[Senate Hearing 107-1130]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1130
 
              S. 415, AVIATION COMPETITION RESTORATION ACT

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 13, 2001

                               __________

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


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED 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 March 13, 2001...................................     1
Statement of Senator Burns.......................................     6
Statement of Senator Carnahan....................................    69
Statement of Senator Edwards.....................................    70
Statement of Senator Fitzgerald..................................    67
Statement of Senator Hollings....................................     3
    Prepared statement...........................................     3
Statement of Senator Hutchison...................................     7
Statement of Senator McCain......................................     1
    Prepared statement...........................................     2

                               Witnesses

Cooper, Dr. Mark N., Director of Research, Consumer Federation of 
  America........................................................    46
    Prepared Statement...........................................    48
Hauenstein, Glen W., Senior Vice President for Scheduling, 
  Continental Airlines...........................................    27
    Prepared Statement...........................................    30
Hecker, JayEtta Z., Director, Physical Infrastructure Issues, 
  U.S. General Accounting Office.................................    14
    Prepared Statement...........................................    16
Kahan, Mark, Executive Vice President and General Counsel, Spirit 
  Air Lines......................................................    41
    Prepared Statement...........................................    44
Miller, Thomas J., Attorney General, State of Iowa...............     9
    Prepared Statement...........................................    11
Neeleman, David, Chief Executive Officer, JetBlue Airways........    37
    Prepared Statement...........................................    38


              S. 415, AVIATION COMPETITION RESTORATION ACT

                              ----------                              


                        TUESDAY, MARCH 13, 2001

                               U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 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. Today, the Committee will hear testimony on 
S. 415, the Aviation Competition Restoration Act. S. 415 was 
introduced by our distinguished ranking member, Senator 
Hollings. I was one of the original cosponsors of this bill, 
and we worked together on this issue to attempt to craft 
legislation that would effectively address some of the 
shortcomings in our aviation system today.
    The airline industry is in turmoil. There are numerous 
reasons for these problems which can be lumped into four major 
categories: mergers, competition, delays, and capacity. I would 
add one other issue, Senator Hollings, and that happens to be, 
at the moment, labor problems, but this legislation would deal 
with two of these issues. It would give the Department of 
Transportation an increased role in the merger review process, 
and it would ensure that underutilized gates, slots, and 
facilities are available for competitive purposes and ensure 
that the capacity of the existing system is fully utilized.
    The General Accounting Office has pointed out that low-cost 
competition has been a driving force behind the benefits seen 
by the industry since deregulation. A recent Department of 
Transportation study found that passengers pay 41 percent more 
at dominated hubs than passengers who fly in hub markets with 
low-fare competition.
    I don't think that anyone would disagree that competition 
benefits the consumer. Southwest Airlines has brought enormous 
benefits to the communities it serves. The ``Southwest effect'' 
is now a commonly used term to describe lower fares and 
increased economic benefits.
    On a slightly lesser scale, JetBlue and AirTran have 
brought tremendous competition, reduced fares, and benefits to 
the communities they serve. However, JetBlue was able to 
achieve its remarkable success due to a 75-slot exemption 
granted to it at Kennedy Airport by the Department of 
Transportation. AirTran took advantage of Eastern Airline's 
difficulties to acquire the gates and facilities that Eastern 
had at Atlanta.
    Most observers would agree that these occurrences, which 
provided significant new-entrant opportunities in busy areas, 
were anomalies in the market.
    Hub airports are particularly difficult to get a foothold 
in. Dominant carriers hold tremendous leverage and power and 
use it to stifle competition. Slots, gates, baggage carousels 
can all be very hard to obtain by a new entrant in these 
conditions. Allegations of hording of slots and gates have been 
presented many times before Congress. Predatory pricing remains 
an effective means of forcing competition out of business.
    The current proposed mergers would give several airlines 
increased market share and substantial increased ability to 
wipe out competition. One need only listen to new entrants 
trying to get a foothold in a hub airport or look at the recent 
example of the competitive response Legend Airlines faced at 
DFW to see how new entrants are being treated.
    I'm sure the airlines will complain about this bill as 
Federal intervention or meddling in their industry; however, I 
note that they seem to be welcoming Federal intervention on the 
labor front. Competition is a necessary integral piece of our 
aviation system. This bill will take steps to improve the 
situation.
    I know that many people are anxious to address delay and 
capacity issues. I believe that this bill is another piece to 
solve the problems facing the system today. However, we will 
continue to focus our efforts on capacity and delay issues 
also.
    I am gravely concerned about the status of the airline 
industry. Just yesterday, FAA forecast that there will be 1.2 
billion passengers flying by the year 2012. We must continue to 
look for solutions to aviation's increasing problems. I'm 
committed to holding hearings and crafting legislation to 
attempt to combat these problems.
    I look forward to working with my colleagues on the 
Committee, especially Senator Hollings, as we continue to work 
toward a common end.
    Senator Hollings.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona

    Today the Committee will hear testimony on S. 415, the Aviation 
Competition Restoration Act. S. 415 was introduced by our distinguished 
ranking member Senator Hollings. I was one of the original cosponsors 
of this bill. I worked closely with Senator Hollings on this issue to 
attempt to craft legislation that would effectively address some of the 
shortcomings in our aviation system today.
    The airline industry is in turmoil. There are numerous reasons for 
these problems, which can be lumped into four major categories: 
mergers, competition, delays and capacity. This legislation would deal 
with two of these issues. It would give the Department of 
Transportation an increased role in the merger review process and it 
would ensure that underutilized gates, slots and facilities are 
available for competitive purposes and ensure that the capacity of the 
existing system is fully utilized.
    The General Accounting Office has pointed out that low-cost 
competition has been a driving force behind the benefits seen by the 
industry since deregulation. A recent DOT study found that passengers 
pay 41 percent more at dominated hubs than passengers who fly in hub 
markets with low-fare competition. I don't think that anyone would 
disagree that competition benefits the consumer. Southwest Airlines has 
brought enormous benefits to the communities it serves. The ``Southwest 
effect'' is now a commonly used term to describe lower fares and 
increased economic benefits.
    On a slightly lesser scale, JetBlue and AirTran have brought 
tremendous competition, reduced fares and benefits to the communities 
they serve. However, JetBlue was able to achieve its remarkable success 
due to a 75 slot exemption granted to it at Kennedy Airport by the 
Department of Transportation. AirTran took advantage of Eastern 
Airlines' difficulties to acquire the gates and facilities that Eastern 
had at Atlanta. Most observers would agree that these occurrences, 
which provided significant new entrant opportunities in busy areas, 
were anomalies in the market.
    Hub airports are particularly difficult to get a foothold in. 
Dominant carriers hold tremendous leverage and power and use it to 
stifle competition. Slots, gates, baggage carousels can all be very 
hard to obtain by a new entrant in these conditions. Allegations of 
hoarding of slots and gates have been presented many times before 
Congress. Predatory pricing remains an effective means of forcing 
competition out of business.
    The current proposed mergers would give several airlines increased 
market share and substantial increased ability to wipe out competition. 
One need only listen to new entrants trying to get a foothold in a hub 
airport or look at the recent example of the competitive response 
Legend Airlines faced at DFW to see how new entrants are being treated.
    I'm sure the airlines will complain about this bill as federal 
intervention or meddling in their industry. However, I note that they 
seem to be welcoming federal intervention on the labor front. 
Competition is a necessary, integral piece of our aviation system. This 
bill will take steps to improve this situation.
    I know that many people are anxious to address delay and capacity 
issues. I believe that this bill is another piece to solve the problems 
facing the system today. However, we will continue to focus our efforts 
on capacity and delay issues also. I am gravely concerned about the 
status of the airline industry. Just yesterday, FAA forecast that there 
will be 1.2 billion passengers flying by 2012. We must continue to look 
for solutions to aviation's increasing problems. I am committed to 
holding hearings and crafting legislation to attempt to combat these 
problems. I look forward to working with my colleagues on the Committee 
as we continue to work toward a common end.

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

    Senator Hollings. Well, thank you very much, Mr. Chairman 
for calling this hearing--and you and the other sponsors for 
helping us in this move. I'm faced with a typical senator's 
problem of having time down on the floor, but it's only limited 
to a few minutes, and I'll have to excuse myself and come back. 
I would ask that my statement be included.
    The Chairman. Without objection.
    Senator Hollings. I'll make a deal with you. I'll give you 
all the slots you want in Washington if you give me Southwest 
Airlines down in South Carolina. How about that?
    [Laughter.]
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Mr. Chairman, I want to thank you for convening this hearing. You 
and I introduced legislation almost two weeks ago focused on 
competition, or rather, the lack of competition in the airline 
industry. If we are to have mergers, and also continue to see higher 
concentration levels at hubs, then somehow, someway, we must ensure 
that competition can co-exist for all markets. I often have said that 
85 percent of the short haul markets are subsidizing the 15 percent of 
the long haul markets. My point is that on the short haul, monopoly 
routes, the carriers charge what they want. They then compete on the 
long haul, and one stop markets through the hubs.
    Mr. Chairman, it is time for the Congress to really understand what 
is going on in the airline industry. It is an industry that no longer 
competes. Passengers no longer matter. We are like cattle in a 
stockade.
    The bill we are focusing on today seeks to restore the public's 
interest in our aviation system, to reclaim it from the carriers. We 
have a number of cosponsors--Senators Dorgan, Grassley, Reid and Wyden. 
I appreciate their recognition that something has to change.
    With the introduction of the bill, the major airlines have been 
gearing up to stop the bill. That should tell us all something right 
there. I know we need hubs, and that hubs enable the major carriers to 
serve small communities. This bill does not, despite their rhetoric, 
threaten small community service, and we will ask GAO to comment on 
that later. All the bill does is make sure that there is room for 
competition and new service. The major carriers seem to believe that if 
they have 85 percent of a market, and have to give up a little space to 
someone else, somehow we have forced them to cut service to the most 
vulnerable places. They also know that by making that argument, many 
may be susceptible to that argument.
    When we deregulated this industry, we were told that small 
communities would be well served, and that all would be well. As I look 
around this Committee, I know many of us do not believe that, and this 
bill attempts to fix the problem. Either we will have competition or we 
won't. Its not a hard choice.
    This bill injects a dose of plain commonsense to reviewing 
transactions--it does not, as opponents claim, kill any specific 
merger. We should not be faced with a situation where we either support 
2 complicated acquisitions, or else we are labeled as killing jobs. 
That is not the case. Put TWA in a different box altogether. I do not 
like the fact that St. Louis will have one carrier with 76 percent of 
the traffic, but it does have a growing presence from Southwest, so 
fares should go down because of real competition. In addition, TWA 
clearly is in extreme financial difficulties. That is a matter for the 
bankruptcy Court and the Department of Justice's review right now under 
the failing company doctrine. Our bill enables TWA to make its case to 
DOT in a similar vein, but if we need to explicitly carve out a 
bankruptcy exception, we will consider it.
    We have spent countless hearings listening to various airline 
executives, government officials and expert witness talk about the 
problems confronting the traveling public. It is time we put all of 
that information and knowledge together to benefit the traveling 
public.
    Let's start with the hubs. There are 20 major airports, essential 
facilities, where one carrier has more than 50 percent of the total 
enplaned passengers. Study after study has told us, warned us, that 
concentrated hubs lead to higher fares, particularly for markets to 
those hubs with no competition. Average fares are higher by 41 percent, 
according to DOT, and even higher for smaller, shorter haul markets, by 
as much as 54 percent. DOT estimates that for only 10 of the hubs, 24.7 
million people are overcharged, and another 25 to 50 million choose not 
to fly because of high fares.
    We have got to take a can opener and pry open the lids to the 
hubs--without competition, whatever benefits deregulation has brought, 
will quickly fade away. Our legislation will ensure that other air 
carriers have the ability to compete, the ability to provide people 
with options, and the ability to threaten to serve every market out of 
the dominated hubs. Gates, facilities and other assets will need to be 
provided where they are unavailable, or where competition dictates a 
need for such facilities. Dominant air carriers have relied upon 
Federal dollars to expand these facilities, and they have taken 
advantage of those monies by establishing unregulated local monopolies. 
It is time to use the power and leverage of the Federal government to 
restore a balance to the marketplace.
    Right now, the air carriers are attempting to dictate what the 
industry will look like. If they are successful, all of the concerns 
raised by countless studies, will not only be realized, but they will 
be exacerbated. The public's needs, the public's convenience, are 
something that must be first and foremost as we watch this industry 
evolve.
    Airline deregulation forced the carriers to compete on price for a 
while, but not on service. Congress had to threaten legislation in 1999 
before the airlines even began to even understand the depth of consumer 
anger towards the airlines. Today though, they no longer compete on 
price. Instead, they seek to acquire one another to create massive 
systems - perhaps only three will survive, leaving us all far worse 
tomorrow than we are today. And clearly today, we are not getting what 
is needed.
    What are the facts: United wants to buy US Airways, and create DC 
Air. American wants to buy TWA, a failing company with a hub in St. 
Louis, and then American wants to buy a part of US Airways. Continental 
and Northwest have a 25 year marketing relations, and Delta, 
Continental and Northwest are all eyeing other deals.
    Right now there are 20 major cities where one carrier effectively 
controls airline service. Department of Transportation, General 
Accounting Office, National Research Council and others have all 
documented abuses, high fares, market dominance, hoarding of facilities 
at airports so other carriers can not enter, and let's not forget poor 
service. It must stop. It is not enough for the antitrust laws to look 
at each transaction in a vacuum. The public's interest, its needs, and 
its convenience must be reasserted.
    DOT, in its January 2001 study, made three key observations:
    1. The facts are clear. Without the presence of effective price 
competition, network carriers charge much higher prices and curtail 
capacity available to price sensitive passengers at the hubs. . . . 
With effective price competition, consumers benefit from both better 
service and lower fares'', citing Atlanta and Salt Lake City as 
examples where a low cost carrier is able to provide competition to a 
dominant hub carrier.
    2. ``The key to eliminating market power and fare premiums is to 
encourage entry into as many uncontested markets as possible''
    3. ``. . . barriers to entry at dominated hubs are most difficult 
to surmount considering the operational and marketing leverage a 
network carrier has in it hub markets.''
    In its 1999 study, the Department stated most clearly what we are 
trying to achieve: ``Moreover, unless there is a reasonable likelihood 
that a new entrant's short term and long term needs for gates and other 
facilities will be met, it may simply decide not to serve a 
community''. FAA/OST Task Force Study, October 1999, at page iii.
    I urge my colleagues to cosponsor this legislation.

    The Chairman. If I'm made the CEO of Southwest, I will find 
that fairly easy to do.
    [Laughter.]
    Senator Hollings. What happens is--we're here this morning 
because this is very timely. NBC Dateline's got a program on, 
after an 8-month investigation, this evening. And I'm told, 
just coming here, that the bill is really intended to go 
against the mergers.
    I'm not necessarily for these mergers. There is a Dorgan 
bill that I intend to cosponsor, but this bill isn't to stop 
mergers or to break the airlines. The airlines, themselves, 
come and testify at that conference table that, ``Look, you've 
either got to approve my merger--namely, I've got to have a 
monopoly--and extend that monopoly, or I've got to go into 
bankruptcy.'' We've had the chairman of the board say just 
that.
    That's a pretty desperate situation for capitalistic 
enterprise. And what has really happened in the deregulation of 
the airlines is, about 85 percent of the communities are 
subsidizing the 15 percent long-hauls; and otherwise. The 
airlines themselves, because money controls, have concentrated 
and now control 20 airlines, over 50 percent of the landings 
and takeoffs at the airports in this country.
    And I would hope, like down in my own backyard where, in 
Charlotte, North Carolina, US Airways controls 91 percent of 
the landings and takeoffs, we can inject some competition. This 
won't be, in and of itself, the solution.
    Obviously, if we open up some of those slots, what happens 
is, ``Let's get me 20 slots, and they've still got 70 percent 
of the landings and takeoffs, they can still, more or less, 
control things by lowering the prices and everything else of 
that kind.'' The FAA has to look at the predatory pricing 
statutes and make sure they follow through.
    This is a small initiative to allow those airlines--or 
rather, those airports to begin to control themselves. What 
really happened is--in the olden days, the communities, like my 
own city, the county wouldn't build an airport, so we went out 
into the county, we built the airport, we went to Captain Eddie 
Rickenbacker, and we--Eastern came, and we all ventured to 
Washington with the Civil Aeronautics Board. We got approval 
for the particular routes, the slots, the prices, and the times 
of day and everything else, and it was a sweetheart deal 
between the communities and the airlines and the travelers.
    I had made the statement about a round-trip, coach--I get 
the government fare, but my wife--I buy her a ticket, and it 
was $917 just this last week. The fellow came up to me as I was 
catching the flight back to Charleston last Thursday night, and 
he said, ``You complained about $917. I just paid $976 for the 
same round-trip ticket.'' The public convenience and necessity 
and the need for quick travel and everything else has totally 
gone out of the window, and all kind of machinations with 
money-controlling has come into effect. This will begin to open 
up, I would hope, some of that monopolistic control where you 
can inject some competition, the original intent of 
deregulation. What we're trying to do is not hurt the airlines, 
or anything else like that, but to inject some public 
convenience and necessity, some competition back into it where 
we know those $917- or $976-fares, which are outrageous, to fly 
to and fro, will go out of the window and we'll get back to 
some semblance of the good service that we had when we had some 
good competition going and had good service--and many of the 
particular hubs were served by more than one airline, but by 
several airlines.
    So I thank you very much. I'll have to excuse myself, but 
I'll be right back.
    The Chairman. Thank you, Senator Hollings.
    Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman, and thanks for 
holding this hearing today. And, you know, we'd all like to 
operate in a perfect world, but we do not. We understand that.
    On this particular piece of legislation, I think the 
oversight of two different departments on these mergers is 
probably a good thing. We have to look at mergers, and we have 
to look in DOJ, with the antitrust and everything else, and 
they're charged with that responsibility, and I think that's 
the good part.
    On one hand, I'm concerned, though, that mergers and their 
impending downstream effects will further exacerbate this 
situation if you look at it; on the other, I'm quite confident 
the domestic airlines have served the traveling public much 
better following deregulation than they did in the mid-'70's.
    But even in the most perfect worlds, we still face pockets 
of inequity, as we do in the rail industry. I do think it's 
important that my colleagues--and on this panel, we recognize 
the intention of the bill we're addressing today as a 
comparison to the very similar economic situation that we faced 
in the rail industry. And I intend to introduce legislation and 
call it the Railway Competition Restoration Act and will 
address the similar economic inequities of the rail industry.
    If enacted, the bill we are considering today will give the 
Department of Transportation specific authority to determine 
whether or not a merger or acquisition is in the public's best 
interest. Duel oversight and interaction between DOT and the 
Department of Justice would provide the traveling public with 
additional safeguards to ensure our domestic airline network 
doesn't result in the fate of the current railroad industry.
    I commend the authors of this bill for including that 
provision; however, I still have some concerns that the 
provision would give the Federal Government the ability to 
further control slots at our nation's airports. We should be 
opening up these slots to competition, not granting authority 
to take away or reassign them.
    Furthermore, I'm concerned that redistribution of the 
assets of the carrier-dominated hubs would have a significant 
impact on rural-state service to small and medium airports, 
that such characterized by ours in Montana.
    In the case of Salt Lake City, if 10 percent of the 
dominating carrier slots were reassigned, that may reduce the 
service to Montana. There is no assurance that the carrier 
gaining those assets would serve my State at all. In fact, I 
can think that we can all agree, an acquiring carrier would be 
likely to serve the larger market where profits are much 
higher.
    So, Mr. Chairman, I think that you and the ranking member 
have come up with an idea here that basically is a good idea. 
If Mr. Hollings wants to get into the big leagues of fares, why 
tell him to fly to Montana sometime. That's the big leagues 
there, I'll tell you.
    But nonetheless, I think this legislation can be massaged 
and can be worked to where it will be a workable product. And I 
appreciate this hearing today, and I appreciate your 
participation in it, and thank you.
    The Chairman. Thank you, Senator Burns.
    Senator Hutchison.

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

    Senator Hutchison. Thank you, Mr. Chairman. I'm looking 
forward to beginning a dialog with you about the solutions to 
the gridlock and customer dissatisfaction that is pervasive in 
the aviation industry today. By now the statistics are 
familiar: one in four flights are delayed or canceled--450,000 
flights last year delayed or canceled.
    Along with the Chairman and Ranking Member, I'm 
cosponsoring a bill that will force the airlines to disclose 
better delay and fare information to consumers and hold them to 
their commitments to improve customer service. I'm pleased to 
see that our bill, the Airline Customer Service Improvement Act 
is on the markup agenda later this week.
    I cannot say the same about the bill that we are 
considering today. I have grave reservations about this 
legislation. If enacted, S. 415 would impact airlines and 
airports in two distinct ways. S. 415 gives the secretary of 
Transportation broad new authority over the use of gates and 
facilities by airlines at the nation's largest airports.
    Second, it adds a new government review standard and 
procedure with regard to proposed mergers and transactions.
    Like many of my colleagues, I'm concerned about the 
concentration of the aviation industry and the economic 
conditions leading to this phenomenon. It is true that smaller 
airlines are having a difficult time gaining access to the 
nation's large airports. However, I believe this bill takes the 
wrong approach to dealing with this situation.
    I am working with Senator Stevens and other colleagues to 
develop legislation to streamline the environmental review 
process. This morning, the FAA released a report indicating 
that we are, in fact, facing a capacity crisis. I believe that 
building new runways, terminals, and airport facilities and 
upgrading air-traffic control capabilities are the best way to 
provide competitive access to aviation facilities.
    Creating new barriers to mergers and acquisitions in the 
aviation industry is like closing the barn door after the horse 
has escaped.
    Secretary Mineta recently indicated the Department of 
Transportation will conduct an in-depth analysis of the 
competitive aspects of all proposed mergers and acquisitions in 
the industry, but the final judgment rests with the Department 
of Justice, and it should remain there.
    The Department of Transportation review called for in this 
bill is redundant. The proposed United Airlines acquisition of 
US Airways is under review by the Justice Department and the 
Department of Transportation. Last week, Federal regulators 
announced the latest in a series of delays of the transaction 
to deal with their concerns. Clearly, this deal is receiving a 
thorough review from the Justice and Transportation 
departments. Creating new hurdles for the merger is overkill.
    As for the other merger on the drawing board, the American 
buyout of TWA is a rescue mission to save a major carrier and a 
major employer from liquidation. Still, the acquisition is 
properly under review.
    More serious are the implications of the bill's other 
section which deals with airline hubs. S. 415 requires the 
Department of Transportation to review utilization of gates and 
other assets at the nation's largest 35 airports and reassigns 
the facilities to smaller carriers in the name of improving 
competition.
    This state-sponsored redistribution of assets amounts to 
re-regulation. It would disrupt airline services throughout the 
country. Under S. 415, airlines must also surrender gates as a 
consequence of completing a merger. Major carriers could lose 
gates at critical airports, leaving their passengers with fewer 
options.
    The last time I checked, the average flight was running 
pretty close to full. Every airline passenger is familiar with 
the phrase ``middle seats only.'' Taking away gates from 
carriers at their hubs will mean even less capacity for 
travelers. At DFW Airport, the gate situation is so bad, I have 
spent an hour or more after landing waiting for an open gate.
    Mr. Chairman, I believe the way to promote competition and 
improve service is to build more capacity, not restrict the 
limited resources we have. Under this bill, we could take gates 
away from carriers, and give them to smaller competitors who 
may not be able to utilize these resources for the best 
passenger service.
    While I cannot support this legislation, I appreciate the 
opportunity to work with you and the Committee to address the 
problems we all acknowledge. Thank you.
    The Chairman. Thank you very much, Senator Hutchison.
    Senator Fitzgerald, would you care to make a----
    Senator Fitzgerald. I'll pass.
    The Chairman. Thank you. Then I want to welcome the first 
panel, which is the Honorable Thomas J. Miller, the Iowa 
Attorney General; Ms. JayEtta Z. Hecker, the Director of 
Physical Infrastructure Issues, U.S. General Accounting Office; 
Mr. Glen Hauenstein--he's Senior Vice President of Scheduling 
at Continental Airlines; Mr. David Neeleman, Chief Executive 
Office of JetBlue Airways; Mr. Mark Kahan, who is the Executive 
Vice President and General Counsel of Spirit Air Lines; and Dr. 
Mark N. Cooper, Director of Research, Consumer Federation of 
America.
    And we will begin with you, Attorney General Miller. 
Welcome again before the Committee, and it's good to see you 
again.

 STATEMENT OF THOMAS J. MILLER, ATTORNEY GENERAL, STATE OF IOWA

    Mr. Miller. Thank you. It is good to see you, as always, 
Mr. Chairman.
    About 35 attorney generals have been working on this issue 
of airline competition, and we've done that for many of the 
same reasons that you're working on the issue and that you've 
brought forth this legislation. I think we all recognize that 
deregulation in the airline industry, on balance, has been an 
enormous plus for consumers and for the country, but there are 
areas where that competition does not extend, and they're areas 
throughout the country. In Iowa, we have some of those areas. 
Upstate New York, until recently, lacked competition. Richmond, 
Virginia, had some of the highest rates in the country--
Tallahassee, Florida, the same thing.
    So you have interest in at least 35 State attorney 
generals. Indeed, some of them said, Senator Burns, instead of 
pockets of inequity, there were pockets of competition in those 
states. So the whole idea is to spread the benefits of 
deregulation as far as we can throughout the country, and the 
main way to do that is through competition--through low-cost 
carriers, through new entrants--through competition, not 
through re-regulation.
    And that is the goal, certainly, of the 35 attorney 
generals, to have greater competition in more markets so that 
we all can have the benefits.
    And we also recognize, and I think you do, too, that--where 
the prices are very high in city pairs, they're highest for the 
business traveler. That's where you get the extraordinary high 
rates. And that can have consequences for economic development 
in a community. So it reaches to the core economic interest of 
some of our cities and states.
    The first thing we need to do is not make it worse. And 
what you're doing here is giving the DOT authority on mergers. 
The thing that could make the whole situation even worse is 
more mergers. You give them the authority to stop a merger; you 
give them the authority, if they approve a merger, to 
reallocate some of the gates and slots. And I think that that 
kind of authority is very important to make sure that there is 
no further harm.
    Then you do other things to improve the situation. You 
focus on gates and slots. And for a long time we concentrated 
on pricing and slots and somewhat ignored gates as a key issue 
here. One of the really positive things that you do with this 
legislation is put gates on the map as something that's very 
important and give DOT the authority to work in the area of 
gates; because even if an airline has slots, or if it's a non-
slot airport, if they can't get a gate, they can't fly.
    And we've seen situations where for long periods of time 
new entrants are not able to get gates.
    What we've seen over the last few years is an evolution in 
terms of the DOT--a very positive evolution, I think. DOT was 
given authority--broad, basic authority to prevent unfair 
methods of competition in the deregulation legislation in the 
late 1970's and, for one reason or another, for a while didn't 
need to use that authority. But now they really need to use 
that authority.
    We think Secretary Slater brought us forward in that area 
by proposing the guidelines for price competition. And then 
coming out with a report and establishing a basis for DOT to 
take action against predatory pricing situations was very 
positive. He did some things in the area of slots--I think the 
Chairman mentioned the 75 slots at Kennedy--Secretary Slater 
was sensitive to that. I think he did a study on gates, as 
well.
    Now, with the new secretary, Secretary Norman Mineta, his 
positive statements recently on the mergers indicates, I think, 
a real continuation at DOT in this area and a positive one.
    I think that what you're doing here, particularly in terms 
of gates, is giving what I might say ``permission'' for the DOT 
to act. You know, arguably, by the broad authority, they can do 
quite a few things in regard to gates; but when you don't use 
authority for long periods of time, and there's very entrenched 
interest opposing that, it's difficult for an agency to then 
all of a sudden use that authority.
    What you're doing here, on the gates, in particular, is 
giving them permission and a specific authority--a specific 
procedure to deal with the gate situation--I think that's very 
positive.
    You do not take any authority away from the Department of 
Justice, in terms of merger, and I think that's very important. 
I think the Department of Justice was given authority maybe 10 
years ago in this area, and they're using their authority very 
well. They have brought the case, the American Airlines, case. 
They're reviewing the merger, as Senator Hutchison mentioned.
    It's very important that when you give additional authority 
here to DOT, you do not take it away from DOJ, and you do not.
    In summary, this is a difficult set of issues, a very 
complex set of issues with a lot of different pieces. There's 
no magic solution that's going to bring price competition 
immediately to Montana or Iowa, but there are things that we 
can do along the way that are going to increase that. And it 
seems to me in this bill, you address a number of them, 
particularly highlighting gates.
    And there's also an intangible here. The Senate is much 
more engaged now on these issues, through Senator McCain's 
leadership and the efforts of others. And this is a very 
important intangible in dealing with this whole set of issues 
to try and bring competition to greater parts of America so 
that we can all enjoy the benefits of deregulation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Miller follows:]

Prepared Statement of Thomas J. Miller, Attorney General, State of Iowa

    I appreciate the opportunity to appear before this Committee today. 
As a point of departure, I believe we can agree that we are now at a 
particularly critical juncture in the nation's efforts to create a 
competitive airline industry. Travelers and the business community 
alike are keenly aware that a major airline consolidation effort is 
proposed that would have seemed incredible to industry experts just a 
few years ago. If this consolidation isn't halted, we have to consider 
the possibility that the entire U.S. air transportation industry may be 
in the hands of three or four major companies within the next few 
years.

                   THE UNEVEN IMPACT OF DEREGULATION

    Deregulation of the airline industry has largely been a success 
with better service and better prices for the traveling public. 
Nonetheless, in many areas of the country, we have witnessed more 
costly airfares, a reduction in new entrants into air markets, and 
lessening competition among the major carriers with their grasp on key 
hubs. We have come to understand how fundamentally the lack of real 
competition and meaningful access to air service is linked to the 
economic development and vitality of our communities and states in 
addition to its impact on the leisure traveling public.

                 INITIATIVES OF STATE ATTORNEYS GENERAL

    Over the past three years I worked closely with over thirty-five 
state attorneys general who have learned that the benefits of 
deregulation have yet to be realized in significant parts of the states 
that they represent. Having formed a multi-state Airline Working Group, 
the States have taken concrete steps to ensure access to the advantages 
of deregulation for their citizens, especially through the support of 
an open and fair competitive environment in which low-cost and new 
entrant airlines can compete on a level playing field.
    In the course of this effort we have learned a great deal. We have 
worked closely with others interested in these issues, including the 
Department of Transportation, the Department of Justice, as well as the 
Congress. We have also met with and listened to key consumer and 
industry groups on numerous occasions. We filed several sets of 
comments on proposals that were being considered by the Department of 
Transportation for dealing with the problem of unfair competition 
against new and emerging small carriers. And we contributed to the work 
of the National Transportation Research Board in its study of these 
same issues.
    Currently we are examining dedicating substantial resources to 
investigating the airline mergers that have been announced, as well as 
looking into the possible impact of Orbitz, the airline owned internet 
ticket business currently in the formulation stage.
benefits of competition and increased airport access: specific examples
    In certain fortunate markets we have learned clear lessons about 
the benefits of competition to the consumers and business communities. 
Competition among the major airlines in our airports is a good start 
for our traveling public. We have also come to realize that low cost 
carriers can be a real asset for generating competition. One low cost 
carrier showing consistent growth reports that when it enters a new 
market that fares to the new markets that it serves are reduced by 
fifty percent and the passenger traffic increases by one hundred 
percent. I think that a few examples effectively illustrate this point.
    Recently upstate New York has seen the advent of a local low cost 
carrier which has created immediate and significant competition for 
passengers with the result that some communities went from experiencing 
some of the highest prices in the nation to very competitive prices. In 
the hub city of Atlanta, a low cost carrier has moderated prices 
significantly for travelers in many city pairs.
    When the Department of Transportation has elected to become 
proactive in encouraging competition through the distribution of slots, 
we have witnessed real competitive results. The provision of 75 slots 
at Kennedy airport in New York to a new low cost carrier, for example, 
has generated competition in numerous key markets including the 
traditional high cost area of upstate New York.
    On the other hand, the historical trend can be seen with the 
acquisition of TWA by American Airlines. At National Airport in 
Washington TWA has 49 slots--all of which may go to American--giving 
that carrier a total of 390 slots at this airport which is one of the 
most important in the nation to travelers. This is precisely the 
circumstance which this bill is designed to address. Parenthetically, 
we believe it is already possible and entirely appropriate for the 
Department of Transportation to shift a number of these slots to 
competitors, especially low cost carriers which wish to enter the 
market but are prevented from doing so by the barriers to entry that we 
noted earlier.
    Examples abound of the barriers to entry presented by a lack of 
gates, including such constricted locations as Boston and Philadelphia. 
When gates have been made available the results are good for 
competition and consumers. A low cost carrier fought for over a year to 
get gates at Newark where majors held control of the airport. In a 
number of instances the gates were not being fully utilized but were 
withheld from carriers trying to obtain space to run their operations. 
When the gates were finally opened, a reduction in prices to the 
markets served by this new competitor were immediately felt by local 
travelers. A similar story can be told about another small carrier, who 
after a two-year effort finally succeeded at obtaining gates at 
Detroit, to the benefit of consumers.
    I would like to touch upon one final point I believe merits this 
Committee's consideration. While major airlines challenge the studies 
showing that consumers pay a premium at hub airports--often called 
fortress hubs--, it seems fairly clear to most of us that the premiums 
are real and frequently substantial. When a competitor, especially a 
low cost carrier, is allowed to enter the market and compete for local 
traffic, the outcome is telling. In Atlanta a low cost airline has 
challenged the incumbent carrier in its own hub and prices to 
communities served by that airline have dropped substantially. We feel 
that this needs to occur elsewhere to provide the benefits of 
competition to consumers living in hub cities and this bill helps us do 
that. Again, we believe that the DOT can take steps to promote this 
healthy competition using its own authority.

S. 415 AND AIRPORT ACCESS: IMPORTANCE OF SLOTS AND GATES TO COMPETITION

    We come before this committee in support of efforts by this 
Congress to pass legislation that will ensure a fair and equitable 
opportunity for competing airlines to obtain slots and gates and 
thereby access to key airports in our country.
    Our involvement with airline issues has taught us that one of the 
primary factors that impedes competition in the industry lies in the 
ability of airlines to dominate individual airports. Quite obviously if 
competing airlines cannot get access to an airport, competition is 
impossible, regardless of any other factor. In our view, airport access 
is a key to a real competitive marketplace. Access refers to both the 
physical space and also the vital time periods when people want to 
travel.
    Our current system consists of a unplanned mixture of airport 
rules, transportation regulations, lease obligations, and squatters 
rights, that allow individual carriers to gain significant power to 
control access to individual airports. These conditions allow carriers 
such as Northwest to dominate the hub at Minneapolis-Saint Paul, for 
United and American to dominate O'Hare in Chicago, and for Delta to 
dominate Atlanta. And the most remarkable thing about this phenomenon 
is that it is effective against even the most powerful competitors in 
the industry. Not only making it difficult for small carriers to serve 
Chicago, Atlanta and Washington, the lack of access curbs the major 
carriers' ability to compete effectively in those markets as well.
    Air transportation is a network business. That is, successful 
airlines have come to believe fervently in the idea that their growth 
and prosperity depends on their ability to fly everywhere, to offer 
major corporations and travel agencies unlimited options for reaching 
any destination. However, this desire to create a complete network 
collides head-to-head with the airport access problem.
    We know that true and effective competition cannot be mandated or 
regulated. But what the government can and has the duty to do, is 
address the artificial structural barriers to entry created by arcane 
airport access rules as well as de facto control of certain airports by 
the major carriers. We believe that these tactics are stifling 
competition.

              SUPPORT FOR THE GENERAL PRINCIPLES OF S. 415

    Airports are public facilities which must be accessible to all 
competitors on reasonable terms. As more and more people crowd the 
airlines, it is of paramount importance that the government devise a 
means of insuring that competitive initiatives are not thwarted as a 
result of structural conditions at the airports. Consequently, we 
strongly support efforts to create a better system for the allocation 
of gates and slots.
    As we understand it, the underpinning of S 415 is twofold:
     To grant the Department of Transportation greater power to 
approve airline mergers and acquisitions under new standards, and
     To address more effectively the problem of the allocation 
of slots and gates.

                   FOCUS OF ENFORCEMENT: DOT AND DOJ

    First, I want to note at the outset Transportation Secretary 
Mineta's recent commitment to place more emphasis on ways the 
Department can take a more proactive role in addressing crucial issues 
in the airline industry. This is a development that we welcome.
    For some time we have recognized the potential for DOT to play a 
significant role in promoting competition in the market. In January, 
Secretary Slater and the DOT staff produced several papers that 
outlined the authority the Department already has to address anti-
competitive behavior in the industry. In this regard we believe that 
the Department of Transportation currently has authority to take 
actions in regard slots and gates when their allocation becomes an 
impediment to competition. That authority is embodied in current 
statutes and has existed for many years. However, to date it has not 
been employed effectively.
    To the extent the S. 415 further develops and enhances the 
Department's authority specifically to open access to airports through 
modest redistribution of slots and gates, it could move us closer to 
the open competitive environment we are seeking. Any legislation that 
focuses on restructuring the rules that govern airport access will 
address one of the most significant impediments to competition in the 
industry and the factor that is leading to these unprecedented 
consolidation efforts.
    I would emphasize that I do not believe that we should in any way 
withdraw authority to review mergers from the Department of Justice. In 
working closely with the Justice Department on many investigations of 
all kinds in the past, I have come to have great respect for the 
Department's resources, its depth of knowledge, and its commitment to 
applying the appropriate standards in an objective manner. I would note 
that it has not been that long since the Justice Department has had 
primary responsibility for addressing airline acquisitions. Changes 
regarding the primary responsibility for airline mergers should be made 
only when a reasonable degree of confidence can be developed that we 
are proceeding in the right direction.

       ACCESS TO AIRPORTS: OPENING SLOTS AND GATES TO COMPETITION

    A principal feature of the bill is to shift slots and gates to 
foster real competition in markets. When the States were participating 
with the Transportation Research Board in its examination and 
evaluation of competition in the airline industry we began to clearly 
understand the importance to meaningful competition of access to 
airports through the provision of slots and gates. Indeed, the TRB 
recommended letting pricing and market-based methods of allocating 
slots drive access to markets for competitors to the entrenched major 
carriers.
    The TRB went on to observe that a long history of government 
involvement with the major carriers and with the airports themselves 
had created an artificial barrier to entry for competitors. 
Consequently, they suggested that airports should take steps to assure 
a sufficient availability of gates to competitors wishing to enter the 
market, including allowing for the purchase of gates from dominant 
carriers controlling gates at the airport. They additionally urged that 
the Department of Transportation monitor the availability of gates and 
presumably take steps within its authority to resolve existing 
conditions in favor of competition for local passengers.
    S. 415 seems to me to state categorically and unequivocally that 
access to our key airports through the provision of gates and slots is 
crucial to promote competition that will serve the interest of business 
and leisure travelers across the country. Even in the event that this 
bill does not become law, this Committee has provided a blueprint for 
future competition. The dialogue here today will provide greater 
awareness and useful information about how we can open our airports to 
the clear and convincing benefits of competition. Time will tell 
whether these standards work and whether they are effective in this 
industry.

                               CONCLUSION

    I note that there is still much to learn about the airline 
industry. There are limits on our ability to see into the future that 
we must respect. What we do know with reasonable assurance is that the 
lower the barriers are to entry in the marketplace, the more likely it 
will be that consumers will find the choices they prefer at the lowest 
possible price. Increased access to our nation's airports through the 
provision of slots and gates to competitors will enhance the 
opportunity for healthy competition that will extend the benefits of 
deregulation to communities across the nation. We applaud your 
proposals to spur real competition in the airline industry.
    Thank you for the opportunity to appear before you today.

    The Chairman. Thank you very much, Attorney General Miller.
    Ms. Hecker, welcome back before the Committee.

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

    Ms. Hecker. Thank you, Mr. Chairman. I'm pleased to be here 
today.
    And the focus of our remarks really are, as the title our 
statement covers, the challenge is really in enhancing 
competition, that really the focus here, as the intent of the 
bill makes clear, is to ensure competitive access by commercial 
carriers to markets. And that's probably the single most 
important factor to getting competition to work, to ensuring 
the benefits are spread more broadly across the population.
    I'll focus on three things today. First, an overview of the 
status of deregulation and airline competition, how well it's 
really working, briefly talk about Federal oversight and 
enforcement of competition, and then finally offer some limited 
observations on the proposed legislation.
    I think it's often helpful to kind of give you the sense of 
where I'm going to go with this, so I give you the three 
answers to the three questions right away. In our view, the 
State of competition is in jeopardy. There are severe 
limitations, and that is something that really matters to a 
significant part of the population and the economy. The State 
of Federal oversight, in our view, is limited. And, finally, 
our observations on the bill--we have full concurrence with the 
intent of the legislation, although we have some very specific 
concerns on some of the aspects, and I'll repeat those very 
briefly.
    The first area, then, in the State of competition--there's 
really two ways to look at this. First, is concentration--
market power or domination at hubs. And if you have the 
statement before you, I have a map on Page 6 which lists all of 
the airports hubs that are dominated. And I think you see that 
they range from 50 percent to well over 90 percent. And these 
are clearly--the 16 of the 31 major hubs, and all of the major 
hubs are dominated by the carrier that's present there.
    Now, the next thing, though, is that domination, by itself, 
really is not market power, and it's certainly not the exercise 
of market power. So the next thing to turn to is, what's the 
evidence of the possible harm that comes from this domination. 
And we look at two things. We look at fares, and then we look 
at possible exercise of barriers to entry.
    On the fares, this issue has been studied for years, and 
there is really constant repeated evidence from all the 
research that dominated hubs tend to have higher fares. The 
most recent study that you, yourself, referred to out of DOT, 
made it very clear--because it looked within the hubs, and it 
looked at the markets that had low-fare competition and didn't. 
So the city pares out of the dominated hub.
    And, as you said, the markets where there was no 
competition had 41-percent higher fares, and even over 50-
percent higher fares in the short-haul market. So the evidence 
is really conclusive that there are some problems with higher 
fares in dominated markets.
    But the other side of this is also to look at possible 
exercise of market power to restrict entry. And this is 
something that affects not only the use of airport facilities, 
which this bill focuses on, such as gates and counters and 
baggage facilities and slots, but also there are marketing and 
operating characteristics of airlines where there is the 
potential for exercise of market power and the restriction of 
entry. And we've done many reports on this and, in fact, 
concluded several times that there are some real problems.
    I could say more, but I'll move on quickly to the second 
issue on the status of Federal oversight. The Airline 
Deregulation Act clearly contemplated an active oversight role, 
not only from Justice enforcing the Antitrust laws, but from 
the Department of Transportation enforcing unfair trade 
practices laws. And our review of the kind of exercise of that 
authority over the past decades is really that very limited 
action has been taken.
    This basically leads to the third area that I'll cover, 
which is comments on the legislation. And what we so fully 
concur with is that the real intent of the legislation, as we 
read it, is to direct DOT to take a more active, affirmative, 
pro-competitive oversight role using existing authority, and, 
as has been discussed, to some extent, giving them some new 
authority.
    What's key about that is that the legislation really 
focuses on the single most important impediment to competition, 
and that is problems with entry. And that clearly is an 
important thing to focus on, because the benefits of preserving 
and enhancing competition are indisputable, and access to 
markets is the key factor that's behind the lack of functioning 
of competition.
    Now, the concerns we have really are that the legislation 
may be more prescriptive than necessary and, in fact, have more 
detailed roles and actions by the department that, themselves, 
could further exacerbate some of the competition.
    A couple of the points that I mentioned in my statement, 
it's actually not clear that the forced divestiture of airport 
facilities would even result in real competition in some high-
value markets, because new competitors may or may not have a 
cost advantage relative to the incumbent. They only have to 
have under 15 percent of the market share to be able to get 
access. And, as we know, not all carriers really compete on 
price.
    Now, there's another issue that I know there's a lot of 
concern on in the Congress, and that is that the potential 
forced divesture could result in the reduction of service to 
smaller communities.
    Let me say, though, that the broader strategy of having an 
activist DOT role, in our view, is not to force more 
administrative controls and choosing of winners and losers and 
administrative allocation of slots and gates by presumably all-
knowing officials in the Department of Transportation. It's our 
sense that there's really an important urgency to move away 
from administrative allocation of assets, which is most 
significantly typified by the way slots have been managed for 
the last 30 years, and to apply more market-based principles to 
the allocation of scarce facilities.
    What this goes to is actually something Senator Hutchison 
was referring to, and it's really the use of the pricing 
mechanism to not only address the critical delays and capacity 
shortages and finance that expansion, but really to allocate 
the existing space more efficiently and use market forces for 
that purpose.
    I know these are complicated ideas, and I know the amount 
of time for the overview remarks is limited, so I'll conclude 
there but say that I think the issue, of whether telling DOT to 
be more active amounts to re-regulation, is addressed in the 
report that was mandated--the Transportation Research Board--by 
the Congress on entry and competition in the airline industry. 
It brought together some of the best minds. And there were a 
lot of differences of views there, but the one thing there was 
absolute consensus on--and I'd like to just read it:

          The Committee unanimously believes that DOT's strategic role 
        should be positive, fostering market-placed conditions that are 
        conducive to entry and more competition.

    So, in that sense, again, I endorse the objectives of the 
bill. I think they are right on, in terms of the impediments 
and the problems in the functioning of competition. And I think 
some focus on some of the details to ensure they're truly pro-
competitive and inducing the more strategic pro-competitive 
policies that DOT should be pursuing is really an important 
step forward.
    Thank you, Mr. Chairman.
    [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 some of the vexing 
issues of competition in the commercial aviation industry. 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--particularly small and medium-sized communities in the 
East and upper Midwest--have suffered from relatively high airfares and 
a loss of service due in part to a lack of competition.
    During the past 12 months, four major U.S. passenger airlines have 
announced proposed mergers and acquisitions. In May 2000, United 
Airlines (United) proposed to acquire US Airways and divest part of 
those assets to create a new airline called DC Air. More recently, 
American Airlines (American) has proposed to purchase Trans World 
Airlines (TWA) along with certain assets from United.\1\ The potential 
shifts in industry structure that would result from the proposed 
mergers represent a crossroads for the structure of the airline 
industry and the state of competition and industry performance. These 
proposals have raised public policy questions about how such 
consolidation within the airline industry could affect competition in 
general and consumers and small communities in particular.
    The Congress has long been concerned about ensuring that the 
airline industry remains vibrant and competitive. The bill now before 
the committee--The Aviation Competition Restoration Act (S. 415)--
expresses that concern by focusing on airline market concentration. The 
bill would require the Department of Transportation (DOT) to assert its 
authority in analyzing and overseeing competition in the airline 
industry. It would generally prohibit airlines from merging or 
acquiring the assets of another airline if the resulting carrier met 
certain tests of market strength and the Secretary of Transportation 
determined that the acquisition would substantially lessen competition 
or result in unreasonable industry concentration or excessive market 
domination, unless the merging airlines were willing to surrender 
gates, facilities, and other airport access to smaller carriers. The 
bill would also require the Secretary to investigate the assignment and 
usage of gates, facilities, and other assets by airlines that have 
dominant market positions at large airports. The bill would then have 
the Secretary require those airlines to surrender gates and other 
airport assets upon request of another airline or the Secretary's own 
motion if gates and other assets are not available and competition 
would be enhanced.
    GAO has analyzed aviation competition issues since enactment of the 
Airline Deregulation Act. Last month, we testified before this 
committee on how the proposed consolidation in the industry might 
affect competition.\2\ In December 2000, we issued a report on the 
potential effects of the proposed merger between United Airlines 
(United) and US Airways.\3\ Our statement today is based on those 
products, earlier work on airline competition issues, and additional 
analyses of competition at key large U.S. airports. We will: (1) 
present an overview of the status of airline competition in markets to 
and from key large airports, (2) summarize federal oversight and 
enforcement of competition in the industry, and (3) provide some broad 
observations on the proposed legislation.
    In summary:
     Major airlines dominated 16 of the 31 largest U.S. 
airports (i.e., the airlines carried more than 50 percent of the 
passengers), at which about 260 million passengers traveled in 1999. 
Moreover, these dominant airlines faced relatively little competition; 
another airline competed (i.e., carried more than 10 percent of the 
passenger traffic) at only 6 of the 16 dominated large airports. Low-
fare airlines such as AirTran Airlines (AirTran) competed at just 3 of 
those 16 airports. Dominance at an airport, in and of itself, is not 
anticompetitive. Nevertheless, research has consistently shown that 
dominated airports tend to have higher airfares than airports that have 
more competition from other airlines. DOT reported earlier this year 
that passengers at 10 airports paid on average 41 percent more than do 
their counterparts flying in markets where the dominant airline faces 
low-fare competition. In addition, dominant carriers often have 
exclusive access to essential facilities at airports as well as sales 
and marketing practices which combine to limit the ability of new or 
existing airlines to enter markets and compete with them.
     DOT generally has not taken enforcement action against 
airlines for alleged anticompetitive behavior concerning airline 
mergers and predatory practices. This includes the period during the 
1980s when DOT approved a wave of mergers, such as TWA's acquisition of 
Ozark, as well as more recently with respect to its authority to 
prohibit unfair method of competition such as predatory practices. 
While DOT is not required to proactively take action to ensure or 
enhance competition, it has taken some actions more recently to enhance 
competition (e.g. using its authority to grant more slots to new 
entrants). In the past 3 years, the Department of Justice (DOJ) has 
twice brought lawsuits against airlines under its authority to enforce 
the federal antitrust laws.
     GAO and others have repeatedly found problems with fares, 
service, and access which the proposed legislation would address. While 
we have not reviewed the proposed legislation in detail, we agree with 
the intent of the legislation--i.e., to direct DOT to play an 
affirmative, activist and pro-competitive oversight role in airline 
competition. However, we have some concerns that the proposed 
legislation may be more prescriptive than necessary, with the result 
that the intended results may not be achieved and that some adverse 
unintended consequences might result. For example, it is not clear that 
the forced divestiture of airport facilities would necessarily result 
in real price competition in high-value markets because the new 
competitor may or may not have a cost advantage relative to the 
incumbent dominant airline. In addition, we are also concerned that 
forcing dominant airlines to provide access to other airlines at larger 
U.S. airports could result in the reduction of service to smaller 
communities. Finally, while the proposed legislation would make clear 
that Congress intends DOT to actively pursue investigations of 
potentially unfair competition, DOT may need additional resources to 
carry out the legislative intent.

                               BACKGROUND

    The U.S. air transportation structure is dominated by ``hub-and-
spoke'' networks. Since the deregulation of U.S. commercial aviation in 
1978, nearly all major carriers have developed such networks. By 
bringing passengers from a large number of cities to one central 
location and redistributing these passengers to their intended 
destinations, an airline's fleet can serve more cities than it could 
through direct ``point-to-point'' service. Hub-and-spoke systems 
provide travelers with more departure and arrival choices and generally 
allow the airlines to use their airplanes and other equipment more 
efficiently. Airline networks generally have several hub cities. For 
example, Northwest has hubs in Minneapolis, Detroit, and Memphis, and 
American has hubs in Chicago, Dallas, and Miami.
    As we recently reported to this committee, 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.\4\ While the mergers would also each create new competitors 
in some markets and provide other benefits to consumers, substantial 
questions remain about how the profound structural changes would affect 
industry performance. These include the three issues we discussed with 
the committee last month: 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, and how service to small 
communities might be affected.
    Both DOJ and DOT have responsibilities for reviewing airline 
business practices. 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. DOJ also has the responsibility to 
enforce the Sherman Act, which prohibits unreasonable restraints of 
trade and attempts to establish and maintain monopoly power. DOT has 
authority to prohibit airline practices as unfair methods of 
competition if they violate antitrust principles, even if the practices 
do not constitute monopolization and attempted monopolization under the 
Sherman Act.\5\

          MAJOR AIRLINES DOMINATE A MAJORITY OF LARGE AIRPORTS

    Major airlines dominated a majority of the 31 largest U.S. airports 
in which approximately 470 million passengers traveled in 1999.\6\ Our 
analysis indicates that major airlines dominated 16 of those ``large 
hub'' airports, in which about 260 million passengers traveled.\7\ 
Moreover, these dominant airlines faced relatively little 
competition.\8\ At 9 of those 16 airports, the second largest airline 
carried less than 10 percent of passenger traffic. Only at Atlanta, 
Salt Lake City, and St. Louis did a low-fare airline such as AirTran or 
Southwest Airlines (Southwest) carry 10 percent or more of passenger 
traffic.\9\ Figure 1 shows the large hub airports dominated by each of 
the major US airlines, along with the market share of the dominant 
airline.

[GRAPHIC] [TIFF OMITTED] T8037.001

    Notably, some of the country's very largest airports are not 
dominated by any single airline. These include Los Angeles 
International, New York LaGuardia, and Chicago O'Hare International. In 
addition, four major airlines--Alaska, America West, Southwest, and 
American Trans Air--dominate no large hub airport. Table 1 shows the 
large hub airports dominated by each of the major US airlines and the 
total (1999) enplaned passengers for the hubs of each carrier. Appendix 
I lists each of the 31 large hub airports and shows the percentage of 
passenger enplanements held by the two airlines that carried the most 
passengers there.

            Table 1.--Airline Dominance at Large Hub Airports
------------------------------------------------------------------------
                                    Dominated large    Total passengers
             Airline                     hubs           enplaned (1999)
------------------------------------------------------------------------
American........................  Dallas/Ft. Worth,   44,636,299
                                   Miami.
Continental.....................  Newark, Houston     31,791,401
                                   Bush
                                   Intercontinental.
Delta...........................  Atlanta,            57,881,013
                                   Cincinnati, Salt
                                   Lake City.
Northwest.......................  Detroit,            32,332,669
                                   Minneapolis.
TWA.............................  St. Louis.........  14,831,699
United..........................  Denver, Washington  46,235,863
                                   Dulles, San
                                   Francisco.
US Airways......................  Charlotte,          31,946,837
                                   Philadelphia,
                                   Pittsburgh.
                                 ---------------------------------------
  Total.........................  ..................  259,655,781
------------------------------------------------------------------------
Source: GAO's analysis of data from the Federal Aviation Administration
  and BACK Aviation Solutions.


    Should the proposed merger between United and US Airways occur, 
along with American's proposed acquisition of TWA, the dominance of the 
major airlines at these airports would increase. For example, the 
addition of US Airways' relatively small market share at Chicago O'Hare 
International Airport would then allow new United to control more than 
half of the scheduled domestic seating capacity there. New United's 
share of scheduled domestic seating capacity at Philadelphia would 
increase from 66.4 percent (US Airways' share of currently-scheduled 
capacity) to 72.8 percent. New American's share of scheduled domestic 
seating capacity at Washington's Reagan National would increase from 
its existing 12.1 percent to 36.6 percent of total scheduled seats; new 
United's share of scheduled domestic seating capacity at Reagan 
National would be 23.2 percent.\10\

Evidence of Market Power at Hubs--Higher Fares and Barriers to Entry
    An airline's dominance of an airport alone, however, does not 
demonstrate its market power. One important indicator of the possible 
exercise of market power is what is known as a ``hub premium,'' which 
represents the extent to which fares to and from hub cities are higher 
than average fares on similar routes throughout the domestic route 
system. Dominated airports tend to have markets with higher airfares 
than airports that have more competition from other airlines.\11\ In 
1999, the Transportation Research Board (TRB) confirmed that dominated 
hub markets (i.e., markets where either the origin or the destination 
is a dominated hub) tend to have higher airfares than other markets. 
This is especially true in short-haul markets.\12\
    In January 2001, DOT concluded that high fares at dominated hub 
airports result, in large part, from the market power exercised by 
network carriers at their hubs.\13\ Based on a comparison of fares at 
10 dominated hub airports, DOT estimated that 24.7 million passengers 
in hub markets with no low-fare competitor paid on average 41 percent 
more than those flying in hub markets with low-fare competitors. 
Passengers in short-haul hub markets (750 miles or less) without a low-
fare carrier on average pay even more. DOT concluded that the lack of 
price competition, and not other factors such as a concentration of 
high-fare business travelers, resulted in these higher prices. DOT 
reported that Cincinnati, Pittsburgh, Minneapolis, and Charlotte--four 
of the six hubs with the highest market shares of dominated carriers--
have the highest overall fare differentials. (See Table 2.) DOT's 
report further observed that spoke communities may also be subject to 
higher fares when hub dominant carriers are the predominant service 
carriers at the spoke communities. Passengers on these routes are 
charged higher fares because they too do not benefit from aggressive 
price competition.

          Table 2.--Fare Differentials at Dominated Hub Markets
------------------------------------------------------------------------
                                      Percent difference in airfares:
                                    routes without low-fare competition
                                    vs. routes with low-fare competition
          Dominated hub           --------------------------------------
                                    Short-haul   Long-haul   All markets
                                   markets [In  markets [In      [In
                                     percent]     percent]     percent]
------------------------------------------------------------------------
Cincinnati.......................          78%          35%          57%
Pittsburgh.......................        86           18           57
Minneapolis......................        46           63           55
Charlotte........................        75           23           54
St. Louis........................        38           61           49
Memphis..........................        57           29           43
Atlanta..........................        49           28           41
Detroit..........................        51           21           40
Denver...........................        37           28           29
Salt Lake City...................        -6            6            2
                                  --------------------------------------
  All............................          54%          31%          41%
------------------------------------------------------------------------
Note: These fare differentials were derived by comparing fares at
  dominated hub markets in which low-fare competition exists against
  fares at dominated hub markets in which no low-fare competition
  exists. All fare comparisons were controlled for distance and density.


    It is important to focus on competition and possible pricing 
premiums in city-pair markets rather than the hub overall, since the 
existence of large hubs and the presence of low-fare competitors are 
not mutually exclusive. For example, in 3 of the 31 large hub airports 
(Baltimore, Las Vegas, and San Diego), Southwest carried the largest 
percentage of passenger traffic; in another four of the 31 large hubs, 
it carried the second largest percentage of passengers. Other low-fare 
airlines compete in some city-pair markets with the dominant airline in 
dominated hubs. In those markets, travelers experience lower airfares 
brought about by the presence of low-fare competition. Table 3 
illustrates selected markets in which dominant airlines face 
competition from low-fare airlines with markets of similar distance in 
which the dominant airline faces no low-fare competition. For example, 
passengers traveling from Philadelphia to Atlanta appear to benefit 
from AirTran's competition against US Airways, which charged nearly the 
same average airfare in 2000. But passengers paid an average of $110 
more to fly basically the same distance on US Airways from Philadelphia 
to Chicago, a market in which no low-fare competition exists.

 Table 3.--Comparison of Selected Hub Markets in Which Dominant Airline Faces Low-Fare Competition With Those in
                                      Which No Low-Fare Competition Exists.
----------------------------------------------------------------------------------------------------------------
                                                                             Passengers
               Origin                       Destination          Distance     per day        \1\Average fare
                                                                             (one way)          (airline)
----------------------------------------------------------------------------------------------------------------
Atlanta.............................  Boston.................          945        1,130  $104.67 (AirTran)
                                                                                         $153.85 (Delta)
  ..................................  Providence.............          902           82  $207.05 (Delta)
Dallas..............................  \2\Chicago.............          795          576  $137.11 (American Trans
                                                                                          Air)
                                                                                         $177.28 (American)
  ..................................  Indianapolis...........          756          135  $254.04 (American)
Denver..............................  Omaha..................          470          225  $141.95 (Frontier)
                                                                                         $171.30 (United)
  ..................................  Oklahoma City..........          493           79  $244.46 (United)
Detroit.............................  Tampa..................          985          549  $103.92 (Spirit)
                                                                                         $130.77 (Northwest)
  ..................................  Dallas.................          981          434  $234.56 (Northwest)
\3\Houston..........................  Baltimore..............        1,232          392  $141.10 (Southwest)
                                                                                         $215.01 (Continental)
  ..................................  Pittsburgh.............        1,124          117  $328.20 (Continental)
Philadelphia........................  Atlanta................          666        1,164  $92.71 (AirTran)
                                                                                         $105.64 (US Airways)
  ..................................  \4\Chicago.............          676          910  $216.18 (US Airways)
----------------------------------------------------------------------------------------------------------------
\1\ Data for passengers and fares are for the period from the fourth quarter of 1999 to the 3rd quarter of 2000.
\2\ Fares and passenger totals shown are for ATA and American's service to Chicago's Midway Airport. American
  carried most of its Dallas--Chicago passengers to O'Hare International Airport, for an average fare of
  $280.70.
\3\ Fares and passenger totals shown are for Southwest's service from Houston's Hobby Airport and for
  Continental's service from Houston's Bush Intercontinental Airport.
\4\ Fares and passenger totals shown are for US Airways' service to Chicago's O'Hare International Airport.

Source: GAO's analysis of data from BACK Aviation Solutions.


    The other way dominant carriers may exercise market power is to 
employ operating and marketing barriers to limit the ability of 
airlines to enter and compete in new markets. Figure 2 lists the wide 
range of operating and marketing barriers available to the large 
dominant network carriers for either deterring entry into their 
dominated markets or for reducing the competitive threat from new or 
existing carriers. A difficult issue to decide is whether exercising 
these barriers or operating practices represents vigorous competition 
or anticompetitive practices.

[GRAPHIC] [TIFF OMITTED] T8037.002

    In 1999, we reported that competition in certain key airports 
continued to be inhibited by slot controls, federal and local perimeter 
rules, and lack of access to facilities.\14\ Airfares at these 
airports, including Pittsburgh and Reagan Washington National, were 
consistently higher than at airports of comparable size without 
constraints. Previously, new airlines (i.e., those that began 
operations after the deregulation of the industry) reported difficulty 
gaining competitive access to gates at six airports--Charlotte, 
Cincinnati, Detroit, Minneapolis, Newark, and Pittsburgh. Although some 
of these airports now have a limited number of gates available, the 
vast majority of gates continue to be leased to one established 
airline. Airport and airline officials also told us that factors other 
than restrictive gate leases, such as the marketing strategies of 
incumbent airlines, prevented new entrants from providing service at 
their airports. These marketing strategies, combined with a new 
entrant's fear of perceived predatory conduct by the incumbent carrier 
and its possible lack of adequate capitalization, can deter airlines 
from entering dominated markets.
    Airline sales and marketing practices (such as frequent flyer 
programs, travel agent commission overrides, or corporate incentive 
agreements\15\) make it difficult for potential competitors to enter 
markets dominated by established airlines. As we have previously 
reported, the dominant carrier in each market uses these strategies to 
attract the most profitable segment of the industry--business 
travelers. Since the strength of these programs depends largely on the 
incumbent airline's route networks, alliances, and hubs, new entry 
carriers who lack such tools are concerned about their ability to enter 
the market successfully. Therefore, airlines in many cases have chosen 
not to enter, or to quickly exit, markets where they did not believe 
they could overcome the combined effect of these strategies. This is 
particularly true given that, to attract new customers, a potential 
competitor must announce its schedule and fares well in advance of 
beginning service. Thus, the incumbent is provided an opportunity to 
adjust its marketing strategies and match the low fares offered by the 
new competitors.

        FEDERAL OVERSIGHT OF COMPETITION IN THE AIRLINE INDUSTRY

    Both DOJ and DOT have responsibilities for prohibiting unfair 
competitive practices but only DOJ has responsibility for taking 
actions against mergers. Initially, DOT had inherited the Civil 
Aeronautics Board's antitrust responsibilities. In the 1980s, it 
approved a wave of mergers, including two--Northwest's acquisition of 
Republic and TWA's acquisition of Ozark--that DOJ urged it to oppose. 
Congress subsequently removed DOT's authority for approving airline 
mergers, giving that responsibility to DOJ.
    DOJ's authority to review airline mergers and prohibit 
anticompetitive behavior comes from the Sherman and Clayton Antitrust 
Acts and the Hart-Scott-Rodino Act. DOJ exercised this authority in 
filing a complaint against the Northwest-Continental proposed stock 
acquisition. Proposed in 1998, this acquisition gave Northwest 51 
percent of the voting rights in Continental. In January 2001, DOJ 
dismissed its lawsuit Northwest divested all but 7 percent of its 
voting interest in Continental. In a case involving alleged predatory 
practices that is still pending, DOJ exercised its authority under the 
Sherman Antitrust Act to prevent monopolization by filing a complaint 
in 1999 against American Airlines. DOJ alleged that American violated 
the Sherman Act by attempting to monopolize service out of Dallas-Fort 
Worth by increasing capacity and reducing fares ``well beyond what 
makes business sense,'' to drive new competitors, such as Vanguard and 
Western Pacific airlines, out of the market.
    DOT has no current authority to approve mergers, but it does have 
general authority under 49 USC 41712 to act against what it considers 
to be an unfair or deceptive practice or an unfair method of 
competition in air transportation. DOT has used this authority to 
investigate several complaints of predatory practices by major air 
carriers against new entrants. Based on these complaints, DOT in April 
1998 proposed guidelines that sought to define standards for air 
carrier conduct. However, DOT did not finalize or implement those 
guidelines, concluding instead that it should develop standards through 
a case by case approach.\16\ Today, it is unclear the extent to which 
DOT's authority under section 41712 extends with regard to predatory 
practices. Because DOT has not yet exercised its authority, the way in 
which this provision will be interpreted and applied is unclear.
    The Wendell H. Ford Aviation Investment and Reform Act for the 21st 
Century\17\ (AIR-21) required certain large and medium hub airports to 
submit annual competition plans to DOT in order for the airport to 
receive new federal grants or to impose or increase the passenger 
facility charge. The plans are to include information on the 
availability of airport gates and other facilities, gate-use 
requirements, patterns of air service, financial constraints, and other 
specific items. Starting in fiscal year 2001, all covered airports are 
required to have their plans reviewed by the Federal Aviation 
Administration (FAA) in order to receive Airport Improvement Program 
(AIP) grants and new authority to levy passenger facility charges.\18\ 
DOT is to review the plans and their implementation to ensure that each 
covered airport successfully implemented its plan.
 proposed legislation focuses on significant impediments to competition
    While we have had only limited time to study the proposed 
legislation, we are nevertheless pleased to provide some broad comments 
on the intent and a few key provisions. The intent of the Aviation 
Competition Restoration Act to ensure ``competitive access by 
commercial air carriers to major cities'' is clearly sound. The 
benefits of preserving and enhancing competition in the airline 
industry to the public are indisputable. The absence of effective 
access to markets goes to the heart of failures in the functioning of 
competition in so many markets. Under current law, DOT has the 
authority to take action against anticompetitive practices, but it is 
not required to take any action. The proposed legislation would 
expressly require DOT to act. We fully concur with the finding that 
``public concern about the importance of air transportation . . . and 
continued hub domination requires the Department of Transportation to 
assert its authority in analyzing proposed transactions among air 
carriers that affect consumers.'' Moreover, as noted in the bill's 
findings, many of the other concerns of the public and Congress 
regarding the airline industry--increasing flight delays and 
cancellations, overscheduling, and poor service--are linked to 
weaknesses in the functioning of competition.
    We do, however, have some concerns that the proposed bill may be 
too prescriptive--and either may not result in the intended effect or 
produce unintended adverse effects. These comments relate primarily to 
the provisions of Section 3 which may be more specific than necessary 
in specifying solutions to potentially anti-competitive effects of 
proposed mergers\19\--when in practice both problems and solutions 
could vary from airport to airport, market to market, and carrier to 
carrier. Below are two examples of these concerns:
     Forced divestiture of airport ``assets'' may not 
necessarily result in real price competition in high-value business 
markets. Fares may fall only in markets where competition is 
effectively introduced from a low-fare carrier rather than another 
network carrier. Were another network carrier to enter against an 
incumbent dominant airline, it may offer little if any price 
competition. The new competing network carrier may or may not have a 
cost advantage relative to the incumbent dominant airline. Moreover, an 
airline may be reluctant to enter or cut prices in a market where its 
rival has a large market share for fear that the rival would retaliate 
by cutting prices in markets where it has a large share--a practice 
known as ``mutual forbearance.'' For new entrant airlines, access to an 
airport through its slots, gates, and facilities is necessary but not 
sufficient as dominant incumbent airlines' sales and marketing 
practices may make competitive entry difficult if not impossible.
     Service to small communities could likely be the first 
casualty of forced divestiture of critical assets. Depending upon how 
intensively the dominant airline uses its gates and other facilities at 
an airport, a requirement that they surrender such assets could 
negatively affect the airline's ability to maintain service to its 
spoke communities. Airlines forced to reduce service would be expected 
to eliminate flights to and from communities that provide the least 
profit--likely smaller communities. Based on the pattern of service 
provided by low-cost airlines such as Frontier, Spirit, and JetBlue, 
each of which generally fly only to larger communities, there is no 
guarantee that new entrant low-fare carriers would choose to serve 
smaller markets abandoned by incumbent airlines. Similarly, other 
network carriers that might initiate service at the hub would also be 
unlikely to use that facility to begin service to routes they could 
more profitably serve from their own hubs. However, if dominant 
airlines could increase the frequency with which they use their gates, 
facilities, and other assets, service to smaller communities may be 
little affected.
    Other provisions of the proposed legislation appear to provide 
clear direction regarding DOT actions to exercise its current authority 
to preserve and enhance industry competition. Section 4 requires DOT to 
undertake a review of access in the nation's 35 largest airports and 
authorizes the Secretary to require carriers to provide access at 
reasonable rates. Section 6 conditions approval of AIP funds and 
approval of Passenger Facility Charges on an airport sponsor assuring 
open access to the airport. We have expressed concern about 
restrictions on access to essential airport facilities functioning as 
an important barrier to entry. As early as 1996 we recommended that DOT 
be actively aware of airport and airline practices at the major 
airports and condition approval of AIP funds on appropriate remedies 
being instituted. Thus, we fully support the intent of these 
provisions. Again, however, the specific language might be clarified to 
focus more on the intended result. For example, AIR 21 already requires 
the Secretary to ensure ``that gates and other facilities are made 
available at costs that are fair and reasonable to air carriers at 
covered airports where a ``majority-in-interest clause'' of a contract 
or other agreement or arrangement inhibits the ability of the local 
airport authority to provide or build new gates or other facilities'' 
(Section 155(d)). Potentially there may be more value in calling for a 
status report on DOT's implementation of their existing authority.\20\
    Overall, we recognize that the proposed legislation seeks to focus 
DOT's wide discretion under their current authority and direct a more 
activist role in overseeing, promoting and enhancing competition among 
carriers, as well as assuring a pro-competitive role by airport 
operators. In this regard, we would suggest that there are a wide range 
of DOT and FAA policies, resources, tools and practices which affect 
competition in the airline industry which should be both better 
understood and more strategically aligned. One prominent area where a 
clearly anti-competitive ``temporary'' policy has been perpetuated for 
decades is DOT's administration of ``slots'' at high density airports. 
Another area not addressed in the proposed legislation is DOT's 
inaction to fully investigate and remedy persistent charges of 
predatory actions by major network carriers to the entry by low cost 
carriers in their dominated markets in a timely manner.
    In short, a dramatic shift of emphasis, commitment and resources is 
required for DOT to fully address their existing authority and 
responsibility for protecting and preserving competition in the airline 
industry. The proposed legislation makes clear many of the key areas 
where DOT could and should be present in overseeing and enforcing 
principles of fair competition. The legislation would underscore 
Congressional intent for an activist oversight role. The major 
remaining gap--whether or not the proposed legislation becomes law--is 
the adequacy of resources and technical capacity within DOT to fulfill 
this vital role. Over the past several years, DOT has lost considerable 
expertise in airline competition issues due to staff attrition. This 
expertise needs to be replenished if DOT is to undertake an assertive 
role in overseeing airline competition. For example, DOT's ability to 
pursue investigations of potentially unfair competition is constrained 
by the limited available resources in the Office of the Assistant 
General Counsel for Aviation Enforcement and Proceedings and the Office 
of the Assistant Secretary for Aviation Affairs. Perhaps one way for 
the committee to promote an activist role by DOT could be to require 
the Secretary of Transportation to make an immediate assessment of the 
resources available and required to fulfill their existing 
responsibilities under old Section 411 and AIR 21, the resources needed 
to implement the proposed legislation, and to develop a strategic plan 
for meeting these responsibilities.

                              CONCLUSIONS

    The major network carriers dominate traffic at most of their large 
hubs and there is extensive evidence that fares in markets where 
competition is absent are consistently above competitive levels. We 
believe that the oversight scheme contemplated when the industry was 
deregulated--with antitrust enforcement by the DOJ and oversight of 
unfair trade practices by DOT--has not been entirely successful in 
preserving and assuring the functioning of competition. In particular, 
while the current legislative scheme grants explicit authority for DOT 
to regulate unfair competitive practices, the legislation does leave 
substantial discretion with DOT on the scope of their action, if any. 
Thus, with the range of competitive challenges confronting the industry 
and directly affecting consumers, especially in the face of 
unprecedented industry consolidation, we believe there is merit in the 
overall intent of the bill to direct DOT to actively monitor the state 
of competition in the industry, and to institute remedial actions as 
appropriate--both through recommendations to DOJ as well as actions on 
their own--and all with open reporting to the Congress and the public.
    This concludes my statement. I would be pleased to answer any 
questions you or other Members of the Committee might have.

[GRAPHIC] [TIFF OMITTED] T8037.003

                                Endnotes

    1. 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.
    2. Airline Competition: Issues Raised by Consolidation Proposals 
(GAO-01-370T, Feb. 1, 2001).
    3. Aviation Competition: Issues Related to the Proposed United 
Airlines--US Airways Merger (GAO-01-212, Dec. 15, 2000). See the list 
of related GAO products attached to this statement.
    4. To prepare the GAO products containing this information, we 
analyzed the most recent data available from DOT on the top 5,000 city-
pair markets, which covered calendar year 1999. 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 did not subtract 
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.
    5. 49 USC 41712 (section 411 of the now-repealed Federal Aviation 
Act).
    6. Consistent with definitions that others (i.e., the 
Transportation Research Board) have applied in the past, we define an 
airport as ``dominated'' if a single airline carries more than half of 
the total passenger boardings or enplanements. Similarly, an airline 
would be defined as a ``dominant airline'' if it carried more than half 
of total passenger enplanements. ``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. Data for the total number of 
passenger enplanements in these airports is for calendar year 1999, the 
latest data available from the Federal Aviation Administration.
    7. ``Large hub'' airports are those defined in the US Code as 
having at least 1 percent of total annual passenger enplanements. Those 
hubs are not necessarily the same airports as those which airlines may 
identify as hubs within their networks (``airline hubs''). Of the 31 
large hub airports, airlines label 21 as airline hubs. Each of the 16 
large hubs that we identified above are dominated by the airline that 
runs its network hubs at those locations.
    We calculated each airline's share of passenger traffic at each of 
the large hub airports using data from BACK Aviation Solutions. These 
data covered four quarters from the 4th quarter of 1999 through the 3rd 
quarter of 2000--the most recent data available at the time of our 
work. We confirmed each airline's dominance at these airports by 
examining current data on airline schedules from the Kiehl-Hendrickson 
Group. Those data reveal the total number of seats available for 
purchase by passengers on each airline, including their smaller code-
sharing regional affiliates.
    8. As in our previous work and consistent with definitions applied 
by DOT and others, we define a competitor as an airline that carries at 
least 10 percent of total passenger traffic.
    9. Other airlines that DOT defines as being low-fare carriers 
include American Trans Air, Frontier, National, Spirit, Sun Country, 
Tower, and Vanguard.
    10. New American's market share of Reagan National's capacity 
includes an estimate of the seating capacity that DC Air would hold 
(because of American's proposed equity partnership and planned 
marketing agreement with DC Air) along with half of the capacity of US 
Airways' Washington-New York-Boston shuttle operations, which it would 
obtain under an agreement with United. New United's market share of 
Reagan National's capacity includes its existing capacity with that of 
US Airways, adjusting for US Airways' divestiture of assets to DC Air 
and the agreement to split US Airways' shuttle operations with 
American.
    11. Several studies, including our own, have found that airfares in 
dominated city-pair hub markets are higher than those in markets with 
competition, when controlling for factors such as distance and traffic 
density. See for example Airline Competition: Higher Fares and Less 
Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 
1993). That report defined concentrated airports as one where an 
airline handled at least 60 percent of the enplaning passengers or two 
airlines handled at least 85 percent of the enplaning passengers. We 
concluded that these fares at these airports were generally higher than 
at airports with more competition. See also Severin Borenstein, The 
Evolution of U.S. Airline Competition, Journal of Economic 
Perspectives, Vol. 6, No. 2, Spring 1992). Borenstein concluded that 
hub-and-spoke networks are not just a source of increased production 
efficiency, but that they are also associated with airport 
concentration and dominance of a hub airport by one or occasionally two 
airlines.
    12. Special Report 255 Entry and Competition in the U.S. Airline 
Industry: Issues and Opportunities, Transportation Research Board, July 
1999.
    13. Domestic Aviation Competition Series: Dominated Hub Fares (US 
Department of Transportation, Office of the Assistant Secretary for 
Aviation and International Affairs, January 2001).
    14. Airline Deregulation: Changes in Airfares, Service Quality, and 
Barriers to Entry, GAO/RCED-99-92, March 4, 1999.
    15. Under frequent flier programs, passengers qualify for awards by 
flying a certain number of miles with the sponsoring airline. A travel 
agent commission override is a special bonus commission paid by 
airlines to travel agents or agencies as a reward for booking a 
targeted proportion of passengers on their airline. Corporate incentive 
agreements represent offers by airlines to corporate clients for fares 
that are discounted from the prices that are otherwise applicable. They 
may be stated as percentage discounts from specified published fares.
    16. DOT reported in January that its review of the TRB report on 
the proposed guidelines, along with additional analyses, confirmed that 
airlines engage at times in unfair competitive practices designed to 
eliminate or reduce competition and that it should take action to 
prevent such practices.
    17. P.L. 106-181
    18. Passenger facility charges, authorized originally in the 
Aviation Safety and Capacity Expansion Act of 1990, are fees levied by 
local airports (with the approval of the FAA) on enplaned passengers. 
The charges may broadly be used to (1) preserve or enhance airport 
safety, security, or capacity; (2) reduce noise; or (3) enhance airline 
competition.
    19. For example, care would be needed in crafting the final 
language for the DOT role in reviewing mergers to assure consistency 
with DOJ's authority under the antitrust laws.
    20. For example, the FAA/Office of the Secretary of Transportation 
Task Force Study on ``Airport Business Practices and Their Impact on 
Airline Competition'' (October 1999) already outlined a number of 
specific measures that were needed to ensure competitive access at 
major airports, including best practices that they identified for 
replication by various airports. In addition, the recently required 
airport competition plans have recently been received in DOT. The 
Committee may want to consider calling for an update on the 1999 report 
and the status of specific actions DOT has taken and are underway to 
assure airports are meeting their obligations to ensure competitive 
access to airports.

    The Chairman. Thank you. I take your recommendations very 
seriously, obviously, and I think it's--this hearing was 
planned before this week, when three startup airlines have 
declared bankruptcy in the last few days, I think, lending some 
urgency to this issue.
    Mr. Hauenstein.

  STATEMENT OF GLEN W. HAUENSTEIN, SENIOR VICE PRESIDENT FOR 
                SCHEDULING, CONTINENTAL AIRLINES

    Mr. Hauenstein. Good morning, Mr. Chairman and members of 
the Committee. I'm Glen Hauenstein, Senior Vice President of 
Scheduling for Continental Airlines. It's an honor to be here 
representing my 54,300----
    The Chairman. You need to pull the microphone a little bit 
closer, please.
    Mr. Hauenstein. It is an honor to be here representing my 
54,300 colleagues at Continental. All of us at Continental 
commend this Committee for moving so swiftly on merger 
legislation.
    Let me start my testimony today with a clear statement 
about Continental's position on these proposed mega-mergers. 
They are bad, and we oppose them.
    As you know from the hearings you've held in this room and 
from the testimony from the GAO and others, the impact of these 
proposed mega-mergers will be felt from one end of the country 
to the other, hurting consumers, communities, and employees. 
Should the Department of Justice approve these proposed 
mergers, further consolidation won't be just predictable, it 
will be necessary to preserve competition.
    We believe the swift introduction of the McCain-Hollings-
Dorgan-Grassley bill, and the timely scheduling of this 
hearing, reflect the fact that Members of the Commerce 
Committee and others in Congress recognize the dire 
consequences of the proposed mergers.
    However, before I address the substance of S. 415, the 
Aviation Competition Restoration Act, I do want to expand on my 
statement that the proposed mega-mergers are bad.
    We believe, and our analysis shows, that the proposed mega-
mergers of United/US Airways and US Airways/American, if 
implemented, will create a coordinated duopoly that will 
control the U.S. domestic market and marginalize smaller 
carriers, like Continental. For example, if the deal is 
approved, almost 80 percent of all slots at the four federally 
constrained slot-regulated airports will be controlled by the 
duopoly of American and United.
    At Washington Reagan and New York La Guardia, where slot 
controls are likely to remain indefinitely, the two mega 
airlines will control over 65 percent of all slots. By 
comparison, Continental currently operates with less then 5 
percent of the slots at Washington Reagan and New York La 
Guardia.
    On a broader scale today, each major airline has strengths 
in specific regions of the country. However, none is overly 
dominant, and a competitive equilibrium exists. With their 
proposed mega-mergers, United and American have proposed to 
divide and conquer the entire U.S. market.
    Their MOU makes clear they intend to coordinate their 
businesses. The immediate result will be two giant carriers 
that jointly control nearly 50 percent of the U.S. airline 
market. They will each be 50 percent larger in terms of 
capacity, traffic, and revenues, than the next-largest non-
merged carrier, Delta, and three times as large as Continental.
    But that's not all. As my chairman has stated publicly on 
several occasions, the poor customer service which is 
characteristic of the current operations of those carriers 
seeking to merge will look glorious compared to the inevitable 
service disruptions and even worse customer service that will 
prevail in a post-merger environment.
    Nearly half of U.S. air-travel consumers will suffer while 
the new duopoly attempts to integrate the disparate operations 
and disgruntled employees of the separate airlines--no small 
task, especially for airlines currently unable to manage their 
own operations.
    We continue to believe that Continental may benefit from 
this consumer dissatisfaction in the short run, as we will 
offer a welcome alternative to the surly and unreliable service 
offered by the mega-carriers. However, the truth is, over the 
long-term, we simply will not be big enough fast enough.
    Our analysis indicates it would take nearly 20 years of 
rapid growth to offer a truly competitive alternative to the 
giant American and United. We won't be in enough markets with 
enough planes and enough slots with enough gates and facilities 
to put a dent in the market share of the mega-carriers. We 
simply won't be able to offer effective competition.
    The topic of gates and facilities brings me to the 
substance of the bill. On behalf of my colleagues at 
Continental, I want to commend Senators McCain, Hollings, 
Dorgan, and Grassley for introducing this legislation. 
Continental supports the thrust of this legislation as to 
mergers and acquisitions because it combines the aviation 
expertise of the DOT with the antitrust expertise of the DOJ.
    We are concerned that the legislation, as drafted, could 
result in the DOJ and the DOT coming to separate conclusions 
with regard to the same transaction, but we do agree the DOT 
ought to have an expanded role in the analysis of the proposed 
mergers and their impact on competition. The DOT has the 
information, knowledge, and experience needed and can and 
should be a significant contributor to the Hart-Scott-Rodino 
process.
    The legislation requires that DOT do an analysis of the 
impact on competition, concentration, and monopoly powers. That 
analysis, as well as a detailed and specific list of 
recommendations as to which gates and facilities at all 
airports, not just hub airports, ought to be divested in order 
to preserve competition should be provided to the DOJ for their 
use in conducting the Hart-Scott-Rodino review. And, as the 
legislation points out, DOT itself has the authority and the 
responsibility to manage assets under DOT's control to protect 
competition.
    This legislation is on the right track in setting up a 
standard, or a level of concentration, after which DOT will 
review the impact of constrained airports. While DOT should be 
directed to make specific recommendations to DOJ on 
divestitures of gates and slots at other airports, DOT should 
also be required to act decisively to protect competition in 
those areas uniquely managed by the Department of 
Transportation, such as slots, international route rights, and 
government-granted anti-trust immunity of international 
alliances.
    We would suggest strengthening DOT action in this arena by 
setting a slot concentration level that simply cannot be 
exceeded as a result of mega-merger, as well as a process to 
redistribute government slots and gates and facilities 
necessary to operate those slots.
    We would also suggest that, in addition to international 
route divestures, DOT be directed to determine whether the 
change in domestic dominance requires that DOT revoke the anti-
trust immunity it has previously given to the applicants to fix 
prices and coordinate schedules internationally.
    This merger bill is clearly headed in the right direction, 
and we look forward to working with the Committee on it.
    In closing, I would like to emphasize three points. First, 
I want to repeat our primary message: these proposed mega-
mergers are bad and should not be approved. Should these 
proposals be approved, however, United and American will each 
have such vast scale and scope that other U.S. airlines will be 
unable to offer effective competition to them. Other airlines, 
like Continental, will be forced to combine, be carved up, or 
be put out of business by the onslaught brought on by the 
United and American duopoly.
    Second, the McCain-Hollings merger provisions represent a 
good start at attacking the heart of the problem that will 
result from the proposed airline consolidation by strengthening 
DOT's role and taking clear aim at assets critical to 
competition.
    My last and final point is a simple one--time is of the 
essence. This is not the time to be lulled into a sense of 
complacency. Even though the April 2nd date has been delayed 
and several unions have made public their opposition to the 
proposed mergers, the time to act on legislation that impacts 
these mergers is now. The merger provisions of this bill 
require immediate attention and I hope, in this case, that the 
Committee will maintain the pace it has already begun.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hauenstein follows:]

  Prepared Statement of Glen W. Hauenstein, Senior Vice President for 
                    Scheduling, Continental Airlines

    Good morning, Mr. Chairman and Members of the Committee. I am Glen 
Hauenstein, Senior Vice President of Scheduling for Continental 
Airlines. It is a pleasure to be here representing the 54,300 employees 
of Continental.
    Thank you for your invitation to discuss the important topic of 
aviation industry consolidation, and, specifically, the proposed 
mergers between United Airlines, American Airlines, and US Airways, and 
the legislation which the esteemed Chairman and Ranking Member of this 
Committee, along with Senators Dorgan and Grassley, have proposed, the 
Aviation Competition Restoration Act. As the fifth largest airline in 
the United States, Continental has a unique perspective on the proposed 
mergers, the proposed legislation, and the effect these will have on 
the U.S. aviation system and on the passengers that utilize air travel 
every day.
    My goal today is to explain to the Committee why we at Continental 
believe that the proposed airline mergers should not be approved. These 
proposed mega-mergers would harm competition and consumers. Moreover, 
federal approval of these mergers today would be directly at odds with 
positions taken by the government just a few months ago when the 
Department of Justice successfully opposed a much smaller airline 
acquisition: Northwest's purchase of 51 percent of Continental's voting 
stock. While I know that it is ultimately the Department of Justice's 
decision as to the future of the proposed United and American mergers, 
it is important that everyone be fully briefed and that everyone 
understand the inevitable outcome if these mergers are permitted to 
occur. These mega-mergers will be bad for competition and will harm 
consumers, communities, and employees. For this reason, Continental 
applauds the actions by this Committee to seek ways to stop the mergers 
or, at the very least, lessen the detrimental impact on competition.
    Continental itself is an airline that emerged from a series of 
mergers in a very different era and a very different industry 
structure. Texas International, New York Air, PEOPLExpress and Frontier 
all merged into what is now Continental Airlines. As a result, 
Continental went through years of delivering poor service to customers, 
treating employees poorly and managing its finances poorly (including 
two bankruptcies). However, in 1995 Continental implemented a sensible 
plan and motivated its employees to turn things around, and over the 
past six years things have been very different at Continental. 
Continental is now recognized as the best major airline in the 
industry. In fact, over the past five years Continental has won more JD 
Power and Associates/Frequent Flyer Magazine awards for customer 
service (this past year taking top honors for both long and short haul 
flights) than any other airline in history. Just two months ago, 
Continental was named 2001 Airline of the Year by Air Transport World, 
the second time Continental's worldwide peers have recognized it in 
five years. Finally, I am especially proud of the fact that Continental 
has been ranked in the top half of the past three Fortune magazine 
lists of the 100 Best Places to Work in America, this year ranking in 
the top twenty. No other major airline, except Southwest, is even on 
the list. It is from this perspective that I want to give you my 
thoughts on what is currently facing the U.S. airline industry and on 
the legislation that has been proposed.

     I. THE AIRLINE INDUSTRY CURRENTLY IS CHARACTERIZED BY A STATE 
                       OF COMPETITIVE EQUILIBRIUM

    Allow me to describe the current environment within the U.S. 
airline industry. There is currently a competitive equilibrium among 
the major airlines in the United States. Major reviews of the airline 
industry since deregulation have concluded that the major network 
carriers provide effective competition. Air travel has skyrocketed 
since deregulation, airfares (adjusted for inflation) have declined and 
the current system of carriers has been able to offer a wide variety of 
competitive services. The levels of concentration in the airline 
industry since deregulation have remained relatively low for a network 
business. Even after the airline mergers of the 1980's, concentration 
in the airline industry has stayed below critical levels. While each 
major airline has strengths in specific regions of the country, none is 
truly strong in every U.S. region. Thus, national competition has been 
balanced and effective.
    The major carriers can be split into three distinct groups: very 
large national carriers (the ``Big Three''), medium national carriers, 
and small national carriers. United, American, and Delta make up the 
very large national carrier group. Each of these three airlines has 
over 16 percent of domestic system capacity and traffic. They are the 
largest three airlines in the world. They already have the largest 
frequent flyer programs and distribution channels, and they control 
more airport real estate than any other carrier. While the Big Three 
are considerably larger than the next group of carriers, they provide 
equilibrium for each other. Moreover, the medium national carriers can 
remain competitive because their scope and scale disadvantage is not so 
large that it cannot be at least partially overcome by offering 
superior service or lower prices compared to the Big Three.
    The medium national carrier group consists of Northwest, 
Continental, Southwest, and US Airways. Each of these carriers 
maintains between 7 percent and 9 percent of domestic capacity and 
traffic. These four airlines, while not as large as the Big Three, 
offer strong competition on a national basis and have found a niche in 
which they are able to compete. For example, US Airways holds many 
slots at the four federally slot-controlled airports and has a strong 
position in the important Northeast region of the country. Southwest 
competes based on price. Northwest has a strong North Central and Asia 
market position. Continental competes based on its internationally 
recognized superior customer service. Each medium sized carrier has 
found a way to be successful, even though they are about half the size 
of their larger counterparts.
    The final group, small national carriers, consists of TWA, America 
West, and Alaska. These carriers are each between 2.5 percent and 6 
percent of domestic capacity and traffic. While these carriers have 
found it more difficult to compete against the seven larger airlines, 
all but TWA have been successful in their regional focus. TWA has 
historically shown strength at its Midwest hub, while both America West 
and Alaska have shown similar strengths in the West.
    Finally, there are currently a number of successful new entrant/low 
cost/niche carriers that help in maintaining balance and competition in 
the airline industry. Airlines such as Midway, Midwest Express, Air 
Tran, and JetBlue all compete vigorously with larger carriers in a 
limited number of individual markets.

             II. THE PROPOSED MERGERS WILL HARM COMPETITION

    Against this backdrop of a competitive environment that is at 
equilibrium is the proposal of United and American to split up US 
Airways. This will create an unbalanced competitive environment in 
which the two resulting mega-carriers are significantly larger than 
their next largest competitors. Clearly United and American's plan is 
to reach detente, build a cartel, and carve up and dominate the U.S. 
air travel market. Look closely at the proposals; they include sharing 
the Northeast shuttle and sharing the Northeast region between the 
cartel members. Ultimately, the same way United and American have split 
Chicago O'Hare and London (Heathrow), they will split the rest of the 
U.S. (and maybe even split global aviation). The two mega-airlines have 
even incorporated a provision in their agreement that restricts 
American's ability to merge with other carriers and puts limits on 
American's growth. Should American grow faster than United wants it to, 
United would have the right to terminate the Northeast shuttle 
agreement the two airlines have proposed. United would also have the 
right to repurchase certain US Airways assets being divested to 
American and a right of first refusal for any assets American divests 
as part of a subsequent transaction. This provision is clearly a 
horizontal restraint between major competitors. It allows United to 
restrict American's future growth by acquisition, requires cooperation 
between United and American on future acquisitions, and has the effect 
of stabilizing the relative shares of the two largest airlines.
    After consolidation, United and American will each be of such vast 
scale and scope that other U.S. airlines will be unable to offer 
effective competition against them. The airline industry will change 
for the worse, adversely affecting competition, consumers, communities 
and employees. Other airlines will be forced to combine, be carved up, 
or be put out of business by the onslaught brought on by the United and 
American cartel.
    After the current wave of proposed consolidation, United and 
American will control nearly 50 percent of the U.S. airline industry 
and have twice as many hubs as Delta, Northwest, or Continental. The 
new United will serve one hundred more domestic destinations than its 
nearest competitor. Additionally, American and United will each become 
more than 50 percent larger in terms of capacity, traffic, and revenue 
than the next largest non-merged carrier (Delta), and they will be 
almost three times as large as Continental. After the mergers, United 
and American will also be the #1 and #2 airlines in the largest regions 
with the most revenue and business traffic, the Northeast and West 
regions. Via the mergers, United and American will have created the 
only two truly national networks. While other airlines may continue to 
maintain some regional presence, their ability to compete nationwide 
will be lost. Consummation of these mergers will allow United and 
American to ensure that they have eliminated competition on the 
national (and even on the global) stage. In conjunction with their 
national presence, the two mega-carriers will have frequent flyer 
loyalty programs two or three times as large as their nearest 
competitors and distribution and marketing systems that no other 
airline will be able to match. The combined effect of this will be to 
produce a quantum shift in the distribution system that squeezes out 
other carriers in a manner that has never occurred before.
    Finally, the two airlines will operate almost 80 percent of all 
slots at the four federally slot-controlled airports (Washington 
Reagan, New York LaGuardia, New York JFK, and Chicago O'Hare). At 
Washington Reagan, where slot restrictions are expected to remain in 
place in perpetuity, and at New York LaGuardia, where the FAA has 
already stopped expansion and slot restrictions are likely to be 
reinstated, the two airlines will control over 65 percent of all slots. 
By way of comparison, Continental operates only 3 percent of all slots 
at the four airports, with less than 5 percent of the slots at 
Washington Reagan and New York LaGuardia.
    In order to compete with the two mega-carriers, other airlines will 
need to grow to at least a scale that is near that of the market 
leaders. Independent growth to the scale of United or American will be 
nearly impossible. An airline like Continental, with just over 8 
percent of the current domestic capacity, would need nearly twenty 
years to grow to the size of United and American even if Continental 
could grow at a very aggressive average annual rate of 10 percent (2-3 
times expected GDP growth) and if the two mega-carriers grew at 
expected GDP levels of about 4 percent. By comparison, over the past 
six years Continental has only been able to grow at an average annual 
rate of just under 5 percent. Hyper-growth of 10 percent annually for 
Continental is not realistic over the long term.
    Slot restrictions at Washington Reagan, New York LaGuardia, New 
York JFK, and Chicago O'Hare limit growth in major eastern markets. Not 
only is access to these airports limited, but United and American will 
hold the keys with their combined 80 percent share of the slots. 
Additionally, the limitations on the supply of capital, mechanics, 
pilots, and aircraft, and limitations on the capacity of the air 
traffic control system, will also impede the ability of airlines to 
grow at such a hyper-rate for extended periods. More importantly, 
however, Continental is concerned that faster than historical growth 
will limit its ability to do what it does best, providing passengers 
with quality customer service. With hyper-growth, an airline runs a 
serious risk of spoiling its product, something Continental will not 
do.
    The destruction of the competitive equilibrium that is the obvious 
and direct result of these proposed mergers means that independent 
growth to compete with United and American is virtually impossible. 
Airlines will be left with no choice but to merge in order to compete 
effectively with the two mega-carriers. Additional airline mergers will 
be required to restore a competitive playing field to an airline 
industry that would otherwise be split by the United and American 
cartel.

    III. THE PROPOSED MERGERS WILL HARM CONSUMERS, COMMUNITIES, AND 
                               EMPLOYEES

    The proposed mergers are clearly bad for consumers. The labor and 
service disruptions coupled with reduced customer service brought on by 
the integration of the four merging airline systems will, in the short 
run, benefit Continental as we attract passengers looking to escape the 
uncertainty and problems they will experience with the mega-carriers. 
The service disruptions and customer service complaints of the past few 
years are nothing compared to what is coming if the proposed mergers 
are approved. Think back over the past few years. American has been 
through pilot and flight attendant slowdowns. United also has been 
through work slowdowns which created some of the worst operational and 
customer service problems this industry has ever known, and labor 
unrest is the story of 2001, aside from the news generated by the 
proposed mega-mergers. United ranked last in Department of 
Transportation on-time performance statistics seven times this past 
year, with an average quarterly on-time performance (in the second and 
third quarters) of barely 50 percent. Continental, by way of 
comparison, ranked in the top three each quarter of the year. 
Continental's on-time performance last summer was better than previous 
years, and in December we beat our closest competitor by almost seven 
percentage points in on-time performance. Continental was also the #1 
airline in on-time performance for the entire year 2000, out of all 
major network carriers. And Continental is off to a great start in 2001 
as well, finishing #2 in January and #1 in February. With regard to 
baggage performance, United again had poor performance, finishing each 
quarter in ninth or tenth place, with statistics at least 25 percent 
worse than the industry average. And regarding customer complaints, 
United's record has been so bad that by the third quarter of last year, 
United's number of complaints per 100,000 enplanements was more than 
double the industry average. Now think about the same service 
disruptions and problems aggravated by the incredibly difficult task of 
integrating four systems, four aircraft fleets, and most importantly 
four distinct groups of fragmented and hostile workforces into two 
airlines. While Continental stands to gain in the short run because we 
offer an attractive alternative to surly and unreliable service, we 
will simply not be big enough to offer a truly competitive alternative 
in the long run. The vast majority of passengers will have no choice 
but to be forced to suffer whatever service, or perhaps more 
accurately, lack of service, United or American may offer.
    The proposed mergers are also bad for communities. According to the 
General Accounting Office, in its report ``Aviation Competition, Issues 
Related to the Proposed United Airlines-US Airways Merger'', released 
December 2000, 290 markets will have reduced competition or have 
competition eliminated completely because of only this one merger. The 
report goes on to state that ``About 16 million passengers traveled in 
those 290 markets in 1999 . . .'' In a hearing before this very 
Committee, the GAO reported that ``the United and American proposals 
would each reduce competition in approximately 300 markets, with each 
affecting over 10 million passengers.'' As a point of comparison, the 
Northwest/Continental transaction opposed by the Department of Justice 
entailed reduced competition in only 63 markets affecting 2 million 
passengers.
    Communities not only will be affected by a loss of competition and 
deteriorating service, but also could face service cutbacks and route 
elimination as United and American rationalize their systems. By 
merging all of the routes each carrier serves from their pre- and post-
merger hubs, it is highly likely routes will be eliminated to reduce 
overlap. While United has given a ``commitment'' that it will not 
eliminate routes, this ``commitment'' is for only two years, does not 
hold for American, and does not extend to reductions of service on 
routes short of route elimination.
    It is clear that the proposed merger will be bad for consumers and 
bad for communities. The mergers will also be bad for employees. Unlike 
Continental, which prides itself on its excellent management-labor 
relationships and on the fact that it is a great place to work, history 
has shown that both United and American have different views on how 
they treat employees. The ramifications of poor labor relations that we 
have felt over the past few years will be amplified and continue for 
years to come. Significant labor integration issues have accompanied 
virtually every major airline merger in the history of our industry, 
and these proposed mergers would not be exceptions to this rule. As you 
know, our industry is currently facing significant labor unrest, 
including problems at the four largest domestic airlines (United, 
American, Delta, and Northwest). The risk of compounding this turmoil 
with the labor integration issues of a consolidating industry is 
massive, and the problems faced by passengers every day are sure to be 
greatly compounded.

                    IV. US AIRWAYS HAS OTHER OPTIONS

    While it is clear that US Airways will lose a significant amount of 
money this quarter, and possibly this year, it is simply unclear that 
any merger is necessary, as US Airways has one of the richest pools of 
valuable assets in the industry. Their cache of lucrative slots and 
their Northeast strength cannot be matched. If Continental was able to 
turn itself around (with its more limited assets yet intensely focused 
management team) and become the financial and commercial success it is 
today, there is no reason that US Airways, with the right incentives 
and appropriate management, utilizing US Airways' crown jewels of 
assets, cannot do the same. But if US Airways is determined to sell 
itself, allowing the airline to be split by United and American is not 
the only option. Continental made an offer for US Airways' Washington 
Reagan position that was for a much higher price than the current DC 
Air/American deal. Continental's offer was turned down, not based on 
the economics, but based on the fact that it would put a crimp in the 
cartel's plan. Continental is also very interested in the significant 
slot and facility holdings of US Airways in New York. These assets were 
never even offered to anyone except American. Other carriers have also 
expressed interest in significant portions of US Airways assets, 
although it is unclear why the carrier feels that it has no choice but 
to sell itself.
    Reports indicate that US Airways may be a failing concern, or soon 
will be, much in the same way that TWA is being seen as a failing 
concern. While it is clear that TWA has many problems and probably 
could not survive on its own, it is equally clear that this is not the 
case for US Airways. First, US Airways is growing. Its revenue base, 
year over year (2000 versus 1999) has grown by nearly 8 percent, as has 
the number of aircraft the airline has in its fleet. System capacity 
for US Airways (as defined by the available seat miles it offers) has 
grown by nearly 12 percent. While earnings for the airline have 
declined (as they have for most U.S. airlines), high fuel prices have 
been the key driver of reduced profits. US Airways' cash balance has 
grown to over $1.2 billion, more money than Continental currently has 
on hand, and clearly a sustainable amount. Finally, US Airways has 
spent nearly $2 billion over the past three years on a stock buyback 
program. Companies that are having serious financial problems and that 
are concerned about their long-term future do not spend their cash 
buying back their own stock. All of this points to the reality that the 
``financial concerns'' about US Airways are myth, and certainly not 
reality.

             V. THE PROPOSED MERGERS SHOULD BE DISAPPROVED

    So what is the answer to the proposed mergers that will create two 
mega-carriers that have the ability to dominate the market, reduce or 
eliminate competition and are bad for all constituencies? JUST SAY NO!
    The conspiracy by United and American to reach detente, create a 
duopoly, and control the U.S. domestic market (thereby tightening their 
stranglehold on foreign markets as well), if implemented, will be so 
devastating that it should be disapproved outright. The government 
should stop trying to find fixes to mergers that should not be approved 
in the first place. And the government needs to clearly understand that 
it cannot fix, after the fact, the problems these mergers will create.
    It is important to note that the Department of Justice prevailed in 
its antitrust challenge of Northwest's proposed acquisition of 14 
percent of Continental's stock (representing a little more than 50 
percent of Continental's voting rights). This case was brought to trial 
notwithstanding the fact that Northwest signed a governance agreement 
limiting its control of Continental for at least six years. The 
government brought the case because it believed that Northwest's 
partial ownership would lessen competition primarily on routes between 
the six Northwest and Continental mainland U.S. hubs. Today we are 
faced with the prospect of a combined United/US Airways (10 hubs) and 
American/US Airways (7 hubs). Consolidation of these carriers would 
give the combined firms more than 90 percent of the non-stop traffic on 
the routes between their respective hubs. Moreover, unlike the 
Continental/Northwest transaction in which Continental and Northwest 
would have continued to compete, United and American will actually have 
eliminated their primary competition between those important hubs and 
have agreed not to compete with one another on some of the most 
important routes in the world (the Northeast shuttle markets).
    While the facts should compel the government to reject the proposed 
acquisitions, I am not confident that the right thing will be done to 
protect airline consumers and competition from the United and American 
duopoly. Because of my skepticism, I must impress upon you that if, 
against all of the best wisdom, United and American are allowed to move 
forward with their plans, further airline consolidation is inevitable 
and will be required to assure effective competition. The U.S. aviation 
industry will require at least three large national network carriers to 
recreate the equilibrium that we currently have and that will be lost 
if United and American are allowed to complete their proposed 
transactions. Only through the smaller airlines' ability to grow and 
their ability to further consolidate will competition be possible. 
Consolidation will be required because, absent legislation to make sure 
that the assets necessary to compete are available, there will be no 
other choices.
    Congress, the Department of Transportation, and the Department of 
Justice must together ensure that appropriate slots, gates, and other 
facilities at slot and capacity constrained airports are made available 
to smaller network competitors. The legislation offered by Senators 
McCain, Hollings, Dorgan, and Grassley, the ``Aviation Competition 
Restoration Act'', brings together many of the elements necessary to 
prevent mega-mergers from wiping out the competition.
    Continental supports the thrust of this legislation as to mergers 
and acquisitions because it combines the aviation expertise of the 
Department of Transportation with the antitrust expertise of the 
Department of Justice. Continental agrees that the Department of 
Transportation must play a more active role in the analysis of the 
proposed mergers and their impact on competition and consumers. We are 
encouraged that Secretary Mineta has made a commitment to begin this 
process. The Department of Transportation has the information, 
knowledge, and experience needed and can be a worthwhile contributor to 
the Hart-Scott-Rodino process by providing an analysis of the impact of 
the proposed mergers on competition, and whether or not the mergers 
would result in unreasonable industry concentration, excessive market 
domination, or monopoly powers. The Department of Transportation can 
and should provide specific recommendations for needed asset 
divestitures at all airports impacted by mergers. Additionally, the 
Department of Transportation must act aggressively in areas under its 
unique jurisdiction - particularly in those areas managed by the 
Department of Transportation, such as the federally created high 
density rule slots, international route rights, and antitrust immunity 
for international alliances. Where the Department of Transportation 
finds that, in the context of mergers, these Department of 
Transportation managed assets can and will be used to reduce 
competition, it must act to protect and defend consumers. Many of these 
important elements are contained in the proposed legislation.
    Continental suggests, however, that the legislation could be 
strengthened by the addition of specific requirements for the 
redistribution of federally limited slots and the gates and facilities 
necessary to operate these slots, when a mega-merger causes the 
concentration of slots to become so high that it simply will not be 
possible to adequately compete. We are also concerned that, as drafted, 
the merger and acquisition section of the proposed legislation would 
not only require two separate reviews by two different government 
departments, but that those two departments could come to different and 
opposite conclusions. Much as we would like to see the proposed mega-
mergers disapproved, we believe that each of the two departments should 
retain primary jurisdiction and its unique areas of expertise. The 
Department of Justice should continue to be the final arbiter of the 
antitrust issues, but its should do so taking into account the analysis 
required under this legislation by the Department of Transportation. 
The Department of Transportation should be directed to provide specific 
recommendations for asset divestitures necessary to protect 
competition. This means that the Department of Transportation should be 
directed to review all airports (not just hub airports) that are 
impacted by the mergers to determine whether or not facilities are 
reasonably available. And in this instance, let me say that special 
attention must be given to airports such as New York LaGuardia, 
Washington Reagan, Chicago O'Hare, Boston Logan, Los Angeles 
International, and San Francisco International, just to name a few! 
This specific analysis and recommendation should be provided to the 
Department of Justice for use in their deliberations under Hart-Scott-
Rodino.
    As to the Department of Transportation, it should have primacy and 
be required to act in areas under its control and expertise. Therefore, 
the legislation could be strengthened by setting out the concentration 
level that would trigger specific and required actions by the 
Department of Transportation in the areas of slots, international 
routes, and antitrust immunity for international alliances.
    There is no doubt that where there are mergers which result in 
particularly high levels of system capacity concentration, such as the 
proposed United and American mega-mergers, there will have to be 
divestiture of assets at high density airports, most importantly 
Washington Reagan and New York LaGuardia, airports where federal slot 
controls are not likely to ever be removed. Slots at these airports 
should be reallocated to ensure that other carriers, like Continental, 
have a reasonable chance to compete. In addition, gates, ticket 
counters, and other required facilities should accompany the 
reallocation of slots so as to make sure it is possible for the 
receiving airline to use the slots.
    As United and American strengthen their domestic positions, the 
ability of other U.S. carriers to compete internationally will be 
reduced. For example, United and American are already the only two 
airlines with the right under the U.S.-U.K. bilateral to fly into 
London Heathrow airport, the most important business airport in Europe. 
United and American's growing control of the domestic market will make 
this already huge disadvantage to Continental and other U.S. airlines 
even greater. The U.S. should renew its efforts to negotiate more 
access to London Heathrow for competitors of the mega-carriers or to 
negotiate to substitute other carriers at London Heathrow for the two 
mega-carriers. Additionally, United and American have a large array of 
foreign partners with which they have alliances, making their control 
of world air transport even greater. The ability of small network 
carriers to offer foreign partners enough scale and scope in the U.S. 
is limited, and it is clear that given a choice of partnering with a 
member of the duopoly or partnering with a smaller carrier, foreign 
airlines will choose the duopoly. As antitrust immunity only 
exacerbates this problem, I call for a serious re-evaluation and 
revocation of the antitrust immunity already granted to the mega-
carriers and their foreign partners.

              VI. HUBS PROVIDE IMPORTANT CONSUMER BENEFITS

    Last year, Congress required all airports to develop and implement 
a plan to guarantee access to the facilities necessary to preserve and 
protect competition. Many airports have moved quickly to address the 
capacity issues of concern to this Committee and should be commended 
for their work in this area. Certainly, the Department of 
Transportation should survey all airports to determine if there are 
continued capacity constraints and whether or not the airport has a 
plan in place to deal with the constraints. The Department of 
Transportation should report back to the Congress as to the progress 
that has taken place and outline those airports where improvements are 
still needed. If the airports are not meeting their obligations under 
Air-21, the Department of Transportation should withhold federal 
funding for those airports.
    However, Continental is concerned that any action requiring the 
Department of Transportation to confiscate assets and force divestiture 
in the absence of a proposed mega-merger could have disastrous 
unintended consequences. Consumers could be harmed by major reductions 
in airline service, loss of employment for airline employees, and 
reductions in service to the very small and medium sized communities 
the Congress tried to assist last year with the passage of the Air-21 
legislation.
    Airline hubs do provide important benefits for consumers and allow 
more passengers more options every day. Hubs allow airlines to serve 
many more destinations than they would otherwise be able to and allow 
airlines to create connections across the world. This benefits 
passengers who have more options than they would have if connecting 
complexes were not available. Hub airports and consumers could be 
devastated if the non-merger elements of the proposed legislation are 
implemented, as airlines are forced to reduce schedules and as the 
communities these airports serve are faced with a loss of nonstop 
service. Airline employees could see their opportunities dwindle as the 
airlines are forced to shrink to meet legislative requirements. And 
small and medium sized communities will be the first to see a loss of 
service, as they are usually the thinnest routes an airline operates 
and therefore would be the first to lose service.
    That having been said, Continental understands the need for a study 
on constraints at airports, but would urge the Committee to refrain 
from further action, at least until the Department of Transportation 
study is completed and Congress has had a chance to review the Air-21 
provisions already enacted in this area. This, however, must be 
contrasted with the actions that must be taken quickly to provide 
competition in the face of the proposed mega-mergers. Tying the hands 
of those remaining independent carriers who are fighting for their 
lives will only exacerbate the problem.

                            VII. CONCLUSION

    Mr. Chairman, the time has come for the Government to put a stop to 
the mega-mergers being proposed by the two largest airlines in the 
world. I hope that I have helped to explain to you, this Committee, 
your constituents, and all Americans the dangers that face the U.S. 
aviation industry should the proposed United/American/US Airways 
mergers be approved.
    While I know that it is not ultimately this Committee's decision as 
to whether the mega-mergers are allowed to proceed, it is within this 
Committee's power to ensure that all of the facts are available and 
that the consequences are known. This Committee has also taken an 
important first step in discussing the legislative options available, 
in a small way, to help ensure that competition remains if the mergers 
are incorrectly allowed to proceed. Continental urges this Committee 
and the Congress to act quickly, as time is running out. I must also 
remind you that if these two mega-mergers are permitted, other airlines 
will be forced to merge, and those mergers will be necessary to restore 
effective competition. Therefore, if the Department of Justice approves 
the pending mega-mergers, others will follow and must be approved to 
permit effective competition.
    Mr. Chairman and members of the Committee, I thank you for giving 
me the opportunity to discuss these very important issues with you and 
for your attention. I would now be pleased to answer any questions that 
you may have.

    The Chairman. Thank you very much.
    Mr. Neeleman, welcome.

 STATEMENT OF DAVID NEELEMAN, CHIEF EXECUTIVE OFFICER, JetBlue 
                            AIRWAYS

    Mr. Neeleman. Thank you, Chairman McCain.
    I appreciate the opportunity to come and speak to you 
today, and I think it's certainly apropos for this legislation, 
because JetBlue is nothing more than a living, breathing 
example of a company, when given access and given the chance to 
succeed, is--and we never like to count our chickens before 
they're hatched--but is succeeding. And we're succeeding--we 
had quite a first year and added 11 brand new jets with 11 new 
cities, flew 1.1 million passengers, reached profitability 
after 6 months, and have had five consecutive months of 
profitability--in the last 5 months.
    Senator Lott. Mr. Neeleman--Mr. Chairman, if you'd yield--
I'm not that familiar with your company. Where do you--what 
area do you serve?
    Mr. Neeleman. We serve--we're based out of New York, in 
Queens, and we serve Upstate New York, 13 flights a day--
Buffalo, Rochester--we'll begin Syracuse, also serve 
Burlington, Vermont, and we serve five cities in Florida, as 
well as--we serve cities--Oakland and Ontario, California, 
Seattle, Denver.
    And so we're basically adding a plane every month, and we 
have--I think the reason that we're a living, breathing example 
is that we were granted, under the 1994 FAA re-authorization, 
75 takeoff and landing slot exemptions at Kennedy Airport, 
which was a slot-restricted airport. It was an airport that had 
really--had gone away from domestic air service, and we saw 
there was a need for the people in the area there, as well as 
people in Upstate New York. And so we went to the DOT and they 
granted us the slots, and we combined new planes, great 
capitalization, a fantastic management team, and a great 
employee group, and are currently, today, providing great 
customer service to our customers.
    And that--I think that's the number one factor in----
    The Chairman. You might mention, for the benefit of Senator 
Lott and others, how you equip your airplanes.
    Mr. Neeleman. Well, I think--we looked at air travel, and 
it hadn't changed in the last 40 years, and so we came up with 
a couple of interesting ideas. And we put, in the back of every 
single seat, live TV--24 channels of live TV and leather seats.
    And so what we found is, by using innovation, using 
technology, using high utilization of our assets, we found a 
very loyal customer base that loves flying on JetBlue. They 
call it the ``JetBlue experience.''
    The Chairman. You have new airplanes?
    Mr. Neeleman. And we have brand new airplanes, as well.
    And that brings me to the reason that we're here today, and 
it is to speak in favor of S. 415. You know, we have had 
success, like I said, bringing--there was no jet service from 
Kennedy Airport to Buffalo, Rochester, Syracuse, Burlington, 
Vermont, Fort Meyers, Oakland, and Ontario--and we have many 
other cities we're going start the first jet service to this 
year. But our biggest concern is access to other cities.
    As we start working down the coast to the Carolinas, with 
Senator Hollings, to Virginia--there are a lot of cities there 
that have pockets of pain--it is very difficult for us to be 
able to serve these medium-sized markets unless we have feed.
    We cannot gain access to Boston, for example. There are no 
gates available in Boston for us. And, ironically enough, as 
we've studied the airport and looked at the gate utilization, 
if we could help reschedule the gates, we could find an 
abundance of gates. But that's not something that's in the 
cards for us at this time.
    The Chairman. What you're saying is the major airlines 
underutilize their gates.
    Mr. Neeleman. Yes, they do, and I think that's pretty well 
proven, that they use them--there was examples of these hubs 
where you have 87 planes land, and they're 35 minutes, then 45 
minutes, then they all take off, and then they're vacant for 4 
hours and----
    But I think, for the most part, particularly in a city like 
Boston, that is in a major hub, there are gates available, and 
we need access to those gates. Without access, it would be very 
difficult for us to serve the medium-sized markets to create, 
really, a critical mass to be able to fly enough passengers to 
the Virginia's and to the Carolinas, where we would like to 
serve but are having difficulty doing because of access to 
Boston.
    We also don't have access to Washington National with slots 
and/or gates. And if we could do that, we could also serve more 
cities to the north of New York, as well.
    And so I think it's really critically important, as we 
contemplate these mergers and as we look at what we can do to 
foster competition--you know, I'm reminded of a statement that 
I used last time I testified here in Washington last Spring. 
And it was a comment by the president of the United Airlines, 
Ronno Dutta. And he said that he sees the day where there will 
be three or four finished networks, where there will be these 
carriers, and you'll be able to go from anywhere to anywhere. 
But he also sees the day there will be a dozen or so thriving 
regional carriers that will be able to provide service for low 
fares and good service.
    And we agree with him. We just need to make sure that--when 
the dust settles from these mergers, that we have access. We've 
proven that if we have access, we will succeed.
    And we are strongly in favor of S. 415, because we think 
that the major purpose of this bill is to grant us access. And 
we ask for the Senate support on that and thank Chairman McCain 
for his leadership in making sure that this bill is being heard 
today.
    Thank you very much.
    [The prepared statement of Mr. Neeleman follows:]

    Prepared Statement of David Neeleman, Chief Executive Officer, 
                            JetBlue Airways

    Mr. Chairman, Ranking Member Hollings and other distinguished 
members:
    Thank you for the opportunity to again testify before this 
Committee. Since I was here last June, much in the industry has 
changed, and unfortunately for the American consumer, much has stayed 
the same.
    This morning I will briefly discuss the changes underway in the 
U.S. aviation industry and some of the issues that these proposed 
changes raise for the American consumer and smaller carriers.
    JetBlue Airways is New York's low fare hometown airline.
    We have been flying from New York City, the nation's largest travel 
market, for more than a year and we have achieved many successes. From 
our humble start last February with two new jets flying between 
Buffalo, JFK and Fort Lauderdale, JetBlue now has eleven new jets 
serving twelve cities with 64 daily flights.
    Although JetBlue is a low fare carrier with fares up to 79 percent 
lower than our competitors, we achieved our first profit after only six 
months of operating and reported our first profitable quarter at the 
end of last year. We are on track to continue this financial growth. In 
our first year JetBlue operated more than 10,000 flights and achieved a 
99.2 percent completion factor with an on-time performance of 79 
percent, compared to an on-time average of 72 percent for the ten 
largest carriers. During this inaugural year, JetBlue carried more than 
1.1 million customers and achieved a system-wide load factor of 73 
percent. Finally, after only ten months, we had flown more than $100 
million in revenue.
    Our financial performance is a direct result of our dedicated crew 
of 1,400 and our relentless drive to keep our costs down. We achieve 
low costs through an industry-leading use of our aircraft, nearly 14 
hours per day, and an unprecedented use of technology. JetBlue is proud 
to be the only carrier in America with a fully electronic FAA manual 
system, increasing safety and efficiency by enabling our pilots to use 
their standard issue laptop computer to log on and access the most up 
to date manuals prior to each and every flight they operate.
    While our operating statistics are all far above the industry 
average, most important for us is the experience, the JetBlue 
Experience, we deliver to our customers. With low fares, leather seats, 
free in-seat satellite TV with 24 channels and our special brand of 
friendly service, we only had ten complaints lodged against us with the 
DOT in our first year of operations, translating to a rate of .66 
complaints per 100,000 enplanements, putting JetBlue far ahead every 
major carrier save Southwest, with whom we were tied for the lead. 
Further, DOT reports our mishandled bag rate was nearly half that of 
the major carriers' average rate.
    Senators, I suspect that if the six largest carriers in America 
each offered everyday low fares on all of their routes no matter when a 
passenger reserved their trip or whether they stayed over a Saturday 
night, offered comfortable leather seating with plenty of legroom, had 
very gracious and friendly staff from check-in to the in-flight portion 
of the trip, brought you your bags on time and operated flights 
regularly and always in an on-time manner, many of you and most 
Americans would have very little concern with the pending consolidation 
of the airline industry.
    Unfortunately, the reality is that today's airline industry is far 
from this picture I have just described. Rather, today's airline 
industry is perceived as late, uncaring, uncomfortable and expensive. 
Thus, the thought of strengthening the power and market domination of 
carriers with this reputation is frightening for many.
    I submit that the answer to many of the problems plaguing today's 
industry is not a re-regulation of the industry or laws governing how 
big an employee's smile ought to be, but rather the only thing that has 
ever altered industry behavior in America: the capitalistic cure known 
as competition.
    JetBlue, and others, offer competition. We offer choices. 
Oftentimes, and in JetBlue's case, these competitive alternatives come 
with low fares and more reliable service.
    Yet, if the aviation business cycle is leading us to three or four 
major carriers dominating the domestic airline landscape, the 
government should not be opposed to this consolidation per se, but 
rather be determined to let the marketplace work itself out through 
vigorous and fair competition. The role of government, however, should 
be to ensure that smaller carriers have the opportunity to compete on a 
level playing field, in particular at constrained facilities where it 
matters most.
    Today, JetBlue stands ready to play its role as a vibrant 
competitor, but finds that it is being shut out of key airports and 
thus being denied the opportunity to compete fairly.
    Several of you and your colleagues have introduced legislation 
addressing important issues from how passengers are treated to imposing 
a moratorium on mergers to insuring access to key facilities in a post-
consolidation era.
    JetBlue strongly supports S. 414, the Aviation Competition 
Restoration Act, introduced by Senators Hollings and McCain. This bill, 
particularly Section 4, requires the Secretary to investigate the use 
of gates and facilities at the 35 largest airports and determine 
whether they are being fully utilized, whether they are available for 
competitors and whether they should be reassigned to non-dominant 
carriers in order to improve competition. Following such an 
investigation, the Secretary would be required to make such facilities 
available to an applicant airline on a fair, reasonable and 
nondiscriminatory basis. While other carriers have had difficulty 
obtaining access to numerous airports, JetBlue has been effectively 
locked out of two airports important to New Yorkers, both Boston's 
Logan and Washington's Reagan National.
    Of the top 1,000 passenger markets in the United States, the 
Boston-New York market is the third largest and the Washington-New York 
market is the fifth largest. These two short-haul markets, while very 
large today, sustain their strength despite the high average one-way 
fare of more 60 cents per mile in the Washington market and nearly 80 
cents per mile in the Boston market, due to the total absence of any 
low far service. Imagine how much commerce and leisure traffic would be 
stimulated with JetBlue's everyday low fares to and from New York's 
JFK. In fact, fifteen years ago when there was low fare competition 
these two markets had two million more passengers than they do now.
    Today, there simply is not a level playing field and thus, clearly 
viable new entrant carriers like JetBlue cannot enter these critical 
markets. In Boston, we are told there are no gates. In Washington, we 
are told there are no slots.
    If the Department of Justice, after its deliberations, determines 
the pending deals present no violations from an antitrust perspective, 
then it is up to the Department of Transportation to review the 
competitive impacts of the proposals. S. 415 guarantees that the 
Secretary of Transportation will in fact investigate, and upon 
application, remedy any lessening of competition on non-discriminatory 
terms. JetBlue certainly expects that the bill's intent in using the 
term ``non-discriminatory'' is to make sure non-dominant carriers pay 
no more for facilities than the carrier that presently has them paid 
for such facilities.
    This key provision of S. 415 is precisely why it the bill is so 
important. It allows the marketplace to work itself out fairly, with no 
special treatment for the largest carriers or the smallest carriers. If 
a large carrier paid X amount for a gate, so too should the smallest 
carrier that obtains the gate under this bill. If a large carrier 
received a publicly owned landing or take-off slot at no cost, so too 
should a smaller carrier under S. 415.
    In this light, JetBlue has strong reservations about one key 
provision of the bill that reportedly will be introduced by Senators 
DeWine and Kohl. In their bill, carriers with more than 15 percent of 
domestic available seat miles would be prohibited from owning or 
operating more than 20 percent of the slots at LaGuardia or National 
Airport in any two-hour period. While this is a positive step in the 
right direction as it recognizes the unacceptable level of dominance at 
key facilities, their proposed solution to preventing such 
concentration appears not to be aimed at ensuring competitive access by 
smaller, low fare carriers but rather to ensure parity among the three 
major carriers not involved in the pending mergers. Their bill would 
redistribute the slots through a blind auction where the richest 
bidders would surely obtain the slots, thus maintaining the status quo 
of limited or no new, low fare competition. Such high bidding, as would 
likely continue under the DeWine-Kohl bill, has been widely used to 
create the present system and effectively block new entry. This, as the 
General Accounting Office and Department of Transportation have 
observed, is the key reason that the 1986 buy-sell rule has failed to 
achieve its goal of fostering competition by new entrants in key 
markets.
    As we were not in existence in 1986 when slots were given to 
carriers at no cost, JetBlue's very existence is in part a result of 
the 1994 FAA Reauthorization law which created slot exemptions at all 
High Density Rule airports, save Washington's National. JetBlue applied 
for and received the right to use, or lose, up to 75 slot exemptions at 
JFK during that airports' five-hour slot period by the end of a three-
year term. Senators, using these slots we are.
    While we cannot, by law, sell, trade, lease or collateralize these 
public assets as other carriers can and do, JetBlue has used its slots 
to bring low fares to markets with either no service, high fare service 
or both. In just our first year, JetBlue introduced the only nonstop 
jet service between New York's JFK and both Rochester and Buffalo, New 
York, with Syracuse to begin this Spring, Burlington, Vermont, Ontario 
and Oakland, California and Fort Meyers, Florida. All of our slot 
exemptions have brought unprecedented levels of fare reductions and 
traffic stimulation to each market we serve.
    JetBlue's slot exemptions represent an initiative taken by Congress 
and implemented by the Department of Transportation, which has proven 
that a level playing field for new competitors can have a dramatic 
impact. Senators, S. 415 also represents a moderate and measured step 
to letting the marketplace pursue its natural course while ensuring 
that, especially in key markets, new competitors, if interested, are 
assured they can enter and compete.
    I will conclude in the manner I did last Spring when I reminded the 
Committee of a prediction made by the President of United Airlines: Ron 
Dutta envisioned the day when only a few large carriers with finished 
networks would exist in the U.S. along side a dozen or so regional 
carriers. His prediction, in part, is proving true in a quicker manner 
than I suspect he even realized.
    If this Congress watches as the Government approves the pending 
consolidation that creates these finished network carriers, and does 
nothing to ensure that the other regional carriers are able to compete 
fairly, then the worst fears about the pending deals which I alluded to 
earlier will certainly materialize.
    Thank you for the opportunity to come before this Committee.

    The Chairman. Thank you, Mr. Neeleman, and congratulations.
    Mr. Kahan.

 STATEMENT OF MARK KAHAN, EXECUTIVE VICE PRESIDENT AND GENERAL 
                   COUNSEL, SPIRIT AIR LINES

    Mr. Kahan. Thank you, Mr. Chairman. It has been, I think--
it's been five times that I've been before you, and I always 
begin my oral remarks by reminding myself, if nobody else, that 
I came to Washington 24 years ago with Fred Kahn, my mentor, to 
deregulate the airline industry. It is the--certainly, it is 
the professional capstone of my career, and it's something that 
I'm very proud of, very concerned about. I think that almost 
everybody agrees that we are at a critical moment in the 
process of deregulation. And I'm, as always, honored to be here 
to speak to the Committee.
    Before I get into the meat of the problems, I would want to 
spend just a minute or so just going over a few good signs, 
because I think that this hearing shouldn't be all gloom. There 
are some good things. The year 2000 had AIR-21 and some other 
things. The idea that a carrier would get 75 slots to begin its 
new entry was really unthinkable 5 years ago. In fact, I 
remember filing a wonderful application--well-supported 
application for 10 slots to fly between Detroit City Airport 
and New York, and it was denied by the Department of 
Transportation in a totally different climate. And I think the 
Committee's efforts have been instrumental in changing that 
climate.
    Likewise, in 2000, our two gates at Detroit, after 10 years 
wait, finally became operational, and our 500,000 passengers 
that we serviced last year are beginning to get the service 
they deserve. Likewise, as a direct result of this Committee's 
efforts, we began service to Chicago in late 2000. I'm pleased 
to say that by January, with a limited number of slots, we 
carried 30,000 passengers from O'Hare.
    Now, we're at the international terminal--there are times 
of the day when we can't operate--so we wouldn't be able to 
compete with the business carriers, even if we wanted to. And 
we pay customs and immigrations fees for passengers who are 
flying from places like Fort Lauderdale and Myrtle Beach to and 
from Chicago. So our situation is not perfect, but I think that 
the Committee and, you, Mr. Chairman, in terms of our service 
to DCA, that just wouldn't have been possible without your 
efforts. So we, at Spirit, think there has been some progress 
made, and we think the Committee should be commended for its 
efforts.
    Of course, if all were rosy, we would not be sitting here 
today. With the proposed mergers before us, the long-predicted 
concentration we've discussed so many times of the country's 
merger airlines into, at most, three entities covering 80 
percent or more of the national market has moved from a 
reasonable prediction to a substantial probability.
    Now, I've always believed the goal of competition policy, 
whether expressed through legislation or through the executive 
branch, should always be to protect and promote competition, 
not individual competitors. If a company, like TWA, has been 
through two bankruptcies and has been unable to earn a profit 
for a decade or longer, public policy should not prevent it 
from exiting the market.
    Likewise, it's not really unreasonable for the management 
of a high-cost carrier to look for a way out in the interest of 
its shareholders and employees when it's losing market share.
    So there's nothing personal about this. I want to focus in 
on some of the policies, some of the regulations, which have 
made this possible and which I believe is fueling the merger 
wave.
    What is unreasonable is not that carrier managements want 
to merge, but that the management of a high-cost carrier might 
expect a merger solution that will result in a very, very large 
stock premium primarily because the purchaser will gain control 
of congested airports through public assets that the acquired 
carrier previously obtained without charge.
    Now, one of the things that S. 415, which I support, shines 
a light on, without out quite saying so, is the buy/sell rule. 
This was promulgated in 1986. The way to avoid some of the 
regulation in S. 415, as Senator Hutchison would like to do, is 
to take a close look at that regulation. I think all of us 
should agree that if there are regulations on the books that 
are outmoded, they should be sunset-ed rather than fueling a 
merger wave.
    Here's the problem. The value of slots to carriers who are 
seeking to protect existing operations or thwart new entry will 
always be greater than their intrinsic value to a new entrant 
who must offer lower competitive fares to penetrate the market.
    Since incumbent carriers also have the biggest checkbooks, 
there is no contest as to who gets access in these situations. 
And, not surprisingly, concentration at the major airports in 
the country has increased. I'd point out that it's not just the 
question of mergers. If there was no merger, and TWA and U.S. 
Air, God forbid, were to simply liquidate through the 
bankruptcy auction process, the competitive result would be 
much the same.
    And so I think that as long as buy/sell is on the books, 
the DOT authority provided for in S. 415 is vital, and it's 
vital in principle, in any event. But if somebody doesn't like 
that particular regulation, they should look at the buy/sell 
rule very closely. And I urge the Committee to ask the 
Department of Transportation and the FAA to look at that and to 
sunset it.
    S. 415 also shines light on another problem which is 
fueling the merger wave. There really is a gap in Federal 
legislation relating to control of gates. Control of gates has 
always been viewed as appropriately local. S. 415 deals, in my 
opinion, effectively, although I hope in the course of its 
consideration to offer some suggestions for improvement for the 
gate problem when we're in the presence of mergers or where 
there is a very dominated hub--more than 50 percent. OK? I 
believe that DOT should have effective tools to deal with 
airport concentration issues on a regular basis and not only in 
those particular situations.
    I think that all gate transactions that increase 
concentrations should be within DOT's discretionary authority, 
and I believe that refusals to deal by ``have'' carriers should 
be presumptively labeled as unfair and exclusionary practices.
    Now, I take the point that, better than introducing 
legislation, public policy ought to try to increase the 
availability of resources and the efficiency with which they 
are used. And I agree that the NIMBY approach, Not In My Back 
Yard, is an enemy of progress in the airline industry, just as 
it is in so many other places that we have to deal with here. 
But we also have to recognize that there are some Federal 
policies which, in my opinion, actually create a bias in favor 
of congestion at airports.
    I think that we are effectively subsidizing small 
airplanes. And, if I can, I'd like to give you one little 
anecdote to illustrate my point. I recall sitting in the jump 
seat of one of our MD-80's last November while we sat immobile 
on a taxiway waiting to cross some other taxiways to get to our 
gate 150 yards away.
    And in the 45 minutes that we sat waiting--and this was at 
the height of the chaos at La Guardia--I did some calculations 
as to how much our passengers were effectively paying in 
infrastructure-related costs and how much the passengers of the 
ten turboprops and regional jets that were parading past us 
were paying. And I calculated that our passengers were paying a 
minimum of $2100 for infrastructure-related costs and that the 
smaller planes were paying $600.
    Now, I'm not saying that there's not a good place for small 
planes. I think that they do have a very, very important place. 
But I also believe that in order to harmonize our goals, in 
terms of providing small community service, but at the same 
time avoiding gridlock at airports, we have to look seriously 
at pricing. All right?
    Basically, infrastructure cost right now are the excise 
tax, the segment fee, and wait-based landing fees, but you have 
to recognize that at a congested airport, the relevant cost, 
the asset that we're allocating, is time--runway time--and 
there's no difference in the costs between those imposed by a 
large airplane and a small airplane. And I know it's going to 
be very difficult to look at that kind of stuff, but unless we 
start to look at that stuff seriously, we're going to have some 
trouble.
    In closing, I'd like to comment on DOT's role, which is 
expanded by this legislation. S. 415, is to some degree self 
executing and to some degree requires considerable 
administrative discretion by the department.
    Now, the previous administration did ask many of the right 
questions with respect to the State of aviation competition, 
and it sought to move in the right direction. At the same time, 
DOT was hampered by a lack of resources and expertise, and it 
did drop the ball on some issues entirely.
    My mentor, Fred Kahn, taught me one fundamental rule--
regulate only if necessary; but if you must regulate, regulate 
well. His declared intention to bring more rigor into the DOT's 
competitive analysis and recommendations to the Department of 
Justice are welcome.
    It is my hope that this Committee, along with the relevant 
appropriations committees, will take the steps necessary to 
ensure that the secretary's goal becomes reality.
    Thank you, sir, and I'll be happy to answer your questions.
    [The prepared statement of Mr. Kahan follows:]

Prepared Statement of Mark Kahan, Executive Vice President and General 
                       Counsel, Spirit Air Lines

    Chairman McCain, Senator Hollings, and Members of the Committee:
    It has been almost five years since my first appearance on behalf 
of Spirit Airlines before this Committee to discuss competition in the 
airline industry, and the nation's successes and failures as the 
deregulation process has unfolded. I am honored to be here again today 
in support of the Aviation Competition Restoration Act, because it 
addresses many of the dangerous trends we have observed over those 
years. As Professor Michael Levine testified before you on Feb 1, 2001, 
the deregulation process is at a critical point.
    First, Spirit Airlines would like to recognize the Committee's 
efforts over these last five years in promoting airline competition. In 
1997, when I first testified here, no branch of government had a good 
understanding of the potential for predatory behavior in this industry, 
its tendencies toward concentration, or the intractability of its 
barriers to new entry. In 1997, Spirit had just finished a very 
difficult year. In 1996, Spirit was driven by its major hub competitor 
from the Detroit-Boston and Detroit-Philadelphia markets. We had no 
gates in Detroit and little prospect for obtaining them. Spirit had no 
access whatsoever to the High Density airports.
    There has been progress in a number of areas. Last year, we carried 
almost 3 million passengers and our 1950 dedicated employees saved 
passengers in excess of $300 million. Our two gates in Detroit became 
fully operational last year and serviced almost 500,000 of those 
passengers. In 2000 as well, as a direct result of this Committee's 
efforts, Spirit began service to Chicago's O'Hare airport. That service 
has been well received and, in just two days, will be expanded to 
include Myrtle Beach, South Carolina. We began a very limited service 
from Reagan National Airport, which would have been completely 
impossible without the Chairman's efforts. And in New York City, a 
subleased gate became available at Newark and Air 21 slots became 
available at LaGuardia, permitting service throughout the day from both 
airports.
    Spirit's progress has not always been smooth and we have 
encountered bumpy air from time to time. Our operations remain 
intensely constrained by a scarcity of facilities and slots at key 
airports. There are many examples, which I would be pleased to share 
with you and your staff. But much of Spirit's growth would have been 
impossible without this Committee's efforts and your continuous 
oversight has helped the public understand that airline deregulation 
cannot succeed unless barriers to entry are addressed by an intelligent 
public policy.
    Of course, if all were rosy, we would not be sitting here today. 
One theme has been constant in every hearing over these past years--the 
airline industry is concentrating to alarming levels. Far more carriers 
continue to exit the market than enter it, even without mergers. 
Although I believe that S. 415 can be improved in some ways as it goes 
through the legislative process, its fundamental premises are correct. 
S. 415 recognizes that barriers to entry and exclusionary conduct 
remain constant concerns and that concentration of the industry's real 
estate (gates) and its airspace (slots) in a few dominant carriers 
precludes truly competitive outcomes. With the proposed mergers of 
American and TWA, and United and US Airways (with American's 
participation), the long predicted concentration of the country's major 
airlines, covering 80 percent or more of the entire national 
marketplace, toward three principal entities, has moved from a 
reasonable prediction to a substantial probability.
    A second and related theme at each hearing is that we must 
seriously address congestion in the infrastructure supporting the 
airline industry if deregulation is to succeed. In 2000, congestion 
issues came to a head as DOT, despite good intentions, implemented Air 
21 without sufficient regard for practicality. This led to total 
gridlock at LaGuardia airport, creating enormous problems for us and 
the travelling public.
    Before addressing what needs to be done, however, a caution is in 
order about what we should not do. The goal of competition policy, 
whether expressed through legislation or the executive branch, should 
always be to promote and protect competition, not competitors. We say 
this often, but cannot overemphasize it. If a company has been through 
two bankruptcies and has been unable to earn a profit for a decade or 
longer, public policy should not prevent it from exiting the market. In 
fact, the marketplace is distorted when well-intentioned policy makers 
take actions designed solely to prop up such a carrier--such as 
conferring two free slots from DCA to Los Angeles when that same 
carrier is already selling or leasing to other carriers the vast 
majority of slots it long ago received for free. Likewise, it is not 
totally unreasonable for the management of an extremely high cost 
carrier, which is steadily losing market share to others, to look for a 
way out in the interests of its shareholders and employees.
    What is unreasonable is for the management of a high cost carrier 
to expect a merger solution that will result in a 100 percent stock 
premium primarily because the purchaser will gain control of congested 
airports through public assets that the acquired carrier previously 
obtained without charge. To the extent that the impetus for either of 
these mergers flows from monopoly power arising from conglomeration of 
public assets, government intervention such as that envisioned under S. 
415 is certainly appropriate. Anti-trust analysis and remedies are 
important but not sufficient.
    This legislation shines the spotlight on several problems that must 
be addressed. First, 15 years after it was issued, it is time to 
recognize that the ``Buy-Sell'' slot rule (14 CFR 93.221) has retarded 
rather than promoted competition. It is a major facilitator of both 
current mergers and a problem all by itself; even if the carriers left 
the market in the traditional manner, i.e., through bankruptcy and 
liquidation, the competitive outcome would be much the same because the 
resulting auction would see the airport assets likely going to the same 
incumbents.
    The value of slots to carriers who are seeking to protect existing 
operations or thwart new entry will always be greater than their 
intrinsic value to a new entrant who must offer lower, competitive 
fares to penetrate the market. Since incumbent carriers also have the 
biggest checkbooks, there is no contest as to who gets access in these 
situations and, not surprisingly, concentration at slot controlled 
airports has steadily increased. Along with passage of S. 415, Congress 
should require DOT and FAA to take a hard look at this regulation and 
sunset it. And, for much the same reasons, I believe the Committee will 
be highly disappointed if an auction turns out to be the principal tool 
of slot allocation.
    Second, there is a gap in federal law relating to gates at 
congested or hub airports. Control over gates has always been viewed as 
appropriately local. Neither Anti-discrimination provisions in the 
FAA's authorizing statutes, nor competitive impact requirements in PFC 
(passenger facility charge) administration, have provided effective 
tools to avoid concentration of scarce airport gates in the hands of a 
few dominant carriers. There is also considerable doubt that DOT's 
jurisdiction over unfair and competitive practices reaches these kinds 
of situations. DOT should have effective tools to deal with airport 
concentration issues on a regular basis and not only in the crisis of a 
proposed mega-merger or where there is extreme hub dominance. 49 U.S.C. 
41712 could be amended to bring all gate transactions that increase 
concentration within DOT's discretionary authority. Refusals to deal by 
``have'' carriers should be presumptively labeled as unfair and 
exclusionary practices.
    Public policy that increases the availability of resources and the 
efficiency with which they are used is far superior to prescriptive 
regulation that merely deals with the negative effects of scarcity. We 
need to address the underlying problems of airport and airway 
congestion, which not only lead to these competitive distortions but 
also, as we are all aware, have seriously degraded service to the 
flying public in recent years. Before we can think in terms of 
congestion pricing, which, in principle, I wholeheartedly support, we 
must recognize that the current bias in airport pricing effectively 
subsidizes small airplanes. Current airport pricing practices, some of 
which are embedded in legislation, actively promote congestion. This is 
not, as popularly thought, a simple political struggle between the 
airlines and general aviation. This bias infects airline scheduling in 
a major way.
    I recall sitting in the jump seat of one of Spirit's 164 seat MD-
80s while we sat immobile on a LaGuardia taxiway waiting to cross some 
other taxiways and enter the alley where our gate is located. This was 
in November, at the height of the chaos. Before we could make a move, a 
parade of 10 turbo props and regional jets had to taxi by and clear the 
area. Recognizing that current ``user charges'' for airport facilities 
are basically the excise tax/segment fee and a weight-based landing 
charge, I did some basic arithmetic during the 45 minutes our 164 
passengers waited to move the 150 yards to the gate. I concluded that 
our MD-80 passengers were contributing a minimum of $2100 to 
infrastructure costs while the commuter passengers were paying, at 
most, about $600. Consider, however, that there is little or no 
difference in infrastructure costs imposed by varying sizes of 
aircraft; the primary resource to be allocated is runway space and time 
and, if anything, smaller and slower planes impose more costs than 
larger aircraft. It follows that, at least at congested airports, a 
rational pricing system would assess infrastructure fees on a per plane 
basis. The only quick way to increase airport capacity is to encourage 
the use of larger aircraft and the discouraging truth is that we 
currently do the opposite.
    In closing, I'd like to comment on DOT's role. S. 415 is to some 
degree self-executing and to some degree requires considerable 
administrative discretion by the Department. The previous 
Administration asked many of the right questions with respect to the 
state of aviation competition, increased the understanding of predatory 
pricing, and sought to move in the right direction. At the same time, 
DOT was hampered by a lack of resources and expertise. It dropped the 
ball entirely on some issues, such as CRS and the use of new entrant 
proprietary data by mega-carrier marketing departments. We at Spirit 
are heartened by the President's decision to name an experienced and 
effective aviation legislator as Secretary. My mentor, Alfred Kahn, 
taught me one fundamental rule: regulate only if necessary, but if you 
must regulate, regulate well. Secretary Mineta has his work cut out for 
him. His declared intention to bring more rigor into the DOT's 
competitive analysis and recommendations to the Department of Justice 
are welcome. S. 415, the Aviation Competition Restoration Act, will not 
work well unless the Executive Branch is capable of doing its share. It 
is my hope that this Committee, along with the relevant Appropriations 
Committees, will take the steps necessary to ensure that the 
Secretary's intention becomes a reality.
    Mr. Chairman, I will be pleased to answer any questions from the 
Committee or to provide any additional information that may be helpful.

    The Chairman. Thank you very much.
    Dr. Cooper, welcome back.

STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Dr. Cooper. Thank you, Mr. Chairman. I'm glad to be back, 
and I'm going to deliver roughly the same message I delivered 
last week when we addressed a different issue, and that is a 
pro-competitive message, and I might out that--start by 
pointing out to Senator Burns that the Consumer Federation of--
and myself, personally--are original members of the Competitive 
Rail Access Coalition from 15 years ago, and we believe in that 
pro-competitive access. And that's what this statute is about, 
and we'll be glad to support you when you move your legislation 
in the sister network transportation industry.
    With the introduction of the Aviation Competition 
Restoration Act, the public-policy debate over the airline 
industry and its deregulation has entered a new phase. It is 
none too soon. With four of the largest airlines proposing to 
merge and several other major mergers being discussed, the 
airline industry is organizing itself into a private cartel--
you've heard that described--that will be disciplined neither 
by market forces, nor by regulation, and that is unacceptable.
    A few dominant airlines will control the vast majority of 
traffic through monopoly airports in fortress regions--we've 
now moved from fortress hubs to fortress regions--that are 
imbedded in national networks that rarely compete. They will 
bump into each other at an end point here and there, but 
everybody else in between will be captive. The ability of new 
entrants to crack these markets will be further reduced, as 
you've heard today, because it becomes harder and harder to 
attract passengers on flight segments, and the scale of entry 
necessary becomes larger and larger.
    At the core of this structure is a system of fortress 
airports defended by anti-competitive practices. Incumbent 
airlines create barriers to entry by locking in customers and 
locking out competitors, denying access to facilities and 
engaging in predatory pricing. It should come as no surprise 
that the result of these anti-competitive practices are higher 
prices and lower quality endured by the public.
    As demonstrated in dozens of studies--and I've been adding 
these to the list, and the list gets longer and longer every 
time I come up and testify--it is quite clear that competition 
among numerous airlines lowers prices and increases output. The 
cost savings we have seen in study after study is between 20 
and 50 percent for each additional competitor. And this is true 
whether competition is measured and analyzed by the entry and 
exit of individual carriers on individual market segments or at 
the level of general concentration ratios.
    Whenever the industry is confronted with this overwhelming 
evidence, it tries to divert your attention back to that 20-
year-old debate about whether or not to deregulate this 
industry and whether or not we have benefited. It seeks to 
hamstring policymakers' ability to address specific problems by 
saying any form of intervention is a return to price and 
quality regulation.
    The simple fact of the matter is that deregulation is more 
than 21 years old. The industry is mature. It has grown up, and 
it has to take responsibility for its own anti-competitive 
actions. There's inadequate competition in the industry. It is 
abusing consumers, and it is time to act.
    The Aviation Competition Restoration Act is exactly the 
kind of response we need. It is a well-crafted, pro-consumer, 
pro-competitive approach to reintroducing competition in the 
industry to discipline its abuse. It is not re-regulation of 
prices and quantities.
    The logic of these measures is impeccable. Concentration of 
traffic through hub and spoke networks, which was unanticipated 
when we deregulated this industry--and I hate to date myself, 
but I was in town when we had that debate--was unanticipated. 
No one saw hub and spoke. It's an efficient way to organize the 
industry. The airlines found that out.
    But concentration of ownership and control of slots has 
been mistaken with concentration of traffic. We do not have to 
have complete dominant control of 90 percent of the traffic in 
an airport to concentrate it there at critical times. It was 
never necessary to have both forms of concentration.
    By opening up half the slots at fortress hubs, new entrants 
will be able to compete for the flow of traffic. At the same 
time, by allowing firms to dominate 50 percent of the traffic 
at the major airports, they will still have an interest in 
concentrating the flows there. And that is the kind of solution 
we need.
    The competitive access provisions of the Aviation 
Competition Restoration Act are a form of interconnection 
requirement to ensure fair access to choke points in this 
network industry. The Consumer Federation of America and 
Consumers Union have vigorously supported exactly this type of 
competitive access across a range of industries--railroads, 
electronics, computers, telecommunications. In a network world, 
which is where we live, access to the choke points is critical 
to ensure competition.
    We commend you for taking this approach, for understanding 
the nature of these industries, and we look forward to working 
with you to ensure that we restore competition in this 
industry.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Dr. Cooper.
    [The prepared statement of Dr. Cooper follows:]

    Prepared Statement of Dr. Mark N. Cooper, Director of Research, 
                     Consumer Federation of America

    Mr. Chairman and Members of the Committee, On behalf of the 
Consumer Federation Of America\1\ and Consumers Union,\2\ I commend 
Senators Hollings and McCain for introducing the Aviation Competition 
Restoration Act and urge speedy enactment of this bill as a critical 
first step in bringing more competition to the airline industry. The 
legislation could help to crack open the dominance of major airlines at 
fortress hubs and expand consumer protection by restoring real 
competition in the industry, which is the form of competition we 
prefer.
    A couple of years ago I published a paper entitled Freeing Public 
Policy From The Deregulation Debate: The Airline Industry Comes Of Age 
(And Should Be Held Accountable For Its Anticompetitive Behavior).\3\ 
Since then this industry has experienced a dramatic decline in the 
quality of service, a dramatic increase in prices, and now stands on 
the verge of a merger wave that will make matters worse. Not only is it 
time for the industry to bear responsibility for its own actions, it is 
time for policymakers to confront the reality that this industry is not 
and will not be organized on a vigorously competitive basis.
congressional action is necessary to protect the flying public from the 

             ABUSE OF MARKET POWER IN THE AIRLINE INDUSTRY

    With the introduction of the Aviation Competition Restoration Act, 
the public policy debate over deregulation has entered a new phase. It 
is none too soon. From the consumer point of view, the intense, 
ideological debate over deregulation that has taken place in this 
country over the past three decades has had a major, negative impact. 
Instead of crafting careful public policies that promote competition 
while restricting the abuse of market power, regulators have been 
largely immobilized by a fruitless debate over what would have happened 
under continued regulation as compared to what did happen with 
deregulation.
    At one end of the spectrum, advocates of deregulation refuse to 
accept the fact that problems arise, for fear that such an admission 
will be used to convince policymakers that reregulation should be 
tried. At the other end of the spectrum, the advocates of regulation 
refuse to acknowledge that efficiency improvements flow from 
deregulation, for fear that such an admission will be used to prevent 
policy makers from addressing the specific problems that arise. What 
gets lost in the middle is good public policy. The pure efficiency 
gains that have clearly been made as a result of deregulation have been 
polluted by rampant abuse of market power. The performance of the 
deregulated industries certainly improved, but not nearly as much as it 
could have from the consumer point of view or should have from the 
public policy point of view.
    With the two pending major airline mergers and a third being widely 
talked about, there can be no more uncertainty about the structure of 
the industry. The airline industry is in the process of organizing 
itself into a private cartel. The three dominant firms will control the 
vast majority of traffic through monopoly airports in fortress regions 
embedded in national networks that rarely, if ever, compete with one 
another. A few end points will have vigorous competition, but the vast 
majority of passengers will be trapped on routes with far too few 
alternatives to create an effectively competitive market.
    As travelers fall more and more under the control of one airline, 
the ability of new entrants to crack markets is reduced, as it become 
harder and harder to attract passengers to flight segments. The 
necessary scale of entry gets larger and larger. The inconvenience and, 
in many cases, the impossibility of inter-airline travel, give the 
originating airline enhanced market power over the traveler and makes 
it more and more difficult for smaller airlines to compete for the 
traffic.
    Market power results in higher prices wherever it exists and 
miserable service. Since the major airlines do not face effective 
competition, they do not feel compelled to improve quality. Thus the 
future debate should not be about whether to return to the old-school, 
price and quantity regulation of the middle of the century, but about 
how policy can increase public welfare by promoting competition and 
preventing anti-competitive actions.
    The Aviation Competition Restoration Act embodies two of several 
essential steps necessary to rebuilding the competitive base of the 
airline industry and protecting the public from the abuse of market 
power by the airlines. The critical elements contained in the proposed 
legislation are (1) to empower an agency to take a hard look at the 
overall industry structure in reviewing merger activity and (2) to 
empower the Department of Transportation to crack open the fortress 
hubs where there is a demonstrated interest in entry or new airlines.
    Ultimately, at least two other steps would be needed: (3) an anti-
predation rule that prevents dominant incumbent airlines from snuffing 
out entrants with predatory practices and (4) a consumer bill of 
rights, since it will take significant time for the procompetitive 
measures to function and there are many markets in which too few 
airlines will exist to compete to meet consumers' travel needs. While 
we note the other things that must be done, CFA and CU believe that the 
measures in the Airline Competition Restoration Act would be an 
enormous step in the right direction. To appreciate why this is exactly 
the right place to start, we must review the nature of the failure of 
competition in the airline industry.

               ANTICONSUMER EFFECTS OF A WEAK COMPETITION

    At the heart of the market power wielded so brutally by the major 
airlines is a system of fortress hubs and the anticompetitive, 
predatory practices that major airlines use to prevent new entrants 
from serving the fortress hubs. As these fortress hubs grow into 
fortress regions, the prospects for new entrants will shrink into non-
existence, unless Congress takes action.
    The empirical evidence that the creation of fortress hubs raises 
price is overwhelmingly clear. It should come as no surprise to you 
that dozens of studies show that competition among numerous airlines 
leads to lower prices and higher output. This is true no matter how 
competition is measured. The effect is observable at the micro level in 
the form of the entry of individual airlines into specific markets and 
at the macro level in the form of generalized concentration ratios.\4\ 
Econometric studies of market structure have consistently shown that 
concentration on routes, at airports, and in the industry at large are 
associated with higher fares (see Exhibit 1).
    Flowing from this evidence, we find support for a number of 
traditional observations about public policy. Actual competition is 
vastly more important than the threat of competition.\5\ Barriers to 
entry play a critical role in determining the level and nature of 
competition.\6\ Analysis of specific events--entry, exit and mergers--
confirms these findings. Mergers tend to reduce competition, increase 
prices and lower output.\7\
    Estimates of the general impact of competition on price are on a 
similar order of magnitude. Several GAO and DOT studies have found that 
prices are 20-50 percent lower in competitive markets. Similarly, 
estimates of the elimination or addition of one competitor bolster 
these findings. The impact of a low cost competitor is particularly 
pronounced. When specific low cost carriers are identified, like 
People's or Southwest, fares often are 35 to 40 percent lower than in 
markets without such aggressive new entrants. Thus, having one 
additional competitor impacts prices by 20 to 50 percent.
    The econometric and anecdotal evidence is supported by a general 
trend in prices (see Exhibit 2). Airfares, as measured by the consumer 
price index have increased dramatically, particularly when key 
components of airline costs are taken into account. Since the mid-
1980s, fuel prices have dropped by almost 50 percent. The cost of 
capital (measured by AAA corporate bonds) has declined by 20 percent. 
These are two of the three largest costs for airlines. Yet, airfares 
have mounted steadily.

                             FORTRESS HUBS

    The centerpiece of industry structure in the deregulated 
environment--the hub and spoke network--is a constant source of public 
policy concern. Advocates of deregulation failed to anticipate the 
development of this form of industrial organization.\8\
    While they may have recognized the possibility that competition 
would not develop on lightly traveled routes or at small airports,\9\ 
the notion that single airlines would come to dominate and control huge 
airports as fortress hubs was unthinkable twenty years ago. As a 
result, there has been a vigorous effort to understand why the industry 
has organized itself in this way.
    Part of the complexity of the analysis stems from the fact that the 
characteristics of hubs that appear to confer market power are both 
``positive'' and negative. Just as competition can create efficiencies 
so too can hub and spoke networks. The key characteristics include 
economies of scale and operating efficiencies, as well as marketing 
advantages that make it extremely difficult for competitors to enter. 
The concentration of traffic at hubs allows incumbents to achieve lower 
costs.\10\ The concentration of traffic and prominent position in the 
hub enables the incumbent to achieve both a greater reputation and to 
offer a broader range of options at the hub.\11\ Advertising and 
promotion are facilitated.\12\ Scheduling and baggage handling are 
better coordinated.\13\
    Unfortunately, the story does not stop with these positive aspects 
of industry organization. In practice these ``positive'' economic 
advantages of hub and spoke networks have been immediately leveraged 
with anti-competitive actions to increase and exploit market power by 
incumbents dominating hubs. Incumbent airlines create barriers to entry 
by locking in customers and disadvantaging competitors in a variety of 
ways. Traffic is diverted to the dominant incumbent hubs through a 
number of marketing mechanisms that extends market power over travelers 
frequent flier programs,\14\ deals with travel agents to divert 
traffic,\15\ manipulation of computerized reservation systems,\16\ and 
code sharing.\17\ The ability of competitors to enter hubs is 
undermined in a number of ways. Access to facilities is impeded through 
a number of mechanisms that preclude or raise the cost of entry,\18\ 
including denial of gate space,\19\ extraction of excess profits on 
facilities,\20\ and efforts to prevent entrants from attracting 
adequate passengers to establish a presence.\21\
    As a result, consumers do not see any of the savings from hubs. 
Instead, they endure higher prices and are treated badly. This finding 
cannot be overemphasized, especially in light of recent efforts by 
airlines to demonstrate that, in theory,\22\ larger networks provide 
consumer benefits. In practice, as the Department of Justice and a 
great deal of empirical analysis demonstrates, the theoretical benefits 
never materialize in reality because the major airlines abuse their 
market power. Cost savings are not passed through to consumers. When 
competitors enter concentrated hubs, prices go down and frequency goes 
up--both in the number of departures and in the number of seats 
available. This gain occurs not only because the new entrant provides 
new seats at lower prices, but also because incumbents do too.
    When entrants do show up, the dominant airlines have engaged in 
blatantly predatory pricing to drive them out of the market.\23\ The 
state Attorneys General and the Department of Justice have identified 
six specific airlines and at least fourteen routes (from major fortress 
hubs) in which predatory conduct drove competitors from the market. In 
each case, one of the airlines that is currently proposing to merge was 
involved in the anti-competitive behavior. The dominant airline cuts 
its fares and adds capacity when the new entrant shows up. Once the 
entrant is driven out of the market, capacity is reduced and fares are 
increased.
    Having gained this advantage, the incumbents can raise price, 
without risking entry\24\ and rely on excessive market segmentation to 
restrict price competition.\25\ The strategy involves finding 
mechanisms to sort customers into categories with different price 
sensitivities and then offering higher prices in the less price 
sensitive category.\26\ Prices\27\ and profits at hubs are higher.\28\ 
Since they do not face effective competition, they do not feel 
compelled to improve quality.
    Examples of clearly abusive pricing are also too frequent and too 
blatant to ignore. The state Attorney's General give three types of 
examples where fares differ by $700 or more: one airport originates 
flights to destination airports with dramatically different levels of 
competition; nearby airports with dramatically different levels of 
competition originate flights to the same destination; prices charged 
before and after a competitor is driven from the market.\29\ The 
Department of Transportation has recently identified 19 routes on which 
new entrants were successful in establishing a presence in short haul 
hub markets in the past three years.\30\ The resulting price reductions 
were in the range of 33 and 55 percent, with increases in passengers of 
between 61 and 86 percent.

           BUILDING BLOCKS OF A HIGHLY CONCENTRATED INDUSTRY

    The monopolized hubs are building blocks of potential national 
market power through concentration of the industry. The geographic 
extension that United and American are seeking (soon to be followed by 
some combination of Delta, Northwest and Continental) and the denser 
network that the mergers would create make it less and less likely that 
competitors will be able to attack these markets.
    As all such airline networks do, these mergers would lock travelers 
in by concentrating their flow through fortress hubs, coordinating 
scheduling at those hubs, and binding them with frequent flier and 
other promotional programs. These mergers are likely to promote a 
movement from fortress hubs to fortress regions.
    Industry structure has become sufficiently concentrated to raise a 
fundamental question about whether market forces are sufficient to 
prevent the abuse of market power. Both at individual hubs and in the 
industry as a whole, markets have become or are becoming highly 
concentrated. Attorney's General from 25 states filed comments in 
support of the Department of Transportation's anti-predation rule which 
identified 15 airports at which the dominant firm had a market share in 
excess of 70 percent. This is the standard generally applied to 
indicate monopoly status. Another half dozen airports have a dominant 
carrier (50 to 70 percent market share) close to the monopoly (see 
Exhibit 3).
    This is not a small airport problem. Seven of the ten busiest 
airports in the country are on the list. One-half of all passenger 
enplanements take place at the twenty airports on the list. These 
fortress hubs are the cornerstone of a nationwide problem. The local 
monopolies are reinforced by an industry structure in which there is 
simply inadequate competition to discipline the abuse of market power. 
There are too few competitors in the industry as a whole and in most 
markets on a route-by-route basis.
    Let us step back a moment on consider what constitutes ``too few'' 
competitors. Identification of exactly where a small number of firms 
can exercise market power is not a precise science, but it is widely 
recognized that when the number of significant firms falls into the 
single digits public policy concerns are triggered.\31\ In fact, I like 
to use what I call the ``Ed Meese tests of market power.'' You will 
recall that based on the extensive theoretical and empirical record of 
decades of analysis, Ronald Reagan's Department of Justice headed by Ed 
Meese issued the Merger Guidelines in 1984.
    The Reagan Administration DOJ established a fundamental threshold 
to separate an unconcentrated market from a moderately concentrated 
market at the level of a Hirschman-Herfindahl Index (HHI) of 1000. This 
level of concentration would be achieved in a market of 10 equal size 
competitors. In this market, the 4-Firm concentration ratio would be 40 
percent. The DOJ established a second threshold at an HHI of 1800. 
Above this level, the market is considered highly concentrated. This is 
roughly equal to a market with fewer than six equal sized competitors. 
A market with six, equal-sized firms would have a HHI of 1667. In a 
market with six, equal-sized firms, the 4-Firm concentration would be 
67 percent.
    The reason the six and ten firm thresholds are important is that 
they constitute well-documented and understood levels of oligopoly. In 
a tight oligopoly with a small a number of firms controlling such a 
large market share, it is much easier to avoid competing with each 
other and harm the public through price increases or quality 
deterioration.
    Shepherd describes this threshold as follows:\32\

        Tight Oligopoly: The leading four firms combined have 60-100 
        percent of the market; collusion among them is relatively easy.

        Loose Oligopoly: The leading four firms, combined, have 40 
        percent or less of the market; collusion among them to fix 
        prices is virtually impossible.

    By these definitions, airline markets are generally highly 
concentrated. Most routes have fewer than four carriers. National 
averages typically find HHIs in the range of 4000 on a city-pair 
basis.\33\ One recent study found that, measured at airports, the HHI 
was just under 3300--the equivalent of three airlines per airport), but 
measured by city pairs the HHI was over 5000--the equivalent of two per 
route.\34\ Given such a high level of concentration, we should not be 
surprised to find that anti-competitive behavior and changes in market 
structure have a significant impact on fares. Exercising market power 
is easy in such highly concentrated markets.
    While market power is best analyzed on a market-by-market basis, 
since it is the monopoly at the point-of-sale that triggers the abuse, 
national markets are not irrelevant. As the industry becomes more and 
more concentrated, the pool of potential major entrants shrinks. The 
ability of the large dominant firms to avoid one another in the market 
and engage in conscious parallelism or strategic gaming increases. It 
is this level of analysis that is frequently lacking in the merger 
review process, which becomes trapped in the merger-by-merger scrutiny 
and loses sight of the forest for the trees.
    Before the pending merger wave, the industry had become moderately 
concentrated, with an HHI of approximately 1400. The two pending 
mergers (United/US Airways and American/TWA) would push it above 1800. 
A Delta/Northwest or Delta/Continental merger, which is anticipated as 
a defensive response, would drive it well above 2200. Each of the 
pending consolidations would violate the Merger Guidelines on a 
national scale, as well as in individual markets. Taken together, they 
drive the industry structure well above the highly concentrated level

          THE PROPOSED REMEDIES ARE KEY ELEMENTS OF A SOLUTION

    With two decades of econometric evidence about competitive problems 
at the levels of structure, conduct and performance reinforced by 
detailed analysis of recent events, one can only hope that the public 
policy debate will not revert to the irrelevant question of whether 
deregulation served the consumer interest. The trigger for public 
policy concern is, as it always should have been, whether 
anticompetitive practices are hurting consumers. By every measure, the 
airlines are failing that test today.
    The Aviation Competition Restoration Act attacks the problem at its 
core.
     The Act would provide a more focused set of criteria to 
assess the impact of mergers and would encourage the Department of 
Transportation to consider the impacts of mergers in a broader context.
     It also seeks to crack open hubs when one airline gains a 
majority position. It identifies several of the most important ways in 
which dominant incumbents have prevented entry into their fortress hubs 
and would require them to be made available to bona fide entrants.
     It identifies the withholding of facilities as an 
anticompetitive practice.
     It sets aside funding to expand facilities at dominated 
hubs and reorients passenger facilities charges in a procompetitive 
direction.
    The logic of these measures is impeccable. Concentration of traffic 
through hub and spoke networks is clearly an efficient form of 
organization for the industry. Concentration of ownership and control 
of slots, gates, facilities and enplanements are clearly the source of 
abusive market power in the industry. It was never necessary to equate 
concentration of traffic with concentration of ownership. By opening up 
half the capacity at fortress hubs, competitors will have a chance to 
compete for the flow of travelers through these high density airports. 
The leading firms will continue to have an interest in serving this 
flows since a 50 percent share of the nation's 35 largest airports is 
still a very substantial business that captures the efficiencies 
(economies of scale) in the industry.
    This solution is akin to the open standard/platform solution that 
we observe in other network industry. We have learned in the computer 
and electronics industries that open standards are as good as, if not 
better than, closed standards in achieving efficiency gains (network 
effects), and infinitely better at preventing anticompetitive abuses. 
The competitive access provisions are a form of interconnection 
requirement to ensure fair access to choke points in the network. CFA 
and CU have vigorously supported these types of competitive access 
principles in a range of industries\35\ and we applaud Senators 
Hollings and McCain for introducing them into the debate over the 
airline industry. CFA and CU believe that enactment of the Aviation 
Competition Restoration Act is an essential first step in preventing 
further consolidation in the airline industry that would undermine the 
already inadequate competition that exists in the industry. It opens 
the way to introducing competition in the fortress hubs that dominate 
the industry.

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                                Endnotes

    1. The Consumer Federation of America is the nation's largest 
consumer advocacy group, composed of over two hundred and forty state 
and local affiliates representing consumer, senior-citizen, low-income, 
labor, farm, public power and cooperative organizations, with more than 
fifty million individual members.
    2. Consumers Union is a nonprofit membership organization chartered 
in 1936 under the laws of the State of New York to provide consumers 
with information, education and counsel about goods, services, health, 
and personal finance; and to initiate and cooperate with individual and 
group efforts to maintain and enhance the quality of life for 
consumers. Consumers Union's income is solely derived from the sale of 
Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports, with approximately 4.5 
million paid subscribers, regularly carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.
    3. American Bar Association, The Air and Space Lawyer, January 
1999.
    4. A broad range of studies includes the Herfindahl index as a 
measure of concentration. These invariably find that higher levels of 
concentration are associated with higher prices, all other thing 
equal--see, for example, Morrison and Winston (1986), Borenstein 
(1989), Dresner and Trethaway (1992), Dresner and Windle (1996).
    5. Graham, Kaplan and Sibley (1983), Call and Keeler (1985), 
Morrison and Winston (1986), Moore (1986), Strassman (1990), Petraf 
(1994), Petraf and Reed (1994), provide evidence on actual competition. 
Tests of potential competition have generally shown much smaller 
effects. The evidence suggests that one competitor in the hand is worth 
between three and six in the bush. The empirical evidence from the 
airline industry must be considered a thorough repudiation of 
contestability theory. On this point see Borenstein (1989), Butler and 
Houston (1989), Hurdle (1989), Abbott and Thompson (1991).
    6. The clearest examples of the importance of barriers to entry are 
the consistent finding that physical limitations on slots and gates 
result in less competition and higher prices. Virtually every 
econometric analysis includes a slot variable which supports this 
conclusion--see, for example, Morrison and Winston (1986, 1990), Hurdle 
(1989), Whinston and Collins (1992), Windle and Dresner, 1995, and 
Dresner, Lin and Windle (1996). Analysis of legal barriers reaches 
similar results--see Dresner and Trethaway (1992), Burton (1996).
    7. Borenstein (1990), Werden et al. (1991), and Morrison and 
Winston (1995).
    8. Rakowski and Bejou (1992), Oum Zhang and Zhang (1995).
    9. The unique problems of small airports and low density routes 
were recognized in the legislation ending the existence of the CAB--see 
Meyer and Oster (1984) and Malloy (1985).
    10. Johnson (1985), McShane and Windle (1989), Oum and Trethaway 
(1990), Berry (1990), Morrison and Winston (1990), Oum (1991), Berry 
(1992), Boucher and Spiller (1994), Joskow, et al (1994).
    11. Levin (1987), Bornstein (1989, 1992), Zhang (1996).
    12. Evans and Kessides (1993).
    13. Oum and Taylor (1995).
    14. Levine (1987), Oum (1987), Borenstein (1989), Layer (1989), GAO 
(1996).
    15. Levine (1987), Borenstein (1989, 1991, 1992), Morrison and 
Winston (1995).
    16. Oster and Pickerell (1986), Borenstein (1989), Layer (1989), 
Brenner (1989), Evans and Kessides (1993).
    17. Oum (1995) identifies three positive advantages created by code 
sharing--increased frequency of flights, concentration of traffic, 
marketing of single line travel--and one negative--CRS placement 
advantages due to frequency and single line service.
    18. Berry (1987), Levine (1987), Borenstein (1989), Butler and 
Houston (1989), Reiss and Spilber (1989), Oum, Zhang and Zhang (1995), 
and Hendricks (1995).
    19. Levine (1987), Borenstein (1989), Kahn (1993), GAO (1996).
    20. GAO (1996).
    21. Credible entry requires the entrant to move sufficiently up the 
S-curve to have a viable economic base (Russon (1992), Vakil and Russon 
(1995). GAO notes that entrant require at least six slots at prime 
times to establish a credible presence.
    22. DOT, 2001, identifies. A study by ESI.KPMG, The Advent of 
National Aviation Networks (October 2000), sought to justify the 
consolidation into three national networks on the basis of an analysis 
that is so fundamentally flawed it lacked any identified authors. The 
analysis ignores all price effects due to the loss of competitors. It 
uses an econometric estimate of gains from online traffic that assumes 
the price of a ticket has no effect on air travel. It excludes all 
large hubs all airports served by Southwest all Essential Air Service 
airports, all airport served within 50 miles of a hub and all airports 
in leisure markets to derive a coefficient for network effects that is 
not statistically significant by traditional standards (i.e. it fails 
the 95 percent confidence interval). It applies this statistic to all 
airports to derive its estimate of positive benefits.
    23. ``Comment of the Attorneys General of the States of Arkansas, 
Connecticut, Florida, Iowa, Kansas, Massachusetts, Michigan, Minnesota, 
Missouri, Montana, Nevada, New York, North Carolina, North Dakota, 
Oklahoma, Oregon, South Dakota, Tennessee, Utah, Vermont, Virginia, 
Washington, West Virginia, Wisconsin, and Wyoming,'' U.S. Department of 
Transportation, 1998, Docket No. OST 98-3713 (hereafter, Attorneys 
General.
    24. The fact that higher prices persist at hubs is evidence of the 
ability to sustain prices. Direct tests of the entry decision also 
support this notion (see, for example, Joskow et al (1994).
    25. Borenstein (1989) notes that by segmenting markets incumbents 
can diminish the impact of competition at hub airports. Evans and 
Kessides (1993), Oum and Zhang (1993), and Mallaiebiau and Hansen 
(1995) observe a generally low elasticity of demand across all markets.
    26. DOT, 2001, notes that while some price discrimination is to be 
expected, it appears to be excessive in concentrated airline markets.
    27. Bailey and Wilkins (1988), Huston and Butler (1988), Borenstein 
(1989), Evans and Kessides (1993), Joskow, et al. (1994), GAO (1996), 
DOT (1996).
    28. Toh and Higgins (1985), McShane and Windle (1989).
    29. Attorneys General.
    30. U.S. Department of Transportation (2001).
    31. Friedman, 1983, pp. 8-9,
    Where is the line to be drawn between oligopoly and competition? At 
what number do we draw the line between few and many? In principle, 
competition applies when the number of competing firms is infinite; at 
the same time, the textbooks usually say that a market is competitive 
if the cross effects between firms are negligible. Up to six firms one 
has oligopoly, and with fifty firms or more of roughly equal size one 
has competition; however, for sizes in between it may be difficult to 
say. The answer is not a matter of principle but rather an empirical 
matter.
    32. Shepherd, 1985, p. 4, see also Bates, B. J. 1993, p. 6.
    33. See for example, Dresner, Lin and Windle (1996). City-pair 
markets generally include all flights between to points including 
direct and connecting (single airline) flights.
    34. Hayes and Ross.
    35. On telecommunications, see Cooper, 1997, 1998; on the Internet 
see Cooper, 2000a, b; on electricity, see Cooper, 2000b; on software 
see Cooper 2001 (forthcoming).

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    The Chairman. Attorney General Miller, I want to thank the 
National Association of Attorneys Generals for their active 
participation in this issue, and we appreciate it very much.
    You State that you believe that a shift of the slots owned 
by TWA at National to low-cost competitors is possible and 
appropriate. Some would argue this is a takings, either legally 
or because of the significant investment in slots by the 
airlines. How would you respond to that charge?
    Mr. Miller. Well, there's a number of ways to deal with 
that. One is to provide them some fair competition, some fair 
return, but do it in a way that does not continue the 
concentration that Mark spoke of--some way that they do go to 
competitors but there is some competition.
    But also, keep in mind that the slots were created by the 
government. They are a government-created ability to land and 
to take off. They were not property that was created by any way 
in the private sector, so you have that consideration, as well.
    The Chairman. Thank you.
    Mr. Kahan.
    Mr. Kahan. If I could embellish that a little bit, I think 
the takings arguments just flies in the face of the regulation 
itself which says that the slots are not property, that they 
remain with the government.
    In terms of the equity of it, I don't understand that 
argument either. People who have had these slots have been able 
to use them for many years. They got them for free, all right, 
for the most part. It's actually distorted competition because 
people who got their slots for free and who now think that they 
have property which they should pledge as security collateral 
to a bank and get a couple of million dollars and do things 
like that, actually make it that much harder for us who don't 
have that kind of assistance for our balance sheet. It's a 
distortion, not a----
    So, to me, I think that we ought to act in the public 
interest, let those who believe it's a taking go to court, and 
I predict that the public interest will win that one.
    The Chairman. Ms. Hecker, I have seen your charts of the 
differences in fares where there's competition and where there 
isn't, something that, one, we all know about and, two, makes 
sense. Do you believe that--however, that the major airlines 
have engaged in predatory practices in order to drive these new 
entrants out of their markets and eventually out of business?
    Ms. Hecker. I think there has been substantial research 
that has raised questions. I obviously haven't done a specific 
investigation of specific firms.
    I think one connection, when we pulled the data for this 
hearing today, was very interesting. There were three pieces of 
data on market concentration, data on fare differentials, and 
the research that we'd done in terms of restricted access to 
gates. And there were four airports that came up to the top of 
the list of every one of those--the highest levels of 
concentration, the highest incremental fares, and also the most 
consistent evidence of the restriction of access to gates--and 
that's Charlotte, Pittsburgh--what are the four of them--
Minneapolis, and Cincinnati.
    That kind of consistency--in terms of domination, fare 
differentials, and clear evidence of restricted access to 
gates--raises substantial questions about how market power is 
used and how it's being clearly used to do both the two things 
that a monopoly provides you--A, to get monopoly rent, and, B, 
to further restrict access to secure your monopoly position.
    Mr. Miller. Senator, if I could expand on that just 
briefly, it's important to keep in mind pricing and capacity, 
that typically what the major will do is meet the price of the 
new entrant. But then if they, in addition, expand considerably 
their capacity between the city pairs, those two together can 
be the predatory knockout, and that's what the American 
Airlines case is about that DOJ brought that could set some 
important precedents.
    The Chairman. Mr. Neeleman, some argue that some of the 
first routes to go in the event that an airline is forced to 
give up gates in a dominant hub are those to small- and mid-
sized communities. Do you agree with that assessment?
    Mr. Neeleman. I don't. And being from Salt Lake City, the 
example that Mr. Burns gave, I know that--I'm very familiar 
with Sky West Airlines and very familiar with Delta Airlines 
and their operation in those areas. You know, they serve those 
communities largely because they're profitable for them; and I 
guess charging the kinds of fares they're charging, it would 
not be difficult for it to be profitable for them. But, you 
know, I think the issue is more the underutilization and the 
squatting on gates and squatting on ticket counters and the----
    The Chairman. I think there was a case in Chicago where 
three gates were used to storage of additional equipment for a 
long time. Are you familiar with that story?
    Mr. Neeleman. I've heard of that, and I've heard others, 
too, at Dallas Love Field and other places, but, you know, our 
analysis--and we've looked around--there's some consolidation 
going on at Kennedy that we're a little bit concerned about, 
and there's three terminals in question. We went and looked at 
the gate allocation at the two and then at the third and saw 
that it would--could quite easily be consolidated into two, 
even though there's positions that say they couldn't. So, yeah, 
I think it happens everywhere, and I think----
    The Chairman. Well, can you discuss some of the markets 
you've had difficulty entering?
    Mr. Neeleman. Well, I think the example I gave--you know, 
People Express had a tremendous amount of success flying to 
Norfolk, Virginia, to cities in the Carolinas--North and South 
Carolina. It's very difficult for us to be able to fly New York 
to the Carolinas and rely solely on that point-to-point 
business without feeding traffic from the north. We can't have 
access to Boston. We've gone there a couple of different times, 
and all they want to do is point us to other airports. There 
are no gates available. With this consolidation and these 
mergers----
    The Chairman. Have you tried Chicago?
    Mr. Neeleman. Yes. We can't--we visited Chicago and can't 
have access to Chicago. And obviously, Boston and Chicago are 
two of the largest----
    Senator Burns. That's either Midway or O'Hare?
    Mr. Neeleman. Obviously, there's a slot issue at O'Hare. 
We've been to Midway, and currently there are no gates at 
Midway.
    The Chairman. My time has expired.
    Senator Hollings.
    Senator Hollings. Thank you, Mr. Chairman. Let me apologize 
to the panel because we had to get down on the floor, and I 
really appreciate your appearance.
    Mr. Neeleman, can we get JetBlue to South Carolina?
    Mr. Neeleman. You know, you had a carrier to Columbia, 
South Carolina, that provided service to New York called Air 
South and they had their problems, and they had their issues, 
but I was impressed, as I looked from afar, at the number of 
passengers that flew from Columbia to JFK, actually where we 
serve.
    It would be difficult for us just to serve those two 
markets without having service to the north. We would be more 
apt to serve South Carolina if we had service to Boston. That 
way we could serve Boston, New York, and the Carolinas, 
particularly in South Carolina, where some of the population 
bases are a little bit smaller.
    So it's on our list of cities. We're looking at it, but we 
need access, to be able to do it, to some of the larger markets 
to flow passengers through.
    Senator Hollings. But what we really need is to just get 
flights into Charlotte. You see, we have----
    [Laughter.]
    Senator Hollings [continuing]. People from Columbia and 
people from Greenville who get in their car and drive to 
Charlotte, because the fare from Charlotte to Washington is 
minimal. It's the outrageous cost of trying to get to 
Charlotte.
    Mr. Neeleman. Right.
    Senator Hollings. And if we can get these little feeder 
ins, not to go all the way to Washington and all the way to New 
York--now, back to the answer Mr. Kahan was giving relative to 
slots, these slots were all developed by the communities. They 
belong to the communities themselves and not to the airlines. 
But I learned the hard way. We had three flights up and three 
back by National Airlines from my hometown of Charleston, South 
Carolina. And when Air Florida crashed out here, then the slots 
were sold by Air Florida. They went out of business and just 
took the money and ran. And all of a sudden the community that 
had developed the--no airline that I know of has built runways 
or built towers or added slots or added facilities or anything 
else. The airlines never have paid for those things. The 
communities have to do it, Mr. Kahan, and don't you agree that 
the slots belong, really, to the communities that develop them?
    Mr. Kahan. Yeah, I thought we had resolved that for all 
time when we had our hearing in Charleston last year, sir----
    [Laughter.]
    Mr. Kahan [continuing]. And I totally agree with that. I 
answered a question from the Chairman along those lines.
    On a positive note, though, I would like to thank you for 
our service from Myrtle Beach to Chicago, which is going to 
start on Thursday. And I know you don't want to drive up Route 
17, but I think that the fare differential between Charlotte 
and Myrtle Beach is going to encourage a lot of your 
constituents to do that.
    Senator Hollings. Let me ask, in the limited, because the 
colleagues who have been waiting here--and I'm out of our 
order, but with the courtesy of the Chairman here--what's wrong 
with this bill? How can we clean it up or get rid of it because 
it's a bad bill, or what improvements? Who wants to criticize 
the bill or the initiative? All we're trying to do is inject 
competition back into airline travel. How would you improve 
this measure or----
    Mr. Miller. Well, first of all, I think----
    Senator Hollings [continuing]. If it is wrong?
    Mr. Miller [continuing]. I think the major thrust of the 
bill is right on the money, to deal with some of the problems 
of expanding competition throughout the country. And, in 
particular, I think it's strong in addressing the gates issue 
which has been somewhat neglected. I think the merger thrust is 
very good, as well.
    You know, I've heard the comments earlier about the huge 
merger--United and US Airways. The attorney generals of this 
country are investigating that. We're committing considerable 
resources to look at that. We're concerned, on that front, that 
if we let that happen and develop this oligopoly, we'll all 
regret the day.
    So, you know, I think the major principles that you're 
embarking upon are exactly right. We would be glad to work on 
some of the details, particularly on the gates, and try and 
fine tune that. Tom Ormiston from my staff is here today and 
would certainly work with your staff. But I think the major 
thrust of what you're doing is right on course.
    Senator Hollings. Thank you very much. Thank you, Mr. 
Chairman.
    The Chairman. Thank you.
    Senator Burns.
    Senator Burns. I'll have to ask Mr. Miller what was wrong 
when, back in the days of--(inaudible)--Airlines, when we 
stopped at Kansas City, St. Jo--(inaudible)--Cedar Rapids, Tri 
Cities, Rockford, and Chicago and we still sold some Chicago 
tickets.
    [Laughter.]
    Mr. Miller. Those were, in some ways, the good old days.
    [Laughter.]
    Mr. Miller. On the other hand, deregulation has decreased 
prices, consumers fly at much greater level throughout the 
country today. So deregulation was a very positive step. It's 
just an attempt to try and make sure the benefits are extended 
to places like Montana and Iowa and other places.
    Senator Burns. I will have to agree with that, because 
basically we have as good a jet service in Montana. I can't 
complain at all. I can complain a little bit about--on the 
fares and that type thing, but we can't complain about the 
service.
    But, Ms. Hecker, I was interested in your--and you said you 
had--we have some secondary problems with this business of 
predatory pricing and this type thing. Would that be in the 
reservation system?
    Ms. Hecker. That's one of the practices that really should 
be further investigated and should be examined. I think there 
are some issues about potential bias in reservation systems, 
but it really extends beyond just the system itself.
    There continue to be issues about commission overrides and 
special agreements that airlines have with travel agents to 
induce less-than-biased advice to passengers.
    And then there are other issues about airline negotiations 
with businesses where they give them special deals, but some of 
them have conditionality that--we'll give you a good deal on 
the flights where we fly as long as you don't fly on some of 
these other low-cost carriers--and are looking at establishing 
for conditions that really restrict open choices in markets.
    So there are a range of practices that are of concern, and 
that's really why we support the intent of the bill to have a 
far more rigorous oversight by DOT of these practices.
    Senator Burns. Mr. Hauenstein, I'm interested in your 
testimony here. Whenever US Airways and you bid on part of 
their operation with--and then were still going on in--with 
United Airlines with that merger. Were you given any reason why 
you were denied access or to even try to price out parts of US 
Airways?
    Mr. Hauenstein. It is our belief that the duopoly had 
already carved up the assets, and we were precluded from 
participating in a fair bidding process for the D.C. Air 
assets.
    Senator Burns. Well, when Eastern--I think when Eastern 
ceased to operate and they went into bankruptcy, I think they 
were piecemeal-ed out, weren't they? Am I not correct on that? 
Mr. Kahan, do you remember that?
    Mr. Kahan. Oh, I remember being at the bankruptcy auction. 
I can tell you an anecdote from that. I remember being there at 
2 o'clock in the morning, and I was representing Air Canada. We 
wanted three gates. These are the three gates, by the way, 
where I think the vehicles are parked, F1, 2, and 3.
    And it turned out that our problem was that United, which 
is the dominant carrier of Chicago, was making an offer for 
gates or slots. So about 1:30 in the morning, we realized we 
were maybe in better shape, because it turned out American 
wanted slots. So Air Canada and American teamed up together, 
and we made a bid and then another bid and yet a still higher 
bid for a package of gates and slots.
    And I remember thinking that we were making some progress, 
but the guys at the United table, which are now some of the 
guys at US Airways, were just sitting over there like sphinx. 
And this is now about 2:30, 3:30 in the morning. All right? And 
at 4 o'clock in the morning----
    Senator Burns. Who in the world was your auctioneer?
    [Laughter.]
    Mr. Kahan. Oh, he was quite--he was quite a--he was--he was 
an attorney.
    [Laughter.]
    Senator Burns. Auctioneers usually are.
    [Laughter.]
    Mr. Kahan. OK. So at 4 o'clock in the morning----
    Senator Burns. I know something about those fellows.
    Mr. Kahan. At 4 o'clock in the morning, United finally 
opened their mouth. We had offered $44 million for a package of 
gates and slots, which was far more than we should have paid. 
United came up with a $70-million offer, and they blew us away, 
and that was that.
    Senator Burns. Tell me about, on these gates--and I agree 
with the attorney general--and some of these things that have 
come up with regard--we have never given much regard to gates 
and more focused on slots, but I think your anecdotal story a 
while ago about landing early and then sitting out there on the 
crossways or the taxiways for another 45 minutes--I could write 
a book about certain airports that I go through all the time, 
and that is exactly what happens. It's capacity. They don't 
have the gate capacity, or whatever.
    What do you think of some gates being termed as principal-
owned gates and then we would have some shared or common gates?
    Mr. Kahan. We benefit from that right now. At La Guardia, 
where we out-carry TWA, which has multiple gates, we have no 
gates. We have a single common-use gate, and then we get the 
pickings and leavings from everybody else. So that's essential, 
and I commend the Port Authority of New York and New Jersey 
which has taken the initiative where they can to take back 
gates and convert them into common-use gates. Otherwise, we 
would not have an operation there.
    Senator Burns. Now, should that be the authority of the 
local airport authority, or--rather than the Federal 
Government?
    Mr. Kahan. I think that that's something which a self-
respecting local authority ought to be thinking about all the 
time, and they have the authority to do that in most cases. But 
I also believe that the DOT's general unfair and deceptive 
practices authority, which is at issue in S. 415, should be 
clarified to ensure that DOT can deal with anti-competitive 
practices and gate transactions.
    Senator Burns. The reason I say this, because it is of the 
interest of the community to provide an acceptable fare for 
business travel in and out of there so they, alone, could 
probably control the gate situation and maybe in some--but I 
doubt they will in the slot situation--but they could in the 
capacity of the airport, as far as gate assignments is 
concerned.
    Mr. Kahan. Oh, no. Absolutely. Somebody said that the 
airline business has become the real estate business, and I 
think that there's a lot of truth to that.
    Could I have 20 seconds to say something about CRS at some 
point?
    Senator Burns. Yes. Yes.
    Mr. Kahan. OK. You asked the question.
    Senator Burns. Well, I'm not the chairman, here. I'm kind 
of stepping on the man's toes, but----
    Senator Hollings. Oh, that's--we've got the list here of 
Fitzgerald, Carnahan----
    Mr. Kahan. OK, just give me----
    Senator Hollings [continuing]. Edwards and then--
(inaudible).
    Mr. Kahan [continuing]. Just give me 20 seconds, then I'm--
then I'll leave and I'll never bother you again.
    Senator Hollings. Go ahead.
    [Laughter.]
    Mr. Kahan. OK, 'cause you asked about--you asked a question 
which I heard as, ``What is the relationship between the CRS 
regulations and predatory practices,'' and I want to just put 
on the table one very specific item.
    Under the CRS practices, as they have developed since we 
regulated CRS in 1984, major carriers have realtime access to 
everything we do because they get the--day after day, they get 
the CRS tapes. I don't know of any industry--there can't be 
many of them in our free enterprise system--where that happens. 
Frankly, I think it's unethical and un-American and it's one of 
the things that DOT was supposed to do something about.
    It definitely facilitates predation. The predator is 
delighted to know exactly which parts of the marketplace, which 
travel agencies, which whatever, we're penetrating, where our 
successes are; and this data permits them to do that, and it's 
a creature of regulation. So I think that whether you're----
    Senator Burns. I've never supported the centralized 
reservation system. I've never supported that, and I think that 
we right back to where the airlines should go ahead and 
maintain the reservation system, make them inter-operative, but 
don't make it centralized where you've got--everybody knows 
about everybody else's business before they do. Thank you, Mr. 
Chairman. I appreciate that.
    Senator Hollings. Yeah.
    Senator Fitzgerald.

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

    Senator Fitzgerald. Thank you, Mr. Chairman. I was 
wondering maybe if Mr. Neeleman wanted to address this issue. I 
noticed that the bill attempts to allow competition in part by 
giving the Department of Transportation the authority to take 
airport improvement funds and PFC monies to withhold them and 
enforce their use in a way which promotes competition at a 
given airport.
    I'm wondering if the bill wouldn't be improved if we gave 
the DOT the ability withhold those funds and used them instead 
for the construction of a competitive airport itself. And the 
reason I bring this up is that in Chicago, one way two major 
dominant carriers prevent competition is they have been doing 
anything, and stopping at nothing, to prevent the construction 
of a third Chicago airport, even though O'Hare has been at 
capacity since 1969.
    Now, they would benefit if another runway was built at 
O'Hare, because United and American would just carve up that 
additional capacity and make sure nobody else was able to get 
any part of the 87 percent of the Chicago market that they 
enjoy.
    A company like JetBlue might have an opportunity of flying 
into the Chicago market if there were a new airport in Chicago, 
and I wondered if you had any comment on that.
    Mr. Neeleman. Well, obviously, one of the big issues facing 
the overcapacity today--we talk a lot about airspace, but I 
think a lot of it has to do with blacktop. If you've ever been 
in the cockpit of an airplane and lined up for landing right 
after another, it's a little hair-raising sometimes to be going 
through that knowing that we're really at capacity for 
blacktop.
    So there needs to be blacktop, there needs to be more 
runways. And I understand your concern about O'Hare. If there 
was just another runway there, but there also needs to be 
runways in places where there are people and people willing to 
travel. I think to the extent--airports are very expensive 
propositions, billions and billions of dollars, and so there 
needs to be a lot of thought to make sure that if something is 
built, that it will be commercially attractive, that there are 
people around.
    I know in the Chicago area, you know, just over the border, 
I know that the airports have been promoting an airport in 
Gary, Indiana. And so, obviously, those are issues there. And 
it's pretty fascinating to watch, but we are from the outside 
looking in. We aren't allowed to, at this time, serve anything 
there because there isn't the airport to the south. It doesn't 
exist yet. And so we're relegated to either going to Indiana or 
just waiting for some gates or slots to become available.
    Senator Fitzgerald. Well, I'm wondering if Ms. Hecker would 
want to discuss this issue, too. If you just add capacity at an 
existing airport where you have a dominant carrier, even if 
there were some provisions to try and assure that that added 
capacity went to new entrants to provide some competition, 
aren't those new entrants, in many ways, dependent on the 
dominant carrier at that airport, whether it's for contracts to 
provide fuel, services, or any other kind of subcontracts that 
they might take?
    And is it unreasonable to consider giving the DOT the 
ability to withhold some of this money and require that it be 
used for the construction of an entirely competitive facility?
    Ms. Hecker. In the statement, we're very supportive of the 
conditionality for the funds. This is something we've been 
talking about for about 5 years now and looked at that.
    The airports clearly have the leadership authority, in 
terms of overseeing and ensuring competitive access, but the 
conditionality of those funds is critical. I think it would 
take some more examination of somehow requiring any funds 
withheld to be used for some other purpose, though, because, as 
we just heard, the complexity of financing a new airport, 
getting the underwriting, getting the bond markets to support 
it, getting the airlines that make the financial commitment to 
underwrite it is a very complex process.
    Actually, in that light, there was the earlier question 
about what kind of improvements could be made in the bill. I 
mean, the historic relationship between the department and all 
of its funding tools and airports really would benefit from a 
fresh review. A lot of the restrictions on airport financing 
really date from the pre-deregulation era and really would 
merit from an----
    Senator Fitzgerald. What would examples of those 
restrictions be?
    Ms. Hecker. Well, airports cannot discriminate between 
different categories, and it requires--for example, one of the 
most innovative proposals for better pricing of airspace was in 
Boston Logan Airport, and it was very creative and it was 
really dealing with the capacity issues and dealing with 
getting the right incentives in place for the use of the 
airspace. And FAA overruled it and said that it would 
discriminate against certain parties and was inconsistent with 
the authority of airports, and they didn't feel they even had 
the----
    Senator Fitzgerald. How many airports have we built in 
those country in the last 20 years?
    Ms. Hecker. One.
    Senator Fitzgerald. One.
    Senator Hollings. Denver. I wonder, if you don't mind 
sharing your time with that roll call--I'd be willing to come 
back, but I'm afraid we're going to lose the panel--so these 
other senators who've been waiting.
    Senator Fitzgerald. That's fine.
    Senator Hollings. Would that be all right? I'm with you. 
Richard Daley came here 10 years ago, and I was wrong--I didn't 
get enthused--but I'm enthused about it now.
    [Laughter.]
    Senator Hollings. After you get a third airport. That's the 
only way to relieve that situation.
    Senator Fitzgerald. But--one final thing--don't the 
airlines try to prevent the construction of a new airport in an 
area where they have a dominant hub? I mean, that's one of 
their ways of preventing competition that is--maybe we're not 
really looking at.
    Ms. Hecker. Yes, they have that authority, and that's why a 
fresh look at the authorities and flexibilities of airports and 
developing the finance is really warranted.
    Senator Fitzgerald. Thank you.
    Senator Hollings. Senator Carnahan.

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

    Senator Carnahan. Thank you, Mr. Chairman. Since I joined 
this Committee a few months ago, a great deal of attention has 
been given to the consolidation in the airline industry and the 
resulting impact on competition. We appear to be headed toward 
a situation where a few mega-carriers will dominate air travel 
in this country. Such consolidation would undoubtedly lead to 
higher fares, poor customer service, and fewer flights into 
small markets.
    And while I support the main focus of S. 415, one aspect of 
it needs clarification. As I have stated previously, American 
Airline's proposed acquisition of substantially all of TWA's 
assets is distinctly different from the other aviation mergers 
that are currently pending.
    Let's be clear. TWA can no longer function as an 
independent airline. The critical issue, therefore, is the 
future of the 20,000 TWA employees and their families. We are 
in need of a solution that protects these jobs and enables TWA 
retirees to continue receiving benefits.
    American's proposal is the only solution that includes jobs 
for virtually all of TWA's contract employees and benefits for 
TWA's retirees. American's offer, therefore, is the best 
possible solution for TWA's employees, retirees, and the State 
of Missouri.
    American's acquisition has been approved by the bankruptcy 
court. The review process is underway by the Department of 
Justice. Now is an extremely sensitive time for this 
transaction. It is critically important that nothing happens to 
prevent American's acquisition from being completed. I cannot 
overestimate the detrimental effect that any time delay would 
have on this process. Were it not for the financing provided by 
American, TWA would not even be operating today.
    To ensure that the acquisition moves forward and that TWA's 
employees retain their job, the process must proceed in a 
timely fashion. I'm confident that the intent of S. 415 is not 
to delay or to derail purchase of TWA's assets, and I am 
optimistic that the bill can be clarified to make this clear.
    I look forward to working with the sponsors of the bill and 
the other members of the Committee to make this clarification 
so that we do not inadvertently create new obstacles to the 
approval of American's proposed acquisition of TWA's assets. 
Thank you, Mr. Chairman.
    Senator Hollings. Thank you very much.
    Senator Edwards.

                STATEMENT OF HON. JOHN EDWARDS, 
                U.S. SENATOR FROM NORTH CAROLINA

    Senator Edwards. Thank you very much, Senator Hollings. 
Thank you very much for your work in this area. I share your 
concern and Senator McCain's concern about competition. I've 
talked about that at length with respect to the U.S. Air/United 
merger--or potential U.S. Air/United merger and its effect on 
my State of North Carolina.
    Let me talk about a couple of things--or ask about a couple 
of things. With respect to the two major provisions of this 
bill, the second provision that requires DOT to do the 90-day 
study and gives them authority over requiring air carriers to 
make gates, facilities, and other assets available, that makes 
a great deal of sense to me, but I want to talk about the other 
major provision: giving DOT authority over mergers.
    While I have--and have expressed great concern about 
competition and the impact these mergers could have on 
competition, I also, at the same time, have some concern about 
getting another government bureaucracy involved in the merger 
process and would just like to have comments from anybody on 
the panel who wants to comment about that. That's my concern. 
Why do we need to do it, and how do you balance that?
    Mr. Miller. Yeah, I think it's an obvious question and an 
obvious concern, but I think it's balanced by the expertise 
that DOT has in this industry and the need for them to play a 
more active role in competition, generally, coupled with the 
statement of Secretary Mineta's just recently, that he 
envisioned a greater role, even under the current law, for DOT.
    So I think it's the expertise. I don't think there's any 
reason to think that DOT and DOJ wouldn't cooperate effectively 
here. And I think it's looking at the very, very large mergers. 
The----
    Senator Edwards. Tom, doesn't DOT already consult with DOJ 
on these mergers?
    Mr. Miller. I think--clearly, they do, but this would give 
them a heightened role, and I think that that's one of the 
values, to make them more active, more involved in the 
competition issues.
    And, you know, frankly, they've got this wealth of 
expertise on competition matters and on transportation and 
airline matters and have authority and relationships with the 
industry that DOJ does not have.
    I clearly think DOJ's role should continue. They did a 
terrific job on the Continental/Northwest acquisition--or 
partial acquisition--and stopped that. I think that they 
deserve a lot of credit for bringing the American Airlines 
case, as I discussed before.
    So I don't think their role should be diminished, but I 
think a heightened, more active role of DOT would be a 
contribution, and an important one.
    Dr. Cooper. We believe that there are two reasons that you 
have a second layer of policy review. Under the antitrust laws, 
sometimes what you get into a syndrome is where you're not 
allowed to look at the forest for the trees. So Justice goes 
merger by merger and does not--and under the statute, cannot--
take a big-picture policy view of the overall industry and the 
direction you're going.
    You get tangential arguments about merger waves and things 
like that. But the Department of Justice is not going to court 
to stop one merger because of the next one that will get 
triggered. It's a very difficult legal argument to make. So you 
need the big-picture policy review.
    A second reason to do so, to look at--to have a second, 
sort of, policy review, is that some industries are different, 
and we worry about leaving it to only a merger-guidelines type 
of standard. We have this in the Communications Act, and we'll 
see some debate about that. The standard of antitrust in an 
industry such as this, which is moving toward a network basis 
which has a fairly low elasticity of demand, you ask yourself 
the question, ``Is simple merger review sufficient to prevent 
the abuse of market power?''
    And so for both of those reasons, a second layer of public-
policy review, which is what this is about, I think, is 
extremely important. And an infrastructure industry--
transportation and communications industries--have those 
characteristics that really do invite that broader policy 
review.
    Mr. Kahan. Just briefly, I think that the Department of 
Justice is really good at looking at some of the parts of the 
United/U.S. Air merger. For example, the idea that the two 
carriers have met, that they've decided to carve up the 
marketplace, that they have a scheme, that they have--that's 
traditional Department of Justice kind of stuff, and they're 
good at that. They ask for documents, they take depositions, so 
on and so forth.
    In--S. 415, I believe, is correct because the barriers to 
entry in the airline business centering around airport access, 
gates, and slots is intertwined with DOT and FAA regulations 
and policy and creates a whole different set of concerns than 
you get in a typical merger situation in the general economy. 
And I think it could be justified that way very well.
    Senator Edwards. Thank you for your comments. I think we 
have to go vote now.
    Senator Hollings. I want to thank, on behalf of the 
Committee, the panel. We'll keep the record open for questions, 
and we thank you very much. The Committee will be at ease 
subject to the call of the Chair.
    [Whereupon at 11:14 a.m., the hearing was adjourned]
  

                                  
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