airline size \8\). Thus, if both transactions are 
consummated, new United and new American would together control nearly 
50 percent of total airline traffic. Many industry analysts observe 
that these measures would likely not be the end of the movement toward 
further industry consolidation. Figure 1 compares the percentage share 
of total revenue passenger miles that new American and new United would 
carry relative to that flown by other major U.S. airlines. Appendix I 
shows the relative size of major U.S. passenger airlines as indicated 
by common measures of airline market presence, along with the airlines' 
1999 total operating revenue.
---------------------------------------------------------------------------
    \8\ These percentages do not take into account the market share 
that might be attributable to DC Air or the sharing of the US Airways 
Shuttle. Revenue passenger miles represent the number of paying 
passengers transported over each mile. ``Revenue passengers'' do not 
include those who are flying on frequent flyer award tickets and others 
who did not pay for their flights (e.g., airline employees).




    American's acquisition of TWA would reduce competition in 367 
markets--more than the 290 markets in which competition would be 
reduced from the proposed merger between United and US Airways.\9\ The 
number of passengers potentially affected by the new American 
restructuring would be 11 million, compared to the 16 million 
potentially affected by new United. New American would also have a 
larger increase in the number of markets they could dominate (161) 
compared to United (126). However, the dominated markets associated 
with the proposed American-TWA arrangement affect fewer passengers than 
those dominated markets associated with the proposed United-US Airways 
merger (4.9 million compared to 6.9 million). The total number of 
markets that new American would dominate would be 552 compared with 
1,156 that new United would dominate. On the other hand, new American 
would increase competition in more markets than new United (150 
compared to 65), potentially benefiting more than five times as many 
passengers (15.4 million compared to 2.9 million).
---------------------------------------------------------------------------
    \9\ As we did in our December 2000 report on the proposed United-US 
Airways merger, we define a market as a city-pair. We define a 
competitor as an airline that had at least a 10 percent share of the 
passenger traffic in that market, based on DOT's 1999 data on the top 
5,000 city-pair markets, which was the most currently available at the 
time of our analysis.
---------------------------------------------------------------------------
    As a frame of reference for analyzing the competitive significance 
of the proposed mergers, we compared them with our analysis of the 
proposal in 1998 by Northwest to acquire a majority of the voting stock 
in, and enter into an alliance with, Continental.\10\ The potential 
number of markets and passengers who might be adversely affected by 
either the proposed United-US Airways or American-TWA mergers are much 
greater than those that might have been affected by the Northwest-
Continental stock acquisition and alliance. The number of passengers 
who could benefit from the American-TWA merger is roughly comparable to 
those who could have benefited from the Northwest-Continental stock 
acquisition and alliance. Table 1 summarizes the number of markets and 
passengers affected by the proposed mergers and compares them to the 
markets and passengers that potentially would have been affected by the 
Northwest-Continental stock acquisition and alliance.
---------------------------------------------------------------------------
    \10\ Northwest proposed to acquire a majority of the voting stock 
in, and enter into an alliance with, Continental. Northwest and 
Continental announced in January 1998 that Northwest was to acquire 8.7 
million shares of Continental's stock. These shares gave Northwest 51 
percent of the voting rights in Continental. In addition, the two 
airlines were entering into an alliance that would connect their route 
systems. A variety of industry analysts told us they believed that 
Northwest and Continental would not act as independent competitors over 
the long run. As a result, our analysis of the potential competitive 
effects of the stock acquisition and alliance assumed that Northwest 
and Continental would behave as though they had merged. See Aviation 
Competition: Effects on Consumers From Domestic Alliances Vary (GAO/
RCED-99-37, Jan. 15, 1999). Our analysis here largely parallels our 
analysis of the Northwest-Continental stock acquisition and alliance.
    DOJ announced a tentative settlement in its antitrust suit opposing 
Northwest's purchase of a controlling interest in Continental on 
November 6, 2000. Under the terms of the agreement in principle, 
Northwest would divest all but 7 percent of the voting interest in 
Continental and would be subject to significant restrictions on its 
ability to vote any stock it retains.


 Table 1: Comparison of Potential Competitive Impact of the Proposed United-US Airways and American-TWA Mergers
                     with the Proposed Northwest--Continental Stock Acquisition and Alliance
----------------------------------------------------------------------------------------------------------------
                            American-TWA (1999 data)       United-US Airways (1999       Northwest-Continental
-------------------------------------------------------             data)                     (1997 data)
                                                       ---------------------------------------------------------
                           Numbers  of     Passengers                    Passengers                  Passengers
   Competitive  Factor       markets        affected     Numbers  of      affected     Numbers of     affected
                                           (millions)      markets       (millions)      markets     (millions)
----------------------------------------------------------------------------------------------------------------
           Markets where           367             11            290           16.0            63           2.0
       competition would
                 decline
         Newly dominated           161            4.9            126            6.9            25           2.4
                 markets
         Total dominated           552           27.5          1,156           61.1           492          40.7
                 markets
           Markets where           150           15.4             65            2.9           286          15.1
       competition would
                increase
----------------------------------------------------------------------------------------------------------------
Source: GAO's analysis.


    If both mergers proceed, the two new carriers would both compete in 
1,106 of the top 5,000 markets. Competition could be reduced in 267 of 
those markets where, in 1999, about 10.3 million passengers traveled. 
That is, in 267 markets, as a result of combining what are now separate 
competitors (i.e., each airline had at least a 10 percent share of the 
market) through their proposed merger, one competitor would no longer 
exist. However, the data net out markets where the merger might create 
a new effective competitor (i.e., where the two merging carriers 
previously had less than a 10-percent market share but combined have 
over 10 percent.) Table 2 shows the number of markets and passengers 
that could potentially be affected by reduced competition due to the 
combined effect of the two mergers.

    Table 2: Markets Where New American and New United Would Meet and
                      Competition Could Be Reduced
------------------------------------------------------------------------
                                                            Passengers
 Change in the number of  competitors       Markets         (millions)
------------------------------------------------------------------------
                         From 3 to 2               64              2.6
                         From 4 to 3              123              3.5
                         From 5 to 3                3              0.1
                         From 5 to 4               69              3.7
                         From 6 to 5                8              0.4
                               Total              267             10.3
------------------------------------------------------------------------
Source: GAO's analysis of data from DOT.


    Thus, in 64 of the 267 markets, the two proposed mergers leave new 
United and new American as the only remaining competitors. In 1999, 
about 2.6 million passengers traveled in those 64 markets. In 126 
markets where 3.6 million passengers traveled in 1999, new United and 
new American would be two of only three remaining competitors.
    Conversely, the proposed United-US Airways and American-TWA mergers 
would also benefit consumers. In markets where one of the two merging 
airlines now has limited market shares, the merger would allow them to 
create competition against other airlines. For example, were both 
mergers approved, approximately 7 million passengers could benefit from 
gaining an additional competitor in 107 markets. Additionally, by 
extending the carriers' operations to city-pairs where only one of the 
two airlines previously operated at each endpoint, the merger would 
create new on-line service between those communities.\11\ Finally, the 
merger would benefit members of each airline's frequent flyer programs 
by expanding the number of destinations that the members could reach. 
The airlines also assert that the proposed mergers would deliver other 
benefits. For example, American and TWA passengers may benefit by being 
able to connect to their destination over different hubs.
---------------------------------------------------------------------------
    \11\ On-line service provides passengers with connecting flights 
without requiring them to change airlines. Service that requires 
passengers to change airlines to continue their flights (excluding 
those requiring a passenger to transfer between a larger airline and 
its commuter affiliate or other airlines with which it may have a code-
sharing agreement) is referred to as ``interline'' service.
---------------------------------------------------------------------------
Proposed Arrangements Between American, TWA, United, US Airways, and DC 
        Air Raise Significant Competition and Service Issues
    American's acquisition of TWA and its purchase of certain assets of 
United and US Airways, including a portion of DC Air need to be 
discussed separately, as the implications would seem to be quite 
different. Each component of American's proposed transactions raise 
numerous questions.
    Does American's purchase represent the ``least anticompetitive'' 
means to preserve the presence of TWA's assets in the market? By many 
accounts, TWA has been in a difficult financial position for years. 
Since 1992, TWA has entered bankruptcy three times. It has failed to 
earn an annual profit during the past 12 years. Regardless of whether 
TWA ceases operating entirely because of its financial failure, or 
whether TWA is purchased by another airline, an independent competitive 
presence in the 103 cities that the airline serves will be lost. 
(However, were TWA to cease operating entirely, the loss of service 
would likely be temporary, as the market would adjust to meet the 
demand for travel.)
    Whether the loss of competition from TWA is a positive or negative 
development depends on a number of factors. DOJ will have to review 
many of those factors, including increases in market concentration, 
potential adverse effects on competition of the transaction, possible 
efficiencies or other benefits, and the likelihood of new entry. It is 
also DOJ's responsibility to determine whether, for example, absent the 
merger, TWA's assets would exit the market if it failed, and whether 
there is no less anticompetitive alternative. On the one hand, we 
recognize that there are many important considerations involved with 
preventing TWA from ceasing operations entirely, such as continuing 
service to markets and maintaining jobs for its employees. On the other 
hand, the question exists about how the loss of TWA's competitive 
presence could be mitigated. For purposes of creating more competition 
in the U.S. domestic aviation market, would it be better if an airline 
other than American bought TWA?
    American's purchase of certain assets of United and US Airways, 
including a portion of DC Air, raises other significant questions about 
how competition may be affected. Several issues appear central to an 
assessment of possible anticompetitive impacts of the proposed 
transactions:
    How would American's purchasing part of DC Air affect competition? 
As DC Air was originally conceived in the proposed merger between 
United and US Airways, questions arose about whether it would be an 
independent competitor, particularly in certain key markets relative to 
new United. If American purchases 49 percent of DC Air, passengers who 
fly on DC Air could earn American rather than United frequent flyer 
miles. Passengers who may be flying beyond Washington, D.C., could 
connect with online service onto other American flights rather than on 
flights operated by United. American's purchase of part of DC Air means 
that American, not United, would provide some of the aircraft, crew, 
and other support to DC Air.
    How might American's purchasing part of DC Air affect service to DC 
Air's markets? Under the original proposal to create DC Air, the 
airline was to serve 44 markets out of Reagan National, most of which 
are now served by US Airways. DC Air had expressed a commitment to 
maintain service to essentially all of those cities, using the 222 
arrival and departure slots that it would obtain as part of the US 
Airways divestiture. We do not know what commitment, if any, American 
expressed regarding maintaining that service. We also do not know what 
agreements, if any, American made with DC Air to buy the remaining 51 
percent interest in the company or whether American will use the slots 
at Reagan National for other markets.
    How would American's sharing shuttle operations with United alter 
competition? American and United have proposed forming a joint venture 
to share the operations of the US Airways shuttle at New York 
LaGuardia, Boston, and Washington Reagan National for at least 20 
years. The two airlines expect to coordinate schedules, ticketing, 
frequent flyer programs, and access to passenger lounges. We do not yet 
know how this arrangement might affect price competition in the market.
    Does American's adding flights in certain United-US Airways hub 
routes enhance competition? As part of the agreement with United, 
American has agreed to provide at least two daily flights on five 
routes for 10 years. Four of those markets--between Chicago O'Hare and 
Charlotte, Los Angeles and Philadelphia, San Jose and Philadelphia, and 
Washington and Pittsburgh--complement American's existing network by 
originating in one of the airline's ``focus cities.'' However, we do 
not know what impact the agreement between American and United will 
have on competition between the two airlines on price and service in 
those markets.
Critical Public Policy Issues Associated With the Industry's Possible 
        Consolidation
    Some industry observers have suggested that the American and United 
proposals mark the beginning of a new wave of transition. Any industry 
consolidation that these proposals bring about raises a number of 
important public policy issues for consideration. We highlight some of 
these issues--relating to market entry, competition among the newly 
merged airlines in key markets, potential travel disruption, and 
service to small communities--while recognizing that many others also 
exist.
    What barriers to market entry might the proposed mergers exert? 
Scores of new airlines have begun commercial passenger service since 
the deregulation of the industry. Although most failed, other airlines 
have managed to compete, and some have done so quite profitably. The 
most notable example, of course, is Southwest. Others--such as ATA, 
AirTran, and JetBlue--have also experienced success so far. The success 
of airline deregulation in leading to lower fares and better service 
stems in part from competition spurred by the entry of new airlines, 
i.e., low fare carriers are recognized as providing the primary fare 
discipline in the marketplace. A January 2001 DOT report on 
exclusionary practices concluded that major airlines have the 
opportunity and the means to protect their market power by frustrating 
new entry. DOT found there had been instances in which incumbents drove 
new entrants out of markets by cutting fares and flooding the market 
with capacity. Once the new entrant was driven out of the market, the 
incumbent sought an increase in fares and reductions in service.
    If American and United fly nearly half of the industry's traffic, a 
key issue that policy makers would need to address is whether new low-
cost carriers would be able to enter markets and compete. Because 
established carriers would control vast numbers of facilities 
(including slots and gates) at key airports, would those new carriers 
be able to offer service in major markets? Would American and United's 
sales and marketing efforts (such as their frequent flyer programs and 
code-sharing affiliations such as the Star Alliance and OneWorld) 
present barriers that would be too great for new entrants to overcome? 
How effectively would those new carriers compete if the American and 
United transactions spurred additional consolidation in the industry, 
possibly raising entry barriers even higher?
    Would the transactions between American and United alter how they 
would compete in key markets? The proposed United and American 
arrangements--including the agreements in which American would share 
the US Airways shuttle with United and compete in certain markets 
between United and US Airways hubs--raise questions regarding the 
extent to which the carriers might compete vigorously. Economic 
literature and empirical evidence indicate that when fewer firms exist 
in a market and those firms meet in many markets (e.g., city-pairs), 
they are likely to recognize their interdependence and compete less 
vigorously.
    To identify the orders of magnitude of markets that might be 
affected by new United and new American, we examined the number of 
markets where the merged carriers would compete against each other.\12\ 
New American would be a competitor in over 2,100 of the top 5,000 
markets, while new United would compete in over 2,900. The new carriers 
would both be competitors in 1,106 markets. Table 3 summarizes the 
combined passenger shares of the two carriers in these markets.
---------------------------------------------------------------------------
    \12\ As noted earlier, in this and previous reports, we defined a 
competitor as an airline that carried at least 10 percent of the 
passenger traffic in a given market. This is the same definition used 
by DOT.


      Table 3: Passenger Shares of New United and New American in Markets Where Carriers Would Both Operate
----------------------------------------------------------------------------------------------------------------
  Combined passenger  share of new United and  new
                      American                                  Markets                        Percent
----------------------------------------------------------------------------------------------------------------
                                         81-100%                            286                          25.9
                                           61-80                            324                          29.3
                                           41-61                            323                          29.2
                                           20-40                            173                          15.6
                                           TOTAL                          1,106                         100.0
----------------------------------------------------------------------------------------------------------------
Source: GAO's analysis of 1999 data from DOT.


    In 610 of the 1,106 markets (or about 55 percent), the two carriers 
would account for over 60 percent of the traffic. To the extent the two 
large carriers recognize their interdependence in these and the other 
496 markets where they would both operate, should the carriers not 
compete vigorously, it could adversely affect fares and service.
    Will the public be exposed to greater risk of travel disruptions, 
in light of the merged carriers' breadth of service? We have witnessed 
three relatively recent examples of how carriers' labor difficulties 
can greatly disrupt travel: American's 1997 disruption following its 
purchase of Reno Air, United's difficulties this past summer, and 
Delta's current challenges with its pilots. Other labor groups' 
contracts with the airlines are also coming up for renewal in the near 
future. If the proposed mergers are approved, and either airline 
encounters major labor problems, how severely could the public's travel 
be disrupted? The aviation system has relatively little unused capacity 
in it now, having been operating at or near record load levels for some 
time. In general, could the significant integration challenges (not 
only labor, but also systems and fleets) presented by the American and 
United proposals make the public more vulnerable to network wide 
disruptions?
    How might a consolidated industry affect service to small 
communities? The quality of air service to smaller communities and the 
fares that passengers in those communities pay relative to those paid 
in larger communities have been issues that the Congress has been 
concerned about for some time. At the same time, one of the benefits of 
airline mergers and alliances has been the ability of the larger 
carrier to provide online service to increased numbers of destinations. 
For example, the United-US Airways merger could improve competition and 
service in 256 relatively small markets by providing new online 
connections. The airlines have also claimed that small communities 
would gain greater access to international markets through their global 
alliances. However, the mergers could erode service to many small 
communities where the merging airlines compete, even if the service 
provided is over different hubs. One analyst suggested, for example, 
that American might discontinue TWA's current turboprop service between 
Bloomington (Illinois) and St. Louis, because American also serves 
Bloomington, but uses small jet aircraft to and from Chicago. Would a 
more dispersed and competitive market structure offer better promise of 
providing affordable air access for small and medium sized communities 
to major US business centers? How might the potential effect of 
industry consolidation on new entry affect small and medium sized 
communities?
Conclusions
    There are a number of unanswered questions that the Congress, DOJ, 
and DOT need to address in evaluating the proposed mergers. The 
proposals by American, TWA, United, US Airways, and DC Air constitute 
the most significant recent changes that have occurred in the airline 
industry, and the outcome of these decisions could have both positive 
and negative effects for consumers for years to come.
    This concludes my statement. I would be pleased to answer any 
questions you or other Members of the Committee might have.
                                         JayEtta Z. Hecker,
                          Director, Physical Infrastructure Issues.
Appendix I

                                                  Combined Domestic and International Measures of Airline Size, 12 Months Ending June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Revenue passenger  enplanements a               Revenue passenger  miles                   Total operating  revenue
                            Airline                             --------------------------------------------------------------------------------------------------------------------------------
                                                                   Number in  thousands   Percent  of total    Number in  thousands   Percent  of total  Dollars in  millions  Percent  of total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Delta Air Lines               106,218,000               18.8              106,849,814               17.0                14,711               16.3
                                          United Airlines b                87,113,000               15.4              127,455,682               20.3                18,027               20.0
                                        American Airlines c                85,400,000               15.1              114,832,223               18.3                17,730               19.6
                                       Southwest Airlines d                69,056,000               12.2               39,641,182                6.3                 4,736                5.2
                                               US Airways e                56,417,000               10.0               42,898,817                6.8                 8,595                9.5
                                         Northwest Airlines                56,003,000                9.9               77,324,776               12.3                10,276               11.4
                                                           Continental Airl44,868,000                7.9               60,980,078                9.7                 8,639                9.6
                                       Trans World Airlines                26,271,000                4.7               26,650,717                4.2                 3,309                3.7
                                    America West Airlines f                19,523,000                3.5               18,558,027                3.0                 2,211                2.4
                                          Alaska Airlines g                13,694,000                2.4               11,962,007                1.9                 2,082                2.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Total h               564,563,000              100.0              627,153,323              100.0                90,316              100.0
                                               New United i               143,530,000               25.4              170,354,499               27.2                26,622               29.5
                                             New American i               111,671,000               19.8              141,482,940               22.6                21,039               23.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
a ``Passenger enplanements'' represent the total number of passengers boarding an aircraft. Thus, for example, a passenger that must make a single connection between his or her origin and
  destination counts as two enplaned passengers because he or she boarded two separate flights.
b Total operating revenues are for the parent (UAL Corporation).
c Total operating revenues are for the parent (AMR Corporation).
d Southwest Airlines provides only domestic service.
e Total operating revenues are for the parent (US Airways Group, Inc.).
f Total operating revenues are for the parent (America West Holdings, Inc.).
g Total operating revenues are for the parent (Alaska Air Group, Inc.).
h Totals may not add to 100 percent due to rounding.
i Totals for new United and new American do not make any allowance for those operations that might become part of DC Air or sharing the US Airways Shuttle.
Sources: GAO's analysis of DOT data.


Related GAO Products
    Aviation Competition: Issues Related to the Proposed United 
Airlines-US Airways Merger (GAO-01-212, Dec. 15, 2000).
    Reagan National Airport: Capacity to Handle Additional Flights and 
Effect on Other Area Airports (GAO/RCED-99-234, Sept. 17, 1999).
    Aviation Competition: Effects on Consumers From Domestic Alliances 
Vary (GAO/RCED-99-37, Jan. 15, 1999).
    Aviation Competition: Proposed Domestic Airline Alliances Raise 
Serious Issues (GAO/T-RCED-98-215, June 4, 1998).
    Domestic Aviation: Service Problems and Limited Competition 
Continue in Some Markets (GAO/T-RCED-98-176, Apr. 23, 1998).
    Aviation Competition: International Aviation Alliances and the 
Influence of Airline Marketing Practices (GAO/T-RCED-98-131, Mar. 19, 
1998).
    Airline Competition: Barriers to Entry Continue in Some Domestic 
Markets (GAO/T-RCED-98-112, Mar. 5, 1998).
    Domestic Aviation: Barriers Continue to Limit Competition (GAO/T-
RCED-98-32, Oct. 28, 1997).
    Airline Deregulation: Addressing the Air Service Problems of Some 
Communities (GAO/T-RCED-97-187, June 25, 1997).
    International Aviation: Competition Issues in the U.S.-U.K. Market 
(GAO/T-RCED-97-103, June 4, 1997).
    Domestic Aviation: Barriers to Entry Continue to Limit Benefits of 
Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997).
    Airline Deregulation: Barriers to Entry Continue to Limit 
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 
1996).
    Domestic Aviation: Changes in Airfares, Service, and Safety Since 
Airline Deregulation (GAO/T-RCED-96-126, Apr. 25, 1996).
    Airline Deregulation: Changes in Airfares, Service, and Safety at 
Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19, 
1996).
    International Aviation: Airline Alliances Produce Benefits, but 
Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr. 6, 1995).
    Airline Competition: Higher Fares and Less Competition Continue at 
Concentrated Airports (GAO/RCED-93-171, July 15, 1993).
    Computer Reservation Systems: Action Needed to Better Monitor the 
CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992).
    Airline Competition: Effects of Airline Market Concentration and 
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
    Airline Competition: Industry Operating and Marketing Practices 
Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990).
    Airline Competition: Higher Fares and Reduced Competition at 
Concentrated Airports (GAO/RCED-90-102, July 11, 1990).
    Airline Deregulation: Barriers to Competition in the Airline 
Industry (GAO/T-RCED-89-65, Sept. 20, 1989).
    Airline Competition: Fare and Service Changes at St. Louis Since 
the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988).
    Competition in the Airline Computerized Reservation Systems (GAO/T-
RCED-88-62, Sept. 14, 1988).
    Airline Competition: Impact of Computerized Reservation Systems 
(GAO/RCED-86-74, May 9, 1986).
    Airline Takeoff and Landing Slots: Department of Transportation's 
Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986).
    Deregulation: Increased Competition Is Making Airlines More 
Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985).

    The Chairman. Thank you, Ms. Hecker.
    I believe that this has been a very important and 
beneficial hearing and one that has been very educational to 
all of us. Let us jump right into it, Mr. Carty, to what Ms. 
Hecker describes as an extraordinary agreement, that if you 
grow more than 7.5 percent they will take back your assets. 
What is that all about?
    Mr. Carty. I think that is all about United being concerned 
they do a transaction with us and we would embarrass them by 
doing another transaction that would make us dramatically 
bigger than them. We would be delighted if that was removed, I 
can assure you. On that particular item, we are the furthest 
thing from conspirators that you can imagine. United and we 
fought vigorously over this contract, I can assure you.
    United did not offer, as Mike suggested, to give us half 
the shuttle. Just as they insisted on the provision you just 
alluded to, we insisted we would not do a transaction with them 
unless we had half the shuttle. This was a very vigorous 
negotiation between two longstanding and very vigorous 
competitors that, I might add that Jim Wilding, who is the 
President of the Metropolitan Washington Airports Authority, 
recently referred to as the cobra and the mongoose. That has 
been the history of American and United and I can assure you it 
will continue to be the history of American and United.
    The Chairman. Well, because it was a hard-fought agreement, 
you entered into one of the most extraordinary agreements in 
history?
    Mr. Carty. As I say, we would be delighted to have that 
removed.
    The Chairman. I do not quite understand that.
    Mr. Carty. Well, certainly, Senator, as I testified, there 
are a lot of aspects of this agreement that work very well for 
American. There are a lot of aspects of this agreement that 
provide competitive remedies to the issues raised by Justice.
    United did not dream up an idea of enhancing their major 
competitor. If there was a conspiracy here, I think you would 
have to conclude that the Department of Justice was part of it, 
because United was clearly responding to issues that the 
Department of Justice raised with them. As I said in my 
testimony, this Committee and the Justice Department will have 
to decide whether those remedies are sufficient. But clearly, 
the provisions of this contract were a response to the 
Department of Justice.
    The Chairman. According to GAO's analysis, the newly merged 
United and American Airlines would control a combined 60 to 100 
percent of the passenger traffic in more than 55 percent of the 
markets where both would compete, which works out to 610 
markets. You testified that you are worried about a United-
Delta duopoly in the shuttle market. Yet why should not 
consumers be alarmed that the two mega-airlines will have 
effective duopolies throughout the country?
    Mr. Carty. I have not, Mr. Chairman, reviewed the GAO study 
to determine which precise markets they are talking about. 
There is a distinction in the shuttle markets, as you well 
know----
    The Chairman. Let us say there is a duopoly in only one 
market. Would that concern you?
    Mr. Carty. What I was about to say, Mr. Chairman, is there 
is a distinction in a market that cannot be entered as a 
consequence of slots, and the shuttle markets are such markets. 
We have had entry and exit from a vast array of markets in this 
market where we are not confined, as Mr. Leonard has suggested, 
by the absence of slots. The shuttle markets are a market that 
we would long since have entered unilaterally as a third 
competitor had there been slots available to us.
    I know you and this Committee have been concerned about 
that issue for many years. We continue to be concerned about 
it. On one area we would agree absolutely with Mr. Leonard and 
that is the faster we can move in this country to remove the 
limitations that are imposed by the limitations of the air 
traffic control system, the happier all of us will be.
    The Chairman. Mr. Johnson stated that the combination of DC 
Air with the support of American will become the largest 
presence at Reagan National. Is American going to compete 
against DC Air, a carrier that it owns 49 percent of?
    Mr. Carty. I think it is fair to say, Mr. Chairman, our 
intent is to run a complementary system with Mr. Johnson's. I 
think the interest of the Justice Department here, and in 
United, was in recognizing that the Justice Department was 
terribly concerned about the concentration of market power in 
the entire Washington, D.C., area, Washington Reagan, Dulles, 
and Baltimore. It would have left a surviving United as the 
largest carrier in all three of those airports.
    United in creating DC Air, and DC Air in eventually 
partnering with American, was to create some competitive 
response to that United presence, both in terms of the local 
Washington market, but also in terms of some traffic flows that 
can happen through Reagan by building network connecting 
opportunities between DC Air and American, connecting 
opportunities that will be competitive with Dulles, competitive 
with Newark, competitive with a number of the other East Coast 
connecting points.
    Again, I think it was United trying to be responsive to 
that issue with the Justice Department that led to this deal.
    The Chairman. Mr. Compton, you mentioned that American has 
made a commitment to absorb responsibility for the TWA 
retirees' medical and dental insurance benefits. My office has 
received numerous calls from retired TWA employees regarding 
their retirement benefits. What is the status of the lifetime 
term pass, plus-65 medical coverage for retired TWA employees, 
and the life insurance policy provided by TWA in your 
negotiations with American Airlines?
    Mr. Compton. Thank you for that question, Mr. Chairman. 
That has been a very big concern of ours as well. TWA, because 
we are a company that has been in business for 75 years, has 
thousands of retirees, as a matter of fact more retirees than 
we have active employees. One of the bedrock issues in our 
discussions with American and discussions that we had 
previously with others was the importance from our perspective 
in protecting those retirees.
    On the liability side of our balance sheet we have got $509 
million, nearly a half a billion dollar liability, for post-
retiree medical and dental benefits. Unfortunately, a lot of 
carriers that we spoke to had no interest in assuming that 
responsibility, which was very problematic for us. I am happy 
to say that Mr. Carty and American Airlines has agreed to 
assume all of that liability. So our retirees' medical and 
dental insurance is protected.
    With reference to the pass issue, there were a lot of 
things that we had to focus on initially that did not allow 
time to focus on everything. Mr. Carty and I have spent some 
time talking about that particular issue and, though we do not 
have it resolved yet, I am relatively confident--and maybe Don 
can be more confident than my ``relatively confident''--that we 
will be able to address successfully the retiree pass 
privileges.
    Mr. Carty. We intend to offer retirees pass privileges, Mr. 
Senator.
    The Chairman. Thank you.
    Mr. Johnson, when you originally entered into a deal with 
United and you testified before this Committee, you agreed not 
to sell DC Air for 3 years or you would forfeit the profits 
from the deal to United. After your deal with American, you 
negotiated a lifting of that restriction. Why would you lift 
that restriction in a period of months after committing to the 
American people and this Committee that you would wait 3 years?
    Mr. Johnson. Mr. Chairman, I do not think I committed to 
that. I think that was part of the deal as it was drafted and I 
had to take it. I never felt that that was an appropriate 
restriction on my ability to generate value by bringing on an 
additional partner. That was part of the original deal and to 
move forward it was something I accepted. But it was never 
something that I felt was appropriate.
    The Chairman. I am sorry that you did not inform us at the 
time when you testified before the Committee in favor of this 
and specifically stated--I think we can review the record--that 
you were in agreement that you would wait 3 years.
    Mr. Johnson. No, Mr. Chairman, I have not changed on that 
point. I have no plans whatsoever. Three, 15, 20 years, I have 
no plans whatsoever to sell DC Air. But as far as that 
commitment, that commitment was put in as part of United's 
requirement because they felt that if I were to sell DC Air and 
reap a profit they wanted to share in that up side. But it has 
nothing to do with my personal commitment to continue to own DC 
Air.
    The Chairman. Well, I tell you, Mr. Johnson, it brings into 
question the commitment that was made before this Committee of 
all the details of the agreement that you made with United and 
was presented to this Committee.
    Mr. Johnson. Mr. Chairman, if I may comment. The biggest 
issue for DC Air and United was the question of whether or not 
DC Air would be independent and free to compete against United. 
As Mr. Carty just pointed out, DC Air will be able now to 
compete aggressively against United, against Delta, against the 
other carriers on the East Coast, with the alliance with 
American.
    On the question of the restriction from United, that to me 
would have raised even more of a question about our ability to 
compete by having that proviso in the deal. I would think that 
the Committee would have wanted that out as opposed to having 
it in.
    The Chairman. Mr. Johnson, all we wanted was the details of 
what it was all about, that we were briefed on that and that 
everybody was in support of it, and in a matter of months it 
changes. That is clearly your option, but it then 
understandably leads to increased scrutiny on the part of the 
Committee, and I thank you for your response.
    Mr. Johnson. Thank you.
    The Chairman. Mr. Leonard, do you maintain that DC Air 
would not provide meaningful competition out of Reagan 
National?
    Mr. Leonard. I believe that DC Air will provide competition 
and it would obviously bring some advantages with the American 
frequent flyer program and that sort of thing. But I do not 
think that anybody in the D.C. area or marketplace is going to 
see fares any different than what they are seeing today, what 
US Airways and United charge today. We submitted some documents 
the last time we were here that showed that it would be 
virtually impossible to start with United's cost structure, now 
American's cost structure, and turn that into a low-cost or 
low-fare airline.
    So we believe that the service that is provided today and 
at the costs and prices provided today will not change at all. 
We have run a model starting with United's costs and looking at 
a reduction in costs over time, and our model would indicate 
that DC Air will be unprofitable in the fourth year of 
operations.
    The Chairman. Thank you.
    My final question. Mr. Levine, when you were working on 
airline deregulation in the CAB, did you foresee the current 
structure of the airline industry?
    Mr. Levine. No. Rather, we assumed that the marketplace 
would work out solutions that regulators had been unable to 
foresee. I think we understood that airlines might grow. I do 
not think we understood the significance of hubs as they 
emerged.
    I ought to say, in my view the industry today is workably 
competitive. It is a very competitive industry. My concern is 
that if it moves from an industry in which there are five or 
six airlines that can compete with each other to two airlines 
with whom no one can compete, it will cease to be competitive. 
In both cases Southwest Airlines will exist, but I have tried 
to explain why Southwest is not enough.
    So the short answer to your question, Senator, is we did 
not expect to foresee exactly what happened. That is part of 
the point of deregulation, is that a government agency cannot 
do so. But we expected that the industry would emerge as a 
competitive industry, and it did prior to this really 
unprecedented proposal that is on the table.
    The Chairman. Senator Hollings.
    I thank the witnesses.
    Senator Hollings. Cost structure. Mr. Leonard has just 
attested to the fact, Mr. Johnson, about the cost structure. 
Namely--Bob, you are not listening. Watch him. You are making 
money.
    In your testimony, Mr. Johnson, at the previous hearing 
when I said, I knew you were not an ingrate and if you were 
going to get the equipment and the slots and the mechanics and 
the frequent flyer and all the other benefits, as a former 
member of the US Airways board, and they were selling it to you 
and it looked like a sweetheart deal, then how were you going 
to compete? Your answer was that you did not have to subsidize 
those long-haul expenses, that you would be independent.
    I see you shaking your head. Let the record show that the 
witness shakes his head affirmatively.
    Now, having said that, you put American Airlines back into 
that same situation, that you will have the long-haul expenses 
of American. I do not see how--I was taking heart that I was 
going to get, like Mr. Leonard's airline, some small 
competition that did not have to subsidize the long hauls and, 
therefore, could reduce the fares. The Vice President of US 
Airways is present in the audience. He will attest to the fact 
that I called 2 days ahead of time to get a round-trip ticket 
from Washington to Charleston, South Carolina, and back. Coach 
class was $917.
    Now, this is not theory or whatever else it is. This has 
gotten horrendous, Mr. Levine. This has made me a born-again 
regulator. I wish I had not listened to you folks on 
deregulation.
    The small, medium-sized towns in America are subsidizing 
the long hauls and the airlines are taking over a monopolistic 
hub control.
    Mr. Johnson, what is your answer now?
    Mr. Johnson. My answer, Senator, is that DC Air will not 
have American's high cost structure.
    Senator Hollings. Why not? They have got a 49 percent 
ownership. You are sitting there 50-50 just about. You are not 
going to refuse them.
    Mr. Johnson. I am 51-49 and I have control, and I am not 
going to pay Mr. Carty's high price for the services that he is 
going to provide. He is going to give me competitive prices 
that I can either bid out or continue to take from him. I can 
take the wet leases from him or I can bid them out. I can take 
his fuel costs or I could bid those out. I can take his ground 
service costs or I can bid them out.
    So I will have lower cost alternatives if I choose to. But 
my hope is that, obviously, Mr. Carty as an equity player would 
give me his best price, that I will be able to pass along to 
our customer.
    The other point of fact is we will be a simplified, point 
to point flying airline. We will not be flying, as I pointed 
out earlier, we will not be flying the long routes that US 
Airways currently flies, nor will we be flying the long routes 
that American flies. So we will be a point to point flyer. A 
lot of our costs will be reflective of that of a regional 
carrier, not of one of your big national carriers. So in the 
leasing of our regional jets we will have a cost structure that 
is a function of regional jet leases, not of operating with 
high labor costs and higher employee costs.
    The Chairman. Mr. Carty, would you, American Airlines, go 
forward with the agreement if the government approval required 
the breakup of the St. Louis hub?
    Mr. Carty. Would I go forward with the TWA transaction, 
Senator?
    Senator Hollings. Yes.
    Mr. Carty. No. We are very interested in the St. Louis hub.
    Senator Hollings. In that hub?
    Mr. Carty. Yes, sir.
    Senator Hollings. Well, that points up the dilemma. We are 
all trying to help the employees of TWA. They are in a 
struggle. Yet at the same time we are burdened with the 
responsibility of trying to provide competition, and there is 
no question that these hubs, 85 percent of the landings and 
takeoffs, like Charlotte, which I am required to go through by 
US Air, that there is no competition there. You can just go 
around the country and see similar examples. I am drawing up a 
bill now to at least break up the hub control, a bill intended 
to promote competition.
    But your testimony is, then, that you are not going forward 
with the agreement unless you can extend your monopoly.
    Mr. Carty. Well, we are not looking to extend our monopoly, 
Senator. We use hubs to participate in the thousands of O and D 
markets that the GAO referred from the East Coast to the West 
Coast. We are largely an east-west carrier.
    Senator Hollings. In a monopolistic way. Nobody else can go 
in and cut the fares, the service or anything else. They have 
tried that down in Texas.
    Mr. Carty. I do not believe we have very many markets on 
those east-west markets that are monopolies, Senator. Our 
dilemma today is that the east-west hubs we use--Chicago in the 
first instance, as you know, is terribly bottlenecked. So our 
ability to continue to grow our east-west business is 
bottlenecked by the infrastructure limitations in Chicago that 
are unlikely to be cured any time in the near term.
    In DFW we do have growth potential, but actually in the 
next 4 or 5 years while we are building a new terminal and a 
new train system to be able to allow that facility to grow as 
we know it will, we are limited at DFW as well.
    So we are looking for ways to facilitate continued growth 
in those thousands of highly competitive markets.
    Senator Hollings. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Smith.

                STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman.
    I fully appreciate as a former businessman myself that 
sometimes mergers and acquisitions are the best way to retrieve 
the most public good out of bad business circumstances. But as 
a current consumer of airline services, I am acutely aware, Mr. 
Chairman, that big does not equal better. The danger this 
industry runs, I believe, of re-regulatory pressure from 
Congress is born out of the fact that to the modern public air 
passenger service is no longer a luxury, but a necessity.
    As Members of Congress, it is increasingly difficult not to 
hear the chorus of complaints from the traveling public, or to 
experience them ourselves, I would add.
    I am interested, Mr. Carty and Mr. Compton, what would be 
the effect on prices if this goes forward as opposed to 
allowing the normal bankruptcy proceedings to go forward? I ask 
that question simply because I wish St. Louis well. I would 
like to help. I would like to see this happen. But I am also 
mindful from what I have heard this morning that you are making 
a really good deal and you are making everybody whole, and I 
think that is wonderful, but somebody is going to have to pay 
for it if your shareholders, as I heard, are going to get the 
right return on their investment.
    So what does that mean to the consumer? That tells me their 
prices are going way up, not down.
    Mr. Carty. Well, Senator, let me just make the observation 
that we are obviously not a charitable institution. We 
obviously have got to make a return on this investment. On the 
other hand, the reason that we could never make business sense 
out of a deal with TWA in the past is their liabilities 
exceeded their assets. In bankruptcy court we are able to go 
and buy those assets at what we consider to be a fair market 
value.
    If we look at growing our company by 200 airplanes and the 
cost of building a new hub and the cost of building the 
passenger loyalty that we need to make that hub work, the cost 
would far exceed what we are able to buy those assets for in 
the bankruptcy court. So actually we are making a very good 
financial deal, one that is better than starting from scratch, 
and therefore we do not need any unique pricing to make this a 
successful business venture. It is a successful business 
venture simply by extending the existing TWA business model and 
curing some of the defects that TWA has had that Bill Compton 
referred to. That is, a terribly weak balance sheet and 
therefore paying way too much for their airplanes due to Carl 
Icahn.
    Senator Smith. Do you think the economies of scale are such 
that you can absorb all of these costs, new costs, with other 
savings so that it will not affect the price of tickets to 
consumers?
    Mr. Carty. Yes. What I am saying yes, Senator, that the 
investment in this--we do not need to save costs. The TWA 
business model that exists today, absent those two or three 
factors that Bill Compton referred to, is a successful business 
model. The hub in St. Louis is working now, and by acquiring it 
at a fair and reasonable price we can make that a satisfactory 
return.
    Senator Smith. My colleague Senator Wyden, if I know him--
and I know him well--he is going to talk about the Passengers 
Bill of Rights. I have to tell you that regulation to me as a 
Republican is an abhorrent thing, being a party to that. But I 
have to tell you that I believe you are playing with fire, 
because I would personally find it difficult not to listen to 
all the calls that I get, particularly last summer, about how 
horrible airline traffic is and waits and discourtesies.
    What I am hoping you all will come and educate me about is 
what part of this is the federal government's fault, what is 
the FAA doing to complicate your work, and what we need to do 
to provide a better system. But I would hate to have to vote 
right now on Senator Wyden's bill, because I would have a tough 
time voting no. I want a better service for me and the people 
that we serve. I want to hear from you what the FAA needs to 
do.
    Finally, I represent a state that is sort of off the beaten 
track and this has not meant good things for Portland, Oregon. 
I would hope that we would continue to have American Airlines 
service to St. Louis and TWA as well, but I do not know that. I 
hope you will answer that.
    Mr. Carty. Let me just make a couple of observations. 
Obviously, we cannot go through that discussion of the FAA and 
the ATC challenges today. But we and others in the industry 
would be delighted to have that dialogue with you.
    I want to be very clear--and I have said this to this 
Committee before--all of the challenges to service in the 
airline industry do not depend on the federal government. The 
airlines can do a better job and I have testified to that in 
front of Senator Wyden under questioning on a number of 
occasions.
    We at American certainly are trying to do a better job. We 
have tried to restructure our hubs so that they work better. We 
have tried to do a better job of manning. We have tried to do a 
better job of a lot of things in the last year, and I can give 
you a long list of things. We have got another long list this 
year. We are certainly going to do a better job of deploying 
data processing devices to help service, help our employees 
give better service, and so on.
    But there is a big piece of this problem that relates to 
the ATC. I think the new Secretary of Transportation testified 
to that effect, acknowledged it, and recognized that something 
needs to change and change dramatically. Under Senator McCain's 
leadership we had the Mineta Commission several years ago and 
that is as good a blueprint for fixing some of the air traffic 
control issues that I think exists.
    I know a number of you--and I know certainly Senator 
Hutchison is very interested in this issue. The airline is 
interested in this issue. And of course the airline 
manufacturers have a new-found interest in this. Boeing, as you 
probably have seen, is trying to come up with a radical 
proposal to address this issue.
    All I would say to you, Senator Smith, at this stage is, 
with or without a Passenger Bill of Rights, until we fix the 
air traffic control system those letters that you get, which 
are a drop in the bucket compared to the letters I get and am 
not happy about, will not stop.
    Senator Smith. That is all, Mr. Chairman.
    The Chairman. Senator Wyden.

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

    Senator Wyden. Thank you, Mr. Chairman.
    Senator Smith has been so helpful to me, I ought to quit 
while I am ahead. I thank him for his comments, for his kind 
words.
    Mr. Carty, I come at this this way. First, I think all of 
us want to be sensitive to Senator Carnahan and Senator Bond 
and others in the Missouri situation. But the bottom line for 
me is that when you look at this entire array of mergers that 
is on the table, it is going to suck up most of the competitive 
juices that are left in the airline sector. Now, today's level 
of competition is not doing a whole lot to improve service to 
the customer.
    Now you are proposing more concentration and obviously you 
are going to be very busy as an airline integrating the new 
assets you want to acquire from TWA and US Air and figure out 
how to operate the shuttle.
    My first question to you is, given all that, what 
commitments will you make this morning specifically to improve 
life for the passengers?
    Mr. Carty. Well, Senator Wyden, as you know, I think it is 
fair to say that American has been on the front end of that in 
the last year. We have provided our customers with a lot more 
space in the cabin. We have restructured hubs. We have had a 
series of programs that have been designed to do that.
    But as I testified to Senator Smith, Senator Wyden, I 
honestly have to agree with the Secretary when he testified 
that we are not going to fix this problem as quickly as all of 
you and I can assure you that all of my meeting team and I 
would like. This is a terrible challenge.
    You will see around the room a number of pilots from TWA. 
If you want a real story of the horrors of flying in this 
country in the context of congestion and difficulties, they are 
probably far better equipped than I to testify to it. But I 
wish I could assure you this problem is going to get fixed. I 
would be disingenuous if I testified to that.
    Senator Wyden. What I disagree with in your argument is you 
are saying again that you and the industry really will not take 
significant steps to help passengers until you get more runways 
and a better air traffic control system. We are with you on 
more runways and air traffic control. Clearly it needs to be 
improved, and FAA permitting as well. But the idea that you are 
not going to make any commitments to passengers now, when there 
are steps that you can take for those people that sit out on 
the runways for hours on end with a little bag of pretzels and 
a glass of water, is just unacceptable to me.
    Once again this morning, you have said: Well, it is just up 
to getting more runways. I think that is unfortunate.
    Mr. Carty. I am sorry if you heard that, Senator. That is 
not what I said.
    Senator Wyden. You send to us in writing what specific 
commitments you are willing to make to improve life for the 
passengers as a result of this array of deals that you are 
involved in; I am happy to take a look at it.
    Mr. Carty. I will be glad to do that. It will have nothing 
to do with the array of deals. I will do that regardless.
    Senator Wyden. Why are airlines different than other 
sectors? I mean, what we have been told--and I have sat through 
all the hearings on antitrust here--is that one big merger 
follows another, and if this array of deals goes forward two 
airlines are going to dominate 51 percent, more than 50 
percent, of the airline business. Are we not as sure as the 
night follows the day going to be back here in 6 months for the 
last one?
    Mr. Carty. I think--what makes the airlines different, was 
the question. I do not know that anything does uniquely, 
Senator. Of course, we have seen mergers and acquisitions in a 
lot of industries, far bigger ones, far more concentration than 
you have yet seen in the airline business. We buy a lot of fuel 
and I have watched 20 and 30 and $40 billion companies merge 
with really almost zero in the way of remedies proposed by the 
government.
    I am not going to sit here and defend United's package of 
remedies. But I will say they have already indicated a 
willingness to divest themselves of some 20 percent of what 
their are acquiring. Now again, that may or may not satisfy 
this Committee, these remedies.
    But what drives us to do this? Because network is one of 
the competitive vehicles. It is not the only one, but it is an 
important one.
    Senator Wyden. Supposing that we separate out these deals 
so that we can be responsive to Senator Carnahan and the 
Missourians and we in effect say American takes over TWA, but 
the United-US Air merger does not happen and the American deal 
with United and DC Air does not happen. Would not that kind of 
scenario result in less concentration of the market, address 
Senator Carnahan's concern, and avoid harming competition to 
the consumer?
    Mr. Carty. Well, it would certainly address the TWA 
concern. I might add, I neglected because Senator Smith left to 
make a commitment to Portland-St. Louis, but all I can tell you 
for sure, unless that hub survives there will not be service 
between St. Louis and Portland.
    But to your point, again I think that decision needs to be 
made carefully.
    Senator Wyden. You are open to that? So I can be responsive 
to Senator Carnahan, who has made such a good case for her 
constituents? You are open to separating out the deals along 
the lines I described?
    Mr. Carty. Senator, I will simply say the two deals are 
unrelated. They happened to get announced the same day, but 
they are not interdependent one on another.
    Senator Wyden. Mr. Chairman, I would only say as we take a 
look at this that we just can no longer look at these deals in 
abstraction. I mean, what you have heard in the antitrust 
hearings that we have held before the Committee through the 
last Congress is, just as sure as the night follows the day, 
one is going to follow another. The fact that Mr. Carty is 
willing to look at separating out these deals is something I 
hope this Committee will look at on a bipartisan basis.
    I thank you.
    The Chairman. Thank you.
    Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I am sorry I was 
gone. I had to preside on the Senate floor and that precluded 
me from hearing all the testimony. My duty as presiding officer 
precluded me from hearing all the testimony, and also it was 
not proper to be inattentive in reading all the statements that 
were made here while presiding on the Senate floor.
    The Chairman. As I mentioned, it is our practice to go 
according to early bird, the ones who are here first, and if 
you are required to go preside then we preserve your priority. 
I hope Senator Fitzgerald appreciated that as well.
    Senator Allen. It surprised me that you called on me. I 
know I was here early and had to leave.
    I would only make a few comments in this regard and I would 
like to address some questions or comments to the panelists 
here. The issues of consolidation in the airline business is a 
concern to all of us. The concern for all Americans, of course, 
is competition and thereby service. Then in our individual 
states we care about service to the airports and the citizens 
of our state, as well as the companies, such as US Air, that 
have a very strong presence in our state. TWA has a reservation 
center in the City of Norfolk. DC Air has put a maintenance 
facility in Roanoke, which is helpful.
    But overall, and I think it is very timely for this 
Committee to have a hearing on this to help us understand and 
thereby our constituents understand what is going on here. But 
the issue of market consolidation in my perspective, in my 
view, is not just unique to the airline industry. Especially in 
the area of transportation, it seems to be happening 
everywhere, from the steamship lines, with someone buying Sea-
Land from CSX and the alliances of steamship lines, whether it 
is in Europe or in the Pacific, Far East Asia area.
    The same thing is happening in the railroads as well, 
trying to get efficiencies of scale, getting greater economics 
and thereby helping make their employees even more productive.
    Now, this consolidation is one that--more people fly than 
go on a container ship, so all of us understand this on a 
personal level. I think that we need to make sure that the 
aviation market is competitive, safe, and efficient. I think 
that safety and efficiency are generally the province of the 
Federal Aviation Administration and this Committee clearly has 
a lot of work ahead in my view as far as fixing the antiquated 
and outdated air traffic control system.
    But there are acts that have been passed by the federal 
government, by the Congress, on the issue of compensation, 
which are known of course as the Sherman and Clayton Acts, and 
they do have very clear directions that are given, guidelines, 
which the Department of Justice must analyze in any potential 
merger that could impact an industry.
    Obviously, the US Air-United merger is getting attention. 
The focus here, though, is mostly obviously with the 
participants on TWA's precarious situation, financially 
precarious situation, and American Airlines' acquisition 
thereof, and then how the whole thing comes out with DC Air and 
the different aspects of it.
    As I see the TWA situation, if nothing happens with TWA 
they are clearly going to go bankrupt. I would not call the 
people who buy up the different assets and routes and slots and 
so fort buzzards. They are just folks that are like any other 
bankruptcy sale, they are buying chairs, desks, assets, and so 
forth. That is the way bankruptcy--that is the way some types 
of businesses turn out.
    To me this seems to be a very logical approach to try to 
save those jobs, save those routes. I would want to make sure 
that the jobs, with this convergence, that the jobs that are 
already in existence to the extent possible can be kept. I do 
not know what kind of assurances or promises can be made, but 
it seems to me that the Department of Justice is getting 
certain promises in the midst of the US Air-United situation 
which are in addition to the original merger proposal.
    I would like to ask Mr. Johnson, DC Air, since you will be 
operating out of Reagan National Airport in Northern Virginia, 
how do you see your situation benefiting the people along the 
East Coast, which is where you are mostly going to be 
servicing? How do you see the eastern seaboard, Virginia, the 
rest of the East Coast benefiting from your new service?
    Mr. Johnson. Thank you, Senator. I think the key component 
of DC Air and the key commitment we made at Reagan National 
Airport is to take the slots that were formerly flown by US 
Airways and continue the commitment to fly to those 44 
communities that have been served, in some cases for over 40 
years. So all of those communities will continue to have direct 
access to Reagan National Airport, which is most important to 
many of these small communities.
    It is my belief, and I think it is the fact, that if those 
slots were parceled out the individual carriers, many of the 
smaller communities, like some of those in Virginia that are 
not concentrated communities as far as traffic, will lose 
service if you take those slots at Reagan National Airport and 
sell them off piecemeal or hand them out piecemeal.
    What we have made a commitment to do is that we will fly, 
as long as it is economically viable--not economically viable 
against flying to another community or against flying to a more 
attractive market, but as long as it is economically viable 
within that community--we will pledge, and we will put it in a 
consent degree, to continue to fly to these 44 communities, and 
we will also fly in upgraded aircraft. We will try to move as 
quickly as possible from turboprops to all all-jet regional jet 
carrier.
    Senator Allen. The Bombardiers?
    Mr. Johnson. It will be that or some other type of aircraft 
that will give us the number of seats that are necessary for 
the route.
    In addition, with the American Airlines alliance, the 
marketing alliance, our passengers will have access to the full 
frequent flyer program of American Airlines for the entire 
global system. So we are offering a very attractive package. 
There will be lower costs because we will have wage and pay 
scales that operate on a regional basis rather than on US 
Airways' high national basis.
    So we think, Senator, that the key for Reagan National 
Airport, the key for the Washington region, is for those slots 
to remain intact under the control of a competitive carrier 
that will serve those small communities.
    Senator Allen. Is your commitment to the Department of 
Justice or in this merger--when you say you are making a 
commitment, and for that matter the folks, Mr. Carty with 
American, can answer this as well, the promises to serve these 
markets, how long? What is the duration of this promise?
    Mr. Johnson. My promise, Senator, as long as I own the 
airline.
    Senator Allen. Well, is it binding in the event that 
somebody thinks it is a good airline? What if you sold the 
airline?
    Mr. Johnson. Well again----
    Senator Allen. Or there is another merger?
    Mr. Johnson. As I said, I am prepared to go on the record, 
I am prepared to make it part of a term of the deal, that as 
long as I am the owner of the airline the cities, like Norfolk, 
Richmond, and Roanoke and other cities like that throughout--
Huntsville, Birmingham; I can name them all; Charlotte, 
Greensboro, all these small communities, Nashville, Knoxville--
will continue to receive direct service from Reagan National to 
these communities.
    Senator Allen. And thereby get them to, for example, St. 
Louis and to the West Coast?
    Mr. Johnson. Get them throughout the entire American 
system. We will not only have frequent flyer, we hope that we 
can negotiate a code-share with American, so that when you look 
at--when the travel agent looks into a DC Air flight, they will 
see the vast array of connectivity that American will bring.
    I think one of the things that people need to recognize in 
the DC Air-American alliance, we bring a lot of connectivity to 
Reagan National Airport now with American. So Reagan becomes 
for us somewhat of a hub connecting to American's vast network, 
and that is one of the most attractive things about the DC Air 
commitment.
    Senator Allen. I would say, Mr. Chairman--I guess my time 
has expired.
    The Chairman. Thank you.
    Senator Dorgan.
    Senator Allen. May I just make one--one thing that would be 
very helpful I think to every Senator is, as you get into these 
things, as US Air, TWA and so forth serve these areas, if you 
can get a list of, here is the number of flights currently and 
here will be the number of flights under this new situation, I 
think, in airports amongst all our states and places served, 
that will help us understand that competition will continue.
    Thank you, Mr. Chairman. I am sorry.
    The Chairman. Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you very much.
    I have ridden on all three airlines that are represented 
here today by their chief executive officers. All good 
companies, and we appreciate your testimony.
    But I do not even know where to start in this discussion. I 
have been sitting here trying to figure out how you begin to 
ask question in these areas. I would make a wager to any of you 
at the table that we could leave here after this hearing and 
get on the telephone and I can find an airline fare to Paris 
that is cheaper than an airline fare to Charlotte. It is going 
to be less expensive to fly to Paris than Bismarck, North 
Dakota.
    The reason I mention that--if anybody wants to take the 
wager, I did that last week, so I would know I would win. But 
Mr. Levine, when you say there is aggressive competition in 
this country, you are wrong. What we have is unregulated 
monopolies in regional hubs. The big airlines have retreated to 
regional hubs, dominate the hub, and we have unregulated 
monopolies.
    I guess we have a lot of interests here. We have interests 
at the table representing the company. We have interests of the 
employees. We have interests of financiers and others who are 
not here. The interest I think this Committee represents is the 
interest of the American people to try to evaluate what needs 
to happen here to maintain a good transportation system, a 
network of airline carriers where you have some reasonable 
competition.
    With respect to TWA, in the mid-1980's I was serving in the 
House. I was highly critical of what happened when TWA became a 
pawn in the leveraged buyouts. It became a football with 
financiers treating it as something they could make money off 
of, and they succeeded, moving it through two bankruptcies, for 
a lot of reasons. I felt it was a shame at the time that that 
happened. Of course, a decade and a half later we are here at 
the table and you are pleading that your company can be 
purchased by American and the employees are not so severely 
disadvantaged and you have an ongoing enterprise.
    Regrettably, a decade and a half later you are still 
cinched in that saddle that was put on you back in the mid-
eighties.
    I do not know where we go here. I guess I would just say 
this. We need more competition in the airline industry, not 
more concentration. I am not under any circumstance willing to 
be a Member of Congress and be silent while we move toward 
three major airline carriers dividing up our country. It is not 
in this country's interest to do so.
    Mr. Carty, you and I have had discussions and I admire your 
work at American and I think American is a great company. Tell 
me, if you will. You represent your company and represent it 
well. But from the vantage point of people who represent the 
long-term interests of the American consumer, how on earth can 
more concentration be in the interest of the regulation 
consumer?
    Mr. Carty. Well, if you are speaking, Senator, to the TWA 
transaction, TWA is going away one way or another. The question 
is is there going to be a hub in St. Louis or not, and if there 
is not that cannot be in the interest of the consumer that 
wants to get from Portland, Oregon, to St. Louis, because he 
will now have to go through Chicago, Minneapolis, or Denver.
    I would simply say to you, I think that is a very black and 
white issue. If that hub fails to survive under anybody's 
ownership, that cannot be in the interest of the U.S. consumer.
    Senator Dorgan. I understand your point. But the other 
gorilla not at the table is also part of this hearing, and that 
is the United Airlines-US Air issue. We are not going to be 
able to deal with these things in isolation. Frankly, we are 
headed very quickly, I think, to a circumstance where three 
major carriers, because the others are going to have to do 
something defensively, three major carriers will be involved in 
commanding most of the traffic in this country.
    I just fail to see how that increased concentration is in 
any way other than detrimental to the American consumer. Now, I 
was told--I grew up where there were raccoons and raccoons when 
they eat, they get their food and wash it in streams and lakes 
and they wash it meticulously. But even when there is no water 
around, they go through the exact identical motions to make it 
appear as if they are washing food despite the fact there is no 
water, so they pantomime.
    I was thinking about that this morning. We kind of are in a 
circumstance where I am seeing some pantomime competition 
develop here. We do not have competition into Bismarck or 
Charlotte, not real competition. What we see with more 
concentration is we are going to have pantomime competition, 
but it is not going to be real for the American consumer.
    The only way the system works, I would say to all of you--
this is therapeutic for me to be able to say this, so I am 
sorry I am not asking you questions. This free market system 
works only when you have free and open competition, easy entry 
and exit. It seems to me concentration clogs the arteries, it 
is the cholesterol that clogs the arteries of the free market 
system, and we are relentless in this drive toward more 
concentration.
    Mr. Levine, I know you want to answer me, but I would say I 
just think you are dead wrong when you say there is aggressive 
competition. What we have is monopolies in regional hubs, 
dominated by one carrier, in almost every circumstance in this 
country.
    Mr. Levine. Mr. Chairman, do the rules of the Committee 
allow one to answer when addressed?
    The Chairman. Yes.
    Senator Dorgan. I would invite you to answer me, of course.
    Mr. Levine. I think it is important to understand how hubs 
work. There are very highly differentiated price structures in 
those hubs. The average prices in the hubs and in the system 
are quite low and they are lower than they were under 
regulation. But there is a lot of price differentiation and 
some, relatively few, passengers pay very high fares for the 
convenience of having a hub.
    People have been talking about Charlotte, a hub I have had 
no responsibility for and so no one can say that I am defending 
as my handiwork or anything like that. Charlotte is a hub that 
provides nonstop service to many, many cities that would get no 
nonstop service to Charlotte if there were not that highly 
differentiated price structure were not in place. I should 
point out that despite fares which seem high, Charlotte is a 
hub that loses money.
    The fact is that in order to provide frequent nonstop 
service at the hub it is necessary to charge somebody for that 
convenience. I understand that it is infuriating, really 
infuriating----
    The Chairman. That understates it.
    Mr. Levine.--to pay four times or five times as much as the 
guy sitting on the plane next to you. Nobody likes that and I 
am not suggesting that we will learn to like it.
    You know, let me talk about one of the great blues singers 
of all time, Albert King, who used to sing a song that went: 
``Everybody wants to go to heaven, but nobody wants to die.''
    The story about hubs is that everybody wants nonstop 
service to a lot of places, but nobody likes to pay for it.
    Senator Dorgan. But the story about blues is that everybody 
in small markets sings them after deregulation, because we have 
less service at higher prices, and that is the fact.
    I do not have the slightest interest in averages. You know 
the old story about one leg in ice water and the other in 
boiling water on average is pretty comfortable. I do not have 
the slightest interest in averages. On average, we pay the 
highest prices in the world in these rural markets. Olympia 
Snowe and I have talked about this and others have. In our 
markets, we no longer have any serious competition. That is why 
Fritz Hollings gets so excited about this, and others of us do 
as well.
    The question today is whether we have a big old pie that 
people are slicing up for their own interests. I am hoping we 
can find--I flew Braniff, Western, Eastern, and Pan Am. I flew 
on all those carriers, and they are gone and we are talking now 
about, well, how do you slice up what is left? But the question 
for us is what does all this mean to the American consumer? 
What kind of system do we have in 10 years and what does it 
mean to the American consumer? That is what I am interested in. 
That is the interest at the table that needs to be discussed.
    Mr. Levine. I just want to be clear. As you know, I am here 
objecting to the transactions that are the particular focus of 
today's hearing.
    Senator Dorgan. I understand that, Mr. Levine, I think you 
have done a lot of good work. I do not think deregulation was 
your best work, but I think you have done a lot of good work 
and a lot of good writing. I would just say, when you said, 
gee, there is a lot of competition, I just sat up and thought, 
why, I do not want to let that sit out there, because in many 
areas of the country there is really no competition.
    But thanks for your good work.
    Mr. Carty. Senator Dorgan, if I could respond just a little 
bit.
    The Chairman. Mr. Leonard and then Mr. Carty, and then 
anybody else who would like to make a brief response, if that 
would be agreeable. Mr. Leonard.
    Mr. Leonard. The only comment I would make is that airlines 
like AirTran, jetBlue, and Frontier that are successful network 
airlines, but smaller, and are perfectly willing to provide the 
competition and lower the fares in the markets, as we do in 
Atlanta. We run up against one of the strongest airlines in the 
world every day and we do very well with them. If we had access 
to other airports, facilities, gates, and other physical 
facilities, we are perfectly willing to go into these other 
markets and provide that service. But we are constrained from 
that because you cannot get gates, you cannot get slots, you 
cannot get some of the other facilities that you need.
    I think this is an opportunity to change that. I think this 
is a real opportunity to change that and require carveouts as 
part of these acquisitions that are going forward.
    Mr. Carty. Senator Dorgan, just a couple of observations. 
The market is a mysterious place and there are two places--
there are two positions in the market, the seller and the 
buyer. Joe Leonard mentioned the average published fare between 
Chicago and DCA. The biggest single buyer in that market is the 
federal government. The federal government buys that product 
from both United and American at less than $100, because they 
have got buying power, and that buying power creates enormous 
competition between American and United for that big block of 
business.
    So part of the vagaries in the market are the strength of 
the buyers as well as the strength of the seller.
    To your other question, though, and I think this is a very 
interesting one and one I am interested in, and that is small 
communities. I genuinely believe we mix up business with needed 
economic development issues. I think the EAS program in this 
country is today inadequate to accomplish what many of you 
would like to accomplish for your smaller communities. For one, 
I would be supportive of a complete relook at the EAS program, 
because I do not think it encourages carriers to serve those 
communities.
    The carriers that serve those communities are not 
necessarily American. They are not even AirTran and the 
jetBlues. They are, as you know, in many instances smaller 
carriers that operate smaller airplanes, and they have a very 
tough time making a dime. I would be glad to participate in 
that discussion.
    The Chairman. Do you have a brief comment?
    Mr. Compton. Yes, I do, Mr. Chairman. Just briefly, I 
think, coming back to the TWA issue once again and the effect 
on competition, the fact of the matter is, unfortunately--and 
you named all of those other airlines. My father was a Braniff 
employee, so I have experienced it, he has experienced it, and 
it is a sad situation when a company just goes away, for not 
only the employees and the retirees, but the communities we 
serve and our customers.
    What happened with those other airlines is they went away. 
The circumstance that we have got here is that either TWA will 
go away and the 187 aircraft that we fly will go to the ground 
for some period of time--some Pan Am and Eastern airplanes are 
still in the desert and have not been flown since those 
airlines shut down--and you will be taking capacity out of the 
system and diminishing competition and diminishing choices for 
the consumer.
    I look at, for example, TWA flies six times a day between 
Cedar Rapids and St. Louis with full-sized jet aircraft. 
Without the St. Louis hub, I would argue that places like Cedar 
Rapids--and I could name 25 cities like that--would be severely 
disadvantaged. So unfortunately, our circumstance is one in 
which TWA will go away, will take capacity out of the system, 
will disadvantage employees and retirees, will disadvantage the 
consumer, and will disadvantage communities.
    So from our parochial perspective, we think that the deal 
with American Airlines is a win for all of the stakeholders.
    The Chairman. Mr. Johnson.
    Mr. Johnson. Senator, I would be remiss if I did not remind 
the Committee that the greatest blues singer was a guy named 
Robert Johnson. The point is that this Robert Johnson is a new 
entrant, and I think people tend to forget that. There is new 
competition being created out of the merger of United and US 
Airways. It is called DC Air, a new entrant, a minority-owned 
entrant and one that will be competitive on the East Coast 
against the other carriers in and out of Reagan National 
Airport.
    So I do not want to lose sight of the fact that there is no 
new competition, Senator, coming on the scene.
    The Chairman. Ms. Hecker, do you have anything?
    [No response.]
    The Chairman. I thank you. I would like to announce, in my 
4 years as Chairman of this Committee we have set a record for 
metaphors--very illuminating.
    [Laughter.]
    The Chairman. Senator Fitzgerald.

            STATEMENT OF HON. PETER G. FITZGERALD, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman. I really want 
to thank the panel. I think this has been an excellent hearing.
    I have a question for Mr. Johnson before I go on and ask 
some more direct questions of Mr. Carty. But just out of 
curiosity, how much money did you put in to capitalize DC Air, 
and has that money been put in already? It is not up and 
operating.
    Mr. Johnson. Senator, to date in the process of going 
through this transaction I have invested a little over a 
million dollars in what I call startup expenses, and I have 
acquired a line of credit in excess of $70 million.
    Senator Fitzgerald. So you have invested about $71 million?
    Mr. Johnson. $71 million is available to me that I have to 
invest, and it will probably go up higher than that. It will 
probably end up being about $100 million all in.
    Senator Fitzgerald. But now, you are selling 49 percent of 
your interest in DC Air, which you now own 100 percent of----
    Mr. Johnson. That is correct.
    Senator Fitzgerald.--to United, and how much are----
    Mr. Johnson. To American, Senator.
    Senator Fitzgerald. To American, I am sorry.
    How much is American paying you for that 49 percent?
    Mr. Johnson. It would be approximately $67 million.
    Senator Fitzgerald. So on a million dollars cash, $70 
million borrowed, to capitalize 100 percent of the company, you 
are selling 49 percent of it to American for, did you say $70 
million?
    Mr. Johnson. Approximately, $67 million.
    Senator Fitzgerald. That is a real good return, and you 
have not borrowed yet.
    That is maybe why he wanted to enter the airline business, 
Mr. Carty. You wondered about that.
    Mr. Carty. I think there is a little confusion, Senator 
Fitzgerald. We are both putting in substantial amounts of 
money. He is not taking a million dollars and selling half of 
it to us.
    Senator Fitzgerald. He owns 100 percent of the stock right 
now, correct?
    Mr. Carty. We are putting our money into the company.
    Senator Fitzgerald. Okay. But he is going to----
    Mr. Johnson. That money is not coming back into my pocket. 
It is going into the company.
    Senator Fitzgerald. Okay, but it is enhancing your other 51 
percent. What is the value of your 51 percent right now versus 
what it will be after they put in----
    Mr. Carty. We are putting in the money pari passu, Senator.
    Senator Fitzgerald. He is putting in----
    Mr. Carty. He is putting in equivalent with us.
    Senator Fitzgerald. Right, but he was going to have to put 
in that. He was going to borrow that $70 million anyway.
    Mr. Johnson. That is right, Senator.
    Mr. Carty. Each percent that he buys is costing him as much 
as each percent we are buying. So he is actually putting in 
more than we are.
    Senator Fitzgerald. And your book value of your shares will 
go up after they put in their cash.
    Mr. Carty. The total book value of the company will go up, 
but his share of the book value will stay the same.
    Mr. Johnson. Will stay the same.
    Senator Fitzgerald. All right.
    Mr. Johnson. So it is not as good as it sounds, Senator. 
This is not a sweetheart deal, Senator.
    Senator Fitzgerald. Back onto focusing on the Midwest, Mr. 
Carty, you have a hub at O'Hare. You will acquire TWA's hub at 
Lambert Field. What effect will your owning another hub in the 
Midwest nearby in St. Louis have on your hub operations in 
Chicago?
    Mr. Carty. We do not anticipate any major changes in our 
hub in Chicago, Mr. Fitzgerald. As you know, because of the 
limitations on O'Hare and the fact that neither we nor United 
can really get much more capacity into O'Hare absent another 
runway, we have been shifting the traffic we carry at Chicago 
gradually to more and more and more local traffic and less and 
less connecting traffic, simply because we cannot add capacity 
as the market grows.
    So St. Louis gives us a complementary outlet to begin to 
participate in the growth of those east-west markets.
    Senator Fitzgerald. It would make it easier for you to 
shift some traffic out of O'Hare, which has been at capacity 
since 1969 now, to St. Louis, right?
    Mr. Carty. But O'Hare is a very rewarding place for us to 
be, and we are going to use all the capacity at O'Hare we can 
lay our hands on.
    Senator Fitzgerald. That you can get.
    Now, you have, you and United, which have 83 percent of the 
market at Chicago O'Hare, have long opposed the construction of 
a third airport. I know we have had friendly conversations 
about this before. I fear that the reason United and American 
oppose a third airport in Chicago is because you have 83 
percent of the market and you do not want new entrants to come 
in and have all this access with no barriers to getting in and 
operating at a third airport in Chicago.
    Are you going to be even more opposed now to a third 
airport now that you have got two hubs to protect in the 
Midwest? Will you ever--in return for doing this deal with TWA, 
would you consider dampening for 1 minute your steadfast 
opposition to the third airport in Chicago?
    Mr. Carty. Let me, Senator, clarify American's current 
position on a third airport. If people want to build a third 
airport, we are perfectly happy to have them build a third 
airport. We obviously do not want to pay for it because we do 
not want that third airport for our use. We are more interested 
in another runway to complement our O'Hare activity.
    But if the city, the state, the country, decides a third 
airport is a good thing to have at Chicago, we are perfectly 
happy to have it.
    Senator Fitzgerald. I sense some softening there. I mean, 
that sounds like a little bit----
    Mr. Carty. You are so convincing. I hope I can be as 
convincing on another runway at O'Hare.
    Senator Fitzgerald. Well, you want another runway at O'Hare 
because you and United would be able to capture that added 
capacity if it is at O'Hare. You are not so sure if it goes to 
a third airport which you do not control. You would not 
necessarily wind up controlling the new capacity if it were at 
a third airport.
    Mr. Carty. It is more, Senator, this phenomenon I referred 
to a moment ago. We are losing market share at American, at 
United, and Chicago O'Hare. Chicago is diminishing in its 
importance as a hub because we can carry less and less 
connecting traffic at Chicago. The reason Chicago is becoming 
less and less airport relative to the Atlanta's and the DFW's 
and so on is because we do not have the capacity we have at 
those other airports.
    Senator Fitzgerald. That was a good--you skirted it a 
little bit, but that is okay.
    I would be interested to see what your plans would be with 
respect to the commuter air travel from downstate Illinois to 
Lambert Field in St. Louis. Right now TWA Express does those 
commuter flights from places like Quincy, Springfield, into St. 
Louis. As part of the bankruptcy reorganization, will you 
reaffirm the contract with TWA Express? Will you get rid of TWA 
Express, bring in American Eagle to serve those places, or will 
you not commit to any continued service?
    Mr. Carty. We are now, Senator, in an active dialogue with 
the TWA Express carriers. There is more than one. There are 
actually, I think, three, and we are in contact with all of 
them and have an active dialogue going to them. What I will say 
to you is that we want that feed at Lambert Field. It only 
makes----
    Senator Fitzgerald. But you own American Eagle as a 
subsidiary of yours and I would think it would be easier for 
you to put American Eagle in those communities rather than to 
reaffirm the contracts that TWA Express----
    Mr. Carty. Actually, Senator, because of Eagle's capacity 
planning they do not have the resources to provide the commuter 
feed at Lambert Field over the next 2 or 3 years. So we intend 
to work with those carriers to make that happen. I would say 
this to you: if it makes economic sense for them to feed TWA, I 
would hope, with our expanded network at Lambert field, it 
would make even more sense for them tomorrow.
    Senator Fitzgerald. So you do not anticipate the diminution 
of service from those places in central and southern Illinois 
into Lambert Field as a result of your acquisition of TWA?
    Mr. Carty. I certainly do not. Again, these are decisions 
that each of those carriers make on their own merits. But given 
that they have not at this stage reduced those services feeding 
TWA, I would think the economic opportunity for them would be 
even larger as we build a stronger network in St. Louis.
    Senator Fitzgerald. Finally, on the pension liabilities. 
Mr. Compton, you said you have $500 million, a half billion, in 
unfunded pension obligations. Is American Airlines going to 
assume 100 percent of that unfunded pension obligation?
    Mr. Compton. It is actually post-retiree medical and dental 
liability. The pension plans were taken over by, the defined 
benefit plans, were taken over by Carl Icahn in the first 
bankruptcy, and that plan had been terminated by Carl Icahn and 
is now administered by the PBGC, the Pension Benefit Guaranty 
Corporation.
    Senator Fitzgerald. So the taxpayers already had to bail 
that out.
    Mr. Compton. To some extent. TWA coming out of the 
bankruptcy was required to fund--even though Icahn took over 
the administration of the plan, TWA had to fund $300 million. 
We did that. We accomplished that by 1998. Now, what we did 
when the pension plans were frozen and taken over by Icahn in 
1993, we converted our employees to defined contribution plans. 
So it is a monthly contribution into their pension plans, and 
those are portable, 401k's for example. So the employee can 
take that defined contribution plan at TWA, it is portable, 
roll it over to an IRA or take it over to an equivalent plan at 
American Airlines.
    So the employee will not be disadvantaged in any shape, 
manner or form with reference to pension, but will be 
advantaged with reference to medical and dental benefits which 
they would not have gotten if TWA was liquidated.
    Senator Fitzgerald. As part of the bankruptcy, none of 
these pension or--I should not say pension--health or retiree 
benefits will be sought to be wiped out in the bankruptcy 
court?
    Mr. Carty. No. We have affirmed our responsibility for 
those.
    Senator Fitzgerald. So you will take them all over.
    Mr. Carty. One of the liabilities we are taking as part of 
the process and have contractually committed to take is the 
post-retirement health.
    Senator Fitzgerald. Now, I gather from reading things about 
the bankruptcy court case that----
    The Chairman. Senator Fitzgerald.
    Senator Fitzgerald. All right, all right.
    The Chairman. Your time has expired.
    Senator Fitzgerald. Thank you all very much.
    The Chairman. Thank you very much.
    Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Mr. Chairman, thank you for putting together 
this excellent panel.
    I wanted to say, you have all been I think very 
forthcoming. I wanted to compliment Ms. Hecker because--you 
know, I rely a lot on your work and the work of your agency. I 
think you have done a good job of explaining what the long-
range situation is.
    With all the talk about blues and jazz, I hope everyone has 
watched Ken Burns' documentary. If you have not, watch the 
reruns.
    I look at the two issues before us as very distinct: the 
TWA bankruptcy, which I see demands our immediate attention. I 
could see a lot of employees of TWA here and I am sure they are 
hanging on our every word, and this is not just some 
intellectual discussion we are having. As I know and Senator 
Carnahan and Senator Bond know, it is very real for a lot of 
people, a lot of families.
    Second, American's role in the United Airlines-US Air 
merger. So I look at those very differently. My immediate 
concern is the TWA issue. My long-term concern mirrors that of 
a lot of comments here. I thought Mr. Levine laid those out, as 
well as Ms. Hecker. We want to make sure that our people, who 
are becoming so dependent on air travel, are going to be served 
in the long run.
    I would say to the airline people, your big problem is that 
we are all million mile flyers, so we know firsthand. Sometimes 
we have businesses come before us and we do not really have 
that much expertise, but we do when it comes to air travel.
    I was glad that Mr. Carty said he looks at these two issues 
separately. I was wondering--you said you put them out on the 
same day in a press release. Why did you do that?
    Mr. Carty. I mentioned in my remarks, Senator Boxer, that 
it was almost coincidence. I had the great good fortune to have 
the financial analyst community conclude that I was brilliant, 
but it really was just pure coincidence. The two deals happened 
to come together. We had been negotiating with United for a 
very long time, and on the TWA side suddenly it became apparent 
to us, which it had not before, that TWA was going to have to 
file for bankruptcy. That created an opportunity and we went 
into a very intense period of negotiation and discussion with 
TWA that culminated in the agreement.
    Senator Boxer. Mr. Levine, it has been stated here by Mr. 
Compton, I think in a pretty straightforward way, that he is 
very concerned about TWA employees and retirees and creditors 
and consumers and communities served by the carriers, and he 
feels that if this does not happen and if this thing just goes 
off into a lot of different pieces it could be terrible for all 
those groups. I wonder if you agree with that.
    Mr. Levine. I think that if TWA does not get acquired by 
American it will be very difficult for someone else to attempt 
to run a hub at St. Louis. I think it is going to be so 
difficult for American that I have expressed some question as 
to whether its shareholders will in the end benefit from this 
transaction, but that is not your problem. That is Mr. Carty's 
and his shareholders' problem. I think it is very unlikely that 
anyone would attempt to run a hub at St. Louis if the result of 
the bankruptcy is a liquidation of TWA.
    Senator Boxer. I wonder, Ms. Hecker, if you would agree 
with that?
    Ms. Hecker. I think one of the interesting things about TWA 
is how many airlines have looked at it over the past few years 
and attempted to assess whether it was a profitable 
acquisition. I think the records show that no one saw that both 
its encumbered assets and the fact that----
    Senator Boxer. I am not asking you that. I am just asking 
you, do you agree with Mr. Compton that, if your concern is TWA 
employees, retiree, creditors, consumers, and communities 
served by both carriers--do you agree with what Mr. Compton 
said, that if they do not go this way then those, all those 
interests, would be not as well served?
    Ms. Hecker. I agree there is a substantial risk of that.
    Senator Boxer. Well, let me say that to me that is of 
paramount importance, both Ms. Hecker and Mr. Levine saying 
this, because I do think in this time where we are seeing such 
massive layoffs, Mr. Chairman, around the country for various 
reasons, an economy slowing and so on, I think the last thing 
we need are pensioneers who suddenly do not have their health 
care and employees who suddenly do not have anywhere to go.
    Let me ask you, Mr. Carty, in my remaining time. How many 
people, more people, will you be taking from TWA? Or maybe Mr. 
Compton knows that. If in fact you intend, you say, to employ 
everyone, how many people is that?
    Mr. Carty. It is about 20,000. Bill?
    Mr. Compton. Right.
    Senator Boxer. 20,000 people would continue in employment. 
Would you bring them in at their same level of pay or integrate 
them into American Airlines' pay? Have you thought that through 
yet?
    Mr. Carty. By definition, Senator, they will become part of 
the American Airlines system and therefore the contracts that 
the unionized people at TWA operate under will be the American 
Airlines contracts. Quite frankly, for most people it means a 
pay increase. The question of how they are integrated and so on 
really is largely up to the unions to work through.
    Senator Boxer. But it is in fact your intention to keep 
them all on board?
    Mr. Carty. Yes.
    Senator Boxer. And to make them part of the parent company, 
American Airlines.
    Mr. Compton, did you get any other offers as good as this 
one?
    Mr. Compton. Unfortunately, I got no other offers.
    Senator Boxer. What is the time frame that we are looking 
at here, Mr. Compton, for this to be as smooth as it could be? 
What do you see as a drop-dead date for this thing to be 
completed?
    Mr. Compton. We have got a couple of important dates coming 
up. We had an important date last weekend in the bankruptcy 
court, where Judge Robinson allowed the bidding process to 
begin so we can bring some order to this process. We now are 
looking for in the first half of March, towards the middle of 
March, the final sale hearing. Then there will be a period of 
time to move forward to the closing, but no more than a matter 
of months.
    So it is very important from TWA's perspective to try to 
resolve this as quickly as we possibly can to the benefit of 
all of our constituents.
    Senator Boxer. Are your people still getting paid at this 
time?
    Mr. Compton. Absolutely.
    Senator Boxer. And they will, if this all goes smoothly 
under this bankruptcy filing, until they get taken over?
    Mr. Compton. Absolutely.
    Senator Boxer. Last question. How many cities does TWA 
currently serve?
    Mr. Compton. Approximately a hundred.
    Senator Boxer. They will continue to be served, Mr. Carty? 
That is your plan?
    Mr. Carty. That is certainly our plan, Ms. Boxer.
    Senator Boxer. Thank you very much, Mr. Chairman.
    The Chairman. Thank you, Senator Boxer.
    Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman.
    I have listened to all the questions and I think most areas 
have been covered. I want to say, as the new Chairman of the 
Aviation Subcommittee, I plan to work closely with the Chairman 
on the air traffic control system. We also must remove barriers 
to infrastructure improvements, because that clearly is a 
factor in the problems that airline passengers are having 
dealing with delays and passenger service.
    However, I want to also say that I think there are still 
more things that the airline can do in the area of scheduling 
that would also bear on the terrible delays and frustrations of 
the traveling public, and I will expect the airline to do their 
part if we do what we can do to smooth the infrastructure both 
in the air traffic control system and the runways and the 
terminal improvements that are needed.
    I find it interesting in all of the hearings that I have 
attended on these subjects that very often I hear people talk 
about the free market when it comes to deregulation, but they 
do not talk about the free market so much when it comes to 
mergers. I think we have got to tread very carefully in this 
area, and I think the example that we have made with American 
and TWA is the wrong one, even if you are a person who is 
concerned about too many mergers.
    I am concerned about the lack of competition. I had great 
concerns about deregulation. I think, with all due respect, 
deregulation has not worked. I think the hub system has caused 
the increase in prices in airline tickets, and I think that 
perhaps some other partial deregulation might have been a 
better answer than what was done by Congress.
    But we are where we are. Deregulation, the hub system, and 
now merger mania is possibly going to, in many cases, eliminate 
or lessen competition. I do not think American-TWA is one of 
those mergers. According to your written testimony, Mr. Levine, 
you agree that there is not much hope for St. Louis if TWA goes 
under and there is no one willing at this time with the 
capability to buy TWA and to protect the jobs that are there 
and the service that is necessary at a very large city in our 
country.
    So I would just ask you, in light of all of the questions 
that we have heard, mostly to Mr. Leonard and Mr. Levine: What 
is your alternative? I mean, if you do not think that American 
and TWA merging is going to be in the best interests of this 
country, the State of Missouri, and the employees, what would 
you suggest is a better option? Second--I will just ask one 
question and hope that you can answer them in the context of 
the mergers that are being looked at and already contracted 
for--what is your alternative to these mergers?
    How are you going to increase competition when there are no 
willing competitors ready to step up?
    Mr. Levine. I thought I was quite clear both in my verbal 
testimony and my written testimony that I do not object to the 
American-TWA merger on public interest grounds. Any comments I 
have been making are addressed to whether it might or might not 
be a great business transaction for American. It is American's 
job under the U.S. economic system to figure out what is a good 
business transaction for them. So I am not suggesting an 
alternative to that transaction because as far as I am 
concerned I do not think there ought to be a public objection 
to that merger.
    As to the larger transactions that are the much more 
important issues here today, I would not permit these mergers. 
I would let US Air and its unions negotiate out US Air's cost 
disadvantages, which in my judgment are manageable. US Air in 
my judgment is not a failing company. It is a company which has 
faced hard choices and is ducking them on both management and 
the union side and hoping that this transaction will bail them 
out of those choices, and in my opinion they should be left to 
work their way in the competitive marketplace.
    I think the East Coast infrastructure is an emergency issue 
that needs to be dealt with. I have a variety of suggestions 
that probably time does not permit my making here, but----
    Senator Hutchison. May I just interrupt you before you go 
to that second point. Do you think it would be fair to United 
and US Airways to allow this merger to go through, but not 
theirs? Would that set up a competitive----
    Mr. Levine. AA-TWA?
    Senator Hutchison. Yes.
    Mr. Levine. Absolutely, it would be fair. The antitrust 
laws as far as I am concerned are about preserving competition. 
They are not about the question of whether you are being nicer 
to one company than another. They are addressed to preserving 
competition. In my judgment the TWA-American merger does not 
threaten competition because TWA will not be here to compete 
and in my judgment it is unlikely that anyone else will attempt 
to run a hub at St. Louis, so I do not see an effect on 
competition.
    In the case of US Air-United on its own or with American, I 
think both of those transactions ought to be disapproved. That 
is my personal view, unpaid for by anybody. I would allow the 
process which has been going on to continue. The fact is that 
Delta and Northwest and Continental have all been gaining 
market share on American and United. That is a process that in 
my judgment United and American seek to arrest by building a 
fortress wall around the East Coast which will not be 
duplicable by anybody else, and I do not think that is 
something the government should allow.
    Senator Hutchison. Mr. Leonard?
    Mr. Leonard. I think if you look at it in context there are 
four successful new entrant airlines, highly successful new 
entrant airlines. We are one. We were formed because of 
Eastern's bankruptcy. The only way that we got started was 
Eastern vacated gates in Atlanta and we took those over. We 
could never start today and get to where we are. It would be 
virtually impossible.
    JetBlue got started because the government granted them 75 
additional new slots in order to do that. Without those slots, 
they could not have gotten started.
    Southwest was protected by the Wright Amendment for a very, 
very long time. That gave them time to build a fortress in 
Texas and then grow that nationwide and now it is a very, very 
tough competitor all over the country.
    The last is Frontier. Frontier was created because 
Continental abandoned gates in Denver and they were able to get 
a foothold in Denver and build a network.
    Very few of the other new starts are successful because 
they do not have network. The same principles that apply to Mr. 
Carty apply to us. If you do not have a network, you are not 
going to be able to survive.
    So what I would recommend, which is what I have been 
recommending, is that as part of national policy, any time a 
merger occurs, big or small, that a certain percentage of the 
gates and slots at these slot-controlled airports and gate-
constrained airports should be forced to be relinquished back 
to a pool and reassigned to new entrant airlines.
    It took us a year and a half to get one gate at Newark, 
even though we could prove that there was the equivalent of 13 
gates available there which were being horded by the large 
airlines. Well, we have been trying for 2 years to get 
additional gates at Philadelphia; impossible to do so up until 
now when we are starting to get some help. I could go on and 
on. Slot-constrained at LaGuardia, slot-constrained at 
Washington National.
    So what needs to be done is for the barriers to come down, 
and the United-American deal that is on the table will make the 
barriers so high that it will be impossible for anybody to 
compete in the future. We need to reallocate the assets that 
are restraining trade.
    Senator Hutchison. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hutchison, and we look 
forward to working with you and Senator Rockefeller, 
particularly in the area of the air traffic control system and 
increased capacity. It is very popular, and I am probably one 
of the most guilty, to voice criticism at the airlines 
themselves, but if they do not have places to land and if they 
do not have a system that can get them from one place to 
another, clearly the responsibility has to be shared. I look 
forward to working with you and Senator Rockefeller as we 
address those important aspects.
    I would remind the panel that Senator, now Secretary, 
Mineta was part of a panel a few years ago that predicted 
pretty much what was going to happen to aviation in America, 
and we as a nation and as a Congress were unable to come up 
with solutions and we are there. So I think the issue is 
serious. I think it will dominate a lot of the work of the 
Commerce Committee, and I look forward to working with you.
    Senator Carnahan.

               STATEMENT OF HON. JEAN CARNAHAN, 
                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Mr. Chairman, like Senator Allen, I want 
to apologize to you for my late arrival. I was at the National 
Prayer Breakfast, where I hoped that my participation would 
also serve the national interest. However, it did not qualify 
me for the early bird exemption.
    The Chairman. Thank you, Senator Carnahan. I am sure it was 
well spent.
    Senator Carnahan. Thank you. With your permission, I would 
like to submit my full remarks for the record.
    The Chairman. Without objection.
    Senator Carnahan. I also want to commend Senator Bond and 
Governor Holden for their strong commitment to the TWA 
acquisition.
    As I mentioned during Secretary Mineta's confirmation 
hearing, I share the concern of many Members of this Committee 
regarding the consolidation in the airline industry and the 
resulting reduction in competition. However, I want to 
emphasize again, as it has been emphasized today already, that 
I believe that the American Airlines acquisition of TWA is 
distinct from the other mergers that are pending. TWA is a 
financially distressed firm. It cannot be saved or revived 
without the intervention that is proposed by American Airlines.
    But I am concerned about the future of TWA's employees and 
their families, and to date American's proposal to purchase 
substantially all of TWA's assets is the only scenario I have 
seen that assures continued employment opportunity for TWA 
employees. Should this venture fail, I can only imagine the 
heartache of the families of these 20,000 employees who have 
struggled so long in the hopes that they could find a workable 
solution.
    So I urge my colleagues here on this Committee to consider 
the unique circumstances, these unique circumstances, when 
assessing this proposal.
    I have one question I would like to ask of you, Mr. Carty. 
I was extremely pleased to hear you say, as well as Mr. 
Compton, that you plan to offer employment opportunities and to 
maintain the hub in St. Louis and to also maintain the health 
and the travel and the retirement benefits. But I would like to 
inquire about the overhaul facility in Kansas City. I know you 
have two overhaul facilities already, one that is far larger 
than our Kansas City one, one that is about the same size. Do 
you see the need for keeping the one in Kansas City?
    Mr. Carty. Most definitely, Senator. I am glad you asked. 
One of the real hidden assets from our perspective in the TWA 
transaction is in fact the Kansas City major overhaul base. 
This country and this industry is going to be facing a shortage 
of maintenance capability both in terms of facilities and, just 
as importantly, in terms of skilled professional mechanics. 
Kansas City in one fell swoop gives us both.
    We will have, as a consequence of this transaction, 200 
more airplanes to do major overhauls on and Kansas City can 
accommodate those 200 and it can accommodate more than that. So 
as we continue to grow the company, I would expect we will be 
growing the Kansas City maintenance base, not simply sustaining 
it. That to us really is one of the unique aspects of this 
deal.
    Senator Carnahan. Thank you, Mr. Chairman.
    [The prepared statement of Senator Carnahan follows:]

  Prepared Statement of Hon. Jean Carnahan, U.S. Senator from Missouri
    Mr. Chairman, TWA has one of the most distinguished histories in 
the airline industry. Many of you may not know this, but having been in 
service for over 75 years, Trans World Airlines is the oldest 
continuous name in U.S. commercial aviation. As a Missourian, that is 
something that I take great pride in.
    Unfortunately, however, after nearly two decades of financial 
difficulties, including the current string of 12 consecutive years 
without posting a profit, TWA has reached the point where it is no 
longer able to survive independently.
    The company's mounting debt and poor credit, coupled with continued 
problems associated with a prior separation agreement with former 
owner, Carl Icahn, caused irreparable damage to the airline. 
Ultimately, these problems became too burdensome to overcome, even in 
light of the exceptional efforts of TWA's management and employees.
    Earlier this month, American Airlines proposed to acquire 
substantially all of TWA's operating assets. TWA's board of directors 
approved American's proposal. While I am saddened by the fact that St. 
Louis will lose it's hometown airline, my overwhelming concern is for 
the jobs of the more than 20,000 TWA employees and their families. 
Officials at American Airlines have assured me that they plan to offer 
employment to virtually all of TWA's contract employees--including the 
employees at TWA's overhaul base in Kansas City.
    While continued employment opportunities for TWA employees is 
foremost among my concerns, I was similarly fearful about the negative 
impact that TWA's liquidation would have on the rest of the state's 
economy. St. Louis' Lambert International Airport, where TWA is 
headquartered, has an annual economic impact of $5 billion on the 
region. Having a ``hub'' in St. Louis is critical to maintaining the 
region's economic vitality. American has assured us that they plan to 
use St. Louis as a hub.
    American's proposal is the only scenario I have seen to date that 
provides the key assurances in terms of maintaining jobs, the overhaul 
base in Kansas City, and St. Louis as a hub.
    Therefore, Mr. Chairman, even in light of my general concerns about 
consolidation in airline industry and the potentially adverse impacts 
it could have upon consumers, I view American Airlines' proposed 
acquisition of TWA as wholly separate and unique from the other mergers 
which are currently pending. I urge you and the other Members of the 
Committee to do so as well.
    The primary difference with the American/TWA deal is that, as I 
mentioned, TWA is a financially distressed firm. With most of its 
assets used as collateral for earlier loans, the airline is unable to 
borrow any additional funds. Furthermore, record-high fuel prices have 
ultimately driven TWA into bankruptcy. In fact, were it not for the 
$200 million of debtor-in-possession financing that American provided, 
TWA would not even be operating today. Because of TWA's precarious 
financial situation, it is also critical that this transaction be dealt 
with swiftly.
    During the bankruptcy court proceeding last weekend, the judge in 
the case held up a thick folder of papers and said, ``These are letters 
and forms from TWA employees. And they all support the transaction.'' 
My office has been similarly inundated with calls and letters from TWA 
employees imploring me to help save their jobs.
    As a Senator from Missouri, I cannot overlook the damage--
particularly the loss of jobs--that TWA's closing would have on my 
state and on the nation as a whole. I hope that these circumstances 
will be taken into account when evaluating the various deals that are 
before us. Mr. Chairman, thank you for convening these hearings, and I 
look forward to hearing from the witnesses who are here today.

    The Chairman. Thank you very much.
    Senator Snowe.

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

    Senator Snowe. Thank you, Mr. Chairman. I appreciate your 
scheduling this hearing today. Unfortunately, we are all too 
often having hearings on this subject, and for good reason, 
because obviously, as you have heard from so many of my 
colleagues here on the Committee, there are some serious 
concerns about the direction of the aviation industry.
    I always like to mention the fact that when I was elected 
to Congress and began commuting on a weekly basis in 1979, we 
were still in a regulated environment. The current environment 
does not resemble the kind of an environment today in the 
airline industry. Obviously, a lot has changed. For those of us 
who represent rural states and rural communities, we are all 
the more concerned about the direction that these mergers 
portend.
    Ultimately, we are going to see, I suspect, three airlines 
that will dominate 75 percent or more of the market here in the 
United States. Obviously, we are seeing competition undermined. 
We are seeing higher prices. We are seeing diminished service 
to smaller communities, like the State of Maine, in addition to 
what Senator Dorgan indicated in his remarks. So that is the 
direction and that is the concern.
    I would like to ask, Mr. Johnson, in your original proposal 
with United you mentioned the fact in the creation of DC Air 
that you were going to maintain service to the communities in 
the Northeast, that you were going to continue essentially the 
same service. Do you intend to maintain that commitment in your 
merger with American?
    Mr. Johnson. Yes, Senator. I think the cornerstone of what 
DC Air is proposing is that the communities, the small 
communities, particularly those in Maine and other places along 
the Northeast Corridor, will continue to receive the service 
that they were receiving for the past 40 years under US 
Airways, but with some significant differences. We believe we 
will bring lower costs and therefore lower prices because of 
the nature of our operation as significantly different than US 
Airways.
    We will bring the advantage with American of the frequent 
flyer miles that will be very attractive to passengers 
traveling on DC Air from Portland, say, who will then have 
AAdvantage miles that will take them throughout the American 
system. We will move very quickly to a full jet/regional jet 
service that will have the right number of seats for the 
capacity that we are flying.
    As I said before, if these slots at Reagan National were to 
be distributed out, as some have suggested, it is very likely 
that many of these small communities that are not profitable in 
the context of a hub system would lose direct nonstop jet 
travel to Reagan National. As I finally indicated----
    Senator Snowe. That is a big ''if.``
    Mr. Johnson. There are people advocating that that is the 
best way to dispose of these slots, rather than to create DC 
Air which will continue to serve these 45 communities, which I 
think is in the best interest. Furthermore, I would say that 
probably of all the carriers at this table I would be the only 
carrier to sign a consent decree committing to fly to those 
communities and no other communities.
    Senator Snowe. What about American's commitment in that 
regard in providing air service?
    Mr. Carty. Senator Snowe, our commitment, as I said 
earlier, is to let Bob Johnson run this company and be 
absolutely supportive and be a minority investor, unless he 
wants help or advice.
    Senator Snowe. So you would support that approach?
    Mr. Carty. We are prepared to invest in a company that has 
made that kind of consent decree commitment.
    Senator Snowe. There was an article recently concerning 
this proposed merger and it talked about how, as for hub to hub 
concentration concerns, on five routes where only one carrier 
would operate after the merger, American agreed to serve those 
routes for a long period of time whether they make money or 
not. Those routes are Charlotte to Chicago, Pittsburgh to 
Washington Reagan, Philadelphia to Denver and San Francisco or 
San Jose Airport.
    I could not help but think, if Charlotte, Pittsburgh, and 
Philadelphia's hubs could not make money, I do not know how 
Portland, Bangor, or Presque Isle could. I think that is a 
central concern. As we see fewer and fewer airlines serving 
America, and certainly serving our part of the country, how is 
it that we are going to get better customer service how is it 
we are going to get lower prices or fair prices, how is it we 
are going the get better equipment, because that has not 
happened?
    US Air has really done a good job in serving Maine and I 
certainly appreciate what they have done for our State, at 
least in providing direct service and continuous service. But 
that has been the exception for our part of the country and not 
the norm. That is what concerns me, because we have no control 
over the direction or the prices or the type of equipment. I do 
not see how that is going to get better in the future with 
fewer airlines.
    Mr. Carty. Senator, I think you make a very good point, but 
I would say this to you. I think the challenge of serving small 
communities economically lies before us regardless of whether 
or not there is further consolidation or not. I think it is 
almost an independent issue, but an important one. As I said in 
my earlier testimony, I really do believe that if we want to 
have the kind of service in this country to these small 
communities that they want and they deserve if they are going 
to participate in the economic benefits of what the U.S. 
economy is doing, we are going to have to relook at the 
essential air service system, because I think we are going to 
have to find a way to subsidize that service and do so until 
such time as those communities build enough critical mass to be 
successful on their own.
    Senator Snowe. Well, you make an important point, Mr. 
Carty, because in northern Maine, in Presque Isle, Maine, we 
had to invoke essential air service for that reason, because 
there would be no airline service to northern Maine otherwise. 
Twenty years ago they had 727's. Now you have to rely upon the 
essential air service program in order to have any kind of 
service, and you cannot get there from within Maine. You have 
to go to Boston in order to get to northern Maine. So that is 
where we are today. That is the state of the aviation service 
within Maine, and a lot has changed.
    Frankly, I see some other policies that need to be 
addressed As Ms. Hecker has mentioned, I have asked for a GAO 
study on the whole issue of regional jets. Portland, Maine got 
short-changed at LaGuardia recently. Delta was making a major 
investment of a billion dollars in regional jet service and, 
guess what, the one direct service from Portland to LaGuardia 
was based on one of the many slots eliminated, at a time when a 
major airline was investing in regional jets, which we are 
encouraging as a policy in this country. Yet, when it comes to 
being able to compete with the populated areas with the bigger 
aircraft, we will never be able to stand on a level playing 
field. That is the other dimension to this entire problem.
    When I look at how much all Americans have invested in 
commercial aviation, it is an incredible number. I asked my 
staff to look it up and since 1918 American taxpayers have 
spent $155 billion for infrastructure, for air space, for 
equipment, and so on and so forth. So not every American 
benefits from all of this investment, but ever American pays 
for it.
    So we clearly have been on the wrong track and it is one 
that I think that we have to consider in the future in terms of 
perhaps conditioning some of these arrangements to ensure that 
all Americans in fact do benefit.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Snowe.
    Senator Rockefeller.

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

    Senator Rockefeller. Thank you, Mr. Chairman. I will be 
very brief. I will not even ask a question.
    A couple things occur to me. No. 1, as the Chairman of the 
Committee knows, I support the US Air-United-DC Air 
arrangement, and I always have and I always will. It is very 
easy for me because US Air does not provide the kind of service 
I would like to see in West Virginia and Bob Johnson and DC Air 
is going to do it, and he is going to do it with something 
called regional jets.
    It has been so long since I have heard the sound of a jet 
that I look upon him as salvation for our economy. So that is 
not very hard for me. You know, US Air goes up and down, United 
goes across, and they intersect in DC Air. Bob Johnson is right 
about the slots. They would all go elsewhere. So that is one 
point.
    The second point, I do not start off at all unfriendly to 
the second merger, because again, is it a merger or is it a 
bailout? It is something which needs to happen and if it did 
not happen where would there be any sense of increased 
competition? There would not be. So it needs to happen.
    Now, that makes three or four or whatever it is very large 
airlines and therefore offends the sense of competition. But in 
dealing with reality, competition to me is when I can get 
somebody from, let us say, Dallas or Santa Barbara to get into 
Washington and then to get to West Virginia in something called 
a regional jet, because if they do their whole attitude about 
West Virginia, either locating a business there or coming back 
there, wanting to meet with me or deciding I do not exist, a 
lot of that is formed by whether or not they come in on a 
regional jet or a prop plane. So I support that.
    Second--and I think I support the second one, too, because 
of the backup that you have each indicated, that Bob Johnson 
and Don Carty have indicated, in terms of the way you view each 
other.
    The last point I want to make, Mr. Chairman, is something 
that Don Carty mentioned in conversation. That is--and this is 
not a good comparison, but it is the only one I could come up 
with for the moment--in the telecom business we passed a law--
and the telecom business, that is the way people communicate. 
Well, so is flying. I think flying, aviation, is now coming to 
the point where it is more important than highways for 
America's future. Telecom obviously is huge.
    But in telecom we say: Oh, you cannot just have comparable 
service; you have got to have similar service at similar rates, 
and that is the deal. It is in the law. Now, that does not 
apply just by definition of economics, passenger loads and 
everything, in aviation and I understand that. But that is why 
I like the idea of us as a Committee, but more importantly the 
industry as an industry, taking what you referred to, Mr. 
Carty, as a very special effort to look at the whole question, 
not just of essential air service, which I now sort of 
associate with airports which are barely open--it is almost 
like a death wish--but rather taking rural--and you have got to 
get people out of the rural areas to get them to your hubs, to 
get them into your mainstreams, around the country and around 
the world, and Bob Johnson is going to help you do that, up and 
down the East Coast.
    But I think that the idea of the industry, industry leaders 
taking the lead to get together to figure out what do we do 
about these rural areas, because if you are born in a rural 
area you are no less of a person than if you are born in New 
York City or some huge city like Rockland. There is a real 
principle involved here about human beings.
    So I would just really encourage you to do that. We need to 
do it, but you need to do it. It is like customer service. We 
can do it, but you probably will not like it, and therefore you 
have got to do a good job at it or else we will do it. I think 
the same applies on this.
    That, Mr. Chairman, is my statement.
    The Chairman. Well, I thank you, Senator Rockefeller.
    I want to thank the witnesses for their patience. This has 
been a very long hearing. Senator Allen would like to ask 
another question, so the hearing will be even longer.
    Senator Allen. I thank the chairperson and the witnesses. I 
would like to put my statement in the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Allen follows:]

  Prepared Statement of Hon. George Allen, U.S. Senator from Virginia
    Mr. Chairman, thank you very much for calling this hearing on such 
a critical and timely issue. This issue of market consolidation is not 
unique to the airline industry, but is being experienced across our 
economic landscape as the expansion of international trade and gains in 
reducing unit costs and improving labor productivity forces companies 
to seek greater economies of scale wherever possible. This 
consolidation is evident throughout the transportation industries, from 
steamship companies, with the purchase of SeaLand by Maersk from CSX, 
to railroads, and to automobile manufacturing. But not many passengers 
travel by steamship these days, and so it doesn't become a matter of 
general public discussion as does airline consolidation.
    I share with you, Mr. Chairman, as I believe every Member of this 
Committee does, the absolute commitment to seeing that the United 
States commercial aviation market is competitive, safe and efficient. 
Safety and efficiency are truly the providence of the Federal Aviation 
Administration, and this Committee has a lot of work ahead of it to try 
to fix the severe stresses the Air Traffic Control system is 
experiencing.
    And on the issue of competition, the Sherman and Clayton Acts lay 
down, as you well know, clear guidelines under which the Department of 
Justice must analyze any potential merger that could impact competition 
within an industry. For the last seven months, I understand the 
Department of Justice has been intimately involved with the parties to 
the United-US Airways merger, and that this process will most likely be 
continuing into April of this year. I also understand that the 
Department of Justice has been raising a number of concerns regarding 
the proposed merger, concerns that have required significant changes to 
the original merger proposal, and that this merger proposal is by no 
means a done deal.
    While I was Governor of Virginia, I learned first-hand how complex 
and time-consuming the regulatory review process can be. For a $13 
billion deal like that being proposed by United and US Airways, and now 
also American Airlines, I can only imagine how much more so it must be 
here. I raise this issue because throughout the testimony and 
statements here today, I have not heard much about the inadequacy of 
the current merger antitrust review process. In fact, I can remember 
the strong objections many Members of the Senate have taken to other 
antitrust measures initiated by the Department of Justice, most 
noticeably the case against Microsoft, or even the hostility evinced by 
Justice to the initial forays by Northwest and Continental to some type 
of merger. Before I came here, my impression was that many Senators 
believed Justice was TOO aggressive in antitrust enforcement, not too 
lax.
    Given that, I think that we need to move cautiously before we pre-
judge the decision making process underway at the Department of 
Justice. The fact of the matter is that Justice could still deny this 
merger application and that the concerns raised today may very well be 
moot.
    But meanwhile, there is something that is proceeding apace, 
regardless of what Justice decides. And that is both TWA and US Airways 
are in unsustainable financial situations. US Airways lost almost $300 
million last year, more than one-third of that in the last quarter 
alone. TWA has gone through bankruptcy twice, and I understand if not 
for the proposal with American, would have had to go into liquidation 
very soon.
    Such an uncontrolled demise would be catastrophic for the 
communities served by these airlines. Without some type of controlled 
transfer of aircraft, routes, gates, airport slots, reservation 
systems, existing tickets, and passenger reward programs, air travelers 
will be left holding the bag with little recourse except to accept 
their personal losses and inconvenience. Meanwhile, tens of thousands 
of highly-paid technical employees will be abruptly laid off, and 
communities could very well find themselves with extremely limited, or 
even no air-service. Forcing such an outcome would be, in my opinion, 
irresponsible and ultimately more injurious to airline competition than 
an orderly transition overseen by the antitrust division of the 
Department of Justice.
    So I guess that's the main point I want to make today, Mr. 
Chairman; the status quo is not sustainable and some type of major 
change in the airline industry is inevitable. TWA is on it's last 
gasps, and US Airways is finding itself in an increasingly untenable 
financial situation, one that I do not believe can be maintained for 
any significant period. Therefore, in my opinion, the question becomes 
how will such inevitable change be managed?
    I am heartened by the commitments United has made to the 
communities currently served by US Airways, as well as to the US 
Airways employees, especially for the communities and employees in 
Virginia. No one will be laid off, fares will be frozen, and service to 
all existing communities will be maintained. In addition, a new low-
cost carrier will come into one of the highest cost airports in the 
country, Reagan National. Given the realities we face, this seems like 
an exceptionally favorable outcome to a bad situation for my 
constituents.
    However, I realize that significant issues will still remain 
regarding the competitiveness of the US airline industry, issues that 
have their roots in market structures that were established before, or 
independently of, the current financial woes that beset TWA and US 
Airways. Such issues as hub dominance, market exclusion, potentially 
predatory behavior, and the impact of new technologies such as regional 
jets and Global Positioning System, all deserve full analysis, and I 
look forward, Mr. Chairman, to working with you to ensure a viable, 
competitive, safe, and efficient airline market.

    The Chairman. Without objection.
    Senator Allen. Thank you.
    Senator Rockefeller. Mine too.
    The Chairman. And Senator Rockefeller's.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia
    Mr. Chairman. This Committee spent three days in hearings on this 
subject last year, another day debating S. Res. 344, which effectively, 
and in my view inappropriately, denounced the United Airlines-US 
Airways-DC Air deal, and many more hours analyzing the transactions' 
impacts on our communities and on competition in general. The 
Departments of Transportation and Justice have done and are doing the 
same, though in much more detail and according to strict legal and 
economic standards. In the end, I hope that these transactions will be 
approved, subject to the modifications and conditions that the 
Department of Justice requires to ensure competition.
    I look at these various transactions from two vantage points--one 
as the Senator from West Virginia in dire need of better air service, 
service that is a life line to the outside world; and a second as the 
Ranking Member of the Aviation Subcommittee, with a desire for a 
competitive, dynamic, and safe national air transportation system.
    What I see for my State in this deal is the equivalent of a seat 
upgrade, from coach to business class. We all are aware that US Airways 
does not have a stellar record of service. Its commuter affiliate 
network which today provides most of its service to West Virginia is, 
frankly, not doing the job. We have had countless meetings with our 
airport directors, the commuter carriers, and others to try to improve 
the situation. US Airways management has tried to work with us, but 
hasn't had the resources to take any significant action.
    US Airways may not technically be a ``failing company'' under the 
antitrust laws, but at the bottom of its service food chain it 
certainly acts like one. And by virtually any measure, US Airways is a 
company with a deeply troubled future. In a year when a carrier like 
Delta had earnings of $897 million, US Airways lost $269 million. 
Perhaps they should have done many things differently, but the fact is 
they did not grow substantially during the boom years of the late 1990s 
and have not succeeded in reducing their costs. US Airways still has 
the highest costs per available seat among the major carriers. Despite 
controlling two so-called ``fortress hubs'' in Charlotte and 
Pittsburgh, where DOT says the airline enjoys incredibly high yields, 
US Airways is not making money.
    The bottom line is that the problems for this carrier are real, and 
they are affecting the economy and the future of my State and of other 
small communities in the East.
    Along comes one of the two biggest carriers in the industry with a 
deal for US Airways, and the creation of a new air carrier, DC Air. All 
of a sudden, we move up to business class. United will offer us more 
connections to more cities and, hopefully, better schedules, more 
flights, and generally better service. United, as we all are painfully 
aware, had its own set of customer problems last year and it must 
improve its performance, but small communities in West Virginia and 
across the country need access to a major network carrier to survive. 
DC Air is the icing on this cake. DC Air offers us a true entrepreneur 
and committed new airline executive, who is willing to invest his time 
and a substantial amount of his personal funds to create a new carrier. 
DC Air has a business plan that is all about serving small cities out 
of Reagan National Airport better than they have been served in years.
    Now, DC Air and United have taken seriously the competition demands 
and challenges of the Department of Justice, and Members of this 
Committee. They have found a serious, significant competitor--some 
would say United's single biggest competitor--and divested parts of the 
original deal. Last year Mr. Johnson committed to us that he and DC Air 
would be independent of United Airlines, and now he's followed through 
on that commitment by selling to American Airlines a 49 percent share 
in his airline. The American Airlines marketing arrangement and 
possible code-sharing place DC Air squarely independent of United. And 
American's agreement to start service in 5 critical markets that stood 
to lose competition, plus the splitting of the highly lucrative shuttle 
service on the East Coast, seem to me only to strengthen the 
competitive nature of this deal.
    Still to be determined by DOJ is whether or not American is 
obtaining too much in the way of gates and slots in the Northeast. 
American already has a substantial presence at Boston (14.2 percent), 
at JFK (21.7 percent) and at LaGuardia (16.6 percent). The TWA-American 
deal and United's sale of US Airways assets to American will change 
those figures significantly. American will get gates and slots in New 
York, and gates in Boston. American and United may end up creating a 
town that's only big enough for the two of them, leaving the other 
major carriers with too little to build and maintain an airline around. 
DOJ will have to be persuaded not only that the American-United 
transaction addresses its concerns with the United-US Airways merger, 
but also that it doesn't create any new competitive problems, and I 
look to them for a sound decision.
    Market by market, airport by airport, United's takeover of US 
Airways has consequences--some good, some bad. The good news is that 
West Virginia gets an increased presence by United, gets American 
Airlines back in the state for the first time since deregulation, and 
gets added competition and a long-term service commitment from the best 
new regional carrier to come along for us in a very, very long time--DC 
Air.
    Given the fundamental decisions on these mergers are, by law, out 
of our hands, I think the real question for this Committee and this 
Congress, I think, is whether airline consolidation creates an 
opportunity to take affirmative steps to actually improve service and 
competition. For the state of West Virginia, I believe these deals do 
that on their face. For other communities it may take some other 
action--perhaps a whole new approach to rural air service and a more 
concerted effort to break down any remaining barriers to entry and 
promote start-up carriers. This is the time to think creatively and 
work cooperatively to ensure that the public interest comes first in 
aviation. I look forward to working with my colleagues to do that in 
this new Congress.

    Senator Allen. In reading all this, Mr. Chairman, I think 
the key to the lower cost for customers is competition, not 
necessarily in the emergency situations in rural areas, but in 
places like Richmond. There was no doubt when I was Governor we 
were trying--we put billboards up to get Southwest, outside of 
Southwest Airlines headquarters in Texas, to come into 
Richmond. AirTran provides that in some of the facilities that 
you should come to in Virginia, but we do need to get better 
competition for lower prices and better service.
    To how that is all done, it may be predatory behavior, 
whether it is the gates, whether it is the hub dominance, and 
so forth, clearly that is not going to get figured out right 
today. But that is something that this Committee clearly needs 
to look at.
    I think I am in support of the US Air situation. I think 
they are in an untenable financial situation and that is an 
unfortunate situation as far as I am concerned, since US Air is 
headquartered in Virginia.
    The TWA situation, clearly to have American take over TWA 
is very important. You will not find in a bankruptcy sale or 
liquidation anybody saying: Gosh, we will take over and pay the 
medical, health and dental benefits, and those obligations. So 
that is a slightly different situation. TWA is just further 
along the line in economic stress than US Air is, but US Air in 
their view will soon be there.
    Now, Senator Boxer and Senator Carnahan talked about 
various employees and so forth, and I have spoken with Mr. 
Compton about their airline reservation center in Norfolk. When 
I was Governor we were in competition to get that airline 
reservation center in Norfolk, and that means a lot. I would 
like to hear Mr. Carty's views as to--and I know you have 
airline reservation centers. I think they are in Chicago and 
St. Louis, I think were the other ones. How are you going to 
analyze the airline reservation centers as to which jobs? I 
know they are unionized jobs and I know they are protecting 
their jobs. I would like to see their jobs staying in Norfolk 
as opposed to saying, you can keep your job but you have to 
move to Illinois.
    Mr. Carty. Senator, obviously with a bigger airline we are 
going to need more res positions than we have today, so it is 
our expectation that we will need all the capacity that TWA 
currently has. I am told, as an aside, by Bill Compton that the 
res operation in your state is the most efficient one in the 
St. Louis system. That will certainly bear on our thinking.
    But I should mention one thing. That happens to be a group 
of employees, the only group of employees, who are unionized at 
TWA and are not unionized in American Airlines. So it is not 
clear when the smoke clears that they will be unionized. But 
nonetheless, we do intend to employ those employees and we do 
intend, if all that Bill has told me about the Virginia res 
office is true, to operate the Virginia res office.
    Senator Allen. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Allen.
    Again, I want to thank the panel for their patience. I 
think it is an indication of the deep interest that not only 
this Committee but the entire Senate and American people feel 
about this issue. I thank you for your participation and I 
think you have been very beneficial in helping us be better 
informed as we address not only this particular issue, but the 
broader issues that have been addressed in the hearing.
    Thank you, and this hearing is adjourned.
    [Whereupon, at 12:39 p.m., the Committee was adjourned.]


                                APPENDIX

   Prepared Statement of Hon. Sam Brownback, U.S. Senator from Kansas
    Mr. Chairman, thank you for holding this hearing on this important 
issue--I think everyone noticed at last week's confirmation hearing of 
Secretary Norm Mineta, that aviation issues are at the forefront of 
everyone's minds, whether it is mergers and acquisitions, delays and 
congestion, competition and pricing, or even customer service. The 
Chairman and the new head of the Aviation Subcommittee, Senator 
Hutchison, have their work cut out for them in this Congress.
    I come from a rural state, which has no hub airports, and has a lot 
of rural communities with little air service, or no air service at all. 
Many of our communities are dependent on essential air service. I share 
my colleague's concerns that consolidation in the airline industry will 
mean higher prices and fewer choices for consumers. If you think fares 
are high in hub airport cities, try coming to Wichita, Kansas, where 
last night, the walk up, round trip, same day return fare to Denver 
ranged from $1,069 to $1,643, and the cheapest flight goes east to 
Kansas City, before going west to Denver. In fairness, I must point 
out, the walk up fare between Wichita and the number one destination 
out of Wichita, Dallas--Fort Worth, ranged from $349 to $369. But if 
you think fares are high in hub cities, try going to Goodland or Great 
Bend, Kansas which have lost their essential air service, and flying is 
not an option at all.
    But as I travel my home state, the number one aviation issue among 
my constituents is not fluffy pillows or whether the gate agent was 
helpful or not. My constituents are sick of flying because of flight 
delays, cancellations and congestion at our airports. We have a 
capacity crisis in our nation's aviation infrastructure, and my 
constituents have caught on. They fly defensively, avoiding if at all 
possible certain airports because they are notorious for delays.
    We must increase the capacity on the ground at our nation's 
airports. We must build more runways and build them faster than we are 
doing now. The new runway at Memphis, took, what, 12, 16 years to 
complete? That is absurd. The crisis is here. It was last summer, and 
it was the summer before that, and we still have done nothing about it. 
I intend to do something about it, and I look forward to working with 
the panelists and my colleagues on this Committee to see that at least 
this one aspect of our nation's aviation capacity crisis is addressed 
by this Congress.
                                 ______
                                 
      Prepared Statement of Hon. Rick Santorum, U.S. Senator from 
                              Pennsylvania
    Thank you Chairman McCain, Senator Hollings and Members of the 
Committee. I appreciate the opportunity to submit testimony today on 
the impending airline mergers. I am particularly interested in these 
mergers as they relate to jobs and services for my constituents and as 
they impact competition in the airline industry.
    With regard to the United-US Airways merger, I made it clear when 
the merger was first announced that to gain my support the airlines had 
to address my two principal concerns--protecting existing jobs in my 
state and continuing plans to build a new maintenance facility in 
Pittsburgh. Since that time, United Airlines Chairman Jim Goodwin and 
US Airways Chairman Stephen Wolf announced their willingness to make 
good on both of those promises.
    In particular, I was very pleased that United Airlines committed to 
the long-planned expansion of the maintenance facility in Allegheny 
County. This project is not only important to the Commonwealth of 
Pennsylvania; it is critical to the thousands of maintenance workers 
that depend on these jobs to support their families. I believe the 
United-US Airways alliance will benefit the people of Pennsylvania and 
consumers.
    Knowing there are still critics of the United-US Airways merger, I 
respectfully request that you consider the alternative. Just a few 
weeks ago, US Airways reported that high fuel prices and expanding low-
cost and network carrier competition combined to produce disappointing 
financial results for the company--a net loss of $269 million for the 
year 2000. Absent this merger, US Airways would be in dire financial 
straits and jobs at US Airways would be in jeopardy. Previous air 
carriers didn't have the opportunity that US Airways has today. 
Consider the employees of Pan Am, Eastern and Braniff and how the 
states where they operated have been impacted.
    Without the merger to preserve US Airways' service network, I 
question if Pittsburgh, Philadelphia and smaller communities across my 
state will continue to get the kind of service that they need. The 
merger would not only ensure but expand the service to and from the 
Commonwealth of Pennsylvania.
    I understand that looking beyond the United-US Airways merger there 
is some concern about the longer-term impact on competition in the 
airline industry. However, recent economic studies demonstrate that 
airline mergers can have tremendous benefits for consumers--in addition 
to saving tens of thousands of highly skilled, high paying jobs.
    Specifically, airline consolidation can increase travel convenience 
for consumers. In the merger of US Airways with United Airlines, 
travelers would be able to reach more destinations without switching 
airlines. Not only is direct travel more convenient in terms of 
connection times, baggage handling and frequent flier miles, it is also 
on average 55 percent cheaper than switching airlines.
    I believe the airline mergers in question are a step towards 
replacing fragmented regional networks with truly national networks and 
creating local and nationwide competition. The end result would be good 
for my constituents and good for our nation's travelers.
    Thank you, Mr. Chairman.
                                 ______
                                 
                                                   February 7, 2001
Hon. John McCain,
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Mr. Chairman:

    I am writing to express my strong support for the proposed merger 
between Trans World Airlines (TWA) and American Airlines. As the 
Congresswoman representing Missouri's fifth district, which includes 
most of Kansas City, I feel it is quite important to share my thoughts 
with the Senate Committee on Commerce, Science, and Transportation on 
how important this proposed merger is to my constituents as well as to 
my State.
    I understand that you and many of your colleagues have concerns 
with the consolidation process in the airline industry. Such 
consolidation threatens to reduce air service to smaller communities as 
well as decrease price and service competition. I share these concerns 
as well, but I know the TWA-American Airlines merger is different. TWA 
cannot survive in today's current market. Without American's debtor-in-
possession financing, TWA would go out of business immediately. Its 
assets would he liquidated, its employees out of their jobs, and St. 
Louis would no longer be a hub. The economic impact to Missouri's, 
Kansas City's, and St. Louis' economies would be quite substantial.
    TWA currently has 20,000 employees. In my home state of Missouri, 
almost 13,000 people are employed by TWA, including 3,500 in Kansas 
City. Many of TWA's Kansas City retirees and employees reside in my 
district. Under the agreement between American and TWA, virtually all 
of TWA's contract employees will retain their jobs and TWA's retirees 
will be provided medical and dental benefits through American. In 
addition, American has agreed to keep the hub at St. Louis' Lambert 
International Airport and potentially expand the overhaul base in 
Kansas City. Retaining St. Louis as a hub and the overhaul base in 
Kansas City is critical to the Kansas City metropolitan and St. Louis 
regional economies.
    I respectfully request that you and the Members of Senate Commerce 
Committee view the American-TWA merger in a different light from the 
merger proposed by United Airlines and U.S. Airways. TWA only has 3.9 
percent of the market share and would go immediately out of business 
without American's proposed buy out. The only way to ensure that 
thousands of long term employees of TWA do not lose their jobs in my 
state of Missouri and throughout the country is for this deal to be 
approved. It is my hope that the Justice Department does not prevent 
this transaction from going forward, and I would respectfully urge my 
Senate colleagues not to take any steps that would jeopardize this 
effort to save the jobs and services of TWA.
        Best personal regards,
                                             Karen McCarthy
                                 ______
                                 
            Prepared Statement of Hon. Thomas M. Reynolds, 
                    Congressman from New York State
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before the Committee today. I represent the 27th 
district of New York State, including the rural and suburban areas 
surrounding the upstate cites of Rochester and Buffalo.
    Both these areas are working to rejuvenate their local economies: 
working to tie academia and industry to a technology base to create a 
pro-growth atmosphere that encourages job creation and retention.
    In seeking to foster economic development, experts often cite a 
number of factors as disincentives to new business development in the 
region, including high taxes, regulatory burdens, energy prices and 
astronomical airfares.
    Pending mergers and acquisitions in the airline industry present 
the prospect that my constituents, who currently pay some of the 
highest airfares in the nation, will continue to find themselves locked 
into these high fares in virtual monopoly markets. It is highly 
unlikely that the conditions of current proposals--including the 
proposed sale to DC Air of US Airways' valuable slots at Reagan 
National--will provide any prospect of relief.
    Mr. Chairman, in your opening statement before the July 27 hearing 
of the Committee on antitrust issues in the airline industry, you 
quoted the ``father of airline deregulation,'' Professor Alfred Kahn: 
``If I had to choose between encouraging low-fare entry like the kind 
that has benefited the public with low prices, and the unencumbered 
ability of major airlines to respond to low-cost competition . . . I 
will pick the first every time.'' It is just this type of low-fare 
competition that has been a saving grace for the upstate New York 
economy thus far, and it is just this type of competition that we 
desperately need more of.
    Southwest Airlines currently provides service between Buffalo and 
Baltimore-Washington-International Airport. JetBlue Airways provides 
service between New York's John F. Kennedy International Airport and 
both Buffalo and Rochester. The low-fare service these airlines provide 
upstate New York has been a successful first step in bringing greater 
competition to our marketplace. These carriers as well as others, such 
as AirTran Airways and Sun Country Airlines, have expressed an interest 
in bidding for assets at Reagan National with the intention of 
providing low-fare service to upstate New York. Without such a 
consumer-friendly arrangement I'm afraid that I agree with your 
statement, Mr. Chairman, that on balance, pending mergers and 
acquisitions will do air-travelers more harm than good.
    The possible divestiture of US Airways slots at Reagan National is 
an opportunity to bring expanded service and lower costs to Buffalo, 
Rochester, and other areas of the Northeast, mid-Atlantic and Midwest. 
However, a transfer of these assets to a large carrier would 
essentially be the death warrant for such relief.
    Consider for a moment, some of the elements of the massive merger 
deals involving American, TWA, United and US Airways:

   American will obtain from TWA 175 gates and related terminal 
        support facilities and 173 slots. American will purchase 
        current US Airways assets including 14 gates, 36 slots, and the 
        gates and slots necessary for American to operate half of the 
        DC-Laguardia-Boston (United Airlines will operate the other 
        half). In other words, the two largest carriers in the world 
        will work together to operate the shuttle with joint marketing 
        agreements, frequent flyer programs, and clubs.

   American will acquire 49 percent of DC Air including 
        additional slots (222 at Reagan National) and gates. American 
        will gain a total of 467 slots from the transaction (173 from 
        TWA, 36 from US Airways, 36 for the Shuttle and 222 from DC 
        Air.)

   American Airlines will guarantee that the following routes 
        involving current United hubs or new hubs obtained from US 
        Airways will be served by at least two roundtrips a day for the 
        next 10 years: Philadelphia-Los Angeles, Philadelphia-San Jose, 
        Philadelphia Denver, Charlotte-Chicago (O'Hare), and Washington 
        DC-Pittsburgh. To assist American's service in these markets, 
        United has agreed to provide codesharing with American at 
        United's dominated hubs.

   American and United have also agreed that if American enters 
        any other transactions within four years causing American to be 
        at least 7.5 percent larger than United, the shuttle and 
        associated gates and slots will revert to United. Think about 
        that for a minute--the nation's two largest competitors 
        dividing up markets. This appears to be contrary to the spirit, 
        if not the letter of our antitrust laws.

    As a result of the disappearance of US Airways and TWA, along with 
the new alliance between American and United, there will be a reduction 
in the number of hub airports competing for traffic to small and medium 
markets in the Northeast, mid-Atlantic and the Midwest. Options will 
drop for all of these communities. Moreover, none of these mergers will 
create low-fare carriers. DC Air's flirtation with being a low-fare 
carrier has long since disappeared.
    Numerous media outlets, including the Buffalo News, reported long 
ago that DC Air not only wouldn't promise lower airfares, but may also 
very well reduce seats from Buffalo to Reagan National. Neither does 
any independent analysis of the merger to date show DC Air to have a 
cost structure that is likely to allow low fares. Mr. Goodwin, Chairman 
and CEO of United, in a letter to me, went as far to say that the 
airline would realize ``merger synergies'' that could result in a 
reduction in seats to upstate New York.
    The nation's largest carriers have had approximately 10 fare 
increases in the past 18 months. More recently, they have agreed to 
increase the charge of changing a non-refundable ticket from $75 to 
$90. It stands to reason that without increased competition, those 
increases will become more frequent when we have only four major 
carriers.
    Also relevant today is the fact that a number of DOT, GAO and other 
studies have listed slots, gate limitations, and the computer 
reservation system as factors that keep new entrants out of markets. In 
Enforcement Policy Regarding Unfair Exclusionary Conduct In The Air 
Transport Industry, DOT reports: ``to keep entrants from obtaining 
slots at slot-restricted airports, incumbent airlines have allegedly 
purchased the slots that come on the market. Incumbent airlines 
additionally `baby-sit' slots--they use the slots in relatively 
unprofitable markets in order to keep from losing them to a potential 
entrant.'' Incumbent's understandable reluctance to part with slots 
that will give a foothold to new entrant low-fare competition is an 
issue that can and should be addressed through the current merger 
deliberations.
    The consolidation of the industry at this point in time to no more 
than a handful of carriers will only make what is already a bad 
situation close to intolerable. The passage of the Wendell H. Ford 
Aviation Investment and Reform Act for the 21st Century (AIR-21) was 
hailed as a bill to make our skies safer, modernize air traffic 
control, reduce flight delays and boost airline competition. Announcing 
the passage of AIR-21 in the House, Transportation and Infrastructure 
Chairman Bud Shuster said, ``Our air traffic control systems must be 
modernized, single airlines have gained monopolistic supremacy at many 
of our large airports, and flight delays and customer complaints are 
increasing. This legislation will go a long way in relieving our 
overburdened aviation system without raising taxes.''
    Unfortunately, the spirit of AIR-21 has been violated by events 
such as the FAA auction to rescind the slot exemptions granted under 
AIR-21 at LaGuardia (which was the subject of a recent hearing before 
the House Aviation Subcommittee). With the passage of AIR-21, which 
created incentives for carriers to serve medium and small communities 
with regional jets, Rochester saw the proposed number of seats to 
LaGuardia nearly double and daily aircraft operations triple. In 
addition to the proposed increase in seats and daily operations, the 
number of airlines proposing to serve LaGuardia doubled from two to 
four. However, the FAA lottery to restrict access to LaGuardia is now 
having a disproportionate impact on airports like those in Rochester 
and Buffalo that are striving to provide service options to the 
travelling public. While these actions threaten to undo AIR-21's 
success, industry consolidation threatens to permanently trap my 
constituents in a traveler's nightmare of high fares and poor service.
    We are witnessing what may be the most significant mergers in U.S. 
history. These mergers would allow United Airlines and American 
Airlines to dominate most airports on the East Coast including Reagan 
and LaGuardia. New entrant carriers would be blocked from getting into 
these airports. Actions need to be taken to ensure that new entrants 
can obtain access at National and to increase operations at LaGuardia. 
Failing that, these mergers will not achieve the maintenance of any 
real competition in the marketplace and will therefore fail the 
consumer and fail western New York.
    In closing, Mr. Chairman, I believe these mergers and acquisitions 
not only threaten the existence of real competition in the airline 
industry, but will further negatively impact on the economies of those 
communities which can least afford additional burdens.
    Thank you, Mr. Chairman, for the opportunity to address the 
Committee today on an issue of such great importance to western New 
York and the nation.
                                 ______
                                 
Prepared Statement of Air Line Pilots Association, TWA Master Executive 
                                Council
    The Air Line Pilots Association, Intl. (ALPA) is the collective 
bargaining representative for over 2,300 pilots at TWA, and over 59,000 
pilots in the United States and Canada. ALPA has represented airline 
pilots since 1931.
    TWA's future has been in doubt for many years, but its pilots have 
come through again and again to keep the airline flying. In the last 15 
years, pilots alone have agreed to more than $600 million in tangible 
concessions in reduced salaries and work rule changes. As a result, TWA 
pilots today make significantly less, on average, than pilots at other 
airlines who have equivalent seniority, expertise and training.
    Despite those difficulties, ALPA and the pilots it represents have 
continued to work tirelessly to help TWA achieve success. Due in part 
to the efforts of TWA's pilots, TWA has achieved consistently high 
customer satisfaction rankings, on-time performance, and has one of the 
best safety records in the history of commercial aviation.
    The pilots have played an integral role in TWA's future not only as 
employees, but also as stakeholders and creditors of the airline. 
Although others may have bankruptcy claims against TWA that contain 
higher dollar figures, no one has more invested in TWA than its 
employees--especially its pilots.
    ALPA's primary concern regarding the proposed acquisition of TWA by 
American Airlines is for the long-term stability and professional 
growth of the 2,300 pilot jobs. However, ALPA believes that, in this 
specific situation, what is best for the pilots is also in the best 
interest of the traveling public, the hub state of Missouri, and the 
jobs, families, lives and communities of our 2,300 pilots and 20,000 
TWA employees worldwide.
    With all of these interests in mind, ALPA-represented TWA pilots 
support a complete, fair and sound resolution to this latest and, we 
believe, final chapter in our airline's history. This resolution will 
allow TWA and its many constituencies, including its 20,000 employees, 
to:

   Secure the long-term stability of 20,000 jobs that remain as 
        good or better than they are now.

   Protect the medical and retirement benefits of past TWA 
        employees. Even though ALPA does not represent its retired 
        members in collective bargaining, no one would argue that 
        fulfilling promises to retirees is the right thing to do.

   Avoid ongoing fatal damage from Carl Icahn, who is in no 
        small part responsible for the situation which TWA now finds 
        itself, and who has claimed he is willing to provide economic 
        support to other interested parties.

   Advance a complete, fair and sound resolution, sparing those 
        markets largely served by TWA from economic damage.

    For these reasons, we submit that the offer from American Airlines 
to buy TWA's assets satisfactorily crosses the threshold and meets the 
criteria outlined above. It is an example of the complete, fair and 
sound solution we seek. We applaud American for coming forward with 
this proposal that recognizes the tremendous value of TWA.
    In particular, American Airlines Chief Executive Officer Donald 
Carty has specifically committed in testimony before this Committee 
``to hire all of TWA's employees and to continue a hub operation in St. 
Louis.'' We note especially and favorably Mr. Carty's statement before 
the Senate Judiciary Committee on February 7 in which he stated, ``We 
look forward to adding TWA's 20,000 employees to the American Airlines 
family. We are keenly aware of TWA's illustrious history and know that 
were it not for the hard work and great performance of the people 
throughout TWA, they would not be the perfect fit for American that we 
believe they are.''
    Other bids for TWA's assets are possible, but it is unlikely that 
any other proposal will be presented that will protect employees, 
retirees and customers. TWA's financial weakness has been no secret, 
and during the months when, prior to bankruptcy, TWA management sought 
buyers, only American came forward.
    We respectfully urge the Committee to support the type of complete, 
fair and sound solution that we seek--a solution that fully addresses 
the interests of all parties from employees to creditors, consumers and 
communities; that is fair to all parties and, most important, is sound, 
ensuring a smooth transition from the TWA of today to a new and more 
promising future for all concerned.
                                 ______
                                 
                  Transportation Trades Department, AFL-CIO
                                                   February 1, 2001
Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
Washington, DC.
            Re: Hearing on Mergers in the Aviation Industry

Dear Mr. Chairman:

    As your Committee reviews mergers in the aviation industry, and 
specifically the proposed acquisition of Trans World Airlines (TWA) by 
American Airlines, I write to share with you the views and concerns of 
the 32 affiliated unions of the Transportation Trades Department, AFL-
CIO (TTD).\1\ Although we are not directly commenting at this time on 
the American/TWA issue or the merger of United and US Airways, we are 
deeply involved in the debate over so-called ``airline competition'' 
proposals. We believe Congress must reject proposals that sound good on 
paper, but fail to consider the effects on service, safety and good 
jobs.
---------------------------------------------------------------------------
    \1\ Attachment 1 is a complete list of TTD's affiliated unions. 
Specifically, the following aviation unions are members of TTD: the Air 
Line Pilots Association; the Association of Flight Attendants; the 
Communication Workers of America; the International Association of 
Machinists and Aerospace Workers; the International Brotherhood of 
Teamsters; the National Air Traffic Controllers Association; the 
Professional Airways Systems Specialists; the Transport Workers Union; 
and the American Federation of State, County and Municipal Employees.
---------------------------------------------------------------------------
    As amplified in the TTD attached policy resolutions, transportation 
labor opposes any initiative needlessly threatening the stability of 
this vital industry and the job security of the several hundred 
thousand workers employed in the aviation industry.\2\ While we 
understand the concerns expressed by some regarding competition and 
service, it is patently unfair and contrary to sound transportation 
policy for the government to favor one segment of the industry over 
another. For these reasons, TTD and our aviation affiliates opposed the 
so-called predatory pricing guidelines proposed in 1998 by the U.S. 
Department of Transportation. Simply put, these regulations did not 
account for the higher fixed costs of operating a major air carrier and 
would have made it extremely difficult for these airlines to 
legitimately defend their market share in a fair business environment 
against low-cost, typically non-union operators.
---------------------------------------------------------------------------
    \2\ Attachment 2 are policy resolutions adopted by the TTD 
Executive Committee in September of 1998 and September of 1999.
---------------------------------------------------------------------------
    Proponents of this policy and other competition proposals justify 
their plans as necessary to address some of the problems created by the 
1978 aviation deregulation. Better than anyone else, we know that 
deregulation was a risky policy experiment undertaken without any 
understanding of the impact that it would have on air carriers, service 
to communities, safety, and workers and their families. While some were 
touting free-market principles, for working families the result of 
deregulation was the financial collapse of major pioneer air carriers, 
including Pan Am and Eastern, and the destruction of tens of thousands 
of high skill jobs paying good wages and benefits. Over the course of 
several years following deregulation, bankruptcy rates soared and 
outsourcing replaced sound investments in facilities and people. It 
took almost 20 years for the aviation industry to recover from this 
ill-conceived policy experiment, and that recovery is due in large part 
to the sacrifices and commitments made by aviation workers.
    Some say it is time for our government to intervene in the 
marketplace and alter the playing field. In our judgement, this would 
ignore the mistakes made two decades ago by again hastily implementing 
significant policy changes without considering their effects on the 
core of the industry and on the men and women who make it the world's 
finest. Moreover, it would be an injustice for present and past 
aviation workers to see our government step in on behalf of a special 
interest segment of the airline industry when our government refused to 
act on behalf of thousands of workers who were left powerless and with 
few or no rights during the destructive shake out that followed 
deregulation.
    Aviation employees have done more than anyone to maintain a strong, 
safe and secure U.S. aviation industry. In seeking to provide more and 
better air service, we must not sacrifice service, safety and America's 
working families.
    Thank you for your consideration of our views, and I respectfully 
request that you include this correspondence as part of the official 
Committee record.
        Sincerely,
                                            Edward Wytkind,
                                                Executive Director.

        Attachments

        cc: The Honorable Ernest F. Hollings, Ranking Member, Committee 
        on Commerce, Science, and Transportation
        Members, Committee on Commerce, Science, and Transportation
                                 ______
                                 
    Attachment 1
TTD Affiliates
    The following labor organizations are members of and represented by 
the TTD:
    Air Line Pilots Association
    Amalgamated Transit Union
    American Federation of State, County and Municipal Employees
    American Federation of Teachers
    Association of Flight Attendants
    American Train Dispatchers Department
    Brotherhood of Locomotive Engineers
    Brotherhood of Maintenance of Way Employes
    Brotherhood of Railroad Signalmen
    Communications Workers of America
    Hotel Employees and Restaurant Employees Union
    International Association of Fire Fighters
    International Association of Machinists and Aerospace Workers
    International Brotherhood of Boilermakers, Blacksmiths, Forgers and 
Helpers
    International Brotherhood of Electrical Workers
    International Brotherhood of Teamsters
    International Longshoremen's Association
    International Longshoremen's and Warehousemen's Union
    International Organization of Masters, Mates & Pilots, ILA
    International Union of Operating Engineers
    Marine Engineers Beneficial Association
    National Air Traffic Controllers Association
    National Association of Letter Carriers
    National Federation of Public and Private Employees
    Professional Airways Systems Specialists
    Retail, Wholesale and Department Store Union
    Service Employees International Union
    Sheet Metal Workers International Association
    Transportation * Communications International Union
    Transport Workers Union of America
    United Mine Workers of America
    United Steelworkers of America

    January 2001
                                 ______
                                 
    Attachment 2
Resolution No. 1
Protecting Workers From Airline ``Competition'' Proposals
    In recent months a number of dangerous and counterproductive 
proposals have surfaced including the Administration's policy on unfair 
exclusionary conduct and TTD-opposed slot confiscation programs 
designed to promote competition in the airline industry. While 
transportation labor supports the concept of providing consumers and 
businesses with fair and competitive air transportation, this goal 
cannot be achieved at the expense of workers who just now are emerging 
from a difficult 20-year period since deregulation.
    When the airline industry was deregulated in 1978, few protections 
were offered to long-time workers and in fact no group has suffered 
more in this volatile environment than airline employees. These 
consequences were predicted by airline unions and that is why they 
opposed this dangerous policy experiment. Major carriers have gone 
bankrupt and over 100 smaller carriers have faced the same fate. 
Industry pioneers and giants such as Eastern, Pan American and Braniff 
were liquidated as their employees saw their careers and years of 
service evaporate in the name of the free market. In fact, in the late 
1980s and early 1990s the major carriers experienced billions of 
dollars in financial losses that threatened the viability of this 
industry and the security of tens of thousands of jobs. Workers were 
simply told that the unemployment, job dislocation, pressure on wages 
and benefits and the loss of collective bargaining rights that followed 
deregulation were natural consequences of a freer marketplace and that 
government could not interfere.
    Many carriers were able to survive deregulation only by working 
with their unionized employees to restructure the workplace, alter 
wages and benefits, and reform work rules and procedures. In 1993 
Northwest Airlines, on the brink of financial collapse, turned to its 
workers whose cooperation allowed management to restructure debt and 
avoid certain and potentially disastrous bankruptcy proceedings. In 
1994 pilots, mechanics and fleet service employees at United Airlines 
became part owners by exchanging a 55 percent stake in the company for 
almost $5 billion worth of concessions. At TWA, employees have worked 
with management and restructured their contracts more than once to help 
this ailing carrier survive continuing financial turbulence.
    Airline employees who retained their jobs during deregulation 
became partners with and investors in their companies. Now these 
investments are starting to pay off as airline corporations are once 
again flying high with record revenues and profits. Unfortunately some 
want to ignore recent history and alter the playing field with little 
regard for what the changes mean for workers whose sacrifices allowed 
this industry to become the economic success that it is today.
    This point has been raised time and time again by unions that have 
voiced their opposition to the Administration's proposed policy 
regarding unfair exclusionary conduct--so called predatory pricing 
guidelines. These guidelines inappropriately favor one segment of the 
industry--new entrant carriers--at the expense of established airlines 
and their workers. By restricting the ability of major carriers to 
aggressively respond to low-fare salvos into the marketplace, the 
guidelines would favor new entrant carriers whose low fares are 
achieved by paying substandard wages and benefits and outsourcing 
safety-sensitive aircraft maintenance functions. Our government should 
not respond by rewarding these carriers with a policy-imposed 
competitive advantage.
    To compensate for their higher fixed costs, which include good 
wages and benefits that support working families, established carriers 
have complicated fare structures. In order to compete effectively, 
these fares need to be flexible and are subject to change. Instead of 
recognizing this competitive reality and the fact that these carriers 
support the highest safety and worker compensation standards, the 
guidelines punish major carriers who defend their routes and market 
share. Meanwhile new entrant carriers are left free to use their lower 
wage scale to compete in a market place that is artificially protected 
by a government policy that actually deters vigorous competition.
    Contrary to what some have argued, transportation labor's position 
on this issue is not based on a simple desire to protect carriers that 
employ our members. The reality is that most new entrants will 
eventually become unionized and in fact at a number of smaller carriers 
employees have already chosen to enjoy the benefits that union 
representation and collective bargaining can bring. TTD's position is 
driven by our unique perspective on deregulation in general and our 
specific experience in aviation. We have seen what effects ill-advised 
government policies can have on our industry not only for workers, but 
for communities and businesses that depend on air service. The 
promotion of competition cannot be attained by favoring one sector of 
the industry over the other with worker interests once again left 
hanging in the balance.
THEREFORE, BE IT RESOLVED:
   That TTD will voice its formal opposition to the Department 
        of Transportation's proposed policy statement regarding unfair 
        exclusionary practices; and
   That TTD will work with interested affiliates to educate 
        policy makers about the impact the 1978 decision to deregulate 
        the industry had on the aviation workforce and the impact that 
        subsequent government action would have on these same 
        employees.

    Resolution No. 1-98 (s)
    (Adopted September 23, 1998)
                                 ______
                                 
Resolution No. 1
The Administration and Congress Should Scrap Harmful ``Airline 
        Competition'' Proposals
    With major aviation legislation pending in Congress, calls are once 
again being heard for the imposition of airline competition proposals 
that would repeat the mistakes associated with airline deregulation by 
ignoring the severe effects on employees. Transportation labor is 
firmly on record opposing these proposals, including the U.S. 
Department of Transportation's (DOT) draft enforcement policy on unfair 
exclusionary conduct, for the simple reason that these measures would 
unfairly disadvantage established major carriers and their workers as 
they attempt to compete with air carriers that provide employees with 
substandard wages and benefits. (See Resolution No. 1-98.)
    At the Transportation Trades Department, AFL-CIO's (TTD) fall 1998 
meeting, the Executive Committee described these policy proposals as 
``dangerous and counterproductive'' and said that ``by restricting the 
ability of major carriers to aggressively respond to low-fare salvos 
into the marketplace, the guidelines would favor new entrant carriers 
whose low fares are achieved by paying substandard wages and benefits 
and outsourcing safety-sensitive aircraft maintenance functions.'' The 
Executive Committee also pointed out that many of today's air carriers 
such as Northwest survived the brutal shake-out inspired by airline 
deregulation ``. . . only by working with their unionized employees to 
restructure the workplace, alter wages and benefits, and reform work 
rules and procedures.''
    Transportation labor reaffirms its opposition to competition 
measures that threaten the livelihood and job security of aviation 
workers who have contributed so much to the industry's remarkable 
economic turnaround. Whether couched in terms of slot confiscation 
plans, unexplained pricing guidelines, or other initiatives that 
unfairly favor one segment of the industry over the other, the result 
is the same--a stranglehold would be placed on established carriers 
faced with the dumping of new air service by start ups. While 
monitoring the conduct of corporations is an important government 
function, the economic rights of existing companies and their workers 
to compete and operate in the complex world of air travel cannot be 
ignored.
    Congress agreed with many of these concerns and last year acted to 
bar the Administration from implementing the guidelines until the DOT 
and the independent Transportation Research Board (TRB) conducted 
separate studies on airline deregulation. While flawed in many 
respects, including its endorsement of changing foreign ownership 
restrictions, the recently released TRB report concluded that the 
Administration's guidelines could inhibit genuine competition and that 
certain carriers would receive special treatment. Specifically, the 
report declares that ``. . . distinguishing between legitimate and 
questionable competitiveness responses poses significant challenges, 
and raises the possibility of false charges of predation . . . .''
    Although the effects of flawed competition measures on aviation 
employees were ignored by the TRB, its warning against the 
Administration's competition guidelines underscores the serious 
problems posed by government intervention that fails to recognize the 
legitimate rights of established air carriers to compete in a far more 
liberalized marketplace. Transportation labor calls on the Clinton 
Administration and Congress to heed the TRB's warning and refrain from 
pursuing any competition measures whose consequences could be severe 
for major U.S. air carriers and their employees.
THEREFORE, BE IT RESOLVED:
   That TTD reaffirms its opposition to ill-advised airline 
        competition measures that disadvantage major air carriers and 
        their workers in favor of start-up airlines;

   That TTD educates Congress on the threats posed by federal 
        government intervention favoring start-up carriers that maybe 
        incapable of assuring the same level of service, efficiency and 
        safety as established air carriers; and

   That TTD and its Aviation Coordinating Committee 
        aggressively opposes any attempts by the Clinton Administration 
        or Congress to advance competition policy proposals that again 
        fail to protect the jobs and rights of aviation workers.

    Resolution No. 1-99 (F)
    (Adopted September 29, 1999)
                                 ______
                                 
             Prepared Statement of Leonard L. Griggs, Jr., 
              Director of Airports--City of St. Louis, MO
    Mr. Chairman and Members of the Committee: I am Leonard L. Griggs, 
Jr., Director of Airports for the City of St. Louis. The City is the 
owner and operator of the Lambert-St. Louis International Airport, 
historically the main hub for TWA. Thank you for allowing me the 
opportunity to submit the views of the City of St. Louis regarding the 
proposed acquisition of TWA assets by American Airlines.
    Mr. Chairman, not all mergers are created equal. As Senator 
Carnahan recently stated before this Committee, ``While we may be 
initially inclined to view all of the current airline mergers in the 
same light, we must consider the American Airlines' acquisition of TWA 
independently of the other proposed mergers.'' The City of St. Louis 
agrees.
American/TWA Merger is not Like Other Mergers
    The American-TWA proposed agreement is unlike any other mergers 
currently being discussed. Contrary to press reports, and the opinion 
of many pundits and even some critics in Congress, the proposed 
acquisition will not necessarily harm the development of the airline 
industry or be anticompetitive for consumers. On the contrary, given 
TWA's current financial condition, I believe that consumers would be 
worse off with the possible alternatives had American Airlines not come 
forward with its proposal to acquire TWA. This is why St. Louis fully 
supports the proposed transaction.
    It was recently stated in our local newspaper that ``TWA, after 
years of valiantly trying to turn around, is out of time and out of 
money.'' In contrast to its previous financial problems, this time it 
seems clear that without outside help TWA would have been forced to 
stop flying and simply liquidate its assets. American Airlines came 
forward with its proposal in the very same week that TWA would have 
stopped operating due to lack of funds. Reportedly, Mike Palumbo, TWA's 
CFO, testified before a Delaware bankruptcy court judge last week that, 
without American's debtor-in-possession financing, TWA would have 
ceased to operate. Instead, American's commitment of $200 million in 
debtor-in-possession financing has allowed TWA to continue serving the 
public until the transaction is completed.
    In short, Mr. Chairman, without the American deal, TWA would have 
ceased to compete in the marketplace. However, this acquisition should 
not raise concerns of reducing or stifling competition. Instead, it is 
my opinion that the proposed deal is simply making the best of a 
worrisome situation.
    Over the last few weeks, it became abundantly clear to us that 
TWA's options were fast disappearing. Since TWA no longer had the 
possibility of maintaining healthy, financially robust operations to 
compete with the other U.S. regional or network carriers, we were left 
with the choice of allowing American to take TWA as a whole, or 
allowing TWA to fail, and let others pick at the carcass.
TWA is ``Failing Airline'' in Merger Parlance
    This is a classic example of a failing airline whose on-going 
business concern can only be rescued by allowing it to merge with a 
healthy airline. Indeed, although federal policy does disfavor the 
acquisition of healthy air carriers by their competitors, there is a 
long-standing exception when the proposed acquisition involves a 
failing carrier. The rationale for the exception is that, no matter 
what, a failing airline will not remain in the market. I believe that, 
by now, there is enough evidence to conclude that TWA will simply cease 
to exist. Therefore, the key question that must be answered is how to 
maximize the public benefit in the distribution of its assets.
    Bill Compton, TWA's CEO, was quoted as saying that he has been 
``shopping'' the airline for some time, and has had no other viable 
offers for its acquisition as a going concern that would preserve its 
name and intangible assets. Moreover, although it is true that certain 
assets (such as slots and leased aircraft) could be sold and placed 
into service absent the proposed transaction with American Airlines, 
most of TWA's many valuable assets and resources (such as certain 
gatehold rights at Lambert, St. Louis aircraft maintenance facilities, 
and, more importantly, TWA's St. Louis workforce) would have been 
underused.
    For St. Louis, the choice is clear. If the proposed acquisition is 
not allowed to proceed, St. Louis risks losing its air carrier hub. 
Without a large airline hubbing at our airport, our community will lose 
large numbers of well-paying jobs, as well as its close link to 
national and international markets that makes our region a favored 
business location.
Air Service Requirements of St. Louis Area Are Substantial
    Without TWA's operations, St. Louis risks the loss of substantial 
levels of air service. Although TWA is only one of nine major airlines 
serving the airport, it alone provides 73 percent of the daily flight 
departures from the airport. TWA's 374 daily flights out of St. Louis 
serve more than 100 non-stop markets, 65 of which would not otherwise 
receive non-stop service. Without the TWA-American agreements St. Louis 
would lose valuable air service to many communities throughout the 
United States, and possibly, the world. So far, other than American 
Airline's proposal, no other credible plan has been offered in the 
bankruptcy process which would maintain St. Louis' present level of air 
service.
New St. Louis Runway Capacity Supported by American Airlines
    American Airlines' promise to serve St. Louis means the continuing 
use of the City's public airport infrastructure. In fact, American 
Airlines has stated that, after it completes its acquisition of TWA 
assets, it intends to use the St. Louis airport and TWA's gates for a 
mid-continental hub.
    And, Mr. Chairman, in connection with American's commitment to the 
St. Louis community, I have been assured by American's senior 
management, following an extensive briefing on our new runway project, 
that American will be fully and enthusiastically supporting our new 
runway (W-1W) expansion plan. This early decision by American is 
critical to keeping our expansion on schedule so that Lambert can 
maintain its hub status and remain competitive.
Local TWA Employment Would be Protected
    The risk of mass unemployment in our area is real. If TWA were to 
shut down, it could leave 20,000 TWA employees out of work, including 
almost 9,000 in our immediate area, and 12,000 throughout Missouri. TWA 
is the second largest employer in the City of St. Louis, and the 
seventh largest in the metropolitan region. It has been estimated that 
TWA's operations in St. Louis contribute approximately $5 billion 
annually to the local economy. American Airlines has proposed to 
maintain TWA's unionized workforce and as much of its administrative 
employees as feasible.
Conclusion
    Mr. Chairman, I ask that you consider American Airlines' proposal 
to acquire TWA assets not as a competition-reducing merger. If TWA were 
to shut down and liquidate, the City of St. Louis would lose most of 
its air service, close to 9,000 of its area citizens could be forced to 
stand in the unemployment line, large amounts of existing valuable 
airport infrastructure would go unused, and valuable new national 
runway capacity might go undeveloped. We cannot let that happen. That 
is why St. Louis fully supports the proposed acquisition of TWA.
    Thank you.
                                 ______
                                 
                Prepared Statement of Richard Bidwell, 
              St. Louis Convention and Visitors Commission
   Maintaining hub status in St. Louis is critical to the 
        community's continued growth as a convention, meeting and 
        tourism destination.

   American Airlines provides a hub in St. Louis and the 
        potential for additional future growth.

   The high number of arrivals and departures from Lambert-St. 
        Louis International Airport is critical for meetings, 
        conventions and leisure visitors coming to St. Louis.

   American Airlines has an excellent reputation among meeting, 
        convention and incentive travel planners. The airline has an 
        aggressive position toward marketing itself to those important 
        groups.

   An American Airlines hub in St. Louis provides the St. Louis 
        Convention & Visitors Commission with new opportunities for 
        partnerships with other AA gateways to encourage travel to St. 
        Louis.

   The strong American system gives international travelers 
        greater opportunities to visit St. Louis. This is especially 
        critical because St. Louis will be hosting the Travel Industry 
        Association of America's International Pow Wow travel trade 
        show in May 2003. This event brings travel buyers from across 
        the globe to St. Louis to meet with travel industry suppliers.

   American Airlines has an excellent reputation as a good 
        corporate citizen. This is critical to the quality of life in 
        St. Louis.

   The future of TWA has been an issue with convention and 
        meeting planners considering St. Louis for their groups several 
        years out. However, since the announcement of American's offer 
        to purchase TWA's assets and maintain a hub in St. Louis, 
        groups such as Dallas-based Price, Waterhouse, Coopers which 
        had been considering Chicago, Dallas and other cities for their 
        meeting--now are considering St. Louis.

   American's establishment of a St. Louis hub will help us 
        change perception of St. Louis in major markets like Chicago.

   American's frequent flyer program is better, with more 
        subscribers than TWA's program.
                                 ______
                                 
           St Louis Regional Chamber and Growth Association
                                                   January 31, 2001
Mr. John M. Nannes, Esq.
Acting Assistant Attorney General,
Antitrust Division,
United States Department of Justice,
Washington, DC.
       Re: American Airlines Acquisition of TWA is Vitally 
 Necessary for Economic Survival of St. Louis Metropolitan 
                                                       Area

Dear Mr. Nannes:

    I write to you on behalf of the St. Louis Regional Chamber and 
Growth Association (``RCGA''), to voice our whole-hearted support for 
American Airlines' proposal to buy TWA outright and incorporate its 
operations, facilities, equipment, and employees into American.
    RCGA is the regional chamber of commerce for those areas of 
Missouri and Illinois that fall within the St. Louis metropolitan area. 
It is the only regional economic development organization working for 
economic growth and improved quality of life throughout the twelve-
county region. It is a civic, not-for-profit association. RCGA has more 
than 4,000 members, including representatives of labor, large and small 
businesses, and professional organizations. RCGA has long supported the 
development and expansion of airport capacity and air service, because 
it recognizes that the future economic development of the St. Louis 
region is inextricably intertwined with enhanced airport capacity.
    By supporting this transaction, we do not favor the particular 
interest of American or TWA, but rather seek to protect the continuing 
vitality of the region's enormous investment in Lambert, and the 
interest in securing and furthering regional economic development, 
which demands a continued hub airline presence at Lambert.
    Lambert has been serving the St. Louis region since before 1920, 
just a few years after the Wright Brothers' pioneering flight. At 
approximately 2,100 acres, Lambert is one of the smallest major 
airports in the United States, Despite its constrained size, Lambert 
International Airport is extraordinarily busy. In 1999, Lambert ranked 
11th nationally in total aircraft operations. In 1999, approximately 
15.1 million passengers boarded aircraft at Lambert, 180 percent 
increase from the 5.4 million who did so in 1980. The projected number 
for the year 2015 is 20.9 million.
    Billions of dollars in public and private funds have been invested 
to develop Lambert and its immediate environs in its current 
configuration. The fabric of regional economic activity has woven 
itself around this critical community asset. Countless investments and 
business relationships depend on it. To name but a few:

   The region's surface transportation infrastructure is 
        designed to bring passengers and others to and from Lambert. 
        Interstate highways I-70, I-170, and I-270 were all routed to 
        facilitate airport access. The Metro-Link light rail transit 
        line, with two stations at Lambert, terminates at the airport.

   Airport-related businesses, such as in-terminal businesses, 
        hotels, automobile rental agencies, and frequent air shippers, 
        have sunk major investments into their existing locations.

   Residential and business location patterns have developed 
        concurrently with the airport. Due in part to airport-related 
        economic activity, the industrial, residential, and office 
        development in the St. Louis region area are now centered on 
        this Lambert environs. Lambert is today very close to the 
        residential population center of the St. Louis region.

   Many steps have been taken over the years to make building 
        heights, noise-sensitive uses, and sound insulation in the 
        areas near Lambert compatible with its continued operation.

    Lambert currently operates under severe constraints in bad weather 
due to its runway configuration. The City of St. Louis, the FAA, 
airport staff, and many others have spent the last several years 
preparing for a major airport expansion. Now that the legal challenges 
to expansion are over, and the expansion program is underway, it would 
be a waste of precious aviation capacity not to use the expanded 
airfield to its fullest potential. American's proposed acquisition of 
TWA would take full advantage of the airport expansion.
    The Lambert air service hub benefits the economic health of the 
region in two ways. First, the hubbing operation itself creates jobs 
directly and indirectly. TWA's use of Lambert as its primary mid-
continent hub brings major economic benefits to the region; only 
adoption of Lambert as the major hub of another airline will continue 
those benefits. It has been estimated that Lambert contributes some 
$5.1 billion to the region's economy today, including some 16,800 
directly or closely-related airport jobs. If Lambert can continue as a 
viable hub, the number of directly or closely-related jobs is expected 
to double by 2015; annual economic impact of an expanded Lambert is 
projected to more than double to the $12 billion to $15 billion level. 
This rate of growth far exceeds the 11 percent growth projected for all 
metropolitan area jobs.
    Second, the presence of the hub provides the region with excellent 
air service, which entices businesses to locate and expand in the 
region. Loss of the hub could mean loss of jobs and great inconvenience 
to the traveling public.
    Enlarged economic activity and strong air travel connections both 
enhance the role of the St. Louis region in the national and global 
economy.
    In conclusion, we recognize that any acquisition of a major air 
carrier raises concerns about the resulting competitive landscape that 
will face consumers. But TWA is not a candidate for independent 
survival in the long run. American's proposed acquisition of TWA has 
the potential to preserve (and, in fact, enhance) the economic vitality 
of the St. Louis airport hub and the surrounding region. In comparison, 
if the proposed acquisition is not allowed to proceed, we believe that 
St. Louis would lose its air carrier hub, would lose substantial 
numbers of well-paying air carrier jobs, and would lose the close link 
to national and international markets that makes it a favored business 
location.
    We believe that the proposed acquisition is absolutely necessary 
for the economic survival of our region. We urge you to support it.
        Sincerely,
                                      Richard C.D. Fleming,
                                                 President and CEO.
                                 ______
                                 
                          American Society of Travel Agents
                                                   February 7, 2001
Hon. John McCain,
Chairman,
Senate Commerce Committee,
Washington, DC.

Dear Mr. Chairman:

    The American Society of Travel Agents (ASTA) applauds your efforts 
to monitor competition in the aviation industry by conducting the 
February 1, 2001 hearing on ``Airline Acquisition.'' As a proponent of 
airline deregulation and an advocate of the traveling consumer, ASTA is 
deeply concerned about the excessive concentration within the airline 
industry.
    With the looming American Airlines acquisition of Trans World 
Airlines' assets, the proposed merger of United Airlines and U.S. 
Airways, along with the potential for further mergers among Delta 
Airlines, Continental Airlines and Northwest Airlines, the Nation will 
be left with no more than three giant carriers. The result is an 
unregulated shared monopoly in which consumers face increasing prices, 
fewer choices and further deterioration in already unacceptable 
service.
    Attached is an editorial that was featured in the New York Daily 
News, on Sunday, January 21, 2001, entitled, Mergers: The latest air 
rage. This editorial represents the views and concerns of ASTA, and we 
ask that it be included in the hearing record.
        Sincerely,
                                   Richard M. Copland, CTC,
                                                 President and CEO.
    Attachment
                                 ______
                                 
                      Mergers: The latest air rage
                         By Richard M. Copland
    If the U.S. Department of Justice approves the two deals pending 
between United Airlines/US Airways and American Airlines/Trans World 
Airlines, it will be the deathblow to competition in the airline 
industry.
    And that would be a disaster for customers. Simply put, reduced 
competition means higher prices, less service and serious disruptions 
in travel when, inevitably, there's a labor dispute.
    Without price and route competition, the traveling public would be 
held hostage by a few monster airlines. It would mean less aggressive 
discounting by the airlines, less willingness to challenge one another 
in new markets and more follow-the-leader behavior.
    According to Merrill Lynch, if the American/TWA and the United/US 
Airways deals are allowed to proceed, United will control 26 percent of 
the domestic market, while American will control 25 percent. That 
sounds bad, but it doesn't tell the whole story.
    These giant airlines already have divided up the country and agreed 
not to compete on many routes. At Kennedy Airport, where American 
already controls 27 percent, the merger with TWA would increase 
American's share to 48 percent. That means if you fly out of JFK 
domestically, chances are you'll pay more than ever.
    In ``Competition in the U.S. Domestic Airline Industry,'' the U.S. 
Department of Transportation said, ``High fares in shorter-distance 
markets come about at hub airports where one major network airline has 
a dominant market share. Average fares at some of the airports can be 
50 percent to 60 percent higher when compared to more competitive 
markets.'' Just ask the folks in upstate Rochester, where the price for 
a one-way ticket to Chicago, for instance, is $789. But the price for a 
ticket from Salt Lake City to Spokane, Wash., a route that's roughly 
the same distance but is serviced by a low-fare carrier (Southwest), is 
$393.59.
    With the approval of these huge deals, competition in markets 
throughout the country would be eliminated. American and United would 
share in an agreed division of time slots on the heavily traveled East 
Coast shuttles. United/US Airways' merger would establish dominance in 
Washington for United by controlling about 60 percent of domestic seats 
and eliminating competition to 30 cities. American/TWA would give 
American a market share in San Juan of 59 percent. And on and on.
    But it's not just about fares. It's also about service. Travel 
should be a profitable pleasure--profitable for the airlines and a 
pleasure for the consumers. As the major carriers consolidate, the 
record of declining customer service has become a national disgrace.
    In the first half of 2000, consumer complaints to the U.S. 
Transportation Department rose 69 percent over the previous year. 
According to Inspector General Kenneth Mead, one in five flights 
arrived late in 1999, with delays averaging about 50 minutes. The 
number of flights with taxi-out times of one hour or more increased 130 
percent in the past five years.
    Travel agents sell about 80 percent of airline tickets. We listen 
to our customers' frustrations about airline service daily, and we 
intend to do something about it.
    The American Society of Travel Agents strongly believes that no 
more mergers, buyouts or airline alliances should be allowed until an 
Air Travelers' Bill of Rights is approved by Congress. Our organization 
proposed such a bill two years ago, and the airlines scoffed at it. 
They still do.
    If every plane is full and profits are fat, but passengers are 
fuming, what kind of a national transportation system do we have?
    Labor issues are another major consumer concern. We survived the 
last American shutdown, but it was touch-and-go. With just two or three 
supergiants, how would the country fare in an extended labor dispute? 
It could have disastrous economic consequences for our country's 
economy.
    The government must act now to protect consumers. A concentration 
of a handful of supergiant airlines means it would be far easier for 
price hikes to stick and airlines to ignore the needs of the traveling 
public, the rightful owners of the airways.
    If airlines want to increase market share, they should have to earn 
it by winning the loyalty of the customer, not by gobbling up 
competitors.
    Copland is president and CEO of the American Society of Travel 
Agents.

                                  
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