[Senate Hearing 110-1059]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1059
THE STATE OF THE AIRLINE INDUSTRY: THE POTENTIAL IMPACT OF AIRLINE
MERGERS AND INDUSTRY CONSOLIDATION
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JANUARY 24, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
----------
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Margaret Spring, Democratic General Counsel
Lisa J. Sutherland, Republican Staff Director
Christine D. Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on January 24, 2007................................. 1
Statement of Senator Cantwell.................................... 64
Statement of Senator Dorgan...................................... 59
Statement of Senator Inouye...................................... 1
Prepared statement........................................... 1
Statement of Senator Klobuchar................................... 49
Statement of Senator Lautenberg.................................. 51
Statement of Senator Lott........................................ 55
Statement of Senator McCaskill................................... 71
Statement of Senator Rockefeller................................. 2
Prepared statement........................................... 2
Statement of Senator Snowe....................................... 53
Statement of Senator Stevens..................................... 45
Witnesses
Cooper, Dr. Mark N., Director of Research, Consumer Federation of
America; on behalf of Consumer Federation of America and
Consumers Union................................................ 37
Prepared statement........................................... 38
Grinstein, Gerald, Chief Executive Officer, Delta Air Lines...... 21
Prepared statement........................................... 23
Isakson, Hon. Johnny, U.S. Senator from Georgia.................. 4
Parker, W. Douglas, Chairman/CEO, US Airways Group............... 14
Prepared statement........................................... 16
Roach, Jr., Robert, General Vice President of Transportation, The
International Association of Machinists and Aerospace Workers.. 32
Prepared statement........................................... 34
Steinberg, Hon. Andrew B., Assistant Secretary for Aviation and
International Affairs, Department of Transportation............ 6
Prepared statement........................................... 8
Appendix
Aircraft Mechanics Fraternal Association, prepared statement..... 83
Faberman, Edward P., Executive Director, Air Carrier Association
of America, prepared statement................................. 84
Letters to Hon. Daniel K. Inouye:
Coalition for a Passengers' Bill of Rights, dated January 21,
2007, with attachments..................................... 92
Cone, Cathy, Chair, Delta Air Lines Retirement Committee and
Delta Section 1114 Committee of Nonpilot Retirees, dated
January 24, 2007........................................... 96
Delta Board Council, dated January 19, 2007.................. 95
Ford, A.A.E.,Frederick C., dated January 26, 2007............ 97
Hudak, CTC, Cheryl Corey, President, American Society of
Travel Agents, dated January 23, 2007...................... 86
Singer, Linda, Acting Attorney General for the District of
Columbia, dated January 23, 2007........................... 82
Letter, dated January 23, 2007, to Hon. James Oberstar and Hon.
Peter F. Costello, from Members of Congress.................... 81
Lott, Hon. Trent, U.S. Senator from Mississippi, prepared
statement...................................................... 80
McCain, Hon. John, U.S. Senator from Arizona, prepared statement. 79
Moak, Captain Lee, Chairman, Delta Master Executive Council, Air
Line Pilots Association, prepared statement.................... 86
Response to written questions submitted to Dr. Mark N. Cooper by:
Hon. John F. Kerry........................................... 112
Hon. Frank R. Lautenberg..................................... 113
Hon. Bill Nelson............................................. 113
Response to written questions submitted to Gerald Grinstein by:
Hon. John F. Kerry........................................... 105
Hon. Frank R. Lautenberg..................................... 106
Hon. Bill Nelson............................................. 106
Hon. Mark Pryor.............................................. 107
Hon. David Vitter............................................ 103
Response to written questions submitted to W. Douglas Parker by:
Hon. John F. Kerry........................................... 109
Hon. Frank R. Lautenberg..................................... 110
Hon. Bill Nelson............................................. 110
Hon. Mark Pryor.............................................. 111
Hon. David Vitter............................................ 108
Response to written questions submitted to Robert Roach, Jr. by:
Hon. John F. Kerry........................................... 111
Hon. Frank R. Lautenberg..................................... 111
Hon. Mark Pryor.............................................. 112
Response to written questions submitted to Hon. Andrew B.
Steinberg by:
Hon. Daniel K. Inouye........................................ 99
Hon. John F. Kerry........................................... 100
Hon. Frank R. Lautenberg..................................... 101
Hon. Bill Nelson............................................. 101
Hon. Mark Pryor.............................................. 102
Hon. David Vitter............................................ 103
Stevens, Hon. Ted, U.S. Senator from Alaska, prepared statement.. 79
Thune, Hon. John, U.S. Senator from South Dakota, prepared
statement...................................................... 80
THE STATE OF THE AIRLINE INDUSTRY: THE POTENTIAL IMPACT OF AIRLINE
MERGERS AND INDUSTRY CONSOLIDATION
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WEDNESDAY, JANUARY 24, 2007
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10:15 a.m. in
room SR-253, Russell Senate Office Building, Hon. Daniel K.
Inouye, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
The Chairman. If I may, I would like to submit my statement
on the airline industry, and yield the chair to Senator
Rockefeller.
[The prepared statement of Senator Inouye follows:]
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Over the past 5 years, the airline industry has suffered its worst
financial performance in the history of commercial flight.
Collectively, domestic air carriers have lost nearly $40 billion, but
after intense restructuring among the major carriers, the industry may
have turned a corner. Even conservative estimates suggest the airline
industry will turn a profit of $4 billion in 2007. Despite this
positive outlook, most industry observers warn that external factors or
other negative business trends could dramatically impact any potential
profits next year or beyond.
In this climate, US Airways has proposed a merger with Delta Air
Lines that many believe would lead to rapid consolidation of the legacy
air carriers serving the United States. Due to the industry-wide
implications of the proposed consolidation, it is critical that the
Senate Commerce Committee review and understand the potential effects
of such a deal. Aviation is vitally important to our Nation's system of
transportation and commerce. We must be quite certain that the likely
benefits of various merger proposals far outweigh any potential
consequences.
Financial analysts generally agree that consolidation will be good
for the airline industry because it will quickly ease problems of
overcapacity. However, industry is just one part of the equation the
Congress must consider. We must also weigh the extent to which
consolidation is in the best interest of consumers, particularly since
the impact of decreased capacity on travelers and local communities is
less clear. Multiple mergers would reduce air service where combined
route structures overlap significantly, and consequently allow industry
to raise fares and maintain much higher fares. Both of these
consequences--fewer options and sustained higher prices--hurt the
consumer. Further, airline workers, who have already given so much in
wage and benefit cuts during the past 5 years, would have to compete
for the fewer jobs that remain after consolidation of the fleet.
In the coming months, the Commerce Committee will be working on a
significant reauthorization of the Federal Aviation Administration
(FAA). We will continue to closely follow the state of the industry and
the impact of airline mergers on the American public. If the benefits
of consolidation are less than promised, we will have to consider
addressing this matter in the context of the FAA reauthorization
legislation we plan to develop this Congress.
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. [presiding] I thank the Committee Full
Chairman, will the Committee Full Chairman be waiting?
I do not have an opening statement, I'm going to encourage
other members to just insert an opening statement into the
record so we can get right to Senator Isakson, and get right to
the witnesses.
Will the Chairman be able to ask the first round of
questions?
The Chairman. Yes.
Senator Rockefeller. Good.
The Chairman. But I'm just going to put my statement in the
record.
Senator Rockefeller. As I will. I will put my statement in
the record. I hope all members will put their statement in the
record, and thus will save us some time.
Senator Stevens. Mr. Chairman, could we just have unanimous
consent that all members may file an opening statement?
The Chairman. Is there any objection to that?
Senator Rockefeller. That's a better idea.
The Chairman. Without objection, so ordered.
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
We are approaching the thirtieth year of airline deregulation.
Airline deregulation changed the very nature of air travel in this
country. For millions of Americans in large urban areas, it ushered in
an era of affordable air travel, but for hundreds of small communities,
including all of West Virginia's, deregulation meant a loss of service
and convenience, and often higher prices. It seemed to me that the big
jets disappeared from West Virginia within days of deregulation.
Deregulation brought dramatic change to the airline industry. The
only constants deregulation brought to the airline industry was brutal
competition and financial instability. Legendary airlines such as Pan
Am, Eastern Airlines, and TWA could not survive the competitive
onslaught that deregulation brought nor could many others. However,
deregulation allowed airlines like Southwest and other low-cost
carriers to thrive and provide consumers, mostly in large markets,
lower fares and more choices.
In the industry's frequent periods of financial trouble, airlines
either merged or went out of business. It comes as no surprise that
after the last several years of serious financial difficulty that the
industry is on the precipice of consolidation again. With the proposed
merger of US Airways, the product of a recent combination of US Airways
and America West Airlines itself, and Delta Air Lines, all other legacy
airlines would likely seek partnerships of their own.
However, the consolidation this time would be different and have
far greater consequences. In previous rounds of consolidation, regional
carriers merged to create larger airlines to allow them to compete or
healthy carriers bought the assets of weak carriers. No one merger
threatened the competitive balance of the industry. If the largest
carriers in the industry decided to merge, our Nation would have a
dramatically different aviation market. We would go from having six
major network carriers to three, which would have major policy
implications for this country, especially in the area of small
community air service.
There is no question that our airline industry is just emerging
from one of the most difficult periods in its history. U.S. air
carriers are beginning to see the results of ongoing cost reduction
efforts and increased passenger flow. The Air Transport Association,
the primary trade organization of the Nation's airlines, recently
projected an aggregate net profit of $2 billion to $3 billion for 2006,
and more than $4 billion aggregate net profit in 2007 on operating
revenues exceeding $150 billion.
Despite this recent economic upturn in the industry, we must
remember that between 2001 and 2005, the domestic U.S. airline industry
posted $35 billion in cumulative net losses. The poor financial
performance of air carriers over this period was heavily exacerbated by
a number of external factors, beginning with the September 11, 2001,
terrorist attacks, which precipitated a dramatic slowdown in air
passenger traffic.
We must also remember that this return to profitability has not
come without a price. The legacy carriers have aggressively sought to
cut costs by reducing labor expenditures and by decreasing capacity
through cuts to flight frequency, use of smaller aircraft, or the
elimination of service to some communities. Airlines cut almost 140,000
jobs in the last 5 years. Those employees who kept their jobs did so by
accepting billions of dollars in wage and benefit reductions. The
airlines have used bankruptcy to terminate defined-benefit pension
plans, costing the Pension Benefit Guarantee Corporation and airline
employees billions of dollars.
There is clearly a strong probability that air fares will continue
to go up in a number of markets. Consolidation may accelerate this
trend. No one wants to advocate for higher air fares for consumers, but
for too long, the competitive environment that carriers faced forced
them to offer their services at an unrealistic cost. Financially weak
carriers may produce benefits for consumers who have choices, but they
are devastating for small communities.
As we all know, small and rural communities are the first to bear
the brunt of bad economic times and the last to see the benefits of
good times. The general economic downturn in the aviation industry over
the last 5 years has placed exceptional burdens on air service to our
most isolated communities. In West Virginia, Tri-State Airport in
Huntington lost service to Pittsburgh and Atlanta, the Harrison-Marion
Regional Airport in Clarksburg lost service to Cincinnati and
Washington, D.C.
As the Government Accountability Office has noted, most small
communities' service levels remain far below their pre-September 11th
levels despite the airlines increasing capacity levels. West Virginia
has five communities that currently only have one air carrier. The
proposed merger between US Airways and Delta would put 100 percent of
West Virginia's second largest airport, Tri-State, and over 60 percent
of our largest airport, Yeager Airport, into the hands of into the
hands of one company. Because of the lack of competition in many West
Virginia markets, air service options are extremely limited and fares
are high.
The airline industry's restructuring has been brutal and it may not
be over. Although there is a positive outlook for the immediate future,
the long-term financial outlook for the industry is still uncertain at
best. The industry has enormous debt levels, fuel prices are vulnerable
to spiking upward, and newly found pricing power may collapse as
competition increases.
Over the last 2 years, I have met with almost every major airline
Chief Executive Officer (CEO). I have heard most of them advocate for
consolidation within the industry. I am not unilaterally opposed to
consolidation, but I believe that every transaction has to be
considered on its own merits. I know that our Nation needs a
financially healthy airline industry. Air service to small communities
in my state and across the country depends on network carriers who use
hub-and-spoke operations. We do not have any other options. Low-cost
carriers are not going to serve West Virginia's communities because
they are too small.
Our hearing today will allow to examine the potential impact
another round of consolidation would have on the airline industry and
the communities and consumers they serve. Given that this proposed
merger between US Airways and Delta Air Lines could set off a round of
industry consolidation, this Committee needs to understand the effects
consolidation would have on competition and small community air
service.
My state needs healthy network carriers if we are to attract new
air service. At present, low-cost carriers are not going to fill the
service void in our markets. Congress and the Administration need to
develop policies that promote competition but also make sure all
communities have access to affordable air service. Balancing these
competing values will not be easy.
As much as I believe that regulating the airline industry again is
necessary, I recognize that we are not going back. The industry is far
too changed and far too global for us to return to a completely
regulated environment. However, I am becoming increasingly convinced
that some regulation may become an option to make sure small
communities are not harmed by consolidation.
I look forward to hearing from our witnesses today. I know that the
future of the airline industry will be a continuing issue for this
Committee.
Senator Rockefeller. I'd like to now introduce Senator
Isakson for whom I have a particularly high regard, for reasons
which he knows, and I know and many folks in Appalachia know.
And he asked if he could make a statement, and I was more than
happy to allow him to do that.
Senator Isakson, you may proceed.
STATEMENT OF HON. JOHNNY ISAKSON,
U.S. SENATOR FROM GEORGIA
Senator Isakson. Thank you Chairman Rockefeller, Chairman
Inouye, Vice Chairman Stevens. I appreciate you giving me this
courtesy. I asked to do this today because I wanted to
introduce the President and CEO of Delta Air Lines.
I wanted to introduce him for a couple of reasons. He's a
very humble man, and I was afraid he wasn't going to tell you
all of the great things about what he and Delta Air Lines and
employees have done during difficult times.
But second, I think it's important to have a perspective
into why the Commerce Committee is looking into the state of
aviation in this country, and what has gotten us to the point
that we are.
My background in this is not just by being from Atlanta and
knowing Delta. My background is, in the 6 years preceding my
election to the U.S. Senate, I served on the Aviation Committee
in the House. I was there, and saw the after-effects of 9/11 on
the aviation industry, watched with horror what happened in
that affair. Watched further as gas prices spiraled, and the
cost of running of an airline spiraled out of sight, with
little or no control. And I watched a great airline, Delta, go
through very difficult times, as did every airline in the
aviation business. I watched them go to the depths, and I've
watched them now come back to the heights of what everybody
would hope would happen.
Delta Air Lines, under the leadership of Jerry Grinstein,
have done some truly amazing things. When the company went into
bankruptcy, it had heavy debt, it had many, many problems with
contracts, it had many, many problems with costs, it had many,
many challenges with configuration of aircraft, and it had many
ways in which it could go. But Jerry Grinstein decided it would
go one way, and that's up. And he joined with his employees,
together as equals, to make this airline back into one of the
truly great airlines of the United States of America.
Jerry Grinstein has a great history in transportation. He
was President of Burlington-Northern, and presided over the
largest merger to create the largest railroad in the country,
when they purchased Santa Fe.
Before that, he ran Western Airlines as President and CEO.
And his most important accomplishment, I think this Committee
would recognize, is he was Chief Counsel to the Commerce
Committee of the U.S. Senate, preceding those accomplishments.
Delta Air Lines has, in a short period of time under his
leadership, emerged as a great airline. It went into bankruptcy
with the goal of emerging competitive and strong, and honoring
its commitments to its employees, and to its customers. Delta
Air Lines has cut its costs, reconfigured its aircraft,
aggressively gone into international markets, made its fares
more affordable, and the attitude of its employees give it one
of the highest service rankings of any airline in the industry.
That doesn't happen by accident, and it particularly
doesn't happen when someone's in bankruptcy. It happens when a
company comes together and decides on greatness. Delta has
joined in that greatness.
As you look around this room today, you'll see pilots,
flight attendants, rank-and-file employees up and down, here to
support their President, and that airline. And it should not go
unnoticed on behalf of the U.S. Senate, that it was Delta Air
Lines that went into bankruptcy, wanting to emerge with a
commitment to honor its pensions to its rank-and-file
employees.
In an age where pension funds are more often than not
jettisoned under the PBGC, Delta went into bankruptcy wanting
to come out honoring that commitment. With the help of the
Chairman of this Subcommittee, the Members of the U.S. Senate,
by a vote of 95-3, then-pension rules were modified in this
country, and Delta Air Lines is honoring that commitment today,
and it's not on the backs of the taxpayers of the United States
of America.
All of that has happened under the quiet, calm and
dedicated leadership of a great president of a great airline.
Delta Air Lines.
Mr. Chairman, I thank you for the opportunity to introduce
Jerry Grinstein, and tell his story. And like most everybody in
Atlanta, Georgia, and like the buttons all of these employees
wear, when you're from Atlanta, you feel like Delta Air Lines
is your airline. They've done a wonderful job. They deserve to
emerge from bankruptcy and compete again as the airline they
have always been.
And I thank the Chairman, the Vice Chairman, and all of you
for your attention, and your courtesy in holding this hearing.
Senator Rockefeller. Thank you, Senator Isakson. And I must
comment that in my several years on the Committee, I've never
known such an eloquent speech to be given without the advantage
of a single note.
[Laughter.]
Senator Isakson. Poor eyesight.
[Laughter.]
Senator Rockefeller. The second panel will consist of
Andrew Steinberg, who is Assistant Secretary of Aviation and
International Affairs, U.S. Department of Transportation; Mr.
Doug Parker, Chairman and Chief Executive Officer, US Airways;
Mr. Gerald Grinstein, who is Chief Executive Officer of Delta
Air Lines; Mr. Robert Roach, Jr., General Vice President,
Transportation, The International Association of Machinists and
Aerospace Workers; and, Dr. Mark Cooper, who is Director of
Research, Consumer Federation of America.
If you gentlemen could come forward as quickly as possible.
I will ask that you try to hold your remarks to 5 minutes.
That's asking a lot, but we need to have that to move forward--
we have a vote coming up at 11:30, that is very disruptive, as
the Senate often is--and I wanted to give members a chance to
ask you questions.
Mr. Steinberg, we'll start with you.
STATEMENT OF HON. ANDREW B. STEINBERG, ASSISTANT
SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS, DEPARTMENT OF
TRANSPORTATION
Mr. Steinberg. Mr. Chairman, Mr. Vice Chairman, Members of
the Committee, good morning. Thank you for the opportunity to
appear today at this timely and important hearing.
Before I share our thoughts about the state of the industry
and the role of consolidation and industry restructuring, I'd
like to briefly explain the Department of Transportation's role
in reviewing proposed mergers and acquisitions in the airline
industry.
While we closely monitor all such transactions, and review
them to assess their effect on domestic competition, airline
economic fitness, safety, international alliances, and route
authorities, as well as customer service, it is the Department
of Justice that retains primary antitrust jurisdiction. Of
course, we work closely with Justice, and we share our findings
with them, but the decision whether to challenge a particular
transaction under the antitrust laws is the province of the
Antitrust Division.
Having said that, we at DOT obviously take a keen interest
in all such proposals, given their potential impact on the
national air transportation system.
The U.S. airline industry is at something of a crossroads.
The last several years, as Senator Isakson noted, marked,
perhaps, the most trying period in the history of the U.S.
airline industry since deregulation. The attacks of September
11, the war on terror, the resulting new security burdens,
SARS, and of course the markedly higher cost of fuel, have all
made running an airline a much more challenging endeavor than
ever before, and that's saying a lot.
But thanks, in part, to the sacrifices of airline
stakeholders, including employees, suppliers and creditors,
through multiple rounds of bankruptcy, it appears that the
industry is poised to return to broad-based profitability in
2007.
It's a remarkable story. In the past 5 years, our network
carriers slashed their annual non-fuel costs by nearly $20
billion, and improved their productivity by 30 percent. Yet,
during the same period of time, air travel has also become
safer, cheaper and more abundant than ever before. And the good
news for consumers is that the very circumstances that have
kept fares low in the past, are now, I think, pervasive in the
marketplace and should endure, even if we see some
restructuring, and even as consolidation unfolds, and that's
good for competition.
What are these factors? Well, they include the continued
growth of low-cost carriers like Southwest Airlines in the
domestic market, and the competitive responses that they
unleash; the availability of essentially perfect price
information for consumers via the Internet; and the lower cost
structures that have now made profits possible even in a lower
fare environment. And the proof is in the pudding, as they say.
The average price of a ticket for an industry average trip of
882 miles has actually fallen since 2000, from $125 to $109,
and this despite, again, the dramatic increase in fuel prices.
The recent encouraging financial results of our airlines,
both network, and most of the low-cost point-to-point carriers
suggests we are in something of an equilibrium, in which the
industry can produce very low fares, and abundant service
options in most parts of the country, while enjoying modest
profitability. The question is, over the long-term, can we
sustain that balance? And to do so, I'd like to just note
several problems.
First, our network carriers remain very highly leveraged,
despite having shed a great deal of debt in the past 5 years
while in, or near, bankruptcy. Second, industry results are
still heavily dependent on even minor fluctuations in the two
largest cost inputs, which are fuel and labor. Third, several
of our biggest, and potentially most lucrative, international
markets are still not open to our carriers, at least not
entirely, and these include routes to the United Kingdom,
China, Japan, and parts of Latin America. Fourth, anachronistic
restrictions on cross-border investment artificially hamper the
ability of our airlines to capitalize on their inherent network
strengths, and operate as global companies. Fifth, the
continuous cycle of failure and domestic bankruptcy in the last
several years in the United States has obviously been damaging
to the industry as a whole; and that means our carriers must
play catch-up, in terms of renewing their fleets, investing in
technology and enhancing their products. Sixth, our air traffic
system is becoming increasingly outmoded, and cannot support
the near-tripling of capacity that we think is needed to meet
the growth and demand for air transportation in the next two
decades.
Now, the question of consolidation and industry structure,
I think, should be considered in the context of dealing with
all of these problems, and what emerges to us from this
picture, is an overriding policy goal of having a healthy
domestic airline industry that can broadly serve the needs of
the public.
While the focus of this hearing is on mergers, industry
consolidation, of course, can take a number of different forms,
not just M&A activities, but also asset sales of airplanes,
gates and routes, or even market exit. The Department of
Transportation does not necessarily view mergers as a panacea
to industry problems. Mergers are complex and demanding
endeavors that have a poor track record in the airline industry
because they're difficult to execute. But some have been
successful.
At the same time, all major airlines today are, in fact,
the product of at least one merger, including both Delta, and
obviously US Airways.
Consolidation itself, we think, is part of the natural
evolution of any business, and is an inevitable by-product of
having a deregulated industry. While I can't comment on any
specific transaction--and, in fact, none is pending right now
for our review--I can say what our goals would be in reviewing
proposed mergers.
In addition to the obvious one----
Senator Rockefeller. Mr. Steinberg, if I can interrupt.
What you have to say is extremely important, but you should
know that you're already over the time limit, and simply to be
fair to all the others to be able to speak, try and wrap up.
Mr. Steinberg. I'm almost done, Senator, thank you.
While I can't comment on a specific transaction, I will
tell you about the goals we will pursue in examining proposed
mergers. Obviously, one is low fares. But also our interests
include encouraging the use of market forces to encourage
efficient and well-managed carriers to earn adequate profits
and attract capital, ensuring consumers in all regions of the
United States have access to affordable, regularly scheduled
air transportation, and strengthening the competitive position
of U.S. carriers, to ensure, at least, equality with foreign
air carriers. There's no ``one size fits all'' way to view
airline mergers. And so, I think when it comes to
consolidation, we have to keep an open mind toward any and all
proposals.
I think I'll stop there. Thank you.
[The prepared statement of Mr. Steinberg follows:]
Prepared Statement of Hon. Andrew B. Steinberg, Assistant Secretary for
Aviation and International Affairs, Department of Transportation
Mr. Chairman, Vice Chairman Stevens, and members of the Committee:
Introduction
Thank you for the opportunity to appear before you to discuss the
state of the U.S. airline industry, the role of the Federal Government
in the industry's ongoing restructuring, and the prospect of
consolidation. This is an important and timely hearing. Although I
cannot discuss the specifics of any potential merger transaction, I can
shed some light on our outlook for the industry, the role of
consolidation in the context of a deregulated business, and the process
the Department of Transportation will use in reviewing an airline
merger should a transaction be presented to us.
State of the U.S. Airline Industry: Short-Term Recovery, Long-Term
Challenges
Let me begin with the state of the airline industry. The U.S.
airline industry remains in the midst of an historic restructuring.
Over the last 5 years, U.S. network airlines have reduced their
annualized mainline costs excluding fuel by more than 25 percent, or
nearly $20 billion. While some of the cost savings were the product of
identifying greater operational efficiencies, most of the savings were
generated by renegotiation of existing contractual arrangements with
creditors, aircraft lessors, suppliers and airline employees and
achieved either through the bankruptcy process itself or under threat
of bankruptcy. 22 percent of industry capacity is still operated in
bankruptcy--down from a high of 46 percent in 2005 but still
substantial by any measure. The result is that several carriers that
were on the precipice of liquidation just 5 years ago now have much
lower cost structures that should allow them to return to profitability
over the short term.
The financial crisis that necessitated this massive restructuring
and the sacrifices of our largest airlines and their employees was
produced by the confluence of intense competition, structural
conditions in the industry, and a series of exogenous events that
temporarily depressed air travel demand or increased costs (e.g., the
September 11th terrorist attacks, the war on terror, greater security
burdens, SARS, and much higher fuel prices). During this difficult
period certain sectors of the industry fared relatively better than the
network airlines, including low-cost and regional carriers and cargo/
express operators.
In addition to geopolitical challenges, the industry has also found
pricing to be increasingly competitive. Low-cost carriers (LCC's)
increased their share of the market from 23 percent to 30 percent
during this time period, bringing prices down on many origin-
destination routes (``citypairs'') to the benefit of air travel
consumers. At the same time, the percentage of business travelers
willing to pay substantially higher ``walk up'' or unrestricted fares
has steadily fallen. These trends have been enhanced by the growth of
the Internet as a mainstream marketing and distribution channel,
creating an environment of nearly perfect price information for both
leisure and business travelers, further curtailing the ability of
network carriers to charge significantly higher prices to the most
time-sensitive passengers. As a result, average yields fell from 14.2
cents per revenue passenger mile (RPM) in 2000 to 11.1 cents in 2005,
before bouncing back to 12.4 cents in 2006. To put that in more
understandable terms, the decline means that the price of a ticket for
an industry-average, 882-mile trip has declined from $125 to $109.
This decline in average fares came despite the dramatic increase in
the price of jet fuel over the past 18 months. Prior to their recent
moderation, fuel prices more than doubled from approximately $1.03/gal
jet kerosene in mid-2004 to over $2.23/gal in mid-2005 and remained
near $1.91/gal throughout much of 2006. Jet kerosene is now $1.62/gal
in the spot market, brought down by the very recent declines in the
price of crude oil from which jet kerosene is derived. Fuel is now
either the first or second largest expense category depending on the
airline, representing on average about 26 percent of cost. Each one-
cent increase in the price of a gallon of fuel translates into an
additional $193 million annual expense for the industry. U.S. airlines
have responded to the challenge of high and increasing fuel prices with
operational and technological changes that have cut fuel consumption
during the past 5 years, resulting in cost savings for the airlines,
and cuts in emissions that benefit the environment. Nevertheless, fuel
prices present a major challenge to the health of the industry in an
environment in which airlines are obviously not able to pass on the
full brunt of these higher costs to their customers. In effect, the
growth in the fuel expense burden has masked the tremendous progress
made by network carriers in cutting their costs to levels that are much
more competitive with low-cost/low-fare carriers. Thus, on the positive
side, if the very recent moderation in fuel prices continues, the
industry is poised to reap material financial benefit in the short
term, although again it is unlikely they would realize the full benefit
of such savings. Overall, fuel price uncertainty will continue to
motivate industry-wide cost discipline.
Airlines have focused on six areas of cost reductions:
Labor--Taking a clear view of the necessity of cost
reductions, labor and management have negotiated contracts that
have generated major savings. In some cases, those reductions
have been imposed through the bankruptcy process. U.S. network
carriers have reduced their annualized labor costs by over $11
billion over the last 5 years.
Fuel--Fuel saving initiatives such as single-engine taxiing,
more efficient fuel-reserve practices, and installation of
winglets have resulted in significant cost savings.
IT/Reservations/Customer Service--Technology-driven
enhancements to airline websites and self-service kiosks have
not only reduced the cost of bookings and passenger handling,
but have also improved the ability of carriers to generate
additional revenue at the airport from passengers willing to
trade-up to premium services such as service class upgrades,
one-day admission to airport lounges, or even exit-row seating.
External Distribution/Commissions--The airlines renegotiated
contracts with global distributions systems (GDS), further
reduced travel agent commissions, and successfully induced
travelers to book directly with carrier websites, which have
resulted in substantial annualized air carrier savings. GDS
booking fees have declined approximately 15 percent since mid-
2003.
Fleet/Maintenance--Fleet rationalization continues at a
number of airlines both inside and outside of bankruptcy.
Carriers are retiring older, maintenance-intensive, fuel-
guzzling fleets with new aircraft that in many cases allow for
common type-ratings, thus reducing training, spares, and
maintenance expense.
Pension--Bankruptcy has allowed several carriers to
significantly reduce pension expenses. Furthermore, recent
pension legislation will lessen funding requirements, thereby
improving cash-flow. The result has been to shift to the
Pension Benefit Guaranty Corporation (PBGC) an increasingly
large burden of funding the pensions of airline workers.
According to the PBGC, airline pensions today represent at
least 38 percent of PBGC claims--but airlines paid just 2.6
percent of premiums.
For 2006, according to Wall Street analysts, the industry will
record its first annual profit since 2000, estimated to be $2 billion
on revenues of nearly $123 billion, for an approximate return on sales
of 2 percent. The industry is also forecast to post profits this year,
estimated to be approximately $6 billion on revenues of approximately
$128 billion, or a 5 percent return. Over the short-term, network
airlines are expected to maintain capacity and cost control. If the
recent moderation in fuel prices continues, airlines will reap even
more financial benefits from the structural changes made in their
business models.
It is also important to note that over the last several years the
significant and ongoing expansion in the scope of low-cost carrier
operations within the domestic market has not only resulted in lower
fares, but has substantially expanded the availability of those low
fare offerings much more broadly than ever before. Consumers in many
markets where deeply discounted fares were either unavailable or
offered with very limited capacity now have a low-cost carrier option--
-and, of course, this service has had the effect of reducing the fares
that network carriers offer in these markets as well. The price
discipline created by a plethora of LCC offerings is pervasive.
Short-term prospects for the industry this year appear quite
favorable based on the following factors:
Positive revenue trends due to slower domestic capacity
growth and very strong demand.
Higher average yields in part due to less capacity pressure
from low-cost carriers.
Strong economic growth in the United States.
Continued cost discipline.
Improved balance sheets with encouraging levels of current
free cash-flow.
Recent decline in fuel prices.
With a favorable supply-demand dynamic in place for the domestic
airline industry, we expect the positive revenue trend to continue in
the near-term. On the supply side of the equation, network carrier
available seat miles (ASMs) are expected to increase no more than 3
percent, with the bulk of the growth in international markets. In fact,
network domestic capacity is expected to decline. Most capacity
increases will come from greater aircraft utilization, another sign of
improved productivity. Conversely, according to analysts, domestic ASM
growth for the low-cost carriers will continue growing over 10 percent,
resulting in continuing share gains for LCCs in the domestic market.
Overall, industry-wide domestic capacity is projected to increase 2.6
percent. On the demand side of the equation, load factors have reached
record levels, enhancing the effectiveness of airline revenue
management systems, which should enable the network carriers in
particular to improve the fare mix and thus overall revenues.
Over the long term, however, the outlook for the U.S. airline
industry is more uncertain. The industry faces persistent structural
problems that must be addressed if we are to avoid facing another wave
of bankruptcies in the next economic downtown, and if the industry is
to take full advantage of the very substantial progress made in
lowering unit costs. These problems are discussed below:
First, many network carriers remain highly leveraged despite
shedding significant debt while in or under the threat of bankruptcy.
Second, the two biggest inputs into the industry's cost structure--
fuel and labor--are by no means fixed and thus the lower-cost
foundation supporting break-even results in 2006 and modest
profitability in 2007 is impermanent. With respect to labor costs,
history suggests that organized groups will gradually seek to recoup
the wage rate reductions acceded to in economic downturns and will do
so at the earliest stages of industry recovery, which we are now
seeing. With respect to fuel, given the airlines' inability to pass on
the full impact of higher fuel prices to their customers, their bottom
line remains quite sensitive to fluctuations.
Third, several of the biggest and most important international
markets still have unnecessary constraints on competition--including
the United Kingdom, China, Japan, and several countries in Latin
America--that effectively protect foreign airlines and raise costs for
U.S. carriers and consumers.
Fourth, cross-border investment restrictions artificially raise the
cost of capital to U.S. carriers. Those restrictions also prevent U.S.
carriers from optimizing their business models and taking advantage in
international flying of their inherent network strength (a result of
operating out of the world's single largest aviation market) and their
newly minted, lower cost structures.
Fifth, the continuous cycle of domestic bankruptcies has required
U.S. carriers to reduce capital expenditures substantially in order to
bolster beleaguered balance sheets. This has meant delaying much needed
investments in fleet renewal, new technologies, and product
enhancements to remain competitive. This deficiency is becoming
increasingly serious, especially as our carriers must vie with foreign
rivals that have surged ahead in making such investments.
Finally, any discussion of the structural challenges facing the
U.S. airline industry must also include mention of the apparent effects
of the bankruptcy process not only on those firms that are forced to
seek protection under the bankruptcy code, but also on the rest of the
industry that attempts to operate without those protections. Respected
airline industry analysts have frequently observed that the airline
industry is, paradoxically, relatively easy to enter and hard to
leave--sometimes characterizing this phenomenon as an ``exit barrier''
for failed firms that is the inadvertent consequence of the Chapter 11
reorganization process. They point out that airline stakeholders
(lenders, suppliers and employees)--any one of whom could singly cause
an air carrier's demise--rarely force such an outcome and instead trade
in old contractual arrangements and debt for new ones. And the net
result of those decisions is, perversely enough, that those carriers
who manage to avoid bankruptcy eventually find themselves at a serious
competitive disadvantage.
The airline industry is particularly susceptible to this phenomenon
because the business is highly responsive to economic cycles. Just as
most network airlines are now expected to turn an operating profit,
most lost substantial sums in the last several years; when one carrier
finds itself in trouble, typically most others do. Consequently, when
one firm falls behind on its aircraft lease payments, its lessors may
lack the economic leverage to reclaim assets (because they cannot
redeploy them profitably elsewhere)--and thus don't. This is compounded
by the ability of airlines operating in Chapter 11 to win significant
savings on their leases and postpone reconfirmation of leases, allowing
bankrupt airline managers to ``time'' the bottom of the market and gain
a capital cost advantage over their competitors. Airports that are
reliant on large airline tenants face a similar bargaining dynamic in
difficult financial times for the industry and must also make
concessions that keep failing companies afloat. Organized labor usually
makes the same decision; that it is better to keep their employer alive
even at much lower wage rates than suffer the job and retirement
benefit losses of failure. Similarly, the liquidation of an airline
will ordinarily leave a debtor far worse off than a restructuring in
bankruptcy--even one in which creditors get relatively little on the
dollar--because even the prospect of a major airline shutting down will
practically halt ticket sales, forcing assets to be sold at ``fire
sale'' prices. Yet precisely because of the underlying volatility of
the industry, the airlines in effect offer a huge ``option value'' to
their stakeholders; that is, the risk of continuing to invest in or
extend credit to a bankrupt or near-bankrupt airline is outweighed by
the potential reward if the company should survive. All of this ensures
that even failing airlines will almost always have access to capital,
thus perpetuating the cycle of failure.
While these structural conditions cloud the long-term outlook for
airlines, once they are addressed, the industry can more easily meet
the public's expectation of low fares, reliable service for smaller
communities, and innovative product offerings that are competitive in a
global marketplace. Indeed, the role of international markets and the
growth opportunities they now present for U.S. network airlines should
not be underestimated. I am confident that if we can avoid another
cycle of bankruptcies, there is every reason to expect U.S. airlines to
succeed in exploiting their advantages to profit from the tremendous
growth opportunities offered by the liberalization of international
aviation markets through ``Open Skies'' Agreements. And ultimately,
this will redound to the benefit of U.S. consumers in the form of more
service to more destinations at lower fares.
Role of Government: Consolidation in the Context of Complete
Deregulation
These observations about the short- and long-term state of the
airline industry necessarily implicate the question of the appropriate
role of government in the industry's ongoing restructuring. By
deregulating the airline industry in 1978, Congress set the U.S.
Government permanently on the path away from intervention in the
marketplace. This was a wise choice. The Department of Transportation
has long believed that deregulation has been a success in producing
widespread service with low fares, while achieving a spectacular safety
record. The American people continue to enjoy the most abundant, most
reliable, safest, and most affordable air transportation in our
Nation's history. Noting the success of airline deregulation, Congress
went on to deregulate motor carriers, railroads, electricity, energy,
telecommunications, and financial services. As governments around the
world have increasingly opted for market-based approaches, deregulation
has become the default policy of the global economy.
As we examine developments in the airline industry and consider the
appropriate policy response toward them, the Department of
Transportation strives to apply a ``value-added'' test for regulatory
burdens. Simply put, at a time when the industry is buffeted by so many
forces--some attributable to the marketplace, some to geopolitical
challenges--government needs to ensure that each of its regulatory
requirements continues to serve a valid public purpose, and the
interests of the American people and the U.S. economy.
The Bush Administration has been applying that test rigorously, and
finding ways to reduce further the regulatory burden while protecting
the traveling public. For example, we eased the requirements on
airports relating to the filing of competition plans. We repealed in
their entirety DOT's 20-year-old regulations governing the use of
computer reservation systems. We created an expedited, simplified
procedure to award ``route integration authority'' for 5 years to all
U.S. carriers who apply for it. We have eased tariff filing
requirements for the airlines of countries with which the U.S. enjoys a
liberal aviation relationship. And we simplified the requirement for
disclosure of code-share and long-term wet lease arrangements in print
advertising.
Our efforts to get unnecessary government constraints out of the
way of innovation are further evidenced by our persistent pursuit of
liberalized bilateral air services agreements, adhering to the Open
Skies model wherever possible. Working with the Department of State,
and with the support of other agencies, we now have over 70 Open Skies
partners. The U.S. Government has thereby created new commercial
opportunities for U.S. carriers while bringing the benefits of
affordable air travel across the world to American consumers and to
foreign citizens desirous of spending money here.
We need to fully understand the problems affecting airlines and
should take advantage of the current environment--in which the domestic
airline industry appears to be in the midst of a robust cyclical
recovery--by completing the work of deregulation. If we want a
sustained recovery and the benefits that will bring to consumers we
need to ensure that government does not purposefully or inadvertently
prevent the industry from undertaking the restructuring demanded by
market forces. This may necessitate a reexamination of regulatory and
policy assumptions in key areas like bankruptcy, pension funding, labor
relations, and aviation infrastructure financing and development. Our
policies in each of these areas undoubtedly come with burdens and
benefits not only for the flying public, but also for taxpayers,
investors, and employees. We need to better understand the aggregate
impact of these policies and ensure that they do not inadvertently
create obstacles to an efficient and competitive industry in the long
run.
This same philosophy will inform the Department's approach to
larger policy questions involving the issue of ``consolidation.'' The
history of deregulation has shown quite clearly that American travelers
and shippers can support a mix of carrier types with different business
models. The challenge we face is to ensure that our regulatory regime
does not stand in the way of marketplace forces that would otherwise
result in new entry, business combinations, asset sales or even exit.
In a dynamic market, new entry acts as a force that disciplines
incumbents and thus ideally fosters innovation and efficiency. Just as
new entrant firms must be afforded competitive access to satisfy
marketplace demands, we must allow failing firms to exit the business
if market forces decide that assets should be reallocated to more
efficient firms. This is a natural consequence of a deregulated
industry and the mechanism by which market forces ensure that the needs
of American travelers and shippers are met in the most efficient way
possible.
Industry consolidation--regardless of the sector--fundamentally
occurs in three different ways--through the combination of firms,
through asset sales, or through the exit of failed companies. Business
combinations are not necessarily an elixir for any industry, much less
the domestic airline business. Merging two air carriers is a demanding
and extremely complex endeavor that requires effectively combining
route networks, information technology systems, aircraft fleets, and
perhaps most daunting, two different workforces. As a result of these
many complexities, mergers usually fail in the airline industry, but
some don't, and we should be open to both possibilities.
Completing the work of deregulation--the centerpiece of our
policy--means better understanding the role that applying our
competition laws has played, if any, in impeding market forces that may
benefit the public interest. In this context, it is important to
emphasize that the Department of Transportation must fulfill a broader
set of statutory policy objectives than does competition law. While
protecting the interest of U.S. consumers in having access to low
airfares remains paramount, Congress has also instructed the Secretary
of Transportation, in carrying out the Department's responsibilities to
consider other important goals: including the use of marketplace forces
to encourage efficient and well-managed air carriers to earn adequate
profits and attract capital, to ensure that consumers in all regions of
the United States have access to affordable, regularly scheduled air
service, to promote a viable, privately-owned United States air
transport industry, and to strengthen the competitive position of air
carriers to at least ensure equality with foreign air carriers. Our
analysis of a proposed merger will necessarily be informed by all these
considerations.
However, before I leave this discussion on the role of government,
I want to note that there is an important area where government can,
and must, play a major role in driving change and innovation.
Infrastructure constraints, and the resulting congestion problems are a
significant long-term difficultly facing the airline industry.
Congestion problems are widespread: travelers are delayed, airlines
incur additional costs, and economic activity reliant on air service is
slowed. Air traffic is expected to approximately triple by 2025 and,
without action, congestion will become crippling.
In order to address this problem, the Department of Transportation
is working along side several other Federal agencies including the
Departments of Defense, Homeland Security, Commerce, NASA, and the
White House Office of Science and Technology Policy to develop the Next
Generational Air Transportation System, what is known as ``NextGen''.
These efforts, spearheaded by the Federal Aviation Administration, are
being coordinated through the Joint Planning and Development Office
(JPDO), which is staffed by officials from all of these agencies.
NextGen promises to revolutionize the way in which air traffic
moves by using networked information, satellite-based navigation,
enhanced aircraft capabilities, new flight procedures, and automation
among other things. These technologies will allow more efficient use of
physical aviation infrastructure, thus boosting the capacity of our
system and facilitating greater economic growth. We believe that, in
creating NextGen, the Federal Government is contributing an essential
element to the long-term success of the U.S. airline industry.
DOT's Role in the Review of Merger Transactions
Now that I've provided some insight into our perspective, let me
explain how the review process within the Department might transpire
should any proposed transaction move forward.
In addition to requiring bankruptcy court approval, the proposed
merger would be reviewed by both the Antitrust Division of the
Department of Justice and the Department of Transportation. The
Antitrust Division is responsible for determining whether the
transaction will be challenged under the antitrust laws. The Department
of Transportation would conduct its own competitive analysis of the
proposed merger and by practice will submit its views and findings to
the Antitrust Division privately.
DOT would also consider a wide range of public interest issues
involving, among other things, route transfers, economic fitness, code-
sharing, and possible unfair or deceptive practices. In practice, we
would not formally consider such issues until the Antitrust Division
advised us that it did not intend to challenge the transaction.
If a proposed transaction involved the acquisition of international
routes, consummating the merger might entail the transfer of
certificate authority to a new entity. By statute, 49 U.S.C. 41105, we
may approve a transfer only if we find that it is consistent with the
public interest. We must analyze the transfer's impact on the viability
of each airline party to the transaction, competition in the domestic
airline industry, and the trade position of the United States in the
international air transportation market. As a practical matter,
transfers are important only when the acquired airline holds route
authority in limited-entry markets. We would only decide whether to
approve the transfer after we had established a formal record and given
all interested persons the opportunity to comment. Our discussions with
the Antitrust Division on a proposed merger would likely include a
discussion of the competitive effects of the transfer of any
international routes. If the Department determines that the transfer
would be contrary to the public interest on competitive grounds or for
another reason, the Department could disapprove the transfer in whole
or part. Alternatively, the Department may condition its approval on
requirements that would protect the public interest.
Usually, a proposed merger will result in a new corporate entity
under new ownership, and when that is the case, the Department would
conduct a fitness review, including a review of airline management,
financials and compliance disposition. The Department would also review
any codeshare arrangements concluded between the merging carriers under
49 U.S.C. 41720. In the Department's experience, code-share
arrangements would likely be necessary during the early phases of
integration post-merger. Meanwhile, the Department would also have to
evaluate the impact of a merger on any domestic marketing agreements or
international alliances. As U.S. airlines participate in all three
worldwide alliances, some of which enjoy antitrust immunity from the
Department and some of which don't, we would need to review how the
changes in alliance memberships affect airline competition.
The Department has the obligation under 49 U.S.C. 41712 to protect
consumers from unfair and deceptive practices by airlines. In carrying
out that responsibility, we could, if appropriate, review the proposed
merger's arrangements to protect the rights of consumers. For example,
it could be necessary to assess whether the merging airlines plan to
give consumers reasonable notice and an opportunity to adjust to any
changes in the frequent flyer programs.
Conclusion
The issue of ``consolidation'' should thus be understood in the
broader context of allowing deregulation to address the airline
industry's problems. An industry that is truly subject to marketplace
forces will often go through phases of restructuring or consolidation.
This can occur in a variety of forms--not necessarily just mergers and
acquisitions. The airline industry is very dynamic. Thus government
policy should evolve in parallel constantly taking into account rapidly
changing economic conditions, competitive environment, and industry
innovation. The government, absent a clear and convincing need to
protect the traveling public, should not stand in the way of market
forces acting to address structural problems within the industry.
To be sure, mergers are not a panacea for the industry's long-term
problems. Because of the complexity of integrating different labor
forces and fleets, many mergers in the airline industry have failed to
fully achieve their creators' objectives. But we should not assume that
having fewer network carriers necessarily translates into detriment to
consumers. To the contrary, an industry populated by several successful
firms could contain intense and diverse forms of competition as we can
see in other industries, such as the cargo/express delivery business in
which a few large firms compete vigorously not only on price but also
on product innovation.
Let me be clear, however. My remarks today should not be
interpreted as an endorsement or rejection of any particular
transaction or combination of transactions, or of mergers as the
optimal way to address the structural conditions that have impeded
innovation. Each proposed transaction must and will be considered on a
case-by-base basis. The airline industry should be held to the same
antitrust standards as every other industry and certainly there will be
transactions that fail to satisfy a rigorous antitrust test. But as the
Department of Transportation examines such transactions, it will do so
with a variety of statutory policy objectives in mind, not the least of
which is our obligation to ensure a viable airline industry that can
meet the transportation needs of the American people.
Thank you, and I would be pleased to take any questions.
Senator Rockefeller. Thank you, Mr. Steinberg, very much.
And we now turn to Doug Parker, Chairman and CEO of US Airways.
STATEMENT OF W. DOUGLAS PARKER, CHAIRMAN/CEO,
US AIRWAYS GROUP
Mr. Parker. Thank you. Mr. Chairman, Senator Stevens, other
distinguished members of the Committee, thank you very much for
the opportunity to appear before you today to discuss some of
the issues confronting our industry.
I'm Doug Parker, Chairman and Chief Executive Officer of US
Airways. I became CEO after the September 2005 merger of US
Airways and America West Airlines. I'm very proud to be here
today, representing our nearly 35,000 employees.
Senator Rockefeller. Could you move the microphone just a
bit closer?
Mr. Parker. I'll try.
Senator Rockefeller. Thank you.
Mr. Parker. It has been 5 years since I addressed Congress,
shortly after the tragic events of September 11th, and the
airlines industry, at that time, was in a precipitous financial
tailspin. But Members of this Committee, and others in
Congress, stood with the industry in a much-needed show of
support. We were grateful for your leadership, but none of us
could have foreseen the severity and duration of the crisis
that faced airlines.
Oh, I needed to turn it on. That's the first step.
Senator Rockefeller. That would be helpful.
[Laughter.]
Mr. Parker. I told you it has been 5 years.
Since 2001, the industry has experienced 24 Chapter 11
filings, and five liquidations, $35 billion in cumulative
losses, and 154,000 of our employees have lost their jobs. The
severe impact of multiple shocks to the aviation industry
caused us to repeatedly come back to Congress for help.
While you did help, we also heard the message--and
appropriately so--that Federal support should be the exception,
and not the rule. And that it was time, as an industry, that we
got our own house in order. At America West, now US Airways, we
took that message to heart. We believed that if we aggressively
managed our cost, and made things easier and simpler for
customers, they would respond, and we would return to
profitability. We were right.
Consumers responded favorably. So much so, that through the
hard work of our employees, by 2004 we had returned our airline
to profitability. In 2005, we merged with US Airways, a leading
East Coast carrier that was then facing significant financial
problems. We believed that a merger with US Airways presented
an opportunity to strengthen our own company, provide a
brighter future for nearly 35,000 employees of US Airways and
America West, and a stronger airline for the communities and
customers we served.
At the time of the merger, we faced many skeptics who did
not believe that this deal, or any other large scale airline
merger could work. The results speak for themselves.
Today, the new US Airways is the most profitable network
carrier in the United States, with 2006 profits projected at
better than $500 million. Our market capitalizations increased
from about $150 million to over $5 billion in just over a year.
For our people, we combined a fragile America West and a
failing US Airways into a strong, viable competitor, and saved
the jobs of over 30,000 hardworking, frontline employees. Not
only did we not furlough anyone, but since the merger, we've
hired 4,000 new employees. To be clear, these are baggage
handlers, flight attendants, pilots--who not only did not lose
their jobs, but will benefit from approximately $58 million in
profit-sharing payments to be paid this quarter.
With our current cash position of over $3 billion, our
financial stability has improved the job security of all of the
members of our team. Our merger has also made things better for
the 66 million passengers that flew with US Airways last year,
to more than 250 communities. Our larger, combined airline
offers a bigger network, with more flights to more
destinations. Consumers have also benefited from our low-cost
pricing philosophy, which brings lower fares to markets big and
small, throughout our network.
Some examples of the thousands of routes where we have
reduced fares by up to 83 percent, include: Augusta, Georgia;
Huntsville, Alabama; Huntington, West Virginia; Syracuse, New
York; Wilmington, North Carolina; Harrisburg, Pennsylvania; and
most recently, Charlottesville, Virginia. In fact, we've
lowered fares to over 1,100 markets since our merger.
I'm also proud to report that the U.S. taxpayer has
benefited from our merger, as our financial success allowed us
to repay the America West and US Airways loans from the Federal
Government. The loans were paid early, with interest, and with
a profit of over $100 million to the U.S. Treasury.
In short, the merger has been a tremendous success for
everyone. And we are continuing to work hard to wrap up the few
remaining steps necessary to get to a complete integration of
the two carriers.
But the success of that merger doesn't mean we can stop
striving to improve ourselves, particularly in this brutally
competitive industry. We believe we have an opportunity to make
US Airways a better and more efficient competitor through our
proposed merger with Delta. We believe the proposed merger
would be good for all employees. There would be no furloughs of
front-line employees of US Airways or Delta, and we will raise
every employee to the highest common labor cost.
We believe the proposed merger would be good for the
communities we serve. No domestic city with US Airways or Delta
service today will be without service after the merger, and no
hub will be eliminated. In addition, we believe the merger will
be good for consumers. We will implement our customer-friendly
pricing in more markets to more destinations.
Even after this merger, our industry will still be highly
fragmented, and highly competitive. Low-cost carriers are
committed to continued, aggressive expansion. This is an
important time for our industry. The market is bringing about
positive change, and it should be allowed to continue. I would
encourage Congress to let the market work, so long as any
transaction is compliant with the antitrust laws. My fear is
that, if we do not do that, future hearings will not be on the
opportunities facing our industry, but about the overwhelming
challenges--and ultimately, the need for additional industry
bailouts.
Mr. Chairman, Senator Stevens, other distinguished Members
of the Committee, thank you for this opportunity to visit with
you today, and I look forward to answering your questions at
the appropriate time.
[The prepared statement of Mr. Parker follows:]
Prepared Statement of W. Douglas Parker, Chairman/CEO,
US Airways Group
Mr. Chairman, Senator Stevens,
Thank you for the opportunity to appear before you today to discuss
the issues confronting our industry. I am Doug Parker, Chairman and
Chief Executive Officer of US Airways Group. I have spent over twenty
years in the airline industry, starting with American Airlines,
followed by Northwest Airlines, and then joining America West Airlines
in 1995 as Senior Vice President and Chief Financial Officer. I became
Chairman and CEO of US Airways after the September 2005 merger of
America West and US Airways. I am proud to be here representing the
35,000 employees of US Airways Group. Every day, we operate almost
4,000 flights to nearly 250 communities in the United States, Caribbean
and Europe. Our outstanding frontline employees are represented by the
following labor unions--ALPA, AFA, IAM, CWA/IBT, and the TWU.
It has been 5 years since I last appeared before you. Today, I
would like to speak to you about three issues--
1. The State of the Industry Since I Last Spoke With You;
2. The Successful Merger of America West and US Airways; and
3. The Future Prospects for the Airline Industry.
It was shortly after the tragic events of September 11, when I last
addressed the Congress. The airline industry was in a precipitous
financial tailspin when Members of this Committee and others in
Congress stood with the industry by demonstrating leadership and
conviction in enacting legislation to provide much needed liquidity to
our industry. The measures passed by Congress--direct cash transfers,
the creation of a loan stabilization board, and relief on war risk
insurance premiums, among other actions--enabled the industry to cover
its basic operating expenses, including paying employees and serving
communities at a time when commercial loans and financing were
unavailable at any cost.
All of us in the industry were grateful for the help of the Nation.
And we all knew that the industry, like America, had been changed
forever. But none of us could have foreseen the severity and duration
of the crisis that faced airlines. Since 2001 there have been:
24 domestic Chapter 11 filings and 5 liquidations;
$35 billion in cumulative losses; and
154,000 airline industry employees laid off or terminated.
The severe impact of multiple shocks to the aviation industry
caused the industry to repeatedly come back to Congress for help on a
regular basis. While Congress did help, we also heard the message--and
appropriately so--that Federal support should be the exception, and not
the rule--and that it was time, as an industry, that we got our own
house in order. At America West--now US Airways--we took that message
to heart.
As a result, at America West, we re-doubled our efforts to lower
costs and improve our business plan. We simplified our fare structure
for the benefit of consumers by lowering many of our everyday walk-up
fares, eliminating Saturday-night stay requirements and reducing the
number of fare categories that we sold. Not only did we simplify those
areas where passengers interacted with the airline, we also internally
examined all our business processes and procedures. By eliminating
inefficiency and waste, we were able to further lower our costs.
We believed if we aggressively managed our costs and made things
easier and simpler for customers they would respond, and we would
return to profitability. Consumers responded favorably to our new
policies and pricing, so much so that by 2004, through the hard work of
all of our employees, we had turned around our airline and returned it
to profitability.
As we returned to profitability, we sought strategic opportunities
to strengthen our company for the longer term. In 2005, we were
presented with an opportunity to join with US Airways, a leading East
Coast carrier that was then facing great difficulty. Through its two
bankruptcies the carrier had made great strides in lowering its overall
cost structure, but given the inroads made by low-cost competitors in
its core markets, it was unclear that US Airways would ever emerge from
its second bankruptcy. We believed that a merger with US Airways
presented an opportunity to strengthen our own company and provide a
brighter future for the nearly 35,000 employees of US Airways and
America West.
Many experts questioned our strategy. We had named our merger with
US Airways ``Project Barbell.'' One industry analyst called it
``Project Dumbbell.'' A national newspaper featured a headline that
proclaimed ``America West Foolishly Bets the Farm.'' Yet, despite
negative press, we raised over $1.5 billion in equity and partner
financing--the most ever raised by a U.S. airline. I am proud to say
that for our employees, our shareholders, and our customers that
``foolish bet'' has paid off handsomely. Indeed, we posted a profit for
the first three quarters of 2006, and are one of the only network
carriers to forecast a profit for the fourth quarter. The front-line
employees of US Airways and America West who sacrificed so much to turn
around and then merge our companies will receive 2006 profit sharing
payments in March. In fact, year-to-date through September 2006, our
total accrual for profit sharing was $48 million. We fully anticipate
that amount to increase after we report our fourth quarter results next
week.
Since the merger, we have worked to instill our customer-focused
mantra across our larger, combined workforce. We have continued to
implement popular fare reductions in diverse markets such as Syracuse,
NY; Washington, D.C.; Huntsville, AL; Greensboro, NC; and Augusta, GA.
Most recently, we have lowered fares in Harrisburg, PA. In total, we
have lowered fares by as much as 83 percent on over 1,100 markets.
These fare reductions have proven beneficial to consumers and
communities, particularly so in smaller communities where they have
helped small airports retain their local traffic base, and kept local
travelers flying from their hometown airport, instead of driving to
other airports.
We are proud to have brought low fares to communities that have
never been served by an airline with a low-fare mindset. US Airways,
however, offers more than just low fares. We offer service to 234
destinations in the United States and 28 countries, including 19
European destinations with new service to Athens, Brussels and Zurich
starting this summer. We also offer first-class seating, a generous
frequent-flier program and the ability to connect to cities all over
the world through our various code sharing agreements.
What we don't offer is the old legacy airline mindset. After
September 11, we recognized the structural changes that were necessary
to survive. Our industry is continuing to evolve, but it is clear that
the days of high-fare, high-cost airlines are gone, and that low-cost
carriers are growing and thriving. At the same time, the low-cost
carrier business model of point-to-point flying is limited and cannot
serve all passengers, especially those who want to fly to international
destinations or the smallest of communities. We believe our hybrid
model, drawing upon the best of the traditional airline model and the
best of the low-cost model is the right plan for today and for
tomorrow. For price sensitive passengers, we offer low fares. For other
passengers who want enhanced frequent flier benefits or access to a
global network of destinations--we offer those as well. In a
deregulated industry, there is ample room for both point-to-point
carriers and healthy network carriers such as US Airways.
Financially, the new US Airways has been a success. Our stock
appreciated 45 percent in 2006, and we made over $400 million in
profits (excluding special items) in the first 9 months of 2006. This
has enabled us to lower our costs further by restructuring our debt to
more favorable terms, reducing credit card holdbacks and increasing
cash-flow. As I mentioned, we've set aside approximately $50 million in
profits, to date, to share with our outstanding frontline employees,
not management. Finally, one other significant financial accomplishment
was the complete and early repayment of both America West's and US
Airways' ATSB loans ahead of schedule, with interest.
Mr. Chairman, we are proud of our accomplishments, our employees,
and our airline in successfully navigating the challenging years since
2001. Despite naysayers and doubters at each and every critical
juncture, we have remained loyal to our beliefs that if we managed our
business well and gave customers what they wanted, our version of a
network carrier would be successful.
While we believe we have done well, we know we can't rest on our
laurels. We owe it to our shareholders and employees to constantly look
for ways to make our company even more competitive in order to face the
future and all that it may hold. With that in mind, we decided to
launch a public offer for Delta Air Lines on November 15, 2006, after
our private approaches were rebuffed. I would add that this transaction
is different than the norm, as Delta is in bankruptcy. In this
situation, it is Delta's creditors, not management or shareholders that
ultimately are responsible for deciding Delta's future.
One of the key reasons why we believe Delta is an attractive merger
partner is that Delta's bankruptcy provides an opportunity for Delta to
restructure and lower its costs. US Airways successfully did this in
its bankruptcies, and its lower cost structure is one of the reasons
for the success of the America West/US Airways merger. We believe this
success can be replicated and exceeded by a merger of Delta and US
Airways. Allow me to highlight some key metrics and commitments of our
proposal:
$1.65 billion in projected annual cost savings and
synergies;
No furloughs or layoffs of frontline employees of either US
Airways or Delta, a promise we made and kept in the US Airways/
America West merger;
All domestic airports that have US Airways or Delta service
today will be served by the new Delta after the merger;
The new Delta also will be one of the most financially
stable airlines in the industry. The company will be well-
financed to meet its current and long-term obligations, as well
as have a comfortable cash reserve to withstand industry
downturns; and
Finally, the new Delta will have a management team that
understands how to integrate two large, complex airlines. We
have been there before, and know we can do a great job with
Delta.
Some critics cynically dismiss this merger as an attempt to
generate a windfall for US Airways' shareholders and executives on the
backs of the sacrifices made by Delta's employees during the
bankruptcy. Such criticism misconstrues the philosophy that guides the
US Airways' management team and Board of Directors. Our management team
is not made up of financiers and other ``Wall Street'' types who are
here for the deal and then move on to some other transaction with no
regard for the employees. Rather, we are all airline people. Most
members of the senior management team have 10 years or more running
airlines. Put simply, we love this industry. That is why we are trying
to build a network airline that can compete successfully against all
carriers: low-cost, traditional, and international mega-carriers. In
order to do that, we need to build an airline that is strong
financially and able to withstand the next external shock or economic
down-cycle that hits our industry:
For consumers this means their favorite flights and services
are there for the long term, as are their frequent flier miles;
For communities, it means a partner and corporate citizen
that also is in the community for the long term, with service
stability and certainty; and
For our employees, we want a company where their jobs and
benefits are stable not just during the industry peaks, but
also during the inevitable difficult times that are a fact of
life in our industry.
Since this Committee last reviewed an airline merger some 6 years
ago, a lot has changed in the airline industry. Six years ago, although
Southwest had a national presence, airlines such as JetBlue, AirTran
and Frontier were scarcely known beyond their home bases. Since the
industry began to emerge from the depths of the immediate post-9/11
time period, it is low-cost carriers Southwest, JetBlue and AirTran
that have led the industry, with both profits and growth. A few
examples of this growth include:
Since 2004, Southwest has started service in 4 major airline
hub markets--Denver, Philadelphia and Pittsburgh and Washington
Dulles, adding 126 new departures in these markets;
JetBlue added 16 new markets in 2006 and has already
announced new service to San Francisco this year. In addition,
JetBlue serves 23 markets from Boston, having only started
service there in 2004; and
AirTran has grown both internally through the delivery of at
least one airplane per month since 2005, and also is seeking to
grow through an acquisition of Midwest Airlines.
Passengers have responded. Six years ago, low-cost carriers
accounted for a small fraction of the market. Today these carriers
account for approximately 30 percent of all domestic traffic and an
even larger share along the Eastern Seaboard. As traditional carriers
have redeployed aircraft from domestic routes to international routes,
new entrants have moved to take advantage of the opportunities created.
Indeed, these new entrant carriers are no longer afraid to compete
head-to-head with traditional carriers. For proof of these carriers'
popularity and strength one need only look at Southwest's entry into
markets such as Baltimore-Detroit, Philadelphia-Columbus, and Denver-
Chicago, or the fact that JetBlue offers a competing shuttle service
within the Northeast as an alternative to the Shuttle flights operated
by US Airways and Delta.
The low-cost carriers are continuing to grow. Today traditional
airlines are only now looking at re-fleeting their mainline operations,
with deliveries largely pushed out beyond 2010. By contrast, new
entrant carriers have placed firm orders for almost 335 aircraft over
the next 5 years. These new entrants and low-cost carriers provide
head-to-head competition, for they are the price leaders in city pairs
where they compete and they influence pricing in nearby markets. Our
experience has been that passengers will drive 60, 90 or even 120
minutes for a lower fare. Today, we face low-cost carrier pricing from
airlines such as Southwest, JetBlue and AirTran, whose combined market
share currently approaches one-third of the domestic market. After the
merger, 81 percent of US Airways/Delta passengers will have low-cost
carrier competition at their local airports. An additional 13 percent
will have access to such service within 100 miles.
We fully expect that, for example, by lowering fares in Harrisburg,
PA, US Airways will recapture traffic that has been driving from
Central Pennsylvania to Baltimore for lower fares. This phenomenon is
repeated in communities big and small throughout the United States. The
old US Airways would lose money on every ticket sold were it to have
lowered fares in markets where it did not directly face low-cost
competition, in places such as Harrisburg, PA, Wilmington, NC or
Huntsville, AL. In sharp contrast, the new US Airways has a cost
structure that permits it to lower fares and remain profitable, and
indeed, we have to in order to compete with the growing low-cost
carriers.
We believe that through our proposed merger we have the same
potential to benefit consumers that we did in the US Airways/America
West merger. With the ability to lower costs, gain efficiencies and
adjust flying to better align demand and capacity, we believe we can
lower fares in dozens of new markets and communities, just as we are
doing at US Airways today. Moreover, passengers will benefit from the
ability to get to more destinations via more routings; it is far more
likely that thanks to the new Delta more passengers will be able to get
to their destination at a time convenient for them and at a price that
is reasonable, than would be possible under either stand-alone Delta or
US Airways.
Because lots of misinformation and confusion has surrounded our bid
for Delta, we want to provide you with the clear facts:
1. Every U.S. city currently served by either airline will
continue to have service from the new company.
2. On the labor front, we have made several commitments to the
employees and unions of US Airways and Delta. We have committed
to moving to the highest common denominator on labor costs for
all employee groups. We have committed to not furlough
frontline employees of either US Airways or Delta. Instead, we
plan to manage the mainline operational employee reductions
through attrition and other voluntary means, just as we did
successfully in the US Airways/America West merger. We have
committed to allowing Delta's employees, the vast majority of
whom are not represented by a union, to decide for themselves
the question of union representation, and to do so without
management opposition. And we have committed to honoring the
terms of all labor agreements--including the Delta pilot
agreement. Finally, and importantly, we will not close any hubs
in either the current Delta or US Airways' networks.
3. We expect that at the appropriate time the Department of
Justice (DOJ) will fully investigate the merger. We plan to
work cooperatively with DOJ during the investigation and have
begun to do so already. We spent a lot of time prior to making
our bid for Delta considering the many potential antitrust
issues, and we believe that our transaction is beneficial for
consumers, communities and a major step toward building a
company that will provide stability for its employees over the
long-term.
4. This merger is in the best interest of consumers. Our
synergies are not predicated on raising fares. They are
predicated on gaining efficiencies by cutting duplicative costs
in locations served today by both US and Delta. If we were
planning, as our critics claim, to gain synergies by raising
fares, that plan would fail in the long run, because low-cost
carriers would come in and undercut the higher fares. The
industry is brutally competitive today and will remain so even
after this merger. Our model is based on a sustainable plan to
serve markets at a lower cost, and thereby be able to compete
with low-cost carriers on price.
The decisions that we make will be decisions that we believe are in
the best interests of the employees and shareholders of the new Delta
and the consumers and communities we will serve. But, they are by no
means zero-sum decisions. New entrants and low-cost carriers have
hundreds of aircraft deliveries scheduled for the coming months and
years. These carriers can and will quickly capitalize on new market or
growth opportunities. Indeed, AirTran, JetBlue and Southwest have
publicly expressed interest in acquiring divested assets as a result of
the merger. In the current environment, the loss of a carrier in a
market or a drop in frequencies does not equal a permanent loss of
competition. What drives airline expansion decisions is demand, and
demand is driven by continued economic growth and expansion. As the
national economy continues to grow and regional economies grow even
faster, demand for air travel will continue to encourage new market
entry by traditional and low-cost carriers alike, as well as by new
start-up airlines with business plans that have not yet been born.
Our industry stands at a crossroads. We can continue down the
current path of boom and bust uncertainty, or we can chart a new
course. The question that legislators and policymakers face is simple;
shall we embrace change to better serve our customers, employees and
communities, or are we content with a future of continued financial
uncertainty and government bailouts? We believe--and our experience has
proven--that we have to break with the failed policies of the past in
order to provide a more sustainable future for all stakeholders.
Whether or not our industry is on the cusp of a major consolidation
period, I don't know. What I do know is that our industry remains
extremely fragmented with substantial levels of excess capacity. After
the merger, and the announced capacity reductions, our industry will
remain highly-competitive, and consumers will continue to enjoy high-
service levels and low fares. We have put forth a fair and equitable
proposal, which we have enhanced to make even more compelling, to merge
with Delta while the carrier is still in bankruptcy, and to make the
combination of Delta and US Airways into a stronger, more competitive
carrier than either carrier can become on its own. Put simply, in this
merger, 1+1 most definitely equals 3, just as it did with our prior
merger.
While being a good corporate citizen is important to US Airways,
and we know to Delta as well, the most important group of stakeholders
are our customers and the frontline employees. Delta's historical
reputation for customer service was not developed in the boardroom or
the executive offices. It is earned every day on every flight by one of
the most dedicated and professional workforces in the industry. I
pledge to you today that we will not furlough any frontline employees
of Delta or US Airways as part of this merger. We will align the work
group cost structures between current US Airways and Delta employees,
and going forward we will move to the higher cost scale. In fact, the
day after the merger closes Delta employees won't notice any changes--
not even a change to the name of the airline. Over time, we will seek
to take the best practices from either Delta or US Airways and
standardize them across the new combined airline. Our ultimate goal is
to build a stronger and more secure future for all of our stakeholders.
Mr. Chairman, Senator Stevens, thank you for this opportunity to
visit with you today. I look forward to answering any questions the
Committee might have.
The Chairman. Mr. Chairman? May I interrupt?
Senator Rockefeller. Absolutely.
The Chairman. I note that a quorum is present such--may I
temporarily recess the aviation hearing, and return to
Executive Session and adopt the Committee rules?
[Recess of hearing 10:35 a.m.]
[Hearing re-convened.]
Senator Rockefeller. Our next witness will be Mr. Gerry
Grinstein. And we're very happy to have you here, sir, and we
look forward to your testimony.
STATEMENT OF GERALD GRINSTEIN,
CHIEF EXCUTIVE OFFICER, DELTA AIRLINES
Mr. Grinstein. The technology has changed dramatically
since I was here, too.
[Laughter.]
Mr. Grinstein. Thank you.
I appreciate the opportunity to discuss my views about the
impact of consolidation on the airline industry, generally, and
US Airways hostile takeover attempt of Delta, specifically.
In case there's any question of the hostile nature of it,
take a look behind me at all of the people from Delta who have
come here today to let you know by their presence how strongly
they feel about this.
Congress is right to carefully examine this important
public policy issue, because the decisions made now will effect
the competitive landscape for years to come. Your decisions on
consolidation, including any decisions made about the proposed
US Airways/Delta merger, will impact consumers and communities
across the country. If this deal is allowed to go forward, it
most certainly will trigger broad industry consolidation, and
the likely outcome will leave US Airways/Delta, the weakest of
the carriers, with little West Coast and Asia presence, and a
staggering debt load of $24 billion.
In many ways, the market has already helped restructure the
airline industry, so it is not clear to me that consolidation
is inevitable. But, if consolidation does happen, it should
happen in a way that does not unfairly penalize employees, does
not harm consumers and communities, and provides long-term
value for all stakeholders.
To ensure this, each transaction should be evaluated on its
own merits. A US Airways/Delta merger, a merger that is even
more anti-competitive than the proposed United/US Air merger
rejected in 2001 by the Department of Justice after 18 months
of hearing, is the poster child of the worst kind of merger,
and on its merits, should be rejected.
Of course we take seriously our fiduciary duty to maximize
the value of our company for our creditors. Some of our work in
this area has generated rumors and speculation. One such is
that Delta is negotiating with Northwest. Let me be very clear
about that--we are not negotiating any such deal with
Northwest.
Importantly, the US Airways deal would reverse the hard
work and remarkable progress Delta people have made
restructuring our airline. In just 16 short months since filing
for Chapter 11, Delta is poised to emerge from bankruptcy this
spring, as a strong, fiercely competitive, and stand-alone
airline.
Using the bankruptcy process the right way, Delta people
have transformed our company's business model, and will soon
realize a healthy, financially viable company with the best
balance sheet and the lowest cost structure among the network
carriers. We've reduced our debt load from $17 billion to a
projected $7.5 billion. We've eliminated $2 billion in annual
costs. We've generated a sound liquidity position, and our
business plan calls for profitability, and we will attain that.
We've right-sized our domestic network, adding more
profitable international markets. Delta provides service to 209
domestic and 95 foreign destinations. We have undertaken the
largest international expansion in history. We are now the
number one U.S. carrier across the Atlantic.
As a real testament to Delta people during this time of
upheaval and uncertainty, the company's operating performance
and customer satisfaction scores have actually improved,
earning Delta the number two spot, barely behind the number
one, in the J.D. Powers survey for 2006. As a result of Delta's
people's efforts, our company will emerge as a formidable
global competitor with an estimated consolidated equity value
of between $9.4 billion and $12 billion--and, as I noted
before, one of the strongest balance sheets in the industry.
So, unlike US Airways' situation before it was acquired by
America West, Delta does not need to be acquired to be saved--
nothing could be further from the truth. It is clear that what
Delta employees have worked and sacrificed together to realize
is achievable and well in sight. This is the moment they
deserve, and this is the moment US Airways' merger proposal
would unfairly and unnecessarily take away from them. Delta
people deserve to determine their own destiny.
With me today is Captain Lee Moak, Chairman of the Delta
chapter of ALPA, the union representing 6,500 pilots. And, by
the way, Delta has called all of the pilots off of its furlough
list, so we are--now have grown to--everyone has been offered a
position. We also have members of Delta's Board Council, the
group representing nearly 40,000 Delta employees, and Cathy
Cone, Chairman of Delta's Retiree Committee, representing more
than 36,000 retired Delta people and their families. They are
steadfastly united in their opposition to the US Airways deal,
and let me note that ALPA and the retirees are two of the
largest creditors of Delta.
Among the many issues of concern--justifiably worried
about, is the estimated 10,000 jobs that will likely be
eliminated due to the 10 percent capacity reduction US Airways
has said will take place as a result of a merger with Delta.
Each has a prepared statement for the Committee, and I would
ask that those be included in the record, if that could be
done.
Senator Rockefeller. And they will be included.
Mr. Grinstein. Thank you.
The US Airways/Delta merger also must be rejected and
opposed because it is blatantly anti-competitive. As the
overlapping route chart on the easel here graphically shows--
and, by the way, that's US Airways' chart--Delta and US Airways
compete extensively up and down the Eastern Seaboard, and in
routes to many western states. They are, in fact, our largest
competitor, and I believe we are their largest.
Our hubs are natural competitors, due to their geographic
proximity. We jokingly refer to them as the ``three twins and
the triplets.'' My written submission has substantial analysis
and data on that, and I won't go into it now at the moment.
But, this merger will create a near-monopoly with over 90
percent passenger share in more than 1,500 markets affecting
over 8.5 million passengers. And there are nearly 4,000 city
markets where 33 million passengers will see a significant
reduction in competitive choice. Small communities will
certainly suffer.
With less competition, fares will increase. Again, US
Airways denies this, but one only has to look at the track
record. Since its merger with America West, for every market
where US Airways has lowered fares, the average fares increased
in four times as many markets. Maybe that's why tens of
thousands of people from all 50 states and 105 countries have
joined together in the rallying cry, ``Keep Delta my Delta.''
This deal is bad for Delta people, bad for the traveling
public, and bad for small communities. And this hostile
takeover is nothing more than a company's ill-conceived plan to
eliminate its principal competitor, and it should be rejected.
Thank you very much, I'm sorry I went over the time.
Senator Rockefeller. Don't be.
[The prepared statement of Mr. Grinstein follows:]
Prepared Statement of Gerald Grinstein,
Chief Executive Officer, Delta Air Lines
Mr. Chairman and Members of the Commerce Committee, we appreciate
the opportunity to testify today about the potential impact of airline
mergers and consolidation. Obviously, the immediate issue of the US
Airways hostile takeover attempt is of serious concern to Delta and
104,000 active and retired Delta people--all of whom have participated
in this company's remarkable financial turnaround and care deeply about
its future. Clearly, if this transaction occurs, the impact on the
industry will extend well beyond our airline. We are grateful to the
Committee for its vigilance and willingness to examine this proposed
take over more closely.
A primary reason for Congress to examine the competitive impact of
this deal is that it will trigger broad industry consolidation. Almost
every day brings a new media report on potential mergers in the airline
industry, most of which are stated openly as direct reactions to US
Airways' bid. And if this anti-competitive proposed merger gains
approval despite its substantial adverse impacts on competition,
consumers, communities, and employees, virtually any other airline
merger would likely pass regulatory muster. In our view, the likely
outcome of follow-on consolidation would be to leave the combined Delta
and US Airways as the weakest carrier, with little West Coast and Asian
presence and a staggering debt load.
We believe US Airways' unsolicited and anticompetitive proposal
does not meet antitrust standards, and would harm employees, consumers
and communities. It would create a much weaker combined carrier that
would threaten the future stability of our Nation's air transportation
industry. It would reverse the remarkable progress Delta has made. Let
me be clear--this is a hostile takeover bid; not a consensual merger.
1. Delta Is Poised to Emerge From Bankruptcy as a Strong Airline
Delta has made enormous progress over the past 16 months in
transforming the airline into a strong, healthy, and vibrant
competitor. In September 2005, faced with unrelenting competitive and
economic pressures and a staggering $17 billion debt load, Delta filed
for Chapter 11 protection. While many companies use the bankruptcy
process simply to shore up their balance sheet and reduce debt, our
company undertook a top-to-bottom re-engineering that touched every
aspect of how we do business. We are using the bankruptcy process
appropriately: to improve and strengthen our airline.
As they have throughout this company's 76-year history, Delta
people stepped up to these challenges. In every area of our airline, at
every level, they participated fully in the long, demanding
restructuring process. The result has been a remarkable turnaround with
accomplishments that include:
Reduced costs and improved unit revenue, positioning the
airline to emerge from Chapter 11 with the lowest unit costs of
any network carrier. Delta has improved productivity and
eliminated approximately $2 billion in annual costs.
A stronger, more balanced network as a result of rapid
expansion of international routes with the highest profit
potential. In the past year Delta has undertaken the largest
international expansion in its history, and we are now #1 in
the transatlantic market.
Significantly reduced net debt from $17 billion to an
anticipated $7.5 billion by the end of 2007.
Improved liquidity position and profitability, totaling $2.7
billion in cash, cash equivalents and short-term investments as
of November 30, 2006. Delta will emerge with the strongest
balance sheet among network airlines.
An expected consolidated equity value on exiting Chapter 11
estimated between $9.4 billion and $12 billion--compared to
essentially zero equity value only 16 months ago. US Airways'
unsolicited offer clearly recognizes the value Delta people
have helped create.
Importantly, customer service standards and operational performance
were not sacrificed to achieve these gains. Passenger ratings instead
increased, with the prestigious J.D. Power and Associates customer
satisfaction survey for 2006 ranking Delta as one of the top two
domestic network airlines.
Last month, Delta filed its Plan of Reorganization with the
bankruptcy court. We are now poised to exit bankruptcy this spring as
one of the best positioned airlines in the country based on financial
strength, profit potential, and a cost structure among the lowest of
any traditional network carrier. Our global network provides access to
more than 300 U.S. destinations and 52 foreign countries. The stage is
set for Delta to emerge as a powerful, competitive force to be reckoned
with--unless US Airways' takeover bid is allowed to derail our momentum
and jeopardize our hard-won gains.
Given Delta's restored financial and competitive strength, this
deal is not at all comparable to America West's acquisition of US
Airways out of bankruptcy. That purchase was a rescue mission of a
failing carrier that was struggling to avoid liquidation.
Compared to our stand-alone plan for reorganization then, the US
Airways bid produces inferior value for Delta's stakeholders. US
Airways' offer is structurally flawed and raises overwhelming
regulatory and labor issues that would weaken Delta going forward.
Among the many examples is fleet efficiency. Before filing for
bankruptcy, Delta had 14 fleet types. Today, we have eight, all
manufactured by Boeing (Exhibit A).
Although US Airways recently raised its bid, which Delta's Board
plans to review shortly, management's preliminary reaction is that the
revised proposal does not address the serious flaws our analysis
identified in the original bid.
So, Delta remains focused on emerging from Chapter 11 this spring.
A successful emergence requires a complex and highly coordinated series
of events and resources. Timing is crucial, especially since many
essential elements such as financing arrangements are outside Delta's
control. If US Airways' proposal is not stopped now, the regulatory and
bankruptcy review process could take as much as a year, even if it is
rejected eventually based on antitrust and anticompetitive grounds.
Leaving Delta in bankruptcy limbo creates risks for all stakeholders,
including creditors, customers, employees, and vendors--a situation
that is simply unnecessary.
Of course, we take seriously our fiduciary duty to maximize the
value of our company for our creditors. Some of our work in this area
has generated rumors and speculation. One such rumor is that Delta is
negotiating a merger or similar deal with Northwest. One point we want
to make very clear: We are not negotiating any such deal with
Northwest. However, in the face of US Airways' hostile takeover bid,
our Official Creditors Committee asked us to help gather information
about potential strategic alternatives from other airlines, including
Northwest. To that end, we recently retained an investment banker to
obtain that information, a far cry from negotiating for a merger. We
are compiling this information, but there has not been any negotiation
regarding a merger or similar deal with Northwest or any other airline.
2. Delta People Deserve To Determine Their Own Destiny
When Delta entered Chapter 11, the people of this airline came
together and determined to do whatever was necessary to save their
company. They worked hard, long hours through months that included
first terrible hurricanes in Florida and then the devastation of
Katrina. For many at Delta, those crises affected not only their jobs,
but also their families, homes and friends. They implemented the
transformation of our airline, from restructuring hubs to the largest
international expansion in our history. They watched as co-workers and
friends left as part of regrettable but necessary job reductions. When
the cleaning of aircraft interiors didn't meet their standards, they
volunteered their own time on overnight shifts where people from
throughout the company showed up to scrape gum off seat bottoms and
sweep the jetways. They sacrificed financially, too, from pay cuts to
reductions in benefits, from health insurance to vacation time, to the
loss of any equity value their years with Delta had earned them.
They tirelessly developed, implemented, and refined the changes
required to rebuild the airline's financial position, brand, and
customer service--believing all the while they were restoring not only
Delta's future, but their own. And by all rights, it should be. The
exit from bankruptcy our company is poised to make is what Delta
employees have worked and sacrificed together to achieve. This is the
moment they deserve. And this is the moment US Airways' merger proposal
would unfairly take away from them. From the lost opportunity to share
in the benefits of the equity value their blood, sweat and tears have
created to the likely loss of an estimated 10,000 Delta jobs, Delta
people are understandably and deeply concerned.
As soon as US Airways' hostile takeover bid was made public, Delta
employees and retirees erupted in an overwhelming grassroots
demonstration of opposition to the proposed merger, followed by an
outpouring of support for Delta's plan of reorganization. The Delta
Board Council, a group representing Delta employees in various
workgroups, quickly produced tens of thousands of buttons, wristbands
and T-shirts bearing a ``Keep Delta My Delta'' message. The result has
been a nationwide campaign with a website that has so far collected
over 100,000 signatures on petitions opposing the proposed merger, and
generated more than 155,000 letters to Capitol Hill.
The Delta unit of the Air Line Pilots Association, which represents
our airline's pilots, also has voiced its strenuous opposition. They
have stated clearly and publicly that the foundation of the US Airways
proposal--including the 10 percent capacity reduction and related job
losses--cannot be accomplished consistent with the requirements of the
Delta-ALPA collective bargaining agreement. Delta pilot leadership has
openly stated its commitment to do everything possible to stop this
deal, allocating $15 million toward that effort.
Delta people are united in their strong opposition to US Airways'
proposal, representing as it does the worst possible combination with
the most negative impact on virtually all constituencies.
3. US Airways' Proposal Fails Absolutely To Meet Antitrust Standards
and Would Reduce Competition and Harm Consumers
US Airways' principle goal in its hostile takeover attempt is to
eliminate its key competitor. Delta is the airline with which US
Airways' network overlaps most, with the highest number of overlapping
markets and hubs. No merger in the history of this industry has ever
been approved by the Department of Justice with anywhere near this
degree of network redundancy. That's why US Airways believes this will
create cost synergies. This merger is being proposed to cut service,
shrink hubs and increase prices.
US Airways' proposal to merge with Delta will harm competition. In
a pro-competitive merger, the two airlines' routes do not overlap
excessively; they are complementary. Joining complementary networks can
enhance competition and create consumer benefits that result in lower
prices and increased service options. Such mergers can provide benefits
to consumers, communities and employees, as well as creditors,
shareholders, and other stakeholders.
By contrast, US Airways' proposed takeover of Delta is the poster
child of an anticompetitive merger. Delta and US Airways are each
other's most direct and pervasive competitors. The combined networks
almost totally overlap. If a picture is worth a thousand words, the
full story is shown in the map marked (Exhibit B).
The Delta/Western merger in 1987 illustrates a pro-competitive
merger, combining two complementary networks with very few overlaps.
Delta's network strength in the South and East, joined with Western's
network strength in the West, did not reduce competition. Instead, an
expanded network of services provided a platform for growth and
significant additional value for customers, communities and
stockholders.
The America West/US Airways merger in 2005 arguably could be
considered another example of a complementary merger. Combining the two
geographically distinct route systems added network strength and scope
without reducing competition--an important distinction.
Mr. Chairman, time will tell whether the US Airways/America West
merger will be successful or not; it is not yet complete. US Airways
has made numerous promises and commitments on jobs, fares, and
services, based on their experience in the America West/US Airways
combination. But one thing is clear: in terms of size, scope, overlap
and competitive redundancy, it is totally absurd to compare that merger
to the proposed merger between Delta and US Airways.
Impact on Consumers and Communities
US Airways and Delta compete directly in thousands of markets up
and down the Eastern Seaboard and in many transcontinental markets from
western states, to the East, South and Southeast. That's because all of
our hubs are in close geographic proximity to US Airways' hubs, as
illustrated in (Exhibit C).
Delta's Atlanta hub competes against US Airways' nearby
Charlotte hub.
Delta's Cincinnati hub competes against US Airways'
Pittsburgh hub.
Delta's JFK hub competes against US Airways' Philadelphia
hub.
Delta's Salt Lake City hub competes against US Airways' hubs
at Phoenix and Las Vegas.
Each of these hubs draws traffic from smaller cities, gathering
enough passengers to make connecting service to other smaller markets--
or to other big markets or even international destinations--
sufficiently profitable to continue operating. For example, a customer
traveling today between Tallahassee, Florida and Boston can choose a
connection through Atlanta on Delta or through Charlotte on US Airways.
If a merger were to occur, the merged carrier would significantly down-
size service at one or more of the competing hubs--with Charlotte
almost certainly losing out in this example.
While US Airways has said no city would be dropped from the
combined carrier's network, they also have admitted that the claimed
cost synergies of the deal require at least a 10 percent cut in
capacity. While we believe this number is understated, even a 10
percent capacity reduction requires elimination of flights and jobs
equivalent to about 200 airplanes. Where would those cuts occur? At
hubs, most likely leaving only one of the current two or three
operating as a major hub, and in communities served by those hubs.
Cuts in competition are expected to:
Create a near monopoly--more than 90 percent passenger
share--in more that 1,500 markets affecting 8.5 million
passengers annually.
Reduce competition on 31 overlapping nonstop markets,
impacting more than 11 million annual passengers and creating
12 monopoly markets.
Significantly reduce the number of competitors in almost
4,000 markets, affecting approximately 33 million customers
each year.
US Airways contends that concerns about increased fares and service
reductions are unfounded. Their rationale is that so-called low-cost
carriers, or LCCs, such as Southwest or AirTran and other airlines will
fill any service or competition gaps their proposed merger might
create--a speculative claim at best.
The primary loss of competition and service will be in the city
pairs currently connected by one-stop service operating over the two
airlines' competing, overlapping hubs, as noted earlier. But LCCs are
highly unlikely to replace the loss of a competing hub at Charlotte,
Pittsburgh, Cincinnati, or Salt Lake City, for two primary reasons.
First, unlike traditional network carriers such as Delta and US
Airways, the LCC business model is different from the hub-and-spoke
system of gathering travelers from small markets into hubs where they
connect to their destination. Instead, these carriers have typically
cherry-picked markets with enough passengers to fly non-stop, without
connecting through a hub. Since 2000, they have expanded primarily into
larger markets with over 7 million annual passengers.
Second, the rapid LCC expansion of recent years has slowed
considerably in the face of an airline industry which, in order to
survive, has become far more efficient and competitive. As recent
reports from JetBlue, AirTran, and others indicate, profits are
slowing--and along with them, so are orders for the new jets required
to fuel their previous level of growth.
After American acquired TWA in 2001, TWA's major hub at St. Louis,
which competed directly with American's hubs at Chicago-O'Hare and
Dallas-Ft. Worth, was closed. In the interim years, even during the
period when LCCs still were expanding rapidly, no carrier has stepped
in to replace the lost hub service.
Small Communities Will Suffer Significant Loss of Service and Economic
Benefits
The major loser in this proposed takeover is small communities. \1\
US Airways' plan is to cut capacity in connecting markets to achieve
cost efficiencies. This will be devastating to dozens of small cities
because both Delta's and US Airways' networks serve a greater portion
of these markets than the other legacy or network carrier. For example,
Delta serves 144 small cities.
---------------------------------------------------------------------------
\1\ ``Small communities'' as defined by the FAA are small or non-
hub airports.
---------------------------------------------------------------------------
These two carriers are often the only competitors in these markets,
so competition will suffer and consumers will have fewer choices as a
result. For example, the combined carrier would operate:
More than 90 percent of all service at Greenbrier/Lewisburg,
Huntington/Ashland, and Charleston, West Virginia;
60 percent of all seats at Portland and Bangor, Maine,
including more than 90 percent control in 10 markets served
from those cities; and
More than 90 percent of flights at Florence and Hilton Head
and 60 percent to 70 percent at Myrtle Beach, Charleston,
Colombia; and Greensville/Spartanburg--including more than a 90
percent monopoly in 30 to 40 markets.
A merger between Delta and US Airways would make the combined
carrier the largest in 127 small markets, as defined by the Federal
Aviation Administration (Exhibit D).
Once again, US Airways' claim that LCCs will fill the void belie
the facts. Of the 127 small cities where a combined US Airways/Delta
carrier would dominate, only 14 currently are served by LCCs (Exhibit
E). Business travelers typically weigh the price differential between
their time and higher fares and decide not to drive to airports where
LCCs operate when local service is offered.
Fares Are Unlikely to Fall as Competition Is Reduced
US Airways also has said that as a ``price maverick'' and a ``price
leader,'' consumers should not be concerned that it would increase
fares even if the merger were allowed, despite a new-found domination
in thousands of markets. The carrier actually claims to have reduced
fares since the US Airways/America West merger in 2005.
The facts paint a different picture. US Airways is a price leader,
but in an upward, not downward direction. In reality, the airline has
increased the average price paid by consumers in four times as many
markets as it has decreased them. US Airways claims that it has reduced
fares in 1,000 cities, but there are nearly 6,600 cities where
consumers are paying higher fares than they were before US Airways
merger with America West (Exhibit F). These increases were attained
through a combination of actual fare increases as well as restrictions
placed on the availability of lower fares. Again, it is important to
remember that the America West merger, unlike the proposed US Airways/
Delta merger, was not about eliminating your primary competitor.
Also, US Airways has given few specifics about how it might reduce
capacity by 10 percent while maintaining, much less increasing, current
revenues--unless, of course, the combined carrier raises fares. All
indications--and all past evidence--point to price increases for
consumers should this merger go forward.
4. US Airways' Proposed Takeover of Delta Would Have Major Adverse
Impact on Washington-Reagan National and New York's LaGuardia
Airports
The potential anticompetitive impact of US Airways' takeover
attempt also would extend to Washington National and New York-LaGuardia
airports. The combined carrier would overwhelming dominate at these
unique airports with restricted entry due to slot controls imposed by
the Federal Aviation Administration and limited gates (Exhibit G). For
example:
At Washington National, a merged US Airways/Delta would
operate nearly four times more slots as its next largest
competitor, even after divesting one of the Shuttles. Contrary
to US Airways claims, divestiture of one of the Shuttles won't
solve the problem.
At New York-LaGuardia, the combined carrier would operate
almost twice as many slots as the next largest competitor, even
after divestiture of one of the Shuttles.
The two carriers also would control 38 percent of the gates
at LaGuardia and 46 percent of the gates at Reagan Washington
National.
Delta and US Airways are currently the only carriers with
enough slots to serve small communities from LaGuardia and
Washington National. Those services would be reduced, if not
eliminated entirely, should US Airways' proposal be allowed to
occur because additional slots and gates would have to be
divested to meet DOJ approval (if it could be met at all), and
the new carriers would not be able to serve those small
communities with their smaller portfolios of divestiture
obtained slots at those airports (Exhibit H).
5. The Proposed Merger Would Make Delta a Weaker and Less Competitive
Carrier
Despite Delta's massive restructuring and incredible progress since
September 2005, our airline will end up as a weaker, less competitive
company if US Airways is allowed to proceed with its take-over.
The combined company would have a staggering debt burden of $24
billion--even higher than Delta's debt when it entered Chapter 11--and
far higher than the $7.5 billion projected for an independent, stand-
alone Delta, following our exit from bankruptcy this spring. The size
of debt does matter in the airline industry. A mountainous debt load
like that proposed by US Airways would place the merged US Airways/
Delta one crisis away from financial collapse.
The combined carrier would have no significant presence in Asia and
the West Coast. It would be competing against carriers with far more
extensive global networks. It would be the weakest and least efficient
of the major carriers when, not if, follow-on mergers occurred.
A combined carrier would face significant employee integration
problems. US Airways is far from completing the labor integration made
necessary by its merger with America West. To add more then 45,000
Delta professionals to the mix, all of whom are vehemently opposed to
this merger, is a recipe for disaster. The Delta pilots have publicly
stated that US Airways' plans for reducing capacity would violate their
contract. Dissatisfied Delta people likely will see their hard-earned
gains disappear. The traveling public will likely see service and
operational performance declines. All of this will disrupt Delta
people's lives as well as the service received by the traveling public.
Employee integration would be further complicated by pension
issues. Delta and Delta people joined together to minimize cuts to
their health programs, and also, with the help of Congress, to preserve
the already-earned pension benefits of 91,000 Delta employees and
retirees. US Airways, on the other hand, turned all of its employees'
pension plans over to the Pension Benefit Guaranty Corporation, or
PBGC, with a liability of $4.8 billion.
Yet another concern in a service industry where employee engagement
is crucial would be the pending reduction of an estimated 10,000 jobs,
though US Airways denies that such job reductions would occur. In
reality, the number of employees employed by US Airways/America West at
the time of the merger was 43,000--that number has fallen by 8,000 to
the current figure of 35,000. The simple fact is that the combined US
Airways and Delta will not be able to sustain as many jobs as the two
companies do now. Regardless of how the process is defined, eliminating
10 percent capacity across the system, consolidating operations at
airport facilities, and consolidating administrative and management
staff will lead to significant job reductions, despite US Airways'
assertions to the contrary.
Summary
The central question for this Committee to consider is which is
better for consumers, the hundreds of communities served by Delta, and
the employees whose blood, sweat and tears have earned them the right
to participate in Delta's success, as well as Delta's creditors and
other stakeholders?
To have Delta emerge as a strong, stand-alone competitive
force?
Or to allow US Airways to merge with Delta, by far its
largest competitive rival, thus reducing competition in
thousands of markets; eliminating service, especially to
smaller communities; eliminating 10,000 jobs; and creating an
airline with a precariously high debt load?
And also ask, is this what the people of Delta Air Lines deserve
for all their hard work?
Clearly, Delta would be much weaker financially and competitively
if this takeover bid were to succeed. All Delta stakeholders and the
public will benefit from a stand alone, independent Delta.
Again, our company sincerely appreciates the opportunity to submit
this testimony to the Committee and we will be happy to answer any
questions you might have.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Rockefeller. Thank you, Mr. Grinstein, very much.
Mr. Grinstein. Thank you.
Senator Rockefeller. And now we call on Mr. Robert Roach,
Jr., General Vice President of Transportation, The
International Association of Machinists and Aerospace Workers.
STATEMENT OF ROBERT ROACH, JR., GENERAL VICE
PRESIDENT OF TRANSPORTATION, THE INTERNATIONAL
ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS
Mr. Roach. Thank you, Mr. Chairman, Mr. Vice Chairman, for
the opportunity to speak to you on behalf of the Machinists
Union throughout North America.
My name is Robert Roach, Jr., I'm General Vice President of
the International Association of Machinists, and I'm appearing
on behalf of the International President Robert Thomas
Buffenbarger.
The Machinist Union is the largest airline union in North
America. We represent more than 100,000 airline employees
working in every classification, including flight attendants,
ramp service workers, mechanics, and public contact employees.
And I've been privileged to come before this Committee on two
previous occasions since 9/11, and I thank you for the
invitation this week.
The history since 9/11, the last 6 years, have been the
most turbulent years in airline history, with bankruptcy after
bankruptcy, and employees being forced to take pay cuts,
benefits reductions and have lost billions and billions of
dollars worth of pensions that were promised to them.
The next step appears to be consolidation. However,
consolidation brings with it very difficult tasks--merges,
hubs, routes, integration of aircraft, a maintenance program,
you're fixing competition, and consumer pricing are very few of
the issues that must be resolved.
The most important issue that must be resolved is the
integration of the workforce. That's one of the biggest
challenges confronting an airline merger.
The failed US Airways/United merger cost United Airlines
hundreds of millions of dollars, which could have been used to
avoid bankruptcy, as they assigned over 500 management
personnel to work on that particular merger. We had done a
study on that particular merger, and we saw that they did not
have a plan to integrate the maintenance program, integrate the
employees, and we advised them of such, and we opposed that
merger. However, we believe that had they not gone down that
road for 18 months, that $500 million would have been in the
coffers of United Airlines, maybe our pensions would have been
saved, and maybe they would not have gone into bankruptcy.
Another impact on the airline industry was the American
Airlines/TWA merger, in which TWA employees were promised jobs
at American Airlines. Subsequent to 9/11, the overwhelming
majority of those employees are gone--on furlough, or have been
forced to retire prematurely. Those employees now, the flight
attendants, are losing their recall rights, the flight
attendants are losing their recall rights, and will not have
any other jobs in the airline industry, and again, the loss of
pensions.
The US Airways proposed merger with Delta Air Lines--I've
been asked on numerous occasions, Can it work? Will it work? Do
you support it? Don't you support it? And my answer's been very
clear--it's a very difficult job to merge an airline, and what
has to happen, you have to look at the people involved, the
management people involved, and do they have the capability to
merge an airline?
I say that that question is still open. America West merged
with US Airways in 2005. We have yet been able to reach a
transition agreement with US Airways management. There is not a
maintenance program in place on America West or US Airways. We
believe that those things must happen first, before we can
consider another merger, into another larger airline.
If we take--if US Airways or Delta Air Lines takes their
eye off the ball, then we could have a catastrophe within the
airline industry. We have put together a merger team of
economists, professionals, lawyers and employee
representatives, and we are prepared to sit with US Airways,
and Delta and any other airline and evaluate their proposal and
see whether that proposal is sufficient.
Today, we believe we are close to an agreement. We are tens
of millions of dollars apart. It is disheartening to our
members as we are only tens of millions of dollars apart, that
billions are being thrown into a merger, without regard to
resolving those particular issues. So again, we say that the
issue remains unresolved in our minds, however, with an
agreement, the transition from America West to US Airways, or
vice versa, we believe that the possibility exists that we can
work together to resolve those issues.
Again, we don't have sufficient information. We believe
that that investigation must be very transparent. We must
understand the business plan, we must understand the
maintenance program, we must understand what happens to the
employees in that particular transaction. And we have the
people, and we're prepared to do that in a confidential basis,
with our professional people.
We must remember, that in the last 5 years, billions of
dollars of pensions have been terminated. The Pension Benefit
Guaranty Corporation is now $18.1 billion in deficit. Many of
the airline people that we represented would have lost their
pensions, had we not been able to transition them to an IAM
multi-employer plan. But others, in other classifications,
working at these airlines, do not have any pension today. And
any time we think about a merger, or an acquisition of an
airline, that must be taken into consideration. And I would ask
the Congress, and this Committee, to take that into
consideration in their deliberations of any merger transaction.
Again, we must look at the combined indebtedness of the
carrier--and again, we will look at that from a professional
standpoint, and see, and look at the, this particular map that
was up there--put those airlines together, and we have the
people. We've been involved in every major transaction,
bankruptcy, merger, since deregulation. We have the people in
place that can help and assist in that transaction. And if we
find it is not going to be a successful venture for the
communities that these airlines represent, the people that we
represent, and for the flying public, we will oppose it. But,
at this point, we don't have sufficient information.
We must also remember, that oil prices----
Senator Rockefeller. Mr. Roach, are you approaching the
conclusion?
Mr. Roach. I'm coming right to the conclusion, right now.
Senator Rockefeller. Thank you.
Mr. Roach. I don't know how you do that.
We must remember, that oil prices were once $80 a barrel.
It's now down to close to $50. A well-known oil trader named T.
Boone Pickens says we'll see $100 before we see $40. We will
evaluate that--as President Bush said last night--we have too
much of a dependency on foreign oil. So, we have a very
significant situation we must evaluate. Again, the door is
open, however, we must transition America West in US Airways,
before we can transition US Airways into Delta Air Lines.
Thank you for allowing me to speak here, and we're prepared
to answer any questions that the Committee may have.
[The prepared statement of Mr. Roach follows:]
Prepared Statement of Robert Roach, Jr., General Vice President of
Transportation, The International Association of Machinists and
Aerospace Workers
Thank you, Mr. Chairman, and Members of this Committee for the
opportunity to speak to you on behalf of airline workers throughout
North America. My name is Robert Roach, Jr., General Vice President of
Transportation for The International Association of Machinists and
Aerospace Workers (IAM). I am appearing today on behalf of
International President R. Thomas Buffenbarger. The Machinists Union is
the largest airline union in North America. We represent more than
100,000 U.S. airline employees working in almost every classification,
including flight attendants, ramp service workers, mechanics, and
public contact employees. I have been privileged to come before this
Committee on two previous occasions since 9/11, and I thank you for the
invitation to speak today.
The last 6 years have been the most tumultuous in the history of
the airline industry. The terrorist attacks of 9/11 nearly destroyed
the industry, so much so that Congress had to take action, providing
grants and loans to ensure its survival. Subsequently, the industry has
experienced the loss of over one hundred thousand jobs. Airlines used
the bankruptcy process to obtain onerous concessions from their
workers. This has lead to the outsourcing of jobs, further erosion of
earnings, and the destruction of pension plans. Since 2001, 169,000
employees have lost jobs in the industry and 195,500 hard-working
employees and retirees saw their nest egg destroyed, their pensions
shattered. This has devastated the morale and efficiency of those
employees left working. Now that the reaction to 9/11 is behind us and
the last two airlines remaining in bankruptcy are expected to emerge in
the near future, the stage is set for the next chapter in our saga--
industry consolidation.
The merger of two or more air carriers is not a simple process.
There are many aspects to be considered in an airline merger; the
integration of routes, consolidation of hubs, blending of aircraft and
effects on competition and consumer pricing are but some of the many
intricacies of a merger. Perhaps the biggest challenge in any merger is
the integration of the workforce so that the newly merged carrier's
employees can work most efficiently under common conditions. Rumors of
a merger prompt endless speculations from industry analysts, insiders
and casual observers. Mergers, however, don't fail or succeed on such
speculation. Sound business and integration plans are essential if a
merger is to be successful.
Carelessly proposing a merger could create such an atmosphere that
the carriers involved may be adversely affected. In 2000, United
Airlines assigned hundreds of management employees to coordinate its
failed merger with US Airways. Instead of focusing on United's
operations, tremendous resources were wasted on a merger that had
little chance of success. The Machinists objected to the merger because
management failed to plan for fair integration of the workforce, the
meshing of maintenance programs and to develop stable business
projections. Had management at the time listened to the Machinists
Union, it would have been quite evident that the proposed United-US
Airways merger was DOA. More importantly, it would have saved the
company hundreds of millions of dollars that may have been helpful in
preventing the subsequent bankruptcy of that airline.
What constitutes a successful merger is debatable. In our opinion,
a merger should be judged on its impact on employees, communities and
passengers. Employees have been devastated in the past as a result of
airline mergers. There must be a qualified management team with the
requisite skills to facilitate a smooth integration of work groups from
the different airlines. Otherwise, a merger could be disastrous.
When American Airlines purchased TWA out of bankruptcy in 2001,
commitments were made to TWA employees. American's then CEO Donald
Carty testified before this Committee and said, ``We look forward to
adding TWA's 20,000 employees to the American Airlines family,'' and
that American was willing to make ``commitments to the 20,000 TWA
employees and their families that no one else would make.'' In spite of
these assurances, the overwhelming majority of former TWA employees are
no longer employed by American Airlines. Thousands of mechanics, ramp
workers, customer service agents, flight attendants and pilots who were
promised careers with American are no longer working in the industry.
Additionally, furloughed former TWA flight attendants are now losing
their recall rights for jobs at American.
Communities also often suffer in mergers. American Airlines
promised the city of St. Louis that it would maintain TWA's hub
operation at Lambert Field. That once bustling hub with over 300
flights per day has now been reduced to less than 100.
When considering the merger of two airlines, it is important to
look at how their management has handled past mergers. In 2005, US
Airways merged with America West Airlines. As a result of post-2001
restructuring, employees at both airlines suffered tremendous
hardships. Since 9/11, US Airways' employees have been forced to endure
two separate bankruptcies and three consecutive reductions in their
wages and benefits.
US Airways has not yet negotiated a transition agreement with the
Machinists Union that would merge the mechanic and related workforces
of the two airlines. The failure to reach an agreement means the
maintenance programs at America West and US Airways have yet to be
integrated. Nor has the fleet service operation at the combined carrier
been integrated. The failure to merge the groups has resulted in
employees at the same airport doing the same job, but working under
different work rules and receiving dissimilar wages and benefits. In
our opinion, that is a very inefficient way to operate an airline,
especially in today's cost conscious environment. This is clearly a
recipe for turmoil.
In the midst of an incomplete merger, US Airways has now made a $10
billion bid for Delta Air Lines. The financial sacrifices of US
Airways' employees are what put the airline in a position to make such
a proposal. The employees' issues must be addressed at the bargaining
table before US Airways can merge with any other airlines.
Proposed mergers must further be scrutinized to ensure that
employees' hard earned nest eggs--their pensions--are preserved. The
Machinists Union has members at US Airways, United Airlines, Aloha
Airlines, British Airways, and Air Micronesia who still have a defined
benefit pension plan, the multi-employer IAM National Pension Plan. Our
members at Northwest Airlines will participate in the same pension plan
when that carrier emerges from bankruptcy. IAM-represented Continental
Airlines flight attendants are currently voting to join the secure IAM
National Pension Plan. Although the IAM has been successful in
negotiating new pensions for our members, many other airline employees
have lost the advantages of a defined benefit pension plan. At a time
when airline-sponsored pension plans have either been terminated or
underfunded, preserving existing pension plans, and extending benefits
to employees without pensions, is a priority for the IAM.
We recommend that this Committee consider whether any merger could
result in the termination of pension plans. The terminated plans would
become the burden of the Pension Benefit Guaranty Corporation, which
currently has an $18.1 billion deficit. Ultimately, many of the workers
affected by pension terminations will become the responsibility of the
Federal and State governments.
The Machinists formed a Transportation Merger Team to protect the
interests of IAM members affected by airline mergers. Comprised of
employee representatives, attorneys, economists and research
specialists, our team is prepared for any potential industry
consolidation. We are also prepared to evaluate any proposed merger and
determine whether it would serve the interests of our members, an
airline's most important asset, and the interests of the flying public.
For this to occur we need a transparent process that allows for
information sharing. This can be accomplished while respecting the
airlines' need for confidentiality. Once US Airways resolves its issues
with integrating employees from its last merger, our team of
professionals is prepared to work with US Airways and any potential
merger partners to evaluate future mergers. We know that when airlines
are in trouble, the first people they look to for help are their
employees. Let airlines demonstrate beforehand that the merger they are
proposing will not have additional adverse effects on loyal employees.
There are numerous media reports of alleged merger talks between a
number of carriers. United is rumored to be talking with Continental,
Northwest with Delta, Continental with Northwest, United with Delta. A
very significant question must be asked of any merger, ``What happens
if oil goes back to $80.00 a barrel? Can these combined entities, with
enormously increased debt, survive? '' T. Boone Pickens, a well-known
and successful oil trader, has publicly stated we will see $100.00 per
barrel before we see $40.00 per barrel. Can a merged carrier survive
under those circumstances?
Therefore, we will look at any proposed merger with those factors
in mind. We urge this Committee to utilize similar criteria in
evaluating whether any airline merger will be successful.
Mergers have been a part of the airline industry since its
inception; however, airline consolidations are fraught with
difficulties. The Machinists Union has been involved in nearly every
airline merger since airline deregulation. We are prepared to protect
the interests of all affected workers by working with airline
management and the appropriate government bodies to avoid the pitfalls
of previous mergers. To do so, we need: (1) proper information, (2) a
transparent process, and (3) a management team that demonstrates an
ability to work with its employees. Without such a process, we will be
left with no choice but to openly oppose any merger that we determine
to not be in the best interests of working people and their families,
the flying public, and the airlines themselves. On behalf of the more
than 100,000 airline workers who are members of the IAM, I implore you
to work with the Machinists and other airline unions to ensure
employees are not adversely affected by any airline mergers.
We are aware that some of the mergers being contemplated would have
included greater foreign investment and control than is currently
allowed. I thank Congress and especially this Committee for its work to
stop the crusade to allow greater foreign control of U.S. airlines. I
also thank the Committee for the opportunity to speak with you today. I
am happy to answer any questions.
Senator Rockefeller. Thank you, Mr. Roach, very much.
And now we call upon Dr. Mark Cooper, Director of Research,
Consumer Federation of America.
STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF
RESEARCH, CONSUMER FEDERATION OF AMERICA; ON
BEHALF OF CONSUMER FEDERATION OF AMERICA AND
CONSUMERS UNION
Dr. Cooper. Thank you, Mr. Chairman, Mr. Vice Chairman,
members of the Committee. I greatly appreciate the opportunity
to appear before you today to present the consumer view on the
current state of the airline industry, and the impact of some
pending mergers that are on the table, and being discussed. I
will offer the views of the Consumer Federation of America, and
Consumer's Union.
If mergers like the US Air hostile takeover of Delta are
necessary to save the airline industry, then Congress must
confront the fundamental failure of the unregulated airline
market, to meet consumers' needs, and protect the public in
half the country. If these mergers go forward, this Nation will
be divided between major urban areas, primarily on the coast,
where consumers have a number of choices, and a modest level of
competition, and the rest of the country, where small cities
and rural areas have little--if any--service, and even mid-
sized cities are the captives of virtual monopolies in fortress
hubs.
The so-called low-cost airlines have not entered those
markets, and would leave half the country unserved. The fiction
of competition as the primary means of consumer protection, and
industrial organization, will have to be abandoned, if these
mergers between large legacy carriers go forward.
Looking back at theories of low-cost entrance, economies of
scale, and cost savings synergies, ignores fundamental changes
that have taken place in the industry, and the current
structural condition in the industry. In the past several
years, competition from low-cost entrants has not disciplined
dozens of price increases. Low-cost entrants have not entered
these markets--they cherry-pick high-volume routes. Capacity
has been shed, and costs have been slashed by the legacy
carriers. So the claim that entry by low-cost carriers would
discipline prices, and protect the public, has lost its teeth.
It was a great theory before the last half-decade. It doesn't
work anymore.
Once this facade is stripped away, one cannot ignore the
likely and obvious impacts of these mergers. Reduced service,
eliminate choice, and price increases. We have not opposed
every merger that comes down the runway. Certainly not
geographic extension mergers, like US Air/America West. But, we
urge you to send a strong message to the airlines and the
antitrust authorities, that mergers which move thousands of
routes to monopoly, duopoly or triopoly status, are not
acceptable.
The antitrust authorities do not have responsibility for
the overall structure of the industry--you do. The antitrust
officials can only attempt to promote and preserve competition,
but if there is not enough competition, there is not an awful
lot they can do about it, especially when they are concerned
about financial stability.
It is the Congress that has the obligation to protect the
large numbers of consumers, who will not be protected by
effective competition. To have a world-class economy in the
21st century, we must have a world-class airline sector, that
serves the entire continent--this vast continent.
As I testified on September 20 before the Congress, just a
few short days after the horrible events of 9/11--air travel is
infrastructure in the 21st century. These mergers, this
hearing, are a wake-up call. We must have a public policy that
balances the goals of efficiency, and financial stability, with
a need to serve the public--all of the public--and protect
consumers--all consumers--not just half the consumers who will
be lucky enough to have the benefits of competition.
I commend you for holding this hearing, and look forward to
working with you on this very difficult and important set of
issues. We've emerged from a very, very dark period in this
industry, and it's really time for public policy to make sure
we get the airline sector that this Nation needs.
Thank you.
[The prepared statement of Dr. Cooper follows:]
Prepared Statement of Dr. Mark N. Cooper, Director of Research,
Consumer Federation of America; on Behalf of Consumer Federation of
America and Consumers Union
Mr. Chairman and Members of the Committee,
My name is Dr. Mark N. Cooper. I am Director of Research of the
Consumer Federation of America. I appreciate the opportunity to address
the issue of mergers in the airline industry. I appear before you today
on behalf of the Consumer Federation of America \1\ and Consumers Union
\2\ to express our deep concern about the pending merger wave in the
airline industry.
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\1\ The Consumer Federation of America is the Nation's largest
consumer advocacy group, composed of over 280 state and local
affiliates representing consumer, senior citizen, low-income, labor,
farm, public power and cooperative organizations, with more than 50
million individual members.
\2\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the State of New York to provide
consumers with information, education and counsel about good, services,
health and personal finance, and to initiate and cooperate with
individual and group efforts to maintain and enhance the quality of
life for consumers. Consumers Union's income is solely derived from the
sale of Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. In addition to reports on Consumers
Union's own product testing, Consumer Reports with more than 5 million
paid circulation, regularly, carries articles on health, product
safety, marketplace economics and legislative, judicial and regulatory
actions which affect consumer welfare. Consumers Union's publications
carry no advertising and receive no commercial support.
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In June 2000 testimony on ``The Proposed United Airlines/US Air
Merger'' before the Senate Antitrust Committee, I opened my testimony
with the following observation:
There are some mergers to which policymakers and the Department
of Justice should just say ``no!'' This is one of them. This
merger would reduce competition in an industry that already
suffers from a general lack of competition. It would trigger a
round of mergers that would leave consumers with fewer and
fewer choices across the Nation. New airlines would find it
harder and harder to enter these more concentrated, integrated
markets that would result.
There was a time when airline problems were largely problems
for business travelers, but that has changed. The rapid growth
of personal income over the past decade has made air travel
much more common among residential consumers, in spite of
sharply rising ticket prices. As a result, consumer groups such
as CFA have become more and more concerned about the failures
of the airline market--poor service and the abuse of market
power in a highly concentrated industry. \3\
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\3\ Testimony of Dr. Mark Cooper, Director of Research on ``The
Proposed United Airlines/US Airways Merger,'' Antitrust Committee, U.S.
Senate, June 14, 2000, p. 1.
In March of 2001, we were confronted with a merger wave; I
expressed consumer concern about the emerging industry structure at a
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hearing in the House of Representatives as follows:
With two mergers pending between major airlines and a third
being widely talked about, there can be no more uncertainty
about the structure of the industry. The airline industry is in
the process of organizing itself into a private cartel. Two or
three dominant firms will control the vast majority of traffic
through monopoly airports in fortress regions embedded in
national networks that rarely compete with one another. \4\
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\4\ Statement of Dr. Mark Cooper, Director of Research, Consumer
Federation of America, ``Mergers Between Major Airlines: the Anti-
competitive and Anti-Consumer Effects of the Creation of a Private
Cartel,'' Subcommittee on Commerce, Trade and Consumer Protection,
Committee on Energy and Commerce, U.S. House of Representatives, March
21, 2001.
Exactly 6 months later, testifying a few days after the events of
September 11, 2001, I again urged the Congress not to forget the
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consumer in writing public policy to deal with the airline industry.
In addition to ensuring a more secure air travel network, it is
absolutely appropriate for Congress to require fairer
competition, better service and more effective consumer
protection in exchange for assistance to commercial operators.
The airline industry was falling seriously short in these
crucial areas before the attack. \5\
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\5\ Statement of Dr. Mark Cooper, Director of Research, Consumer
Federation of America on ``The Financial Status of the Airline
Industry,'' Committee on Commerce, Science and Transportation, U.S.
Senate, September 20, 2001, p. 2.
The mergers that are on the table today, such as the Delta-US AIR
merger or those that are being contemplated trigger all of our
concerns, and are actually worse from the competition and consumer
point of view than the United/US Air merger that we opposed in 2000.
\6\ I again urge the Congress to keep the consumer interest front and
center when it examines these mergers.
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\6\ Justin Bachman, ``Airline Mergers: Ready for Takeoff? ''
BusinessWeek.com, December 22, 2006: Delta contends that such a
behemoth would never pass regulatory muster and has assembled a
detailed power point scenario of job cuts, reduced flights, hub
domination, and higher fares that would make almost any consumer
advocate cringe. Dave Carpenter, ``Airline-Merger Talks: How Will
Fliers Fare? '' Associated Press, December 14, 2006: Despite numerous
recent fare increases, however, ticket prices are still too low for
airlines' liking as they scramble to boost profits in the face of
soaring jet-fuel prices. The industry's solution? Reduce the number of
available seats by gobbling each other up. A wave of U.S. airline
mergers could mean higher prices for travelers as overlapping routes
are eliminated, experts said Wednesday as discussions between United
Airlines and Continental Airlines coincided with an announcement by
AirTran of plans to buy Midwest. And just last month US Airways began a
hostile bid for Delta Air Lines. W. Schoen, ``Airline Mergers Won't
Help Passengers: Travelers Face Packed Planes, Higher Fares as Industry
Consolidates,'' MSNBC, December 14, 2006: Though it's far from certain
that any of these deals will go through, such mergers would likely give
the remaining carriers more clout in raising fares, according to Jerome
Chandler, a contributing editor to Frequent Flyer magazine. ``It's
Economics 101,'' he said. ``If you have fewer players in the industry,
you are going to have higher fares. It's almost inevitable. Mergers are
about what's good for the airlines--not necessarily what's good for
consumers.''
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We have not opposed every airline merger that comes down the
runway. The US Air-America West merger was generally a geographic
extension merger with little overlap in route, which we did not oppose,
although it has had some anti-competitive effects. However, we do
oppose mergers that have significant anti-competitive effects and there
can be little doubt that the mergers on the table will have severely
anti-competitive \7\ and anti-consumer \8\ effects. The industry has
repeatedly claimed that anticompetitive mergers are crucial to the
viability of the industry, but that has not generally been the case.
The effect over time is to leave the consumer with less competition and
an industry that is no healthier.
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\7\ Jeff Bailey, ``Big Consolidated Airline Inc.: A Wave of Merger
Deals May Increase Profits, Fares and the Crowding of Flights,'' The
New York Times, December 14, 2006, C-1: Mr. Leonard (Chief Executive of
AirTran) may relish his role as underdog but that is not why he hopes
the carriers (Delta and US Airways) merge--he just wants to see fewer
jets in the sky. After all, US Airways' proposed takeover would reduce
the two airlines combined jet fleet about 10 percent. That, in turn,
would allow the merged Delta--and AirTran--to raise fares on many
routes, significantly increasing profits.
\8\ Brad Foss, ``Airline Mergers Could Raise Fares in 2007,''
KiplingerForecasts.com: Kevin Mitchell, however, said ticket prices
would rise significantly and the public can expect service disruptions,
repercussions from labor strife and more job insecurity in the airline
industry if the carriers merge. He said that if all the deals in
discussion come about, there will effectively be three fewer U.S.
network airlines in operations. I would view it, if I'm a business
traveler, on the customer service side as many years of unimaginable
pain.''
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We have had a hiatus in consolidation in the industry in the past
half decade, as the industry restructured, \9\ but that does not change
the fundamental concerns about anti-consumer and anti-competitive
effects of mergers in this industry. The elimination of competition and
the reinforcement of dominant fortress hubs inevitably raise concerns
about rising prices. Competitive entry in the industry, to the extent
it can discipline the abuse of market power, is highly restricted,
limited to selective, high volume routes and markets. The so-called
low-cost airlines would leave more than half the country unserved.
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\9\ W. Schoen, ``Airline Mergers Won't Help Passengers: Travelers
Face Packed Planes, Higher Fares as Industry Consolidates,'' MSNBC,
December 14, 2006: ``We've had about 15 percent of the industry's
capacity come out of the market,'' from the peak of 2001 to the trough
this year, said airline analyst Helane Becker. ``And there's still
another 5 or 6 percent that could come out.'' Justin Bachman, ``Airline
Mergers: Ready for Takeoff? '' BusinessWeek.com, December 22, 2006:
After a 4-year struggle to survive billions in losses, the industry has
finally gained a little breathing room, thanks to fundamental
restructurings and somewhat higher fares. That, in turn, has more than
one airline executive mulling long-term structural fixes--and less
competition via consolidation might just fit the bill.
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As travelers fall under the control of one airline, the ability of
new entrants to crack markets is reduced. It becomes harder and harder
to attract passengers to flight segments and the necessary scale of
entry gets larger and larger. The inconvenience, and in many cases, the
impossibility of inter-airline travel, give the airline enhanced market
power over the traveler. Travelers thus suffer the typical effects of
the abuse of market power--fewer choices, higher prices and lower
quality. Low-cost airlines selectively enter the high volume routes,
leaving much of the country with little competition. The past history
of mergers suggests that consumers will end up with higher prices, less
service and the industry will remain in turmoil.
The fact that the industry goes through wild boom and bust cycles
is not a justification for letting down our guard against the abuse of
market power. At a minimum, the boom and bust cycles create cycles of
uneven service; at a maximum, it strands consumers. Having gone through
a series of bankruptcies and a large loan guarantee program to bail the
industry out, we are faced with a massive consolidation and Congress
must ask where is the public interest in all this? How will the
consumer be served?
Backward looking analyses based on pre-2000 industry behavior that
claim the so-called low-cost airlines will discipline price increases
are misguided. Looking in the rear view mirror, such analyses ignore
the fundamental shifts in the industry that suggest low-cost entrants
simply will not restrain price increases on the many routes that lack
sufficient competition today and would have competition further reduced
by these mergers.
Low-cost carriers have not entered these lower volume
routes. They are highly selective in the routes they enter. The
characteristics of those routes that have led them to stay away
are not likely to change sufficiently to induce entry. \10\
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\10\ Jason Paur, ``Small Airlines Fly Under The Merger Radar,''
Marketplace, December 19, 2006. Big carriers operate on the hub-and-
spoke model and are looking to merge with a similar operation to
complement their existing routes. Smaller carriers aren't appealing
because they just don't fly to enough places.
Notwithstanding the expansion of low-cost carriers, total
capacity in the industry is down by about 15 percent. \11\
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\11\ W. Schoen, ``Airline Mergers Won't Help Passengers: Travelers
Face Packed Planes, Higher Fares as Industry Consolidates,'' MSNBC,
December 14, 2006. ``We've had about 15 percent of the industry's
capacity come out of the market,'' from the peak of 2001 to the trough
this year, said airline analyst Helane Becker. ``And there's still
another 5 or 6 percent that could come out.''
There has been a long series of price increases over the
past 2 years that the low-cost airlines have failed to
discipline. \12\
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\12\ Dan Schlossberg, ``Airline Merger Mania, Bad News for
Consumers,'' Consumeraffairs.com, December 29, 2006. The impact on
consumers--already reeling from 23 hikes in airline ticket prices over
the last 2 years--could be devastating. After all, less competition
means fewer choices for budget conscious flyers.
Industry-wide prices have flattened or been rising, so the
industry-wide price disciplining power of the low-cost carriers
is doubtful. \13\
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\13\ Jeff Bailey, ``Big Consolidated Airline Inc.: A Wave of Merger
Deals May Increase Profits, Fares and the Crowding of Flights,'' The
New York Times, December 14, 2006, C-4, graph.
The so-called legacy carriers have substantially modified
their cost structures, so the claim of bloat has lost its
credibility. \14\
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\14\ Justin Bachman, ``Airline Mergers: Ready for Takeoff?,''
BusinessWeek.com, December 22, 2006. After a 4-year struggle to survive
billions in losses, the industry has finally gained a little breathing
room, thanks to fundamental restructurings and somewhat higher fares.
That, in turn, has more than one airline executive mulling long-term
structural fixes--and less competition via consolidation might just fit
the bill. Brad Foss, ``Airline Mergers Could Raise Fares in 2007,''
KiplingerForecasts.com. After several years of financial darkness, U.S.
airlines are seeing rays of hope. Passenger demand is stronger and
costs are under control.
Backward looking analyses of previous mergers do not lay our
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concerns to rest either, for two reasons:
First, the underlying motivations for past mergers differs
from those being contemplated today. The economic rationales
offered had a more plausible basis to claim they would be
consumer friendly, even though they have not worked out that
way. \15\
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\15\ Ed Perkins, ``Are Airline Mergers Good of Bad for
Consumers?,'' Smarter Travel, November 30, 2006: One overriding fact
governs the outcome: The Incentive for the merger is almost solely to
reduce competition. In the past, airlines have merged for three basic
reasons: (1) The earliest focused mainly on extended geographic scope,
such as Delta with Western, US Airways with PSA, American with Reno,
and even the recent America West with US Airways; (2) A few prior
mergers were designed to rescue a failing line, such as American with
TWA; and (3) Some of the earlier mergers were designed to take
advantage of the economics so scale, such as the consolidation of
several smaller lines into Hughes Airwest. But even the industry now
admits that future mergers among mega-carriers will be aimed almost
solely at reducing competition. They're already so big that extra size
doesn't help lower costs, and they already cover most of the Nation.
But reduced competition would likely produce many rewards, allowing the
remaining airlines to hike rates--and probably reduce service levels--
even further. Also, mergers would probably involve the shutting down of
several adjacent ``hubs,'' where local travelers would see substantial
reductions in service.
Second, even with these more benign justifications, the
history of past mergers is far from encouraging. \16\
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\16\ Jerry Chandler, ``Airline Mergers? Not So Fast,'' Cheap
Flights Limited, December 15, 2006: Of the six major mergers I just
touched on, four essentially failed to live up to their purported
promise--US Air/Piedmont, US Air/PSA, Northwest/Republic, and Pan Am/
National. A fifth, American/TWA, resulted in the downsizing of St.
Louis. Only Delta/Western really worked for airlines and airline
passengers alike. No, past history doesn't dictate present success.
Antitrust analysis recognizes that the failing firm defense will
allow apparently anticompetitive mergers to go forward when they would
not usually pass muster. However, this defense is valid only in the
context of an industry that is otherwise competitive and exhibits a
healthy competitive structure. That is not the case within the airline
industry.
This is an infrastructure industry of vital importance to the
Nation and there is serious doubt that the current approach to
industrial organization can provide the full, nationwide service that a
continental, world class economy needs. Policymakers face a fundamental
challenge. If these mergers go forward under the claim that they are
necessary to save the industry, then the basic premises of the approach
to public policy must be questioned because the fiction of competition
can no longer be maintained for a large part of the Nation.
This Committee does not review mergers, but it has the ultimate
responsibility for the public policy that deeply affects the industrial
organization of the industry. I urge you to send a strong signal that
if the industry tries to go down the path of massive consolidation it
will find a Congress ready, willing, and able to prevent the abuse of
consumers that inevitably follows from such a concentrated market.
The assumption that markets are the best way to organize an
industry is just that, an assumption. The assumption must be
rebuttable, if economics is to be an empirical science. Policymakers
must accept that sometimes there are market failures and take the
appropriate actions to ameliorate the problem. \17\ In the airline
industry, with its boom and bust cycles, its fits and starts of
competition, and fortress hubs, where half the markets are competitive
and half are captive monopolies a potential merger wave demands close
scrutiny.
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\17\ Marilyn Geewax, ``Key Legislator Says Airline Mergers Threaten
Competition,'' Cox News Service, December 15, 2006, p. 1: With six U.S.
airlines now involved in merger discussions, the trend ``runs afoul of
the very purpose of deregulation,'' incoming House Transportation
Committee Chairman James Oberstar, D-MN, told reporters.
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There are a range of policies that could be pursued.
First, if the Congress wants to stick to the market model, it must
urge regulatory authorities to just say no to those mergers that are
anticompetitive. Certainly, the US Air-Delta and United-Continental
mergers fit the bill. Close analysis of route overlap and hub proximity
suggests that these mergers will have substantial anti-competitive
effects that will be impossible to ameliorate with traditional
antitrust remedies. \18\
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\18\ Brad Foss, ``Airline Mergers Could Raise Fares in 2007,''
KiplingerForecasts.com: Regulators could look at the combined airlines
added strength in the Northeast as detrimental to competition, with
Continental's Newark hub and United's at Washington-Dulles. Marilyn
Geewax, ``Key Legislator Says Airline Mergers Threaten Competition,''
Cox News Service, December 15, 2006, p. 2: For example, Delta and US
Airways have many overlapping routes along the East Coast, with hubs in
Atlanta and Charlotte, NC. Justin Bachman, ``Airline Mergers: Ready for
Takeoff?,'' BusinessWeek.com, December 22, 2006: Delta contends that
such a behemoth would never pass regulatory muster and has assembled a
detailed PowerPoint scenario of job cuts, reduced flights, hub
domination, and higher fares that would make almost any consumer
advocate cringe.
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Traditional antitrust remedies for the anticompetitive effects of
mergers are not likely to be effective in these cases. The spin-off of
some assets to repair the competitive harms in the markets would occur
in city-pairs that are already insufficiently competitive. They have
not experienced competitive entry and it is difficult to see how the
spin-off will result in sustained competition if these mergers are
approved. Consumers would suffer severe price increases before entry
might occur. \19\
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\19\ Ed Perkins, ``Are Airline Mergers Good or Bad for
Consumers?,'' Smarter Travel, November 30, 2006: Not all air travelers,
however, will feel the pinch equally. On many of the Nation's busiest
routes, low-fare lines such as AirTran, JetBlue, and Southwest will
continue to set the ceiling on fares, even the largest old-time airline
can't raise fares much. Travelers on those routes will probably see
little effect. But travelers to or from smaller cities, where no low-
fare line flies, are likely to get stung, big time. If US Airways
acquires Delta, travelers in the Southeast are particularly likely to
be gouged.
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The antitrust authorities will also have to micro-manage the gates
and slots at regional hubs where the merger eliminates competition to
ensure that they result in sustained competition on a large number of
routes. If not, consumers would be left with reduced competition and
declining service, but this is an approach the antitrust authorities
hesitate to take and generally refuse to engage in for the long term.
Broader policies to protect consumers in an industry were
competition is weakened generally fall outside of the purview of the
anti-trust authorities. \20\ Occasionally, an antitrust consent decree
will set prices for a short period of time, although that is frequently
for inputs in a vertically integrated production chain, not retail
prices to the public.
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\20\ Ed Perkins, ``Are Airline Mergers Good of Bad for
Consumers?,'' Smarter Travel, November 30, 2006: When it approves big
airline mergers, the government often imposes conditions to protect at
least some level of competition . . . In my view, however, it is time
for a different government focus. Route adjustments are no longer as
important as the once were. Instead, I'd like to see regulators accept
the inevitability of reduced competition and require merged airlines to
provide other offsetting benefits. Among the possibilities: (1)
Increased compensation for involuntary bumping. (2) Expanded definition
of bumping to include factors other than overbooking. (3) Compensation
for delayed baggage delivery. (4) Guaranteed levels of seats for
frequent flyers.
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Merger waves start with one deal and the antitrust authorities tend
not to take a broad view of the wave. \21\ They simply cannot see the
forest for the trees. It is the Congress that must take the broad view
and recognize that when it comes to competition, a forest with too few
trees is very bad for consumers. The best way to stop the wave is to
stop the first merger, which would be Delta-US Air in this case,
particularly when it has such pervasive anticompetitive effects.
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\21\ Jeff Bailey, ``Big Consolidated Airline Inc.: A Wave of Merger
Deals May Increase Profits, Fares and the Crowding of Flights,'' The
New York Times, December 14, 2006, C-1: Discussions about a possible
deal between United Airlines and Continental Airlines came to light
this week. And if one big merger goes through, other airlines will
probably feel compelled to pair off as well or wind up at a competitive
disadvantage because they have higher costs or smaller route networks.
Marilyn Geewax, ``Key Legislator Says Airline Mergers Threaten
Competition,'' Cox News Service, December 15, 2006, p. 1: The merger
wave was launched last month when US Airways Group, Inc. made an
unsolicited bid, now worth $8 billion, for Delta Air Lines, Inc. This
week, UAL Corp., parent of United Airlines, and Continental Airlines,
Inc., announced they are holding talks on a possible merger. In
addition, AirTran Holdings Inc, has offered to buy Midwest Air Groups,
Inc. for about $290 million. Brad Foss, ``Airline Mergers Could Raise
Fares in 2007,'' KiplingerForecasts.com: Analysts say other potential
deal permutations that may be explored--if they haven't already--
include AMR Corps's American Airlines linking up with Northwest
Airlines Corp.
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In sum, the antitrust authorities cannot approve mergers, like
Delta-US Air or similar mergers and pretend that competition will
protect consumers in the large number of markets that are presently
inadequately competitive and in which competition will be further
reduced. If antitrust authorities conclude that consolidation is
necessary to restore the financial health of the industry, then they,
along with the Congress, must give up the fiction of market competition
as the primary approach to industrial organization for the airline
industry. They must provide consumers with much greater non-market
protections against the abuse of the market power that will inevitably
result from a merger wave in this industry.
Senator Rockefeller. Thank you very much, Dr. Cooper.
I now call upon the Chairman of the full Committee, or Vice
Chairman of the full Committee, as he prefers to be called, for
the first round of questions.
The Chairman. Thank you very much, Mr. Chairman.
Secretary Steinberg, you've just heard Dr. Cooper's
testimony. Do you believe that his concerns are valid?
Mr. Steinberg. Thank you, Mr. Chairman.
Any time there's consolidation, we have to look at the
effects on consumers. I think it's hard to generalize about any
specific--generalize about whether mergers are ``bad'' or
``good'' for consumers. It's highly dependent on the specifics
of a transaction.
In general, I would say that, that healthy network carriers
that earn adequate profits are actually good for smaller
communities, and good for consumers, because they can afford
the breadth and scope of service that we want to deliver.
In any situation in which there's excess concentration,
obviously we have to be careful of prices going up. But, I
think what we've seen over the years is an intensely
competitive industry, characterized by many carriers. And today
we have six network carriers, and we have several low-cost
carriers.
And, in fact, the most successful carrier by, really, any
measure, is not the largest, at all. And that's Southwest
Airlines. So, it's very hard to generalize that a merger, per
se, will lead to harm to consumers.
We do think there are execution risks in mergers, that can
result in bad business combinations. But, the role of
government, obviously, is to protect consumers, by focusing on
ease of entry into markets, and the ability of the marketplace
to support competition.
The Chairman. Can you assume that it will result in fewer
choices? Higher prices for consumers?
Mr. Steinberg. Again, Mr. Chairman, I think it really
depends on the nature of the transaction. Certainly, in the
short term, any merger results--by definition--in fewer
choices. But, what we've seen over the years is a tendency of
the marketplace to respond. And new carriers can come in and
lower prices.
And that's not to say that we're proposing mergers, as a
way to ``save'' the industry. Quite to the contrary. We're just
saying the marketplace should be allowed to operate.
The Chairman. Mr. Grinstein, do you believe that Dr.
Cooper's concerns are valid?
Mr. Grinstein. I do. I think that they're valid because
this industry--I'm a slow learner--because this industry has
improved itself dramatically in the last 2 or 3 years, and I
think that point is well taken. If you look back 2 or 3 years
ago, the network carriers were on the run. They were in serious
trouble. They were financing themselves by drawing down their
balance sheets, and they were failing in competition with the
low-cost carriers.
Since then, a number of us have restructured ourselves--
most or many of them in bankruptcy, but some outside of
bankruptcy--and in that process, they have completely rebuilt
the way they operate the airlines. In Delta's case, we've gone
from a company that was 18 percent international, up to 35
percent, and headed toward 50 percent, because we're finding
that a better use of our equipment, and a much more stable fare
environment. So, we've completely changed things.
In the process of doing that, the low-cost carriers have
not been as fortunate. And what was predicted as straight
upward growth has changed. In the case of AirTran, they have
deferred deliveries of aircraft; in the case of JetBlue, they
have sold airplanes, and they, too, have deferred delivery of
aircraft.
So, the network carriers have traction now, they are
performing well. The business plan that we have, and that I
think, the others have, all indicate that they're going to be
profitable in 2007 and going ahead because of all of the
changes made. So, I think that these--these companies have
gotten the traction, and I think that when Dr. Cooper points to
the inherent competitive--loss of competitive force--from the
public interest point of view, that that will happen in certain
mergers. And the one in front of you today is, I think,
blatantly anti-competitive.
The Chairman. Mr. Parker, what are your thoughts?
Mr. Parker. Well, I disagree. And I point back to the
success of the US Airways/America West merger. When, in fact,
what we have done is increased service that would not be there,
had that merger not happened, saved jobs that wouldn't be
there, and given consumers more choice.
I believe that the biggest competitive threat to the
network carriers are the low-cost carriers, and for those who
have concerns about small communities--which those low-cost
carriers will never serve--they should be very concerned about
the health of the network airlines.
The low-cost carriers, since 2000, 2000 to now, have grown
at 20 percent per year. Not 20 percent in total, 20 percent per
year, each year. At the same time, network airlines have
shrunk, each year, about 3 percent. That is not a good trend
for small communities. Because if that trend continues, it
won't be long until network carriers are a much, much smaller
percentage of the total, and you will continue to see service
on a point-to-point basis--not to those communities.
We need to encourage an airline industry that allows
network carriers the ability to be profitable instead of having
us in this continuous cycle of coming back to you every 5 or 6
years and asking for help. And again, all I would ask is that
we let competition continue under the laws in place. I believe,
firmly, that the transaction we propose would easily pass
Department of Justice scrutiny, due to the fact that our
industry is so intensely competitive.
The Chairman. We have been told that the immediate impact
of this merger, if it goes through, would be a 10 percent
reduction in personnel, is that correct?
Mr. Parker. That is not correct. Our plan is to reduce the
capacity--and this may be the source of confusion--to reduce
the capacity in the system by about 10 percent. What that does
is allow us to reduce costs, and in doing so, still serve the
same number of customers. This in turn allows us to compete
with low-cost carriers. So, as we reduce capacity by 10
percent, still serve all of these markets that are being served
today, the result is we have lower costs, and retain the vast
majority of the revenue. This is where the network synergies
are generated.
As it relates to employees: our commitment is to ensure
that no front-line employees are furloughed. We will get the
airline right-sized to that smaller size over time, but the
right way to do that, as we found in our past merger, is allow
this to happen through attrition--people who choose to leave,
of course, leave. And we don't need to replace them at a
slightly smaller airline. But we would not reduce the employees
by 10 percent upon the merger.
What we would do is allow people to leave of their own
volition, and not replace them over time. We find that to be--
in addition to being the right thing for our employees for
morale, it's also the right business decision. Because the fact
of the matter is--as I noted in my testimony--US Airways/
America West, which reduced capacity even more than that, has
already hired 4,000 people in the 14 months since we completed
that merger. So, it doesn't make any sense to--the right
business decision is to run with a slightly higher than
necessary complement of employees through the transition
period, and to not do any reductions in force immediately.
The Chairman. Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, Senator Inouye.
The Vice Chairman of the full Committee.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you very much, Mr. Chairman.
I want to ask just two questions of Mr. Steinberg. I've
been told that if this merger goes forward, the one we're
talking about here now, that it's just the first of a series of
mergers. Do you predict that if this merger goes forward, there
will be a series of mergers within the industry?
Mr. Steinberg. Thank you, Mr. Vice Chairman.
You know, we often hear about the so-called ``domino
effect'' if this proposed transaction, or a similar one, goes
forward. And I think, as much as I'd like to say yes or no, and
answer the question definitively, I don't think we can.
Management of the network carriers, I think, will have to
evaluate their competitive position, based on the specifics of
a transaction, if it goes forward. Mergers are difficult things
to pull off successfully. So, it's no easy decision to simply
decide, in response to a competitor, that we'll go buy or merge
with another competitor. Because, as I said, earlier history
shows that most--but not all--airline mergers have not
succeeded.
I do agree that size and scope in the airline business are
important, and therefore, management of network carriers will
look at the resulting competitive playing field and make a
decision. But as to this particular proposal, I think it's very
hard to answer your question definitively.
Senator Stevens. Thank you. I hope that it does not result
that way, if a merger takes place.
Mr. Grinstein and Mr. Parker--everyone around the table
knows I'm provincial--I recently had a report that, as a matter
of fact, two of my staff were stuck in Fairbanks for 3 days and
couldn't get out or get new reservations. Both of our
international airports are near two large military bases with
all the change and rotations going on, it's not sufficient air
service. What effect would this merger have on states like
mine? Seventy percent of our cities can be reached only by air,
and the major carriers are, in fact, the backbone of our total,
across-the-state service. We are one-fifth the size of the
United States--are we going to lose service, in terms of the
number of flights, if this merger takes place? And what's going
to be the effect on the customers? I think Dr. Cooper's ringing
a bell for you all, I hear this from very conservative people
in my State. They're talking about asking Congress for re-
regulation of the airlines, because of the lack of service.
Now, what's going to happen if these mergers take place?
Mr. Grinstein?
Mr. Grinstein. Well, I believe that that necessarily is
going to result in loss and decline of service.
Let me go back and comment about something that will lead
us into that question. The idea that the America West/US Air is
a model for what would happen with Delta and US Air is a
strange flight of fancy. That was an end-to-end merger. There
was virtually no overlap. America West was in extremis, and US
Air's Chairman said that, ``We have burned all of the
furniture, and the company is in a death spiral.''
But, these companies are not in death spirals, and they're
not at that point. And what they need are the opportunity to
grow and expand. I've mentioned earlier----
Senator Stevens. Jerry, I only have two more minutes left.
Mr. Grinstein. OK, I'm going to build to that. I believe
this merger will, of necessity, lead to loss of service
opportunities, reductions in service. If you believe that with
the kind of debt that this company is going to have, that
you're not going to reduce your hubs, you're not going to
reduce frequencies, you're not going to consolidate flights,
and reduce planes--you believe in Tinker Bell. It has to
happen.
Senator Stevens. Thanks.
Mr. Parker?
Mr. Parker. This merger would not result in any change in
service to Alaska. US Airways flies to Alaska, as does Delta.
We would have no intention of changing that, nor the routes
that are served, including the code share that exists today
with Delta within Alaska.
Senator Stevens. If you complete this merger, do you
contemplate any further additions to your company?
Mr. Parker. Excuse me, I'm sorry, Senator?
Senator Stevens. If you complete this merger, do you see
that--you getting even bigger and forcing another merger?
Mr. Parker. Right now, we're just focused on this one, and
I----
Senator Stevens. Where do you buy your airplanes?
Mr. Parker. We haven't bought an airplane in quite some
time, Senator. Our airline, like most network carriers have
gone through reductions.
We do have in our fleet today a combination of both Boeing
and Airbus airplanes--about half of each. We are currently
looking to replace airplanes, and we have bids out to both of
those companies. If, indeed, this merger went through, that
would significantly tilt that balance toward Boeing.
Senator Stevens. Where does Delta buy their airplanes,
Jerry?
Mr. Grinstein. We have an all-Boeing fleet. Senator, they
are at 57 percent Airbus, and they have the--they are the only
American company to order the A-350 which will be the
replacement aircraft for the 767, which is the large one that
we fly now in our--most of our international markets. And we
exist with an all-Boeing fleet.
What you have to have--I mean, you can screw up a lot of
things in the airline industry, but you have to have fleet
simplification, and by having a consistent manufacturer and
supplier, it gives you that opportunity.
Senator Stevens. Thank you for your courtesy.
I must leave to make a quorum in another committee, Mr.
Chairman. Thank you.
Senator Rockefeller. Thank you, Senator Stevens.
A slightly offbeat question. If consolidation were to take
place within the airline industry, we may have only three
network carriers left, and these three carriers would control
80 percent of the market. I've dealt for 30 years with these
exact same kinds of problems with the steel industry in West
Virginia. The result has never been happy. The result has
always been fewer employees, and massive conflicts and crises
over health and retirement benefits.
Now, at the present rate, 19 percent of the share--nobody
has more than 19 percent of the passenger aviation market.
American has 19 percent, United has 15 percent, Delta has 15
percent, Northwest has 10 percent, Continental has 10 percent,
Southwest has 9 percent, US Airways has 8.8 percent.
Now, Dr. Cooper might suggest, as he did, that maybe the
Federal Government should return to regulating at least these
markets where competition does not exist. And I then, sort of,
throw in ad hoc, ad hominen comment to Mr. Steinberg how
enthusiastic he must be against the captive shipper problems in
railroads, because he's described that precisely with respect
to airlines. So, a lot of the industry analysts anticipated
that if US Airways/Delta merger occurs, it would lead to the
other four major carriers merging as follows: United and
Continental, American and Northwest.
If this occurs, US Airways and Delta would have 25 percent
of the market, United and Continental would have 26 percent of
the market, America and Northwest would have 29 percent of the
market--these three carriers would control 80 percent of the
aviation market.
So, I simply take you back--Senator Dorgan and I are very
strong advocates, and others here, Senator Lott, Senator Snowe,
many others here--are very upset about what happens in end-of-
the-food-chain markets, and the prices, and the service. We
have lost service, fundamentally. We can't exist with that.
We're a state that's no less important than any of the other
49. We treat ourselves as such, and we try to make policy which
takes that into account. What's wrong with that idea, other
than it's unusual? I would ask of the two CEOs.
Mr. Grinstein. It's interesting you raised that, Mr.
Chairman, because in 1999, this Committee adopted a resolution
in opposition to the US Air/United Airlines merger, saying that
it would, of necessity, lead to three network carriers. And, so
history is now, 8 years later, repeating itself.
I do think, Senator, that you are going to have a loss of
service to small communities----
Senator Rockefeller. That's not answering my question.
Mr. Grinstein. I'm sorry, I must have misunderstood your
question.
Senator Rockefeller. No. I assume the loss of service.
Mr. Grinstein. Right.
Senator Rockefeller. What I'm asking is, should there cease
to be a deregulated market in the, as Dr. Cooper, I believe,
suggested, in those stressed, rural, end-of-the-food-chain
States, where there can be no other solution to adequate
passenger traffic?
Mr. Grinstein. Well, you have that now, in the sense that
you have assistance for Essential Air Service to certain
communities----
Senator Rockefeller. Essential Air Service doesn't do
anymore, Jerry Grinstein--I hate to say that to you, but it
doesn't do it anymore.
Mr. Grinstein. Well, there are a number of communities that
are benefiting, there may be more that need it.
Let me come at it, if I may, at another angle. I think the
smaller communities need the service, and that this Committee--
recognizing its public interest responsibilities--is going to
try to find a way to get it. I'm not sure that it has to be
done by re-regulation, or deregulation.
Senator Rockefeller. Why, because it's radical? Or because
it doesn't make sense to you?
Mr. Grinstein. Well, I don't have any difficulty with
radical proposals. In fact, the more groundbreaking they are,
in some ways, the more interesting they get. So that is not my
issue with it.
But, I think that the best way to do it is to provide
incentives for the companies to serve those markets. And our
experience----
Senator Rockefeller. Incentives? The government would
provide incentives?
Mr. Grinstein. Well, you may not do it in the form of cash.
Senator Rockefeller. Essential Air Service doesn't do it,
please don't tell me----
Mr. Grinstein. No, no, no--I understand that. Essential Air
Service does some of it, but not enough of it. There are other
ways of doing it.
Senator Rockefeller. But it's not enough, it doesn't do it.
It's got to be enough, or it doesn't count. I don't want to
interrupt you, but I want to give Mr. Parker a chance to
respond.
Mr. Parker. I'd be happy to. Any radical ideas you have,
Senator, as to ways that we can improve service----
Senator Rockefeller. No, sensible ideas which some might
call radical.
Mr. Parker. All right, perfect. Even better yet, sensible
and radical ideas--we'd love to listen to them. I agree with
your concern that providing air service to small communities is
becoming more and more difficult. I would argue that the market
force that's causing this is the continued decline of the
network airlines. And left to the policies we've had to date--
in particular, not allowing market forces to work, as it
relates to things like mergers and acquisitions, would
absolutely result in a weaker set of service to small
communities, because our airlines would be weaker and weaker.
But to the extent that you or anyone else has sensible and
radical ideas on ways that we can provide service in a way that
is economic to the airlines, we'd love to hear those.
Senator Rockefeller. And it is not radical--I would say to
my colleagues--it is not radical if it works for the small and
rural communities which are represented by so many of us around
this table. It's only radical because it was changed earlier.
We deregulated. And to not regulate the parts that don't need
it, but to regulate the parts that you both admit, do need it,
and which can not be served properly, unless there's some
arrangement of that sort, I think then bears Committee
scrutiny.
Mr. Grinstein. You know, it's interesting, Mr. Chairman, of
the 209 domestic markets that Delta serves, 144 are defined as
``small markets'' by the FAA. So, our system of network
carriage that has the types of aircraft that can feed those
into hubs and then deliver them into markets is exactly what
you want to have happening, and that's exactly the mission that
we have, as a company.
Senator Rockefeller. Good.
Senator Klobuchar?
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you, Senator.
My home is in Minnesota, and as you know, that's the home
of Northwest Airlines, with Minneapolis/St. Paul as its hub,
with over 30,000 employees, serving millions of Minnesotans as
well as people across the country. I know my colleague from
South Dakota knows this is true.
And Northwest, as you know, is also in bankruptcy. And when
I was hearing the Senator from Georgia talk about the
sacrifices of the employees of Delta during this time, I
thought about our own employees at Northwest Airlines--the
pilots, the flight attendants, and the machinists, and everyone
who joined together and took incredible cuts to be able to keep
Northwest Airlines afloat.
And, of course, I'm concerned about what happens here would
be good for consumers, and for employees and for the industry,
and isn't just happening because bankruptcy provides an
opportunity to do something. And I think we have to look at
this as the industry as a whole, instead of just this one
incident.
My question, first of all, would be about--to you,
Assistant Secretary. About the, this idea of alliances, as
opposed to mergers. One thing that I know that Delta has been
in alliance--correct me if I'm wrong----
Mr. Grinstein. No, that's true.
Senator Klobuchar.--with Northwest, as well as with--and
Northwest has also been in alliance with Continental. And in
your testimony, you mentioned briefly this concept of
alliances. And I just wondered if you could elaborate on that
more, and what are the prospects for these type of alliances
that fall short of mergers, and what have they produced?
Mr. Steinberg. Thank you.
Alliances have played a role in the airline industry for a
long time, actually. Co-Chairs go back, probably, 20 years or
more.
Generally speaking, alliances have been most effective in
international markets that are otherwise closed, or not, not
completely open to our carriers. And they've been most
effective in those markets.
On the domestic front, of course, any proposed alliance has
to be reviewed for antitrust considerations and they can raise
some competitive--competitive issues. Alliances that create new
service are good for consumers, because they enable passengers
to, you know, experience new product offerings. Alliances that
are simply pricing agreements can be bad for consumers.
I think, as the industry continues to restructure, what
we'll probably see is less of a focus on alliances,
domestically, and either stand-alone companies, or some other
form of consolidation.
Senator Klobuchar. And then my other question would be
along the lines of what Senator Rockefeller was asking about.
And that's, while we have a hub in Minnesota, we still have a
number of communities that are of the--what did he say? The
``end-of-the-food-chain''? And if you've ever landed in
Bemidji, Minnesota in a snowstorm, you know what I'm talking
about. And I--and you didn't have an opportunity to answer
that, I'd just like----
Mr. Steinberg. OK.
Senator Klobuchar.--your answer to what you've seen these
consolidations have done to the rural communities in our
country.
Mr. Steinberg. Yes, I appreciate the opportunity to address
that, I think that is a very difficult question.
Since September 11th, we've seen a growth in the number of
Essential Air Service communities. So, with the decline of the
health of the network carriers, we've seen more and more need
for subsidies. And that's occurred during a period in which
there, frankly, hasn't been all that much consolidation. So, I
think the issue is: How do you serve these markets profitably?
The reason that there isn't enough service today is that
airlines can't make money serving those markets. As airlines
become more profitable, and their networks become larger, it
becomes that much easier to serve so-called ``thinner'' markets
with fewer passengers.
So, I think, contrary to what some have suggested, actually
having fewer, healthier network carriers might end up resulting
in more service to your smaller communities, as they attempt to
serve the entire country on a network basis.
Senator Klobuchar. Well, with this merger, would this
enlarge the network? Because you're talking about----
Mr. Steinberg. Well, I think the map, you know, speaks for
itself, and I don't really want to comment on the specifics of
the transaction--I've observed where the hubs are, the
proposed, combined carrier. And we can all make our own, you
know, judgments based on that.
Senator Klobuchar. Mr. Parker, do you have anything to add?
Mr. Parker. No, other than that I would agree with Mr.
Steinberg, as I've already said. I firmly believe that strong
network airlines in our current structure is what small
communities need if--to ensure consistent and reliable air
service. And, right now, we do not have strong network
airlines.
Mr. Grinstein. Well I----
Senator Klobuchar. Go ahead.
Mr. Grinstein.--on the alliance issue, I think that's one
of the unexplored opportunities in the business. The--there are
a number of things that airlines can do together, without
affecting price, but which would provide for cooperation and
modern technology, and so my feeling is that where you have an
alliance, as we have with Northwest and Continental, that you
should explore things such as: common IT platforms, common
purchasing, and other things that produce significant cost
savings, and move on.
Oddly enough, I agree with Mr. Parker, that the service to
the smaller communities is helped by healthy network carriers.
But, what you don't want is to have one strong competitor
swallowed up by another strong competitor. What you want is to
have them out competing and trying to expand in the marketplace
and develop that feed into the hubs. And so there are
situations where, I think, mergers may strengthen the company.
But where there's a significant overlap, and I think that it's
going to lead, of necessity, to reductions in service, as
opposed to expansions.
Senator Klobuchar. Thank you very much.
Senator Rockefeller. Thank you, Senator.
Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman.
And I thank each of you for your very persuasive
statements. I think we ought to invest in--more in railroading
in this country, and Amtrak, and get it up to snuff, so that we
can relieve some of the pressure that we see placed on the
airline business.
But one thing I don't understand is, how these little guys
came into the industry, and came under your tent walls, and
created such good businesses? Why didn't it happen with the
legacy airlines? Why weren't they able to step down, or
whatever they had to do to compete with these? With the Blues
and the Southwests, and--? Mr. Parker?
Mr. Parker. First off, I would argue that it's good to have
a structure whereby startup airlines can come in. And if they
can do a better job, they should be allowed to come in. And
these airlines have figured out a better model. They've come in
with a lower cost structure than we have, and this is good for
consumers and good for the United States. To have a system that
allows competition, and that encourages competition, is exactly
what we should have. And what these airlines have done.
Senator Lautenberg. And that is business that you'd like to
have----
Mr. Parker. Oh, would I like to have it? I'd prefer to own
Southwest Airlines than US Airways, yes, sir.
[Laughter.]
Mr. Parker. I don't----
Senator Lautenberg. Mr. Grinstein, what kind of
encouragement does that statement make?
[Laughter.]
Mr. Parker. For the record, I don't own either. But, my
point is, the Southwest model is a much better model, but it
can't be recreated. They have done a very good job. And the
question--if your question is, Why didn't the legacy airlines
go and do the kind of things that JetBlue has done? We didn't
have the cost structure at that time.
Senator Lautenberg. Let me ask you this. You made a bold
commitment here, that you intend to reduce capacity of the
combined airline by 10 percent, not let a single employee go.
But, 10 percent of the system may involve something like 10,000
mainline jobs, and up to 200 aircraft. How will you keep so
many employees around, and still satisfy Wall Street, and your
obligation to pay off the other debt that you're acquiring?
Mr. Parker. We would do it by gradually, over time, getting
to the right size. The aircraft would go away immediately,
through Delta's bankruptcy process. As I've already stated, as
it relates to the employees, our view is--because we need very
much to have our employees working with us on this transaction,
we would not go and furlough any front-line employees. What we
would do is, allow those who want to leave, over time, to
leave----
Senator Lautenberg. Well, let me put the question this way.
Two airlines have largely different fleets of aircraft. One of
the benefits of the merger is the fact that you can reduce the
types of aircraft that you utilize. Now, how do you do that,
cut the capacity by 10 percent, and not let go of a single
mechanic?
Mr. Parker. Actually, we would keep a mix of fleet types
and indeed, Senator, I do want to be clear--my view is that
over time, we would need fewer mechanics than the two airlines
have today, initially. We would eventually hire them all back.
But, the way we would get there would not be to go through and
furlough members of Mr. Roach's Machinist Union. What we would
do is, leave those around until people decide to leave--which
they do in our business--and we just wouldn't replace them.
Senator Lautenberg. Well, time is short. So, I want to ask
one last thing here, of you. And that is--the pension benefit,
the pension were--obligations were reduced by $5 billion as a
result of your reorganization. If you can come up with $5
billion in cash for the merger, shouldn't US Airways pay those
pensions back before buying other airlines?
[Applause.]
Senator Rockefeller. I'm sorry, but that does none of you
any good. And, if that happens again, those who make such
interruption will be cleared from the room.
Mr. Parker. Senator, as you well know, given your business
background, the $5 billion is not our money. And indeed, it's
more than $5 billion--we actually have committed financing for
this merger of around $8 billion at this point--that money is
not ours, that money is Citigroup's money and Morgan Stanley's
money, which they are willing to loan to us if we do this
transaction. We're not using cash on hand, and we don't have
anything like that amount of cash on hand. They're willing to
loan it to us for this transaction. Your suggestion is much
like someone saying to the mortgage lender, ``Please lend me
the money, but I don't want to buy the house.'' That money only
comes to us if we acquire the airline, because they know full-
well the value that can be created by putting these two
companies together, and they know they will be paid back.
Senator Lautenberg. That's a very large hope, and I'm
concerned about that.
Mr. Grinstein, how large were the bonuses paid in your
company when the bankruptcy proceedings came along? You said
that after December 2004, you had gotten past the bankruptcy
issue. How long did it take before you filed, and what did you
do about bonuses to the senior executives during that period?
Mr. Grinstein. I--we filed in 2005. There were no bonuses
paid. We did not seek KERPs--Key Employee Retention Programs
when we filed, although we could have, legally. And there are
no bonuses in place now for any executive, at all. They, the,
everyone gets a flat salary, and that's it.
Senator Lautenberg. So, there haven't been any bonuses paid
in the last couple of years?
Mr. Grinstein. No, that is correct, Senator. There have
been no bonuses paid in the last couple of years.
Senator Rockefeller. All opening statements are included in
the record, as will yours be.
Senator Snowe?
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman.
Obviously, as one who represents a rural State, I've seen
the evolution of deregulation since 1978. There's no question
that rural States, like Maine, and West Virginia, and North
Dakota, have experienced, you know, the downside of
deregulation and borne the brunt, you know, of higher costs and
less service.
Now, we've been fortunate to have benefited by both US Air
and Delta services to Maine. You know, we're essentially
regional airports, or Essential Air Service. There's also--I
think it's indisputable--that rural states have, you know, bore
the disproportionate burden any time there is consolidation or
any times there are difficulties within the industry. I think
it's important for this Committee to examine the overall issue
of these mega-mergers. I think we're on the cusp of more,
potentially, and I think we really do have to examine the
risks, and the ramifications for, you know, the entire country.
And when I looked at that map of the overlapping hub structure,
that concerns me, and the whole network.
Because, I think what's different, in this instant, Mr.
Parker, than the merger you had with America West, is the fact
that you weren't overlapping network structures. So, the
inevitable will happen. Which is to say that we're going to,
you know, lose service and also, I think, result in higher
prices. One or the other. And, frankly, our areas of the
country are ones to first experience higher prices and less
service. And the last to reap the benefits of any change.
So, you know, I hear what you're saying. It's hard, you
know, down the road--today, you know, you've obviously
expressed good intentions about, you know, maintaining the same
service, not furloughing personnel. On the other hand, what
does it mean for even, you know, the short term, or the long
term and how viable that could be, given the fact that you're
assuming a debt load of $24 billion? Doesn't that put your
airline even in greater risk, potentially?
What I hear the choice is, that you're not going to get the
low-cost carriers into your smaller markets, and that's true.
And that's true. On the other hand, we're left with the choice
of having one dominant carrier, potentially, in our smaller
markets. But, if you should fail, then what do we have? And I
think that is the risk here.
It's hard to believe that we'll continue the same service.
And two of our airports, in Portland and Bangor, for example,
if we had this combination, then we would have 11 or 12 city
pairs. Without any competition, that would really represent a
market share of more than 90 percent of the passengers.
So, I'd like to hear from you how you think it will not
increase the risk to your company, leveraging this kind of debt
for the future.
Mr. Parker. I'm happy to answer that, and to go back and
cover your overlap question, as well.
As it relates to the debt load, an absolute level of debt
is not a particularly meaningful number in and of itself. For
example, General Electric has $400 billion of debt. General
Electric is an enormous company that has enormous profits. What
matters is if you can service the debt.
What we have, in this case, is a larger airline, that has
higher profitability, and as a result, can service the debt.
And I feel extremely comfortable that the balance sheet that
the US Airways/Delta merger creates, would be the strongest in
the industry. Today, US Airways is the strongest. The new US
Airways would be the strongest of the network airlines in terms
of debt, so, I do not believe that is a concern. But thank you
for the concern, and believe me, it's something we're extremely
focused upon.
As it relates to the overlap question, and as it relates to
small cities like those in Maine: First off, on the overlap
piece--it is not the number of overlaps that matter, it is the
extent of competition on those overlaps. And again, when you
take the time to actually, not just look at a map, but to
actually go and do the analysis on a market-by-market basis,
what you will find, is that those markets are intensely
competitive.
Finally, one of the things that I would like to point out
is, our pricing philosophy at US Airways. Coming from America
West--a low-cost carrier--we actually understand that if we try
and charge people in places like Portland, Maine higher fares
than are rational, those people will end up driving to
Manchester, as they're doing today. And we have gone through,
in a number of places already throughout the country, and
lowered fares.
A number of communities who have submitted letters to the
Chairman about their support for this, without going through
them all, it will just reference the final sentence from
Huntsville, Alabama, it says, ``Huntsville International feels
it's time for change, and we believe that Delta/US Airways
should be given the chance to be the catalyst to foster lower
fares, and more service, for smaller communities.''
That is a community that has seen what happens when an
airline with a pricing philosophy like ours serves their
airport . . . we understand that if you don't lower your fares
to stop people from driving to where low-cost carriers are, you
will lose the customer. This is not a mentality that legacy
carriers have. One of the radical changes we've made, with our
pricing philosophy at US Airways, one that you would see at the
new Delta----
Senator Rockefeller. Senator Snowe and Mr. Parker--I need
to interrupt at this moment to say that a vote is gone off, and
what I would like to suggest is I will stay here--Senator Lott,
you're next?
Senator Lott. If I could go, because I will----
Senator Rockefeller. Yes, you're next, I hope you will
stay, you are the next up, so that will have to be your
judgment listening to that.
But, we are going to try and just keep this going. But, if
anybody leaves me out to dry, I'm going to remember it for 30
years.
[Laughter.]
Mr. Parker. I'm not getting up, Senator.
Senator Rockefeller. Yes, Senator Lott.
Senator Lott. May I proceed then?
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Thank you very much, Mr. Chairman for having this hearing.
Of course, it was described as a hearing on the state of the
airline industry, and the health of the airline industry,
broader than just the mergers. But, I think it's a part of the
process, it's very important, we need to think very carefully
about how we do our job this year in support of the aviation
industry. We are going to have to deal with the FAA
reauthorization, and so to have these hearings are very, very
good.
Thanks--welcome all of you here, and thank you to our
panel, all of you, for your testimony. I find it very
interesting. To the two CEOs here, let me congratulate both of
you, you obviously have been doing an outstanding job as the
head of your airlines, and you've made, you know, very fine
statements here today.
You know, we are making progress in aviation. I do think
the quality of our leadership, our CEOs, has improved,
markedly, in recent years. Your industry--airlines are making
important moves: coming out of bankruptcy, and even making
money, Heaven forbid, and that's all very good.
I think that your merger with America West has worked well
for you, but I'm a little concerned as you're still working
through that process, now you're--you know, you're making a big
leap here, and trying to take on this next merger.
And, I must say, you are an aggressive suitor. But the lady
from the South, Atlanta, does not seem to want to be forced
into this shotgun wedding.
[Laughter.]
Senator Lott. And so, generally speaking, I don't oppose
mergers. I think mergers that can make good business sense, and
if they're not anti-competitive, completely, or cut back on
service, let the process work.
But there's something that does bother me, first of all,
when it's a hostile effort. How do you respond to that, Mr.
Parker?
Mr. Parker. Well, we didn't want this to be hostile,
indeed, we'd prefer it not to be. But I fully understand Delta
management's response.
But we have an obligation as well, Senator, to the people
that I work for, and the people that work for me, to do what's
best for our company, and to ensure that we're building a
company that is as strong as it can possibly be. And what I
believe fully, is that US Airways, on a stand-alone basis, is
an outstanding company that's going to have a fantastic stand-
alone if this merger doesn't happen.
Having said that--and furthermore, as much as I enjoy this,
I could be sitting at home and not testifying in front of you
about why it's so important to do this. I could have an easier
life than this, Senator. But the fact of the matter is, it's my
job, to go do what I--to go do what the people that pay me, pay
me to do, to go try and build something better. And I have an
obligation to do that, as I know you appreciate. And that's why
we're going forward.
It's not--it's not as simple as when someone tells you
``no,'' you go away. When indeed, you have an obligation to
fulfill for the people that work for you.
Senator Lott. Have you made any commitments to your
employees about transferring bargaining rights to the merged
company?
Mr. Parker. No, sir, the situation is as follows. We have,
as Mr. Roach can tell you, a heavily unionized workforce at US
Airways. Delta has only one union--two, actually--but is not
very unionized at all. What we have said, is we will let our
employees decide. We will neither ask people to be represented,
organized--by organizations that they don't want to be, but
furthermore, we're not going to fight organization efforts from
union. If they can convince people, that's what they want to
do. We happen to believe that unions at airlines are not
necessarily a bad thing that need to be fought. What we need to
do is work together and get contracts that make sense. But, the
fact of the matter is, we will not oppose if, indeed, our
employees decide that's what they want to do----
Senator Lott. All right, thank you.
Mr. Grinstein, first, thank you for what you've done. I
think you've done an outstanding job at Delta, you've made a
lot of progress. I presume, and hope that you're getting ready
to come out of bankruptcy and you're going to retake your
position of prominence, of service in the aviation industry,
and I appreciate that. I'm sorry you're having to be tied up
with this process when you really need to be, I think, focusing
on other things.
My greatest concern is that this could mean less service.
You know, I just, I think when you look at the routes,
duplication of the routes--I mean, it would lead to some of
these routes being eliminated. I don't see how you could do
otherwise. I don't think it would make good business sense in a
merged arrangement. How do you respond?
Mr. Grinstein. Well, of course, I agree with that. I think
that when you get into the level of debt that you're talking
about with this company, that you're going to have to trim it
significantly, and among the things that you're going to trim
is service to smaller communities. And those markets that go
from three to two competitors, and from two to one competitors
are going to pay part of the price, and the other part of the
price is you're just not going to continue service in those.
Senator Lott. There's something worse than prices that are
too high. And that's no service. We've dealt with both of
those. Now, I admit, your pricing system makes, you know--maybe
it makes sense to you, but the people don't like it, don't
appreciate it. And, you pay an outrageous price to fly, just to
Atlanta. And then you can fly, you know, all over the dang
country, to the big cities, for one-third the price.
So, the main thing is, I want reasonable prices. Not
outrageously low prices--you can't make any money when it costs
more for gas to drive to a site than it does to pay for a plane
flight. So, I do think the industry as a whole needs to have
some system that makes more sense in regard to fares,
reasonable and fair fares. Not just necessarily $200 fare, but,
you know, I think the risk here is--in the industry as a
whole--and I realize there are some small communities and areas
where you've--maybe you've been providing service that doesn't
make sense. You're not going to be able to continue to do it,
you're going to have to cut back.
But, this merger causes me concerns, and I just wanted to
get that on the record. Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, Senator Lott.
There's been a revision. We, in fact, have two votes. We
are, however, a very loyal band of Commerce Committee Members,
we will be back, and Mr. Steinberg--if you could maintain your
position between those two CEOs----
[Laughter.]
Mr. Steinberg. I'll keep them apart from each other.
Senator Rockefeller. We would appreciate it. About 15
minutes.
[Recess.]
Senator Rockefeller. We're waiting for Senator Dorgan, who
is on his way back. And, for Senator Cantwell, who is on her
way back. And people can talk.
[Laughter.]
Senator Rockefeller. Mr. Steinberg, maybe I'll just take
advantage of my colleague's absence, and simply ask you that--
this question.
Mr. Parker testified that there would be very little impact
on the communities if the proposed merger went through, Mr.
Grinstein testified that there would be significant negative
impact. In evaluating mergers--which I'm sure you have--and
their impact on small, smaller communities--have you come up
with any wisdom?
Mr. Steinberg. Senator Rockefeller, I think that the answer
to the question of what will happen, of course, very much
depends on the decisions that a combined entity would make
about continuation of the hub structure that's now in place.
Obviously, it stands to reason that if the result of the
transaction that a hub is downsized or closed, then you
probably would see a reduction of some sort, in service, to
some communities.
Senator Rockefeller. You are, you're astudiously and
admirably neutral.
[Laughter.]
Senator Rockefeller. Let me try this----
Mr. Steinberg. Well----
Senator Rockefeller. Would it be possible to construct a
carefully regulated service into carefully selected rural
communities who really do depend on it, and unlike captive
shippers, who do, then, raise the price to whatever they want,
regardless of their protestations--have dual capacity in those
areas?
Mr. Steinberg. I think we need to work hard to find a way
to improve service to small communities, because clearly that
remains to be the biggest problem from deregulation. I don't
think that re-regulation will work. And the reason is, that, if
you re-regulate service in small communities it won't, by
definition, have an impact on service elsewhere. There's no way
to separate out the markets.
I do think that----
Senator Rockefeller. Well, then, is there a construct,
which does not involve re-regulation, which is not there for
impact on the rest of the route?
Mr. Steinberg. Yes.
Senator Rockefeller. Is there a construct which you have
thought of, which has been kicked around----
Mr. Steinberg. Yes.
Senator Rockefeller.--which could be possible?
Mr. Steinberg. One of the things that we're at the
beginning stages of looking at is ways to encourage more
service to small communities through the use of the new class
of jets that are out there, which are smaller, cheaper to
operate and--well, I can't say that today they would allow such
service--over the long-term, they should allow such service.
If you combine a new fleet of, sometimes they're called,
very light jets but they're basically, they're jets that carry
many fewer passenger, with new technologies that allow us to
aggregate demand by passengers. And you can envision, at some
point in the future, a much more vibrant network where there
would be, what we would call ``on-demand'' service for people
living in small communities that could be operated profitably.
Senator Rockefeller. A final question before I yield to
Senator Dorgan. Would these jets contemplate carrying more than
12 to 15 passengers?
Mr. Steinberg. I think the current breed of jets are around
six passengers, but I think over time, what you'll see with
improvements in manufacturing these composite materials is,
jets of all stripes, if you will. But the point is, that they
are jets, so the customer experience over time would be
markedly better than it is today with smaller planes.
Senator Rockefeller. Those customers that get on.
Can I ask my staff to work with you to try and figure other
ways? I think there is a solution here, I don't think it's
easy, it's given to all kinds of pre-determined, horrible words
like re-regulation, which is the railroad's favorite word. But
I don't think it necessarily has to come down to that, but it
has to come down to something in that order.
Mr. Steinberg. I would very much welcome the opportunity to
do that----
Senator Rockefeller. Thank you.
Mr. Steinberg. This is a very high priority for us.
Senator Rockefeller. Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Senator Rockefeller, thank you very much.
Mr. Steinberg, first with regard to your testimony--I'm a
big fan of the marketplace, I used to teach a little economics,
I think the market system is the best method of allocating
goods and services, but it also needs a referee. And, as I read
your statement it is--the market forces have to determine
everything.
You know, I was telling somebody once about Judge Judy on
television, that out-of-sorts television judge earns $25
million a year, according to a report I saw, and the Chief
Justice of the Supreme Court earns, what, $180,000 or $200,000
a year. That market system. Or a third baseman earning the
equivalent of 1,000 elementary school teachers--the market
system.
So, I love the market system, but it needs a referee.
Sometimes perverse results come from the market system. And if
we are only concerned about the ``market,'' with respect to air
service, you know, it might well be the market would say air
service only exists between major cities.
I just want to make a couple of comments, and then ask some
questions. Deregulation has given us two levels of air
service--one is an urban level of air service that is
wonderful, if you're fortunate enough to live in Chicago and
want to travel to New York, or Los Angeles, God bless you,
you're going to have lots of opportunities, and competition for
fares, and low fares. And if you, however, live in a rural
area, tough luck.
So, you can go to a travel agent, and you can say to the
travel agent this, ``I want to travel twice as far and pay half
as much,'' and the travel agent would say, ``Well, how about
traveling half as far and paying twice as much.'' That's
exactly the case, traveling from here to Los Angeles, or here
to Bismarck. Do I like that? Of course not. I don't think it
makes any sense at all.
Now, there's a natural tension here, and it relates to this
hearing, tension with respect to the airline industry, in which
network carriers have created post-deregulation a hub-and-spoke
system. And unregulated hub-and-spoke system in which the big
airlines dominate their hubs. I like the hub-and-spoke system,
because it's the only way the spokes get service into a hub,
and then move anywhere.
Other airlines have decided, ``We're not interested in hub-
and-spoke systems, we want to pick city pairs where we can make
money.'' And so, you all, Mr. Parker, you with really a
wonderful look in your eyes as you contemplated owning
Southwest--you look at that and say, ``What a wonderful
model!'' It's certainly not a wonderful model for much of rural
America, is it? Because that model would obliterate the hub-
and-spoke system.
And so, I say all that because, as I said, if you're
leaving today flying across the country, you're going to get a
much better deal than leaving today to fly halfway across the
country. And that's a shame. It's a shame for a lot of
consumers out there who get injured by these policies and by
these issues.
I am not a fan of mergers. I'm not a fan of--I wasn't a fan
when United wanted to buy US Air. Mr. Parker, when America West
wanted to buy US Air, it occurred to me it was a minnow
swallowing a sick whale. And, somehow, apparently something has
worked here, and so, good for you. I admire that. But, look--
that is a different transaction, America West buying US Air,
than two network carriers deciding that they're going to marry
up. Or, in this case, there was no romance, so there's not a
marriage, it's one network carrier saying, ``I'm going to take
over the other network carrier.''
I'm not a big fan of that, because inevitably what is going
to happen is, the other network carriers are going to decide,
``We've got to merge.'' It's going to be, I think, American/
Northwest, Continental/United--we're going to see transactions
in those areas. And so, I don't think that gives consumers more
choices, I think it gives them fewer choices. I don't think it
gives them more competition, I think it gives them less
competition. I think concentration is the exact opposite of
competition.
So, having said all of that, let me ask a couple of
questions, if I might. Mr. Parker, you first. If Delta were not
in bankruptcy, would you be pursuing this transaction?
Mr. Parker. Most likely not. I can't say that for certain,
of course, but most likely not. Much of the value that is
created is through Delta's bankruptcy, to restructure the route
network by returning aircraft to lessors, which is dramatically
easier through the bankruptcy.
Senator Dorgan. You can actually abrogate contracts and
take those assets, the airplane assets and get rid of them?
Bankruptcy gives you a much, a much more--I should say, it
gives you an opportunity you wouldn't have, were Delta not in
bankruptcy, right?
Mr. Parker. It makes the ability to return aircraft to
lessors easier, which is--we believe one of the ways of
reducing the cost structure of the airline to compete with low-
cost carriers is one of the basic tenants of this. And yes, the
bankruptcy process facilitates that.
Senator Dorgan. Airlines have had very significant
financial trouble--I respect and understand that. It's been
tough, especially for the network carriers--for a lot of
reasons. But, it is also the case, I think, that some
bankruptcy filings were a result of the previous bankruptcy
bill passed by Congress, and the effective date, and were
defensive filings to allow them to do certain things to become,
perhaps, more competitive with low-cost carriers. Would that be
the case, you think? I would ask either of the CEOs.
Mr. Parker. If they were defensive filings?
Senator Dorgan. Yes.
Mr. Parker. Before the law? I don't know, I haven't filed
bankruptcy.
Mr. Grinstein. The--if I understood your question, Did the
companies race to file before the new bankruptcy law took
effect? Was that----
Senator Dorgan. Congress passed a new bankruptcy law----
Mr. Grinstein. Right, right.
Senator Dorgan.--it had an effective date on it, and there
were certain advantages to, to filing prior to the effective
date. And some airlines, I believe, took advantage of that for
their own reasons, is that correct?
Mr. Grinstein. Well, I can only talk about Delta, because I
don't know--the only other company that filed at the same time,
or approximately the same time--exactly the same time--was
Northwest Airlines.
But in our case, there were two changes that Congress made
in the bankruptcy law that affected it. One was the ability to
get what we call KERBs, Key Employee Retention compensation
pieces, and the other was the limit on the amount of time that
the debtor--management had the right to oppose the plan.
In Delta's case, we did not ask for KERBs, so it was not
relevant to us, the timing. And, we are well ahead of the
schedule that was there. So, it was not a motivating factor for
Delta, at all.
Senator Dorgan. I'm interested in what this proposal means
for the consumer, the employees of the industry and finally,
for the corporations themselves. I'm not unmindful of the fact
that you need to make a profit. We need to have an airline
industry that is profitable--I understand that. The question
is, how is it structured?
And I started by telling you that I have great angst about
what has happened in recent years since deregulation. I don't
think deregulation has served rural interests at all, rural
States' interests at all--I think it's been devastating. And
so, as I take a look at what's happening in these kinds of
discussions, it was US Air/United and then this one, and this
would be followed by, at least, two or three more. As I take a
look at that, it doesn't seem to me like there's any discussion
of the type that Senator Rockefeller has been asking about--
what about us? What about the folks in the rest of the country?
I mean, tell me, if you would--both of you, I guess, perhaps
Mr. Parker first--tell me why this merger, or this acquisition
by US Air is the best choice for consumers, employees, and for
the country? And Mr. Grinstein, tell us why this is an awful
choice, for the same groups, OK?
Mr. Parker. Right. As it relates to consumers, again, the
consumers after this merger would have more choices to fly to
more places, we would not eliminate service in any city that we
fly, and you would have the benefit of a stronger airline. And
getting back to your small community question, Senator, I
reiterate my firm belief that the best, in our current
structure--notwithstanding Senator Rockefeller's ideas that he
may have on changing the structure--in the current structure,
the best way to ensure that small communities have continuous
and good service is to ensure that the network airlines are
healthy. And that has been, that has been much of the problem
over the last, several years, in my view. Is the constant churn
that has gone through network airlines that make it--where you
see communities like yours lose and add service, and lose
service. And it also creates problems for all of the employees,
as well.
Senator Dorgan. But, Mr. Parker, I don't disagree with you,
I agree with you on that point. I think it's important that
network airlines be healthy, especially those that have hub-
and-spoke systems that serve our rural areas.
But your airline is a network airline and you've described
your health--you're making, you're profitable at this point--so
at this point, why is that not enough, and why, why is there
not a risk for you, now, to absorb another major airline--is
there not a risk in that, to move you to a situation that is
different than you have today?
Mr. Parker. I think it dramatically reduces the risk of the
combined companies. Again, and again, to go back to a real-
world example--we took America West Airlines that was not doing
particularly well, US Airways that was on the brink of
liquidation, the whale that the minnow swallowed, in your
terms----
Senator Dorgan. Sick, actually, sick whale, I said.
Mr. Parker. Sick whale. Our employees said we were hitching
our boat to the Titanic. So, I heard all of those things. The
reality is, what happened is, we took that sick whale, we took
that Titanic, and we turned it around. And small communities
that would not have service today had we not gotten that--a
number of small communities would not have service today if we
hadn't gotten that done, and 30,000 employees would be out of
work.
Healthy network airlines are the most important thing in
today's structure to provide service to small communities. I
believe that a merger of US Airways and Delta makes both of our
companies stronger, and that, therefore, is better for
consumers throughout the United States.
Senator Dorgan. I appreciate the Chairman indulging me on
time, I know my colleague, Senator Cantwell, has questions as
well.
I want to make the point--you could make the same argument,
one I support, about strengthening network carriers--you could
make the same argument in support of the next three mergers
coming up to one carrier, with a seamless transaction for the
country. It's important for the health of the network carrier.
The question is, what will this merger really mean for the
consumer, and the rest of the country?
And if I might ask Mr. Grinstein, then, to answer the
question, if you would, why is this a terrible idea for
consumers, employees, and for the country?
Mr. Grinstein. Well, in the first place, we--these are not
unhealthy companies at this point. I know that US Airways is
projecting a profit and a performance, they've indicated
already that they're talking about fleet replacement and
discussing that. Delta has--is on a business plan that is--
exceeding its business plan, Delta's projection is that it will
be profitable, it will be able to afford aircraft, it will be
able to compensate its employees, it will be able to give them
the kinds of career satisfaction that they are entitled to
have, and it will be a growing company.
As I mentioned, we've called back all of the pilots on our
furlough list, we have almost called all of our flight
attendants back from the furlough list, so Delta is not a
company that is unhealthy. They are two healthy companies that
are competing in essentially the same market.
I think it's a bad deal for a number of reasons. In the
first place, from the employee point of view, you want to have
approximately--you would have the 10 percent cut. You're
talking about approximately 200 aircraft, and all of the people
that go with it. What we're listening to is, ``I don't intend
to stop serving the hubs, I don't intend to stop, to reduce
employment other than by attrition, I don't intend to raise
fares,'' but there's no one to enforce it.
If you take a look at St. Louis, when American bought TWA,
they said, ``We will expand international service, and we will
expand domestic service.'' If you take a look there today,
domestic service is down about 60 percent, there are about 70
percent fewer seats on the market, and the low-cost carriers,
Southwest, has gone down 18 percent. And there's no
international service except one a day--one a week--to Puerto
Vallarta.
So if history tells us anything about it, it doesn't work.
And, you're going to have lay offs. You don't have anyone to
enforce that--it's not a contract, it is--believe me, trust me,
I've done it before. But, what you're talking about with
America West and US Airways is not an example like anything
that will go ahead.
But, in terms of service to small communities--are you
better off with six network carriers, or are you better off
with three? Are you better off with more hubs, or with fewer
hubs? Are you better off having those network carriers fiercely
competing with each other, trying to get into those markets,
taking, for example, Mr. Steinberg's example of the new, very
light jets that are coming in, and trying to serve all of those
markets to feed into a network?
Because, approve this, and what you are approving sets such
a low standard that--how are you going to say ``no'' to
Continental and United? How are you going to say ``no'' to
Northwest and American? You will devolve into three network
carriers. And once that happens, you won't get the same level
of service.
When we talk--let me just say a word about debt. The
comment was that companies have huge debts, like General
Electric. General Electric is a perfect example.
In General Electric capital, they have about a $400 billion
debt. Three hundred and ninety-five billion dollars of that is
in General Electric capital, because they're constantly
churning and trading it. But in the rest of the manufacturing
company, they only have a debt of about $5 billion, and $100
billion of revenue. So, it's a totally diff--it's like
comparing the rock of Gibraltar to a sand dune. It's a
fundamentally different kind of business.
When you look at the frailty and the fragility and the
volatility in this business, you can't service that kind of
debt without making fundamental changes, and when you have an
overlap like this, you're going to have hub reductions, you're
going to have service reductions to smaller communities, you're
going to lose frequencies, and there is no way. And the history
of it in US Airways' own case, is that a number of--almost 70
percent of--their small hubs had significantly reduced service.
So, it is not a good deal for the consumer, for the small
community, and it sure as hell isn't a good deal for all of
these people who have worked so damned hard for Delta Air
Lines, and have invested their careers in it, and they're
entitled to get the benefits of it. And----
Senator Rockefeller. Senator Dorgan, I'd like to move on to
Senator Cantwell.
Senator Dorgan. Mr. Chairman, I hope to talk to Dr. Cooper
and Mr. Steinberg at some point, and maybe I will a little
later, but I thank the witnesses for their responses.
Senator Rockefeller. Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman.
And I thank Senator Dorgan, although my questions are,
really, I think, along the lines that you were exploring, which
I think is a very important issue.
GAO recently did a report in 2006 that said since 1980, the
average fares for flights over 1,500 miles has declined by 52
percent, while those for trips shorter than 250 miles have just
fallen 13 percent. So, those small markets that you were just
alluding to, and that many of my colleagues alluded to earlier
in their questioning, are important issues for us. How do you
maintain those markets? How do you maintain competitive fares
for those markets? So that's something that, I think, is very
important, Mr. Chairman, in this discussion.
I am concerned about the history of these two stories. And,
I'm trying to understand, Mr. Parker, and Mr. Grinstein, about
this process. Delta has gone from $17 billion down to $7
billion in their reorganization of debt, and in the meantime,
basically kept pensions for 90,000 employees. And yes, while
there are people here today that represent a worker agreement
on 10,000 of those employees for a new retirement plan.
On the other side, US Air hasn't completed its merger yet,
and yet in that process, you know, you've come to the U.S.
Senate for $900 million in a package, a part of what was the
post-9/11 efforts, and in the meantime dumped the pension
program for 35,000 employees. So, I'm not sure why the people
in the back of the room really aren't the question here, the
picture of the two different approaches.
So, Mr. Grinstein and Mr. Parker, first of all, I want to
ask you if you plan to reinstate the defined benefit retirement
plan?
And second, Mr. Grinstein, I'd like to ask you, How did you
go through this bankruptcy process, and considering these
pension programs, as it relates to the efficiencies that you
also have to achieve in trying to keep this balance between
large and small markets?
And Dr. Cooper, last, to you, do you think that US Air can
achieve these efficiencies that it is describing in this merger
and consolidation?
Mr. Parker. Thanks. First off, as it relates to the US
Airways pension history, I wasn't there--to be clear--that
doesn't mean I don't know anything about it. But what I do--my
understanding is that without terminating the pension plans,
that company was going to liquidate. And they went through a
bankruptcy court process to do that. The laws that have since
been passed by Congress, that I believe were good laws, were
not in place then. Despite then-US Airways management trying to
lobby for such a law, they didn't have the ability to do what
Delta has the ability to do. So, the only choice available for
that management team, my understanding is, was to terminate
those plans. The alternative----
Senator Cantwell. Will you reinstate them?
Mr. Parker. Well, as we move forward, if we move forward
with the Delta plan, we would abide by all of the--the plans,
the pensions would be exactly the same as the Delta employees
have today, we'd make no changes to it.
Senator Cantwell. How could you make no changes to it?
Mr. Parker. We don't have any intention to change the
existing----
Senator Cantwell. And so would you reinstate those
pensions----
Mr. Parker.--it would continue to fund.
Senator Cantwell. Would you reinstate pension benefits for
US Air employees?
Mr. Parker. I don't believe the company can afford
reinstating the pension plans for the US Airways employees.
Senator Cantwell. So you would just--you are just saying
you would keep the good business practice that Delta has had to
go through in its reorganization and its process, but not
adhere to reinstating those benefits for US Air employees.
Mr. Parker. The benefits for the US Airways employees have
been assumed by the PBGC, and that's where that obligation
lies. And we would abide by the obligations to the Delta
employees and move forward.
Senator Cantwell. Do you understand how that sounds to a
Member who voted for that $900 million bailout plan, and then
the PCBG is picking up the pensions, and you're asking me to
take over a larger airline that has gone through the hard work
of bankruptcy and making these decisions, but in that
bankruptcy decisions, basically did keep the pensions for the
majority of their employees? And is in a battle, a working
relationship with the pilots that are here today, to try to
figure out how to move forward? So, there has been a lot of
sacrifice and a lot of balance.
Mr. Parker. Oh, absolutely. And, believe me--this is not
about us trying to ignore the sacrifices that have happened at
Delta Air Lines. The people have been through an amazing
amount, and the company has done a fantastic job. Never have we
stated that this is about our ability to do it better than
Delta has done it, I think they've done an admirable job, I
know the people have done a fantastic job and have gone through
a number of concessions, as has the entire industry--including
the people of US Airways. We have all had to go through the
same thing.
What I believe, unfortunately, is our work isn't done. And,
if all we do is let it settle with a bunch of airlines coming
out of bankruptcy, and then going back to where we were, which
is, ``Oh, fuel prices are falling, the economy's coming back,
let's just keep the status quo,'' we're going to be back here
in 5 or 6 years, Senator, asking you for other bailouts. And I
don't want to do that.
Senator Cantwell. Well----
Mr. Parker. What I want to do is come up with a, with an
industry that can actually succeed through good times and bad
times, so we don't have to go ask our employees for
concessions, and so we don't have to come back here and ask you
to bail us out.
Senator Cantwell. Mr. Grinstein?
Mr. Grinstein. How did we get from 17 to 7? A variety of
ways. We basically said that we would cut $3 billion--$2
billion of costs out, and we would so restructure the airline
that we'd add another billion in revenue. And I will tell you
that we're well ahead of that plan.
We included in our calculation trying to retain those
pensions, if we could get Congress to pass the Pension
Protection Act--and as you recall, fortunately, at the last
moment, we got it. And so we were able to honor the pensions of
the 90,000 non-pilot employees.
Some of it was renegotiating aircraft leases I mean, we
were paying $225,000 for a plane, we're now paying $75,000. We
had to go through the negotiations for airport leases and all
of our suppliers, and so we took enormous costs out. But we
always felt that we were going to be obligated--that we were
obligated, a commitment had been made, and we had to preserve
as much of that pension as we possibly could, and that has led
us to where we are.
The creditors' committee represents a large portion of the
debt, but the largest single group of our creditors would be
the PBGC, the pilots and the retirees. That's how we got where
we are.
Senator Cantwell. And if this hostile takeover actually
happened, then instead of $7 billion, what would the debt be?
Mr. Grinstein. Twenty-four billion dollars.
Senator Cantwell. Dr. Cooper, on efficiencies?
Dr. Cooper. Well, if you look at the story you've heard
today: the route overlap, the capacity reductions, the labor
issues, and the promises that you've heard about, ``We won't
cut this, we won't cut that,''--it doesn't add up. And, you can
see the Members of this Committee--to use an expression from a
lots of the parts of the Members of this Committee: that dog
won't hunt. It just doesn't add up.
And so, in the end, when you look at this merger, and
you're being given examples about America West, US Air--which
we did not oppose--completely different kind of merger. You're
told that the industry's going to go back to where it was, and
we'll be back here asking for more money--this industry is
different. It has radically transformed itself in the last 5
years. So, the story just doesn't make sense.
If you look at the history of these kinds of mergers, where
you're eliminating overlap, where you're--clear plans to
dramatically reduce capacity, you're either creating lots of
monopoly cities, which you are then subject to abuse of market
power, or you're going to lose service.
If you try to write in merger conditions all of the
promises that were made here today, that company would squeal
like a stuck pig. Tell you that, ``Hey, we can't go forward on
this, the bankers would probably bail.'' Because, if you try
and do the math, the bankers will look and say, ``Hey, this
doesn't add up anymore, we're not going to put our capital at
risk.''
So, the simple fact of the matter is that--and this
Committee knows full well, I've heard it expressed--the only
way to stop this merger wave is to stop the first merger. If
you don't like the picture you see at the end of the three or
four mergers that are being talked about, somebody has to stand
up and say, ``Wait a minute, this one is anti-competitive.''
If we want to have network carriers, we can accomplish this
in a way in which we have some competition, where people are
healthy, they've shown that they can get that way, they've
taken the hard steps, and to allow an anti-competitive merger,
I think, consumers will be hurt. Because, you simply are
eliminating too much competition.
Senator Cantwell. Mr. Steinberg, did you want to comment on
that GAO report about the small markets only having a slight
decrease in price while the large markets had all the
competition which would lead one to think that this would leave
the smaller hubs with even more challenging times and higher
prices? And for, you know, for the Washington State economy and
I'm assuming some of my other western colleagues, but probably
it's in lots of other states whose economies depend on
relationships like, between Seattle and Spokane and various
parts of our State, we count on having good competition for
price and fare.
Mr. Steinberg. And we recognize that. One of the explicit
goals of DOT in looking at economic issues is to ensure a
competitive breadth of service to small communities, which
means enough flights at the right prices. The difficulty, of
course, is that in a deregulated environment, there's only so
much the Government can do to make that happen. This is the
observation that fares have gone down in markets where there's
lots of competition and they've not gone down in other markets
isn't at all surprising to me. That's what one would expect to
happen.
Deregulation has been a big success in producing low fares
for, you know, millions of Americans in most markets, but
there's no question that in some of the smaller markets, it has
not been as successful. And that's why we recognize that there
do need to be other constructs for fixing the problem.
But, going back to the discussion we had earlier, it does
seem to me that healthy network carriers will support more
service. Because the first service to go when they start losing
money is the service with the fewest passengers and the
thinnest profit margins. That's why I said earlier, since
September 11th, without significant consolidation, there has
been a decline in service to small communities.
Senator Cantwell. And I'm assuming you don't define
``healthy'' as only two or three large carriers?
Mr. Steinberg. That's, you know, I don't think there's a
magic number. There are industries that are quite competitive
where there are just a couple of companies, like UPS and FedEx
would be an example of one. There are other industries where
you need to have more to ensure that consumers get the benefit
of lower fares.
But as I said in my opening statement--this industry, you
don't want to place too much reliance just on market share.
Because you have the presence of companies like Southwest--and
admittedly, they don't go everywhere--that have had an enormous
impact on the fare structure generally. You have an environment
where, thanks to the Internet, essentially perfect pricing
information, and you do now have lower cost structures which,
as I said before, I mean, the situation we're now in, I think,
we can say for the first time, the network industry has the
ability to provide low fares, but still make some profits.
But I don't mean to minimize the significance of the issue
that you raise--it's a very important issue, with obvious
economic consequences for the communities that are involved.
And we have to work very hard, and I'd like to work with the
Committee on ways we can incentivize more service.
Senator Cantwell. Well, just as an example, the wine
industry in Washington State, in Walla Walla is a growing,
diverse industry. And air flight service into that area is of
great economic importance to a whole new industry that hadn't
previously existed so, getting good flights----
Dr. Cooper. The UPS/FedEx example really rung a bell,
because you know, let's not forget we have the Postal Service.
And we've got a firm commitment to that. And UPS and FedEx
compete for certain kinds of traffic, certain types of
packages, in certain types of markets. And that's essentially
the kind of problem we have in this industry. Is that, there's
a lot of the, you know, the small market, you know, simple
transportation that the competitive part won't deliver.
So, that analogy is actually, it rings the bell, you know,
we still have a Postal Service that moves an awful lot of
letters that the other two guys are not interested in moving.
And, if you try to tell them, ``Move those letters,'' the price
of delivering a letter, as much as we complain about it today,
would go through the roof, if you left it to the marketplace.
So, we've got this challenge of recognizing the broad
public interest, and also having the benefits of competitive
markets in some places.
Senator Cantwell. Well, Mr. Chairman, thank you for your
indulgence, and I hope that we'll continue to look at this, as
Dr. Cooper and others said. You know, there was a San Jose
Mercury news article about how--I think it was an editorial--
that lawyers, investors and bankers and airline executives come
out as the likely winners, but where are travelers and the
labor unions that are part of this organization? So, I think we
really need to keep our eye on this, Mr. Chairman, and thank
you for this hearing.
Senator Rockefeller. Thank you, Senator Cantwell.
And just before--Senator McCaskill is on her way back,
hurriedly, and we have Senator Dorgan back, and I'm going to
ask one more question.
You can not on the basis of America being America, allow--
not just a Walla Walla, which has a coming industry, and a
growing industry, which the airlines recognize--but a state
like West Virginia, or Montana, or South Dakota which could
have growing industries but have not yet shown them. But if
there were air service, it would really make it possible, and
it's easy to prove. And my question is this, to both of the
CEOs: If we were to try to find a way to get both of you or
other iterations of you into rural communities by means other
than the classic market system, would you be amenable? And,
before you answer that, when I say ``re-regulate,'' of course,
the whole world goes crazy. I mean, I've seen CEOs of railroad
companies levitate, to the extent that they could levitate.
[Laughter.]
Senator Rockefeller. It is a horrible word. So, we banish
that word from the dictionary, and we use creative, alternative
thinking to help Americans arrive at their just fruits, and
communities which do everything they can in the world to try
and make that attractive. Could you both live with an effort
that Secretary Steinberg and a number of us made, which
potentially could end up being in law? Or being in practice?
Where smaller communities were served? Not just by Essential
Air Service--you've got to have at least three flights a day to
do anything, OK? That--you don't exist if you don't have three
flights a day. Would you be willing to listen to a construct of
that sort?
Mr. Grinstein. The answer is, I would welcome the
opportunity, on behalf of Delta, to work with the Department of
Transportation to see if we can come up with something that
addresses that.
I think what you're talking about is something that
recognizes, simultaneously, the needs of those small
communities and also is something that the airlines can do to
provide adequate service, and still work toward replacing their
fleet and making all the kind of human and material
investment----
Senator Rockefeller. Well, I was saying something more, I
was saying something that Senator Dorgan said, former professor
of economics, as we all know. And that is, that he believes
fully in the free market system, but there has to be a referee.
Small American communities, who have real Americans who go
to war, to fight and do all kinds of good things for this
country have a right to a future. Would you be willing to
contemplate a referee of how--whatever description--to see if
we can solve that problem?
Mr. Grinstein. If we can work with you toward defining the
role of that referee, the answer is yes.
Senator Rockefeller. That's not an answer.
[Laughter.]
Senator Rockefeller. You have to work with the Secretary of
Transportation.
Mr. Grinstein. OK.
Senator Rockefeller. I will work with him, and therefore
you will be working with me, but you'll be working with him, so
there will be something more official about it.
Mr. Parker. My answer is yes.
Senator Rockefeller. Thank you.
Senator Dorgan?
Senator Dorgan. Mr. Chairman, I saw that pained look on
your face when I came back----
[Laughter.]
Senator Rockefeller. No, no. I was worried that you weren't
going to stay long enough.
[Laughter.]
Senator Dorgan. Right. Mr. Chairman, I should confess at
the outset, I have been wrong about things with the airlines
from time to time. And I--at a previous hearing we had airline
CEOs come and testify, and it was during restructuring and when
everything was changing, and I said to them--they talked about
their new market plan was to sell food to passengers, and I
said, ``I would like very much to get the list of the names of
people who are actually willing to pay for airline food, I have
some things to sell them myself.''
[Laughter.]
Senator Dorgan. It turns out I was wrong about that, I've
actually been on airplanes and watched people buy food, so
congratulations.
It is, you know, the airline industry is absolutely
essential to this country. This country's economy cannot exist
without a health airline industry. And, I think my colleague
just described it very well a moment ago, my colleague, Senator
Rockefeller. There are plenty of areas in this country where,
but for better airline service, there would be companies that
might well want to do business there, might well want to create
a plant there, hire some people there. But, they see where that
community is with respect to airline service, there's one
airline coming in there, because they've dominated a hub and
they're on the spoke--nobody else is going to show up to
compete, because that's not the way the system works anymore.
So, they're consigned forever to inadequate service.
And that--the reason I wanted to come back is just to
explore this tension between the market system--Mr. Steinberg,
you actually were worshipping in a couple of spots in this
statement of the marketplace, which I have great respect for.
``By deregulating the airline industry,'' I'm quoting you,
``Congress set the U.S. Government permanently on the path away
from intervention in the marketplace.''
You know, some things are universal in nature. For example,
telecommunications--we work on that. We decide it's much higher
cost for telephone units in my hometown of 300 people--much
higher cost per unit, than in Chicago. But, we have a Universal
Service Fund to drive down those costs in high-cost areas. Why?
Because universal service is important. A telephone in my
hometown makes the telephone in Donald Trump's office more
valuable, because he can call my hometown, not that he would.
[Laughter.]
Senator Dorgan. But, you understand my point?
Mr. Steinberg. Yes.
Senator Dorgan. The same is true with air service. Not that
everybody should get it, but that countries should not have a
divide in which you've got great service, multiple choices,
lower prices, then you've got folks out at the end of a spoke
that are stuck.
And, Dr. Cooper, you've talked about this some, let me ask
you this question, and then, I see my colleague Senator
McCaskill's here and wants to inquire. If a hub-and-spoke
system did not exist in this country at this point, isn't it
the case that many areas--far more areas--would have no
service. Is anybody going to come in and say, ``You know, the
city pairs I want to serve--I want to create an airline,
because I want to serve from Bismarck to Eau Claire, Wisconsin,
non-stop.'' It won't happen.
So, what happens if a hub-and-spoke system does not exist?
Dr. Cooper. Senator, you use the word ``pick,'' that the
new entrants ``pick'' the cities--I use the word ``cherry
pick,'' which gives it a different connotation, because that's
exactly what will happen. We will lose these network carriers,
that's my first response.
My second response is, we actually forget our history. I
understand regulation is a dirty word and I said unregulated,
but the point, we forget that we did not build these networks
without substantial infusion of public funds--both railroad and
airlines, right? We gave away mail contracts and made them very
lucrative, we subsidized airports, we gave away land grants, we
gave telephone companies franchises. We have never built--this
is a vast, under-populated continent compared to the rest of
the world. So, when we build these networks--whether it's
telecom or railroads or airlines, we understand that there is a
public commitment. Mr. Parker talks about coming back and
asking for help--well, some of us look at this as a way you do
public finance. And you understand the benefits of making life
in rural America bearable.
So we have, we feed ourselves with fewer on the land than
anybody else in the history of the planet, by a mile. Precisely
because, we understood over the last century that we were one
country, and there's a benefit to be had by having a relatively
even standard of living.
If you abandon--the challenge in the airline industry,
unlike some of the other industries is that, there are lots of
places it looks like it could be competitive. And so we've got
this, what I called, an airline divide. Just sometimes we talk
about the digital divide we're now worried about in telecom in
rural areas. So that, you've got this problem of, you can show
a significant number of markets where competition can work. And
we tend to get the ideological statements that, therefore, we
should only do competition. And we stop thinking about how we
balance those two, because we have lots of markets where it
can't work.
Senator Dorgan. Dr. Cooper, my time is up.
The stakes here are very high. This is a subject that's
very important--important to both of the carriers, but
important to the entire country, because other carriers will be
involved, inevitably. And this has been a, for me, a very
interesting opportunity.
I, the Chairman did not, but I did resist the opportunity
to talk about railroads, although I've got so much to say about
the railroad issue, having worked with Senator Rockefeller on
it.
But, I thank all of the witnesses for coming. I think this
has been a great dialogue, and an important dialogue on
something that's very important to the country.
Senator Rockefeller. And it's about to get even better.
Senator McCaskill?
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. Thank you, and I thank you, Mr. Chairman
for the patience, and Senator Dorgan for continuing to find out
good information while I had an opportunity to get here.
Let me first ask--thank you all for being here this
morning--let me first ask the two CEOs to give us the total
amount of money that your airlines received from taxpayers
since 9/11?
Mr. Parker. Received from taxpayers--the U.S.--again, I'll
do my best.
The old America West received a loan guarantee per the Air
Transportation Stabilization Act of--by recollection--$400
million. I believe US Airways received one of approximately a
billion dollars, I could be off on that by some amount, so
that's $1.4 billion, and then both airlines shared in their
fair share of the $5 billion that Congress delivered in a grant
to airlines, also as part of the same act of 9/11. I don't know
what the share of the $5 billion was, probably something around
$400 or $500 million.
Mr. Grinstein. Yes, Delta did not get an ATSB loan, they
did share in the $5 billion grant, and my recollection is that
it was somewhat less than a billion dollars.
Senator McCaskill. And, refresh my memory--were both of
your airlines profitable last year?
Mr. Parker. Ours was--last year being 2006?
Senator McCaskill. Yes.
Mr. Grinstein. No. We were in bankruptcy and we were not
profitable last year. But a large part of that was the cost of
bankruptcy.
Senator McCaskill. You know, I have really mixed emotions
about this subject. I care very much about the health of
American airlines, for many different reasons, but at the same
time, I have a great deal of angst over what has happened to
the former TWA employees.
Currently, there are only 7 percent of the former TWA
workforce that are employed by American Airlines. They have
just completed a study of 500 of the furloughed flight
attendants. Forty-eight percent of them are 55 or older; 58
percent of them are heads of households; 46 percent of them
have not found full-time employment; 16 percent have had to
relocate to find employment; 47 percent report their income has
been reduced by 50 percent or more; 49 percent have had to tap
into their 401Ks, their IRAs and other retirement funds; 42
percent have received Federal, state or local charitable aid;
36 percent have had to move or downsize; 35 percent have
depleted 75 percent or more of their savings; 42 percent have
been diagnosed with a medical condition since furlough; 31
percent report their children's educational needs have been
adversely impacted; and 81 percent report their lifestyle has
been negatively impacted since furlough.
And, of course, I understand 9/11 happened. But, I also do
know that the CEO of American said to Congress at that time how
they were going to take care of the TWA employees. And TWA--
American was profitable last year, I know they've struggled,
but they were profitable last year, and now we have a looming
issue that, I think, has to be addressed by Congress, which is
the recall rights of some of those employees, that their recall
rights are expiring. And some think they're expiring because
American's waiting them out, because of their seniority and the
financial impact their re-employment would have on American.
And if they just wait them out past the 5 years, then they can
hire anew, and avoid a lot of the legacy costs.
So, I would--and by the way, we still don't have an
American flight between Kansas City and St. Louis. I believe
they're going to announce a new flight in Missouri, which I'm
thrilled about, and I congratulate them on that, but we have
one option. We're not talking about between, the end-of-the-
food-chain. We're talking about two major metropolitan areas in
Missouri, and there's one option for travelers.
And, so I would appreciate Mr. Parker and Mr. Grinstein,
and Mr. Steinberg, your comments on that.
Mr. Parker. I'm first, I guess.
Again, without--in fairness to the people in American, who
I can't speak for, and how that happened, and what commitments
they made, what I can tell you is--the statistics you rattled
off about the TWA employees, unfortunately can be said about a
lot of employees in our industry. It happened worse to TWA in
total, because, one, that airline was near liquidation when
American acquired it, and in doing so made the choice to put
the TWA employees at the bottom of the seniority scales in most
cases. So, when 9/11 hit, and American had to do furloughs--
like all of us did--those people were gone first. And I'm
just--explaining facts, not an opinion as to why that--if that
was fair or not. But that's what happened to those employees.
Those employees suffered, you know, again, the unfortunate
statistics you rattled off can be said about US Airways
employees, Delta employees, all employees of legacy airlines
who have gone through enormous angst.
So, at any rate, what that means as it relates to this
transaction, you know, all I can tell you, Senator, our view
is, by putting these two companies together, we make them
stronger. And we're looking to make a stronger airline.
I am not making promises that I do not believe, and I do
not do that, and I wouldn't do that--everything that I've said
about commitment to fares, commitment to services are things I
believe and that we will do. And that I tell you with all
sincerity.
So, again, it's hard for me to try and--to try and, you
know, go and, go back to what happened in 2000 with American
and TWA and use that to explain what can happen here. But all I
can tell you is, I do not believe it's a parallel situation
because--and what I can tell you for certain is, I would ask
that you don't take the fact that people made commitments to
you, and then--for whatever reason--weren't able to----
Senator McCaskill. Well, I wasn't here, I'm new.
Mr. Parker. Your constituents. Weren't here, and weren't
able to deliver upon them. I would just ask that you don't hold
that against us, and the commitments we're making, because we
make these in all earnestness, and that's what we believe is
going to happen.
Mr. Steinberg. Thank you, Senator.
The last 5 years has been, you know, as I said earlier,
very painful for employees across the board. And, I think,
something like we saw in that loss in jobs of about 155,000 in
the airline industry, and obviously, the TWA jobs were part of
that. So, there has been considerable pain, across the board.
I agree with Mr. Parker that--as I recall it, at the time,
TWA was in very dire straits. It's not, you know, therefore,
you know, clear looking back that they would have survived, and
you wouldn't have had the same kinds of very painful
dislocations.
The best way to prevent this from happening, again, is to
ensure that we have an industry that can both produce low
fares, and profits for its owners and increase employment. Over
time, cities like St. Louis have had difficulty, historically,
supporting a hub. And that's just simply a function of the size
of the population and the size of the local economy. As the
economy improves, I think you'll see, you know, the possibility
of more service.
Senator McCaskill. Yes, because now our taxpayers have
invested a lot of money in a new runway.
Mr. Steinberg. Yes, and you have a great----
Senator McCaskill. We have a saying----
Mr. Steinberg.--a great airport.
Senator McCaskill.--``if you build it, they will come''?
Mr. Steinberg. Yes.
Senator McCaskill. Well, we only hope.
Mr. Steinberg. Thank you.
Mr. Grinstein. One of the reasons why we're so opposed to
this merger is that it contemplates taking out 10 percent of
the fleet of Delta, which is 200 aircraft. And, what you'd be
looking at--despite all of the assurances that you're going to
maintain employment at the same level--200 aircraft is about
the size of AirTran Airways--it is a large change. And there is
no way you can maintain all of the employment that goes with it
and at the same time meet debt obligations and handle that.
In terms of the situation in St. Louis--I am sure that the
American executives that promised that there would be more
international service, more flying, more employment, and
everything else, meant every word of it. I am sure that they
were as committed to it as Mr. Parker is.
But, it is a volatile industry, and there are changes that
take place, and there is no one to enforce those--it is not a
contract. It is not something that is signed, that you can
check on and enforce performance. So, at the end of the day,
you can take their word for it, but circumstances will come
along. And if you take a look at St. Louis today, they have 60
percent fewer flights, they have 73 percent fewer seats in that
market. The thought that LCCs will come in has not proved
accurate, because Southwest Airlines has reduced its flying by
about 18 percent.
So, while I hope that things work out with the runway, it
is just an indicator of the kind of things--that there is no
one to enforce. And you don't have any international service,
in Mexico and Canada, except one flight a week to Puerto
Vallarta.
Senator McCaskill. And I want to be fair to American--I do
know that one of the reasons that the TWA folks got stapled at
the bottom had to do with decisions within the various unions
at American at the time, and wasn't completely within the
control of the corporate structure.
But saying that--I opened with my questions about the
taxpayer money because, you know, I think--I don't want to lose
sight of the fact that we had a national catastrophe. And I
think the Federal Government responded to do what was necessary
to help this industry because of that catastrophe.
But implicit in that, I think, is an agreement that there
be fair treatment to the men and women who lost their jobs as a
result of that catastrophe. And I worry that in, in some of the
decisionmaking that's going on--I understand the bottom line,
and I understand the need for profit. But, I think there have
been so many examples that we have seen in corporate America,
where the decisions have not been as accommodating to the
people at the middle and the bottom, as they have been to those
at the very, very top.
You know, mediocre CEOs are getting hundreds of millions of
dollars. Somebody who's spent 40 years of their lives making
sure that the people who traveled on TWA were doing so safely,
are out of work. And meanwhile, the taxpayers have spent,
literally, billions of dollars trying to bail out this
industry.
And, I just didn't want this hearing to conclude without
expressing how strongly I feel that, if there are going to be
mergers--which I have a lot of trepidation about, based on Dr.
Cooper's testimony and other readings I've done--I, for one, am
going to be hollering about these people and their security,
and their pensions, and their ability to--and there is no
reason why--no one, I don't think anyone is asking that the TWA
employees be put back to work. I think what they're saying is,
I think, that they're willing to make concessions. I think what
they're saying is, to wait out our recall rights--under the
circumstances of hundreds of millions of dollars of taxpayer
money flowing to that airline--to wait them out, to me, just
seems fundamentally unfair.
Yes, Mr. Roach?
Mr. Roach. Yes, I'm a TWA employee. These two gentlemen
over here are former TWA employees out of St. Louis. And what
happened to TWA is that--is the same thing that could happen
here, with US Airways and Delta. The fact the transition was
not completed when they took TWA over, the fact that the
seniority issue was not resolved, and it was left to a
political process rather than a business process--all of those
TWA people went to the bottom.
I don't really have much to say, I, people have been asking
all of these--I'm the employee representative here. And the
fact remains, you can't take 10,000 people, and say you're
going to float around the airports until you decide to retire.
What we are proposing to America West and US Airways is that,
we guarantee work. We bring work in-house, similar to what
American is doing, through efficiency process, bring money to
the bottom line, those people will have something to do.
So, there are a lot of things that have to happen here.
And, to be quite frank, an experienced team--and that's why
we're trying to work with Mr. Parker, on US Airways/America
West, to give him that experience--because some of things that
he's said are well-meaning, are not plausible in the real
world. I've been in this industry 30 years. We could work with
him, but he'd have to finish this transaction first.
You see, you can't have Delta Airline employees with one
pension plan, and US Airways with another pension plan--the law
don't allow it. We have to have a transition agreement, we have
to put all of those things together.
We're trying to resolve those issues, right now. Yes, this
very panel. I was at the doctor's office yesterday, a lady
pulled up to me, she said, ``I'm from TWA, I lost my job, I had
to go back to school and relocate,'' Jerry Mitchell. She said,
``Give them my phone number if you want me to call them.''
These transactions are very difficult. The process is very
difficult. And as well-meaning as people might be, they just
don't come easy.
And therefore--I'm going to say it again--you've got to
finish transaction one, before you go to transaction two. You
cannot put together a maintenance program--when you don't have
a maintenance program at US Airways, you cannot put a
maintenance program in again at Delta Air Lines. It is
impossible.
We're willing to work with them, we've got a proposal on
the table to resolve those issues. And if you can't resolve
those issues on US Airways and America West, you damn sure
can't--excuse my language--resolve them on Delta Air Lines.
Senator McCaskill. Your language is excused.
[Laughter.]
Senator McCaskill. Thank you, Mr. Roach.
Thank you all, very much.
Thank you, Mr. Chairman.
Senator Rockefeller. Thank you very much, Senator
McCaskill.
I have two things to say: Number one, is that I think this
has been a really, really useful hearing. And, one of the
things that has happened to me during the course of it is that
I have sort of taken on another iteration. And that is the
health of--that America is fair. We may or may not be, should
be in Iraq--that's for everybody to decide. But, we have a fair
system. Little states have two Senators, huge states have two
Senators--it makes no difference, we're based upon equality. We
don't live up to it always, but that is our standard.
And, what strikes me is that, in the automobile industry,
General Motors never paid any attention, until Toyota and
Nissan came into Southern California and had a friendly air
pollution-control district in that area, and then 10 years
later, General Motors began to pay a little bit of attention.
You don't have that. You don't--you have foreign competition,
but you don't have foreign competition for little places.
Therefore, I am very intrigued, Secretary Steinberg, by
your coming workload. And that is to try and find a way which
does--and only the silliest person could say that this
invalidates the American culture, corporate culture or
otherwise--it's simply trying to solve a problem for people who
need a problem solved. Amongst whom are many absolutely
brilliant entrepreneurs, if they were given a chance. Or even
if they're not.
So, I want this to be--this has been a very long hearing,
and I apologize to all of those who have had to stand, and
those who've squiggled and wormed, squirmed and all of the rest
of it--I don't care. It's been a really good hearing. And we
have a new concept on the table here: How can we be fair; and
genuinely be fair, to small communities?
And the small communities are not to be categorized as the
disadvantaged. They're not to be categorized as some attention
deficit disorder group of people--they deserve our help, and I,
as Chairman of this Committee, am determined to deliver it to
them.
So that, we have agreed, Secretary Steinberg, that you, my
staff, and others--and I assume the help of Mr. Grinstein, and
Mr. Parker, Dr. Cooper, you, sir--that we are going to figure
out some way to try and make this work. Let us not fall down on
the angst that's been caused by the word regulation or re-
regulation. That's stupid. We're above that.
My announcement, finally, is that the next meeting of the
Commerce Committee will be at 2:30 on January 31 for an
Executive Session to consider the Committee's budget
resolution--you won't want to miss that.
[Laughter.]
Senator Rockefeller. Followed by a hearing on promoting
travel to America an examination of economic and security
concerns.
I thank you all, the hearing is adjourned.
[Whereupon, at 1:15 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
Chairman Inouye, thank you for scheduling our hearing today on the
state of the airline industry and the potential impact of airline
industry mergers and consolidation. I would also like to thank our
witnesses for their participation.
Since Congress passed the Airline Deregulation Act in 1978, the
airline industry has experienced its fair share of mergers,
acquisitions, liquidations, and consolidation. The face of the airline
industry is always evolving and the free market has proven to be
beneficial to the airline industry and the flying public.
The airline industry is still in a time of transition, and is re-
making itself in the aftermath of the September 11th attacks. We have
seen a number of bankruptcies, but the overall health of the airline
industry seems to be improving as tough restructuring plans are
completed and implemented. The line between the low-cost carriers and
the legacy carriers draws closer each day.
Today, I am hopeful the Committee does not get bogged down in the
details of one proposed merger, but looks at the overall health of the
airline industry as we move forward.
Congress created a merger process, and if a large-scale airline
merger is proposed, I expect the Department of Justice and the
Department of Transportation to thoroughly review the implications.
Congress should be hesitant to get involved in any one merger.
I remain open to the idea of airline consolidation, if it leads to
an improved economic health of the industry. If a merger makes business
sense for the companies and the traveling public is not adversely
impacted, I don't see why Congress should get involved.
I welcome our witnesses and look forward to the testimony.
______
Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
The viability of the airline industry has been as issue as long as
I have been in Congress. One hundred and sixty two carriers have filed
for bankruptcy since deregulation in 1978, which means that nearly
every major airline has filed for bankruptcy at some point and some
more than once.
The airline industry lost more than $30 billion between 2001 and
2005, with the legacy airlines accounting for more than $28 billion of
these losses. These losses came about despite Congress providing $5
billion in direct compensation to the airlines, $10 billion in loan
guarantees, insurance aid, pension assistance, and liability
protection.
There has been a bit of good news recently for the large carriers.
Several legacy carriers posted profits in 2006 for the first time in 5
years, while several low-cost carriers did not. This led the Wall
Street Journal to write a headline that was unthinkable just a year
ago: ``Legacy Airlines may Outfly Discount Rivals.'' Airline analysts
expect the industry to earn about $1.1 billion in 2006, which would be
the first industry profit since 2000, and earn a record profit in 2007
of $6.1 billion.
Today we meet to review the most recent proposed consolidations of
US Airways and Delta, and AirTran and MidWest Airlines. Some believe
consolidation is necessary to maintain the health of the industry,
while others believe such consolidation may reduce competition and harm
consumers. If history provides any insight, markets have generally
become more competitive as the industry consolidates. According a 2005
GAO report, the average number of competitors increased from 2.2 per
market in 1980 to 3.5 in 2005.
It is important to remember, however, that history is not the
determining factor. The Department of Justice will perform a thorough
antitrust review. The Department has scrutinized numerous airline
mergers and consolidations, and I respect its role in the review
process and look forward to the Department's findings.
The current condition of the industry and its future prospects are
of paramount concern. There is no dispute about the importance of
aviation to our national economy and I hope Congress can continue to
work with the industry to ensure a robust national air transportation
system.
I thank our witnesses for being here and hope they will be able to
shed light on what the future holds for the industry.
______
Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
I am pleased that the Committee is having this hearing today to
look at the economic health of the airline industry. As we all know,
the airlines have gone through some very difficult times since 9/11.
Many of them have been through bankruptcy and very painful
restructuring.
But recently things seem to be improving. Carriers are emerging
from bankruptcy and some are even making money. So it is very
appropriate for this Committee to get an update on the financial state
of the industry. We want to know if things are truly getting better and
if the industry has turned the corner, or if this is just a temporary
situation. We also should discuss what, if any, public policy changes
we should consider to improve the health of the industry. Since we have
a major aviation reauthorization bill this year that we need to pass,
this is a very timely discussion.
There will also be lots of discussion today about possible mergers
between various airlines. I hope we don't get too caught up in debating
the pros and cons on any particular merger and lose sight of the big
picture.
I have to say that I generally don't see anything wrong with
mergers. If the private markets decide that it makes financial and
economic sense to merge one or more companies, I am not sure that
Government should second guess such a decision. In my view, there
eventually will be mergers in the airlines industry and there probably
should be. As we have seen, the current size and structure of the
industry has resulted in massive losses over the last years with
devastating effects on employees. So maybe we should let some of these
companies merge and see what happens. Could it actually get worse?
Of course, I am not sure that the merger between US Air and Delta
is the best possible combination. There may be other combinations that
may make sense from a financial or industry perspective.
Finally, Congress has set up a process as the Department of Justice
and at the Department of Transportation to review mergers. If we get to
the point were this merger goes forward, then that process should run
its course. I don't think Congress should intervene legislatively while
the merger is under review.
I look forward to hearing from the witnesses.
______
Prepared Statement of Hon. John Thune, U.S. Senator from South Dakota
Chairman Inouye, Vice Chairman Stevens, other Members of the
Committee, thank you for holding this hearing today. I would also like
to thank our witnesses for taking time out of their busy schedules to
testify before our Committee today.
Air travel is vital to our Nation's economy and the airline
industry is at an important point in its history. The industry is
recovering and moving past pre-9/11 high marks in terms of passengers
and other metrics. Many of the legacy carriers have gone through
bankruptcy and reworked their debt and their overhead costs. Many
observers are hoping our airlines will soon start running in the black.
How the airline industry reacts to market pressures, along with how
Congress and the Federal regulatory agencies treat the airline
industry, could have consequences on air travel into the next
generation. This means we all better get it right. It is my hope that
the airlines, along with the government regulators can strike the
balance between the need for efficiencies and the need for competition.
Air travelers will win if the airline industry has the right balance of
scale efficiencies and healthy competition. I hope we can get there.
______
Congress of the United States
Washington, DC, January 23, 2007
Hon. James Oberstar,
Chair,
House Committee on Transportation and Infrastructure,
Hon. Peter F. Costello,
Chair,
House Subcommittee on Aviation,
Committee on Transportation and Infrastructure,
Washington, DC.
Dear Chairman Oberstar and Chairman Costello:
Please accept our belated congratulations on your new positions. We
write to express our strong support for your plans to conduct hearings
on airline consolidation's effect on American workers and travelers.
Given the recent increase in airline mergers, we feel that it is
timely for a comprehensive assessment of airline mergers and its affect
on communities across the Nation. As you know, the Senate Committee on
Commerce, Science, and Transportation plans a public review of this
issue tomorrow.
Two weeks ago, US Airways increased its hostile takeover bid to
$10.2 billion in its attempt to acquire Delta Air Lines. If successful,
this merger would create the world's largest airline. Our constituents
have expressed concerns that the proposed union could result in
significant job loss, fewer seats, and higher ticket prices.
Delta currently employs about 50,000 people nationwide more than
half of whom are employed in the Atlanta area. As a result of the
merger, 3,000 jobs will be lost in the Atlanta headquarters and an
additional 2,200 positions in the region. The proposed 10 percent
capacity reduction of a merged Delta-US Airways could also lead to the
loss of thousands of jobs across the country.
The two carriers' overlapping flight routes further impress the
national impact of airline mergers. Many are concerned that in 25
eastern and southern airports, the combined Delta and US Airways would
become the dominant carrier, carrying more than half of the capacity at
the airport. The negative impact on these airports and the communities
and passengers they serve could be disproportionately high. For
example, airline travelers could witness reductions in flight options
and increases in airfare prices.
Finally, we would like to underscore the need for Congressional
investigation and oversight on the history of airline mergers and
bankruptcy from the perspective of the average airline employee. In the
case of Delta, a loyal and determined workforce of mechanics, flight
attendants, pilots, reservation clerks, ground crews, and others have
sacrificed a lot, including cuts in wages and pensions, to keep Delta
operating and help its emergence from bankruptcy. US Airways is
currently working to address its current America West merger problems
that include numerous computer and service complications, multiple un-
integrated labor contracts, and a variety of complaints from current
employees about issues of seniority, pay, and benefits. The morale and
economic impact of the airline consolidation movement on these
hardworking Americans should be a component of your investigations.
A robust Congressional review of how the Delta-US Airways and other
industry mergers affect airline employees and air travelers around the
country is much needed. We appreciate your attention to this important
issue.
Sincerely,
Members of Congress: John Lewis, David Scott, John Barrow,
Henry C. ``Hank'' Johnson, Jr., Sanford D. Bishop, and Jim
Marshall.
cc: The Hon. Lynn. A. Westmoreland and Hon. Daniel K. Inouye.
______
Government of the District of Columbia,
Office of the Attorney General
Via electronic transmission (January 23, 2007)
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Re: Comments on proposed US Airways-Delta Air Lines Merger for
Committee's January 24, 2007 Hearing To Examine the
Potential Impact of Airline Mergers and Industry
Consolidation on the Airline Industry
Dear Senator Inouye:
I am writing to support the Committee's examination of the
potential impact of mergers and industry consolidation on the airline
industry. My Office is currently participating in a multi-state
attorney general inquiry into the antitrust issues raised by the
proposed US Airways-Delta Air Lines merger. Although our inquiry has
not been completed and no conclusion has been reached regarding a
merger's overall effect on competition, my staff has identified several
issues that may help to focus the Committee's work in this area:
1. How Would a Merger Affect Competition at Major, Capacity-Constrained
Airports, Like Ronald Reagan Washington National Airport (DCA)?
DCA is the airport of choice for many of those who visit the
District of Columbia for governmental or commercial business. Compared
to other area airports, DCA is particularly convenient for travelers
who wish to leave D.C. during the late afternoon-to-evening rush hour
period.
In addition, DCA is a capacity-constrained airport with limited
slots. US Airways operates approximately 47 percent of these slots and
Delta Air Lines operates about another 14 percent. A combined US
Airways/Delta Air Lines, with about 60 percent of the slots at DCA, may
be able to exercise market power and charge an increased premium for
selected categories of passengers flying to and from DCA, such as
business class passengers on certain routes. Another capacity-
constrained airport where US Airways and Delta Air Lines together
operate a majority of the slots is New York's LaGuardia Airport (LGA).
2. How Would the Merger Affect Competition in the Provision of Shuttle
Flights Between the Washington, D.C., New York, and Boston
Areas?
Currently, U.S. Airways and Delta Air Lines are the only airlines
offering shuttle service between DCA and LGA. Absent divestiture of
substantial shuttle operations to a strong competitor, a combined US
Airways/Delta Air Lines would dominate shuttle service between the
Washington, D.C., New York, and Boston areas. Shuttle service between
capacity-constrained airports, like DCA, LGA, and Boston's Logan
International Airport (BOS), would seem to be especially vulnerable to
exercises of market power by a dominant provider because potential
competitors are likely to find it relatively difficult to introduce or
expand service at these airports.
3. How Would the Merger Affect Competition in the Provision of Airline
Service Between Areas With Hub Airports, Like the Washington,
D.C. Area, and Small Cities?
A US Airways/Delta Air Lines merger could have a disproportionately
adverse impact on competition in the provision of airline service
between major metropolitan areas and small cities.
Airlines that have hub operations in the Washington, D.C. area--
including US Airways and Delta Air Lines at DCA, and United Airlines at
Washington Dulles International Airport (IAD)--may have a competitive
advantage in the provision of service to small cities. These airlines
are able to offer flights to and from small cities that serve: (1) to
connect the small cities to the Washington, D.C. area as a point of
origin or destination; and (2) to connect the small cities to other
cities, using a Washington, D.C.-area airport as a hub. In many cases,
it may be the availability of passengers who are using a Washington,
D.C.-area airport only as a hub that allows an airline to fill the
large planes that can provide economical service between the
Washington, D.C. area and many small cities.
If, following a merger, hub operations at DCA and IAD were largely
controlled by US Airways/Delta Air Lines and United Airlines, these
airlines could have the potential to dominate service between the
Washington, D.C. area and small cities. Competitors lacking a hub-like
presence in the area may find it difficult or impossible to maintain
competitive service on these routes, as illustrated by Independence
Air's unsuccessful effort to offer many flights between small cities
and IAD. Since Independence Air's exit from the market about a year
ago, airfares have increased dramatically on many routes from IAD and
DCA.
4. How Would the Merger Affect Overall Trends in the Airline Industry?
Because US Airways and Delta Air Lines operate large, overlapping
networks, a merger would have the potential to affect competition with
respect to numerous city pairs over a large portion of the United
States. On routes now served by both airlines, adverse competitive
effects may include higher ticket prices and discontinuation of
currently scheduled flights. In addition, a merger of this size could
rapidly trigger ``defensive mergers'' by other major airlines, leading
to what Kevin Mitchell, the Chairman of the Business Travel Coalition,
warns could be the `` `tsunami' of airline industry consolidation most
feared by business travel advocates.'' (quoted by CNNMoney.com, Dec.
13, 2006, http://money.cnn.com/2006/12/13/news/companies/
airlines_mergers/index.htm).
Conclusion
Any anti-competitive effects of a merger of US Airways and Delta
Air Lines would have the potential to increase prices and reduce
service for many routes serving the Washington, D.C. area, as well as
for many more routes serving other areas of the country. In addition,
such a merger could trigger a series of defensive mergers leading to
much greater industry consolidation in a relatively short period of
time.
Thank you for the opportunity to share with you some of the issues
that we have identified in the course of our inquiry. Should your
Committee hold further hearings on the issue of airline industry
consolidation, the state attorneys general participating in this multi-
state effort--as well as those participating in the broader Airline
Working Group of state attorneys general--would welcome the opportunity
to present further information and analysis for your consideration.
Any requests from the Committee's staff regarding this matter
should be directed to Senior Assistant Attorney General Don A.
Resnikoff.
Very truly yours,
Linda Singer,
Acting Attorney General for the District of Columbia
______
Prepared Statement of the Aircraft Mechanics Fraternal Association
I am Stephen MacFarlane, Assistant National Director for the
Aircraft Mechanics Fraternal Association (AMFA), a craft union
representing nearly 9,700 aviation mechanics and related employees at
United, Alaska, Southwest, Northwest, Mesaba, Horizon, and ATA. I am
writing to share my organization's concerns regarding mergers and
consolidation within the airline industry. We understand that
consolidation within the industry is likely, and we are not necessarily
opposed to consolidation per se, however, AMFA believes there are facts
that Congress should take into consideration regarding any proposed
merger.
Having endured devastating job losses and drastic reductions in pay
and benefits coerced from airline workers throughout the industry over
the past 5 years, we can't help but flinch at the prospect of another
corporate tactic that has the potential of delivering yet another blow
to the livelihoods of airline workers.
The government has already provided great assistance to the airline
industry in the form of the ATSB, where $5B in taxpayer dollars was
given to the industry without any guidance as to how the airlines were
to spend the money. Another $10B was made available for loans to assist
the ailing industry. While this is laudable, no help was forthcoming to
the tens of thousands of workers who lost their jobs as a result of the
9/11 terrorist attacks.
Additionally, Federal bankruptcy laws, never intended to be used as
a strategic tool for competitive purposes, were turned against workers
as Federal judges aided executive management teams in extracting
severe, painful, and permanent concessions from American airline
workers.
During mergers of airlines in the 1970s and 1980s the government
recognized the peril to workers that mergers presented and insured that
workers were not abused by these business transactions. In 1972, with
the merger of Allegheny Airlines and Mohawk Airlines, Labor Protective
Provisions (LPP's) were established to prevent corporations from using
mergers as a means to circumvent labor contracts. In light of the
devastation delivered to tens of thousands of airline workers in the
form of terminated pensions, twenty-five percent and greater pay
reductions, increased medical premiums, and permanent job losses it
would be proper for the 110th Congress to once again enact these
protections so that airline workers are not unnecessarily placed in
peril at the hands of another government-sanctioned industry
consolidation.
Sections 3 and 13 of the LPP's set out the criteria for merging
carriers' workforces and the time-frame in which to accomplish this
oftentimes difficult task. The provisions ensure, rightly, the
maintaining of seniority lists and collective bargaining agreements for
employee groups, as well as spelling out a framework for arbitration in
the event that the merging of workforces does not go smoothly. As the
US Air/AmericaWest situation shows us, the need for a concrete time-
frame in these matters is imperative, as the merged carrier remains
without a maintenance program and a collectively bargained agreement
for its yet-to-be-merged workforce. Furthermore, if as Mr. Parker
claims, there would be no employee furloughs or layoffs, it follows
that the LPP's should be enacted for the simple reason that they are
apparently benign in this situation.
Mr. Chairman, we acknowledge the value and benefit of having a
viable airline industry that provides great mobility and swift commerce
for our nation, however, the other part of the equation is a stable and
productive middle-class that contributes to the economic vibrance and
tax base of the American economy. Labor Protective Provisions must be a
part of any mergers that are approved by the Federal Government to
ensure a balance of power exists between workers and corporations.
Airline workers are already smarting from the last bus that ran us
over, please do not give the corporations another green light to mow us
down once again.
Having worked in the airline industry for twenty-five years and
lived through two mergers, Hughes Airwest/Republic and Republic/
Northwest, I can attest first-hand to the harm that can befall workers
caught up in airline mergers. If you have any questions or concerns
that I might address please contact me.
Thank you.
______
Prepared Statement of Edward P. Faberman, Executive Director,
Air Carrier Association of America
Introduction
Mr. Chairman and Members of the Committee, as Executive Director of
the Air Carrier Association of America (ACAA), an organization that
represents low-fare/high-service carriers and the communities they
serve, I am very happy to provide comments on the effect of mergers and
consolidation on this industry.
This hearing comes at a time when extremely limited competition
exists in many of the Nation's largest airports and markets. As a
result, low-fare carriers are blocked from providing low fares and
travel options for many American travelers. It is of utmost importance
that we take steps to bring back the benefits of competitive markets,
including airfare and air carrier choices for Americans who rely on
those options for business, leisure, and last-minute travel.
ACAA Members Provide Benefits to Consumers and Communities
Our air carrier members operate thousands of daily flights to
approximately 150 destinations. Their traffic is growing at a rate of
about twenty percent (20 percent) per year. These carriers serve large,
medium, and small hubs and have various focus cities which include
small communities. They offer full-size jet service in most of these
markets. By introducing flights in small communities and creating focus
markets, these carriers connect those cities to leisure and business
markets, as they have done at Akron-Canton Airport, Newport News/
Williamsburg International Airport, Southwest Florida International
Airport, Atlantic City International Airport, Wichita Mid-Continent
Airport, Billings Logan International Airport, and Cheyenne Airport.
Once initial entry into a market is made, the carrier can expand beyond
the traditional business routes by adding additional service to other
destinations. This results in substantial benefits to the local airport
and the entire region it serves. In the previously mentioned markets
and others, our member carriers have significantly expanded passenger
numbers and brought millions of dollars in customer savings and
economic growth. They want to expand more in all markets! To continue
to add all size communities to their route systems, these carriers must
obtain additional access to major business markets such as LaGuardia
Airport (LGA) and Ronald Reagan Washington National Airport (DCA), two
markets currently closed to expansion. Therefore, we continue to push
for open markets consistent with deregulation. If consumer benefits are
to exist, it is essential that the government expand competitive
options on a day-to-day basis, particularly as the industry experiences
further mergers and consolidation.
Mergers and Consolidation
Since the birth of deregulation, the industry has experienced
examples of airline consolidation and mergers and has seen dozens of
airlines terminate operations. The industry and the U.S. economy will
only remain healthy if real competition is allowed to flourish.
Unfortunately, real competition is currently blocked at many of the
Nation's airports. At these airports, mergers could worsen the
situation by giving the newly merged airline even greater market and
airport dominance. Although we must be cautious about mergers and
consolidation, they can also offer opportunities to improve competition
and benefit the industry--as long as the government demands spin-offs
from the merging carriers to promote competition. In the past,
consolidation or bankruptcy has opened the door to new competitive
opportunities. In order to ensure that competition does not disappear,
merging airlines must be required to spin-off assets that would
otherwise increase their market control. In the past, the Department of
Justice has required dominant merging carriers to divest certain assets
including gates, airport facilities and access to airports. It is
expected and important to require the merging carriers to give up some
of their assets. By redistributing such resources to limited incumbents
and new entrants, mergers can actually improve competition and help
build a healthier industry.
It is therefore essential that Congress not only require government
agencies to fulfill their responsibilities in promoting competition on
a regular basis, but also send a message that mergers between dominant
carriers will occur only if considerable assets are made available to
other carriers. It is absolutely crucial that the industry have
significant competition to survive and thrive, but this is not possible
when only a few carriers control the Nation's airports. When proposed
mergers are on the table, the highest priority must be to guarantee
that they will not further limit competition. If implemented carefully
and with an eye toward improving competition, mergers can have positive
impacts on the competitive state of the industry and can improve travel
options for air travelers.
Consumer choice and travel options at individual airports and
within the entire industry must be preserved. Consolidation is
inevitable, but the industry must take immediate steps to provide
opportunities for competition. LGA is one airport severely lacking in
travel options because access by new entrants is blocked by government
regulations. At LGA, new carriers are only allowed to operate ten
roundtrips, while legacy carriers at the same airport have hundreds of
arrival and departure authorizations. At DCA the situation is equally
extreme--AirTran, Spirit and Frontier only have a few roundtrips, while
the legacy carriers dominate with hundreds of flights. The current
regulations have not been modified to reflect changes in the industry
and this has resulted in some very closed airports, many of which have
absolutely no opportunities for new entry. If the Nation's largest
carriers are allowed to merge, steps must be taken to preserve
competition. Without such steps, mergers could force out limited
incumbents and new entrants and some markets could lose all service or
be blocked from obtaining low-fare service options.
For these reasons, the US Airways/Delta merger must be put on hold
until the carriers demonstrate how they will spin-off assets to ensure
that competition expands and is not further limited.
Conclusion
Even without adding the complication of mergers or consolidation,
the government should be continuously taking action to promote
competition. Unfortunately, this has not happened, so with mergers on
the table, it is now even more important to make changes that foster a
strong airline industry. Taking significant assets from the merging
airlines and redistributing them to low-cost carriers will provide
travel options and consumer benefits. In its review of access to closed
airports, DOT/FAA have complete legislative authority to implement
control access and airport facilities changes at airports. \1\
---------------------------------------------------------------------------
\1\ The Congestion Management Rule for LaGuardia Airport NPRM,
specifically highlights its ability to allocate departure and arrival
authorities at restricted airports to promote competition by
emphasizing that the Secretary of Transportation is required to
consider objectives that further the public interest, including:
Keeping available a variety of adequate, economic, efficient, and low-
priced air services; placing maximum reliance on competitive market
forces and on actual and potential competition; avoiding airline
industry conditions that would tend to allow at least one air carrier
unreasonably to increase prices, reduce services, or exclude
competition in air transportation; encouraging, developing, and
maintaining an air transportation system relying on actual and
potential competition; encouraging entry into air transportation
markets by new and existing air carriers and the continued
strengthening of small air carriers to ensure a more effective and
competitive airline industry; maintaining a complete and convenient
system of scheduled air transportation for small communities; ensuring
that consumers in all regions of the United States, including those in
small communities and rural and remote areas, have access to
affordable, regularly scheduled air service; and acting consistently
with obligations of the U.S. Government under international agreements.
Congestion Management Rule for LaGuardia Airport; Proposed Rule, 71
Fed. Reg. 51360, August 29, 2006; see also 49 U.S.C.
Sec. Sec. 40101(a)(4), (6), (10)-(13) and (16), and 40105(b) (2005).
---------------------------------------------------------------------------
It is time to send a message to legacy carriers that competition in
this country will be protected and that ``Open Kkies'' is a goal for
the United States and not merely for international destinations.
Therefore, while mergers are underway, the industry must at the same
time make changes freeing up airport facilities for limited incumbents
that operate full-size jets.
The choice is to either allow legacy carriers to continue to
dominate markets and close doors to competition or to give all
consumers true choices. The American public wants choices.
Mr. Chairman, I thank you and the Committee for addressing this
important issue. This Committee has in the past been instrumental in
promoting competitive options. Without improved access and a more
competitive industry, the traveling public will not have the fares and
options necessary for business, leisure, and last-minute travel. The
merger discussions cannot be considered unless the dream of
deregulation and true competition for all is fully addressed.
______
American Society of Travel Agents
Alexandria, VA, January 23, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Mr. Chairman:
The American Society of Travel Agents (ASTA) supports your
leadership action in conducting a January 24 hearing on the potential
impact of airline mergers and industry consolidation within the U.S.
airline industry. At present, while ASTA is reserving judgment
regarding particular airline combinations, we remain vigilant of the
grave consequences further industry consolidation will have on the
Nation's air transportation system.
The threat to competition from airline combinations is extremely
serious as it pertains to both consumers and travel sellers. Congress
and the Department of Justice should apply the highest standards of
scrutiny to any proposals for mergers or acquisitions among major
carriers. There is no hard evidence that for sustained periods airline
mergers have reduced costs or produced efficiencies that benefit the
traveling public.
Historically airlines have used brute market power to shift costs
to consumers and travel agents, thus lightening the cost load on their
books. These cost shifts are not evidence of efficiencies attributable
to consolidation but are a means to disguise the carriers' inability to
discard ineffective models of operation.
As the number of major carriers decreases, the airline industry
will ultimately see each other as more similar than as different in the
way that Southwest Airlines, for example, remains different in today's
marketplace. In such circumstances, there is no doubt that the
industry's behavior will likely be more parallel rather than
competitive in nature. Congress cannot count on Southwest Airlines and
JetBlue to maintain competitive vitality in the national carrier
industry.
Mr. Chairman, it is crucial that the U.S. air transportation system
continue to maintain its competitiveness, which results in better
service and lower fares for consumers. ASTA thanks you again for
conducting this extremely important hearing.
Sincerely,
Cheryl Corey Hudak, CTC
President.
______
Prepared Statement of Captain Lee Moak, Chairman, Delta Master
Executive Council, Air Line Pilots Association
Good morning. Mr. Chairman, Vice Chairman Stevens, members of the
Committee, thank you for providing me the opportunity to submit
testimony for today's hearing on the ``State of the Airline Industry:
the Potential Impact of Airline Mergers and Industry Consolidation''
and specifically, how the US Airways' hostile attempt to takeover Delta
Air Lines relates to that subject.
My name is Captain Lee Moak, and I am the Chairman of the Delta
Master Executive Council of the Air Line Pilots Association (ALPA), the
union that represents the 6,500 pilots of Delta Air Lines. I am an
international 767 captain and a 19-year employee of Delta Air Lines.
Prior to my career at Delta, I served this Nation as a United States
Marine Corps fighter pilot, and as I joined Delta, I transitioned to
the Naval Air Reserve Force to finish my military career as a U.S. Navy
fighter pilot.
I mention my military credentials because as I continue, I want to
emphasize that I am proud of my service which included the defense of
our American way of life including a free market economy. But our
Nation's aviation industry is unique, and careful government scrutiny
and oversight must ensure that any potential industry consolidation is
in the best interests of the traveling public.
On November 15, 2006, US Airways management announced an
unsolicited hostile proposal whereby US Airways would takeover Delta
Air Lines in exchange for US Airways stock and borrowed cash (debt).
The employees of Delta Air Lines stand firmly united in our
opposition to the US Airways hostile takeover of our company.
Airline Industry Consolidation
Many leading industry experts suggest, and we recognize, that
eventually, industry consolidation is not only likely, but probable and
perhaps even inevitable. With that in mind, I want to make the
following point:
We support a free market solution that includes rational
industry consolidation; consolidation that does not lead to
reduced service, increased fares and other problems for the
industry's constituents.
In the future, sensible airline consolidation opportunities may
occur. If faced with such an opportunity, the pilots of Delta Air Lines
are interested in participating in the ``right'' consolidation effort,
a consensual merger with a rational mix of routes, employees and
resources, and with the absence of major antitrust and other
detrimental issues. The ``right'' merger opportunity could draw our
support and result in a successful merger that benefits everyone
involved--the traveling public, the corporations, the employees, and
the communities we serve.
The hostile attempt by US Airways to takeover Delta Air Lines is
not that merger.
Instead, US Airway's proposal is an opportunistic effort under this
Nation's bankruptcy laws that would harm the traveling public, the
communities we serve, and the career prospects of Delta, America West
and US Airways employees. As such, the Delta pilots and all Delta
employees strongly oppose the US Airways merger attempt and support
Delta and its management's efforts to reorganize as a stand-alone
company.
Background
On September 11, 2001, terrorists used commercial airliners as
weapons of mass destruction to attack the United States of America.
Those events changed our lives forever and also marked the beginning of
drastic change for America's aviation industry. The following years
were marked by record industry financial losses, skyrocketing oil
prices, increased security costs, government-backed loans through the
Air Transportation Stabilization Board (ATSB), and numerous airline
bankruptcies (including US Airways in bankruptcy twice) and even
liquidations.
Delta Air Lines was not immune from the pressures of the post-9/11
environment. The Delta pilots recognized the immensity of the
challenges our company faced and in December 2004, the Delta pilots
reached a consensual concessionary agreement with Delta management
valued at $5 billion which included a 32.5 percent pay cut. The
agreement was designed to help Delta avoid Chapter 11 bankruptcy
protection. Despite the term ``protection,'' we knew then as we know
now that bankruptcy is a horrible place to be, and we took the action
we felt necessary to try and help our company avoid bankruptcy if at
all possible.
Unfortunately, despite our enormous concessions, Delta management
did file for protection under Chapter 11 of the U.S. Bankruptcy Code in
September 2005. At the time, the industry was still hemorrhaging, and
many familiar with the economics of the industry believed Delta might
not survive.
But to paraphrase Mark Twain, the reports of Delta's demise were
greatly exaggerated. Delta has used Chapter 11 to reorganize, a
reorganization that has been fueled in large part by further
substantial concessions from the Delta pilots and our fellow Delta
employees. As a result, less than 18 months after Delta filed for
Chapter 11, Delta is poised to emerge from bankruptcy as a strong,
stand-alone competitor in today's dynamic marketplace. In short, Delta
has used the Chapter 11 reorganization process to make a remarkable
financial recovery in a relatively short time (United Airlines spent
over 3 years in bankruptcy for example.)
As employees of Delta Air Lines, we are looking forward to Delta's
exit from bankruptcy, an exit marked not by a merger or acquisition,
but by the emergence of a new, fiscally healthy and competitively
strong Delta--a Delta poised for long-term success. But with bankruptcy
exit on the horizon, our company has now come under a hostile takeover
attack from a competitor. Now that the hard work is almost complete, US
Airways and short-term money financiers see an opportunity to profit
from Delta's restructuring efforts while at the same time eliminating a
major competitor.
Delta management is committed to exiting bankruptcy as a stand-
alone airline, and the employees of Delta Air Lines share that
commitment.
US Airways/Delta--the Perfect Storm
The US Airways hostile takeover proposal is the wrong merger at the
wrong time. A widely diverse group of industry analysts, corporate,
labor and government leaders all agree that of all possible merger
scenarios, US Airways and Delta is the single worst possible airline
combination. The proposal is the ``perfect storm'' of everything that
can go wrong with an airline merger, putting at risk the concerns and
choices of the traveling public, the communities we serve, employees
and even the success of the corporation itself. Today, I want to
address just four of the many concerns and how they relate to airline
employees:
1. Antitrust Issues
2. Operational Issues
3. Labor Issues
4. Financial Issues
1. Antitrust Issues
A rational airline merger would ideally consist of a complementary
route structure that expands travel opportunities to the traveling
public at reduced cost while minimizing route overlap. Synergies would
not come at the expense of employees. Take, for example, the case of
the Delta/Western merger in 1986. This merger is widely viewed as one
of the most successful mergers in aviation history. Below are pre-
merger route maps of Delta and Western. Note the strength of Delta in
the east and Western in the west.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
An overlay of these two pre-merger route maps demonstrates that
with almost no overlap, the merger allowed the combined airline to
realize true synergy and increased choice for the traveling public
while minimizing route overlap, redundant operations, and lost jobs.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The route overlap is staggering. Competition would be reduced on
thousands of city-pairs across the Nation. A recent independent
analysis \1\ showed that the proposed takeover would result in:
---------------------------------------------------------------------------
\1\ Grantham, Russell, ``If Delta and US Airways combine . . . What
would a merger look like?'', Atlanta Journal-Constitution, December 10,
2006.
---------------------------------------------------------------------------
A virtual monopoly on 159 major routes.
Overlap on 274 major routes.
A monopoly in seven cities where Delta and US Airways are
now the only competitors.
More than 50 percent of the flights in key airports such as
New York's LaGuardia and Washington's Reagan National airports
would be operated by the merged airline.
In addition to the virtual certainty of fare increases, there is
the issue of jobs. US Airways management claims that no frontline
employee jobs will be lost (never mind that ``frontline'' has no
universal definition), but this is simply not a credible statement. The
fact is that their plan calls for ``network rationalization'' including
the divestiture of one of the two Northeast Shuttle operations and at
least a 10-percent capacity reduction. US Airways management has also
indicated on numerous occasions that they would be more than willing to
divest whatever additional routes and assets are necessary to address
antitrust concerns, concerns that they claim do not exist in the first
place.
This should be a clear indication to all involved that the US
Airways proposal is not so much about merging as it is about misusing
the bankruptcy process to eviscerate a competitor. With divestitures
come job losses and the proposed combined route map speaks for itself.
Despite claims by US Airways management, Delta estimates that up to
10,000 jobs would be lost as a result of this merger and we concur with
those estimates.
2. Operational Issues
Almost 2 years ago, America West merged with US Airways, a bankrupt
airline that, unlike Delta, was failing--a rudderless ship foundering
on the edge of liquidation. US Airways was in its second bankruptcy in
as many years, without a business plan, without a management team,
unable to capture revenue or control costs. US Airways was at the mercy
of the ATSB and its aircraft lessors, and they were going out of
business. Like the current proposal, many promises of synergies were
made. But now that America West and US Airways have attempted to
consummate the merger, how has that worked out?
US Airways has failed to integrate facilities at most
airports.
US Airways has failed to integrate their flight operations.
US Airways has failed to integrate their reservations
systems.
US Airways has failed to integrate their passenger's check-
in and passenger handling operations.
US Airways has failed to merge the seniority lists of their
employees.
Recently, my counterpart at US Airways, Captain Jack Stephan,
issued this statement:
``Although they have had ample time and opportunity, US Airways
hasn't yet merged US Airways and America West, and they have
not integrated the pilot groups under one contract. I don't
expect that they will be capable of merging a third airline
into the fold.''
And my counterpart at America West, Captain John McIlvenna, added:
``[US Airways] Management cannot successfully merge without
labor on board. . . . US Airways, despite its statements to its
investors and the financial community, has not completed the
business of integrating US Airways and America West. This
failure calls into question their ability to successfully merge
three airlines, continue to serve their passengers, deliver
dividends to their investors, and maintain a motivated employee
base.''
Post-merger labor integration is a mess. In fact, in less than 2
weeks, at Reagan National Airport just a short distance away, the US
Airways pilots led by their union's Strike Preparation Committee will
conduct picketing operations with the theme ``We are at war,'' as they
escalate their fight for a fair single contract under Doug Parker's
definition of a successful merger.
The bottom line? Despite public claims to the contrary, the US
Airways/America West merger is far from complete. Captain McIlvenna is
absolutely correct--US Airways management cannot successfully merge
without labor onboard.
On behalf of the over 45,000 employees of Delta Air Lines, I am
here to testify that we are not onboard for the hostile takeover of our
company--not now, not tomorrow, not ever!
My suggestion to Mr. Parker is this: If you want to run an airline,
why don't you start with the one you already have?
3. Labor Issues
In addition to the current in-house labor issues that US Airways
management has failed to address, US Airways management ignores
provisions of the collective bargaining agreement that defines the
relationship between Delta Air Lines and its pilots, despite public
claims to the contrary. The Delta pilots have worked under a collective
bargaining agreement--a labor contract--for almost seven decades.
During the course of Delta's bankruptcy, the Delta pilots and Delta
management negotiated a consensual contract at great expense to the
Delta pilots. That is one reason the U.S. Trustee appointed ALPA as one
of only nine members on the Official Committee of Unsecured Creditors
and why ALPA holds one of the largest of all unsecured claims in
Delta's bankruptcy.
The pilot contract was ratified by the Delta pilots and received
the approval of Delta management, the Official Committee of Unsecured
Creditors and the Bankruptcy Court. That contract contains provisions
that are inconsistent with US Airways' ability to achieve its proposed
``synergies.'' Given those provisions, many of the proposed synergies
will not materialize. Without those materialized synergies, the
illusion of financial benefit evaporates.
To date, US Airways management has refused to discuss the pilot
contract in anything other than superficial terms and they appear not
to even understand its implications. For example, in response to just a
single contractual provision, CEO Doug Parker has been quoted as
saying, ``We don't know enough about the contract and how this clause
came to be.'' The Delta pilot contract is a part of Delta's Plan of
Reorganization (POR) and must be a part of any such POR. Most
importantly, the Delta pilot contract is binding on any successor or
affiliate, including a transaction where Delta is bought by another
carrier or holding company.
Pilot contract issues will not go away regardless of how much money
is thrown at this merger. Further, the Delta pilots will not change any
provision of our contract in order to facilitate the hostile takeover
of our company.
4. Financial Issues
There are a number of issues surrounding the financing of this
hostile takeover attempt that I'd like to address individually.
The US Airways proposal would burden the combined corporation with
well over $20 billion in debt, more debt than Delta owed when it
entered bankruptcy in September 2005, and well over twice the debt of
Delta's stand-alone plan. US Airways management claims the
``synergies'' of the merger will allow the debt to be serviced.
However, the synergies are grossly overstated. Further, any student of
the American aviation industry will recognize that airline profits are
based on razor-thin margins. Record profits in our industry are on a
scale that would cause a management team to be fired in many other
industries with similar debt loads. No airline corporation has
successfully serviced that level of debt for any substantial length of
time.
How can US Airways afford to make this offer? During the course of
its own bankruptcies, US Airways dumped $5 billion of pension
obligations onto the lap of the Pension Benefit Guaranty Corporation
(PBGC). Further, both US Airways and America West took advantage of
taxpayer-backed loans through the Air Transportation Stabilization
Board, loans that have yet to be fully repaid, and were in fact
renegotiated during the merger of US Airways and America West
(repayments are scheduled to begin later this year and stretch through
2010). Without those loans, according to Doug Parker, ``America West
probably wouldn't have survived and without America West, US Airways
probably wouldn't have survived.'' \2\ Now, with pension obligations
shed and the assistance of the U.S. taxpayer, US Airways is able to
attract the financing necessary to prey on their most significant
competitor who did not use an ATSB loan and who fought for and
successfully saved most of their employee's pensions. If US Airways is
suddenly flush with extra cash, perhaps instead of attempting to abuse
this Nation's bankruptcy laws, those ATSB loans should be repaid and
the pensions of their employees reinstated.
---------------------------------------------------------------------------
\2\ McCartney, Scott, ``The Middle Seat'', Wall Street Journal, May
30, 2006.
---------------------------------------------------------------------------
Finally, in the area of finances, it is worth looking at who is
behind the curtain of this hostile takeover attempt. It is interesting
to note that roughly 50 percent of US Airways' outstanding shares are
owned by hedge funds with no long-term interest in the success of
either US Airways or Delta. Hedge funds focus on short-term financial
gain and thrive on market volatility other investors shun. In addition,
you may have heard of moves by a self-anointed ad hoc ``Unofficial
Committee of Unsecured Claimholders'' that is supporting Parker's
efforts. These creditors also consist largely of hedge funds and
financial institutions with no long-term interest in seeing either
Delta or US Airways succeed. They are in it simply for the short-term
gain.
The method behind their perceived gains would consist almost solely
of forcing Delta Air Lines to remain in bankruptcy longer in order to
wrest further concessions from employees and reject leases on aircraft
and facilities. Given the unique qualities of our Nation's aviation
industry, it is crucial that certain segments of Wall Street not be
allowed to drive public policy.
Conclusion
The American aviation industry has been through the worst period in
its history in the last several years. Now, after numerous corporate
restructurings, both in and out of bankruptcy, there are strong
indications of an industry on the rebound. Capacity is under control;
there is no ``need'' to remove capacity through consolidation. Oil
prices have moderated (for now.) Individual airlines have begun to see
the fruits of their restructuring efforts and report profits again,
several for the first time since 9/11.
If the Committee would indulge me, I would like to conclude by
reiterating what I stated at the beginning of my testimony.
In the future, there may be airline merger opportunities that make
sense. If faced with the possibility, the Delta pilots are interested
in participating in the ``right'' consolidation effort, a consensual
merger with a rational mix of routes, employees and resources, and of
the absence of antitrust and other issues that burden the current
proposal. The ``right'' merger opportunity could draw our support and
result in a successful merger.
The US Airways proposal is not that merger. Instead, US Airway's
proposal is an opportunistic effort under this Nation's bankruptcy laws
that would harm the traveling public, the communities we serve, and the
career prospects of Delta, America West and US Airways employees. As
such, the Delta pilots and all Delta employees strongly oppose the US
Airways merger attempt and support Delta and its management's efforts
to reorganize as a stand-alone company.
On behalf of the over one hundred thousand active and retired
professionals of Delta Air Lines, thank you for the opportunity to be
heard.
______
Coalition for a Passengers' Bill of Rights
January 21, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Senator Inouye:
As you may know, a number of us recently endured a terrible and
traumatic ordeal at the hands of a major airline during the New Year's
holiday. As concerned citizens, we are now respectfully requesting your
help in ensuring that our experience of chaos and desperation is never
again repeated by any other airline in the U.S.
On December 29, 2006, we were on American Airlines Flight 1348 from
San Francisco, California to Dallas, Texas. After being diverted to
Austin, Texas due to heavy storms in Dallas, hundreds of us, including
families with young children, some elderly, and some disabled persons,
were forced to wait almost 9 hours on the tarmac of Austin Bergstrom
International Airport, enclosed in a plane with no running water and no
working bathroom facilities. Additionally, the only food on our flight
(AA 1348) consisted of a few pretzel snack bags. The dead cabin air
became stale and later polluted when the toilets began to overflow with
human waste. There were other flights, too, on the tarmac that day,
that sat for protracted times with disastrous results.
In light of this horrific experience, and most importantly, the
dismissive attitude of the airlines in not seeking to remedy it in any
way, we are forming a coalition of travelers whose focus it is to
develop an air travelers' bill of rights. Enough is enough. This is not
the first nor will it be the last time that this degrading and
humiliating treatment occurs. Without some corrective action, air
travelers are sure to continue to experience being treated as cattle in
an increasingly uncompetitive airline industry.
We are thus hoping that the Commerce Committee will be willing to
commence hearings on legislation to create a passenger bill of rights.
In addition, we are hopeful that the Committee will consider formally
recommending to the Department of Justice and Department of
Transportation that a passenger bill of rights should be a condition of
approval of airline acquisitions, for instance Delta Air Lines by US
Air. Such consumer-related conditions are common in business mergers
and acquisitions. For example, the Federal Government conditioned
AT&T's acquisition of BellSouth with a host of consumer-related
concerns.
We are attaching to this letter a proposed draft of a passenger
bill of rights that includes guarantees for basic customer service
standards, caps on the amount of time any delayed flight can be kept in
limbo on the tarmac without allowing passengers to de-plane, and to
ensure that the dehumanizing treatment--like that which we experienced
in Austin where food and essential needs are withheld for hours--cannot
occur. We are also urging the formal implementation of a Passenger
Review Committee, not made up of non-airline executives and employees,
but rather passengers and consumers--that would have the formal ability
to review and investigate complaints. Our full set of recommendations
is enclosed below.
Indeed, in this context, history is repeating itself. For just back
in 1999, customer service had reached new lows when Northwest airlines
kept thousands of passengers trapped on grounded planes in Detroit for
hours. Responding to the tidal wave of consumer complaints, legislators
then introduced a passenger bill of rights. The airlines sought to
stave off the legislation by initiating their own set of non-binding
``promises.'' But as the Los Angeles Times recently reported, and a
according to a report by the Department of Transportation, each of
these promises was broken as easily as it was made in successive years.
On behalf of passengers of American Airlines flights 1348, 534,
1008 and anyone who has been forced to sleep in a terminal because of
airline delays, anyone who has experienced mind-numbing delays and
cancellations, anyone who has experienced the blithe and dismissive
rudeness that too frequently accompanies the poor service, we are
hopeful that you can help us light the fire of a new and long overdue
consumer movement that will give air travelers the respect and fair
treatment we deserve.
Signed,
Kathleen and Timothy Hanni, 159 Silverado Springs Drive,
Napa, CA 94558.
Tom and Allison Dickson, 11534 Hillpark Lane, Los Altos, CA
94024.
Alex Perez, 3975 Catamarca Dr., San Diego, CA 92124.
Chase Costello, 4757 Bayard Street Apt. 100, San Diego CA
92115.
Tim Meehling, 618 Meadow Lake Dr., Freeburg, IL 62243.
Meena Reisetter, 1215 Pacific Ave #103, San Francisco, CA
94109.
Karin Flores, 1499 Union Street #9, San Francisco, CA 94109.
Sheli Woodward, 166 Leesburg Pike, Georgetown, KY 40324.
Landen Hanni, 159 Silverado Springs Drive, Napa, CA 94558.
Melissa Wheeler, Casey Courtney, 39703 Rd. 425B, Oakhurst, CA
93644.
Mark Vail, 3366 Avalon Ave., Madera, CA 93637.
Nancy K. Vandergriff, 120 Sunnybrook Pl., San Ramon, CA
94583.
Jeff Hunt, 3549 20th St., San Francisco, CA 94110.
cc: Senator Barbara Boxer, Senator Dianne Feinstein, Senator
Jay Rockefeller, Senator Ted Stevens, Senator Trent Lott, Rep.
Mike Thompson, Chairman James Oberstar, Rep. John Mica,
Chairman Jerry Costello, and Rep. Thomas Petri.
______
Proposed Bill of Rights for Airline Passengers
All American air carriers shall abide by the following standards to
ensure the safety, security and comfort of their passengers:
Establish procedures to respond to all passenger complaints
within 24 hours and with appropriate resolution within 2 weeks.
Notify passengers within 10 minutes of a delay of known
diversions, delays and cancellations via airport overhead
announcement, on-aircraft announcement, and posting on airport
television monitors.
Establish procedures for returning passengers to terminal
gate when delays occur so that no plane sits on the tarmac for
longer than 3 hours without connecting to a gate.
Provide for the essential needs of passengers during air- or
ground-based delays of longer than 3 hours, including food,
water, sanitary facilities, and access to medical attention.
Provide for the needs of disabled, elderly and special needs
passengers by establishing procedures for assisting with the
moving and retrieving of baggage, and the moving of passengers
from one area of airport to another at all times by airline
personnel.
Publish and update monthly on the company's public website a
list of chronically delayed flights, meaning those flight
delayed thirty minutes or more, at least forty percent of the
time, during a single month.
Compensate ``bumped'' passengers or passengers delayed due
to flight cancellations or postponements of over 12 hours by
refund of 150 percent of ticket price.
The formal implementation of a Passenger Review Committee,
not made up of non-airline executives and employees but rather
passengers and consumers--that would have the formal ability to
review and investigate complaints.
Make lowest fare information, schedules and itineraries,
cancellation policies and frequent flyer program requirements
available in an easily accessed location and updated in real-
time.
Ensure that baggage is handled without delay or injury; if
baggage is lost or misplaced, the airline shall notify customer
of baggage status within 12 hours and provide compensation
equal to current market value of baggage and its contents.
Require that these rights apply equally to all airline code-
share partners including international partners.
______
January 22, 2007 Press Release--Passengers Stranded on American
Airlines Flight 1348 Call on the U.S. Senate to Make Passengers Bill of
Rights a Priority
Bill of Rights Sought as Precondition to Upcoming Airline Merger
Napa Valley, CA--A group of passengers who were recently stranded
on American Airlines flight #1348 for over 8 hours with no food or
access to bathroom facilities today called on Members of the Senate
Commerce Committee and the House Transportation & Infrastructure
Committee to hold hearings on a comprehensive Passengers Bill of
Rights. The Passenger Bill of Rights would modernize and improve
airline industry standards for customer service. The group is also
calling upon Members to urge the Department of Transportation and
Department of Justice to condition the merger of US Airways and Delta
Air Lines on the adoption of such a Bill of Rights.
``We feel that enough is enough. This is not the first time, nor is
it likely to be the last, that this kind of degrading treatment is
visited on passengers,'' said Kate Hanni, one of the passengers from
American Airlines flight 1348. ``Thousands of legitimate complaints by
travelers mistreated by the airlines are regularly dismissed or
inadequately addressed by the industry.''
``As Congress considers airline mergers, it is the perfect time to
finally give consumers and taxpayers what we deserve: a comprehensive,
enforceable Passenger Bill of Rights,'' added Hanni.
On December 29, 2006, the passengers on American #1348 were on
their way from San Francisco, California to Dallas, Texas, and were
diverted to Austin, Texas due to heavy storms in Dallas. In Austin, the
passengers were forced to wait in the cabin for almost 9 hours with no
running water and no working bathroom facilities. There was virtually
no food, and the stale air quickly became polluted because of a
sanitary system that met its capacity. Passengers are yet to receive
any explanation or apology from the company.
Consumer-related conditions on mergers are commonly adopted,
including most recently with the AT&T/BellSouth merger. The airlines
successfully fought and killed Passenger Bill of Rights legislation in
1999--a move that was initiated after airlines kept thousands of
passengers trapped on grounded planes for hours.
Poor customer service by the big airlines has dramatically worsened
over the years. One recent government report showed that the airline
industry reported a six-year low in on-time statistics in November
2006. Other reports have shown increasing delays and declining customer
service.
The passengers of American Airlines flight 1348, 534 and 1008
announced they would be forming a national grassroots coalition
comprised of concerned taxpayers and consumers dedicated to passing the
Bill of Rights.
______
Delta Board Council
January 19, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Mr. Chairman:
The Delta Board Council, peer-selected employee advocates to the
company's senior management and its Board of Directors for the nearly
40,000 ground employees and flight attendants of Delta Air Lines, is
writing to express on behalf of Delta employees worldwide our resolute
and unified opposition to US Airways' proposed hostile takeover of
Delta.
Delta employees have made significant sacrifices since our company
entered bankruptcy. We have endured pay cuts, reductions in medical
benefits, relocations, and furloughs. It has been a painful experience
for all. Despite these hardships, we are unified in our fight against
this hostile, unsolicited takeover attempt and we stand together in
support of our company and its future for many reasons.
First, our leadership has demonstrated its commitment to employees
by leading the effort to retain our pensions, and it is this leadership
we support. Rather than discard all pension obligations, we together
fought for and, with the determined efforts of Congressional leaders,
achieved legislation that provided us the ability to preserve pensions
for approximately 90,000 active and retired non-pilot employees. By
contrast, US Airways defaulted on all of its defined benefit pension
plans--though somehow it came up with the funds to try to buy our
airline. This is not the type of leadership we could ever support.
Second, after having made tremendous sacrifices, Delta employees
have been a key component in catalyzing our resurgence as a vibrant,
customer-focused airline and we have earned the right not to have the
results of our hard work and our investment in our company taken from
us or placed at risk by the US Airways deal.
We are certain that US Airways' unsolicited takeover, based on
shrinkage, will reverse our progress. It will dilute our brand. It will
negatively impact our ability to deliver superior service. It will
forever alter our culture of caring for, and dedication to, our
customers and the communities we serve.
Moreover, US Airways has made it clear that its bid depends on
Delta remaining in bankruptcy during a very arduous regulatory review
which, in view of the complexity of our industry, could take a year or
more. The longer Delta remains in bankruptcy, the more everything we
have worked so hard together to accomplish is at risk--a situation we
are unwilling to accept because we were forced to remain in bankruptcy
by US Airways.
Third, we believe in our plan and want to emerge from bankruptcy as
a strong, stand-alone company. Our leadership has worked tirelessly to
craft a plan that is working for Delta employees, our customers, the
communities we serve, and our other stakeholders. In short, Delta
leaders and our people have engineered a resurgence that will be an
example in the industry for years to come. We deserve this chance at
success and all of the potential it holds for Delta people.
When we compare what Delta management has said--and proven--to us
against US Airways' record, our choice is clear and compelling. Through
our efforts--on our aircraft, behind our ticket counters and
reservation desks, in our hangars, and everywhere else we support Delta
passengers--Delta is rapidly becoming the industry standard in
passenger satisfaction. By contrast, US Airways does not even appear to
have the objective of achieving customer service excellence.
Fourth, we are concerned about the loss of Delta jobs and benefits
as a result of this merger. In a recent open letter, US Airways talked
carefully about avoiding ``layoffs'' of ``frontline'' employees. In
reality, the US Airways plan would require that capacity be reduced by
at least 10 percent. That in turn can only be accomplished by
eliminating flights, paring our fleet, and eliminating approximately
10,000 jobs. We are convinced that their assurance about frontline
employees is merely tactical. It is one which, given US Airways'
contentious relationship with its own employees--thousands remain on
furlough 15 months after they merged with America West--gives us no
confidence in whatever public proclamations are made by US Airways.
Moreover, US Airways makes no effort to hide the fact that
thousands of supervisory and administrative employees will be fired or
laid off, or, in their words, they will become bit players in pursuit
of ``synergies.''
In contrast, in 2006 Delta offered recall to more than 340 pilots,
approximately 900 maintenance professionals and approximately 1,200
flight attendants.
For these reasons, we are steadfast in our belief that a strong
Delta is a Delta that emerges from bankruptcy as a stand-alone Delta.
To that end, we have launched a website, www.keepdeltamydelta.org,
which is a public affirmation of our views and highlights our efforts
throughout the world to rally opposition to US Airways' hostile
takeover attempt. The site shows the negative impact state-by-state
that a US Airways/Delta merger likely would have on consumers and
communities. Significantly, the site also has attracted more than
100,000 signatures from Delta employees, retirees, frequent flyers, and
concerned customers in support of a letter opposing US Airways' hostile
takeover attempt. In that letter, we sum up our position:
We've worked hard to strengthen and improve our airline. We
deserve the chance to succeed and benefit from our
contributions, which we have accomplished together. We do not
deserve to lose our jobs and benefits or to have US Airways
place at risk the results of our hard work.
Because Delta employees have so much at stake in our airline,
because we believe that US Airways' proposal is bad for our employees,
customers, the communities we serve and our other stakeholders, and
because we have confidence in our management and in our plan, we have
asked Gerald Grinstein, Delta's Chief Executive Office, to deliver this
letter to you when he testifies before the Committee on January 24. We
speak for our fellow employees. Jerry speaks for us.
Sincerely,
The Delta Board Council: Beth Graham, In-Flight
Representative; Anne Larkin, ACS Representative; Bill Morey,
Reservation Sales & City Ticket Offices; Chris Muise,
Supervisory & Administrative; Jack Roth, Technical Operations.
______
Delta Air Lines Retirement Committee and Delta Section 1114
Committee of Nonpilot Retirees
January 24, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Mr. Chairman:
I am writing on behalf of the nearly 10,000 non-pilot retirees and
dependents of Delta Air Lines who are members of the Delta Air Lines
Retirement Committee (DALRC), which I chair. I also write to you on
behalf over 36,500 Delta non-pilot retirees, spouses, and survivors I
represent as chair of the Section 1114 Committee appointed by the
bankruptcy court in the Delta Air Lines case to represent them in
protecting their retiree medical benefits in Delta's bankruptcy case.
We welcome the Committee's review of airline mergers and of the US
Air takeover attempt in particular. Our message to the Committee is
simple. We are absolutely opposed to a US Air-Delta merger.
Delta was an extraordinary company to work for, and even in
difficult times it has been a very different company than US Air.
During its bankruptcy, Delta successfully lobbied for Congressional
legislation that would allow it to keep its promises to its many
thousands of non-pilot active and retired employees and avoid
terminating their pensions. Facing the same obstacles in their efforts
to reduce cost and exit bankruptcy, US Air, in its two bankruptcies,
eliminated its employees and retirees pensions, saddling the Pension
Benefit Guaranty Corporation with billions of dollars of liabilities.
Delta is now poised to achieve profitability, thanks to the enormous
sacrifices of its employees and retirees, and is ready to emerge from
bankruptcy. But instead, as part of a merger US Air wants Delta to
remain in bankruptcy for many more months to wring out additional
``synergies.'' We know what that means--more Delta employees
involuntarily joining the ranks of our retirees and perhaps even more
retiree give backs.
A US Air takeover will be bad for Delta employees and bad for US
Air employees. ``Synergies'' means more jobs lost and fewer choices for
travel for the customers we serve. And US Air's proposed takeover means
burdening the combined airline with billions of dollars of additional
debt. Airlines are subject to cyclical economic swings and outside
event risks that are hard to manage. An airline burdened by additional
debt might not survive the next crisis.
A US Air takeover would not just reduce competition. US Air would
be an especially chancy partner for Delta. Fifteen months into its
merger with America West, US Air still has not settled labor issues
with its employees and has not merged its separate reservations
systems. US Air's proposed takeover will require them to take on a
third reservation system, additional labor contracts, incompatible
fleets and different domestic and international code-sharing
arrangements.
There are many problems with US Air's hostile takeover proposal--
questionable revenue assumptions, huge new debt, and it fails antitrust
law scrutiny--but for us, the equation is simple. If Delta succeeds as
an independent airline, Delta retirees will preserve what remains of
our benefits for which we worked so hard and that are so critical for
so many of us.
As you consider the state of the U.S. airline industry, and hear
pronouncements from experts that there is excess capacity or that
additional efficiencies are possible through consolidation, please
consider two things. Those high sounding phrases mask genuine human
consequences. Real people lose jobs and pensioners lose health benefits
and income security we worked a lifetime to achieve.
And consider also that a US Air takeover is only possible because
of the different way the two companies have chosen to deal with their
employees and retirees pension obligations. Delta has worked to
continue to provide the earned pension benefits it promised to its many
thousands of non-pilot employees and retirees, and is selling at a
discount because of those remaining obligations. US Air is essentially
using the savings it got by dumping its employees and retirees pension
obligations to now fund this takeover attempt.
US Air's unwanted offer to Delta is a bad deal for Delta, for both
airlines' employees, for our retirees, for the security of our pension
system, for customers, and for competition. It should not survive
antitrust review, but if it did, it would produce an airline so
burdened with debt, at the next difficulty (and in the airline industry
there are many) the combined airline would plunge back into bankruptcy.
Please accept my thanks and that of all Delta retirees for
considering our views. As a gesture of our true solidarity with Delta
Air Lines, I have asked Mr. Gerald Grinstein to deliver this letter to
you personally.
Respectfully,
Cathy Cone,
Chair.
______
Frederick C. Ford, A.A.E.
Cambridge, Massachusetts, January 26, 2007
Hon. Daniel K. Inouye,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Inouye:
I am writing you and your fellow Members of the Committee on
Commerce, Science, and Transportation as a ``friend of the Committee''
and respectfully request this document be entered into the record of
the aforementioned hearing on January 24, 2007.
Please allow me to present my credentials.
I am a former General Manager of Dallas/Fort Worth, Texas
International Airport, Director of Aviation for the Massachusetts Port
Authority and Vice President of Pan American World Airways.
My current business as a consultant causes me to travel over
150,000 air miles per year and I am a member of the US Airways and
Delta Air Lines frequent flier programs and often fly over 100,000 mile
per year on Delta.
Senator Boxer may be familiar with my testimony before the House
Government Operations Subcommittee in the investigation of Pan Am 103
during which I became an advocate for the families of the victims and
this evidences that I am not a blind supporter of the airlines or the
airline industry. I am, in fact, an advocate for the consumer and
passenger rights.
I respectfully submit that I am reasonably qualified to comment on
the topic of airline mergers and their impact on the industry,
employees and traveling public.
If I may, I would like to submit my views as to the merits and
impacts of the hostile merger/acquisition of Delta Air Lines by US
Airways.
As a preface to my remarks I submit that I have not been the
recipient of any compensation or consideration of any kind by either
Delta Air Lines or US Airways.
Allow me to comment first from the airport operator viewpoint.
As the former CEO/COO of airports large and small served by Delta,
US Airways and others, I submit that Delta Air Lines, in its past and
current configurations, has always been regarded as a ``people''
airline. Whether it is for its passengers or its employees, Delta, from
its very inception in Monroe, Louisiana, has always taken pride in
serving its customers with reasonably good service and lowest possible
fares and has always considered its relationships with its employees as
a partnership.
Delta's employees, in the mid-1980s, bought a Boeing 767 for Delta
as a gesture of support, appreciation and loyalty to their company to
evidence this partnership.
Delta has always been amongst the first of major airlines to
outreach to cities they serve and to airports from which they operate
to support local initiatives whether they be for charitable purposes or
new facility construction such as Terminal A in Boston, where, in the
immediate aftermath of 9/11, Delta recommitted to its financial
support. Delta stood tall for Boston and New England.
Delta has a corporate philosophy of being a partner with
communities they serve and they have always been there to support the
airport, city and state from which they operate whether it be for an
aircraft to use for a disaster drill or to providing representation
from senior management to seek solutions to serious local issues such
as congestion at La Guardia or the recovery of traffic from the impacts
of 9/11. Delta is a solid community citizen.
From an airline employee perspective, Delta has always been a
leader in fairness of policies and compensation to its employees as
evidenced by it being one of very few large companies where the
employees, in general, have not felt the need to have collective
bargaining representation.
One just has to look at the history of mergers and acquisitions,
namely the days of the Texas Air Corp acquisitions of People Xpress,
Eastern, and Frontier or the ill-fated Pan Am/National Airlines merger
where corporate cultures, union mistrust of management and the creation
of monopoly markets caused employee unrest, loss of wages, benefits,
retirement programs and employee life savings.
An industry that once was considered to be among the very best
places to work has become, in many cases, one step above temporary
employment. Why?
It is because of corporate greed and not caring about employees,
passengers, public and private debt obligations or the economic futures
and well being of families of thousands of employees! It may be called
the Icahn-Lorenzo Effect!
While Delta has sought and received sacrifices from its employees,
it is largely intact from whence the latest rounds of airline
restructuring began. It still has many senior 30-plus-year employees
and it treats its employees with respect and dignity.
Delta's leadership, from Mr. Grinstein, Mr. Whitehurst and Mr.
Macenczack at corporate headquarters to 39 year employee Lois Goral at
the Crown Room in Boston have been dedicated to providing service at
levels where the customer is completely unaware of the financial
standing of the company. At Delta, people come first!
Airline mergers and acquisitions do result in higher fares, reduced
levels of service and declines in service levels. The cliche
``competition is good for the consumer'' didn't start with the airline
business but it is well stated. The market is better served with
competition . . . just ask Senator Schumer, where the State of New York
and Port Authority of New York and New Jersey provided support and
assistance to JetBlue to foster competition, increase employment,
provide service to underserved communities and, most of all, create
economic development.
Mr. Chairman, please count this very experienced traveler to be a
supporter of market driven economics rather than forced and unwelcome
consolidation. There are no beneficiaries other than the investment
bankers and stock options for the corporate raiders.
Let Delta and other carriers explore together in a voluntary manner
rather than cheating thousand of employees, numerous cities and town,
and purchasers of airport facility bonds. These companies are public
utilities and, therefore, the public interest must be considered from
all perspectives.
There is a very simple question and answer to the suggested
benefits proffered by US Airways. Is the elimination of a great company
and the destruction of the futures of thousands of employees and
families a justifiable price to pay so one segment of the market can
fly once per year to Disney World for under $200.00? I think not!
Thank you very much for considering these thoughts. You and the
Members of the Committee have a daunting task to consider and the well-
being of thousands of people relying upon your diligent and thorough
review of the matter. The deliberations may be difficult but the wrong
answer may create an abundance of personal bankruptcies, lost savings
and a retirement of lost dreams. Please use your wisdom thoughtfully.
Sincerely,
Frederick C. Ford, A.A.E.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Hon. Andrew B. Steinberg
Question 1. The point of consolidation is to address the
fundamental problem of overcapacity that has plagued the industry over
the past several years. It is a matter of too many seats chasing too
few consumers. Recently, however, trends have turned in the opposite
directions. Airlines have constrained growth, and even cut capacity in
some cases, and load factors are at all time highs. Given these trends,
is consolidation really needed?
Answer. The term ``consolidation'' inevitably evokes the idea of
mega-mergers when discussing the airline industry. As stated in my
written testimony, my view is that mergers are by no means an elixir
for the airline industry. Merging two air carriers is a complex, risky,
and expensive endeavor. I think there are two questions that should be
considered: whether consolidation is necessary and whether it is
desirable. The question of whether consolidation is necessary is best
answered directly by the marketplace itself. The trends cited in your
question such as airlines cutting capacity and increasing load factors
are best characterized as airlines' tactical measures to regain their
financial footing in the immediate term. Consolidation, on the other
hand, involves long-term strategic decisions of airlines' to merge with
other firms, sell certain assets, or to even exit the marketplace.
These types of decisions are not typically made in direct response to
the vagaries of business cycles. Rather these decisions take into
account a long-term view of the competitive landscape, macroeconomic
trends, and resource constraints. The free-market, and not the
government, is the best arbiter to assimilate all the data and deliver
an optimal outcome.
This is not to say the government does not have an important role.
Rather it is important for the government to keep an open mind and
maintain a neutral stance acting only when there is clear evidence that
the public interest would be harmed by a transaction or other event.
Both DOT and the Department of Justice are poised to evaluate, and if
necessary, remedy anticompetitive effects such as higher fares or
reduced service options that may occur as a result of consolidation.
However as I state above, I believe it is important that the government
take a neutral stance and keep an open mind as mergers may very well
succeed in some instances.
As to whether consolidation is desirable, it depends on the
ultimate objective. Consolidation could possibly reduce the volatility
associated with extreme boom-and-bust cycles that have historically
affected the industry. U.S. airlines have done a remarkable job at
increasing efficiency and cutting costs in the past 5 years. However, I
do not believe the long-term volatility that plagues the airline
industry is truly gone despite recent reductions in capacity. Rather I
think it is has been simply obscured by relatively good macroeconomic
conditions and, if history is any guide, will return during the next
economic slowdown.
Question 2. Is it possible, particularly if one merger leads to a
flurry of activity, that the efficiency benefits of consolidation will
be outweighed by higher fares and fewer service options?
Answer. To paraphrase your second question, you ask whether it is
possible that a wave of mergers resulting from a domino effect
precipitated by a single merger could result in higher fares and fewer
service options that offset any efficiency gains? It is far from
certain that a single merger would beget a series of mergers. In any
case, entry into the airline industry remains essentially unfettered.
The difficulties of the past 5 years have not deterred entrepreneurs
from starting new low-cost carriers (LCC) nor has it deterred existing
low-cost airlines from expanding. The LCCs and their ability to enter
markets serve as formidable check on the pricing power of large
airlines in most of the Nation. Mergers are often sought in order to
attain new efficiencies. Thus I think it is entirely plausible that
certain mergers could result in intensified competition within the
industry.
Question 3. What are the potential benefits of consolidation given
the current state of the airline industry?
Answer. In response to your question about the potential upside of
consolidation, I think there is the potential for consolidation to
create benefits for the public. One potential benefit would be
intensified competition amongst airlines as airlines with newly
attained efficiencies aggressively leverage those gains in the
marketplace. Another potential benefit is that consolidation could spur
new forms of competition. In the United States, air travel has become
increasingly commoditized and with terms of competition primarily
limited to price and schedules. Consolidation could lead to the
emergence of new business models that compete on the basis of different
product attributes such as on-board service. Another possible benefit
of consolidation would be a more stable airline industry consisting of
companies with the financial wherewithal to weather business cycles. In
addition to layoffs and painful wage cuts, the most recent downturn
precipitated a series of pension defaults that not only deprived
airlines employees and retirees of their benefits but also exposed the
taxpayer to a potential liability. These are not harbingers of a
healthy industry. Thus I believe to the extent consolidation may foster
financial stability within the industry, it could be considered a
benefit.
Question 4. Some industry experts suggest that consolidating down
to three large airlines is needed to best ensure the financial
stability of the airline industry. What is your view of this? Would
this appropriately balance the need for ensuring the financial
stability of the industry with consumer interests?
Answer. I do not believe there is a ``magic'' number of large
airlines that would ensure the financial stability of the airline
industry. As you note many commentators suggest that three airlines
would be optimal, but I think the more important underlying idea in
their observations is that market forces are trying to rationalize the
industry and could result in fewer (but larger) network carriers.
Question 5. Mergers have a history of problems in the airlines
industry. To what extent is it likely a merger could actually realize
the efficiencies given the difficulties of integrating labor forces and
other complex issues?
Answer. It is extremely difficult to say in general whether a
merger could actually realize the efficiencies that may exist. Even
with a specific hypothetical, it would be a challenging intellectual
exercise to make such a prediction with a high degree of confidence.
Historically, some airlines mergers have successfully generated
efficiencies while others have not succeeded for the reasons you have
cited. As I mentioned earlier, I think the best stance for the
government would be to let the market determine the merits of a
particular transaction and intervene only when there is a clear risk to
the public interest.
______
Response to Written Questions Submitted by Hon. John F. Kerry to
Hon. Andrew B. Steinberg
Question 1. Can you describe in detail the Department of
Transportation's role in the review process and how it would determine
whether the merger strengthens or reduces competition?
Question 2. Is there are threshold that you use in individual
markets where you don't allow an air carrier to have more than a
certain percentage of the market? What's the cutoff?
Answer to Questions 1 and 2. Airline mergers are reviewed by both
the Antitrust Division of the Department of Justice (Antitrust
Division) and the Department of Transportation (DOT). The Antitrust
Division is responsible for determining whether the transaction will be
challenged under the antitrust laws. DOT conducts its own competitive
analysis of proposed mergers and by practice submits its views and
findings to the Antitrust Division privately. DOT's analysis is based
on traditional antitrust precepts that define markets typically as city
pairs such as Boston-Charlotte or Baton Rouge-Los Angeles. DOT measures
the concentration using metrics such as the Herfindahl-Hirshman Index
(HHI) and assesses the overall competitive effect that the proposed
merger would likely have in affected markets. We also look at other
factors such as airport capacity constraints that tend to increase the
risk of competitive harm. The more likely a merger is to increase
concentration, the more likely it is to be deemed anticompetitive and
thus subject to challenge or remedial measure. There is not, however,
any threshold percentage for market share that will automatically
indicate whether a merger may lead to anticompetitive effects.
Finally, DOT's competitive analyses may also encompass issues such
as effects on network competition, effects on service to small
communities, and whether a transaction may constitute an unfair method
of competition or a deceptive trade practice.
Question 3. In your written testimony, you make clear that the
government should not ``purposefully of inadvertently prevent the
industry from undertaking the restructuring demanded by the market
forces,'' and that this philosophy applies to consolidation. Do you
feel consolidation is necessary or inevitable, and do you think it will
benefit the airline industry?
Question 3a. If so, how will the Department of Transportation
review this merger objectively if its philosophy is that the government
should let market forces work themselves out?
Question 3b. If this merger is approved, what happens in small
markets that may only have 3 or 4 carriers that both US Airways and
Delta serve that would see 4 carriers reduced to 3 or 3 carriers
reduced to 2? What action would the Department take to ensure
competition in those markets?
Question 3c. What action would the Department take in Boston or any
market that both airlines serve if another airline isn't interested in
that market in the wake of any divestitures that the new airline would
have to make?
Answer. The question of whether consolidation is necessary is best
answered directly by the marketplace itself. Trends such as airlines
cutting capacity and increasing load factors are best characterized as
airlines' tactical measures to regain their financial footing in the
immediate term. Consolidation, on the other hand, involves long-term
strategic decisions of airlines' to merge with other firms, sell
certain assets, or to even exit the marketplace. These types of
decisions are not typically made in direct response to the vagaries of
business cycles. Rather these decisions take into account a long-term
view of the competitive landscape, macroeconomic trends, and resource
constraints. The free-market, and not the government, is the best
arbiter to assimilate all the data and deliver an optimal outcome.
Consolidation may benefit the airline industry although that is not
a certainty. It could result in a more stable airline industry
consisting of companies with the financial wherewithal to weather
business cycles. In the relatively fragmented industry we have today,
each economic downturn brings with it painful and sometimes dramatic
rounds of layoffs, pay cuts, and bankruptcy filings. The most recent
downturn precipitated a series of pension defaults which not only
deprived airlines employees and retirees of their benefits but also
exposed the taxpayer to a potential liability. These are not harbingers
of a healthy industry. Thus I believe to the extent consolidation may
foster financial stability within the industry, it would be a benefit.
DOT does not prejudge the competitive effects of any proposed
merger. Instead, we review each transaction on a case-by-case basis. We
have ample authority and opportunity to consider whether a proposed
merger would substantially reduce competition and to coordinate with
the Department of Justice any proposed remedies. The issue of remedies
to the proposed US Airways/ Delta merger with regard to Boston or other
markets, is moot. US Airways has withdrawn its takeover bid.
______
Response to Written Question Submitted by Hon. Bill Nelson to
Hon. Andrew B. Steinberg
Question. The skies have been pretty bumpy for airlines in recent
years. The Air Transportation Stabilization Board (ATSB) guaranteed
billions in loans and pensions have been dumped on the PBGC. This
essentially means the merger is being funded by the taxpayers. And with
a ``new Delta'' looking to end up with $23 billion in debt--up from the
$10 billion Delta would hold coming out of bankruptcy. What kind of
stability concerns does that raise? Are there any indications that
taxpayers would end up bailing out a ``new Delta'' on a grander scale
than we've already had to do?
Answer. As you are aware, US Airways' takeover bid for Delta has
been withdrawn. Many critics of the takeover bid raised concern over
the amount of debt involved in the transaction--specifically, concern
that the ``new'' Delta would have been excessively leveraged upon its
exit from bankruptcy, thereby weakening its overall prospects for
success. Going forward, DOT will continue its practice of carefully
monitoring the financial condition of airlines in order to assess the
impact of any particular carrier's distress on the overall health of
the air transportation system.
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
Hon. Andrew B. Steinberg
Question. Labor costs are one of the highest costs for air
carriers. Is it an unfair competitive advantage for airlines to be
required to fully fund their employee pension plans while others are
relieved of pension obligations through bankruptcy or other procedures?
Answer. It is true that labor costs constitute a major portion of
U.S. airlines' total costs. It is also true that a major source of
financial distress for certain legacy carriers is the size of the
accumulated pension liability. Most of the major carriers have under-
funded their employee's pensions by billions of dollars. Several
carriers have declared bankruptcy and used the bankruptcy process to
terminate their pension plans and offload the costs to the Federal
Pension Benefit Guaranty Corporation (PBGC). As a result of accumulated
losses and pension fund shortfalls, the airlines account for almost 40
percent of PBGC claims. And while accounting for almost 40 percent of
claims from failed plans, the airlines have paid approximately 3
percent of the total premiums in the history of the guarantee fund,
according to the PBGC.
Respected airline industry analysts have frequently observed the
airline industry is, paradoxically, relatively easy to enter and hard
to leave--sometimes characterizing this phenomenon as an ``exit
barrier'' for failed firms that is the inadvertent consequence of the
Chapter 11 reorganization process. They point out that airline
stakeholders (lenders, suppliers and employees)--any one of whom could
singly cause an air carrier's demise--rarely force such an outcome and
instead trade in old contractual arrangements and debt for new ones.
And the net result of those decisions is, perversely enough, that
airline employees make big sacrifices, and that those carriers who
manage to avoid bankruptcy eventually find themselves at a serious
competitive disadvantage. Given that one of DOT's statutory mandates is
to ``encourage efficient and well-managed air carriers to earn adequate
profits and attract capital'', this situation is problematic.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Hon. Andrew B. Steinberg
Question 1. If the US Airways/Delta merger were approved by the
Department of Justice, many believe it would send a signal to the other
four legacy carriers that consolidation is acceptable. Do you think
that the other legacy carriers would want to merge in order to remain
competitive?
Answer. The proposed takeover bid by US Airways for Delta has been
withdrawn by the management of US Airways. However, industry analysts
and policymakers debate whether the US Airways/Delta transaction would
have triggered a wave of mergers. It is not clear.
The possibility of a domino effect resulting in a wave of mergers
would be dependent on the nature of the initial transaction. A carrier
would likely evaluate the impact of a merger between two (or more) of
its competitors on its own competitive position and then determine
whether a strategic response is necessary or prudent. In some cases, a
merger or acquisition could be the optimal response. In making this
decision, carriers are likely to evaluate not only the scale and scope
of the initial transaction, but also other factors such as execution
risk, potential antitrust remedies, and an evaluation of alternatives
to a follow-on merger transaction, such as organic growth, market
innovation, or marketing alliances.
Question 2. What would be the effect on the flying public if the
U.S. had only three major airlines instead of six?
Answer. Because we review mergers on a case-by-case basis, DOT has
not had occasion to consider whether consolidation resulting in three
versus six network carriers would be in the public interest. Nor do we
normally opine on the myriad hypothetical situations often discussed in
the media. But I believe it is far from certain that a single merger
would beget a series of mergers. In any case, entry into the airline
industry remains essentially unfettered. The difficulties of the past 5
years have not deterred entrepreneurs from starting new low-cost
carriers (LCC) nor has it deterred existing low-cost airlines from
expanding. Additionally, the low-cost carriers and their ability to
enter markets serve as a formidable check on the pricing power of large
airlines in much of the Nation.
Question 3. What impact would such a merger have on low-cost
carriers like Southwest?
Answer. The airline industry is highly competitive. History has
shown that when carriers merge or exit a market, other domestic
carriers may enter and fill the service void. Low-cost carriers such as
Southwest are the fastest growing carriers, often exceeding 10 percent
growth in capacity per year. It is likely that low-cost carriers will
continue to expand capacity and serve new markets, regardless of merger
activity among the legacy carriers.
Question 4. If this merger ultimately does not go through, what do
you see is the future of the six ``legacy carriers?''
Answer. US Airways' withdrawal of its takeover bid for Delta has
not lessened DOT's monitoring of the financial performance of U.S.
airlines. As I stated in my written testimony, short-term prospects for
the airline industry appear quite favorable based on the following
factors:
Positive revenue trends due to slower domestic capacity
growth and very strong demand.
Higher average yields in part due to less capacity pressure
from low-cost carriers.
Strong economic growth in the United States.
Continued cost discipline.
Improved balance sheets with encouraging levels of current
free cash-flow.
Over the long term, however, the outlook for the U.S. airline
industry is more uncertain. The industry faces persistent structural
problems that must be addressed if we are to avoid facing another wave
of bankruptcies in the next economic downturn, and if the industry is
to take full advantage of the very substantial progress made in
lowering unit costs.
______
Response to Written Question Submitted by Hon. David Vitter to
Hon. Andrew B. Steinberg
Question. As the airline industry continues to consolidate it is
inevitable that anti-trust concerns arise. In the case where the
proposed mergers would result in the creation of a ``mega-carrier''
with a significant percentage of the domestic market under their
control, how can we ensure that the consolidation of this carrier's
overlapping route structure will not result in a lack of competition
that will negatively affect the American traveler, especially in
relation to low volume flight routes where low-cost carriers are not
likely to enter into competition with the larger airlines?
Answer. Today, the airline industry is extremely competitive, with
six network (hub-and-spoke) airlines and several low-cost airlines that
effectively set prices for the entire industry. The industry is
somewhat less concentrated today than it was 30 years ago prior to
deregulation. Entry into the industry remains easy and, conversely,
several factors (described at greater length in my written testimony)
have combined to create ``exit barriers.''
While the Department of Justice's Antitrust Division (DOJ) has
primary jurisdiction to review proposed mergers and prevent those that
substantially lessen competition, the Department of Transportation
(DOT) also reviews mergers to make sure consumers are more broadly
protected. Under our governing statute DOT pursues several statutory
goals: promoting competition, encouraging efficient and well-managed
air carriers to earn adequate profits, strengthening the competitive
position of U.S. airlines in relation to foreign air carriers, and
protecting the interests of small communities in maintaining access to
the air transportation system. (See 49 U.S.C. Section 40101.) DOT, in
consultation with DOJ, carefully reviews each major airline transaction
on a case-by-case basis evaluating changes in concentration that it
creates across all routes.
I recognize the mandate that Congress has given DOT to ensure that
small communities receive adequate and affordable air service. We
consider this issue to be a relevant and crucial part of any merger
investigation we do. It is important to note, however, that service to
small communities often depends on the overall financial success of the
hub-and- spoke networks of larger carriers. This is because it is the
thinner routes (i.e., with fewer passengers) that tend to be the least
profitable and thus the first to be eliminated in bad financial times.
In fact, over the last several years, as our network carriers lost
record sums, they reduced capacity and the size of their networks,
directly resulting in cutbacks in service on low volume routes. (During
the same period, obligations of the Essential Air Service program grew
commensurately). Thus, it is not apparent that preventing consolidation
would improve small community air service.
______
Response to Written Questions Submitted by Hon. David Vitter to
Gerald Grinstein
Question 1. It is a significant concern of mine that any
consolidation in the airline industry does not adversely affect the
airline customer in our smaller communities. With a number of smaller
communities' airports already suffering from high ticket costs and a
lack of flight options, how will the continued consolidation of the
industry affect these communities in the future? And in particular how
will the proposed merger between US Airways and Delta affect the small
communities in Louisiana?
Answer. Impact on small communities would really depend on the type
of consolidation. For example, end-to-end mergers among U.S. airlines
could improve service options and fares for small communities. However,
mergers between carriers with dramatically overlapping networks--like
the proposed US Airways-Delta merger--would have a very negative impact
on those communities, mainly because the so-called benefits from such a
merger would come from reduction of capacity, which would reduce
service options and raise fares. And, the sorts of communities that
would be negatively impacted are not the sort, as Mr. Parker admitted
earlier in this hearing, that low-cost carriers would flock to serve.
So, the small communities wouldn't likely see replacement service or
low fares any time soon.
Question 2. Delta Air Lines employs over 400 people in Louisiana
and has had a long and distinguished history in my home state from it's
inception in Monroe, Louisiana in 1928. I am concerned that the further
consolidation of the industry will lead to many of these people losing
their livelihoods. How is the industry going to consolidate and reduce
fleet capability to remain profitable while not dismissing a good
number of their employees?
Answer. The impact on employees of industry consolidation would
really hinge on the sort of merger sought. An end-to-end merger where
two carriers that don't have overlapping networks get together,
resulting in new service options for passengers, would be challenging
from an employee standpoint, since you would likely have to merge
different cultures--but it wouldn't necessarily result in job losses.
However, consolidation between overlapping carriers like a US Airways-
Delta merger would definitely result in job losses. Many of the so-
called ``benefits'' to be gained from the proposed US Airways-Delta
merger will come from the immediate elimination of 10 percent capacity.
In our estimate, that equates to about 200 aircraft--larger than
AirTran's entire fleet--that are supported currently by about 10,000
employees. A company could not operate profitably with 10,000 extra
employees sitting around--the financiers would never allow it--and
attrition won't occur quickly enough to eliminate those positions. So,
you'd see significant job losses, coming in particular from communities
where the carriers overlap.
Question 3. As the airline industry continues to consolidate it is
inevitable that anti-trust concerns arise. In the case where the
proposed mergers would result in the creation of a ``mega-carrier''
with a significant percentage of the domestic market under their
control, how can we ensure that the consolidation of this carrier's
overlapping route structure will not result in a lack of competition
that will negatively affect the American traveler, especially in
relation to low volume flight routes where low-cost carriers are not
likely to enter into competition with the larger airlines?
Answer. Again, it depends on the sort of merger--an end-to-end
merger might enhance competition by providing new access for passengers
to a global network. However, there's really no way to police the
impact of a ``mega-carrier'' that dominates specific regions of the
country, once that sort of merger is executed, and I would say that in
the case of a US Airways-Delta merger, if the DOJ approved it--and it
wouldn't likely do so--you absolutely could not make such a guarantee.
Millions of Americans would be negatively impacted with higher fares
and fewer service options, and many of those impacted would be in
cities where low-cost carriers would not serve. Fortunately, the
Department of Justice's role in reviewing a proposed merger is to
assess the competitive impact, and DOJ follows very specific guidelines
based on U.S. antitrust law in conducting those reviews. DOJ will
either determine that the proposal will not negatively impact
competition, it will suggest remedies that would mitigate the impact on
competition but allow the proposal to proceed, or it will challenge it
on the grounds that it will so negatively impact competition that it
should not be approved. These reviews take a significant amount of time
when there are competitive issues involved, and again, in our view, it
would not approve the proposed US Airways/Delta merger.
Question 4. I understand that currently Delta Air Lines would be $8
billion in debt after emerging from bankruptcy if this merger is
unsuccessful. US Airways claims that in order to maximize the synergies
of the two companies it is necessary to merge with Delta prior to their
emerging from bankruptcy. Is it correct that under the proposed merger
plan the combined debt of Delta and US Airways would reach $25 billion?
And, how is the creation of a larger airline with a larger debt
load going to undergo the trials associated with a merging
successfully, provide a quality product to their customers, and become
profitable at the same time?
Answer. In answer to your first question, yes--with US Airways
increased bid, the total long-term debt load carried by the combined
carrier would be approximately $25 billion, which in this industry, is
an absolute recipe for disaster. A merged Delta and US Airways would
have massive labor integration and fleet integration challenges, not to
mention customer service issues associated with having to merge
operations, IT systems, frequent flier programs, and other facets of
the business. Carrying that kind of debt load would cripple the new
entity, making it nearly impossible to invest in any substantial way in
the product, fleet or facilities because of the need to service the
interest on that debt. Any sort of hiccup--whether an economic
downturn, security scare, labor action--would bring the new entity to
its knees.
Question 5. Mr. Grinstein, I understand that you were on the first
of many flights that Delta sent into the disaster zone following
Hurricane Katrina to bring relief supplies and to help relocate
stranded passengers and community members. I know that Delta was born
in Monroe and I want to thank you and your company for your efforts on
behalf of the State of Louisiana. We appreciate the loyalty and sense
of social responsibility that Delta displayed following such a
monumental disaster.
Mr. Grinstein and Mr. Parker, I would like to know if the
humanitarian efforts of an airline would be hampered through
consolidation or if we can count on a merged US Airways and Delta to be
capable of providing aid in the event of future disasters.
Answer. Senator, thank you. Delta has a long and proud history with
the State of Louisiana, and we were honored to be able to provide
relief flights to bring supplies to the region and ferry survivors out
in the wake of Katrina. It would certainly be my hope that humanitarian
efforts would not be hindered by industry consolidation. But, if a
merger of the sort proposed by US Airways with Delta occurred--a merger
which would significantly weaken the carrier with an astronomical debt
load, major labor integration challenges, increased costs associated
with a more complicated fleet, and decimated morale--it might be
difficult to provide such relief in the future.
______
Response to Written Questions Submitted by Hon. John F. Kerry to
Gerald Grinstein
Question 1. Robert Crandall, the former American Airlines CEO,
wrote an op-ed in the Wall Street Journal in December that lauded
consolidation and said specifically of US Airways' bid that ``any
potential anti-competitive effects . . . would be quickly tempered by
the response of these low-cost carriers.'' Delta has asserted that low-
cost carriers would not come into markets where both US Airways and
Delta have a large presence. Can you respond to Mr. Crandall's
assertion and explain your own view? Which specific markets would not
be served by a low-cost carrier if US Airways is forced to divest
routes?
Answer. Low-cost carriers are not likely to save the day in the
numerous small cities that are currently served by both Delta and US
Airways but will be dominated by the new combined carrier, resulting in
fare increases and reduced service options after the merger. Air
service to many of these small cities works economically only because
of the availability of small aircraft--50 and 70 seat regional jets--to
serve them. Low-cost carriers simply don't have the equipment or the
business model to be able to serve these cities effectively. They fly
bigger aircraft--like Boeing 737s or Airbus 320s--and serve markets
with much larger Origin and Destination traffic than many of the cities
that would be impacted negatively from this merger. Only 14 of the 127
small communities that will be impacted by this merger currently have
low-cost carrier service. Further, the recent history of low-cost
carrier expansion shows that impacted small communities are unlikely to
see relief--since 2000, 93 percent of low-cost carrier growth has been
in large and medium sized cities. Only 117 of 1,633 new average daily
departures since 2000 have been in small or non-hub airports. Cities
impacted specifically by a Delta-US Airways merger would likely
include: Florence, SC; Huntington, WV; Charlottesville, VA; Scranton,
PA; Montgomery, AL; Bristol, TN; and many others.
Question 1a. Beyond the US Airways offer, do you think
consolidation is good for the industry or inevitable?
Answer. Consolidation may be beneficial at some point, but how it
happens and among which industry players are the critical questions.
The airline industry has undergone radical transformation since 9/11.
By almost any measure, it is clear that the industry's health is
improving--traffic has grown while capacity has flattened, we are
seeing record load factors, the gap between breakeven and actual load
factors has almost been eliminated, yields are improving, and costs are
declining. Our workforces have shrunk 28 percent since 9/11 (154K jobs)
but our people are more productive than ever. We've seen pricing power
return and a number of carriers operate in the black in 2006. Whether
consolidation is necessary to make the industry stable in the long term
is arguable at this point. Critical factors in healing the industry
include maintaining capacity discipline, network carriers having
worldwide reach (to be insulated from regional shocks), and low-cost
carriers keeping their costs under control. One thing I can state
definitively is that bad consolidation--such as a merger between major
competitors with overlapping networks--like US-DL--would harm the
industry immeasurably.
Question 1b. Would you be more receptive to this offer if US
Airways and Delta didn't have similar route structures?
As I said earlier, we are not now considering or negotiating any
merger. A good merger would be one where the carriers have similar
cultures and networks that complement each other, rather than
overlapping each other. A good merger would be one where each partner
brings unique strengths to the table and adds value by increasing the
other's reach globally. Even at that, I firmly believe that airline
mergers are very difficult to execute, and even the good ones carry
significant challenges with them. The U.S. industry is just now
entering a period of renewed health and pricing power--engaging in any
merger before U.S. carriers are consistently healthy would be unwise.
Question 2. Delta's Board of Directors rejected US Airways' offer
in December. However, Delta's creditors and a bankruptcy court may
decide that US Airways' offer is better than your own reorganization
plan and approve it. The Departments of Justice and Transportation may
then decide that it doesn't reduce competition and allow it to proceed
as long as US Airways divests certain routes. Why shouldn't this merger
go through if those parties conclude that competition won't be reduced?
Answer. Even with significant divestiture--which would
significantly diminish the value of this proposed merger--the
Department of Justice will still be highly likely to conclude that this
merger is anticompetitive and it would not approve it. By every
measure, the overlap between Delta and US Airways' networks is more
significant and this proposed merger is more anticompetitive than the
proposed US Airways/United Airlines merger, which DOJ deemed
anticompetitive and decided to challenge after 18 months of review.
Regardless, the U.S. industry is just now entering a period of renewed
health and pricing power--engaging in any merger before U.S. carriers
are consistently healthy would be unwise.
______
Response to Written Question Submitted by Hon. Bill Nelson to
Gerald Grinstein
Question. Delta has a reservations center in Tampa, along with
flight attendant and maintenance bases at Tampa, Fort Lauderdale and
Orlando. What is your view of the impact of a merger with US Airways on
the employees that work at these locations?
Answer. Delta employs almost 5,000 people in the State of Florida.
US Airways' business plan calls for elimination of 10 percent of Delta
and US Airways' combined capacity, which will mean the immediate
elimination of nearly 200 aircraft and 10,000 jobs. Mr. Parker has
stated repeatedly that the merger needs to be executed before Delta
exits bankruptcy. This is because it is so much easier to reject leases
and contracts while in bankruptcy, and because many of the
``synergies'' US Airways plans to achieve will come about through those
rejections. With that in mind, it is very conceivable that the
reservations center, and flight attendant and mechanics bases, could be
downsized dramatically if not eliminated in their entirety.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Gerald Grinstein
Question 1. Labor costs are one of the highest costs for air
carriers. Is it an unfair competitive advantage for airlines to be
required to fully fund their employee pension plans while others are
relieved of pension obligations through bankruptcy or other procedures?
Answer. Bankruptcy laws were enacted by Congress to permit
companies to restructure their outstanding financial obligations--which
can include pension, employee and vendor contracts, facilities and
equipment leases and others--according to legal standards that are
applied by bankruptcy courts. Where a choice must be made between
requiring an airline to meet all of its outstanding financial
obligations and liquidating that airline, a bankruptcy court decides
whether meeting its obligation will permit or prohibit it from
restructuring successfully and emerging from bankruptcy. In many cases
in the last couple of decades, including those of Continental, US
Airways, United, and even Delta's pilot plan, the bankruptcy courts
have ruled that pension plans must be terminated or the airlines would
liquidate, taking with them the jobs, service, and other economic
benefit they drive. It is not for me to decide whether all of those
courts' decisions were fair. What I will say is that a company should
do everything it can to meet its pension obligations. In Delta's case,
we froze our pilot and non-pilot plans so that they would not generate
additional liability after they were frozen. Because of the pilot
plan's lump sum feature however, the bankruptcy court determined that
Delta could not survive without terminating that plan. We implemented a
defined-contribution plan for our pilots that features a significant
Delta contribution, and will provide a replacement retirement plan for
our non-pilot employees. We also led a two and a half year battle to
include alternative funding schedules for airlines in pension reform
legislation that has enabled us to save the previously earned benefits
of our 91,000 of active and retired non-pilot employees.
Question 2. Since December 31, 2004, what is the total amount of
bonuses paid to your management team?
Answer. None.
Question 3. Do you have any plans for restoring terminated employee
pension programs at a future date, after the company emerges from
bankruptcy?
Answer. Delta sponsored two primary defined benefit pension plans
for our employees--one for pilots and one for non-pilots. Delta was
able, through enactment of the Pension Reform Act signed into law last
year, to save the previously-earned pension benefits of our 91,000
active and retired non-pilot employees, so no plan restoration is
necessary. Delta's pilot plan was partially frozen in 2004, a new
defined contribution plan was introduced at that time, and that defined
contribution plan continues to provide active Delta pilots with a
competitive pension plan. Because the Pension Reform Act provided no
relief from the unaffordable costs resulting from the pilot defined
benefit plan's lump sum feature--expected to exceed more than $1
billion in the near term alone--the bankruptcy court and the PBGC
approved termination of that plan in late 2006, in essence concluding
that its termination was necessary for Delta to survive. Delta agreed
to pay the PBGC very substantial additional value to assist the PBGC in
meeting the unfunded liability of the pilot plan, and as such, does not
plan to restore that plan. PBGC has also waived its right to call for
restoration of the Delta pilot pension plan. The company has estimated
that even with the termination of the pilot plan, current Delta pilot
retirees will receive on average approximately $75,200 in annualized
pension benefits, including the value of lump sum benefits received.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Gerald Grinstein
Question 1. Six years ago, this Committee held hearings on the
then-wave of airline consolidation and the proposed United-US Airways
merger, which was ultimately challenged by the Department of Justice
and several state attorneys general. Some argue that the landscape has
changed since that time, in particular the emergence and predominance
of low-cost carriers today. I would like to hear your perspective on
how things have changed and whether those changes mean much for a
proposed merger of two airlines like Delta and US Airways with
significantly overlapping route networks.
Answer. What is key here is that whatever has happened to the
airline industry, the law hasn't changed. DOJ still applies antitrust
law as it has done since it opposed the 2000 UA/US Air merger. It
cannot ignore its own merger guidelines, which look at impact on city-
pair competition, impact on business travel, and regional
concentration. The industry has changed, of course. Low-cost carriers
are a much larger part of the airline industry today than they have
been in the past. They are profitable, although that is changing; they
are very competitive, and they have increased their market share by 67
percent. However, they have not expanded into small and non-hub
communities--those which would be most significantly and negatively
impacted by a US/DL merger--nor will they expand into those markets
because of their fleet types and their business models. LCCs generally
serve markets with at least 500K originating passengers per year. Over
100 of the cities that will see reduced competition and higher fares
from a US-DL merger do not have now, and are not likely to get an LCC.
Furthermore, as an Aviation Daily article from last week examined, the
lines are blurring between network airlines and LCCs. LCC costs are
rising and profits shrinking, while network carriers have changed
dramatically since 9/11 to survive head-to-head competition with LCC's.
I would not, if I were a passenger in Pasco, WA or Salina, KS, want to
rely on their expansion into my community for relief from a new
monopoly.
Question 2. Should this offer be accepted and approved by the
Department of Justice, who are the ``winners'' and ``losers?''
Answer. The biggest losers would be, by far, the passengers Delta
and US Airways currently serve in small communities, as they would see
increased fares and reduced service options, and have little hope of
being rescued by a low-cost carrier. Our employee workforce would be
dramatically harmed as they would face the loss of at least 10,000 jobs
and the reversal of all their hard work and sacrifice over the last few
years--the new carrier would struggle to integrate union and non-union
workforces and cultures, it would see a staggering debt load, an
incredibly complex fleet, and diminished salaries and revenues.
Winners--short-term speculators on Wall Street that neither have an
interest in the long-term health nor viability of Delta--just the
growth of their own investments.
______
Response to Written Questions Submitted by Hon. David Vitter to
W. Douglas Parker
Question 1. It is a significant concern of mine that any
consolidation in the air line industry does not adversely affect the
air line customer in our smaller communities. With a number of smaller
communities' airports already suffering from high ticket costs and a
lack of flight options, how will the continued consolidation of the
industry affect these communities in the future? And in particular how
will the proposed merger between US Airways and Delta affect the small
communities in Louisiana?
Answer. On January 31, US Airways withdrew its offer to merge with
Delta Air Lines. US Airways was informed that Delta's Official
Unsecured Creditors' Committee would not meet our demands by the
February 1, 2007 deadline we had previously established. US Airways'
offer of $5.0 billion in cash and 89.5 million shares of US Airways
stock would have expired on February 1st, unless there was affirmative
support from the Official Unsecured Creditors' Committee for
commencement of due diligence, making the required Department of
Justice filings under Hart-Scott-Rodino, as well as the postponement of
Delta's hearing on its Disclosure Statement scheduled for February 7,
2007.
I pledged repeatedly on behalf of US Airways that, had the proposed
merger gone forward, all existing U.S. destinations served today by US
Airways and Delta would have remained part of the new, improved
network. The ``New'' Delta would have provided communities served by
both carriers with access to a wider range of network options.
Furthermore, consumers would have benefited from our low fare business
philosophy. As your question expressly indicates, service to smaller
communities in Louisiana today is limited and costly. We had hoped to
help address those very concerns with the merged company we sought to
create.
Question 2. Delta Air Lines employs over 400 people in Louisiana
and has had a long and distinguished history in my home state from it's
inception in Monroe, Louisiana in 1928. I am concerned that the further
consolidation of the industry will lead to many of these people losing
their livelihoods. How is the industry going to consolidate and reduce
fleet capability to remain profitable while not dismissing a good
number of their employees?
Answer. Again, the US Airways proposal to merge with Delta was
withdrawn on January 31. I pledged repeatedly on behalf of US Airways
that no frontline employees of either airline would have lost their
jobs involuntarily as a result of the merger. Further, all employees
within individual work groups would have been moved to the higher
existing labor cost of either airline. Those commitments would have
been kept had the merger gone forward.
Question 3. As the air line industry continues to consolidate it is
inevitable that anti-trust concerns arise. In the case where the
proposed mergers would result in the creation of a ``mega-carrier''
with a significant percentage of the domestic market under their
control, how can we ensure that the consolidation of this carrier's
overlapping route structure will not result in a lack of competition
that will negatively affect the American traveler, especially in
relation to low volume flight routes where low-cost carriers are not
likely to enter into competition with the larger airlines?
Answer. Had our proposal to merge with Delta Air Lines gone
forward, the Department of Justice would have conducted a full and
thorough evaluation of the transaction to ensure that the benefits to
consumers would have outweighed any potential negative impact. Ample
and adequate authority is vested in DOJ under the time-tested laws in
place for evaluating business transactions such as our proposal. We are
confident that DOJ would have exercised its lawful authority in the
best interests of the American traveler. We, of course, were confident
that our proposal would have passed muster with the Department of
Justice and that consumers would have, in fact, benefited from a merger
between US Airways and Delta.
Question 4. I understand that currently Delta Air Lines would be $8
billion in debt after emerging from bankruptcy if this merger is
unsuccessful. US Airways claims that in order to maximize the synergies
of the two companies it is necessary to merge with Delta prior to their
emerging from bankruptcy. Is it correct that under the proposed merger
plan the combined debt of Delta and US Airways would reach $25 billion?
And, how is the creation of a larger airline with a larger debt
load going to undergo the trials associated with a merging
successfully, provide a quality product to their customers, and become
profitable at the same time?
Answer. A merger between US Airways and Delta would have created a
significantly larger airline with much greater capacity to generate
revenue. An absolute level of debt is not a particularly meaningful
number in and of itself. For example, General Electric has $400 billion
of debt. Yet General Electric is an enormous company that has enormous
profits. What matters is whether a company can service the debt. It is
revealing to note that those willing to provide the financing necessary
to pursue our proposed merger with Delta were clearly unconcerned about
the absolute level of debt.
Question 5. Mr. Grinstein, I understand that you were on the first
of many flights that Delta sent into the disaster zone following
Hurricane Katrina to bring relief supplies and to help relocate
stranded passengers and community members. I know that Delta was born
in Monroe and I want to thank you and your company for your efforts on
behalf of the State of Louisiana. We appreciate the loyalty and sense
of social responsibility that Delta displayed following such a
monumental disaster.
Mr. Grinstein and Mr. Parker, I would like to know if the
humanitarian efforts of an airline would be hampered through
consolidation or if we can count on a merged US Airways and Delta to be
capable of providing aid in the event of future disasters.
Answer. I trust you are aware that Delta was not alone in providing
aid to your constituents in the wake of Hurricane Katrina. The relief
effort mounted cooperatively by the Nation's airlines occurred just
prior to the consummation of the merger between America West Airlines
and the old US Airways. Both companies--US Airways and America West--
participated significantly in that effort, as did virtually every other
major airline. As the communities we serve will no doubt attest, the
new US Airways is a solid corporate citizen, contributing many
thousands of dollars in cash, goods, and services to many, many causes
worthy of support. Likewise, our employees donate countless hours of
their own time in the service of community causes. You need not be
concerned that a merged US Airways and Delta would have been any less
willing or able to engage in the kind of humanitarian efforts brought
to bear by the Nation's airlines to assist the victims of Hurricane
Katrina.
______
Response to Written Questions Submitted by Hon. John F. Kerry to
W. Douglas Parker
Question 1. You have been a strong advocate for consolidation in
the airline industry. Yet, according to the GAO, the new US Airways-
America West has only cut its fleet by 10 percent. It also continues to
operate as two separate airlines for all intents and purposes. At the
same time, you have promised not to eliminate jobs or cut service if
the government approves your bid to acquire Delta. If, as you argue,
the industry needs to consolidate, shouldn't there be a real downsizing
that results in fewer costs?
Question 1a. What benefit does your merging with Delta have for the
industry beyond acquiring a competitor if you don't plan on
significantly reducing overhead costs or selling a significant amount
of infrastructure?
Question 1b.For instance, you have promised $1.65 billion in
savings, but the combined debt of the new airline would be $24 billion,
more than the combined debt of both airlines currently. That certainly
offsets any cost savings. Wouldn't you need to cut costs more than
$1.65 billion to make this deal work?
Question 1c. How do you intend to pay down the estimated $24
billion in debt that the new airline would owe?
Question 1d. If the Department of Justice approves the deal, isn't
it likely that you will be forced to divest routes and assets which
would force you to make layoffs? How can you promise not to cut jobs
this early in the process?
Answer. On January 31, US Airways withdrew its offer to merge with
Delta Air Lines. US Airways was informed that Delta's Official
Unsecured Creditors' Committee would not meet our demands by the
February 1, 2007 deadline we had previously established. US Airways'
offer of $5.0 billion in cash and 89.5 million shares of US Airways
stock would have expired on February 1st, unless there was affirmative
support from the Official Unsecured Creditors' Committee for
commencement of due diligence, making the required Department of
Justice filings under Hart-Scott-Rodino, as well as the postponement of
Delta's hearing on its Disclosure Statement scheduled for February 7,
2007.
______
Response to Written Questions Submitted by Hon. Bill Nelson to
W. Douglas Parker
Question 1. Competition is the key here; more carriers competing on
a route gives travelers more choices, which keeps costs down. It's my
understanding that the proposed merger would give the new airline a 90
percent share of travelers from Florida cities to 370 locations around
the globe. Can you explain how that would not result in higher costs
for Floridians?
Answer. On January 31, US Airways withdrew its offer to merge with
Delta Air Lines. US Airways was informed that Delta's Official
Unsecured Creditors' Committee would not meet our demands by the
February 1, 2007 deadline we had previously established. US Airways'
offer of $5.0 billion in cash and 89.5 million shares of US Airways
stock would have expired on February 1st, unless there was affirmative
support from the Official Unsecured Creditors' Committee for
commencement of due diligence, making the required Department of
Justice filings under Hart-Scott-Rodino, as well as the postponement of
Delta's hearing on its Disclosure Statement scheduled for February 7,
2007.
Had our proposal to merge with Delta Air Lines gone forward, the
Department of Justice would have conducted a full and thorough
evaluation of the transaction to ensure that the benefits to consumers
would have outweighed any potential negative impact. Ample and adequate
authority is vested in DOJ under the time-tested laws in place for
evaluating business transactions such as our proposal. We are confident
that DOJ would have exercised its lawful authority in the best
interests of the American traveler. We, of course, were confident that
our proposal would have passed muster with the Department of Justice
and that consumers would have, in fact, benefited from a merger between
US Airways and Delta.
Question 2. You've said cost savings could come from cutting
``marginal capacity,'' but what guarantee can you give that you won't
simply cut from an entire region? My rural constituents (Pensacola,
Tallahassee, Panama City) don't have a whole lot of choices to begin
with.
Answer. Again, the US Airways proposal to merge with Delta was
withdrawn on January 31. I pledged repeatedly on behalf of US Airways
that, had the proposed merger gone forward, all existing U.S.
destinations served today by US Airways and Delta would have remained
part of the new, improved network. The ``New'' Delta would have
provided communities served by both carriers with access to a wider
range of network options. Furthermore, consumers would have benefited
from our low fare business philosophy.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
W. Douglas Parker
Question 1. Labor costs are one of the highest costs for air
carriers. Is it an unfair competitive advantage for airlines to be
required to fully fund their employee pension plans while others are
relieved of pension obligations through bankruptcy or other procedures?
Answer. Through the bankruptcy proceeding and as a result of laws
sought by Delta and passed last year by the U.S. Congress, Delta Air
Lines has been substantially relieved of its pre-bankruptcy pension
obligations. Lawfully achieved, we don't know of any reason why pension
relief is any more unfair for one airline than for another.
Had the former US Airways not been lawfully relieved of pension
obligations through bankruptcy, it is highly unlikely that America West
Airlines would have sought to merge with the company. At the time of
that merger, the former US Airways was in serious financial distress.
Had the America West/US Airways merger not gone forward, it is
virtually a certainty that many thousands of former US Airways
employees would have lost their jobs.
Question 2. If the Pension Benefit Guaranty Corporation requires US
Airways to restore its pension programs to pre-termination status, how
will this affect US Airways' ability to compete in the airline
industry?
Answer. We do not believe the PBGC will seek to impose pension
obligations of the former US Airways on the newly formed company
resulting from the merger of America West Airlines and the old US
Airways. Should the agency attempt to do so, we do not believe it would
ultimately succeed under existing law.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
W. Douglas Parker
Question 1. You have stated that a merged US Airways and Delta
would reduce available seat miles by 10 percent while increasing
revenues per available seat mile 3.5 percent. Does this mean fewer
seats at higher prices?
Question 2. US Airways has hubs in Charlotte, Philadelphia,
Pittsburgh, Phoenix, and Las Vegas, while Delta has hubs in Atlanta,
Cincinnati, Dallas/Ft. Worth, and Salt Lake City. The Charlotte and
Atlanta hubs have very similar overlays. There have been reports that
with a US Airways/Delta merger, the Charlotte hub could see as much as
a 50 percent reduction in flights. What do you plan to do with the
Charlotte/Atlanta hubs?
Question 3. The Department of Justice is expected to look at cities
served and city pairs served to determine whether the proposed merger
will substantially increase market concentration and decrease
competition. US Airways and Delta serve many of the same destinations,
especially along the East Coast and South. It has been reported that a
merged airline would be the largest airline in 155 of 350 airports
served. It has also been reported that the merger would result in over
2,000 city pairs where the combined airline would have a 90 percent
market share. Should the merger occur, how will the combined city pairs
impact airports like LIT and XNA in Arkansas, which are currently
served by both airlines--can consumers expect a reduction in flights,
fewer destinations, a decrease in service or increased fares?
Answer to Questions 1-3. On January 31, US Airways withdrew its
offer to merge with Delta Air Lines. US Airways was informed that
Delta's Official Unsecured Creditors' Committee would not meet our
demands by the February 1, 2007 deadline we had previously established.
US Airways' offer of $5.0 billion in cash and 89.5 million shares of US
Airways stock would have expired on February 1st, unless there was
affirmative support from the Official Unsecured Creditors' Committee
for commencement of due diligence, making the required Department of
Justice filings under Hart-Scott-Rodino, as well as the postponement of
Delta's hearing on its Disclosure Statement scheduled for February 7,
2007.
______
Response to Written Questions Submitted by Hon. John F. Kerry to
Robert Roach, Jr.
Question 1. Can you give me an overview of how US Airways has
worked to integrate your America West members since the merger?
Answer. The Machinists Union and US Airways began integration/
transition negotiations immediately after the National Mediation Board
certified the Machinists as the collective bargaining representative
for the combined airline's 15,000 Fleet Service Workers (May 11, 2006)
and Mechanic & Related and Maintenance Training Specialist employees
(August 11, 2006). The goal of these negotiations is to integrate
workers from both airlines under a single agreement and seniority list
for each classification. Currently, former America West employees work
under collective bargaining agreements negotiated by their former
unions while US Airways workers in these classifications work under
Machinist Union contracts. Employees doing the same job for the same
company have different work rules, wages and benefits, which is
divisive and inefficient. US Airways has failed to negotiate in good
faith to reach an agreement. Meanwhile, the airline's CEO and other top
management officials receive generous bonuses and stock as a reward for
delaying negotiations and preventing employees from receiving benefits
from the merger.
Question 2. Assuming that Delta's creditors approved the US
Airways' offer, and based on your experience with US Airways, do you
believe that layoffs are inevitable?
It is my opinion that a merger the size of the once-contemplated US
Airways/Delta merger could not be accomplished without major layoffs.
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
Robert Roach, Jr.
Question. Labor costs are one of the highest costs for air
carriers. Is it an unfair competitive advantage for airlines to be
required to fully fund their employee pension plans while others are
relieved of pension obligations through bankruptcy or other procedures?
Answer. Bankruptcy makes it too easy for airlines to shed pension
obligations. Airlines should work with their unions to develop creative
solutions to address a pension shortfall before it becomes a critical
issue. The Machinists Union advised United Airlines in 2000, 5 years
before they terminated their pensions, that our analysis showed they
were headed for a major pension funding problem. The Machinists Union
offered solutions, such as freezing the company sponsored plan at that
time and transitioning into the IAM's multi-employer National Pension
Plan. United refused, and the IAM's predictions came true. Following
the terminations of the company sponsored plans, United's IAM members
now participate in the IAM National Pension Plan. Unfortunately,
United's refusal to address the problems earlier cost its employees
dearly because of the loss of promised benefits.
______
Response to Written Question Submitted by Hon. Mark Pryor to
Robert Roach, Jr.
Question. Should the Department of Justice allow this merger, would
this lead to other mergers among other ``legacy-carriers'' in the
industry? What impact might this have on labor?
Answer. Although this merger offer has been withdrawn, the danger
of other mergers still linger. I believe that if any two legacy
carriers merge it will ignite a frenzy for the others to pair up or be
left at a competitive disadvantage. Airline mega-mergers are designed
to reduce redundancies, and that means a loss of jobs. Thousands of TWA
workers are still out of work following its 2001 merger with American
Airlines. The mergers being contemplated today would lead to even
greater job loss.
______
Response to Written Questions Submitted by Hon. John F. Kerry to
Dr. Mark N. Cooper
Since the merger proposal was obviously based entirely on a US
Airways scheme to use bankruptcy to abrogate contracts and the
anticompetitive nature of the merger was make overwhelmingly clear at
the hearing and elsewhere, most of the questions are moot.
Question 1. In your written testimony, you state that the US
Airways/Delta merger will ``have substantial anti-competitive effects
that will be impossible to ameliorate with traditional anti-trust
authorities,'' and that ``the spin-off of some assets to repair the
competitive harm in the markets would occur in city pairs that are
already insufficiently competitive.'' Can you give me an example of a
divestiture that US Airways would be forced to make that would not
attract a new carrier and would result in less competition in that
market?
Answer. I have no specific example in mind.
Question 2. Why would traditional anti-trust authority fail to
ensure competition?
Answer. Because they have been captured by the theory of efficiency
at the expense of competition and have been asleep at the switch for
the better part of a decade.
Question 3. Can you give me examples of markets that both US
Airways and Delta serve that are insufficiently competitive?
Answer. All of the routes served by 2, 3, or 4 are certainly not
sufficiently competitive. The 5 and 6 carrier routes are also a source
of concern.
Question 4. How many markets would experience a decline in
competition if this merger is approved?
Answer. The best count I saw was 1,000 to 2,000 routes.
Question 5. Have you reviewed US Airways ticket prices since it
merged with America West? Have they increased, and if so, where?
Answer. I have not reviewed their prices specifically. However, I
believe there have been industry-wide price increases.
Question 6. Is there a historical example that you can give of two
airlines in similar size and route structure to US Airways and Delta
that resulted in higher fares?
Answer. The history of the mergers outlined in my testimony shows a
pattern of price increases. The closest similar proposed merger--US
Airways/ United, was opposed by the Department of Justice.
Question 7. Can you list any small markets that aren't served by
low-cost carriers that would see a decrease in competition if the
merger is approved?
Answer. I believe that most of the 1,000 to 2,000 routes that
involve a 2-to-1 or 3-to-2 merger fall into this category, as the low-
cost airlines tend to serve much higher volume routes.
______
Response to Written Question Submitted by Hon. Bill Nelson to
Dr. Mark N. Cooper
Question. The skies have been pretty bumpy for airlines in recent
years. The Air Transportation Stabilization Board (ATSB) guaranteed
billions in loans and pensions have been dumped on the PBGC. This
essentially means the merger is being funded by the taxpayers. And with
a ``new Delta'' looking to end up with $23 billion in debt--up from the
$10 billion Delta would hold coming out of bankruptcy. What kind of
stability concerns does that raise? Are there any indications that
taxpayers would end up bailing out a ``new Delta'' on a grander scale
than we've already had to do?
Answer. We opposed the lavish bailout of the industry last time.
Delta has done a good job of lowering its costs without abandoning its
social responsibilities. I would assume that a second loan would not be
forthcoming if Delta again gets into trouble.
______
Response to Written Question Submitted by Hon Frank R. Lautenberg to
Dr. Mark N. Cooper
Question. Labor costs are one of the highest costs for air
carriers. Is it an unfair competitive advantage for airlines to be
required to fully fund their employee pension plans while others are
relieved of pension obligations through bankruptcy or other procedures?
Answer. I think it is unfair for airlines not to fully fund their
pension obligations.