[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
 IMPACT OF CONSOLIDATION ON THE AVIATION INDUSTRY, WITH A FOCUS ON THE 
     PROPOSED MERGER BETWEEN DELTA AIR LINES AND NORTHWEST AIRLINES

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

                               (110-129)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                                AVIATION

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 14, 2008

                               __________


                       Printed for the use of the
             Committee on Transportation and Infrastructure



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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York             VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida               STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California               FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas         JERRY MORAN, Kansas
GENE TAYLOR, Mississippi             GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland         ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California        HENRY E. BROWN, Jr., South 
LEONARD L. BOSWELL, Iowa             Carolina
TIM HOLDEN, Pennsylvania             TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington              TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington              SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts    BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York          JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine            SHELLEY MOORE CAPITO, West 
BRIAN HIGGINS, New York              Virginia
RUSS CARNAHAN, Missouri              JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado            MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            TED POE, Texas
DORIS O. MATSUI, California          DAVID G. REICHERT, Washington
NICK LAMPSON, Texas                  CONNIE MACK, Florida
ZACHARY T. SPACE, Ohio               JOHN R. `RANDY' KUHL, Jr., New 
MAZIE K. HIRONO, Hawaii              York
BRUCE L. BRALEY, Iowa                LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          CHARLES W. BOUSTANY, Jr., 
TIMOTHY J. WALZ, Minnesota           Louisiana
HEATH SHULER, North Carolina         JEAN SCHMIDT, Ohio
MICHAEL A. ARCURI, New York          CANDICE S. MILLER, Michigan
HARRY E. MITCHELL, Arizona           THELMA D. DRAKE, Virginia
CHRISTOPHER P. CARNEY, Pennsylvania  MARY FALLIN, Oklahoma
JOHN J. HALL, New York               VERN BUCHANAN, Florida
STEVE KAGEN, Wisconsin               ROBERT E. LATTA, Ohio
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey

                                  (ii)

  


                        Subcommittee on Aviation

                 JERRY F. COSTELLO, Illinois, Chairman

BOB FILNER, California               THOMAS E. PETRI, Wisconsin
LEONARD L. BOSWELL, Iowa             HOWARD COBLE, North Carolina
RICK LARSEN, Washington              JOHN J. DUNCAN, Jr., Tennessee
RUSS CARNAHAN, Missouri              VERNON J. EHLERS, Michigan
JOHN T. SALAZAR, Colorado            STEVEN C. LaTOURETTE, Ohio
DANIEL LIPINSKI, Illinois            FRANK A. LoBIONDO, New Jersey
NICK LAMPSON, Texas                  JERRY MORAN, Kansas
ZACHARY T. SPACE, Ohio               ROBIN HAYES, North Carolina
BRUCE L. BRALEY, Iowa                SAM GRAVES, Missouri
HARRY E. MITCHELL, Arizona           JOHN BOOZMAN, Arkansas
JOHN J. HALL, New York, Vice Chair   SHELLEY MOORE CAPITO, West 
STEVE KAGEN, Wisconsin               Virginia
STEVE COHEN, Tennessee               JIM GERLACH, Pennsylvania
NICK J. RAHALL, II, West Virginia    MARIO DIAZ-BALART, Florida
PETER A. DeFAZIO, Oregon             CHARLES W. DENT, Pennsylvania
ELEANOR HOLMES NORTON, District of   TED POE, Texas
Columbia                             DAVID G. REICHERT, Washington
CORRINE BROWN, Florida               CONNIE MACK, Florida
EDDIE BERNICE JOHNSON, Texas         JOHN R. `RANDY' KUHL, Jr., New 
ELLEN O. TAUSCHER, California        York
TIM HOLDEN, Pennsylvania             LYNN A WESTMORELAND, Georgia
MICHAEL E. CAPUANO, Massachusetts    MARY FALLIN, Oklahoma
DORIS O. MATSUI, California          VERN BUCHANAN, Florida
MAZIE K. HIRONO, Hawaii              JOHN L. MICA, Florida
LAURA A. RICHARDSON, California        (Ex Officio)
JAMES L. OBERSTAR, Minnesota
  (Ex Officio)

                                 (iii)

                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................   vii

                               TESTIMONY

Anderson, Richard H., Chief Executive Officer, Delta Air Lines, 
  Inc............................................................     9
Baggaley, Philip, Managing Director, Corporate and Government 
  Ratings, Standard and Poor's Rating Services...................    63
Foer, Albert A., President, The American Antitrust Institute.....    63
Friend, Patricia, International President, Association of Flight 
  Attendants-CWA.................................................    41
Gellman, Ph.D., Aaron J., Professor, Transportation Center, 
  Northwestern University........................................    63
Horan, Hubert, Aviation Analyst and Consultant...................    63
Mitchell, Kevin, Chairman, Business Travel Coalition.............    63
Moak, Captain Lee, Chairman, Delta Master Executive Council, Air 
  Line Pilots Association, International.........................    41
Neidl, Raymond, Analyst, Calyon Securities.......................    63
O'Connell, Jr., Hon. James J., Deputy Assistant Attorney General, 
  Antitrust Division, U.S. Department of Justice.................    28
Reynolds, Hon. Michael W., Acting Assistant Secretary for 
  Aviation and International Affairs, U.S. Department of 
  Transportation.................................................    28
Roach, Jr., Robert, General Vice President of Transportation, 
  International Association of Machinists and Aerospace Workers..    41
Steenland, Douglas M., President and Chief Executive Officer, 
  Northwest Airlines Corporation.................................     9
Stevens, Captain David V., Chairman, Northwest Airlines Master 
  Executive Council, Air Line Pilots Association, International..    41

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Braley, Hon. Bruce L., of Iowa...................................    85
Carnahan, Hon. Russ, of Missouri.................................    87
Cohen, Hon. Steve, of Tennessee..................................    88
Johnson, Hon. Eddie Bernice, of Texas............................    90
Mitchell, Hon. Harry E., of Arizona..............................    94
Oberstar, Hon. James L., of Minnesota............................    96
Salazar, Hon. John T., of Colorado...............................   102
Wu, Hon. David, of Oregon........................................   104

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Anderson, Richard H..............................................   108
Baggaley, Philip.................................................   130
Foer, Albert A...................................................   141
Friend, Patricia.................................................   149
Gellman, Aaron J.................................................   164
Horan, Hubert....................................................   170
Mitchell, Kevin P................................................   181
Moak, Captain Lee................................................   188
Neidl, Ray.......................................................   197
O'Connell, James J...............................................   202
Reynolds, Michael W..............................................   213
Roach Jr., Robert................................................   221
Steenland, Douglas M.............................................   239
Stevens, Captain David V.........................................   278

                       SUBMISSIONS FOR THE RECORD

Anderson, Richard H., Chief Executive Officer, Delta Air Lines, 
  Inc.:

  Responses to questions from Rep. Lipinski......................   122
  Responses to questions from Rep. Wu............................   126
Steenland, Douglas M., President and Chief Executive Officer, 
  Northwest Airlines Corporation:

  Responses to questions from Rep. Lipinski......................   267
  Responses to questions from Rep. Wu............................   273

                        ADDITIONS TO THE RECORD

Aircraft Mechanics Fraternal Association, written statement......   282
Consumers for Competitive Choice, written statement..............   288
Detroit Regional Chamber, Sarah Hubbard, Vice President, 
  Government Relations, written statement........................   290
Memphis Regional Chamber, John W. Moore, President and CEO, 
  Memphis/Shelby County, Airport Authority, Larry D. Cox, 
  President, written statement...................................   294
Minnesota Chamber of Commerce, David C. Olson, President, 
  Minneapolis Regional Chamber of Commerce, Todd Klingel, 
  President, Saint Paul Area Chamber of Commerce, Kristofer 
  Johnson, President, Metropolitan Coalition of Chambers, Daron 
  Van Helden, Chair, written statement...........................   302

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  HEARING ON IMPACT OF CONSOLIDATION ON THE AVIATION INDUSTRY, WITH A 
  FOCUS ON THE PROPOSED MERGER BETWEEN DELTA AIR LINES AND NORTHWEST 
                                AIRLINES

                              ----------                              


                        Wednesday, May 14, 2008

                   House of Representatives
    Committee on Transportation and Infrastructure,
                                  Subcommittee on Aviation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 2:00 p.m., in 
Room 2167, Rayburn House Office Building, the Honorable Jerry 
F. Costello [Chairman of the Subcommittee] presiding.
    Mr. Costello. The Subcommittee will come to order.
    The Chair will ask all Members, staff and everyone to turn 
electronic devices off or on vibrate.
    The Subcommittee is meeting today to hear testimony on the 
impact of consolidation on the aviation industry with a focus 
on the proposed merger between Delta and Northwest Airlines. 
The Chair will announce that I will give an opening statement 
then recognize the Ranking Member, Mr. Petri, for an opening 
statement or any remarks he may have. We expect Chairman 
Oberstar, the Chairman of the Full Committee, to be here. He 
will be giving an opening statement or comments and so will Mr. 
Mica.
    At this time, the Chair would ask unanimous consent to 
allow Mrs. Miller to participate in today's hearing under 
Committee Rule 3(d). Hearing no objection, so ordered.
    I welcome everyone to our Subcommittee hearing on the 
impact of consolidation on the aviation industry with a focus 
on the proposed merger between Delta and Northwest Airlines. On 
April 15th, 2008, Delta and Northwest announced a proposed 
merger, claiming that such a move would generate more than $1 
billion in annual revenue and create cost synergies for more 
effective aircraft utilization, a more comprehensive route 
network and improved operational efficiency. This merger 
announcement has increased speculation that other carriers 
within the industry would merge. According to published 
reports, discussions are underway between United and U.S. 
Airways. The long-term implications of a series of mergers 
could have a major effect on the future of the industry, 
resulting in just a few megacarriers here in the United States.
    Why are the airlines discussing mergers? Many believe it is 
because of fuel prices. Every penny increase in the price of a 
gallon of jet fuel results in an additional $195 million in 
annual fuel costs for the U.S. airline industry. Although most 
airlines made a profit in 2007, the increase in fuel and the 
slowing economy have caused the majority of the airlines to 
report significant first quarter losses for 2008. In the last 
month, increased fuel prices have in part caused four air 
carriers to stop operations and other carriers to reduce 
capacity.
    With very few areas for airlines to reduce costs, some view 
merging as the only way to remain viable. While I am not 
entirely convinced that this is true, we must take a look at 
the impact of fuel on the industry.
    I have some grave concerns about airline mergers. Previous 
mergers have rarely produced the projected benefits and 
efficiencies promised. This has frequently led to reduced 
competition and higher fares. Mergers have been good for 
airlines executives, but not so good for consumers or 
employees. In addition, I doubt that the merger proposed by 
Delta and Northwest would retain both carriers' existing hubs, 
as they have indicated, at their current level. We have heard 
that before. American Airlines executives, when they acquired 
TWA, sat in this very Committee hearing room and testified from 
that table that they would keep their hub in St. Louis and 
would keep the TWA hub at its current level in St. Louis. Yet, 
less than two years later, flights from St. Louis were cut from 
over 500 per day to about 250 per day, just about in half in a 
two-year period. And many TWA employees lost their jobs and saw 
their pensions reduced.
    Past mergers have shown that customer service tends to 
suffer as carriers attempt to merge cultures, IT systems and 
fleets. We must make sure that consumers and employees do not 
end up paying a hefty price for consolidation.
    I look forward to hearing from both the Department of 
Transportation and the Department of Justice on the process 
used in making decisions on proposed mergers and when a 
decision could be expected in this case. I am also interested 
in hearing more about how this potential merger will affect the 
employees. I understand that Delta pilots are supportive but 
other employee groups have not reached any agreement with 
management.
    Further, I am interested in hearing from the analysts on 
our fourth panel today regarding the pros and cons of this 
merger for both consumers and employees, and also if they 
believe that this merger will lead to more mergers in the 
future.
    Finally, Members of the Subcommittee should know that the 
Department of Transportation and the Department of Justice 
witnesses can answer questions on the review process, but 
cannot give specifics on the Delta and Northwest merger 
proposal currently pending before the Department of Justice.
    With that, let me again welcome all of you here today. We 
certainly welcome our witnesses that will be testifying before 
the Subcommittee. Before I recognize Mr. Petri for his opening 
statement or any remarks that he may have, I ask unanimous 
consent to allow two weeks for all Members to revise and extend 
their remarks and to permit the submission of additional 
statements and materials by Members and witnesses.
    Without objection, so ordered.
    The Chair at this time recognizes the Ranking Member, Mr. 
Petri, for his opening statement or any comments he may have.
    Mr. Petri. Thank you very much for holding this important 
hearing today.
    It is essential that this Subcommittee focus on the 
financial issues facing the airline industry right now, not the 
least of which issues is the unprecedented price of airline 
fuel and energy generally. The Air Transportation Association 
is projecting that the industry's 2008 jet fuel bill will be 72 
percent higher than last year's. It seems as though we are 
hearing of record fuel prices being reached on an almost daily 
basis.
    Increases in fuel prices impact the airlines in much the 
same way as it impacts families filling up the tanks of their 
cars and minivans. Difficult budgeting decisions have to be 
made.
    Skyrocketing fuel prices will inevitably lead to and has 
already lead to tough decisions by air carriers. They must 
consider ways to reduce costs and increase revenue where 
possible. Air carriers without enough cash on hand will be 
unable to weather the storm. In fact, eight airlines have filed 
for bankruptcy since December. Many already have cut capacity, 
added surcharges, tried to increase fares, perhaps slowed down 
the flight rate that the planes are flying at to operate a 
little more efficiently on a per-mile basis.
    This is certainly not the first time that the airlines have 
faced difficult economic times. Indeed, the airline industry is 
a cyclical business. But the record fuel prices we are seeing 
is an unprecedented event. Last month, Delta and Northwest 
Airlines announced a proposed merger. The record high price of 
jet fuel, global competition and the slowing economy are cited 
as the main reasons for the merger. Since the proposed merger 
was announced, aviation experts, labor groups, consumer 
advocates and other interested parties have commented both for 
and against airline mergers in general and the proposed Delta-
Northwest merger in particular.
    The proposed merger's impact on the marketplace, 
competition, the air service, employees and airfares have been 
the subject of a great deal of speculation. Today we have 
before us representatives of interested groups to testify about 
airline consolidations, focusing on the Delta-Northwest merger. 
We will also hear from the chief executive officers of both of 
these airlines.
    Finally, the Department of Justice and the Department of 
Transportation are here to explain the extensive and lengthy 
Government reviews required before any merger can actually 
occur. So I look forward to the testimony and I again thank all 
the witnesses for their participation and Chairman Costello in 
particular for organizing the hearing today.
    Mr. Costello. The Chair thanks the Ranking Member and now 
recognizes the gentleman from Illinois, Mr. Lipinski, for any 
comments or opening statement that he may have.
    Mr. Lipinski. Thank you, Mr. Chairman.
    First let me thank Chairman Costello and Chairman Oberstar 
for holding this very important hearing, also Ranking Member 
Petri and Ranking Member Mica.
    I have serious concerns about the proposed Delta-Northwest 
merger and further airline consolidations in general. That is 
not to say that I summarily oppose any mergers, but as I am 
sure will be expanded upon throughout today's hearing, a number 
of past airline mergers have failed airline employees and 
consumers. These mergers have created decreased choice, higher 
fares, more frequent flight disruptions, lost luggage, 
disrupted workforces and losses in employee benefits.
    In March, I sent a letter co-signed by 46 of my colleagues 
to the Attorney General and the Secretary of the Department of 
Transportation, expressing our concerns about the potential 
impact airline mergers could have on consumers and airline 
employees. Now that these Federal agencies are actively 
considering the proposed Delta-Northwest merger, I once again 
urge them to strongly consider the concerns that we have 
expressed and place the interests of the consumers and the 
workers first.
    As I said, I understand the desire to have these mergers. 
The disruption right now being caused in the airline industry, 
especially because of the high prices of oil right now, and of 
jet fuel, so I understand that. But I think we need to take a 
careful look at any mergers that are considered, not just the 
Delta-Northwest merger, but any mergers.
    So I look forward to hearing from the witnesses today and 
hearing their testimony on this. I yield back.
    Mr. Costello. The Chair thanks the gentleman from Illinois 
and now recognizes the gentlelady from California, Ms. 
Richardson.
    Ms. Richardson. Thank you, Mr. Chairman. I would also like 
to thank Ranking Member Petri for holding this very timely 
hearing. I would say not only is it very important, it is very 
timely that we have this discussion while we can still be 
engaged in the process.
    Admittedly, the current economic challenges that we are 
facing, that commercial airlines are facing as well, has really 
caused us all, I think, to take a step back of what is 
happening currently in our economy. I was really disturbed when 
I read a newspaper article that talked about the percentage of 
a lot of the airlines, of how many of the planes now are not 
even being serviced here in the United States, but actually, a 
great amount of them are being serviced outside of this 
Country.
    I will tell you that in my district, I represent the area 
with the Long Beach International Airport, the Compton-Woodley 
Airport, and just neighbors to the Los Angeles International 
Airport. Economically, this is a critical engine in my 
particular district, employing thousands and delivering over 
49,000 tons of goods each year.
    Let me say, as a Member of Congress, we are all going 
through tough times. If there is a role that we have to play, I 
hope that eh witnesses would share with us not only this 
proposal that you feel you need to take in order to survive, 
but give us some suggestions of what we could do to work with 
you to ensure that we can continue this industry. I do not 
believe ultimately that this is best for our Country, but we 
all have a role to play in fixing that. If there is something 
we can do, I would very much like to hear about it today.
    Thank you very much. I yield back the balance of my time.
    Mr. Costello. The Chair thanks the gentlelady and now 
recognizes the gentleman from Colorado, Mr. Salazar.
    Mr. Salazar. Thank you, Mr. Chairman, and thank you for 
having this important hearing.
    I would like to submit my entire statement for the record. 
I can understand and fully sympathize with what is going on 
with the proponents of this merger. I think we can pinpoint 
everything back to the high price of fuel. We see that Frontier 
Airlines has also filed Chapter 11. There are many airlines 
that are suffering.
    But it is not only the airline industry. It is almost every 
single factor in the entire economy, whether it is high food 
prices because of the high cost of transportation. Mr. 
Chairman, I want to make sure the people understand that most 
of the blame has to go back to the high price of fuel on 
everything that is going on in this Country right now. But I 
would also like the witnesses to explain to us what their 
proposal is and what impact it is going to have, the merger 
specifically, on layoffs, on seniority integration and 
pensions.
    So with that, Mr. Chairman, I would yield back. Thank you.
    Mr. Costello. The Chair thanks the gentleman from Colorado 
and now recognizes the distinguished Chairman of the Full 
Committee, Chairman Oberstar.
    Mr. Oberstar. I thank you, Mr. Chairman, and thank our 
witnesses for being here today. It is a long list, a very 
important list of witnesses on an extremely important subject. 
Not the first time that the Subcommittee on Aviation of the 
Committee on Transportation and Infrastructure has visited the 
issue of airline finances, alliances and mergers and leveraged 
buyouts. We have been through all of that over a great many 
years.
    This one, however, has a far-reaching significance for the 
future of aviation in America and worldwide. This should not be 
and must not be considered as a standalone, individual 
transaction, but rather, as a trigger of what will surely be a 
cascade of subsequent mergers that will consolidate aviation in 
the United States and around the world into three global 
megacarriers.
    I know that the witnesses, the two principal carries 
involved, will disagree with that in their own self-defense. I 
expect them to. But the reality is that that is what will 
happen.
    There are only a few of us left who were here in the dawn 
years of deregulation. I sat just somewhere down there where 
Mr. Cohen's seat is, and I rubbed my worry beads about voting 
for deregulation. It was after I proposed an amendment that 
succeeded in Committee, for what we know today as essential air 
service, that I decided that in the end, the balance was in 
favor of deregulation.
    Offering my amendment for essential air service, I said, 
Mr. Chairman, if we don't succeed with this amendment, there 
are communities in my district that without air service, the 
only way to get there is to be born there. Thirty years ago, 
everybody laughed. They understood it. And the amendment 
passed.
    But the principle is the same today. If this merger 
results, there would be communities at the end of the spokes in 
the hub and spoke service after all the dust settles with the 
merger, that will not have air service. Reducing the airline 
industry as a whole sector of aviation to three major carriers 
substantially will reduce competition, will limit consumer 
choice and result in higher fares. In established carriers' 
control markets, the tendency is for the carriers not so much 
to compete as to do price following. Fares become identical, 
passenger choice is limited. It will be even more magnified, 
those issues will be, if there are only a few major airlines.
    The strategy will result in a path leading to not the 
greatest service but the greatest mutual profitability. Profit 
is a good thing in the private sector. But not when it simply 
results in disadvantageous effects on the traveling public. 
Competition in such a scenario, many will reason, could prove 
suicidal.
    The Department of Transportation said ``Economic theory 
teaches that the competitive outcome of a duopoly is 
indeterminate. The result could be either intense rivalry or 
comfortable accommodation, if not collusion, between the 
duopolists.'' Mergers discourage competition at major hubs. GAO 
found that fares at concentrated hubs already are higher, in 
some cases 30 percent higher, than fares elsewhere. That would 
only worsen in a merger environment.
    Airlines have the right to defend their hubs, but not in a 
monopoly construct. I hear Delta and Northwest say that the 
merger proposal is pro-consumer, because they will provide 
single carrier service in many new markets. I don't see how 
they are not going to reduce service. I don't see how, when 
they are flying, with 85 percent of seats filled, they can 
provide new service without reducing it somewhere else.
    They say they will increase revenues without raising fares 
by selling more seats in international markets where they can 
charge higher fares. If they fill the seats with international 
passengers, there are going to be fewer seats for passengers 
paying low fares.
    The effect on international competition will be 
significant. Two groups will control 80 percent of the traffic 
between the U.S. and continental Europe. Mergers between U.S. 
carriers will lead to less competition within and among the 
three alliances. They already have, were on their way at 
Northwest, to getting antitrust immunity with their 
relationship with Air France--Air France, KLM, and other 
continental carriers, and their relationship in the Pacific 
Rim.
    Government studies time and again, going back to the 
hearings I held in the 1980s and early 1990s, markets where 
merging carriers now compete, after a merger, fares go up. 
Delta and Northwest also, as has been previously mentioned, 
cite fuel costs as the need to get together, larger purchasing 
pool just means larger costs for the bigger carrier. Last week, 
Delta and Northwest levied a $20 round trip fuel surcharge, the 
11th increase since December of 2007. They are doing their best 
to pass the costs on. That is what they should be doing in a 
deregulated market environment.
    But to say that to keep doing that we need to merge 
stretches credibility. Then there are all these problems that 
result in the aftermath of the merger. Customer service drops 
by the wayside while management tries to bring together two 
very proud airline cultures, dealing with employee unrest, 
integration of seniority lists. I saw those first-hand in the 
Northwest-Republic merger. At one point there were 10 million 
lost suitcases. We spent a lot of time trying to untangle all 
that web.
    The Weekly Standard, which is a supporter of free markets 
and limited government regulation, recently wrote: ``History is 
on the side of the pessimists.'' Count me in. ``In the period 
immediately following every airline merger,'' they write, 
``chaos is the order of the day or year. Pilots find that 
control panels on the merged carriers differ. Baggage losses 
mount as they did when Northwest acquired Republic. The merging 
of reservation systems causes kiosks and websites to 
malfunction, as U.S. Airways and America West discovered. 
Strikes occur as disgruntled employees find the new pension 
package inferior to the old one. All of these are in the new 
Delta's future.''
    The inescapable lesson for me of 29 years of deregulation 
is that mergers and reduction in competition lead to higher 
fares, deterioration of service, financially weakened survivor. 
And we did not deregulate aviation in order to allow the 
consolidation, the subsequent consolidation of this industry 
into just a handful of carriers.
    With that, I welcome the testimony and approach it with an 
open mind.
    [Laughter.]
    Mr. Costello. The Chair thanks the Chairman of the Full 
Committee and now recognizes the Ranking Member of the Full 
Committee, Mr. Mica.
    Mr. Mica. Thank you. And thank you for calling this timely 
hearing. I think it is appropriate that Congress does conduct 
oversight over what is taking place with passenger service in 
the United States, and particularly in light of the proposed 
merger between Delta Airlines and Northwest.
    This may be the precursor of things to come, as you have 
heard and others have said. I struggled as Chair of the 
Aviation Subcommittee through six of what I thought were the 
most difficult years. Right now, though, I think there is a new 
set of incredible challenges that the industry faces.
    I was Mr. No, I said just say no to Government bail-outs 
and probably forced some of the airlines into bankruptcy. 
Because of the disastrous effects of 9/11, many of them, 
through bankruptcy, undertook a difficult task of paring down 
their operations, cutting wages, eliminating sometimes outdated 
equipment, and work procedures. The whole nature of travel in 
this Country changed. Thousands of jobs were lost, even in the 
service industry of catering, for example.
    Right now, airlines feel the same pressure. This Committee 
will not make a final decision on whether they can proceed, 
Delta and Northwest, with a merger. That is up to the 
Department of Transportation, as you know, and the Department 
of Justice. My take is that there is not an overlap of, or an 
attempt for one entity to consolidate all of the service or 
create a monopoly, and more likely that this merger will be 
granted. Having met with thousands of employees who lost their 
jobs as a result of 9/11, this may be the beginning of another 
disastrous situation for employment in the industry.
    My biggest concern is that people, through the 
consolidation, will also lose positions, seniority and other 
things they have built up. That is very difficult, I know, for 
them to deal with personally. But the industry in fact is under 
tremendous pressure. And if they can't cut oil prices, they are 
going to cut everything else.
    I think that is the biggest concern that I have in this 
question of to merge or not to merge. We will probably end up 
with about three major carriers. I think that if their reliance 
is on international fares, I believe that is a myth. Because 
with Open Skies, they will face discount international 
competition unlike any they have seen. You have carriers like 
Rhine Air, Sky Europe and a host of others who will be in these 
markets and fares will go down.
    So do I have a solution for this? No. Maybe we will end up 
with three major carriers, we will get back to some regulation. 
My final concern would be, though, if the industry does go 
south again, God forbid, a terrorist attack or dramatic 
reversal of the economy, and we end up with three megacarriers, 
even with re-regulation, the Government would be left holding 
basically the financial bag and the obligations of what is 
left. That is not a very bright prospect.
    So this is an important hearing. There are a lot of 
questions that we need to ask and find out where we are going. 
And again, this may be setting the pattern that we will see in 
the future.
    So I thank you and yield back the balance of my time.
    Mr. Costello. The Chair thanks the Ranking Member and now 
recognizes the gentleman from North Carolina, Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman. I will be brief, Mr. 
Chairman. I thank you for having called this hearing.
    I appreciate you all being here. As you may know, the topic 
of this hearing, Mr. Chairman, provides a nexus between my work 
on this Committee and my tenure on the Judiciary Committee, 
which is also conducting a hearing now. I may have to leave for 
that. Generally, Mr. Chairman, I believe it is important to 
withhold judgment on merger proposals until the details are put 
forth, so I will limit my remarks to the proposed merger 
between Delta and Northwest for that reason.
    I would like to acknowledge that I understand the 
tremendous constraints placed on the aviation industry and the 
impact this has put on the industry's condition. Unfortunately, 
due to the increasing pressures in the marketplace, a carrier 
that had a strong presence in my district had to recently cease 
operations.
    Further, Mr. Chairman, I would like to note that I believe 
it is important that the Department of Justice Antitrust 
Division have the time and ability to effectively and 
efficiently review the proposal and the impact upon consumers. 
It is also equally important that they receive input from all 
the stakeholders.
    Finally, gentlemen, should the merger be approved, I would 
like to be the first to extend an invitation to you all to 
expand your operations at the Piedmont International Airport in 
North Carolina.
    [Laughter.]
    Mr. Coble. I feel remiss, Mr. Chairman, I have taken 
advantage of this forum. But having said all that, I thank you, 
Mr. Chairman, and thank you all for being with us.
    Mr. Costello. The Chair thanks the gentleman.
    Before we go to our first panel of witnesses, we will 
finally recognize the gentleman from Tennessee, Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman and thank you for 
calling this hearing. I will be very brief.
    We have the best aviation system in the world, by far. We 
should be thankful that the Government hasn't been running that 
system, or we wouldn't have had that. I know this, though, we 
had a hearing last week in this Committee in which we heard 
that each one penny increase in diesel fuel costs the trucking 
industry as a whole $391 million a year, and the diesel prices 
have gone up far more than that. I have heard for years that 
each one penny increase in aviation fuel costs the airline 
industry $190 million to $200 million a year. So these oil 
prices have really caused some very serious problems for 
several airlines. We have to have some more domestic energy 
production or we are going to have even more airlines in 
trouble.
    But as a general rule, the Country is better off, the 
consumers are better off if they have more airlines instead of 
fewer. I wish we had many more airlines. Because of that 
belief, I think we need to look very closely at this proposal. 
In fact, I think that generally, we should not approve a merger 
unless the survivability of an airline is in question. But I am 
willing to keep an open mind through these hearings and look at 
any and all information about this.
    Because of that, I appreciate, Mr. Chairman, your calling 
this hearing. Thank you.
    Mr. Costello. The Chair thanks the gentleman.
    Finally I will recognize for brief comments the gentleman 
from Georgia, Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    I just want to thank Mr. Anderson, especially, for being 
here and the Delta family and what it means to Georgia. We 
understand that with fuel costs where it is and the environment 
that the airline industry is that there were not a lot of 
choices out there. I think Delta and their board has made the 
best choice possible.
    So I hope that this Committee will look at it and 
understand that the survivability of an airline today is much 
different than what it has been in the past, and that Delta has 
always, at the top of its list, had customer service routes 
that make it possible for people to move all around this 
Country and now all around the world, that we have some of the 
best employees in the world and in the airline industry. I 
think that we are trying to do the best that we can to make 
sure that they all survive.
    Not only that, but welcoming the Northwest family to that 
airline and making it the best airline in the world. With that, 
Mr. Chairman, I will yield back the balance of my time.
    Mr. Costello. The Chair thanks the gentleman and would note 
for the record Congressman David Wu from Oregon was here 
earlier. He has submitted questions that we will ask the 
witnesses to reply to in writing.
    With that, we will go to our first panel and introduce Mr. 
Richard Anderson, who is the Chief Executive Officer for Delta 
Airlines; and Mr. Douglas Steenland, who is the President and 
Chief Executive Officer for Northwest Airlines.
    Gentlemen, your entire statement will appear in the record 
and Mr. Anderson, you are recognized for your testimony.

  TESTIMONY OF RICHARD H. ANDERSON, CHIEF EXECUTIVE OFFICER, 
  DELTA AIR LINES, INC.; DOUGLAS M. STEENLAND, PRESIDENT AND 
    CHIEF EXECUTIVE OFFICER, NORTHWEST AIRLINES CORPORATION

    Mr. Anderson. Thank you, Mr. Chairman. Thank you, Mr. 
Oberstar, Members of the Committee.
    First, I would just like for the record to introduce a 
binder. We have letters of support from 33 States and the 
District of Columbia. We also have a statement of support from 
the Delta Board Council, which is a representative council of 
Delta employees, in support of the transaction.
    With that, on behalf of the many employees of Delta Air 
Lines here with me today and the 47,000 Delta employees 
worldwide, we appreciate the opportunity to talk about the 
industry and the important issues that all of you have raised 
in your opening comments.
    The world that we face is a rapidly changing world. With 
Open Skies agreements around the world and free trade 
agreements around the world, we need to be strong to compete 
against the foreign-flag airlines. In order to do that, you 
really have to have strong financial footing and you really 
have to have a network that has the breadth and scope of being 
able to provide service to corporations around America doing 
business around the world.
    Open Skies agreements have now resulted in foreign-flag 
carriers carrying substantially more U.S. passengers between 
the United States, Europe and Asia. If you just look at it on a 
daily basis, foreign-flag carriers carry about 22,000 
passengers to Asia versus 15,000 on U.S-flag carries carrying 
passengers to Asia. If you look at Europe, the Middle East and 
Africa, about 40,000 passengers a day are carried by foreign-
flags and 30,000 by U.S-flags.
    More importantly, if you look at the order book of 
international wide body airplanes, U.S. airlines only have 5 
percent of the worldwide outstanding wide body airplane orders 
on their books. Ninety-five percent of all Boeing and Airbus 
airplanes that are used for international service, two aisle, 
two engine and four engine airplanes, are held by foreign-flag 
carriers.
    We have talked about fuel, you have all talked about fuel. 
I won't touch that subject again. I think everyone understands 
the tremendous impact that it has on this business. We aren't 
here to ask you for financial support. I sat here six days 
after September 11th and asked you for support, and Congressman 
Oberstar, you came to the aid of the industry. This time we are 
here not asking for that but asking for your support to allow 
us to do what we think is in the best interest of our 
communities, employees and shareholders. Hopefully, we can 
answer your questions along the way and put your minds at ease 
about this.
    It really does give us the power to compete in a global 
environment. Delta and Northwest have very complementary 
networks. If you look at where Delta has historically flown, it 
has not flown and does not fly in the places that Northwest 
flies. So unlike many of the other transactions that this 
Committee may have looked at over time, Delta and Northwest are 
very complementary. Out of nearly one thousand city-pairs, 
there are really only 12 markets where we compete with each 
other on a non-stop basis in the U.S. Internationally, Delta 
has no route network in the Asia Pacific and Northwest is 
really the number one carrier to Japan and has the most 
extensive route network in Asia.
    So the complementarity of the route network should ease 
your concerns about competition, because these are end to end 
networks. We move forward in a world of European Union Open 
Skies, and in Open Skies, we have very strong foreign-flag 
carriers in Europe who have been allowed to consolidate. And in 
order to be able to compete against those carriers, they are 
much better capitalized and they are buying their fuel with 
Euros, which means when we pay $125 a barrel for fuel, they are 
probably paying about 50 percent less than that, because they 
are not using dollars, they are using Euros.
    So the merger really provides, and I know there are some 
skeptics on the Committee, and I hope we can work through this 
with you, but it really provides stability for the employees in 
these airlines. We have kept the employees in mind as we have 
gone forward here, because we have been able to craft an 
agreement that allows us to keep all the hubs of the two 
airlines. And these hubs have been scrutinized closely by both 
carriers. Both carriers just came through bankruptcy. And in 
the bankruptcy process, you have the right to reject aircraft 
leases and airport leases.
    So both of these businesses have been through the scrutiny 
of creditors' committees and the bankruptcy process and have 
gotten to a core business model that is a core business model 
that will be viable over the long term with all of these hubs. 
We have committed to provide substantial ownership in the 
company to the combined employee groups. We have committed to 
fair and equitable seniority integration under Allegheny-Mohawk 
and have written that in the merger agreement.
    In addition, this Committee, of course, and Congress, 
enacted that into law last December, in legislation we 
supported. We have committed to support the defined benefit 
pension plans that have since been frozen but will be funded 
over the course of the next 17 years. We have committed to keep 
our front line employees from being furloughed as a result of 
the transaction.
    Let me speak really quickly about small communities and try 
to address some of Chairman Oberstar's concerns directly. Hub 
and spoke airlines are really built for small communities. The 
discount carriers have never shown any interest or built 
airline infrastructure, bought airplanes or bought gates and 
made investments to serve small communities. When you looked at 
the combined route network of these two airlines, a strong 
route network of a hub and spoke carrier is the most secure way 
to be certain we continue to serve small communities. Small 
communities are really the bread and butter of a hub and spoke 
system.
    I do agree with Chairman Oberstar that we do need a real 
essential air service program in this Country, one that really 
works. We have been clear about that, both Doug and I, that we 
would support that. Because we together serve more small 
communities than any other two airlines in the United States.
    We have made a lot of investments to serve those small 
communities. So we have 34-seat airplanes, we have 50-seat 
airplanes, we have 76-seat airplanes and we have made a lot of 
investment over the years to be able to serve those small 
communities.
    When we go back to the competition issues and the issues 
around consolidation, each of Continental, America, Southwest, 
AirTran, JetBlue, have all been very clear in stating that they 
are remaining independent. Since we have had our announcement 
here, there has been an earnings cycle in the industry, so 
there were the usual analyst meetings. They have all been 
pretty clear in stating that they desire to remain independent.
    This combination will ultimately, given the pull-downs that 
Delta is in the process of making, because of fuel, this 
combination will have perhaps around 17 percent market share 
around the end of the year, given where we are going with pull-
downs. The low-cost carriers have over a third of U.S. 
passengers, 60 percent of all domestic aircraft orders and have 
been growing at double digits.
    At the Senate Commerce Committee hearing last week, Pat 
Murphy, whom many of you know as the Under Secretary of DOT for 
many, many years, he, always a staunch proponent of 
competition, essentially stated that the domestic market is 
perfectly contestable and that there is free entry now and that 
with the growth of the low-cost carriers, there really isn't an 
issue of contestability in the U.S. market.
    We have free entry in this business and real yields in this 
business are down 30 to 50 percent in real dollar terms since 
deregulation. The bottom line is, we think it is pro-
competitive. It is good for small communities and it will be 
good for our employees.
    I am sorry I was a little long.
    Mr. Costello. The Chair thanks you, Mr. Anderson, and now 
recognizes Mr. Steenland.
    Mr. Steenland. Chairman Costello, Chairman Oberstar, other 
Members of the Aviation Subcommittee, my name is Doug 
Steenland, I am the Chief Executive Officer of Northwest 
Airlines and I appreciate the opportunity to appear here this 
afternoon to explain the benefits of the merger between 
Northwest and Delta, and the fact that this merger will not 
lessen competition.
    Let me acknowledge and thank the Northwest Airlines 
employees in this room for their contribution to running a 
great airline. Let me also just take one second to acknowledge 
and thank Congressman Kagen who provided some very important 
medical assistance to a passenger on one of our airplanes last 
week, Thursday, between Washington D.C. and Minneapolis. A 
passenger fainted and the Congressman was able to provide some 
very necessary and needed medical assistance. I want to take 
this opportunity to thank him for that.
    Mr. Kagen. Mr. Chairman, may I respond? I have to say it 
was an honor to be available, and I have never had a flight 
that landed so quickly and got to the gate so quickly.
    [Laughter.]
    Mr. Steenland. Let's hope that does not become a continuous 
pattern, needless to say.
    The U.S. airline industry is at a crossroads, creating two 
choices for Northwest. One is to continue on the road now 
traveled, as a standalone airline, being whipsawed between 
rising oil prices, which will cost Northwest over $1.5 billion 
more this year versus last year, facing increased competition 
from domestic carriers that have now captured more than one 
third of the U.S. domestic market, and facing heightened 
international competition from large, well-funded foreign 
airlines that have been allowed to consolidate and are 
increasing service to the United States under Open Skies 
agreements.
    The other choice is to merge with Delta to create a single, 
stronger airline, better able to face these challenges. By 
combining the complementary, end to end networks of two great 
airlines, we will achieve substantial benefits and build a more 
comprehensive and global network.
    More importantly, the merged airline will be more 
financially resilient and stable, better positioned to meet 
customer needs, better able to meet competition at home and 
abroad, and better able to provide secure jobs and benefits. In 
this merger, importantly, no hubs will be closed. I would like 
to focus on that just for a second. Northwest operates hubs in 
Minneapolis, Detroit and Memphis, and service to those hubs 
will continue. The merger will create over $1 billion in annual 
benefits that will help the merged carrier withstand volatile 
fuel prices and cyclical downturns. All of these benefits will 
be achieved without harming competition.
    The existing domestic and international routes of Northwest 
and Delta are complementary, so the two carriers compete only 
to a minimum extent today. Let's start with international 
markets. The question of competition internationally has been 
asked and answered already by the U.S. Government. Recently, 
the United States Department of Transportation tentatively 
granted antitrust immunity to Northwest, Delta, Air France and 
KLM, and in doing so, found that there would be no reduction in 
competition over the trans-Atlantic from a combination of Delta 
and Northwest.
    Northwest doesn't serve Latin America, a Delta stronghold. 
And Delta has only minimal service to Asia, which Northwest has 
served extensively since 1947. Domestically, Northwest routes 
are focused in the upper Midwest, while Delta is strong in the 
South and the East and the Mountain West.
    And the most important fact to remember regarding 
competition, at today's hearing, is that of the 800 domestic 
routes that Northwest and Delta today collectively fly to, 
there are only 12 overlap city-pair markets between them. On 
the vast majority of those 12 routes, there is robust, non-stop 
competition that makes certain that substantial competition 
will remain in the future.
    The domestic airline industry has undergone a competitive 
sea change over the past several years. Low-cost carriers have 
grown at an average annual rate of 11 percent since 2000. 
Southwest Airlines is the largest domestic airline in the 
United States, carries more domestic passengers than any other 
airline, and will continue to do so even after this merger is 
consummated.
    In addition, online technologies, having some of the most 
powerful search engines in the world, run by Orbitz, 
Travelocity and Expedia, have created a consumer revolution. 
Customers can quickly and easily compare the offerings of 
competing carriers on any given route. If they so choose, they 
can push the lowest-applicable fare button that is guaranteed 
to give them access to the lowest fares. All of these 
developments ensure the continued competitiveness of the U.S. 
market post-merger.
    There clearly has been speculation about a potential wave 
of mergers that might take place. However, recently Continental 
announced that it would not pursue a merger with United, and at 
a minimum, Delta, Continental, American and Southwest, together 
with AirTran and JetBlue and other low-cost carriers that exist 
today and will enter into this market, will continue as 
independent competitors in the domestic marketplace.
    With this merger, we have achieved our goal of crafting a 
transaction that creates benefits for all of our constituents, 
especially when we take into account the massive oil price 
increases that we have experienced. The combined airline will 
be more stable and better positioned to meet the challenges of 
the future both at home and abroad.
    Thank you very much.
    Mr. Costello. The Chair thanks you, Mr. Steenland.
    Mr. Anderson and Mr. Steenland, if you will, you have heard 
my opening statement and Chairman Oberstar and other Members 
who spoke about their concerns of how the employees will be 
affected with the merger, how consumers will be affected. I 
have read the reports from your testimony over in the other 
body that if I am correct and if the reports that I read were 
accurate, you indicated that when the merger takes place, if in 
fact it does, that you do not intend to have layoffs, that you 
are going to keep the existing workforce, and that you are 
going to maintain the hubs that you currently have. Is that 
correct?
    Mr. Steenland. With respect to the layoff issue, we have 
extended that to front line employees, which has been defined 
as pilots, flight attendants, reservation agents, ramp workers, 
customer service agents and others who are directly involved in 
the provision of air service. And again, because this is an end 
to end merger, that involves little or no overlap, we don't 
expect and we don't anticipate service reductions as a result 
of this merger.
    As we discussed, we obviously have a competing challenge 
whether we have merged or not, that is the impact of fuel 
prices. We will have to take actions accordingly. But as a 
result of the merger, we don't anticipate any reductions in 
service.
    If we could talk a second about hubs, if you think----
    Mr. Costello. If I can ask you to clarify a point. When you 
say that you don't expect a reduction in service with the 
merger, how does that affect the employees? Same number of 
employees when the merger takes place?
    Mr. Steenland. Not in totality, because we have 
acknowledged that clearly, within the management ranks, there 
are redundancies and there will be reductions and there will be 
reductions as a result of that. But again, with respect to 
front line employees, if you think about Minneapolis-St. Paul, 
for example, we operate a large hub in Minneapolis-St. Paul. We 
anticipate continuing to operate a large hub at Minneapolis	St. 
Paul, and probably on any given day we have more vacancies in 
the Northwest workforce than Delta has employees in 
Minneapolis. So we anticipate meshing those workforces quite 
easily in that hub operation, and clearly would expect no 
layoff of front line employees. That is just one example of how 
we would anticipate that working.
    Mr. Costello. Surely in your discussions, when you began 
discussions, talking about the merger and talking about how you 
achieve efficiencies, you acknowledge that there will be some 
administrative people who will be affected. What are your 
estimates? How many people will be affected? How many will 
either lose their jobs voluntarily or involuntarily on the 
administrative side and total number of workforce?
    Mr. Steenland. We haven't come up with an exact number yet. 
We kicked off last week the transition planning process. And as 
that gets more detailed and we get more specific, we would 
expect to have a more precise answer as to what that number 
might be.
    Mr. Costello. So you might be able to provide that number 
when?
    Mr. Steenland. I would say two months from now.
    Mr. Costello. The issue of maintaining your current hubs 
after the merger is approved, if in fact it is, you heard me 
say in my opening statement that American Airlines executives 
sat in this room at that table and assured me and other Members 
of the Subcommittee that they in fact would continue to 
maintain their current hubs after taking TWA over. And in 
particular, in St. Louis, that not only would they maintain St. 
Louis International Airport as a hub, but the current level of 
service as well.
    So when you say that we are going to continue to have, to 
maintain the hubs at the current level of service, I indicated 
we were told that St. Louis, same level of service, less than 
two years later, the number of flights went from over 500 per 
day to about 250 per day, a significant reduction, and a number 
of employees were affected or had their pensions reduced. So I 
wonder if you might comment about the level of service at both 
hubs.
    Mr. Anderson. If I may draw a contrast between the TWA-
American transaction----
    Mr. Costello. And we understand the contrast. TWA was in 
trouble, TWA was going bankrupt and they were going out of 
business. We understand that issue.
    Mr. Anderson. Right.
    Mr. Costello. But the point that I am making is, we were 
given assurances by American Airlines. They could have said, we 
don't know, we don't know what the price of fuel will be, we 
don't know what the future holds. But that is not what they 
said. They said that we are going to maintain the hub in St. 
Louis at its current level of service.
    So what I am asking you is, how can you give us assurances 
here that you are going to maintain the same level of service 
in both, at your hubs, and continue basically with the same 
workforce? What is the point of merging if in fact you are not 
going to see reductions in either service or employees to 
achieve efficiencies?
    Mr. Anderson. You are not going to see a reduction in the 
front line employees, because, go back to the example that Doug 
used, there is so very little overlap between the two airlines 
that there really aren't any redundancies. I used the example 
of Salt Lake City where Northwest has five flights and five 
employees. We have at Delta 500 flights, counting our regional 
carriers, and the absorption of their flights onto our gates 
and their employees will be seamless. So because it is not an 
overlapping consolidation, you have the ability to be able to 
transition.
    Now, that is not true, just so we are clear, Mr. Chairman, 
that is not true with respect to overhead, general and 
administrative expenses. And as Mr. Steenland said, we are in 
the process now of doing a bottoms-up analysis of how you put 
the two airlines together. And we will be forthcoming to the 
Committee with what that is, at your request.
    The main factor that is going to drive capacity up or down 
is going to be fuel prices. And it won't be sa a result of this 
merger, as I go back to the point I made in my earlier remarks, 
both of these airlines just went through bankruptcy and if you 
will, really cleaned up their strategies. If the Cincinnati, 
Memphis, Detroit, Atlanta, if any of these hubs were not 
viable, you can bet that the creditors' committee and 
constituents in the bankruptcy process would have required the 
carriers to reject the leases and the airplanes. So we are 
really comfortable that we have solid assets there.
    But as to level of service, it is going to be dictated by 
fuel prices, whether this merger occurs or not.
    Mr. Costello. Final question, at least at this point, then 
we can move on to other Members who have questions. Mr. 
Steenland, you stated, I believe, in your testimony that small 
communities will benefit, and the reason they will benefit is 
you will even have a larger national and global network. Both 
Northwest and Delta, you have both already announced a decrease 
in capacity, that you are going to reduce capacity.
    So if in fact you already have plans to reduce capacity, 
wouldn't the small communities be the first to be affected, 
since they are the least profitable for both airlines?
    Mr. Steenland. No. First, I don't think it is a correct 
assessment to necessarily say that they are the least 
profitable. As Richard said, we have designed a network, and we 
have purchased equipment to be in a position where possible, 
obviously there are EAS cities where it is not possible, but 
whether we are flying into Brainard or we are flying into 
smaller cities in North and South Dakota, we have airplanes 
that range from 34 seats to 50 seats to 76 seats, all of which 
are tailored to meet the needs of that small community and try 
to provide a frequency of service.
    That small community, someone coming out of Chisholm can 
come into Minneapolis and has the opportunity to basically go 
to approximately 175 destinations that we serve, with 500 or 
more departures a day. As a result of this transaction, there 
will be more additional online destinations that will be 
available through that hub. We have created a network and we 
have created an infrastructure that is designed to serve those 
cities in a profitable way. Otherwise, we wouldn't be there.
    Mr. Costello. Thank you. The Chair now recognizes the 
Ranking Member of the Subcommittee, Mr. Petri.
    Mr. Petri. Thank you very much, Mr. Chairman.
    I was corrected, I misspoke earlier when I said that since 
December there had been eight airlines that have filed in 
bankruptcy or suspended business. I was wrong, there have been 
nine, as Air Midwest this morning suspended, announced it was 
suspending operations.
    A question for both of you. The airline business is 
obviously a local and a regional business in the United States, 
but it is also a global business. We have laws requiring that 
there be American-controlling ownership of airlines who each 
have alliances with overseas airlines, that have themselves an 
alliance, Air France and KLM. So as this consolidation goes on, 
is there where a lot of the savings are going to occur? Is this 
irrelevant to your merger? Our Government looks evidently 
totally at domestic implications of the merger. How are they 
defining the market that is merging, I guess is what I am 
asking? Does the European alliance or merger between those two 
airlines, is that in part driving your merger here in our 
domestic market?
    Mr. Anderson. Globally, the industry has been 
consolidating, when you look at what has occurred in Asia and 
Japan, for instance, what has occurred in Europe. So there is 
consolidation globally. But our alliance with Air France and 
KLM will be improved by this transaction, because Northwest and 
KLM have an immunized alliance across the trans-Atlantic. And 
Delta and Air France have an immunized alliance across the 
trans-Atlantic. And where the real efficiency comes is when you 
are in our position of a Northwest or Delta, and we are trying 
to appeal to the business traveler in Europe. So we have a 
strong base in the U.S. and we want to appeal to the business 
traveler in Bucharest or Frankfurt or any of the other large 
firms in Europe.
    We don't have a sales and distribution or brand that 
travels the way Northwest travels in Minneapolis and Delta 
travels in Atlanta. In those countries, everyone looks at KLM 
and Air France and the foreign-flag carriers as their flag 
carrier. So in order for us to get into those markets, and one 
of the things that this transaction gives us the opportunity to 
do through our relationship with Air France-KLM, is to have a 
strong and significant presence in foreign markets. Because we 
essentially sell our product through the Air France-KLM 
distribution network. So we aren't treated as an ``American 
flag-carrier,'' we really get to participate in those large 
traffic pools as a participant with Air France-KLM.
    Mr. Petri. Is there a difference in the profitability of 
international as opposed to domestic flights?
    Mr. Anderson. Yes.
    Mr. Petri. Which is more profitable?
    Mr. Anderson. International.
    Mr. Petri. So this could drive, this could be a significant 
benefit in increasing your international business over time?
    Mr. Anderson. Correct. You could be an airline executive.
    [Laughter.]
    Mr. Costello. The Chair thanks the gentleman and now 
recognizes the Chairman of the Full Committee, Chairman 
Oberstar.
    Mr. Oberstar. Thank you, Mr. Chairman, and I thank Mr. 
Petri for his thoughtful comments and questions, and our 
Ranking Member of the Full Committee for his thoughtful opening 
statement.
    We have before us two of the smartest, most seasoned and 
most experienced airline executive in the industry today, the 
best. That is why you are dangerous.
    [Laughter.]
    Mr. Oberstar. You referenced international competition. And 
just accepting your figures, foreign carriers have roughly 60 
percent of the Pacific traffic, and 55 percent of the Atlantic 
traffic. That is a bit of a shift from just less than 10 years 
ago, when we had 70 percent of the Pacific and 65 percent of 
the Atlantic for U.S. carriers. But that is still U.S. against 
the world.
    So what will the merger accomplish in trans-Atlantic 
service that the alliance, which you will be given tentative 
antitrust immunity, will not accomplish? And I was an advocate 
for that joint venture, for the alliance, the JV has not yet 
been accomplished. And I interceded with Air France, it is on 
the record, I sent a letter urging them to reapply after the 
first turn-down. So I have supported this alliance.
    But what will the merger do that the alliance cannot?
    Mr. Steenland. I would say, Mr. Chairman, that if we just 
isolate the trans-Atlantic, the merger will be incrementally 
beneficial on top of the benefits that the alliance, the 
immunized alliance would otherwise provide. Clearly, the 
immunized alliance will provide benefits, the record speaks for 
itself. You are a strong supporter of it, and the Department of 
Transportation, with the advice of the Department of Justice, 
concluded that there were no anti-competitive impacts created 
by the formation of that alliance.
    Now, where the benefits get to be better is, for example, 
on the United States, there will be a single frequent flyer 
program between Northwest and Delta, as compared to having 
separate frequent flyer programs. So a person can, instead of 
having to build up miles on the Northwest account and then 
build up miles on the Delta account and not being able to put 
them together, now it will be all part of one pool, which will 
make us a better competitor and a more effective competitor. We 
will be able to share best practices that we previously could 
not do, because under the alliance, Northwest and Delta 
remained competitors domestically. And here we will actually be 
able to sort of roll up our sleeves, compare notes as to what 
we each do and we will both be able to learn from each other's 
companies to be sure that we put our best foot forward.
    The alliance and the immunity that the DOT has tentatively 
granted is important and has real value. The merger provides 
incremental value to that.
    Mr. Oberstar. Heathrow continues to be the obstacle, 
though, does it not, under Bermuda II, to an expanded U.S. 
presence in the European market? You would agree with that? 
There are only four carriers, U.S. carriers, really operating 
in that market under Bermuda II, and even under the EU, they 
haven't expanded. So how does the merger improve access to the 
European market coming through London, where now you have two 
carriers competing out of London Heathrow, and, well, only 
Northwest in Gatwick? How does that improve competition?
    Mr. Anderson. Mr. Chairman, the last round of EU 
liberalization opened up Heathrow to both Northwest and Delta.
    Mr. Oberstar. But they are of no value unless they build 
another runway. No really substantial value unless they build 
another runway.
    Mr. Anderson. They should build another runway. They should 
build another runway, but we have been able now to commit 
service from our hubs to London Heathrow Airport, which 
candidly was not something I don't think we ever expected would 
occur. But it did occur, and through our alliance 
relationships, we were able to procure slots and gates.
    So we both started service from our hubs to Heathrow. I 
think we all started in March, April time frame. So we have 
been able to procure access. And Heathrow really is a spoke off 
of our U.S. hubs. That access is sufficient for us, because our 
principal hubs in Europe will be Amsterdam and Paris.
    Mr. Oberstar. Yes. Well, that I understand. But still, 
Heathrow is a massive entry point to the continent. It will 
continue to be.
    Mr. Anderson. By far the largest O&D market in the world is 
the U.S. to Heathrow.
    Mr. Oberstar. Right. You mentioned in a post-merger 
environment the continued presence of what you call low-cost 
and what I call low-fare carriers and cite Southwest as the 
largest domestic airline. But if you look at Southwest's market 
model, they have 3.9 percent of the market out of Detroit. They 
have 13.8 percent of the market in Salt Lake City, zero in 
Minneapolis-St. Paul, zero in Cincinnati, zero in JFK, zero in 
Memphis.
    So when is Southwest going to open their routes to London, 
to Paris, to Amsterdam, to provide international competition?
    Mr. Steenland. I don't know.
    Mr. Anderson. We don't know.
    Mr. Oberstar. They are not challenging you at your 
strongholds.
    Mr. Steenland. Well, I think they are. Southwest, even 
though their percentage in Detroit might be relatively small, 
they have a very big wake in terms of the fares that they set 
and the impact that they have on the community. They operate in 
other parts of our network, they operate to St. Louis, they 
operate to Kansas City, they operate in Omaha, all of which 
affects the heartland market.
    Mr. Oberstar. In smaller markets. My point is, a bigger 
carrier is going to be even more of a frightening effect upon 
the smaller so-called low-fare, point to point domestic 
carriers. I don't see Southwest morphing into a United Airlines 
and becoming an international carrier, as United did after 
deregulation in 1978. Everybody dismissed United, said, who are 
they. Pan Am was expected to be the big winner, and Pan Am 
turned out to be the big loser, because it was the domestic 
network carrier that had the gravitas to compete in the 
international trade. That is the market.
    Southwest has no inclination to do that. And they have no 
inclination to challenge you big carriers in your major hubs.
    Mr. Anderson. In the case of Delta, we have a second 
hubbing carrier in Atlanta, and that is AirTran, and we have a 
second hubbing carrier in JFK, JetBlue. And we have a very 
strong Southwest in Salt Lake City. I would note that Southwest 
got its position in Salt Lake City through an acquisition of 
Morris Air about 15 years ago.
    So across the Delta network, we are in many, many 
contestable markets.
    Mr. Oberstar. I will withhold questions, there are other 
Members. I want others to have an opportunity. Thank you.
    Mr. Costello. The Chair thanks the gentleman and now 
recognizes the gentleman from North Carolina, Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    Gentlemen, thank you all for being with us and for your 
testimony. I have a couple of questions.
    There has been some discussion about vertical versus 
horizontal mergers. How would you classify this merger and why?
    Mr. Steenland. I think you would classify this as a 
horizontal merger, because it is two network air carriers 
getting together who are in the business of being hub and spoke 
providers. We are end to end carriers. So we are taking our 
existing businesses and we are expanding them, but we are 
remaining in the same business. We are not merging with a 
catering company, we are not merging with a maintenance 
provider. We would like to merge with an oil company, but I am 
not quite sure that would work in this environment.
    So that is why I think we would call this horizontal, and 
it would emphasize the end to end nature of it.
    Mr. Coble. Mr. Anderson, do you concur with that?
    Mr. Anderson. I do concur, and I would like to merge with 
an oil company.
    [Laughter.]
    Mr. Coble. So would I--so would we all.
    What, gentlemen, would be the impact on communities that 
are seeking to attract air service?
    Mr. Steenland. I would think that the benefit would be the 
same if not better, because if it is a spoke community that is 
trying to get access to one of our collective hubs, the scope 
of service that that hub would provide would be greater, and 
therefore, it would increase the likelihood that service from 
that spoke would be more feasible and economic.
    Mr. Coble. Mr. Anderson?
    Mr. Anderson. I concur.
    Mr. Coble. And I agree with that as well.
    There has also, gentlemen, been discussion about the state 
of the industry as a whole, given that approval of this merger 
would maybe create a domino effect with other carriers. What is 
your view of the industry as a whole if this proposed merger is 
approved versus if it is rejected?
    Mr. Anderson. From the standpoint of the organization of 
the industry, as I remarked in my opening comments, each of 
Southwest, American, Continental, AirTran, have each been clear 
in stating that they want to be independent. From a 
contestability standpoint, and you look at the size of the 
remaining independent airlines, approval of this transaction in 
the domestic marketplace, which is the only place where there 
is even an issue of antitrust concern, there is plenty of 
competition in the marketplace, and it will remain unchanged 
after this transaction.
    So we believe that what we are proposing here should pass 
muster under the antitrust laws.
    With respect to the overall industry, I think it was you 
or, no, it was Congressman Petri, Ranking Member Petri noted 
that there have been nine bankruptcies in the industry since 
the first of the year. With fuel prices continuing to rise, 
there is going to be more difficulties in this industry. And 
the industry has to change and adapt as rapidly as it can to 
increasing fuel prices if the prognostications that we hear 
from the experts in the oil industry and the commodities 
business are correct, that the price of fuel is going to $200. 
What this merger allows us to do is create a much stronger, 
much more durable airline that allows us to generate $1 billion 
to $2 billion in additional benefits, which makes us stronger 
in whatever fuel environment we face.
    Mr. Steenland. Congressman, if you think about one of the 
unique features of the airline industry, it is that airplanes 
are mobile. If you are in the hotel business and you build a 
hotel, you can't exactly pick it up and move it if you don't 
like the market that you set it down in. If you are in the 
airline world, your airplane can fly away and you can go attack 
any market you want.
    If you think about just what has happened over the last six 
months or nine months, if you look at Denver and you look at 
the increased competition that Southwest has brought into 
Denver, facing up against United, facing up against Frontier. I 
think that is testimony of how airplanes are a very mobile 
arsenal. This industry will remain intensely competitive for 
the long, long term.
    Mr. Coble. Thank you both, gentleman. Thank you, Mr. 
Chairman, I yield back.
    Mr. Costello. The Chair thanks the gentleman and now 
recognizes the gentleman from Illinois, Mr. Lipinski.
    Mr. Lipinski. Thank you, Mr. Chairman.
    Thank you for your testimony here today. It is obviously 
not an easy case.
    I want to start out by talking about my district in 
Chicago. It is home to Midway Airport and we have O'Hare 
Airport close by. They are both major economic engines, and 
thousands of my constituents are employed at the airports or 
with the airlines that operate out of these two airports. And 
of course, my constituents rely on these airports when they 
travel.
    My understanding is right now, Midway has 15 Delta flights 
and 11 Northwest flights each day, and O'Hare has 23 Delta 
flights and 21 Northwest flights each day. So my first concern 
is the impact that you expect this merge would have on prices 
and flight options going in and out of the Chicago area, and 
the impact on Delta and Northwest employees based in the 
Chicago area. Is there anything that you could tell me about 
that right now? I see you are going through a lot of papers 
there.
    Mr. Steenland. One of the points I would just note for 
starters is that Southwest has a major presence at Midway. It 
is one of the most competitive airports, I think, in the 
Country. We operate to Midway just from our hubs. And we do so 
with a level of frequency that, all things being equal, our 
expectation would be for it to remain the same.
    Mr. Anderson. And I was just looking up, we have a service 
summary, because we anticipated this, so we went and checked 
every one of your districts to determine where we stood.
    [Laughter.]
    Mr. Lipinski. Good homework, there. It is a big book.
    Mr. Anderson. It is a big book. And we have eight and a 
half, I don't know how you have a half a trip, but we have 8.5 
trips to Atlanta and 6.5 trips to LaGuardia from Midway. We 
serve Atlanta, Salt Lake, New York and Cincinnati from O'Hare. 
As a result of this, there wouldn't be any change.
    I think the only place in that market where we, separate 
from this or we are always examining, is our service from 
Midway to LaGuardia. We are trying to operate a shuttle product 
from LaGuardia to Washington National, Boston and Chicago with 
pretty high frequency. That has been a sometimes difficult 
market, because there is a lot of service in the Chicago-New 
York market.
    So that will happen, though, separate from whether or not 
this transaction closes.
    Mr. Lipinski. So you are saying the transaction isn't 
necessarily, as you see it right now----
    Mr. Anderson. It won't have any effect on this service, the 
transaction won't. We will still serve all our hubs.
    Mr. Lipinski. One other issue I wanted to discuss in the 
last couple of minutes I have here, I wanted to ask you, Mr. 
Anderson, I know in your testimony before the House Judiciary 
Committee, you didn't really succinctly answer the question on 
whether or not you are remaining neutral in the 
representational election of the Delta flight attendants, or 
whether you were advocating a position. Do you still stand by 
this? Or are you advocating a position on this?
    Mr. Anderson. Yes, we are advocating a position. The way 
the National Mediation Board works, and the process, Mr. 
Congressman, is a process that essentially provides for 
democracy, a democratic process where everyone is engaged, and 
many of our employees are engaged. We have a view in that 
regard, but at the same time we respect the determination of 
our individual employees.
    If you look at Delta's, and I think Congressman 
Westmoreland said it, Delta has been unusual in that it has had 
a long sort of direct relationship culture. While we have 
collective bargaining units that we have great respect for and 
work very closely with, you will hear from one after me, 
Captain Moak and our dispatchers who are represented by 
collective bargaining agreements, Delta has a long history of 
the Delta family. We think that the employees have the right to 
decide and we respect that. And we have a view about that, but 
we think it should be fair and open and we respect the outcome 
either way.
    Mr. Lipinski. I understand that you certainly can't take a 
position. I watched this video earlier today and I did have 
some concerns about the phrase being used, when you were 
suggesting that the flight attendants, when they get their 
voting instructions, to give them a rip. That did concern me a 
little bit in the suggestion there about what to do.
    Mr. Anderson. It is an odd process under the Railway Labor 
Act. The way you vote under the Railway Labor Act is not return 
the ballot. I actually anticipated that question, and I don't 
think I brought with me a ballot and the ballot instructions 
from the National Mediation Board, but the way you vote, you 
either vote yes and send it in, or you don't send it in. And 
that is how the process is conducted by the National Mediation 
Board. That is how the balloting instructions work.
    Mr. Lipinski. I understand that. I did have some concern 
about what the suggestion was there. I respect that you 
certainly can't take a position on this. But I just want to 
express that concern.
    Mr. Anderson. That is fair. I think at the heart of it, we 
want this to be a good place to work. If you look at the 
history of Delta, Delta is the only major network carrier that 
has never had a strike. It has always paid its employees and 
provided benefits that were historically among the best in the 
industry. And even today, when you compare our wages and 
benefits with Northwest, they are higher. So in the end, we 
want it to be a very good place to work, whether our employees 
are organized or not. We respect that process.
    Mr. Lipinski. The employees definitely deserve that right 
to organize.
    Mr. Anderson. They do.
    Mr. Costello. The Chair thanks the gentleman from Illinois 
and now recognizes the Ranking Member of the Full Committee, 
Mr. Mica.
    Mr. Mica. Thank you. Just a couple of quick questions.
    You described a horizontal integration or consolidation of 
the companies. Where are the biggest savings going to come 
from? If you gave me like, one, two three?
    Mr. Steenland. I will start and just mention one.
    Mr. Mica. The top one?
    Mr. Steenland. I would say it is in the top three. That has 
to do with the better utilization of our aircraft. For example, 
Northwest has almost 50 airplanes that are 300 seats or larger. 
Delta has no wide body airplanes that are larger than 275 
seats. It has a lot of wide body airplanes that have 200 seats.
    Mr. Mica. Do you have two and three? Mr. Anderson, where 
are the savings going to come from?
    Mr. Anderson. Where are the savings coming from? I will 
give them to you right in a row.
    Mr. Mica. If you only have 12 sites where there are 
overlapping markets, so there can be some consolidation there.
    Mr. Anderson. I can get you $675 million to $950 million in 
annual operating expense savings very quickly; $75 million to 
$100 million in selling expenses, single sales force, single 
set of corporate sales agreements. Information technology, go 
from one massive platform, from two to one, that is $125 
million to $150 million a year. The overhead reduction that we 
have talked about earlier is $150 million to $175 million a 
year.
    Our facility overlap, take a location like Congressman 
Lipinski's location in Chicago, we each both have pretty big 
terminals in Chicago. We will be able to move to one terminal. 
That is worth $150 million to $200 million a year. We think 
that across the enterprise, general business productivity, $75 
million to $100 million. And on our supply chain, dealing with 
all the vendors, $125 million to $185 million a year, steady 
state, which puts us at least at $675 million on a steady state 
basis.
    Mr. Mica. Do you project any reduction in numbers of 
personnel? I think somebody told me there are 75,000 in the 
consolidated organization.
    Mr. Anderson. Yes, we do expect reductions in management, 
overhead and corporate staff.
    Mr. Mica. What about the rest of the crew?
    Mr. Anderson. The front line employees, we don't expect any 
and won't have any involuntarily layoffs of front employees. I 
would note that Delta just went, we have just gone through a 
significant downsizing that is in the process of being 
finalized right now. We are in the process through an early out 
of voluntary early out, early retirement program of reducing 
about 13 percent of our staff.
    Mr. Mica. So you can take some of that through retirements 
and voluntary separations?
    Mr. Anderson. Yes.
    Mr. Mica. I think that is important, that people know where 
the cuts are going to come from, how the consolidation is 
actually going to take two airlines that are losing money and 
hopefully have them, at least reduce their losses, hopefully 
make a profit.
    I had talked to you briefly and some of the other 
executives, too, about the constraints you have in increasing 
your ticket price. What could we do to allow you to keep the 
price of the ticket concurrent with the fuel prices? Your fuel 
prices have gone from 19 percent of your operating costs in 
2004 to 40 percent. That is a trajectory that is, no matter 
what you consolidate, how you dance around this, we have to 
address this. You don't have the ability to pass some of that 
on, is that correct? Or can you do that?
    Mr. Anderson. It is a very tough market.
    Mr. Mica. Is there a constraint legally?
    Mr. Anderson. No, not that I am aware of.
    Mr. Mica. There is no constraint? So you can pass that on?
    Mr. Anderson. You can put it in your prices, but the 
marketplace is going to determine what the market-clearing 
price is.
    Mr. Mica. The other thing too is you are paying 4.3 cents 
fuel tax. What do they pay in Europe? Is there an aviation fuel 
tax? Does anybody know?
    Mr. Steenland. I don't know.
    Mr. Mica. Does anybody in the audience know?
    Mr. Anderson. Don't know.
    Mr. Mica. I know that our gasoline tax is 18.4 cents, and 
most countries in Europe it is $3 or $4. I just wondered what 
they pay.
    Mr. Anderson. I actually think that aviation bilateral 
treaties prevent that kind of discrimination. In other words, 
you can't put a large tax under the aviation bilateral 
agreements like that to discriminate against aviation 
bilaterals. But we can get back to you, Congressman Mica.
    Mr. Mica. I am just trying to see, you are describing a 
consolidation, I see problems that aren't going away. I am 
looking for solutions. One is increasing your revenue. You told 
me how you are going to cut your costs, through some 
consolidation. But fuel is the big enchilada right here, and we 
have to find a way to help you survive, help people who are 
trying to fill up their gas tanks survive, and a host of other 
things. I don't have time to get into all of them right now, 
because Mr. Costello wants to take back my time.
    Thank you.
    [Laughter.]
    Mr. Costello. The Chair thanks the gentleman.
    Let me say to the gentleman that I think when you were out 
of the room, both Mr. Anderson and Mr. Steenland committed to 
give an estimate of about 60 days from now, that they would 
know the numbers, how many administrative people would be 
affected in the consolidation. So they have committed to 
getting that information to us.
    Mr. Mica. I am also interested in down the chain.
    Mr. Costello. We are very interested in down the chain as 
well, and they are supposed to supply that to us.
    The Chair would announce that we are being called now to 
the Floor for a series of three votes, but we have time to 
recognize one, possibly two more Members for questions, and 
then I will announce when we recess how long it will be, we 
will try and get a determination to come back.
    The Chair now recognizes the gentlelady from California, 
Ms. Richardson.
    Ms. Richardson. Thank you, Mr. Chairman. I will try and be 
as brief as possible.
    First of all, with all due respect, our Chairman here asked 
you in several very polite ways how you expected to maintain 
facilities at both locations and you gave us various reasons 
why you expected no change at all. I have to be honest with 
you, I am very skeptical, and that is a kind word that I am 
using. So I would like to hear through additional discussions 
of really the need, what is the real, true commitment that you 
intend upon giving this Committee that there would be no hub 
changes, that there would be no staff changes. Are you prepared 
to give that to us, and give this Committee in writing? If not, 
to me it is not worth a whole lot, the minimal statements that 
you have made.
    The second point I wanted to state, the gentleman, you said 
that you are not asking us for support. I tell you, I would 
much rather you ask us for support today to help this industry 
than for you to cut back and us have to pay for unemployment, 
us have to pay for people who don't have health insurance. We 
are either going to pay one way or the other.
    So I would rather us fix the situation, truly fix it. This 
issue of oil prices, and we have talked about it and talked 
about it, and maybe it is a key point. But that is not the only 
point of why this merger is being brought to the table. I think 
to lay it only on the oil issues really is not being fair and 
appropriate.
    So those are my very brief comments, if you would like to 
respond.
    Mr. Anderson. We have been very clear in testimony now, 
this is the fourth time, twice in the Senate, twice in the 
House, and in all the written materials we have provided with 
respect to our strategy to keep the hubs and to not have 
involuntary furloughs of front line employees. Now, with 
respect to facilities, which I think I heard in your comment, 
with respect to facilities, there will be facilities that we 
will close and consolidate. Take Los Angeles International 
Airport. Northwest is in terminal 2 and Delta is in terminal 5 
and 6. We will figure out, between the two airlines, where we 
can accommodate both of us and then work with the city to 
rationalize facilities. So that will definitely happen and we 
will be able to consolidate our operation.
    We appreciate very much your concern about the industry. It 
is always difficult in a deregulated industry to figure out how 
effectively the Government can participate. This industry was 
regulated for its first 60 years of existence. For a whole lot 
of policy reasons, as Chairman Oberstar said, that was changed 
in 1978. So it is difficult to sort of hazard what you would do 
from a public policy standpoint, but we appreciate your concern 
about the industry. One of the hardest things you face in this 
business is when you have losses and you have to take cuts in 
your cost structure that affect people and communities, because 
in the end, the only really viable way to have job security is 
to have a viable airline. That is really what we are doing 
here, is building a much stronger airline in combination so 
that we have a good place to work for our employees.
    Ms. Richardson. Well, I would just summarize in saying, and 
I want to yield back, because the Chairman really wants to give 
other Members who have waited an opportunity to speak, I worked 
in the private sector for Xerox Corporation and I have a 
masters in business. For people who have been around a little 
bit, and I may be a new Member of Congress, but I wasn't born 
last night. When you say involuntary, non-voluntary, that is 
the same as saying, if you are going to close the terminal in 
L.A., well, yes, you can keep the job if you are going to move 
to Minnesota. That is not necessarily dealing with the employee 
issues.
    You also stated the fact that, well, you could let us know 
in two months what you think might happen with some of the 
people. Well, if you are expecting our support in this issue 
now, I can't give that to you if you can't even answer the 
question.
    Thank you. I yield back the balance of my time.
    Mr. Costello. The Chair thanks the gentlelady and now 
recognizes the gentleman from Michigan, Dr. Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman.
    In view of the time, I will be extremely brief. I have been 
watching this particular proposal for some time and I have had 
the opportunity to ask a number of questions over that period 
of time, so I won't belabor the issue by asking questions now.
    But let me just express one concern which has nothing to do 
with this proposed merger. I do worry a bit that if this merger 
goes forward, it might give an excuse to a couple of the other 
airlines to attempt mergers, and we end up with only two or 
three airlines in the Nation. And then I would begin to worry. 
But I see nothing to indicate that we should stand in the way 
of this particular merger. But I just want to serve notice that 
if anyone else tries, we could end up with some very serious 
antitrust situations in the future.
    With that, I yield back.
    Mr. Costello. The Chair thanks the gentleman for his 
comments and now recognizes the gentlelady from Hawaii, Ms. 
Hirono.
    Ms. Hirono. Thank you very much.
    I will keep my questions very short. I know that both of 
you have testified, or Mr. Anderson has testified that there 
are a number of other airlines who have expressed a desire to 
remain independent. However, the fact that the two of you would 
like to merge, would either one of you be surprised that other 
U.S. airlines would want to merge in order to compete with your 
merged airline? Would either one of you be surprised with that 
result?
    Mr. Steenland. No.
    Ms. Hirono. Thank you.
    Now, you have also testified a couple of times that you 
intend no layoffs of front line employees, both of you. We know 
that that number amounts to thousands and thousands of 
employees. I think the key question is, though, can either one 
of you tell us for how long you intend to not lay off front 
line employees or for how long you intend to maintain your hubs 
and your current level of services? In all honesty, can either 
one of you commit to any length of time for that kind of a 
goal, which is very worthy? We appreciate that.
    Mr. Anderson. Right. Well, the word I used in the Senate 
Commerce Committee is that it is as definite as you can ever 
make a commitment in any business. We have both been operating 
from these facilities and in these airports for 20, many, many 
years. And it is a core part of what we do as an airline, 
serving Atlanta, Salt Lake, Cincinnati, Minneapolis, Detroit, 
Memphis. We have collectively been serving those locations in 
most instances since the beginning of this industry in the 
early 1920s and 1930s. It is our intention and our business 
strategy to stay operating in these hubs and providing the 
service that we provide to those communities.
    Ms. Hirono. However, your merger does come in the context 
of a changing industry and worldwide competition. So if you 
wanted to ask some----
    Mr. Steenland. No, I was just going to provide an example. 
Today, Northwest flies two wide body airplanes a day from 
Honolulu to each of Tokyo and to Osaka. Delta doesn't serve 
those markets.
    Ms. Hirono. I know that you were one of the original ones.
    Mr. Steenland. We were one of the original ones.
    Ms. Hirono. And that is why you have that.
    Mr. Steenland. And on those airplanes, it is probably 99 
percent Japanese tourists coming to Hawaii. So those airplanes 
will continue to fly, subject to economics of fuel and the 
like. No impact on those routes will be as a result of this 
merger.
    Ms. Hirono. I wouldn't think so, because Northwest I know 
has a very favored status with regard to Japan.
    Just one more thing. One of my colleagues expressed a 
concern about the fact that Delta Airlines flight attendants 
are in the middle of deciding whether or not they want to be 
unionized. I note Mr. Anderson's testimony that says that 
employee relations are really important. That all sounds really 
nice, I commend you for that. And of course, you are going to 
abide by any decision, which by law you have to.
    But I have some information which leads me to think that 
the position of management with regard to this unionizing 
effort is what I would call very aggressive and in your face. I 
have a concern about those kinds of tactics and I would like to 
express those concerns to you here.
    Mr. Anderson. And I respect your concerns. Thank you.
    Mr. Costello. The Chair thanks the gentlelady.
    We are down to about five minutes on this vote, so we will 
recess. There are two additional votes. I will ask our 
witnesses, I think we have other Members who want to ask 
questions of these witness. I would ask everyone to come back 
in 20 minutes. At 4:05 we will resume the hearing. The 
Subcommittee stands in recess until 4:05.
    [Recess.]
    Mr. Costello. The Subcommittee will come to order.
    The second panel consists of the Honorable James J. 
O'Connell who is the Deputy Assistant Attorney General, 
Antitrust Division for the U.S. Department of Justice and the 
Honorable Michael Reynolds who is the Acting Assistant 
Secretary for Aviation and International Affairs with the U.S. 
Department of Transportation.
    Mr. O'Connell, you are recognized under the five-minute 
rule, and you both should be aware that your entire statement 
will be entered into the record.

  TESTIMONY OF THE HONORABLE JAMES J. O'CONNELL, JR., DEPUTY 
ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT 
   OF JUSTICE, AND THE HONORABLE MICHAEL W. REYNOLDS, ACTING 
  ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS, 
               U.S. DEPARTMENT OF TRANSPORTATION

    Mr. O'Connell. Thank you, Mr. Chairman.
    Mr. Chairman and Members of the Committee, I am pleased to 
appear before you today to explain how the Antitrust Division 
evaluates the likely competitive effects of airline mergers. I 
would note, as the Chairman noted at the beginning of these 
proceedings, that as pending transactions are pending law 
enforcement matters, I will not be speaking specifically about 
the Northwest-Delta merger today.
    The Antitrust Division has pursued an active program of 
enforcement in the airline industry for many years in order to 
ensure that consumers receive the benefits of airline 
competition. In October, 1998, for example, the Division sued 
to undo Northwest Airlines' acquisition of a controlling stake 
in Continental Airlines and, in 2001, the Division announced 
its intent to challenge the proposed merger of United Airlines 
and U.S. Airways after concluding that that merger likely would 
reduce competition and result in higher fares on routes 
throughout the United States and internationally. The parties 
abandoned their merger plans in response to that decision.
    The Division has also successfully challenged other 
transactions that would have substantially lessened 
competition, including proposed acquisitions of gates or slots 
that we concluded would have eliminated competition in certain 
markets.
    In addition to challenging transactions, the Division has 
investigation and challenged collusion under Section 1 of the 
Sherman Act, most recently, for example, in an ongoing 
Antitrust Division criminal probe of international airlines for 
fixing rates for cargo shipments and for passenger 
transportation, more than $770 million in criminal fines have 
been imposed, and guilty pleas have been entered by several 
international airlines.
    My written statement provides additional examples of our 
enforcement in these areas as well as some additional details.
    All of these efforts have as their goal the assurance that 
U.S. consumers receive the benefits of a competitive 
marketplace. Most mergers raise no competitive concerns and can 
benefit consumers. However, certain proposed mergers do raise 
serious competitive issues.
    Antitrust analysis is highly fact-specific and, in each 
case, we carefully review the facts and the evidence to 
determine whether a particular merger would violate the 
antitrust laws. The Antitrust Division reviews mergers under 
Section 7 of the Clayton Act which prohibits the acquisition of 
stock or assets where the effect of such a transaction may be 
substantially to lessen competition or to tend to create a 
monopoly. The primary focus is to determine the likely 
competitive effects of a merger in the future.
    The methodology that the Division follows in all merger 
reviews, including those in the airline industry, is set out in 
our longstanding horizontal merger guidelines. Under the 
guidelines, mergers should not be permitted to create or 
enhance market power or to facilitate the exercise of market 
power. By market power, we mean the ability profitably to raise 
prices above competitive levels or to reduce competition on 
dimensions other than price such as product quality, service or 
innovation for a significant period of time as a result of the 
transaction.
    The antitrust agencies generally assess a merger's likely 
competitive effects in all relevant markets--the product, 
service and geographic markets in which the merging companies 
compete--in order to determine whether the transaction would 
likely substantially lessen competition in those markets. In 
the case of airline mergers, those markets typically consist, 
at least, of scheduled passenger service between a point of 
origin and a point of destination. These are generally referred 
to as city pairs.
    The Division also considers broader issues in addition to 
the concern over competition in city pair markets. To mention 
just one example, concern about the merger's potential 
competitive impact on competition for large corporate travel 
contracts and government travel contracts was one of the 
factors that drove our decision in 2001 to announce our 
intention to challenge the United-U.S. Airways merger.
    Once the relevant markets have been identified, the 
Division looks at the number of other carriers serving each 
market and at the nature of that service. We then focus our 
analysis on those markets that might be conducive to the 
creation or enhancement of market power as a result of the 
merger.
    In conducting this analysis, we consider a variety of 
market factors and industry-specific practices to determine the 
likely effects of the merger. For example, we examine entry by 
other firms, and we consider merger-specific efficiencies of 
the kind likely to enhance the merged firms' ability and 
incentive to compete if such efficiencies exist.
    The Division examines all available qualitative and 
quantitative evidence when evaluating a merger's likely 
competitive effects. We obtain evidence from the merging 
parties as well as from their competitors and their customers. 
We obtain evidence from other sources such as consumer groups 
and third party experts and, in the case of airline mergers, we 
consult with the Department of Transportation so that we can 
take advantage of their extensive experience in this area as 
well as the significant amount of data that they maintain.
    By carefully evaluating all of this evidence, the Division 
develops a highly detailed and thorough understanding of the 
markets that are likely to be affected by a proposed merger.
    In conclusion, Mr. Chairman, competition in the airline 
industry is critical for the millions of Americans who depend 
on air travel in their business and personal lives, and the 
Division has a strong record of enforcing the antitrust laws to 
protect competition in this important sector of our economy. If 
we determine that a proposed merger will violate those laws or 
that air carriers are engaging in illegal collusive or 
monopolistic conduct, we will not hesitate to take appropriate 
enforcement action to protect competition and American 
consumers.
    Mr. Chairman, this concludes my prepared remarks. I will be 
happy to answer any questions the Committee may have.
    Mr. Costello. The Chair thanks you, Mr. O'Connell, and now 
recognizes Mr. Reynolds.
    Mr. Reynolds. Chairman Costello, Chairman Oberstar, Ranking 
Member Petri, thank you for the opportunity to discuss the 
state of the airline industry, issues related to airline 
consolidation and the role of the Department of Transportation 
in the industry's ongoing restructuring. Although it would not 
be appropriate for me to discuss the specifics of any 
transaction, I hope that I can shed some light on the process.
    With respect to the state of the airline industry, U.S. 
carriers have been emerging from a major restructuring, one 
that was precipitated by a fundamental change in passenger 
demand that began prior to September 11, and it revealed an 
outdated industry structure built around an unsustainable cost 
structure.
    Despite fuel price increases, the industry as a whole was 
profitable for 2007. Legacy carriers had successfully 
restructured and adapted their business models to compete in a 
more price-sensitive environment with low-cost carriers that 
have continued to expand throughout the decade.
    In 2008, however, persistent record high fuel prices have 
eclipsed the benefit of legacy carrier cost reductions and 
efficiency gains and are changing the fundamental economics of 
the industry. Going forward, the outlook for airlines has 
certainly become cloudy. The industry faces three major 
challenges in 2008: significantly higher than expected fuel 
prices, a potentially weaker economy and labor cost pressures.
    Wall Street currently estimates that with oil at $110 a 
barrel, the U.S. airline industry will lose approximately $4.5 
billion this year. Clearly, the major challenge for the 
industry remains record high fuel prices, and we have heard a 
lot about that today.
    Fuel is now the largest single cost center for airlines, 
from 19 percent of total operating expenses in 2004 to nearly 
40 percent for 2008 based on current trends. While the industry 
posted an operating loss of approximately $1.7 billion in the 
first quarter of 2008, it would have posted an operating profit 
of $3.6 billion in that quarter had fuel prices remained at 
2004 levels.
    Ongoing fuel price pressures have motivated industry-wide 
cost and capacity discipline. All carriers are trying to adjust 
their business models to cope with yet another significant 
challenge. As low cost carriers continue to expand, legacy 
carriers, in particular, must find ways to become more 
efficient producers.
    With respect to the broader economic environment, passenger 
carriers report that demand currently remains fairly strong 
going into the busy summer travel season. However, there is 
some regional weakening in domestic markets and greater concern 
for the fall and winter.
    With regard to the process associated with airline 
transactions, the Department of Justice is responsible for 
reviewing proposed airline mergers due to its primary 
jurisdiction over antitrust laws. The DOT typically provides 
the DOJ with advice and analysis on airline competition issues. 
Of course, my colleague from Justice has just explained his 
department's role and perspective on these matters.
    If the Antitrust Division does not challenge a transaction 
between major airlines, DOT would then consider a wide range of 
regulatory issues that fall within its jurisdiction including 
international route transfers, economic fitness and code 
sharing.
    With respect to the role of government in the industry, the 
issue of consolidation should be understood in the broader 
context of allowing deregulation to address the airline 
industry's perennial challenges. In an industry that is truly 
subject to marketplace forces, we will inevitably see 
restructuring. Each proposed transaction must be considered on 
a case by case basis. The airline industry should be held to 
the same antitrust standards as every other industry, and there 
will inevitably be transactions that fail to satisfy a rigorous 
antitrust test.
    Our consideration of aviation economic policy must focus on 
what is best for both a healthy and a competitive industry. Our 
goal must be to strike what is admittedly a difficult balance 
in the face of a complex and changing industry.
    That concludes my oral statement. I would be pleased to 
take any questions.
    Mr. Costello. Mr. Reynolds, thank you for your testimony.
    Mr. O'Connell, does the Department of Justice consider the 
impact of one proposed merger on the entire industry and as a 
whole and whether one merger might lead to others?
    Mr. O'Connell. Well, Congressman, when we examine a merger, 
we examine each merger that is brought before us when it is 
brought before us and make our determination as to whether the 
transaction may violate the antitrust laws based on the facts 
of that transaction.
    Mr. Costello. So would that be a yes or a no?
    Mr. O'Connell. We do take all the factors into account. We 
do examine the state of competition in all of the affected 
markets. But ultimately the decision on any particular 
transaction, because if we determine that a transaction may 
violate the antitrust laws, we then have to go to court and 
demonstrate that to a judge based on the facts of that deal.
    The decision is based on the transaction itself, but we do 
take every factor into account when we are examining them.
    Mr. Costello. That is one of the factors, how it affects 
the industry and a whole and if one merger may trigger other 
mergers?
    Mr. O'Connell. Well, Congressman, if I may, when we are 
examining a merger, we are trying to determine whether it is 
going to result in market power or enhanced market power in the 
affected markets, and so the industry-wide implications can 
play a part in that, but we do focus on the impact of the 
transaction in specific markets.
    Mr. Costello. Mr. Reynolds, in your testimony, you, of 
course, point to the fact that DOT approves alliances between 
airlines. As all of us know, some of these alliances are 
extensive and involve some of the world's largest international 
carriers.
    You heard a question asked. I think it was by Mr. Cohen or 
Mr. Kagen earlier, and that is: Given the worldwide scope of 
these alliances, do airlines really need to merge in order to 
gain access to international markets?
    Mr. Reynolds. I don't know that mergers are necessary for 
access to markets. It may be a question of whether they feel 
they can compete better in a particular position or not, but in 
terms of whether they have pure access or not, I don't know 
that the merger plays either way into that.
    We are trying to break down barriers, open skies and 
provide access for our carriers_all our carriers across the 
board.
    Mr. Costello. The Chair now recognizes Mr. Petri for any 
questions that he may have.
    Mr. Petri. Thank you, Mr. Chairman.
    I note we have several more panels, and we are starting to 
get into the hour. So I will submit several questions for 
written response and really only want to extend a question that 
our Chairman asked, and that is something that is happening in 
antitrust law more and more. How do you coordinate with the 
European, in particular, antitrust authorities?
    These are international organizations either themselves or 
through alliances. The Europeans evidently allowed Air France 
and KLM to merge, anyway they are part of the same structure. 
Now these companies are both allied with one or the other of 
those. So they have, in effect, merged in Europe already. Does 
that influence your decision?
    How do you define the market? Are you just looking at 
Chicago and Atlanta or are you looking at how this impacts on a 
global basis because a lot of these industries in 
communications and entertainment and now here in air travel 
have basically gone beyond national jurisdictions?
    Mr. O'Connell. Congressman, two points: When we examine a 
transaction and, again, not to speak specifically about this 
one but any transaction in this industry, we look at all 
dimensions of competition.
    We look at, as I said in my opening statement, city pair 
markets. We also look at other factors, other dimensions of 
competition between the merging parties to determine whether 
the transaction poses any competition issues in any of those 
dimensions. And so, that would include looking at international 
routes as well as domestic routes.
    On your question about coordination with the European 
Commission, we do coordinate very carefully with our 
counterparts in Brussels and also in the European member 
states. Often transactions raise similar issues in different 
markets especially if you are talking about reaching towards a 
consistent remedy so you don't end up with different outcomes 
where the company is faced with conflicting results.
    And so, our staffs coordinate very closely with one 
another, and we also coordinate all the way on up the line, 
discussing individual matters, provided that we are clear to do 
so by the parties because there are confidentiality 
restrictions in there. But we work very closely with the 
Europeans to make sure that, to the greatest extent possible, 
we reach results that don't conflict.
    Mr. Petri. Thank you.
    Mr. Costello. The Chair thanks the Ranking Member and now 
recognizes the Chairman of the Full Committee, Chairman 
Oberstar.
    Mr. Oberstar. I have been waiting all day long for your 
testimony. It is very important testimony. I stayed up, in 
fact, quite late last night, reading both the Department of 
Justice's and the Department of Transportation's testimony and 
evaluating and digesting it.
    I take great heart in your statement on page 5 where you 
responded to Chairman Costello's question about this issue. The 
agencies, meaning the Justice Department's Antitrust Division 
and the Federal Trade Commission consider both post-merger 
market concentration and increased concentration resulting from 
the merger.
    That begs more questions about what you consider to be 
included in the concentration in market and resulting from 
merger. You go on to qualify that statement somewhat.
    But earlier on that same page, you say the unifying theme 
of our guidelines to the two agencies is that mergers should 
not be permitted to create or enhance market power or 
facilitate its exercise. You define market power as the ability 
profitably to--very carefully worded--to raise prices above 
competitive levels for a significant period of time.
    Now, let's translate that into today's market structure. In 
exchange with the industry panel, I pointed out that while the 
airlines are fond of saying there is lots of competition. The 
network carriers are fond of saying there is lots of 
competition from the low fare carriers.
    Yet, at Detroit, Southwest that they all point to as the 
leading domestic competitor has a 3.9 percent market share. 
That is in competition with Northwest. In Salt Lake City, in 
competition with Delta, it is 13.8 percent. In Minneapolis-St. 
Paul, it is zero. Cincinnati, it is zero with Delta presence. 
Atlanta, another Delta presence, it is zero. At JFK, it is 
zero. At Memphis, it is zero.
    So a low fare carrier, the biggest one in the business, is 
not willing to challenge existing network carriers at their 
strong point hub. How much more reluctant will that market be 
to challenge a carrier that is more than 50 percent bigger than 
what now exists in any of those markets?
    Mr. O'Connell. Well, Mr. Chairman, that is the sort of 
question that we would set out to determine in conducting a 
review of a transaction, one of the questions we would set out 
to determine.
    As I explained in my opening statement, we would look at 
all aspects of competition including hub competition and city 
pair competition to determine what the current state of play is 
and, most importantly, to determine to what extent, if any, the 
transaction will alter that state of play, will change the 
competitive dynamic. If we determine that there is a problem in 
such a market, we would take appropriate action.
    Mr. Oberstar. Now, while that merged carrier would be 50 
percent bigger than the smaller of the two and while it would 
not be the sole seller in the market, it really is a monopolist 
in those markets, is it not?
    Mr. O'Connell. Mr. Chairman, a question like that would get 
a little close to the facts that we would be determining in the 
transaction that we are reviewing, and so I wouldn't want to 
hypothesize on specific markets.
    Mr. Oberstar. You don't have to. I just want to plant the 
idea with you.
    Mr. O'Connell. So planted.
    Mr. Oberstar. And nurture it.
    [Laughter.]
    Mr. Oberstar. Now, Mr. Reynolds, your testimony is 
delightful. There are all sorts of wonderful, tantalizing 
statements except that you don't bite the bullet. You don't say 
we will counsel the Department of Justice on our views on this 
particular or any merger. If they don't act, then you would 
take some action.
    I think you have a greater responsibility to the traveling 
public because your jurisdiction is, in a way, broader. Your 
scope of review is much broader than that of Justice. It was 
looking at these very narrowly, very important, powerful. Would 
that Teddy Roosevelt were still here as President, we would be 
having a much more interesting discussion.
    Powerful as that is, yours is a much broader scope. I 
wonder whether you have, at DOT, given consideration to the 
market consequences of this merger proposal.
    Mr. Reynolds. Well, for the same reasons as my colleague 
was reluctant to comment on this particular proposal, so am I. 
But, as a general matter of course, as involved in aviation 
policy matters, we do try and take a broad view of all the 
things going on in the industry, including restructuring, in 
terms of any competitive implications of any particular 
transaction.
    Of course, that is judged based on the antitrust laws and 
by our colleagues at the Department of Justice and specifically 
the Antitrust Division. They have the primary jurisdiction 
there. So if there are anti-competitive effects, they are the 
ones who will take steps to potentially address that in any 
potential transaction.
    Mr. Oberstar. Yes. I understand that.
    At the very end of your statement, you say: @@Our 
consideration of aviation economic policy must focus on what is 
best for both a healthy and a competitive industry.''
    But you don't say a healthy and a competitive consumer 
environment. You have left out a very important sector here. It 
is the traveling public that you also have a responsibility to, 
do you not?
    Mr. Reynolds. Oh, we do, and we are very concerned about 
the traveling public from a number of standpoints. We believe 
that vigorous competition in a health industry will serve the 
public best, serve the consumers best, provide them more 
choices, better fares, better offerings and potentially have a 
wider variety of carriers providing a wider variety of 
services. We have seen that a great deal in the current 
marketplace, and we think that that is the proper course.
    Mr. Oberstar. You do say here: @@Our goal must be strike a 
difficult balance in a complex and dynamically changing 
industry.''
    It must also embrace not just short-term but the longer 
term view on stakeholders. That is such a vague term so 
frequently used. No one really understands what it means. Do 
you include it in that the air traveling public?
    Mr. Reynolds. Absolutely, no doubt about that.
    Mr. Oberstar. You should have said that. It would have been 
very comforting to a lot of people.
    Mr. Reynolds. Well, we do care.
    Mr. Oberstar. When you did the antitrust--not you 
particularly but when the Department did the review--I assume 
along with the Justice Department, of the alliance between 
Northwest and Air France-KLM to consider antitrust immunity, 
you considered a very broad set of factors, did you not?
    Mr. Reynolds. Yes.
    Mr. Oberstar. Can you cite those?
    Mr. Reynolds. Well, at the moment, that is an active 
proceeding.
    Mr. Oberstar. But just the factors, not how you came to it, 
but the factors that you considered because they are spelled 
out in the document that you issued.
    Mr. Reynolds. Sure.
    Mr. Oberstar. For the record, could you just say what you 
considered in that process?
    Mr. Reynolds. We, obviously, looked at a variety of factors 
including competition in various markets, both at city pairs, 
country to country, Europe to the United States. So we looked 
at a wide variety of issues in coming to our tentative 
decision.
    Mr. Oberstar. Would it not be appropriate to look at those 
and other factors in evaluating the domestic scene of this 
merger proposal?
    Mr. Reynolds. Whatever the transaction, not speaking to 
this one in particular, of course, we try and take a broad view 
and understand what is going on in the industry and with a 
particular transaction.
    Mr. Oberstar. Would you consider, in providing counsel to 
the Justice Department, the effect of a merger in an Open Skies 
treaty versus the effect of an alliance with antitrust immunity 
in the context of that same Open Skies treaty?
    Mr. Reynolds. We will look at the big picture with regard 
to international aviation policy, with regard to any 
transactions that we may be facing.
    Mr. Oberstar. Would you also then look at the potential 
shrinkage of competition where there is now a Delta presence in 
the London Heathrow and Northwest presence in London Heathrow 
and at Gatwick and what the consequences of a domestic merger 
might have on that international market competition?
    Mr. Reynolds. Well, again, those are very fact-specific 
issues.
    Mr. Oberstar. I am not asking you to make a conclusion 
about it but whether you would consider those as factors.
    Mr. Reynolds. Oh, yes, we look at all those factors. Yes.
    Mr. Oberstar. You would. You would give some thought to it?
    Mr. Reynolds. I think we have actually done that already as 
part of our tentative decision in Sky Team, which we have not 
yet finalized.
    Mr. Oberstar. Would you also give consideration to the 
consequence both for the carriers and for the Pension Benefit 
Guarantee Corporation and well as for another group of 
stakeholders, the employees of the two carriers, of the current 
as well as outstanding future obligations that would be 
incurred in the event of a bankruptcy of that bigger carrier to 
the PBGC?
    Mr. Reynolds. The broader issues associated with pensions 
and a lot of the labor issues are not directly within the 
Department of Transportation's purview. Of course, we try to 
have an understanding of all factors that affect the airline 
industry, but that is not where our expertise or jurisdiction 
lies.
    Mr. Oberstar. True, but that is probably a ten or twelve 
billion dollar--I am just horseback estimating--factor that 
weighs heavily on the economic ability, that is the fitness, of 
the two carriers or the merged carrier to compete in the 
marketplace. That is a very important economic consideration.
    Mr. Reynolds. Well, it could be, depending on the 
particular merger involved.
    Mr. Oberstar. Yes. Again, I want you to consider those 
factors. I think they are very important for you to.
    Coming back, Mr. O'Connell, to I said I took heart from 
your statement concerning both post-merger market concentration 
and increased concentration resulting from the merger. Chairman 
Costello pursued it somewhat with you. I want to pursue it a 
little further.
    Isn't it reasonable for the Justice Department to give 
consideration to the consequences to the marketplace of a 
merger of carriers of this dimension, this magnitude, and the 
cascade of actions that will take place in its wake?
    Mr. O'Connell. Mr. Chairman, yes, and that is something 
that we do look at. When we look at individual markets to 
determine the effect of a transaction in a marketplace, we look 
at all available information. But, again, when the decision 
comes, if the decision comes to challenge a particular 
transaction, we then have to go to court and demonstrate to a 
judge that that deal, based on its merits, is anti-competitive.
    So we do look at the entire industry. We do look at all the 
factors, but ultimately at the end of the day the situation 
with a given transaction has to rise and fall on the merits of 
that particular deal in those affected markets, which can vary 
significantly across markets.
    Mr. Oberstar. Yes. Market concentration, as we discussed 
earlier, relates to the ability of other competitors to enter a 
fortress hub and compete effectively. That competition can be 
one dimension with a smaller carrier but a vastly different 
dimension with a much bigger carrier in frightening off 
competition.
    If that structure results in a collapse of the industry 
into three network carriers, then you have a vastly different 
domestic market competitive structure, don't you?
    Mr. O'Connell. That would be a potential result which is 
why we would look at each transaction that would be presented 
to us as it is presented to us. The decision in one 
investigation doesn't necessarily bear on what we would decide 
in another.
    The facts are always very different. The impacts can be 
very different. We look at each as a separate analysis and 
don't consider ourselves bound by decisions in previous 
transactions in that industry. We take each one as they come.
    Mr. Oberstar. I take great heart from your responses.
    Would you, finally, then look abroad to see what the 
consequences of a domestic merger would be in the international 
marketplace, considering that Americans, our fellow citizens, 
are traveling on these two carriers and would have fewer 
options, fewer competitive choices in an international 
marketplace such as Heathrow? It accounts for--let's see. It's 
the entry point for 50 percent of the European market.
    Mr. O'Connell. Well, without commenting on the facts here, 
in any airline merger, we would look at its impact on American 
consumers whether you are talking about purely domestic routes, 
New York to Atlanta, or whether you are talking about U.S. to 
abroad or abroad to the U.S.
    The entire spectrum of the competitive effects of the deal 
on American consumers is part of our analysis, and we would 
look at all of that.
    Mr. Oberstar. You would not limit yourself to the domestic 
scene but also consider the international competitive 
implications?
    Mr. O'Connell. Absolutely.
    Mr. Oberstar. And the same to you, Mr. Reynolds?
    Mr. Reynolds. Absolutely.
    Mr. Oberstar. I take heart from those comments. Thank you.
    Mr. Costello. Thank you, Mr. Chairman.
    The Chair now recognizes the gentlelady from Hawaii.
    Ms. Hirono. Thank you, Mr. Chairman.
    The industry panelists both said that they would not be 
surprised if as a result of this merger, should it be approved 
or allowed to go through, that there would be more mergers 
coming down the pike. However, as we have more mergers, though, 
I would say that there would be less competition.
    So would the subsequent merger analysis be more difficult 
for the Department to approve because you are just going to end 
up with more and more concentration in the industry?
    It is a hypothetical. Would that be what the Department 
would be faced with analyzing?
    Mr. O'Connell. Well, Congresswoman, any merger review has 
to take as its starting point the condition of the marketplace 
that is presented to us as it exists at that time. So previous 
activity in an industry would be relevant. We would take the 
market as we find it and make our decision based on how we 
thought the merger was likely to change the market going 
forward based on the facts of that case.
    Ms. Hirono. Wouldn't it make sense that as more and more 
airlines begin to want to merge, that it is going to be harder 
to justify and there would be more of an anti-competitive 
impact?
    Mr. O'Connell. Well, Congresswoman, if I could step back a 
little bit from the airline context so I don't get too close to 
the things that are pending in front of us, different 
transactions, it all depends on the facts. I mean the facts are 
stubborn things, and that is what we have to focus on.
    Individual transactions can have different impacts on 
different markets. You could have a transaction that is highly 
anti-competitive in one market and not in others. You have a 
transaction that is fine. It varies enormously from transaction 
to transaction. So it is difficult to generalize.
    Ms. Hirono. Well, I am talking about the ones that involve 
really large airlines.
    Mr. O'Connell. It is difficult.
    Ms. Hirono. United, Continental, those kinds of airlines 
because we can anticipate that those could be coming down the 
pike.
    Mr. O'Connell. The Antitrust Division would look at any 
proposed transaction very carefully based on the facts as they 
exist at the time, and we would take appropriate action if we 
determine that the transaction, any future transaction was 
going to lead to a problem in any market.
    Ms. Hirono. I don't want to beat a dead horse, but it seems 
reasonable to think that if we have subsequent mergers of 
really large airlines, that the analysis becomes, I suppose, 
the anti-competitive impact on the marketplace would be more 
pronounced.
    Mr. O'Connell. Well, again, Congresswoman, it would depend 
on the facts of those deals. Each deal is different. They each 
raise different issues in different markets, and I wouldn't 
want to hypothesize about what we might decide in a future 
investigation.
    Ms. Hirono. Okay. Well, I guess we can draw our own 
conclusions.
    I do have one quick clarifying question. It is about Open 
Skies. We have heard that reference made by the industry 
panelists. I wanted to have clarified, do we allow non-U.S. 
airlines to come into one of our cities, say, New York, pick up 
American passengers, and go on to another U.S. city and pick up 
U.S. passengers?
    Mr. Reynolds. No. That would be illegal. The cabotage laws 
prevent that.
    Ms. Hirono. Yes. So we still have first, second, third, 
fourth, fifth, all those freedoms and limitations.
    Mr. Reynolds. No. That isn't allowed under the Open Skies.
    A carrier could fly between New York and Los Angeles. It 
just couldn't carry any passengers, paying passengers on that 
load.
    Ms. Hirono. Right. So we actually have in place a lot of 
restrictions on the competition from foreign carriers. I know 
that the industry, what they have done is they do code sharing 
and all of that to try and get around some of those 
limitations.
    Mr. Reynolds. Yes.
    Ms. Hirono. They are able, in other ways, to compete with 
the non-U.S. carriers without merging, don't you think?
    Mr. Reynolds. Are you speaking of international air 
carriers, foreign air carriers?
    Ms. Hirono. Yes, they can compete against foreign carriers 
because we do have a lot of limitations on what foreign 
carriers can do in our Country.
    Mr. Reynolds. Not for domestic traffic, they couldn't 
compete for that in any way even if it was through code 
sharing.
    They can compete for traffic that involves an international 
point, a foreign point, depending on the air services 
agreement. Under Open Skies, of course, there are very, very 
few limits, if any, on what carriers may do on those 
international routes.
    Ms. Hirono. It is just domestically that we pretty much 
keep out the international carriers.
    Mr. Reynolds. That is correct.
    Ms. Hirono. Thank you very much.
    Mr. Costello. The Chair now recognizes the gentlelady from 
the District of Columbia, Ms. Norton.
    Ms. Norton. Well, thank you, Mr. Chairman.
    I stayed to perhaps get some clarification on a question I 
asked earlier because Mr. Reynolds raised in his testimony the 
challenges of the merger between two very different airlines. 
His testimony mentions the unexpected costs and delays in 
integration that are likely when you have two different 
airlines merging.
    I am certain that everybody wants to succeed, and they will 
make fairly conservative estimates, but there is some precedent 
off of which to work. That is that historically when large 
mergers occur, there are quite high near-term costs and less, 
of course, near-term revenue than the acquiring company had 
projected.
    Assuming integration costs, because I would like to know 
how you go about, given the fact that you are given a set of 
figures yourself and you indicated that you understand that 
there could be unexpected costs, so I have to assume that they 
would be costs that the parties haven't given you.
    In this case, if there were higher than anticipated revenue 
projections, they would meet at the same time very substantial 
business risks that are perhaps unique to this industry. There 
would be the oil prices which may strike them even worse than 
everybody else, all the rest of us. There would be the ever 
tightening credit markets. Look when they are coming forward. 
Then there would be a downturn in the economy because it 
doesn't look like it is turning up any sooner.
    I wonder how you would, in light of your testimony, deal 
with and analyze the unexpected costs and delays in integration 
that are unanticipated in trying to decide whether this is a 
worthy merger.
    Mr. Reynolds. Well, again, I don't want to speak to this 
particular merger. As you indicated, airline mergers can be 
costly, complex, difficult undertakings and with a lot of up-
front costs. We have seen that several times.
    We definitely have a very challenging environment for air 
carriers; the fuel, the potentially weakening economy as I 
cited. So there are a lot of things that are going to be 
difficult for them.
    Of course, it is going to be a business decision for any 
two companies in any industry to decide how they are going to 
behave, whether or not it is in a merger or consolidation of 
some kind, and how they undertake that and whether they move 
forward.
    As to whether those sorts of factors play into approving it 
or not, that would really be, again, for the Department of 
Justice. I don't know how they factor those particular aspects.
    Ms. Norton. Then I will have to ask the Department of 
Justice.
    Mr. O'Connell. Congresswoman, when we examine a merger 
under the antitrust laws, what we are setting out to determine 
is whether the transaction will result in a substantial 
lessening of competition in the affected markets.
    Transactions succeed or fail for a variety of reasons. I am 
not just speaking about airline mergers here. Consumers may not 
be as enamored of the combined product offerings of the company 
as the parties thought. Management may have difficulty 
integrating cultures, any one of a number of reasons why 
transactions can succeed or fail.
    Many of those factors are not factors that are relevant to 
the antitrust analysis because what we are setting out to 
determine is a very important question but a relatively narrow 
one which is whether post-merger the combined company will have 
market power.
    Ms. Norton. Well, I don't know why he passed the question 
on to you then.
    First of all, Mr. Reynolds, you raised the issue of 
unexpected costs and delays in integration.
    I understand what you are saying, Mr. O'Connell.
    I was interested in, for example, whether these companies 
would be worse off, given what looks like an unusually 
challenging set of factors they face at the time that the 
merger is going forward or would wish to go forward, whether 
they are better off or worse off as a merged entity than as 
standalone airlines. They thought they would be actually better 
off as a merged entity.
    Since you are the Transportation official and you have to 
look directly at that issue, that is why I directed the 
question to you in the first place.
    Mr. Reynolds. Thank you, Congresswoman.
    I think it is more that we are just pointing out some of 
the issues. Mergers can have positive and negative impacts on 
many of the different stakeholders, whether that is the owners, 
the employees, the communities being served.
    We don't take a view as to necessarily whether the mergers 
themselves are positive or negative. They are part of the 
marketplace, and if carriers make mistakes or if any companies 
make mistakes in combining, if it is a bad deal, if it is a bad 
business decision, the marketplace will punish them. That is 
not the basis.
    Ms. Norton. Well, okay, Mr. Reynolds, you have truly 
frightened me because, in other words, if you are left with two 
airlines going down the tube, that is not merely the 
marketplace punishing the two airlines, whatever that means. It 
is punishing the American public.
    That is why I was interested in whether or not it mattered 
to you, whether or not standalone airlines, they could take it 
more easily than if these same factors, unexpected factors, 
challenge them as a merged entity.
    It does seem to me that somebody has to take that into 
account, whether the United States is better off with two 
standalone airlines in bad shape or a merged airline in better 
shape, given--and this is what I posited because I got this 
from your testimony--that there are all kinds of unexpected 
costs, even costs beyond what they factored in because that is 
the history of these mergers, except that I am not sure we have 
ever had a merger of an airline in a more challenging 
environment than this one. So I can only that these be matters 
that you would at least consider so that the matter would be on 
the table somehow.
    Thank you, Mr. Chairman.
    Mr. Costello. The Chair thanks the gentlelady and thanks 
both you, Mr. O'Connell and you, Mr. Reynolds, for your 
testimony today.
    We look forward to your making a very thorough and careful 
review of this proposal, and we look forward to your decision. 
We will be monitoring it with great interest. We thank you.
    AFTER 6:00 P.M.
    Mr. Costello. The Chair would now ask the third panel to 
come forward, and I will introduce the panel as they are coming 
forward.
    Captain Lee Moak, Captain Moak is Chairman of Delta Master 
Executive Council, Air Line Pilots Association, International; 
Captain David Stevens who is the Chairman of Northwest Airlines 
Master Executive Council, Air Line Pilots Association, 
International; Ms. Patricia Friend, International President, 
Association of Flight Attendants; and Mr. Robert Roach, Jr., 
General Vice President of Transportation, International 
Association of Machinists and Aerospace Workers, if you will 
take your seat at the table.
    You should know that all of your statements will appear in 
the record as they have been submitted, and we would ask that 
you summarize your testimony in five minutes.
    The Chair now recognizes Captain Moak.

TESTIMONY OF CAPTAIN LEE MOAK, CHAIRMAN, DELTA MASTER EXECUTIVE 
 COUNCIL, AIR LINE PILOTS ASSOCIATION, INTERNATIONAL; CAPTAIN 
DAVID V. STEVENS, CHAIRMAN, NORTHWEST AIRLINES MASTER EXECUTIVE 
 COUNCIL, AIR LINE PILOTS ASSOCIATION, INTERNATIONAL; PATRICIA 
    FRIEND, INTERNATIONAL PRESIDENT, ASSOCIATION OF FLIGHT 
 ATTENDANTS-CWA; ROBERT ROACH, JR., GENERAL VICE PRESIDENT OF 
  TRANSPORTATION, INTERNATIONAL ASSOCIATION OF MACHINISTS AND 
                       AEROSPACE WORKERS

    Mr. Moak. Mr. Chairman, Ranking Member Petri and Members of 
the Committee, thank you for providing me the opportunity to 
testify at today's hearing. I have submitted a written 
statement for your consideration, so I will keep my testimony 
brief.
    My name is Lee Moak. I am a 20 year captain with Delta 
Airlines, and I am the Chairman of the Delta Master Executive 
Council of the Air Line Pilots Association, International, the 
union that represents 7,300 pilots of Delta Airlines.
    I welcome the opportunity to testify in support of the 
proposed merger between Delta Airlines and Northwest Airlines.
    My goal and the goal of our union is that our pilots be 
provided with pay, benefits and retirement commensurate with 
the responsibility and experience we bring to the profession. 
An airline with the increased potential to be financially 
healthy with a stable long-term future provides the best 
opportunity to ensure that that happens.
    Prior to the announcement of the merger, the Delta Pilots 
Union was able to reach a consensual agreement with Delta 
management designed to facilitate the merger while providing 
financial returns for the unique value that we brought to the 
transaction. This agreement will provide a solid framework for 
a new joint collective bargaining agreement to include the 
Northwest pilots.
    We welcome the Northwest pilots as partners in the building 
of the new merged airline and look forward to not only the 
rapid completion of a new joint agreement but also a fair and 
equitable negotiated seniority list. Our goal is for both to 
take effect at the close of the corporate merger.
    So why are we here today to talk about a merger? Since the 
terrorist attacks of September 11th, 2001, our Nation's 
aviation industry has been through the worst seven and a half 
years of its existence. Last week, the price of crude oil went 
through $126 per barrel, an increase of over 90 percent in the 
past year. The Nation's economy is suffering, and the credit 
markets have become increasingly difficult, if not impossible, 
to access.
    Last month, four U.S. air carriers ceased operations. 
Another announced that it will be closing its doors on May 
31st, and yet another filed for Chapter 11 protection.
    In short, our Nation's aviation industry is now in jeopardy 
for the second time since September 11th, 2001. If our industry 
is to survive and, more importantly, thrive, there must be 
change. The time for rational and sensible industry 
consolidation has arrived.
    Careful Government scrutiny and oversight must ensure that 
any potential industry consolidation is in the best interest of 
the traveling public. I submit that this merger, the proposed 
merger between Delta and Northwest, is not only in the best 
interest of the traveling public but also the employees of both 
airlines, the communities we serve, the communities we live in 
and our Nation's economy and aviation industry.
    We look forward to working with all 78,000 employees of the 
merged Delta as we help build our Nation's first truly global 
airline.
    On behalf of the 7,300 pilots at Delta Airlines, thank you 
for the opportunity to testify before the Committee. I welcome 
the opportunity to respond to any questions or comments you 
might have.
    Ms. Hirono. [Presiding.] Captain Stevens, you have five 
minutes to present your testimony.
    Mr. Stevens. Thank you, Madam Chairman and Members, for 
holding this hearing and providing me with the opportunity to 
testify with regard to the proposed merger between Northwest 
Airlines and Delta Airlines.
    I am Captain Dave Stevens, and I am Chairman of the Master 
Executive Council of the Air Line Pilots Association at 
Northwest Airlines. I am a 23 year Northwest pilot previously 
employed by People Express and proudly served in the U.S. Air 
Force as an active and reserve pilot.
    There are currently over 5,200 ALPA-represented pilots 
flying for Northwest Airlines. The pilots at Northwest have 
undertaken an ongoing review of the proposed merger. We 
recognize that the combined company has the potential of 
becoming a stronger and more viable airline. However, the 
Northwest ALPA Master Executive Council and our pilots strongly 
oppose the merger as it now stands.
    The total economic potential of the combined corporation 
will not be achieved without a joint pilot contract which is 
the only way for all of the predicted revenue enhancements and 
cost savings to be realized. A joint contract would also 
resolve potential labor discord which is counterproductive to 
achieving economic success.
    Given the current high cost of fuel, the broad economic 
downturn and substantial costs related to an airline merger, 
the future viability of the combined company will be in 
question if it is unable to take advantage of every revenue 
opportunity. A critical evaluation of the economics of the 
proposed merger is in the best interest of all groups affected 
by the merger.
    Management of the two airlines has stated that the merger 
will produce greater profitability as a result of a series of 
synergies that allow increased revenue and reduced costs. They 
will predict a financially stronger airline, one better to 
serve all its stakeholders including its customers. According 
to management, these synergies will result from an end to end 
merger rather than a traditional overlap production merger.
    However, many of the synergies and therefore much of the 
economic benefit management is counting on will be unavailable 
without a common contract that includes the Northwest pilots. 
Indeed, for the new combined Delta-Northwest to have any chance 
of fully realizing its potential, all employee groups must be 
treated fairly regardless of their pre-merger carrier.
    Why is this true? Without a joint pilot contract, the two 
airlines' flight operations must remain separate. Without a 
single airline operation, much of the needed revenue growth and 
cost savings will not be achieved. Layer in the bad will 
created by contractually treating Northwest employees as B 
Scale, and the matters will be even worse.
    We appreciate Delta management's statement of optimism that 
we can obtain a common contract and an integrated seniority 
list prior to the date of corporate closing. However, we 
believe actions speak louder than words. To date, we have no 
negotiating session scheduled.
    Furthermore, Delta management has found the time to reach a 
tentative agreement with Delta pilots effective on the date of 
closure that excludes Northwest pilots. The more we review this 
document, the more questions we have as to Delta management's 
intent. We feel there is no reason to have several of the 
provisions in the new Delta pilot contract if the intent is 
truly to have a joint contract before closing.
    We are concerned that the reason for this agreement may be 
to put economic pressure on the Northwest pilots to agree to an 
unfair seniority list. We will not do that. Contract terms can 
be changed. Seniority lives forever.
    We agree with the statement from Delta that in their 
analysis a merged Delta-Northwest airline is stronger than a 
Delta standalone airline. However, our review shows that as 
currently structure the same is not true for Northwest. Given 
the current structure of this merger, we believe a standalone 
Northwest is stronger than a merged Delta and Northwest.
    Our review also shows that Northwest Airlines is the best 
place of any legacy carrier to weather the current high cost of 
fuel and economic downturn. Northwest has an enviable route 
system that includes the Pacific hub, a flexible fleet a fuel 
efficient order book of Boeing 787 aircraft and the most 
relative cash on hand of the legacy carriers.
    We understand that integrating the operations of these two 
large carriers will require a delicate balancing act to 
minimize the employee discontent and maximize the employee 
harmony required to access the proposed synergies necessary for 
the merged carrier to be successful going forward. However, the 
steps to date will largely have the effect of maximizing 
employee discord.
    Rather than a joint statement by Mr. Anderson and Mr. 
Steenland that the new carrier was committed to a fair and 
equitable integration of the workforces, we have only the 
statement of Mr. Anderson that he will protect the seniority of 
Delta employees with the implication being that current 
Northwest employees will have to fend for themselves. Rather 
than negotiating a joint contract, Delta Airlines chose to 
negotiate contract improvements only for Delta pilots.
    Notwithstanding the events leading to this point, the 
officers and representatives of the Northwest MEC are willing 
to negotiate with Delta management and Delta ALPA. However, 
time is critical. There is a small window of opportunity 
remaining in which to conclude a joint contract and a joint 
seniority list outside the traditional merger process.
    I have tried in this statement to explain to you, Northwest 
ALPA's concern about the current situation. I ask that you 
evaluate this merger in the current context. I urge you to 
critically examine management's promises and statements of 
their present intentions.
    Will the company meet its financial obligations and manage 
to abide by its promises to maintain current service and hubs 
or will it shrink and shed thousands of jobs?
    What will the loss of those jobs mean to the broader 
economies of the States and regions affected?
    Will this merger work if management cannot achieve the 
expected synergies?
    In short, what happens if the merger does not succeed?
    We believe the marketplace shares our concern as evidenced 
by tremendous loss of value of the share price of both 
companies since the merger announcement.
    In our view, the proposed merger is risky for Northwest and 
Delta passengers, communities and employees. With the price of 
oil, the weak economy, the closed credit markets and the huge 
costs of combining the two companies, there will be no margin 
for error. As it now stands, the combined company will not have 
access to the predicted synergies due to lack of a joint pilot 
contract.
    Ms. Hirono. Captain Stevens, your time is up, if you could 
just wrap up.
    Mr. Stevens. The same lack of a joint contract is likely to 
cause a pilot labor friction. Labor friction in other employee 
groups is possible. The net result may be a weak combined 
carrier in a terrible economic environment. We must all seek to 
avoid this result.
    Again, Madam Chairman and Members, thank you for calling 
the hearing and providing me with the opportunity to testify 
regarding the Northwest pilots' perspective on the proposed 
merger. I stand ready for any questions you may have.
    Ms. Hirono. Thank you.
    Ms. Friend.
    Ms. Friend. Thank you, Madam Chair, and we wish to extend 
our thanks to Chairman Costello and Mr. Petri for holding this 
hearing on this proposed merger. We very much appreciate having 
a seat at this table to share our views and concerns because it 
is the only table where we do have a seat to discuss our 
concerns about this merger.
    In the very near term, we are very worried that 9,000 
Northwest airlines flight attendants who have had the benefit 
of collective bargaining rights for more than 60 years are in 
danger of losing those rights. We are also skeptical of the CEO 
promises of no job losses and no hub closures and the resulting 
financial burden on the workers.
    In the wider view, we remain concerned that in the absence 
of a sound national aviation policy, our national aviation 
system continues to flounder in search of an effective business 
plan in a deregulated environment.
    This merger between Northwest and Delta has drawn 
significant attention from the media, communities served by 
both carriers and here on Capitol Hill. The attention being 
paid to what will create the largest airline in the world is 
appropriate and necessary.
    While we are confident that many are looking out for the 
interests of the communities served and for the interest of 
those who rely on air transportation, there are virtually no 
protections for airline workers in this or any other merger. 
Very little attention is being paid to the upheaval that 
mergers create for the thousands of airline employees who find 
themselves unemployed or whose lives are disrupted.
    We have heard the guarantees from the two CEOs about no 
furloughs and no hub closures, but each guarantee is qualified 
with references to the current environment.
    As we look for solutions to cushion the enormous negative 
impact this latest merger could have on workers at Northwest 
and Delta and the potential for a wave of airline mergers, it 
is time to revisit the concept of employee protection from the 
deregulation act. As part of this and any airline merger plan, 
money must be set aside to protect the financial security of 
the employees.
    There were many important protections in place for airline 
workers prior to the Airline Deregulation Act but no real 
protections exist today. After deregulation, employers 
successfully lobbied for an end to the labor protective 
provisions because, as they argued at the time, these matters 
are better left to the collective bargaining process.
    Union contracts do provide a level of protection for those 
employees covered by a contract, but there is no protection for 
nonunion airline employees. The majority of the Delta employees 
have no collective bargaining agreement. This merger seriously 
jeopardizes the existing collective bargaining rights of all 
the Northwest employees who have fought for and won the legal 
right to have union representation.
    It is true that today the nearly 14,000 Delta flight 
attendants are the closest to securing their future by forming 
a union through AFA-CWA as they are currently engaged in a 
representation election.
    But the management of Delta Airlines has declared that the 
current Delta, essentially a nonunion company, when it becomes 
the new Delta will also be a nonunion company. They have 
launched the largest, most vicious anti-union and voter 
suppression campaign I have witnessed in my 40 years in this 
industry. Whatever else this merger is permitted to be, it must 
not be permitted to become a vehicle for union busting.
    The selection among the Delta flight attendants is not just 
an opportunity for them to gain a voice on the job and a seat 
at the table, it is the first line of defense to protect the 
over 60 years of collective bargaining rights for the Northwest 
flight attendants. The airline executives have realized the 
opportunity this merger presents for them, and it is not just a 
chance to prevent thousands of nonunion employees from gaining 
a union. It is a chance to eliminate the unions that already 
provided protection for their members at Northwest.
    Using this merger as an opportunity to destroy unions 
provides these airlines and all who would follow with an 
opportunity to drive down wages, work rules and benefits for 
all airline employees. It excuses them from any responsibility 
for the workers' lives destroyed and disrupted by their plans. 
It sets the stage for them to set industry standards back to 
levels we have not seen in decades.
    If the new Delta is a nonunion carrier as well as the 
largest carrier, they will be poised to set in motion an 
unprecedented remaking of the entire airline industry that will 
destroy forever airline jobs as a stable and secure middle 
class career.
    I urge the Members of this Committee to send a strong and 
clear signal to Northwest, but more especially to the Delta 
executives, that they must not use this merger as a means to 
destroy the collective bargaining rights of the employees.
    While much will be made over the coming months about the 
impact of this merger on consumers and communities, I urge you 
to remember that hundreds of thousands of airline employees 
across this Country. Keep us in mind as you review this merger 
and the impact that it will have on our lives and our families.
    It may be the Department of Justice and the Department of 
Transportation that will ultimately decide whether this mega-
merger is approved and in what form, but you have the ability 
to stand up for the workers caught in the middle, restore the 
financial protections lost through the deregulation of the 
industry and stand up for the rights of those workers to freely 
choose to form a union without the influence and interference 
of their employer.
    Without our unions and our collective bargaining rights, we 
have no protection. Please don't let them, with their high-
flying grandiose plans, destroy the one thing we have 
protecting us, our unions.
    Federal regulators will look carefully at the impact this 
merger and others will have on the consumers and communities. 
We hope that this Committee and other congressional committees 
will continue to exercise vigorous oversight responsibilities 
as well.
    Thank you again for this opportunity, and I look forward to 
your questions.
    Mr. Costello. [Presiding.] The Chair thanks you for your 
testimony and now recognizes Mr. Roach.
    Mr. Roach. Thank you, Mr. Chairman and the Members of the 
Subcommittee for the opportunity to speak to you on behalf of 
airline workers throughout the United States.
    My name is Robert Roach, Jr. I am General Vice President of 
the International Association of Machinists which is the 
largest airline union in North America. I appear here on behalf 
of International President R. Thomas Buffenbarger and the more 
than 160,000 active and retired airline workers in every job 
classification including flight attendants, ramp service 
workers, mechanics, customer service agents, reservation agents 
and office employees.
    It is my firm belief and the belief of many others that 
some airline executives are using a crisis of their own making 
to justify the establishment of what can only be called a 
monopoly. Some airlines are consistently asking the Government 
for relief, begging the courts to abrogate labor contracts and 
forcing the Government to absorb its pension obligations.
    History has shown that poorly managed airlines cannot 
operate without Government assistance. These airlines 
repeatedly appeal to the Government for bailouts. They abuse 
the bankruptcy laws to decimate shareholder values or pay 
millions of dollars in professional fees. This is tantamount to 
killing the patient, so the undertaker can make money and then 
having a rebirth and killing the patient all over again.
    Hundreds of millions of dollars were spent in the last 
several years in airline bankruptcies for professionals, for 
lawyers, for economists while the airline employees lost 
hundreds of millions of dollars in benefits, wages and health 
insurance.
    Airline executives continually argue that they must 
consolidate and reduce air miles, air seat miles. Well, Mr. 
Chairman and other Members of the Committee, Pan American is 
gone. TWA is gone. People's Express came and left. Ozark is 
gone. Braniff is gone. Still, they beg for more consolidation 
in the industry.
    We have put together a committee of airline professionals, 
lawyers and economists, and we have determined that the merger 
of Northwest Airlines and Delta Airlines would not be in the 
best interest of the flying public, the cities or States that 
they serve or the employees that work at these airlines or the 
airline support employees.
    We have determined that, based on published reports, United 
Airlines is working very closely with U.S. Airways and will 
probably announce a merger in the next couple of weeks.
    Continental Airlines has been talked about here by airline 
executives who have said they want to stand alone. Published 
reports indicate they are in the process of forming an alliance 
with American Airlines which will mean, as many of you have 
stated, three megacarriers in this Country, running the smaller 
carriers out of business.
    As you have seen, they talk about the airlines that no 
longer exist or recently filed for Chapter 11. These are the 
smaller carriers that are unable to compete because all the 
industry consolidation has already taken place.
    They indicate the high oil prices are the reason for this 
merger. If, as they say, we are going to have an end to end 
merger and all the hubs and all the buildings and all the 
people are going to stay, then the high oil prices are not 
going to come down. They are only going to double.
    I would like to remind this Committee that it was the 
Congress that provided the Pension Protection Act for Delta 
Airlines and for Northwest Airlines which means they have $7.5 
billion combined under-funded pension liabilities and an 
elongated period of time to pay off these liabilities.
    As Congressman Holmes indicated, if this massive airline is 
put together takes, it three to five years to put a maintenance 
program together. There are massive problems in integrating an 
airline.
    I, myself, come from TWA. Again, I have lost my pension, 
and my fellow coworkers lost their pensions. They lost their 
health insurance, and they lost their jobs based on promises, 
as you indicated, Mr. Chairman, that were made in this very 
same room.
    If this massive airline, we are talking about an airline 
that would have 40 billion in debt, inclusive of that $7.5 
billion of pension obligations. Those pension obligations, if 
that mega-airline were to go into Chapter 11, would fall to the 
Pension Protection Guarantee Corporation which would mean that 
the people of the United States would either have to fund this 
under-funded PBGC to the tune of $7.5 billion in addition to 
the under-funding that is already there from United Airlines 
and U.S. Airways that have already dumped their pensions onto 
the quasi-Federal Government agency.
    If they were unable to pay that through the PBGC, then the 
cities and States of the United States, the citizens, would 
have to pay to put people on welfare because that is where 
people will go without their pensions, without their health 
insurance.
    So this is another Government bail-out. This is just 
killing the patient again in order to line the pockets of 
executives to the tune of 15 to 30 million dollars in addition 
to all the other executives from the major carriers that will 
soon announce, as published reports, additional airline 
mergers.
    We believe, as we have urged since 9/11, that we need a 
format. We need an airline summit. We have requested that from 
the airline management. We think we need labor, management and 
Government to sit in a room with the Department of 
Transportation, if you will, and come up with a real plan to 
fix the problems in the industry.
    You must remember that Southwest Airlines, Continental 
Airlines and American Airlines, they are now operating under 
the same situation as the other carriers, but they have not 
come here looking for merger relief. They are looking for the 
bailout that Northwest and Delta are looking for. If that is 
approved, then the others must follow.
    As Chairman Oberstar indicated, you must look at this 
process as the entire industry. You cannot look at it, as one 
of the witnesses, in isolation because it is already publicly 
reported what is going to happen in the industry. It is not a 
secret, and it will happen very quickly.
    Again, it will be detrimental to the industry because it 
will take a very long time to put this process together and a 
lot of things can happen in the interim period.
    So, in sum, we urge the Congress and we thank the Congress 
for voting to stop putting oil into the strategic oil reserves. 
We ask you to go further and ask President Bush to turn the 
spigot on and reduce the cost of oil to all of America. We ask 
for a moratorium on all airline mergers until such time as we 
can sit down--management, labor and Government--sit down in a 
format that we can resolve the industry problems.
    We are talking to many people. We are talking to the former 
CEO of American Airlines, Robert Crandall. We don't agree with 
everything he says, but in a newspaper editorial he clearly 
stated this merger is not going to fix the problem.
    The only thing that may fix the problem is some small, 
slight re-regulation because you cannot continue to sell seats 
for less than what it costs to produce that seat and intend to 
stay in business.
    Thank you, Mr. Chairman. I will be here to answer any 
questions that you may have.
    Mr. Costello. Mr. Roach, thank you for your testimony. I 
share many of the concerns that you just expressed, concerning 
not only front line employees but a number of other issues that 
you touched on.
    Captain Stevens, you mentioned in your testimony that much 
of the synergy and the economic benefits that management is 
indicating that they will achieve through this merger will not 
be there unless there is a common contract that includes 
Northwest Airlines. I wonder if you might elaborate on that.
    Mr. Stevens. I thought it was interesting that Mr. Anderson 
mentioned six different synergies, all of them under $200 
million.
    Mr. Steenland mentioned the biggest item being cross-
fleeting. You will remember earlier in their testimony, they 
referenced $2 billion in savings. Well, if you take those six 
out, there's about a billion left over. Somewhere in that 
billion is where they are expecting in their business plan to 
achieve much of their efficiency, and that would be the cross-
fleeting.
    In the original contract that was negotiated between the 
Delta pilots and the Northwest pilots, that was accomplished in 
a joint contract that was achieved in February. Now they 
recognize that by only having one of the partners, they can 
only achieve in the cross-fleeting perhaps a quarter to a third 
of what they could do in a joint contract.
    So, if this is the direction that the management chooses to 
go, we feel that in all likelihood costs are going to be higher 
than they expect, and so they should take advantage of every 
possibility to generate greater revenue to have the greatest 
possibility for this merger to succeed. The best way to 
accomplish that would be with a joint contract between the 
Delta and the Northwest pilots and Delta management.
    Mr. Costello. Ms. Friend, you referred in your testimony to 
efforts by Northwest management to outsource flight attendants' 
jobs to foreign nationals. I want to ask you to talk a little 
bit about that and also some of the concerns that you raise 
associated with the organizing drive for representation by 
Delta flight attendants, which Mr. Lipinski raised earlier. He 
raised it just prior to me having the opportunity to raise it.
    So I wonder if you would comment on both.
    Ms. Friend. Right. Well, obviously, the outsourcing issue 
is a big concern and becomes a greater concern if we are 
looking at the possibility of this combined group of flight 
attendants having no collective bargaining rights.
    During the bankruptcy, during the Northwest bankruptcy, 
when we were negotiating with Northwest management for the 
concessionaire agreement, one of the things that they put on 
the table was the ability to staff all of their international 
flights with non-U.S. citizens. Their proposal was that the 
existing Northwest workforce would retain domestic flying, only 
point to point within the United States, and anything that left 
the United States and returned would be staffed by non-U.S. 
citizens.
    We have some experience with that in some of our flight 
attendant contracts, and we know what they do there. We have 
isolated usage of what we refer to as foreign nationals in 
specific parts of the world, particularly in the Pacific but 
nothing that ever touches the U.S.
    We know what they do. They chase, obviously, the cheapest 
labor that they can find. So I mean that just adds to our 
urgency of this group of flight attendance retaining a 
collective bargaining agreement so that we can preserve those 
jobs.
    When we filed for the election under the National Mediation 
Board rules for an election, the day we filed, Delta management 
put up in their offices, their in-flight offices where the 
flight attendants have to go to check in before their flight. 
They practically wallpapered these areas with anti-AFA, anti-
union posters.
    As Mr. Lipinski referred to it, under the Mediation Board 
Rules, if you don't cast a ballot, it is a no vote. In order 
for these flight attendants to form a union, 50 percent plus 1 
of them have to actually cast a vote.
    So the management campaign is when you get your ballot, 
don't vote. Rip it up because then that becomes a no vote. So 
that is the theme of their campaign. As I said, they 
practically wallpapered their in-flight offices with this 
message.
    They produced a DVD video from Mr. Anderson. That is what 
Mr. Lipinski has a copy. That is what he referred to, where Mr. 
Anderson talks about all the bad things that will happen to you 
if you should join a union. It will completely destroy Delta 
Airlines. He actually repeats falsehoods about his interaction 
with the flight attendant union at Northwest Airlines for the 
period that he alleges he was there.
    Because they give lip service to this idea that the flight 
attendants who are supporting forming a union are supposed to 
have equal access to talk to their coworkers, they have 
isolated them into what they define as the non-work area.
    Now, the non-work area continues to shrink. In our 
estimation, our workplace is the aircraft, but they have 
defined the work area as every place except a kitchen area that 
is attached to some of these in-flight areas. Even if our 
flight attendant supporters are in this very narrow area and 
they happen to be wearing a tee-shirt because our slogan for 
this campaign is Pro-Delta, Pro-AFA.
    So if the flight attendant supporter is wearing a Pro-
Delta, Pro-AFA tee-shirt, they are not allowed to leave this 
narrowly defined non-work area, wearing that tee-shirt in spite 
of the fact that the rest of the area is plastered with these 
anti-union don't vote. It is massive voter suppression. It is.
    We were told when this merger was first announced. Our 
Northwest leadership contacted Northwest management and said we 
need to sit down and talk about this merger. We were told by 
Northwest management, there is no place for you to discuss this 
merger because it is the intent of the people who will manage 
the new Delta Airlines that when the dust settles you will have 
no union.
    They are true to their word. They are going to try to stop 
it here. Then if we have to go through the second phase with 
the combined group, it will be just more of the same.
    Rather disingenuously, Mr. Anderson answers the questions 
about the DVD, saying, well, we have a lot of passionate flight 
attendants on both sides.
    I find it really very difficult to believe that these so-
called passionate flight attendants who are anti-union were 
allowed to use his name and his photograph without his 
permission.
    Mr. Costello. The Chair thanks you and now recognizes the 
Ranking Member, Mr. Petri.
    Mr. Petri. Thank you.
    We apologize a little bit for the length of the hearing, 
but it is an important subject, and we appreciate your taking 
the effort to stay and participate and for the statements that 
you and your organizations prepared for this occasion.
    I just want to say as a member of the traveling public, I 
appreciate the dedication and seriousness with which nearly all 
of your members take their jobs. I know there has been a lot of 
stress, and it has been difficult work for a whole variety of 
reasons, and people are sometimes cranky, but my own experience 
has been actually getting top-flight service.
    I just wonder if you could answer two questions. One, there 
have been articles about whether the merger would succeed or 
not based on and doubting that it would because of what were 
described as quite different employee cultures between the two 
organizations.
    All of you probably have been through various mergers. 
There have been a lot in the airline industry. If you have been 
with either of your companies for any number of years, you have 
experienced some. Would you care to comment on that?
    Is it possible that will be an impediment or is it 
something that is a concern but can be overcome?
    The second one is I think the chief executives testified 
that they were hoping after the merger to unite the pay 
schedules and benefits at the higher of the two levels--at 
least that is what I heard--between Delta and Northwest.
    Obviously, the airline pilots and probably the mechanics, 
you have union discussions to figure out how you are going to 
be working on that as well as dealing with the companies, but I 
wonder if you could comment on that as well. That sounded like 
a pretty good outreach to me.
    Mr. Moak. Congressman Petri, I would like to start with 
that. I believe that this merger is going to be very successful 
and, not only that, I believe it must be successful and that we 
are going to have to work together. We are going to have to all 
come together and say, what can we do to make this work?
    You hit the nail on the head early on when you said nine 
airlines have gone into bankruptcy or liquidated over the last 
few months. Those airlines, those employees of those airlines 
are not going to get a hearing here in order to talk about a 
potential merger. They have lost their jobs. They will not be 
here.
    I, myself, have an interesting experience as a Delta 
employee because I was up here last year in January, leading an 
effort to fight the hostile takeover by U.S. Airways of Delta 
Airlines. That was a Wall Street transaction, and they had no 
shame. They came out of the gate and what they said to the 
Delta employees is 10,000 Delta employees would be on the 
street and 1,000 pilots would lose their jobs.
    At that hearing, I agreed with Mr. Roach. That was the 
wrong merger at the wrong time.
    But right now, we are faced with all the different events 
we have talked about, whether it is oil, the economy or 
competing with flag carriers in Europe. Lufthansa alone is 
worth more. The German-flag carrier is worth more than all the 
legacy airlines put together.
    So, not only are we going to make this work, we must make 
it work or we won't be at another hearing ever again.
    As far as Captain Stevens and the Northwest pilots, we were 
working together. We met today. We will be meeting after this 
hearing is over, and we will get this done because our members 
demand it and it is important for the airline as we move 
forward.
    The U.S. Air merger, one more time in contrast, at that 
time, when they were trying to do the hostile takeover of Delta 
Airlines, they had not completed that merger. They have still 
not completed that merger today.
    So it may be a little contentious right now, okay, but the 
merger was just announced three weeks ago. We have been working 
three months on it, and I am confident we are going to get the 
job done because we need to get it done. Culture aside, we will 
get it done.
    Mr. Roach. Can I comment on that?
    I respect the captain and what he said. I have been in this 
industry 33 years. I have never seen an airline merger work 
yet.
    History tells us what is going to happen here. Northwest 
and Republic, big culture clash, okay. Very recently, U.S. 
Airways and America West, they are still fighting down there. 
It has gotten to the point where employees couldn't even get 
along with each, that they left the union of their own accord.
    These are serious problems. You just can't put two airlines 
together. They have two different cultures. They have two 
different ways of working.
    We work on different aircraft. We service the passengers 
different, and there are different types of management. There 
is a whole history and culture of working with a company or an 
industry.
    It takes, in the best of conditions, three to five years to 
put an airline merger together because you have a maintenance 
program, you have aircraft that you have to either get rid of 
or downsize, retrain pilots, retrain mechanics. It is a whole 
host of things that happen.
    With all the good intentions, we were at the Senate 
hearing, and Mr. Anderson and Mr. Steenland admitted that all 
these guarantees don't mean anything because they are not 
likely to happen.
    If somebody asks, could you put that in writing, you never 
got an answer to that because they said it is not going to 
happen. That is what they told the Senate side. It is not going 
to happen because we can't guarantee anything because anything 
is liable to happen.
    So all these promises that are being made and how wonderful 
everybody wants to do this and I am quite sure with all good 
intentions. But, Congressman Petri, you are right. There is a 
cultural difference.
    There is a cultural difference, and U.S. Airways and 
America West have been at it for over two and a half years. 
There are lots of internal problems. There are internal 
problems with employees, internal problems with meshing as to 
flight schedules. They are still operating as two separate 
airlines. So it is a problem.
    To diminish the problems that are going to happen would 
seriously take away from the process. There is going to be 
problems. People can work as hard as they want. I don't think 
people are not. There are going to be problems.
    Our view of the world is this is not in the best interest 
of the American people, period. End of story.
    Mr. Costello. The Chair thanks you, Mr. Roach.
    Let me announce that we have a series of three votes going 
on the floor. We have about three minutes to get over for the 
first vote, two five-minute votes after that. So I would ask 
the panel to return, and we will recess.
    Mr. Petri. Mr. Chairman?
    Mr. Costello. Yes, Mr. Petri.
    Mr. Petri. One of the additional witnesses was hoping to 
say something. If they do it when they come back, would that be 
possible?
    Mr. Costello. On this panel?
    Mr. Petri. Are we done with this panel?
    Mr. Costello. No.
    Mr. Petri. Yes. I think Captain Stevens has something.
    Mr. Costello. Quickly, if you will add what you need to 
add.
    Mr. Stevens. Yes, Mr. Chairman.
    Unfortunately, because of the airline industry, I did 
participate on the unsecured creditors committee from 2006 
through 2007, attending all those meetings and seeing the 
challenges faced by all the different groups that Captain Moak 
also referenced in this challenging environment.
    I also was of the belief and again expressing it to my 
executive board of the benefits of a cooperative merger 
starting last December. I do find it somewhat ironic that also 
suggested for all employees at Northwest that they emerge 
similar to management with an equity program to get everybody 
pulling in the same direction starting in February of 2007.
    Fortunately, it is now I have the irony of seeing in the 
announcement statement for the merger with Delta, the only 
group that is excluded from equity being contemplated are the 
Northwest pilots. I find that frustrating along with the----
    Mr. Costello. I hate to interrupt you, but we have a minute 
and 50 seconds to get over to the floor.
    Mr. Stevens. I have a final point, and I am done.
    Mr. Costello. I will ask the panel to come back and be 
ready to answer questions at 7:15. So the Subcommittee will 
recess and ask you to be back at 7:15. Thank you.
    [Recess.]
    Mr. Costello. The Subcommittee will come to order.
    The Chair, at this time, will recognize the gentleman from 
Wisconsin, Mr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman, for holding this 
Committee hearing and thank you to everyone for appearing. I 
don't know how many hours ago you began to be involved in this 
Committee, but this is part of the listening process and part 
of oversight and asking questions.
    So my question has to do with the three things having to do 
with the overhead of the companies that you are employed by. As 
I understand the transportation industry with regard to Delta 
and Northwest, they have some major areas of cost involved in 
people/employees, their fuel costs and their equipment. So, of 
these three categories, as they seek to consolidate and merge 
their organizations, which of these three do you think that 
they can control?
    Can they control their fuel cost? Unlikely.
    Will the merger in some fashion lower their fuel cost? I 
think not.
    Will it lower their cost for their equipment? I doubt it, 
not for their acquisition cost of new planes and new engines 
and new equipment that goes onboard.
    So the only area left to really cut costs is going to be 
for the employees and the people, and that is really where the 
economy of scale comes in, in my mind.
    When I first began to take lessons in business, it was when 
I was a little kid watching television on Saturday night. There 
was Gussman Presents. It was a movie. He would present 
different movies. Mr. Gussman, he sold automobiles, and he said 
there is quality, price and service.
    On these three aspects of quality, price and service, the 
question I have for all of you is I would like you to address 
the areas that you believe the merger will improve upon 
efficiency of scale either by lowering the cost of the fuel, 
the equipment or the cost for employees and also what effects 
this merger will have on the quality of the service that you 
are able to offer.
    Ms. Friend. I will go first because I think my answer will 
probably be the briefest since we are essentially locked out of 
this process.
    Our Delta flight attendants have no union representation, 
and our Northwest flight attendants, whom we represent, have 
been denied access to any information or any discussions about 
the merger because, as I said in my testimony, it is the 
intention of the management of the new Delta that when the 
merger is complete the flight attendants will have no union. So 
we don't have, other than what we hear them say publicly, which 
we are extremely skeptical of.
    I will say in response to the question that was asked just 
before the last recess that, yes, however this comes together, 
whether it comes together with both flight attendants having a 
voice through their union or with the flight attendants having 
no voice, there will be cultural differences to work through. I 
believe that they can be worked through under normal 
circumstances.
    But I have to say that if you rip away the collective 
bargaining rights of 9,000 of those flight attendants that they 
have had for more than 60 years. These are flight attendants 
who have never, ever worked without a collective bargaining 
agreement. The concept is completely foreign to them.
    If you rip up their contract in front of them and say now, 
go and be nice to the Delta flight attendants, I think that is 
going to be an extremely protracted integration process. It 
will be extraordinarily difficult.
    Mr. Roach. It is employees. Clearly, putting these two 
airlines together, the purpose is to reduce the overhead, the 
labor costs.
    They have admitted on CNBC, and they admitted last week at 
the Senate that the reservation agents will be reduced. They 
didn't say that today, but they have said that before. They 
consider them back room, those 1,000 employees, office and 
clerical people who will be reduced.
    I don't know how, what the work rules are for flight 
attendants and pilots, but obviously there is some issue with 
seniority.
    Regardless of what they say and we have heard from industry 
analyst, Mr. Nadelle, last week, there is only one way for this 
to cut costs, and that is to reduce employees. That will reduce 
service because both of these airlines have cut employees to 
the bone.
    You go there and you see a machine, and there is not enough 
people to work it, not enough people to load the planes, not 
enough people taking reservations. It is bad for the employees 
which will be bad for customer service, but fuel is not going 
to go down and putting these two airlines together is not going 
to make it any cheaper to operate.
    Fares need to be what they need to be. That is the real 
issue.
    Mr. Moak. I say this is good for employees. It is good for 
our communities, and it is good for the traveling public.
    I do understand the cultural issues slightly. I believe 
airline employees, mechanics, flight attendants, gate agents, 
reservation people, on and on and on, are all required to work 
together to make an airline work. An airline is a very 
complicated and complex operation, and I believe that these 
people are intelligent, and they are going to be able to work 
together.
    At Delta, we have a long, proud history of being formed by 
four mergers. We had the CNS. We had the Northeast merger of 
1972. We had the Western merger of 1987, I believe. We had the 
Pan Am merger of 1990.
    In every one of those mergers, we took care of our people. 
We moved forward, okay, and we need to move forward because 
customer service in the operation is what is going to make the 
airline profitable.
    Mr. Kagen. So, if I understand you, Captain, you are saying 
that by reducing the number of employees, that makes life 
better for the consumer and that by reducing the pay and the 
negotiation ability of the employees, somehow that makes life 
better for them.
    Isn't it really the history of the labor movement, that the 
labor movement by collective bargaining, by having effective 
collective bargaining, didn't that raise the vote of everybody? 
Didn't it give us the middle class?
    Mr. Moak. Well, Congressman, I beg to differ. That is not 
what I said.
    What I am saying is this: I am not going to jump on the 
management bandwagon or apologize for things that other 
managements have done. But if you are going to vilify every 
single management team, eventually you are going to have a 
management team that arrives that is trying to work through the 
problems. This is a difficult time, difficult problems.
    Now through the collective bargaining process, okay, the 
Delta pilots modified their contract. However, we worked 
together with the Northwest pilots over the last three months 
in what was a first ever attempt to negotiate a contract before 
a merger was announced. We weren't successful, but we are not 
giving up.
    We are years ahead of everybody else. We will get it done. 
I am confident of it.
    We raised the bar for the Delta pilots over the next few 
years. It is approximately a 20 percent pay raise. It increases 
the retirement for the Delta pilots, for the Northwest pilots, 
and I am confident we will get it done.
    I will say it time and time again. I am working with 
Captain Stevens. We welcome them, and we are going to get it 
done.
    But for some of his equipment, some of his pilots, it will 
be a 35 percent pay raise over the life of the agreement. That 
is the right thing to do.
    As far as equity, there is equity for all the employees. I 
know we haven't completed the negotiation with Captain Stevens 
and the Delta management, but I am going to stand here. I am 
sitting here, telling you that I believe there is equity for 
the Northwest pilots also. There has to be to make this work.
    So I think the collective bargaining process. You are 
seeing it work. We are working together. We are going to get it 
done.
    Mr. Kagen. What I haven't seen is it work for the consumer 
today as they get bumped off of one flight because of maybe 
overweight or the seats just aren't available or the seat is 
double-booked. They have squeezed down the number of seats 
available for the existing clientele that they have. I haven't 
seen it work.
    You get to see it from the cockpit. I get to see it from 
coming in off the chairs and from people that talk to me.
    Mr. Costello. The Chair thanks the gentleman from Wisconsin 
and let me comment, if I can.
    Captain Moak, you indicated that you are going to vilify 
every management team. I don't think it is anyone's intent to 
vilify a management team here. It is our intent to recognize 
the facts, and the fact is that when you look at the Federal 
budget and you try and balance the Federal budget or do 
something about it, the lion's share of the outlays are for 
entitlement programs.
    When you look at the aviation industry and you look at 
Delta Airlines or Northwest Airlines or any legacy carrier or, 
for that matter, Southwest or JetBlue, the vast majority of the 
outlays are in fuel and in labor. We heard testimony today, and 
everyone recognizes that there is not much that management can 
do about the price of barrel of oil or jet fuel. It is probably 
going to continue to increase.
    So where do you get your cost savings? It is in labor. I 
think Mr. Roach has indicated that the history of mergers in 
the past paints a pretty skeptical picture.
    I think you or anyone else would have to say you probably 
have reason to be skeptical when we have heard time and time 
again that we are going to keep the employees, we are going to 
maintain our hubs, people are going to be able to keep their 
pensions when, in fact, that has not been the case. So, just an 
observation and a comment.
    With that, the Chair would recognize the Chairman of the 
Full Committee, Chairman Oberstar.
    Mr. Oberstar. I can only say amen to your observations, Mr. 
Chairman.
    Captain Moak, Captain Stevens, do you know whether the 
merger application has been filed with the Department of 
Justice yet?
    Mr. Stevens. I believe it has, Mr. Chairman.
    Mr. Oberstar. You believe it has?
    Mr. Stevens. Yes.
    Mr. Oberstar. Do you know, Captain Moak, whether it has 
been?
    Mr. Moak. I also believe it has.
    Mr. Oberstar. The Justice Department, under their rules, 
has been saying to us that they are not at liberty to divulge 
whether that has occurred or not. It is important to know where 
all these things stand.
    Do you think, Captain Moak, Captain Stevens, that Northwest 
and Delta squeezed out all the excess cost that was reasonable 
to squeeze out during bankruptcy?
    Mr. Moak. Chairman Oberstar, it hasn't really been brought 
up today, but both of us were involved in our bankruptcies. We 
both went into bankruptcy at the same time, same day, same 
court in Manhattan.
    Through efforts by you and many people up here, the 
pensions were preserved of the employees of Northwest and of 
Delta except for one group, the Delta pilots. I believe 
everything has been squeezed out of the Northwest employees and 
the Delta employees.
    As we move forward, which I guess is more than you are 
asking me, I truly believe that this is a one plus one equals 
three merger.
    Mr. Oberstar. At any time during the bankruptcy 
proceedings, was there any suggestion, any hint of a merger 
with another carrier?
    Mr. Stevens. Mr. Chairman, I think there were some 
considerations, and I do feel during the bankruptcy, to your 
original question, it was more than what was necessary was 
squeezed out of all of the Northwest employees. It was a very 
frustrating experience to be part of. I attended all of the 
meetings after my election. It has been over a year.
    I also testified in bankruptcy court. I also appealed to 
Mr. Steenland at the end of 2006 that he had gotten more than 
he needed and he needed to remotivate the employees and 
appealed on behalf of the flight attendants.
    I then, in February, also asked him, besides a management 
equity plan that was grossly outsized, to have an employee 
equity to motivate and to reward employees. That fell on deaf 
ears in February of 2007.
    We then came out of bankruptcy, and now we face quite a 
challenge.
    It is true what Captain Moak says, that we did work hard 
here to try to come to a conclusion of a cooperative merger. It 
seems to be, though, that Mr. Anderson has brought the style 
that was learned at Northwest Airlines, and now we are omitted 
from equity. With great irony, we are the proponents of equity 
for all employees. We are left out.
    Also now, Mr. Anderson has taken on a strategy of reaching 
pay parity for the Northwest pilots over a multi-year period. 
We do have the support of the Delta pilots in opposing that as 
they published, but the idea that that strategy going forward 
is some inclination of perhaps how they think it will answer.
    I think to answer the other Congressman's question, that 
creates the question of increasing costs. Costs will go up, and 
they do need to have a joint contract in order to have all the 
synergies. The top line has to increase. Costs have to go down 
if you are going to have an airline that works. It is basic 
economics as we both learned, apparently.
    Mr. Oberstar. Are your respective pension plans the same 
before the Northwest plan was frozen at the same period of time 
as the Delta plan?
    Were those contributory pensions or are they 100 percent 
company contributed pensions?
    Mr. Stevens. We still have our DB plan, a traditional 
pension plan.
    Mr. Oberstar. Defined benefit.
    Mr. Stevens. Defined benefit frozen, and then we also have 
a smaller defined contribution than Delta does.
    Mr. Oberstar. Yes, going forward. Does Delta have the same 
structure?
    Mr. Moak. No. We had a defined benefit plan going into 
bankruptcy.
    Mr. Oberstar. Was that 100 percent company contributed?
    Mr. Moak. Absolutely.
    Mr. Oberstar. Yes, okay.
    Now do you know what happens in the event of a liquidation 
bankruptcy?
    Mr. Moak. Absolutely.
    Mr. Oberstar. What is your standing?
    Mr. Moak. With PBGC?
    Mr. Oberstar. Yes.
    Mr. Moak. We have been meeting with the PBGC to get a 
valuation on our pension.
    Mr. Oberstar. I will answer my own question. You are 
unsecured creditors.
    Mr. Moak. Absolutely.
    Mr. Oberstar. Unsecured creditors, so with the machinists, 
so with the flight attendants. We have been through that with 
the steel industry and been through that in other sectors as 
well where there are 100 percent company contributed pensions.
    In the event of a bigger bankruptcy, you get nothing except 
that little bit that is left on the table. So, think very 
carefully about where you are headed with this proposition.
    Now let me ask Captain Moak first. How many aircraft do you 
think or might you speculate that are likely to be retired in 
the new Delta?
    Mr. Moak. Chairman Oberstar, I believe like I said earlier, 
that although there are announced domestic capacity drawdowns 
related to the price of fuel, in the press announcement of the 
new global Delta, there are 20 additional wide body planes that 
will be coming and there are many markets that will be added. I 
believe that.
    Mr. Oberstar. Captain, if you believe that, then I have a 
bridge I would like you to buy, if you believe a press release 
issued by your company. They can't tell you on their sacred 
oath and word and trust, and you have to read it in press 
release.
    Mr. Moak. Sir, that is all I can.
    Mr. Oberstar. Captain Stevens, let me ask you what you 
think is likely to happen. How many aircraft?
    They aren't going to continue with this fleet as it stands. 
How many DC-9s? How many 737s? How many?
    Go deeper into your regional carrier fleet. How many of 
those below 50 passenger capacity aircraft are likely to be 
retired?
    Mr. Stevens. Below 50, they will be gone.
    The aircraft larger is a more difficult question. It 
depends on the routing and what the yields are because, for 
example, our DC-9s don't have any current lease payments. So it 
will be very dependent.
    If fuel continues to rise, where no business plan works, 
clearly many of them will be parked. In the other scenario, if 
fuel moderates, there is a future for the 9.
    My bigger frustration is that Mr. Steenland didn't follow 
our advice not today but over a year ago in putting in a risk 
management policy for the price of fuel. Everybody argues that 
the cost of fuel is extremely expensive to hedge when, in fact, 
by using a method of collars, it is a very inexpensive 
insurance process. It would be like not having health insurance 
for any of us, and that is by far the greater problem that we 
have.
    If you look at Mr. Kelly's success at Southwest, it isn't 
great management of the airline. It isn't a single airplane. It 
is that over 50 percent of the fuel is hedged at half the price 
the legacy carriers are paying.
    Mr. Oberstar. Well, it is surprising he didn't take that 
advice because when Mr. Anderson was at Northwest, he and Mr. 
Steenland both combined on a hedge proposition that made $200 
million profit for the airline.
    Captain Moak, have you had a little time to think about 
that question of retiring of aircraft?
    Mr. Moak. Absolutely, sir. That was a public announcement. 
As you know, I am under a confidentiality agreement. I can't 
talk about private matters.
    Mr. Oberstar. I am asking you to speculate.
    Mr. Moak. Well, I speculate that the answer to the question 
is fuel. The current fuel hedge program at Delta is worth $800 
million. They have 25 percent of their fuel hedged.
    However, like you said and you have been very clear with 
this, if fuel goes up, there is a real risk of planes being 
parked, but that is whether you are merged or you are a 
standalone carrier. The same thing would happen.
    Mr. Oberstar. I would suspect that in the larger carriers, 
you have at least 100, maybe more, aircraft parked.
    You are not going to continue flying the DC-9 fuel-eaters. 
You are not going to continue, in the regionals, the smaller 
capacity aircraft. I don't know what the age of the 737 fleet 
at Delta is. At least, I don't remember it, but the older 
versions will be phased out. That is about 1,000 jobs.
    Now, before I go to Mr. Roach and Ms. Friend, do the 
contracts with Delta's and Northwest's regional carrier pilots 
differ from those with the network carrier? Are those different 
tier contracts?
    Mr. Stevens. If I understand the question correctly, yes, 
the main line.
    Mr. Oberstar. Pay scales?
    Mr. Stevens. The pay scale is higher on the main line, and 
we have a very good relationship with Compass, Mesaba and 
Pinnacle, and we have flow-through agreements both with Compass 
and Mesaba because they aspire to join the main line at 
Northwest.
    Mr. Oberstar. Can those pilots migrate up the line?
    Mr. Stevens. Yes, sir, they can contractually.
    Mr. Oberstar. What about Delta?
    Mr. Moak. At Delta, we don't have a flow-through, but in 
the last year we have hired 650 pilots. We just stopped hiring.
    Mr. Oberstar. But the seniority lists are very different 
between Northwest and Delta, are they not?
    Mr. Stevens. Because of the bankruptcy and we are in a 
unique circumstance, the pilots at Northwest are older than the 
pilots at Delta.
    Mr. Oberstar. More senior, don't say older.
    Mr. Stevens. Well, I have debate on that from my 
counterpart, whereas many Delta pilots chose early retirement 
to get part of their DB plan, so they didn't become unsecured 
creditors as you pointed out.
    Mr. Oberstar. Mr. Roach, with the outsourced maintenance 
that is rampant within the industry except for American 
Airlines which still does their maintenance in-house, how do 
you see the playing out of the conduct of maintenance of 
aircraft in a merged carrier, a vastly larger carrier, against 
the backdrop of the hearings this Committee held just a couple 
of weeks ago?
    Mr. Roach. Well, Northwest subcontracts the majority of 
their maintenance work, a lot of it overseas, and I believe 
Delta subcontracts a good portion of their work. You can see, 
based on saving money, that a great deal more work will be 
subcontracted out. Probably they will send planes to Singapore 
and all over the world to be maintained.
    On the Northwest side, which they have an independent 
organization, they really have no restriction on this, and 
there is no restrictions on Delta sending this work out. So you 
can see a lot more work being subcontracted out.
    Mr. Oberstar. Would there be conflicts with the 
multiplicity of providers? There are a number of maintenance 
providers, MROs, in the U.S. for these carriers.
    Mr. Roach. Right. The problem is when you start talking 
about a merger. You have to integrate a maintenance plan. They 
have two different maintenance plans. They have two sets of 
aircraft, two different aircraft, types of aircraft.
    So the FAA, they have to go in and reorganize an entire 
maintenance plan and put that plan together. Until that is 
done, the mechanics from one carrier can't work on the planes 
from another carrier. They have to redo the maintenance 
manuals. This is a three to five-year process.
    These planes have to be maintained separately or maintained 
by somebody who has been trained on that particular plane. DC-9 
aircraft is about as old as I am, and they require a lot of 
maintenance. These older aircraft require a lot of maintenance.
    I would just like to answer one question you said before to 
the pilots. You said, were there discussion during the 
bankruptcy about this merger. There were discussions.
    I think I have some documents--these weren't in 
confidential meetings--that I would like to give to the 
Chairman, that there were some discussions about Northwest and 
Delta merging during the bankruptcy.
    It was a Mr. Checchi who was a former executive of 
Northwest. He was going around with a current member of the 
board of directors of Delta Airlines, Mickey Foret, trying to 
sell this Northwest-Delta deal. We didn't want anything to do 
with Mr. Checchi or Mr. Foret or anybody else, and that is what 
we told them, but this was shopped before.
    I am not sure if they should have discussed this with the 
bankruptcy court. These two companies were in bankruptcy, 
talking about mergers, and the board of directors of Northwest 
Airlines sanctioned these discussions.
    If I have those documents, I will make sure that you get 
them.
    Mr. Oberstar. I invite you to submit those documents to the 
Committee. It is vitally important.
    I asked the question for that very specific reason. I knew 
of contacts during that period of time, and they were not made 
public. I had no documentation about it.
    Mr. Roach. I believe I still have those documents. We will 
check tomorrow and, if I do, we will give them to you.
    Mr. Moak. Chairman Oberstar, can I weigh in on that also?
    Mr. Oberstar. Of course.
    Mr. Moak. During bankruptcy, as I said a little bit 
earlier, Delta was in bankruptcy when a hostile takeover was 
made by U.S. Air of Delta Airlines. It was a very public and a 
very painful process.
    At the end of the day, $10.7 billion was offered to the 
creditors committee. The creditors committee ultimately turned 
that down because they didn't think they would get their money 
in a timely fashion. If that would have happened, Delta, I 
believe, would have still been in bankruptcy today. That fell 
apart January 30th of 2006.
    Mr. Oberstar. Well, Ms. Friend, the merger of flight 
attendant lists would be a nightmare, wouldn't it?
    Ms. Friend. No. I guess it depends on whether or not the 
Delta flight attendants are successful in forming a union. If 
they are successful in this process that they are engaged in 
right now, and we will know that on the 28th of this month, 
then they will become members of AFA.
    Our AFA policy is when two AFA-represented airlines merge, 
we put those seniority lists together by date of hire. There is 
no conflict. It is done, and we hold the seniority list until 
we have a single contract.
    Mr. Oberstar. But absent that, absent a successful vote?
    Ms. Friend. If they are not successful, then we are going 
to rely on the new legislation that Senator McCaskill helped us 
with in the Senate and that you were helpful with here which 
says that if the two groups of flight attendants--in this case, 
workers--but two groups of flight attendants can agree on how 
to merge and to integrate their seniority lists, then it will 
be subject to arbitration.
    I can pretty much guarantee you that if the Delta flight 
attendants are still represented by their management, our 
Northwest flight attendants will come to the bargaining table 
and propose date of hire. I don't know what the Delta flight 
attendants, through their management, will propose, but it 
won't be date of hire. And so, we will end up with an 
arbitrated list.
    Mr. Oberstar. Chairmen and panelists, the information that 
you have provided us and the testimony is not going to be 
considered by the Justice Department in reviewing a merger 
proposal. That is why we have you at the table. That is why we 
have your testimony here.
    We will see to it, though, that the Justice Department has 
this information as a matter of record.
    Thank you for your testimony.
    Mr. Costello. Thank you, Mr. Chairman.
    Let me again thank our panelists for being here today. It 
has been a long day. We appreciate your patience and your 
contribution to this hearing. So, thank you.
    I would ask the last panel, the fourth panel and final 
panel to please come forward, and I will introduce you as you 
are coming up to the witness table.
    Mr. Kevin Mitchell, who is the Chairman of the Business 
Travel Coalition; Dr. Aaron Gellman who is a Professor at the 
Transportation Center, Northwest University; Mr. Hubert Horan, 
an Aviation Analyst and Consultant; Mr. Albert Foer, President, 
the American Antitrust Institute; Mr. Philip Baggaley, Managing 
Director, Corporate and Government Ratings, Standard and Poor's 
Rating Services; and Mr. Raymond Neidl who is an Analyst with 
Calyon Securities. So, if you will please take your seat at the 
witness table.
    The witnesses should be aware that your entire statement 
will appear in the record. We would ask you to summarize your 
statement, and we will begin with Mr. Mitchell. If you are 
prepared to proceed, we will begin with you.

    TESTIMONY OF KEVIN MITCHELL, CHAIRMAN, BUSINESS TRAVEL 
 COALITION; AARON J. GELLMAN, PH.D., PROFESSOR, TRANSPORTATION 
CENTER, NORTHWESTERN UNIVERSITY; HUBERT HORAN, AVIATION ANALYST 
    AND CONSULTANT; ALBERT A. FOER, PRESIDENT, THE AMERICAN 
   ANTITRUST INSTITUTE; PHILIP BAGGALEY, MANAGING DIRECTOR, 
 CORPORATE AND GOVERNMENT RATINGS, STANDARD AND POOR'S RATING 
      SERVICES; RAYMOND NEIDL, ANALYST, CALYON SECURITIES

    Mr. Mitchell. Thank you. Thank you, Mr. Chairman and 
Members of the Committee for requesting the Business Travel 
Coalition to appear before you today.
    Delta and Northwest are playing the fuel card and 
suggesting that their merger is an inevitable response to high 
fuel costs, but does the Delta-Northwest merger math make any 
sense?
    Even if we give them the undeserved benefit of the doubt 
that they will achieve $1 billion in annualized synergies, many 
analysts believe 75 percent of that would be captured by a new 
and well-deserved pilot agreement, leaving just $250 million. 
The project pro forma fuel bill for the combined carriers for 
2008 will be $12 billion.
    So how is it possible that $250 million will materially 
help with fuel costs especially given the $1 billion in 
projected up-front integration costs? The math simply does not 
work.
    What is more, these mergers were planned when fuel prices 
were less than half of today's level. The idea that they are a 
necessary response to $125 fuel is absurd.
    Importantly, many energy experts predict that oil prices 
will retreat to the $50 to $75 range in a relative near term 
especially against a global economic slowdown. Building an 
irreversible national aviation policy around the current price 
of oil makes no sense.
    Delta and Northwest would have you focus on just 12 
overlapping nonstop markets when the real story, as far as 
domestic U.S. competition is concerned, is the 550 nonstop and 
one-stop markets where the combined carrier would have 50 
percent market share or higher. In 139 one-stop markets, the 
market shares soar past 70 percent. These are the small and 
mid-size communities where capacity will surely be ripped out 
and fares increased.
    However, there are many not so small communities that will 
be seriously harmed as well, like Nashville and Baltimore, 
where in numerous city pair markets the standard DOJ measure 
for competitive concentration, HHI, the index is off the 
charts.
    DOJ merger guidelines say that 100 HHI points increase in 
highly concentrated markets, characterized as those market with 
a score of 1,800 or more, establishes the presumption that the 
merger is likely to create or enhance market power or 
facilitate its exercise. In Nashville, for example, there are 
numerous city pair markets where the HHI skyrockets to 8,000, 
9,000 and nearly 10,000. Make no mistake, these are the markets 
that matter.
    Delta and Northwest don't want you to focus on these. All 
their promises about no layoffs, no hub closures, no service 
degradations will fly out the window faster than Ferris Bueller 
with a stomachache on a sunny, spring school day or evening as 
it were.
    Delta, however, realizes HHI is the valid trip wire. In its 
own presentations to Congress last year, rebuking U.S. Airways 
overture with assistance from BTC, the carrier stated, 
``Capacity reductions and fare increases cannot justify 
mergers,'' and quoted the DOJ merger guidelines as follows: 
``Cognizable efficiencies do not arise from anti-competitive 
reductions in output or service.''
    Delta now claims that the circumstances have changed. That 
was then and this is now. Inevitable hub closures last year are 
inevitable no more. But, in truth, Delta's strong reaction to 
the unsolicited U.S. Airways merger that Delta found so 
abhorrent and anti-competitive is a polygraph test for Congress 
and regulators to study in connection with Delta-Northwest.
    Despite the Delta-Northwest spin machine, there are 
scenarios for airlines other than ill-considered mergers, and 
some could produce far better results. If the Delta-Northwest 
merger is the proverbial canary in the coal mine, as time 
passes, the canary is inhaling gas and gasping for air. It is 
time for policy-makers, regulators and airlines to look for 
alternatives to avert disaster.
    What are the choices?
    Status quo: In this scenario, airlines accelerate their own 
unilateral reductions of uneconomic capacity and continue to 
address cost and efficiency issues.
    Robust recovery: If oil prices should fall back to $80 as 
many predict, because of the cost-cutting initiatives of the 
past few years, the major network carriers could come out on 
the other side of the current U.S. economic slowdown and 
experience a robust airlines sector recovery.
    Liquidations: If the proponents of the let the market work 
its will truly believe what they say, then let major carriers 
fail instead of propping them up with Government-sanctioned 
anti-competitive combinations. Antitrust law is not meant to be 
sympathetic to industries that cannot solve their own problems.
    Perhaps the most authoritative voice about airline options, 
however, comes from Delta itself. I quote from an Associated 
Press story on February 29th: ``If Delta's consolidation talks 
with Northwest fall apart, the airline isn't committed to 
finding a replacement deal, said Chief Financial Officer, Ed 
Bastian. When asked if Delta had a Plan B ready if the 
Northwest deal fails, Bastian said, it is not a Plan B. It is a 
Plan A. That is our standalone plan. Bastian said, the company 
expects solid growth for the year, that the airline has a 
great, great standalone plan.''
    As you can see, this merger proposal will neither help 
consumers nor the competitive structure of the airline 
industry, and there are options.
    Thank you.
    Mr. Costello. The Chair thanks you.
    Professor Gellman, I would like to thank you. I know that 
you had a flight out this evening to try and get back, but we 
appreciate your staying here and offering your testimony. Thank 
you, Dr. Gellman.
    Mr. Gellman. Chairman Costello, Chairman Oberstar, I am 
indebted to Captain Moak, who left, because he kept saying ``we 
will get it done.'' The only thing we are going to get done is 
this hearing and soon.
    I am Aaron Gellman, Professor at the Transportation Center 
at Northwestern.
    There are five reasons most often given these days for 
seeking to become a single airline through merger or 
acquisition:
    Economies of scale which leads to reduction of costs;
    Economies of scope where there will be more single-line 
service to more places especially internationally;
    A varied fleet that can be deployed to meet more precisely 
the needs of each city-pair market;
    High and mounting fuel costs; and,
    Reduction in the rate of growth of the U.S. economy.
    I will consider each of these reasons in turn, but before 
doing so I need to state that the views I express today are my 
own and do not necessarily reflect those of the university, its 
faculty and staff, nor of the Transportation Center at 
Northwestern with which I am principally associated.
    I should also make it clear that I am not categorically 
against mergers between airlines. There are amalgamations that 
make economic and public policy sense. But, as I hope to 
demonstrate, this is not one of them.
    Let's consider economies of scale, reduction of costs. I 
should not be surprised if certain non-flying jobs would be 
eliminated at Northwest and Delta if they were to marry. Some 
functions are surely duplicated in the two carriers, and not 
all the associated people will be needed in the future if they 
merge.
    The challenge for a new management team is to assure that 
the best, most productive persons are retained while the 
others, sadly but necessarily, pay the price of displacement. 
But the history of mergers generally, in this as well as other 
industries, gives little comfort that this will be the case, 
thus decreasing the prospective cost savings.
    It is very hard to believe that surviving will be only the 
best. If they are at Northwest, they are already handicapped 
because there is a cost to move them. Indeed, many of them may 
not want to leave the Twin Cities despite their winters.
    As for other cost-related issues, there would be some 
benefit from geographically broader, more efficient advertising 
and marketing programs, but airport space rental and 
maintenance costs are unlikely to be much reduced, given the 
representations of the prospective partners not to close hubs 
or cut services significantly.
    The prospects regarding the pilots of the two carriers 
suggest either a minimal beneficial effect on costs or a 
substantial increase in costs. In the former case, it will 
require the two carriers to continue operating essentially as 
two airlines much as U.S. Airways has now had to do all these 
many, many months since US Air and America West got married. 
Many economies of scale would be sacrificed in the process 
while costs attributable to pilots may well not change much.
    On the other hand, in order to achieve real and full 
integration of the two airlines, it will be necessary to bring 
the pilot corps together through a merger of the two seniority 
lists on a basis that is acceptable to both pilot groups. This 
is something that U.S. Air has still not been able to 
accomplish, and this is likely to be a far greater issue with 
Delta and Northwest.
    Assuming the new Delta can do it, this will mean a 
substantial additional cost burden for some time as seniority 
number rather than pilot age or experience will determine what 
equipment the pilot can bid for. Given the great and perhaps 
unprecedented disparity of the two airline fleets, this will 
take a considerable period to implement with attendant training 
and logistics costs all along the way.
    Turning now to economies of scope, there are economies of 
scope to be exploited in a combined carrier. Perhaps this is 
why there is the pledge in this instance to retain all the hubs 
now in the system. But how the economies work out from greater 
scope and the value of such economies is not clear except for 
the advertising and cost savings previously cited.
    It should also be noted that one of the principal reasons 
given for international alliances in which both carriers 
already participate is that they enable airlines to gain many 
economic and marketing benefits without the need to merge. In 
any case, the greater profitability now to be found in the 
intercontinental markets is not immutable.
    Low cost carriers will enter the markets and some very 
soon. Look who has ordered 787s. There are some carriers, a 
few, that were charter airlines in Europe. They are not going 
to use those for charters. They are going to use them to enter 
the transatlantic market as low cost competitors.
    One of the most amazing claims that has been made in my 
view has to do with the varied fleet of aircraft that the two 
airlines will present. A disparate fleet of aircraft is not 
usually productive of economic benefits.
    To be sure, a variety of aircraft is required to carry out 
the wide range of missions of Delta and of Northwest either 
individually or combined, but the number of aircraft types must 
be constrained if all the benefits of economies of scale are to 
be realized. This means in the present instance that either one 
of the carriers has to substantially re-fleet, which will be 
exceptionally costly and take considerable time or that, again, 
the two carriers be operated separately with all that entails.
    Note that at present the only aircraft type flown by both 
carriers is the 757-200 with Pratt and Whitney power. 
Otherwise, Northwest is oriented to Airbus and Delta is 
exclusively Boeing in its main line fleet.
    In any case, presently each airline alone appears to have a 
fleet varied enough to assign aircraft types to the markets 
best suited to them. Also, each carrier has regional jet and 
turbo prop operations either through subsidiaries such as 
Comair or through contracts, and these provide each with even 
greater flexibility. Therefore, to make a virtue of an 
exceptionally diversified combined fleet seems more of an 
excuse than a reason to merge.
    Now, let's consider, finally, high and mounting fuel costs 
and a slowing economy. First, again, we have excuses being 
offered as reasons. Regarding fuel, with very limited 
exceptions, all U.S. airlines are faced with the same 
conditions. Of course, the major exception is Southwest 
hedging.
    Moreover, how can the combination of these two airlines 
influence either condition, either fuel price or the slowdown 
of the economy? Only by reducing service can fuel costs be 
lowered in the short run, and there is the representation that 
this will not be pursued to any significant degree if these 
carriers combine.
    It is true this may have changed. Mr. Anderson earlier 
stated here today that service will be reduced if fuel cost 
continues to increase regardless of whether the merger is 
completed or not, and that is a direct quote.
    But a larger issue must be faced: When fuel prices decline 
and economic growth is restored, both of which I truly believe 
will happen, what of these ``reasons'' then?
    You will not be able to unscramble the egg. If these were 
not valid bases for consolidation, how much will the public 
suffer in future because of higher fares and reduced services 
as a result of the merger having taken place?
    I would like to conclude with four general observations. 
First, the recent withdrawal of Continental Airlines from 
negotiations with United is of considerable importance in the 
present context. Note that Mr. Kellner, Continental's CEO, 
prominently cited cultural differences as a reason for not 
going forward.
    One has to admire Mr. Kellner for his candor which is of 
benefit to you and indeed to all of us because cultural 
differences do matter in mergers between firms, and we know 
that from the history of mergers in all kinds of industries. It 
is especially true that culture matters where the companies 
that are merging serve the public with a ``soft'' personal 
product like transportation.
    Second, what, if any, has been the role of the hedge funds 
in the present urge to merge of several airlines?
    After all, how can this question be ignored when a fund 
named Pardus, out of whole cloth, announced to the world some 
months ago that Delta and United were negotiating after which 
both carriers quickly and firmly denied it?
    Was this an attempt to manipulate the share prices of one 
or both companies?
    Shouldn't the SEC be alert to the possibility, even 
probability, that this is an emerging pattern?
    Third, the Civil Aeronautics Act of 1938 was bottomed on 
the stated premise that airlines are ``vested with the public 
interest.'' Although this language no longer is present in 
governing legislation, the airlines are no less so vested.
    I, in no way, want to see re-regulation. At the same time, 
I believe we must be careful, and we must take a long-term view 
of this industry. Congress can show the way in doing this.
    Finally, there is the issue of how do you hold a merged 
airline to the representations made in order to gain approval 
to join? Will the system be maintained as promised? If not, 
what can be done?
    I don't have an answer. I certainly hope that you do.
    Thank you for your attention and the opportunity to appear 
before you.
    Mr. Costello. Thank you, Professor.
    The Chair now recognizes Mr. Foer.
    Mr. Foer. Thank you, Mr. Chairman.
    I am Albert A. Foer, President of the American Antitrust 
Institute which is a 10 year old, independent nonprofit 
education, research and advocacy organization.
    The essential points of our written statement are three. 
First, air transportation is an industry in which there are 
substantial network effects, but the incremental costs of 
expanding an already large network may offset the benefits.
    Second, the industry is already moderately concentrated on 
a national basis, but this generalization underestimates the 
market power that is present at most hubs and on most routes 
including the transatlantic routes where three alliances behave 
increasingly like three global companies operating through a 
variety of branded subsidiaries.
    And, third, a merger of this magnitude will, in all 
probability, lead to at least one more merger of similar size 
such that it is imperative to look at the forest and not merely 
the trees, by which we mean the DOJ must not only apply to the 
Delta-Northwest merger the standard antitrust analysis that 
requires the divestiture of overlapping city pairs in 
concentrated markets, but it must also pay attention to systems 
competition and ask the difficult question of whether the five 
or possibly four or even three national networks that will 
emerge from this process are sufficient to provide a 
satisfactory range of choice in service and sufficient 
competition to keep prices close to costs.
    While it is unlikely that the non-system airlines, the LCCs 
and connectors, will emerge in the next few years as 
competitive network carriers, they might very well benefit from 
a raised price umbrella if a less competitive network strategic 
segment is more easily able to raise its prices. The public 
would pay more, not only because of fuel costs, which is 
legitimate, but because of increased market power which is not 
legitimate.
    In most circumstances, a particular travel experience may 
be accommodated by only one or two systems. Reducing the number 
of systems could only be justified if there are substantial 
economies of scale and scope that a competitive industry will 
assure gets passed on in substantial part to consumers.
    If there is one thing that we have learned from the long 
history of antitrust, it is that efficiencies are easy to 
assert, difficult to achieve and rarely of the magnitude that 
the parties predict. In this regard, it appears that a system 
which relies heavily on hubs is expensive to operate compared 
to a point to point system, and there may be limits to the 
efficiency gains achievable through already large networks.
    For example, bigger networks create peak load problems at 
an airport with all the planes arriving at the same time and 
departing at the same time. Such a system is also fragile and 
particularly so with all the outsourcing that we now see.
    A delay in a plane's arrival at a hub can quickly 
metastasize through the system. As networks grow and the number 
of alternative systems decreases, minor inconveniences become 
major national inconveniences, if not emergencies. This is an 
external cost that is not calculated in the antitrust analysis.
    Allowing additional market power to the airlines that 
survive the proposed mergers will obviously not reduce the 
price of fuel.
    The question is whether the inevitable downsizing needs to 
be handled through cartelization of the industry or by 
individual decisions by the incumbent airlines. It is our 
commitment to competition in the airline industry, as opposed 
to regulation, that is fundamentally at stake here.
    Now the ultimate question is whether the public will be 
satisfied with four domestic and three global air 
transportation systems.
    There is little, if any, empirical knowledge that says how 
many systems are needed to provide a workable degree of inter-
system competition.
    There is substantial data, however, both empirical and 
theoretical that suggest that competitive problems increase as 
a market becomes highly concentrated. There is substantial 
experience with domestic air mergers that suggest how difficult 
they are to execute successfully, how few efficiencies have 
resulted from big carrier mergers and how slow entry has been 
at the network level.
    We suggest that the magnitude and certainty of the 
proclaimed efficiencies in this case should be analyzed with 
great skepticism and must be weighed against inefficiencies due 
to other dis-economies of scale and scope, the cost of 
consummating the merger and the reduction in competition 
arising from the merger.
    Thank you very much.
    Mr. Costello. The Chair thanks you and now recognizes Mr. 
Horan.
    Mr. Horan. Mr. Chairman, the Delta-Northwest merger is part 
of a well-planned, organized movement toward extreme 
consolidation of large intercontinental airlines. The most 
important immediate goal of these mega-mergers is permanent 
elimination of market competition on the North Atlantic.
    My belief that mega-mergers will be bad for consumers and 
bad for the future economic efficiency of the industry is based 
on 25 years of experience as to how these airlines actually 
compete and how these types of mergers actually work.
    Mr. Chairman, these mergers can only be financially 
justified by artificial profits from anti-competitive behavior. 
Every comparable U.S. airline merger since deregulation has 
been a dismal financial failure. They all underestimated 
implementation costs and wildly overestimated synergies.
    The profit from anti-competitive behavior in these mega-
mergers will occur in two stages. In the first stage, the Delta 
and prospective United mergers complete this five-year process 
of eliminating competition between the United States and 
continental Europe, a highly profitable strongly growing market 
of over 30 million passengers that never needed any mergers.
    As I will show you on the next slide, the Delta and United 
mergers entrench a permanent duopoly controlling 90 percent of 
this market. This duopoly, which is the two collusive alliances 
led by Delta's and United's partners, Air France and Lufthansa, 
have full immunity to collude on prices, capacity and service 
with huge entry barriers protecting them from future 
competition. With market dominance of this magnitude, 90 
percent, and high entry barriers, the U.S.-Europe duopoly will 
be able to raise prices at will.
    You will quickly see an application from British Airways, 
American and possibly Continental to form a third collusive 
alliance that would have similar dominance and pricing power in 
the U.S.-U.K. market.
    These anti-competitive gains from gouging consumers will 
create an ongoing stream of what economists call artificial 
supernormal profits. All of the claimed synergies you have been 
hearing about today are just a smoke screen. The gain from 
anti-competitive pricing will be large enough to totally 
justify all the complex costs and risks of these mergers.
    The second stage of the anti-competitive threat is that the 
megacarriers will be able to use the artificial profits from 
gouging North Atlantic consumers to badly distort domestic U.S. 
competition including every domestic market where they compete 
with airlines that don't serve overseas markets. A prime 
example, Delta can use North Atlantic profits to block 
AirTran's ability to profitably grow in Atlanta, completely 
undermining the way competitive airline markets are supposed to 
work.
    Domestic concentration would also undermine basic free 
market dynamics because you create three big inefficient 
airlines that were too big to fail. The mega-mergers would 
create a situation where these three or four companies control 
80 percent of the total U.S. airline revenue base, which is how 
you ought to look at it, and 100 percent of many important 
sectors in the market where low cost carriers do not compete 
including all mid-sized and smaller cities and all the large 
fortress hubs.
    This table, I hope you can see it and it is in the 
testimony, shows several traditional measures of market 
concentration in the U.S.-continental Europe market over recent 
periods of time.
    The U.S.-Europe market enjoyed vibrant profitable 
competition with low levels of concentration until very 
recently. The increases in top line concentration that you see 
going from, say, 38 percent in 1995 to 55 percent in 2003 
reflected the normal workings of a dynamic market that was just 
going through a period of deregulation and posed no threat to 
consumers.
    The shift to extreme consolidation, going from 55 to 75 and 
soon in the nineties, was completely driven by mergers starting 
with the Air France-KLM merger in 2004 and has absolutely 
nothing to do with normal, healthy market competition.
    Transatlantic competition ends for good with these mergers, 
with the establishment of a collusive alliance between America 
and the U.K. and Continental's final decision. Does it join and 
collude with the United-Lufthansa group or does it go with the 
British Airways-American group?
    These three competitors will control 95 percent of the 
entire North Atlantic, and no market or regulatory forces will 
be able to stop them from gouging consumers for years to come.
    There are two critical pieces of evidence that you need to 
focus on: one, the hard data of the concentration of this huge 
market that you see before you and the evidence that this 
extreme concentration was not driven by market forces over the 
last five years. It has all been part of a concerted, well-
organized plan to eliminate competition on the North Atlantic.
    This slide just lists a few of these artificial events:
    Policy shifts at the European Union away from letting the 
market decide to deliberate government intervention to drive 
intercontinental mergers; the mergers that occurred within 
Europe; the huge industry consolidation press campaign that has 
been going on in the United States for the last four years led 
by United Chairman Glenn Tilton; the Air France and Lufthansa's 
drive to encourage the two mergers that are before us this 
week; and, the long delay over a new Open Skies Treaty while 
the Europeans didn't only want the right for the collusive 
alliances but wanted the right to control their U.S. partners.
    Here is a snapshot of the end results. This is the North 
Atlantic five years ago. The two separate European and U.K. 
markets with lots of competition and low concentration will 
have been completely eliminated.
    You will have three competitors, 93 percent of the entire 
market, two controlling Europe, one dominating the U.K., and 
they will have the ability to raise prices at will, and you 
won't be able to do anything about it.
    These mergers fail every important antitrust test. The 
concentration is increasing markets with very high entry 
barriers. It is not increasing because of marketplace success 
or economic efficiency.
    There is no way regulators can rely on market forces. These 
transatlantic markets are not in any way, shape or form 
contestable.
    The small, wildly overstated, as you have heard, claims of 
efficiency gains can't possibly justify the risks to consumers. 
There are no offsetting benefits to consumers in terms of 
clearly lower prices, rapid growth in new service.
    It is not helping a shakeout of uncompetitive industry 
capacity. It is not improving the allocation of capital across 
the industry. In fact, it is going to make that problem worse.
    Mr. Costello. The Chair thanks you and now recognizes Mr. 
Baggaley.
    Mr. Baggaley. Thank you. Good evening.
    Mr. Oberstar. Mr. Chairman I would just like to welcome 
Phil Baggaley once again. Over many years, 20 some, he has been 
a constant and consistent contributor to the work of this 
Committee.
    Mr. Baggaley. Thank you very much, Mr. Congressman.
    I do feel a bit of a sense of deja vu. Once again, the 
airline industry is facing a financial crisis, in this case 
caused by very high jet fuel prices and a weak economy.
    The managements of Delta and Northwest suggest that a 
merger will help them survive these challenges. My testimony 
will address the magnitude of the financial problem, how the 
proposed merger seeks to address that and what broader effects 
the merger and others that may follow would have on the 
industry.
    The industry faces a huge increase in jet fuel prices, 
potentially 15 to 20 billion dollars higher this year, which is 
more than triple their pre-tax profits last year.
    The airlines' choices of how to respond are limited: cut 
non-fuel costs and raise revenues. Unfortunately, having 
squeezed costs for years, airlines are running out of places to 
cut. The other choice, increasing revenues, means filling more 
seats on already crowded planes and raising fares in a weak 
economy.
    Would merging Delta and Northwest help? The companies 
forecast at least $1 billion of revenue and cost synergies 
annually by 2012.
    We would agree that a larger combined route network should 
allow them to capture market share from competitors and boost 
revenues by reallocating planes and flights throughout the 
enlarged system. As for costs, combining any two companies 
provides an opportunity to cut overhead, and we believe this is 
no exception.
    However, we also see significant risks. Combining the two 
airlines will require a one-time investment of up to $1 billion 
to integrate aircraft fleets, information systems and for other 
merger-related expenses. Depending on the timing of the merger 
investments and the benefits, cash outlays could actually 
exceed benefits in the first year.
    Perhaps, more important, we believe airline mergers have a 
checkered track record, rarely delivering on expected gains and 
usually creating labor unrest and service disruption.
    In the case of Delta and Northwest, our main concern is the 
cost of new labor contracts. Employees at both airlines made 
deep sacrifices in bankruptcy and will want better compensation 
and new contracts. Therefore, the actual net merger benefits 
may be less than forecast, though still positive.
    We also think that the labor unrest and service problems 
that plagued other airline mergers are a risk here as well.
    What about the effect on air fares? An understandable 
concern is that a big merger could create market domination. On 
this point, the merger of Delta and Northwest appears less 
problematic than some other possible combinations because there 
is little direct route overlap.
    That said, this merger and further consolidation could 
cause some increased fares. With fewer airlines, some hubs 
would no longer compete against each other for connecting 
traffic, for example, Detroit and Cincinnati.
    Another reason for potentially higher fares is that any 
general price increase can succeed only if all the major 
airlines go along. If there are fewer big airlines that have to 
agree, there is probably a better chance that a fare increase 
will stick. Even so, we believe that economic conditions and 
competition from low cost carriers would continue to serve as 
somewhat of a check on fare increases, even in a more 
consolidated industry.
    Also, bear in mind that airlines need higher revenues to 
offset higher fuel prices. This could occur in at least three 
possible ways:
    Airlines could manage to raise fares still further and fill 
more seats. This is getting harder, given the state of the 
economy.
    Airlines could fail to do so, forcing some to file for 
bankruptcy or even shut down. That would reduce the supply of 
seats and make it easier for the survivors to raise fares.
    Or, airlines could find it easier to raise fares in a more 
consolidated industry.
    Most likely, there will be some combination of these three. 
In any case, revenues need to increase if the industry is to 
remain solvent. If this were a regulated utility, airlines 
would be applying for rate increases based on higher input 
costs.
    To sum up, we believe there are three key points. First, 
the U.S. airline industry faces a potential financial crisis if 
it cannot offset much higher fuel costs.
    Second, the proposed merger of Delta and Northwest offers 
potential financial gains but also material risks. Overall, it 
is probably neither as beneficial as supporters promise nor as 
dire as its critics suggest.
    Lastly, one way or another, ticket prices are likely to 
rise if fuel prices remain high.
    Thank you for your attention.
    Mr. Costello. We thank you, and the Chair now recognizes 
Mr. Neidl.
    Mr. Neidl. Good evening. I want to thank the Committee for 
inviting me to present today.
    Representative Oberstar, it is good seeing you again. Thank 
you for having me.
    Being that I am the last presenter, I will keep it brief.
    I come from a family, a long line of family that has been 
involved with transportation, the rails. I have a love for the 
industry. I have been brought up in the industry.
    I saw the passenger railroad industry die as a child. It 
broke my heart, so I got into airlines, thinking I would get 
into the wave of the future. I love the industry also. I worked 
for American Airlines.
    I worked for a creditor agency. I worked as a bond analyst. 
Now I am a stock analyst. So I have seen this industry, 
financially speaking, from all sides.
    I try and put my emotions aside of the love of the industry 
when I try and analyze it, and usually I get criticism from 
everybody: labor unions, politicians, management. So I will 
just go ahead and speak my mind here again tonight.
    Now I have never been a big fan of airline mergers. I have 
been through the cycle a number of times, and I have seen a lot 
of them really struggle the first couple of years as they try 
and integrate the systems, the aircraft types and, most 
importantly, the work groups. I know we have heard a lot of 
this all day during the testimony. I was listening to it, but I 
agree with a lot of what I have heard.
    However, we are in an environment that I have never seen 
before, even after 9/11. I was here after 9/11, testifying. I 
am more scared now than I was even after 9/11 for the industry. 
With oil at $120 a barrel and people saying it is going to go 
even higher on a permanent basis, we have to look at this 
industry differently than we did when oil was at $20.
    Now I followed Delta. I followed Northwest. I have been 
through a number of airline bankruptcies. I used to also follow 
casinos, so I have been through a number of Donald Trump 
bankruptcies as well. It is a little different in the airline 
business.
    But looking at the Delta and Northwest bankruptcies, at 
least in my opinion, they did it the right way. They squeezed 
just about everything they could. They got their balance sheet 
deleveraged. They got the unit cost structure down.
    They squeezed their employees. They squeezed their 
creditors. They squeezed everybody. I couldn't think of another 
thing they could do.
    In fact, if Delta or Northwest were to go into bankruptcy 
again tomorrow, it would be Chapter 7 because there is nothing 
else they can do in bankruptcy. They really did work hard at 
that.
    I am going to say something that you are not going to want 
to hear. I don't want to hear it, but it is the truth. With oil 
prices shooting up over $100 a barrel, we, the traveling 
public, had not been paying our way.
    It is like telling a gas station, oil prices are up, but 
you only can charge a dollar a gallon. How long would they stay 
in business? That is what is happening with the airlines right 
now.
    In my opinion, airline management has been too weak over 
the past two years in putting through further price increases. 
Now they are afraid of the low cost carriers. They are afraid 
of the elasticity of demand. Nobody really knew what that was.
    But we are seeing that the market is supporting price 
increases. People are still traveling even with the weaker 
economy. The question is how much more can they put through?
    My opinion is they may be running up against barriers. If 
that is the case, a lot of capacity has to come out of the 
system which is going to drive out the marginal traveler.
    In other words, I won't be able to do my weekend trip to 
Florida anymore because the price will be going up. I will have 
to do it every other week or something, but I mean those are 
the facts of life. That is my broad prospectus of where I come 
from.
    Now to address mergers, again like I say, in the past, I 
have never been a real fan of mergers, but the industry right 
now is changing. It is becoming more global.
    Since 9/11, we have low cost carriers that are actually 
succeeding. Before 9/11, I think it was Southwest. Now we have 
a number of them. Some of them are failing, but they have a big 
part of the market, probably over 30 percent of the domestic 
market. So, in my opinion, the industry is too fragmented.
    Mergers wouldn't hurt. If we did have a couple of the big 
carriers getting together, it would give them some ability to 
raise ticket prices more than they have. Like I say, I think 
airline management has been too weak on raising ticket prices 
in light of the increased costs. So this would give them a 
little bit more ability to raise prices.
    Certain mergers do make sense like the Delta fighting off 
U.S. Airways' proposal. I thought they did a good job. I like 
the management of U.S. Airways, but I just thought there was 
too much overlap there. As an outsider, I never thought the 
Department of Justice would approve that because there was just 
too much overlap.
    If you look at Delta-Northwest, there is not a lot of 
overlap there.
    Who knows? Maybe you are getting an airline that is too 
big, as some of the former speakers said, but I think this 
would give them worldwide mass market, a better ability to 
compete with the giants that are emerging in Europe: Air 
France, KLM, British Airways, Lufthansa.
    So when you do an end on end merger, if it is done right, I 
think you have a more powerful competitor.
    My main problem is I am not sure where the cost-cutting is 
going to come from if they are not going to cut costs. With 
high fuel costs, that is something that is going to have to be 
done.
    Again, I get back to capacity is going to have to be 
reduced. It will drive out the marginal traveler, at least in 
the short term, until new low cost carriers emerge.
    New low cost carriers will emerge. We have seen them 
coming. We have seen a lot of them go. We see a lot of them 
staying and gaining market share, and that will happen in the 
future.
    I mean the old joke is how do you become a millionaire very 
fast? You start with $10 million and start an airline.
    I think I am running out of time, so basically let me just 
wind this up by saying airline mergers are time-consuming. They 
are risky if they are not done right. You do have to have the 
employees onboard. But if it is an end on end merger where they 
can look at cost-cutting, I think it is something that is 
worthwhile looking at.
    Thank you.
    Mr. Costello. Mr. Neidl, thank you for your testimony.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Kagen.
    Mr. Kagen. Well, before I begin, I might ask for a little 
bit more than five minutes because a lot of data have been 
presented here.
    Let me just start with the last. Mr. Neidl, thank you for 
your testimony, but I couldn't disagree with you more with 
regard to the greater concentration within an industry.
    In the medical field, when you get less choice, you get 
higher prices. Instead of having maybe 100 different doctors to 
call in a city, you might get 2 big and bigger clinics. So I 
don't know how that a greater concentration in the marketplace 
of air travel can lead to a better choice.
    Mr. Horan, I really appreciate your point of view, and it 
raises this question. It is a question I have been asking 
myself and my constituents for a number of months and years. 
Whose side is this Administration on?
    You say in your testimony, @@But it could never have 
happened without the full support of the European Union and the 
United States Department of Transportation.''
    I would like you to amplify. Whose side is this 
Administration on? Whose side is the Department of Justice on 
and the Department of Transportation?
    Mr. Horan. I would actually give some credit to the 
European Union for honesty. They have come out explicitly--DG 
Comp, the agency in Brussels is doing that--and said, we don't 
care about the good of European consumers. We care about 
mergers that would involve the owners of two companies, 
wealthier.
    They are having the same problem in Europe that we will 
soon see in America_the artificial profits for Air France and 
Lufthansa are turning around and hurting consumers and the 
owners of Ryanair, Air Berlin, Vueling and EasyJet who are more 
efficient.
    The DOT has been silent. There is no policy discussion. 
There is no congressional oversight. But if you look at the 
recent decisions up to and including the tentative review of 
the Air France-Delta-Northwest-KLM four-way merger, they simply 
ignore all the data.
    Oh, there used to be 55 percent concentration with 6 very 
reasonable healthy competitors, and tomorrow there will be 
none. Well, we didn't look at that. But the DOT continues to 
insist that there is no problem for consumers.
    Mr. Kagen. But if you have greater concentration and these 
hubs are also concentrated and controlled by larger companies, 
how does a $10 million startup airline get access to that hub?
    They don't have the gates. They don't have the marketing 
muscle. They don't have the ability to sell tickets. So how 
does a small company?
    Mr. Horan. Where you get the ability, where your 
constituents are going to get gouged first and hardest is 
markets where they have the highest concentration, where the 
market is not contestable.
    Southwest or JetBlue or AirTran or Ryanair cannot become a 
competitor on the North Atlantic. It would take them billions 
and billions of dollars to acquire of intercontinental 
airplanes. They have never flown them before. They wouldn't be 
available until 2016, and there is no way to serve markets like 
Kennedy, Newark, Philadelphia, Chicago, London, Paris, 
Frankfurt.
    Mr. Kagen. Mr. Foer, would you join in on this, answering 
this question? Whose side are they on?
    Mr. Foer. The problem with the antitrust analysis is one 
that goes back 20 to 30 years. Analysis that focuses on 
narrowly defined markets, which is what the Chicago School 
revolution led us to under President Reagan and has pretty much 
continued ever since, takes us down to this point where the 
only thing they really care about is overlapping city pairs.
    If that is the only thing that is going to be applied here, 
this merger goes through, at least with the Justice Department. 
DOT could, in theory, rule differently based on its public 
interest jurisdiction.
    But, if I made a prediction, my prediction is the Justice 
Department will take this narrow view. Remember, they didn't 
want to get pinned down on the question of whether they would 
look at two more or less simultaneous mergers. They won't, at 
least not outwardly.
    But if we have two or more clearly contemplated, I think 
that one thing this Committee could do is to find out what the 
other airlines really are planning and thinking. They have 
plans. They know what they are going to do. We don't know, but 
we have speculation.
    So, to answer your question, we have locked ourselves into 
a way of thinking that is simply too narrow and isn't going to 
get us the solutions that are necessary to serve the public 
interest.
    Mr. Kagen. Professor?
    Mr. Gellman. Well, this is a little hard to say here. When 
you put your reliance and trust in the Justice Department, as 
long as they are trained to look back, at most they are trained 
to look at now. What we are mostly talking of here is what the 
future effect of all this is.
    Somehow, we need to discipline those people who hold sway 
over this to look at the dynamics of it going forward, and I 
don't know how you get that done the way the antitrust laws are 
dealt with at the DOJ. I think it has always been a problem. I 
believe that in many industries, many companies and the country 
have suffered because of it.
    But I can't think of a case or a situation, timing either, 
where it is more important to make sure the dynamics of the 
future. If this happens, then that. There has never been a time 
like this where that is so important.
    I don't know how you get the Justice Department disciplined 
enough to do that. I would hope that you can, but I can't tell 
you how to do it because I am not a lawyer.
    Mr. Kagen. Mr. Horan?
    Mr. Horan. Just to respond to a question that several 
Members of the Committee have been posing all day long. There 
is no plausible antitrust logic, whether liberal or 
conservative, anywhere where you could say yes, this Delta-
Northwest merger is kosher, but the next one is not. That is 
key to this well-orchestrated plan. It has always been the plan 
for Delta-Northwest because of superficial appearances to go 
first.
    If that is done, there is no way you can turn down any 
merger that United Airlines wants to do, or any request to 
expand the collusive alliances to Europe.
    British Airways, American and Continental will say, well, 
how can you turn us down? The answer is you can't.
    Mr. Kagen. So the precedent is rather important.
    Mr. Horan. Precedent is everything. It has been planned. 
All of these lawyers and PR people have been working on this. 
They are not stupid.
    Mr. Kagen. Mr. Mitchell?
    Mr. Mitchell. Yes. The DOJ, from my investigation of the 
last few weeks, has the ability and, in some cases, the 
obligation to look at mergers at the industry level. They have 
even gone so far as to call for a timeout in certain 
industries.
    So I think some of the answers today were just by the book 
from the DOJ. I think there is opportunity to ensure that they 
look at this at the largest possible picture level.
    The second thing I would say is that there are a number of 
people here today saying the same thing in different ways in 
the sense that Mr. Roach said we need a summit. Ms. Friend said 
we need something to get at a national air transportation 
policy. Bob Crandall, the former Chairman of American, said the 
same thing in a New York Times editorial within the past few 
weeks.
    I think whether it is the recent problems with the FAA or 
the situation we find now. We deregulated the industry, but we 
never had a debate, the debate on who is it supposed to serve, 
what are the priorities, et cetera. We don't have a framework 
and, consequently, we have a lot of knee jerk reacting within 
the industry.
    I think, if anything, this should be a wake-up call to slow 
the process down, take a step back and impanel the right people 
to get that part of the job done.
    Mr. Kagen. I thank you for your testimony.
    I think you will find I will be a very strong advocate for 
greater choices. The more choices we have, the more competition 
will exist.
    If the competitive marketplace really existed, these two 
airlines could raise their rates and increase their profits and 
their survivability. If they can't raise their rates, it is 
because it is not competitively to their advantage.
    So I yield back my time and thank you for the extension.
    Mr. Costello. The Chair thanks the gentleman.
    This has been very interesting. It is unfortunate that Mr. 
Anderson and Mr. Steenland are not here to hear the testimony 
and attempt to refute some of it.
    The Chair now recognizes the Chairman of the Full 
Committee, Chairman Oberstar.
    Mr. Oberstar. Mr. Chairman, you are very generous to forego 
your questioning.
    Goodness, it is almost 9:00. This is getting to be a record 
hearing. Again, we thank you for your patience and want each of 
you to know how vitally important your testimony is to the work 
of this Committee, to the air traveling public, to the 
communities served by these airlines because you have made an 
enormous contribution.
    My wish is that we had you on earlier so Justice and DOT 
would have been here to hear your testimony in addition to 
Steenland and Anderson.
    Now where to begin. Mr. Mitchell, you talked about 550 
markets in which Delta and Northwest have roughly a 80 percent 
market share. You know we heard earlier in the day these dark 
references to European carriers and Pacific Rim carriers who 
are dominating the international trade market.
    Time out. Lufthansa doesn't have a domestic network to 
serve. Air France doesn't have a domestic network to serve. 
British Airways doesn't have a domestic network to serve.
    They have TGV/Talgo and the ICE in Germany. They have high-
speed intercity rail service. Between Brussels and Paris, there 
is no air service today, no passenger air service, but there is 
a TGV or a Thalys leaving every 3 minutes with 1,100 passengers 
aboard from 6:00 a.m. to midnight at 184 miles an hour, going 
from Brussels to Paris in 80 minutes, a trip that when I went 
to graduate school in Europe took 6 hours.
    Well, we don't have, several of you referred, a plan or a 
national policy, but the Europeans do. They have a plan. 
Anything over 1,000 kilometers gets air service preference. 
Between 750 and 1,000 kilometers, there is a competition 
between rail and air service. Below 750, it is preference for 
high-speed passenger rail.
    Actually, they are now getting to a point where 1,000 
kilometers is preference for high-speed rail because they are 
increasing their speeds to well over 200 miles an hour.
    So, if you have long-haul air service as your principal 
operation, it is highly profitable compared to short-haul 
service, less than two-hour air service. Of course, it is.
    I just dismiss this argument about well, we have to compete 
with Lufthansa, so need a different model. Baloney. We have a 
different structure.
    Mr. Foer, you said incremental costs could well offset 
benefits. You talked about the market power of hubs will lead 
to at least one more merger and to look at systems competition.
    I was trying to get the Justice Department folks to talk 
about the merger behind the merger. They don't want to address 
that, but at least they said they would consider it. Do you 
think that is enough of an opening?
    Mr. Foer. I understand their problem. If they have to go to 
court, they have to go to a conservative court, and the courts 
have not been very favorably disposed toward antitrust lately.
    The question is when do you take a risk as a law enforcer 
to serve the public interest and possibly lose a case or 
possibly have more leverage to negotiate a proper outcome?
    Mr. Oberstar. That is a good point, Mr. Foer.
    Mr. Foer. I don't think that this Department of Justice has 
the backbone to do that based on recent experience.
    Mr. Oberstar. Does it strike any of you in this panel as 
odd that there is more scrutiny given to a simple request for 
antitrust immunity for an alliance than there is for a merger?
    Mr. Mitchell?
    Mr. Mitchell. That is a very interesting observation. It 
seems that the applications for antitrust immunity, there are 
reams and reams and reams of data that are validated, verified 
by independent experts, and when it comes to mergers a lot 
seems to be taken at face value.
    Mr. Oberstar. It is narrowed down. The scope is so narrowed 
down to just this particular merger and its anti-competitive 
effects whereas the alliance, as you said, they looked at reams 
of paper, documents, what the effect was going to be on the 
international trade in the North Atlantic when they were 
considering the Northwest-Air France.
    Mr. Horan?
    Mr. Horan. Mr. Chairman, if I may disagree with the point 
to say that if you look at the recent review, the tentative 
decision on merging the two alliances, they didn't do any 
analysis whatsoever. You are giving them way too much credit.
    Remember, I was involved with the original KLM-Northwest 
alliance back in 1993. I was the one who developed that joint 
network. I am very familiar with that. I recall the level of 
antitrust scrutiny that was required.
    Quite properly, an alliance is, from an antitrust 
standpoint, the same as a merger. You are eliminating 
competition.
    Mr. Oberstar. That is right.
    Mr. Horan. There is full collusion. That is why I am 
careful to call them collusive alliances to distinguish them 
from frequent flyer programs and things like that.
    But if you look, they simply ignored. They pulled out an 
OAG and counted some departures, ignoring the fundamental basis 
that these are network airlines. They had no evidence of the 
trend towards high levels of concentration over time.
    When American Airlines actually put evidence saying, well, 
wait a minute, but prices are going up and service is going 
down, they said, we are going to ignore that because you 
haven't proved it, but we are going to accept all of the claims 
of the billions in savings with no evidence.
    That is a core factual question here, and they are not 
doing any of objective independent analysis.
    Mr. Oberstar. Professor Gellman?
    Mr. Gellman. From the very beginning, I felt that it was 
not proper to grant antitrust immunity to any alliance. I doubt 
there is an alliance that would not have happened without it. I 
don't think it was a necessary condition for very many 
alliances, if any.
    Look what we gave up in the very first one. The very first 
antitrust immunity was Northwest-KLM. We got access, grandly 
so, to Schiphol Airport in Amsterdam. There is no other airport 
in the Netherlands that we could serve, and there isn't today, 
whereas KLM got all of the United States.
    Mr. Oberstar. I asked that same question at the time that 
was being proposed.
    Mr. Gellman. So did I.
    Mr. Oberstar. So we get access to the Netherlands, 
wonderful, wonderful. We have some ore carriers in the Great 
Lakes that are wider than the Pays-Bas as they call the 
Netherlands. Come on. They get access to our whole market.
    The answer was oh, no, but you get access to Europe through 
Schiphol.
    Mr. Gellman. What I was told by one of the two people who 
made the decision to grant antitrust immunity was that they 
wanted the alliance and it wouldn't have been entered into 
without it. I don't believe that.
    Subsequently, some years later, I had the opportunity to 
talk very frankly with the CEO of another airline, a large 
European one, that was in an alliance. He assured me that 
antitrust immunity was not a necessary condition for the 
alliance he was in.
    I just think that that was a path we should never have gone 
down because we see now that antitrust immunity adds a layer of 
anti-competitive behavior to something that is at least mildly 
anti-competitive from the beginning. I think the alliance is 
not a bad idea per se, but to layer antitrust immunity was a 
terrible public policy mistake.
    Mr. Oberstar. I am not sure that we really get the 
competition effects with alliances that you do with head to 
head competition. If our carriers had to buy aircraft, provide 
crews, provide ground service and all the rest, set up a real 
competition, you might get a better result for the consumer, 
not such a good deal for the airline but a better result for 
the consumer.
    Mr. Mitchell, you had your hand up.
    Mr. Mitchell. Yes. I just wanted to add that if Delta-
Northwest were to go through or any of these other mergers that 
have been proposed or talked about, they are going to have, 
according to their own press releases, such grand reach and 
scope and scale that I would think that the DOJ would consider 
as a remedy in all of this to reverse the policy of antitrust 
immunity and code sharing. If they are that big with that much 
reach, why do they need it today?
    Mr. Oberstar. That is right.
    How do you hold the airlines to pre-merger promises was a 
question raised by the panel. Here is a good example. Chairman 
Costello has already cited the effect on St. Louis with the 
American Airlines saying in testimony in our Committee room, we 
will maintain the hub but, poof, it was gone within a couple of 
years.
    In Minnesota, the Metropolitan Airports Commission gave a 
loan to Northwest to bail them out of their high cost short-
term debt, $380 million. It is paid down to $245 million.
    How long do you think it will take the new Delta to buy out 
that loan and throw the hub overboard, throw the Northwest 
headquarters overboard and throw the personnel under the bus? 
In a heartbeat.
    A question and then I have to close. In a mega-carrier era, 
will the U.S. ownership law have any relevance in a real world?
    Mr. Baggaley?
    Mr. Baggaley. Well, the ownership law is actually still 
quite important which is one reason why the E.U. is pressing to 
change it so much.
    Mr. Oberstar. Right, are desperately trying to change it.
    Mr. Baggaley. Certainly, antitrust immune alliances allow a 
greater level of cooperation than otherwise, but I think the 
ownership law still represents a large, large barrier.
    I mean we don't take positions on public policy. I am not 
saying that is good or bad, but I think it is a significant 
factor.
    Mr. Oberstar. But does it have any real world application, 
Mr. Horan and Mr. Foer?
    Mr. Horan. One of the intellectually dishonest things of 
the industry consolidation discussion out of the E.U. is in all 
of the negotiation over Open Skies and can we control U.S. 
airlines is, oh, we need to break down artificial barriers. Why 
are airlines different from Coca-Cola? Why do we have national 
barriers? It leads to efficiency.
    The flaw with that argument, it is absolutely true if you 
look at airlines in Southeast Asia. Why do we have to have 
separate Cambodian and Vietnamese and Thai airlines? They have 
six airplanes, and they have three and they have 14, and it 
might be very efficient.
    If you have a home market the scale of the United States, 
the European Union or maybe the People's Republic of China, 
getting rid of the ownership achieves nothing from a pure 
economist academic efficiency standpoint. You are already 
there.
    So, to answer your question, no. It would actually make it 
harder. With megacarriers, you need to keep the ownership law 
there
    Mr. Oberstar. Mr. Foer?
    Mr. Foer. I think I would disagree with that. It seems to 
me that as we achieve this very high level of concentration 
domestically and we have financially weak airlines, that 
allowing foreign ownership is the way out to generate 
competition domestically. But at the same time I think you have 
to take away the antitrust immunity from the alliances.
    I was told by the general counsel from Northwest that when 
Northwest and KLM got their antitrust immunity, they became a 
single company for transatlantic purposes. That is why, in my 
testimony, I talked about three global companies.
    We have to worry about that too. The whole globe has to 
worry about that because three global companies operating 
airline transportation worldwide, that is sinful.
    Mr. Oberstar. In the testimony, I don't remember whose 
testimony it was, but I think it was Mr. Neidl who said that 
the next stop for these two carriers in a financial crisis was 
Chapter 7 and that Government ownership of carriers is not 
realistic.
    The reverse side of that coin is in Europe if any one of 
their carriers, if Lufthansa were on the verge, Air France on 
the verge or look at Alitalia. Berlusconi pulled Alitalia out 
of the Air France merger as soon as he was sworn in as 
president. They are not going to let their flag carrier go down 
the drain.
    They were owned by the national government before the E.U. 
If there is any risk of losing their flag carrier, they will 
pull them back into national flag ownership again.
    Well, Mr. Chairman, I have been berating this thing. This 
is like a seminar. It has just been wonderful.
    Mr. Costello. I think Professor Gellman has something.
    Mr. Gellman. I just had one point that I think we sort of 
glossed over. If we are going to talk about alliances, we need 
to think about the code sharing aspect of alliances.
    Mr. Oberstar. Yes.
    Mr. Gellman. There was a time when I was on the fence about 
code sharing in alliances. I am not talking about domestic code 
sharing. I am talking about intercontinental.
    I had an opportunity to spend quite a lot of time with the 
senior management of Lufthansa, and I was attacking the idea of 
code sharing. The route that they wanted to focus on was a 
route between South America and Germany. They pointed out the 
value of code sharing which was drawn primarily from the fact 
that both Varig--now you know the country--and they were each 
flying very low load factor flights every day between the two 
points. So they wanted to code share, in order to do things 
more efficiently.
    That seemed reasonable. When I came back to the States, I 
got to thinking about it, and it occurred to me that, first, 
put a time limit on a code share arrangement. Preventing an 
alliance to code share for more than, pick a number, five years 
sounds about right to me.
    Then reexamine it. If, in fact, the code share is leading 
to less service, less profitable service for the two airlines 
than there would be without it, then you don't let it continue. 
If it needs to continue because it is pro-efficiency, you do 
that.
    The other aspect is that alliances have many more benefits 
for alliance partners than just code-sharing. There are myriad 
other benefits. I think we ought to recognize that some of 
those benefits accrue to the public, but not all of them.
    I think the alliances need to be structured in a way that 
is not anti-competitive any more than they have to be to get 
whatever net benefits flow from them. So the net benefits 
should be there even though there are some social costs to be 
paid that are less than the net benefits.
    Thank you.
    Mr. Oberstar. Mr. Chairman, I just looked at a note I made 
for myself.
    In a mega-carrier era, would the domestic airline service 
return to a pre-deregulation model where you have a domestic 
feeder network to these international carriers? What happens to 
the airline service model?
    Mr. Horan is saying no.
    Mr. Gellman. I happen to think we need to watch carefully 
at what evolves in the relationship between JetBlue and 
Lufthansa. As you know, JetBlue has sold about 20 percent of 
its equity to Lufthansa.
    Now Lufthansa has some difficulty, I am sure, in 
transferring passengers to or from JetBlue if they are front-
end passengers; but still that is the best case now before us 
to understand whether the answer to your question is yes or no.
    Mr. Oberstar. Mr. Horan?
    Mr. Horan. With the mega-mergers, if we are down to three 
or four legacy carriers, they have 80 percent of the entire 
U.S. revenue base. The entire LCC group_Southwest plus JetBlue 
plus AirTran plus Hawaiian and Alaskan have the other 20. They 
are in narrow niches.
    Of the legacy megacarriers, they are going to look just 
like they do today: more service if fuel costs get better, less 
service if fuel costs don't.
    The problem with the whole theory of airline competition 
without Government interference is you want carriers who are 
better run with better service and more efficient operations to 
be able to grow and the ones that have lousy service, bad 
management, et cetera, to shrink and go away.
    In the mega-carrier world, that breaks down. You have three 
big carriers who can be just as arrogant as Pan American was 27 
years ago: Well, what do we care about this stuff?
    To answer your narrow question, you are going to freeze in 
today's route structure. You are not going to see a change back 
to the pre-deregulation. The problem is the efficient carriers 
in the markets like Southwest and JetBlue are not going to be 
able to grow, and that is an efficiency question.
    It is not just come help our loyal shareholders and 
employees. You have to hurt the loyal shareholders and 
employees and customers of these other companies that are 
actually more efficient.
    Mr. Costello. The Chair thanks you.
    Mr. Mitchell, a final comment and then we will close the 
hearing.
    Mr. Mitchell. Yes, thank you, a quick comment.
    Last week, someone I work with was sitting at breakfast at 
a hotel here in Washington, listening to one of the two airline 
teams that are proposing this merger plan for their day on the 
Hill. They said three things. Number one, the fleet integration 
is going to be a disaster. Number two, the reservation systems 
are a nice match. Number three, one hub is closing and another 
hub is going to be significantly downsized.
    So a remedy perhaps could be that for a period of five 
years they have to maintain seat capacity at all their major 
hubs.
    Mr. Costello. Very good. This has been an excellent 
hearing, and we deeply appreciate the contributions that each 
of you have made. It has been a long day for all of you, and we 
appreciate your patience and your contribution.
    With that, the Chair will close the hearing, and Mr. 
Gellman, we are actually going to close the hearing now.
    The Subcommittee stands adjourned.
    [Whereupon, at 9:15 p.m., the Subcommittee was adjourned.]

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