[Senate Hearing 110-413]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-413
 
              AN EXAMINATION OF THE DELTA-NORTHWEST MERGER 

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 24, 2008

                               __________

                          Serial No. J-110-87

                               __________

         Printed for the use of the Committee on the Judiciary

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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
           Stephanie A. Middleton, Republican Staff Director
              Nicholas A. Rossi, Republican Chief Counsel
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                     Jeffrey Miller, Chief Counsel
                William Castle, Republican Chief Counsel











































                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     2
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
    prepared statement...........................................   111

                               WITNESSES

Anderson, Richard, Chief Executive Officer, Delta Air Lines, 
  Atlanta, Georgia...............................................    10
Bush, Darren, Associate Professor of Law, University of Houston 
  Law Center, Houston, Texas.....................................    13
Chambliss, Hon. Saxby, a U.S. Senator from the State of Georgia..     4
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota..     5
Mitchell, Kevin P., Chairman, Business Travel Coalition, Radnor, 
  Pennsylvania...................................................    11
Steenland, Douglas, President and CEO, Northwest Airlines, Eagan, 
  Minnesota......................................................     8

                         QUESTIONS AND ANSWERS

Responses of Richard Anderson to questions submitted by Senator 
  Kohl...........................................................    36
Responses of Darren Bush to questions submitted by Senator Kohl..    42
Responses of Kevin Mitchell to questions submitted by Senator 
  Kohl...........................................................    53
Responses of Douglas Steenland to questions submitted by Senator 
  Kohl...........................................................    57

                       SUBMISSIONS FOR THE RECORD

Air Carrier Association of America, P. Nicholas Peterson, 
  Legislative Counsel, Washington, D.C., letter..................    71
Anderson, Richard, Chief Executive Officer, Delta Air Lines, 
  Atlanta, Georgia, statement....................................    75
Buffenbarger, R. Thomas, International President, International 
  Association of Machinists and Aerospace Workers, Upper 
  Marlboro, Maryland, statement..................................    86
Bush, Darren, Associate Professor of Law, University of Houston 
  Law Center, Houston, Texas, statement..........................    98
Memphis Regional Chamber and the Memphis/Shelby County Airport 
  Authority, John W. Moore, President and CEO, Memphis Regional 
  Chamber, Larry D. Cox, President, Memphis/Shelby County Airport 
  Authority, Memphis, Tennessee, joint statement.................   113
Minnesota Chamber of Commerce, David C. Olson, President, 
  Minneapolis Regional Chamber of Commerce, Todd Klingel, 
  President, Saint Paul Area Chamber of Commerce, Kristofer 
  Johnson, President, and Metropolitan Coalition of Chambers, 
  Daron Van Helden, Chair, joint statement.......................   120
Mitchell, Kevin P., Chairman, Business Travel Coalition, Radnor, 
  Pennsylvania, statement........................................   125
Moak, Lee, Captain, Chairman, Delta Air Lines Master Executive 
  Council, Air Line Pilots Association, International, statement.   131
Shook, Veda, International Vice President, Association of Flight 
  Attendants-CWA, AFL-CIO, Washington, D.C., statement...........   136
Steenland, Douglas, President and CEO, Northwest Airlines, Eagan, 
  Minnesota, statement...........................................   149


              AN EXAMINATION OF THE DELTA-NORTHWEST MERGER

                              ----------                              


                        THURSDAY, APRIL 24, 2008

                                       U.S. Senate,
                                 Subcommittee on Antitrust,
                    Competition Policy and Consumer Rights,
                                Committee on the Judiciary,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 2:08 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Feingold, Schumer, Cardin, and Hatch.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good afternoon. Our hearing today will 
examine the $3.7 billion merger between Delta and Northwest 
Airlines, a merger that will create the world's largest 
airline. Many predict this merger will just be the beginning in 
a wave of mergers in our Nation's airline industry.
    We recognize the tremendous pressures that the airline has 
endured in recent years. After recovering from the horrible 
tragedy of 9/11, the industry now faces skyrocketing fuel costs 
at many of our major airlines, including both Northwest and 
Delta, and have undergone the painful process of bankruptcy 
filings.
    Yet, while it has been the worst of times for the airline 
industry, it has been no better for the flying public. We all 
complain about airline service; uncomfortable flights, frequent 
delays, and mysterious prices are a staple of air travel.
    Now the airlines suggest that they will be able to merge 
their way out of their troubles in a way that will benefit 
customers. As we analyze their claim, we will confront the 
crucial question of how this merger will affect air competition 
and whether it will lead to higher prices and reduced services 
for customers.
    We need to very carefully examine the impact of this deal, 
and others that well may follow, on air service offered to 
small- and medium-sized cities that depend on frequent and 
inexpensive air service for their economic health.
    We expect to hear from the airline executives here today 
about their plans to maintain service to these communities. 
While there may always be ample competition between New York 
and Los Angeles, what does this deal tell us about the future 
of competition for the rest of us? Of equally vital interest to 
me is that this merger do no harm to the independence of 
Midwest Airlines of Milwaukee, Wisconsin, which is, in fact, 
regarded as our hometown airline.
    Midwest Airlines is a unique company in the airline 
industry, an airline that offers the highest quality of service 
and is actually beloved by its customers. In the last year, 
Midwest Airlines was acquired by an investment firm that 
partnered with Northwest Airlines. If the merger before us 
today is completed, Delta will acquire Northwest's stake in 
that airline. I will expect today to hear from Delta that this 
will not harm the independence, the quality, and the frequency 
of service or competitive viability of Midwest Airlines.
    Both Delta and Northwest defend this merger by arguing that 
they operate largely complementary route structures that 
overlap only occasionally. Whatever the merits of that claim--
and we expect the Justice Department to scrutinize it carefully 
-our inquiry cannot end merely with an examination of 
overlapping routes. These two airlines are competing national 
networks. Each airline takes passengers from small- and medium-
sized cities through their gigantic hubs and then on to the 
travelers' final destinations. There are now six of these 
national networks. This merger will reduce it to five, and many 
analysts expect even more mergers soon to reduce the number to 
four, or even three.
    As we go from six, to five, to four, and maybe even three 
or even less, we need to stop and ask the question: what will 
be the impact of the loss of competition on price and service? 
Are the few smaller, low-cost airlines really sufficient for 
competition or will the remaining dominant airlines gain a 
stranglehold on our air transportation system?
    Other important issues are implicated by this merger, such 
as the hard-won rights of employees of both airlines. We are 
concerned that this merger not lead to any loss of labor 
protections enjoyed by the airlines' employees. While no union 
is testifying here today in person, we are including in the 
record submissions from any union concerned about this merger.
    In closing, the executives who lead these airlines have a 
responsibility to their shareholders to create the strongest 
airline, but we on this subcommittee have a different, and 
perhaps more important, responsibility. Our responsibility is 
to the public, to protect consumers, and to ensure that no 
airline or small group of airlines gains a stranglehold on the 
market.
    We need to be sure that the announcement that we have all 
heard flight attendants say at the end of the flight, ``We know 
that you have a choice among airlines'', does not become as 
obsolete as airlines as TWA, PanAm, Eastern, Braniff, ATA, and 
now, perhaps, Northwest.
    Senator Hatch, the Ranking Member of this Committee, is 
with us today and we turn to him for his comments.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. I appreciate 
your leadership on this Committee. I'm sorry I'm just a little 
bit late. I've been behind all day long. So, I apologize to you 
again.
    It's always been a pleasure to work with you, and I 
appreciate that you've called this hearing so quickly after the 
announcement of the proposed Delta-Northwest merger. This is a 
matter of the highest importance to all of our States, and in 
particular my home State of Utah as well. I also want to thank 
our witnesses for accepting the subcommittee's invitation to 
testify here today.
    Mr. Chairman, I am looking forward to the possibilities 
that this merger offers. Both Delta and Northwest play 
important roles in the smaller communities that are found in 
the mountain west and upper midwest. The merger holds the 
promise of efficiently connecting those communities not only to 
additional locations inside our own country, but to Europe, 
Asia, and Latin America.
    The proposed business plan for this merged entity is novel. 
Instead of eliminating duplicative route service or leveraging 
similar aircraft fleets, the purpose of the merger is to 
increase revenue by offering increased route offerings.
    However, this transaction raises important antitrust 
questions: first, do Delta and Northwest routes overlap? 
Second, will the merger result in higher prices? Finally, what 
type of analysis should the regulatory officials perform when 
considering this transaction?
    First, Delta and Northwest routes are largely 
complementary. In fact, Delta states that the transaction will 
result in only 12 non-stop domestic city-pair overlaps. City-
pair overlaps are defined as those locations that both Delta 
and Northwest currently offer flights between. Of the 12 
overlaps, 5 cities will have 3 or more non-stop competitors 
after the combinations, and 3 other cities will have 2 
competitors after the merger. There will be only four city-pair 
overlaps, reduced to a single carrier providing non-stop 
service. Those city pairs are Salt Lake to Detroit, Salt Lake 
to Minneapolis, Cincinnati to Detroit, and Cincinnati to 
Minneapolis.
    Delta contends that these non-stop service overlaps will 
affect only 573 people, and I might add, will compromise only 
0.3 percent of the combined airlines' origin and destination 
domestic traffic.
    Second, many speculate that this transaction will result in 
higher ticket prices. Now, this is a legitimate concern. 
However, Delta argues that their new business plan is designed 
to raise revenue. It can be very difficult to raise prices 
drastically due to potential competition from low-cost 
carriers, yet ascertaining the possible range of price 
increases will be one of the more important aspects of today's 
hearing.
    Finally, there is the question of what type of analysis 
should be performed on this merger. Traditionally, antitrust 
regulatory agencies perform their analysis only on the merger 
``in front'' of them. However, other mergers are considered as 
part of the analysis if they affect a similar market, and those 
mergers occur during the period in which the initial merger is 
being considered.
    In the case of this merger, Mr. Mitchell and the American 
Antitrust Institute advocate the Department of Justice perform 
a scenario analysis. Now, scenario analysis takes into 
consideration other possible mergers that could occur even 
though they have not been announced or negotiated. I believe 
this could have disadvantageous consequences, and I look 
forward to discussing this matter with you in greater depth.
    That being said, Mr. Chairman, let me just thank you for 
calling this hearing. I look forward to a thorough discussion 
of these issues, and I appreciate your leadership on this 
matter.
    Chairman Kohl. Thank you very much, Senator Hatch.
    We now turn to two distinguished Senators who are here to 
make a statement, Senator Chambliss from Georgia and Senator 
Klobuchar from Minnesota.
    Senator Chambliss, we'll hear from you.

  STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM THE 
                        STATE OF GEORGIA

    Senator Chambliss. Mr. Chairman, thank you very much. I 
appreciate you and the Ranking Member, Senator Hatch, holding 
this hearing today and letting us have an opportunity to come 
before you. I particularly appreciate the opportunity to 
introduce Delta Airline's CEO, Richard Anderson. Delta's 
headquarters is based in Atlanta in my home State of Georgia, 
where they are the largest tenant of the world's busiest 
airport, Hartsfield-Jackson International Airport.
    Richard joined Delta as a member of their Board of 
Directors in April of 2007. In September of 2007, he had 
succeeded one of Delta's finest chief executives, Gerald 
Grinstein. I've been pleased to have the opportunity to get to 
know Richard over the past few months. Last year when he took 
over, Delta had recently emerged from bankruptcy and, 
interestingly enough, he came to Delta after having served at 
Northwest.
    Under his leadership, Delta strengthened its balance sheet 
at time when we have seen numerous airlines file for bankruptcy 
or see separations. Richard brings more than 20 years of 
airline experience to the job, as he has previously served as 
the chief executive officer of Northwest, whose merger 
obviously you are here today to discuss. Richard's experience 
lends him the necessary skills to successfully meet the demands 
that will be placed on him should this merger be approved.
    Mr. Chairman, we are here today to discuss the viability 
and the effect on consumer choices that a merger between Delta 
and Northwest Airlines would have on consumers. These two 
companies would form a stronger airline that would offer 
consumers increased access to international destinations.
    Delta has a strong presence on the East and West Coast and 
in European markets, while Northwest maintains a strong 
presence in the Midwest and Asia. These synergies should not 
adversely affect customer choices in air service, but should 
actually enhance them and result in a stronger airline that 
should be less susceptible to economic downturns and the ever-
increasing fuel prices.
    Delta Airlines has come a long way since its beginnings in 
Monroe, Louisiana to the international commercial airline it is 
today. It has been an economic engine for Georgia and the 
Southeast for many years. Delta, as many airlines after 9/11, 
has faced many challenges and has emerged as a strong carrier.
    As a resident of rural Georgia, I fly Delta Airlines from 
my home to Atlanta and back, usually at least once a week. 
Excuse me. I get back and forth to Atlanta once a month, at 
least. I fly it all the way home. So, I depend on the connector 
airlines also. And you are right, Mr. Chairman, that is a very 
integral part of this in the overall restructure should this 
merger be approved and it is something that I look forward to 
you following very closely, but I know it is going to be 
successful and is going to be continued.
    I am very proud to have the honor to introduce today a 
superb airline industry leader and a fine American in my good 
friend, Mr. Richard Anderson.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Senator Chambliss.
    Senator Klobuchar?

STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM THE STATE 
                          OF MINNESOTA

    Senator Klobuchar. Thank you very much, Mr. Chairman and 
Senator Hatch. Thank you for the opportunity to testify today 
on a matter of great concern to my home State of Minnesota, as 
well as the people we represent and the future of the airline 
industry.
    The proposed merger of Northwest Airlines and Delta Air 
Lines, which has been called a mega-merger--it would in fact 
produce the largest airline in the world--represents a turning 
point in the history of our country's airline industry, so I 
will start with a few words of history.
    Northwest Airlines was founded in Minnesota in 1926 to 
carry mail for the U.S. Post Office, and it established the 
first air mail service from Minneapolis to Chicago. During 
World War II, it joined the war effort by flying military 
equipment and personnel to Alaska, and after the war, was 
designated by the Federal Government as the United States' main 
carrier in the Pacific.
    In 1947, Northwest became the first American airline to fly 
commercial passengers from the United States to Japan, and by 
the 1960's it was one of the premier U.S. carriers between the 
United States and the booming economies of Asia.
    I recite this history not out of nostalgia, but to describe 
the importance that Northwest Airlines has always played, and 
plays today, in the economy of Minnesota and the Midwest. 
Northwest, represented here today by many employees as well as 
CEO Doug Steenland, provides nearly 12,000 high-skilled jobs in 
my home State, including trained mechanics, pilots, flight 
attendants, and the many workers who support its airport and 
headquarters' operations. In addition, it operates major 
reservation facilities in Eagan, Minnesota and in Chisholm, 
Minnesota on our State's Iron Range.
    Moreover, Northwest is a vital link connecting the 
communities of Minnesota to one another, and Minnesota to the 
world. Minnesota ranks No. 9 in Fortune 500 companies, and in 
addition to being the home to a major research university, as 
well as major medical facilities like the Mayo Clinic, we are 
hope to many people that need this competitive air service.
    If Northwest has been good to Minnesota, our State has been 
good in return. In 1991, when Northwest was threatened with 
bankruptcy as a result of rising fuel costs and an economic 
recession, the legislature passed a loan package worth nearly 
$300 million in exchange for Northwest's promise to stay in 
Minnesota and build new facilities in Minnesota.
    More recently when Northwest faced financial difficulties 
again, our Metropolitan Airports Commission granted it millions 
of dollars in rent reduction and agreed to share airport 
concessions. These efforts came on top of a $15 billion 
financial rescue package that Congress created in 2001 to help 
the airline industry after 9/11.
    So I think it is fair to say that the people of Minnesota 
have had a partnership with Northwest and other major carriers 
over the last many years, and I think that Northwest has an 
obligation to uphold their end of the deal.
    The proposed merger has ramifications not only in 
Minnesota, but beyond our borders. Already, passengers are 
concerned about adequate choice and competitive fares. As the 
industry stands today, the top four carriers--American, United, 
Delta, and Southwest--control nearly 50 percent of the market.
    Many airline analysts predict that a Delta-Northwest merger 
would trigger a new wave of consolidation in the airline 
industry that would further increase market concentration. 
Already there is speculation about a merger between United and 
Continental, and some analysts foresee a consolidation of our 
country's airline industry from seven major carriers to just 
three.
    I am concerned that the agencies with jurisdiction--the 
U.S. Department of the Transportation and the U.S. Department 
of Justice--will evaluate this merger in isolation and not 
consider its effects on the airline industry as a whole, 
something that Senator Hatch was just speaking to.
    I would urge that the departments, as part of their 
competition review, ask for specific assurances from the 
executives of these carriers. If the merger triggers further 
concentration in the industry, what evidence do they have that 
fares will not go up? What assurances can they give that 
consumers will still have meaningful choice?
    One of the major reasons given for this merger, the 
increasing oil prices, how can they show that those oil prices 
would somehow change as a result of this merger or that Delta, 
which is already the third-largest carrier, would somehow be 
able to negotiate better oil prices--much better oil prices--
than they do now? How can they guarantee that affected 
communities will still have frequent, high-quality service? 
These are the questions I hope this Committee asks, as our 
Commerce Committee will do at a later hearing.
    In short, it is essential that the Departments of Justice 
and Transportation not review this merger in a vacuum, but 
consider the likely broader implications for the aviation 
industry and society as a whole. This merger must be considered 
and looked at as to whether increased concentration would lead 
to an oligopoly -that is, a market controlled by a few--
increased barriers to entry, and diminished competition. They 
must also consider establishing formal conditions for approval 
of this merger that would assure the government and the public 
that the industry will have the robust competition necessary to 
move forward.
    Concentration, as we know, often leads to higher prices and 
that is the core, the central concern of our country's 
antitrust laws. I would also add that for those of us that 
represent States that include rural areas, we are not only 
concerned about the hub, but the spokes. One of the things that 
I think we must explore, is former Delta CEO Gerald Grinstein, 
which Senator Chambliss mentioned, when he spoke about his 
opposition to the merger between Delta and U.S. Air before the 
Commerce Committee, on which I serve, he asked: ``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 having these network carriers fiercely competing 
with each other, trying to get into those markets? If you 
approve one merger, how are you going to say no to other 
carriers? You will devolve into three network carriers, and 
once that happens you won't get the same level of service.''
    I think it is important that members of this Committee use 
this hearing, and as we will do on our Commerce hearing, to 
hold the airlines accountable for the commitments they have 
made about this merger and to create a record for the 
Department of Justice so that the DOJ understands the impact 
that this merger may have on jobs, on communities, and on the 
American flying public. In short, what we learn here today and 
what we will learn at the upcoming Commerce Committee hearing 
should help guide the Department of Justice as it considers the 
impact of this merger on our competition laws.
    In conclusion, I urge this Committee to look at this from a 
global standpoint, not just in isolation, for the impact it 
will have on the airline industry. I urge this Committee to ask 
the Federal regulators to undertake a full and comprehensive 
review of the consequences of this proposed merger. We must 
proceed with care and caution, with an eye not only to the 
bottom line for Wall Street, but the bottom line for Main 
Street.
    Thank you very much for this opportunity.
    Chairman Kohl. Thank you, Senator Klobuchar.
    There is a vote on the floor, so we will have a recess of 
10 minutes.
    [Whereupon, at 2:29 p.m. the hearing was recessed.]
    AFTER RECESS [2:49 p.m.]
    Chairman Kohl. The hearing will continue.
    We would now like to introduce our second panel of 
witnesses. Our first witness on that panel today will be 
Douglas Steenland. Mr. Steenland is the president and CEO of 
Northwest Airlines, where he has served in various capacities 
since 1994. Before joining Northwest, Mr. Steenland worked as 
senior partner at the law firm Verner Liipfert in Washington, 
DC.
    Following him will be Richard Anderson. Mr. Anderson is the 
CEO of Delta Air Lines, where he has served since September of 
2007. Prior to joining Delta, Mr. Anderson was the executive 
vice president of United Health Group from 2004 until 2007. He 
worked at Northwest Airlines from 1990 to 2004, where he was 
the CEO from 2001 to 2004.
    Following will be Kevin Mitchell. Mr. Mitchell is the 
founder and chairman of the Business Travel Coalition, where he 
writes and speaks on airline competition and other aviation 
issues. Prior to founding BTC, Mr. Mitchell was the vice 
president of Human Resources and Services at Cigna.
    Finally, we will be hearing from Darren Bush. Dr. Bush is 
an Associate Professor of Law at the University of Houston Law 
Center, where his primary research interests are antitrust and 
regulated industries, energy, as well as intellectual property. 
Dr. Bush also served in the Transportation, Energy, and 
Agricultural sector of the Antitrust Division at the Department 
of Justice.
    We thank you all for appearing at the subcommittee's 
hearing today.
    We ask you all to stand and raise your right hand.
    [Whereupon, the witnesses were duly sworn.]
    Chairman Kohl. Thank you.
    Mr. Steenland, we'll hear from you first.

 STATEMENT OF DOUGLAS STEENLAND, PRESIDENT AND CEO, NORTHWEST 
                   AIRLINES, EAGAN, MINNESOTA

    Mr. Steenland. Thank you, Senator. Chairman Kohl, Senator 
Klobuchar, I am Doug Steenland, chief executive officer of 
Northwest Airlines. I appreciate the opportunity to appear here 
this afternoon to explain the benefits of the recently 
announced merger between Northwest and Delta, and the fact that 
this merger will not lessen competition.
    The U.S. airline industry is at a crossroads, creating two 
choices for Northwest. One choice is to continue on the road 
now traveled as a stand-alone airline, being whipsawed by 
rising oil prices which will cost Northwest an estimated $1.4 
billion more this year, facing competition from discount 
carriers that have now captured one-third of the U.S. market, 
and internationally facing heightened competition from large, 
well-funded foreign airlines that have been allowed to 
consolidate and are increasing service to the United States 
under Open Skies agreements.
    The other choice is to merge with Delta to create a single, 
stronger airline better able to face these challenges. By 
combining the complementary end-to-end networks of two great 
airlines, we will achieve substantial benefits and build a more 
comprehensive and global network.
    Most importantly, the merged airline will be more 
financially resilient and stable, better positioned to meet 
customers' needs, better able to meet competition at home and 
abroad, and better able to provide secure jobs and benefits.
    In this merger, importantly, no hubs will be closed. We 
would like to focus on that for a second. In the U.S., 
Northwest operates hubs in Detroit, Memphis, and Minneapolis. 
In recognition of the service we provide and the essential 
nature we are to the community and the commitment we have made, 
we received strong civic support in Michigan, in Memphis, and 
in Minneapolis--in St.Paul we received the support of the 
Minnesota Chamber, the St. Paul Chamber, and the Metro 
Coalition of Chambers. The merger will create over $1 billion 
in annual benefits that will help the merged carrier withstand 
volatile fuel prices and cyclical downturns.
    All of these benefits will be achieved without harming 
competition. The existing domestic and international routes of 
Northwest and Delta are complementary, so the two carriers 
compete in only a minimum extent today.
    Let us start, first, with international markets. The 
question of competition internationally has been asked and 
answered by the U.S. Government. Recently, the U.S. Department 
of Transportation tentatively granted antitrust immunity to 
Northwest, Delta, Air France, and KLN, and in doing so found 
that there would be no reduction in competition over the 
transatlantic from the combination of Delta and Northwest. 
Northwest does not serve Latin or Central--Latin America, a 
Delta stronghold, and Delta has only minimal service to Asia, 
which, as Senator Klobuchar pointed out, Northwest has served 
well since 1947.
    Domestically, Northwest routes are concentrated in the 
upper Midwest, while Delta is strong in the South, in the East, 
and in the mountain west. The most important fact to remember 
from today's hearing on competition is that, of the 800 
domestic non-stop routes that Northwest and Delta today 
collectively fly, there are only 12 overlap non-stop city-pair 
markets. On the vast majority of those 12 markets, there is 
robust non-stop competition that clearly will make sure that 
substantial competition will remain in the future.
    The domestic airline industry has undergone a competitive 
sea change over the past several years. Low-cost carriers have 
grown at an average annual rate of 11 percent since 2000. 
Southwest is the largest domestic airline in the United States 
and carriers more domestic passengers than any other airline, 
and that will continue to be the case even after this merger is 
consummated.
    In addition, online technologies with amongst the most 
powerful search engines in the world, run by Orbitz, 
Travelocity and Expedia, have really created a customer 
revolution. Customers can now quickly and easily compare the 
offerings of competing carriers on any given route, and if they 
so choose they can push the ``lowest applicable fare'' button 
and they're guaranteed to see low prices from the choices that 
they select. All of these developments ensure the continued 
competitiveness of the U.S. market post-merger.
    For Wisconsin and Minnesota, this merger has a particular 
interest. It has a particular history as well, and it is worth 
recounting it briefly because it explains some of Northwest's 
strengths today. Thirty years ago in one of the first 
noteworthy airline mergers, North Central and Southern combined 
to form Republic, becoming the largest airline in the country 
measured by domestic destinations served. In 1986, Northwest, 
then primarily known for its international service, acquired 
Republic and, but for that merger, I think it is highly likely 
that we would not be here today.
    As you know, Mr. Chairman, Northwest is also a passive 
investor in Midwest Airlines. We have a commercial cooperation 
agreement with Midwest that is beneficial to both. Tim 
Hoeksema, president of the Wisconsin-based Midwest Airlines, 
confirmed this weekend that, in his judgment, this merger will 
not adversely affect his company, and he observed that 
maintaining the status quo is not the way to currently overcome 
the industry's difficulties.
    With this merger we have achieved our goal of crafting a 
transaction that creates significant value for all of our 
shareholders. The combined company will be more stable, better 
positioned to meet the challenges of the future both at home 
and abroad.
    Thank you very much.
    [The prepared statement of Mr. Steenland appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. Steenland.
    Mr. Anderson?

 STATEMENT OF RICHARD ANDERSON, CEO, DELTA AIR LINES, ATLANTA, 
                            GEORGIA

    Mr. Anderson. Mr. Chairman, members of the Committee, thank 
you. I appreciate the opportunity to be here today and to 
represent the employees of Delta, many of whom are here with me 
today.
    This creates an opportunity for Delta and Northwest to 
create a real global airline. As Doug stated, the world is 
changing rapidly around us, both in terms of fuel and Open 
Skies agreements and trade agreements around the world, we 
really should be thinking about this business in a global 
sense. I know it's very important. We serve a lot of small 
communities together, but we really play on a much broader 
stage and we need to be able to compete against the foreign 
competition.
    When we think about these two airlines separately, we are 
not as strong as our foreign competitors. The European Union 
and government agencies in other parts of the world have 
allowed consolidation. Open Skies agreements have now resulted 
in foreign flag carriers carrying more international passengers 
to and from the United States than U.S. flag carriers.
    U.S. airlines--we only have 5 percent of the worldwide 
orders for wide-body airplanes in the U.S., so if you take all 
the U.S. airlines and add up all their wide-body orders at 
Boeing and Airbus, we are 5 percent of the outstanding backlog 
of wide-body airplanes.
    We are not here asking you for financial support, we just 
want the ability to react to the marketplace and do the things 
that we can do for our employees, our shareholders, and our 
communities in response to fuel prices, which have doubled. In 
the case of Delta, in the first quarter, our year-over-year 
fuel bill went up over $500 million. Multiply that times four. 
You essentially have fuel doubling in a 1-year period of time.
    And what we miss on that are two factors. Fuel has gone 
from $60 to $120 a barrel, but refining costs have doubled to 
over $30 a barrel, and we're paying for it with dollars. Our 
European competitors pay for it with euros. They're effectively 
paying about $80 a barrel right now, while we pay $120 a 
barrel.
    These oil prices have driven five carriers to Chapter 11 
since the beginning of the year. And what this merger does for 
two already-strong carriers is give us the power to compete and 
win versus foreign flag carriers. That is good for our 
employees, communities, and shareholders because we have an 
obligation to all of them to build a durable and lasting 
network.
    This consolidation is really complementary. When you look 
at these two airlines, there are two simple numbers. In the 
domestic market, 800 non-stops, 12 overlaps; 0.3 percent of the 
capacity overlaps on a non-stop basis, and in those markets 
there's plenty of competition. So, they are really end-to-end 
networks.
    The same thing internationally. There's really no 
competition issue here whatsoever internationally, which is 
over 40 percent of the combined flying of the two airlines. The 
merger provides stability for our employees. This industry has 
lost 150,000 jobs and $30 billion in financial losses since 
2001, and we have built this combination with our employees, 
communities and shareholders in mind.
    First, we have made a commitment to provide substantial 
ownership to the employees in the combined company. Second, we 
are committed to fair and equitable seniority integration. 
Third, we have a covenant in the merger agreement and the way 
this has been set up will protect the pensions of the 
employees. Last, we have made a commitment to the front-line 
employees that there would be no furloughs as a result of the 
transaction.
    Small communities and large communities benefit because 
there are no hub closures, and we become the largest airline 
serving small communities, with over 140 in the U.S. We create 
new service to 3,000 domestic market city pairs, and over 6,000 
new international city pairs.
    Keep in mind that oil is a game changer today--and by the 
way, a much bigger game changer than just the airline business. 
Fuel prices at this level changes many things in American 
society today, and we have got to be in a position to be strong 
enough to weather that.
    The combined enterprise of these two airlines creates over 
$1 billion in benefits, and the combined entity will have over 
$7 billion in liquid assets. We have the best combined cost 
structure, we have the best combined balance sheet, we have 
solid strategies. We need to be given the chance to be able to 
compete on our own. Customers will enjoy a significant 
expansion of service options and an enlarged Frequent Flyer 
program.
    In sum, it is good for our employees, our customers, and 
our communities. When you look at the stand-alone plans and you 
look at what's happened in this industry over the last six or 7 
years, we should be in a position to act together to build a 
far more durable, far more stable platform.
    I would also like to ask, Mr. Chairman, if I could enter 
statements of support from the Detroit Chamber of Commerce, the 
Memphis Chamber of Commerce, and the Airline Pilots Association 
of Delta Air Lines.
    Chairman Kohl. It will be done.
    Mr. Anderson. Thank you.
    [The prepared statement of Mr. Anderson appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Anderson.
    We'll now hear from Mr. Mitchell.

    STATEMENT OF KEVIN MITCHELL, CHAIRMAN, BUSINESS TRAVEL 
                COALITION, RADNOR, PENNSYLVANIA

    Mr. Mitchell. Mr. Chairman and members of the Committee, 
thank you for requesting that the Business Travel Coalition 
appear before you today to represent the consumer on a 
potential Delta-Northwest merger and airline industry 
consolidation. My testimony today is also on behalf of the 
400,000 members of the International Airline Passengers 
Association.
    As consumers stand uncomfortably on the precipice of the 
first of several breathlessly hurried transactions, dangerously 
poised to do permanent damage to our well-being, never have we 
needed your leadership more.
    From a consumer standpoint, Congress must insist that the 
DOT and DOJ not focus on the proposed on Delta-Northwest merger 
as a stand-alone transaction, but rather the analysis must 
include implications for the competitive structure of the 
industry resulting from a radical consolidation of the major 
carriers.
    Let there be no doubt, Delta-Northwest is the proverbial 
canary in the coal mine. If this anti-competitive deal lives, 
others will follow and follow fast, leaving us in an avian 
apocalypse worthy of Hitchcock. We believe there are powerful 
reasons why these mega-mergers would be harmful to consumers 
and would solve none of the airlines' most serious problems.
    With all due respect to my distinguished fellow panelists, 
airline CEOs have long ago lost the benefit of the doubt when 
it comes to reassurances about mergers and consumer impact. The 
track record they run on is one of dashed dreams and broken 
promises. In preparing for this hearing I reviewed the 
celebratory merger press releases, followed by the coffee-
smelling Monday morning reality of shuttered hubs, wrecked 
communities, disappointed employees, poor service, and, of 
course, higher prices--and oh, yes, regretful CEOs.
    The claims from Delta and Northwest you have heard so far 
today represent the triumph of hope over experience. A rush to 
judgment regarding this merger proposal is a sure-fire recipe 
for a failed policy. BTC urges the Committee to examine the 
consumer and competitive issues carefully and deliberately. 
This transaction, and the others it will ignite, deserves 
thorough and appropriate econometric and stakeholder impact 
analyses.
    Congress must not allow the DOT and DOJ to rubber-stamp 
this troubling transaction based on the high price of fuel, an 
unfortunate reality that also requires careful policy 
consideration. However, one thing seems certain: this 
transaction will do exactly nothing to address fuel prices.
    The claim that a mega-merger would produce many billions of 
dollars in network and cost efficiencies, enough to not only 
provide a reasonable return on a very risky investment but 
enough new profits on top of that to counteract high fuel 
prices, is absolutely unrealistic. How can there be billions of 
dollars in untapped cost savings at two airlines that just 
underwent years of cost-cutting in bankruptcy? Likewise, how 
can one claim huge-scale benefits from mega-mergers unless one 
believes that airlines the size of Delta and United are too 
small to be competitive?
    How can one accept that there are billions of dollars in 
revenue synergy when there are no plans to restructure either 
network? Importantly, unless Delta can convince expert 
outsiders of something on the order of $5 billion in readily 
achievable synergies, there is no possibility this merger could 
benefit consumers or the public interest.
    What is more, mega-carriers create a risk of an operational 
meltdown that could cripple the Nation's aviation system. Fuel 
prices and the lack of merger-related synergies would create 
huge pressures to cut corners on implementation spending, 
exacerbating conflicts with and among employee groups. 
Difficulties with integration of complex computer systems and 
maintenance programs could create problems, but make the recent 
American Airlines MD-80 debacle seem like an unobtrusive 
glitch.
    Then there are competitive--competition problems. Going 
from three to perhaps--from six to perhaps three super-mega 
carriers would make airfare increases and onerous consumer 
policies easier to stick. Congress should also be concerned 
that these super-mega carriers would have the ability to 
exercise market power in adjacent markets and drive supplier 
prices to below competitive rates for travel agencies, parts 
suppliers, caterers, and all manner of participants in the 
supply chain.
    However, the primary objective and dirty little secret of 
these mega-mergers is the permanent end--the permanent end--to 
meaningful competition between the United States and 
continental Europe. Two-airline competitor groupings, led by 
Air France and Lufthansa, who are poised to provide the lion's 
share of financing for these mergers, would control 90 to 95 
percent of a profitable growing market of over 30 million 
passengers, where there would be zero possibility of new 
competition. Airlines could raise prices at will without any 
risk that market forces could constrain competitive abuses.
    As you can see, members of the Committee, this proposed 
merger will do everything but help the competitive structure of 
the airline industry and the airlines have failed to answer the 
many questions consumers have surrounding this merger.
    Thank you.
    Chairman Kohl. We thank you, Mr. Mitchell.
    [The prepared statement of Mr. Mitchell appears as a 
submission for the record.]
    Chairman Kohl. Dr. Bush?

     STATEMENT OF DARREN BUSH, ASSOCIATE PROFESSOR OF LAW, 
        UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, TEXAS

    Mr. Bush. Mr. Chairman and other distinguished members of 
the Antitrust Subcommittee, I want to thank you for giving me 
the opportunity today to speak to you about the potential anti-
competitive effects inherent in a new wave of consolidations 
that might be spurred by the proposed merger of Delta and 
Northwest Airlines.
    In doing so, my remarks today are my own. I do not 
represent anyone. I speak today based upon my experience as a 
former Antitrust Division trial attorney, focused on 
deregulated industries--in particular, airlines--and as an 
economist, and as a law professor who has done extensive 
research on the issue.
    Rather than rehash my written testimony, I want to signal 
to you not the things that may be problematic with the merger, 
but rather those things that may be problematic with the 
Department of Justice's ultimate decision with respect to the 
merger. I do so to highlight larger issues in the world of 
antitrust that are in dire need of your attention.
    With any merger, the ultimate question posed to the 
Department of Justice or the Federal Trade Commission is 
whether the proposed merger injures consumers. The analysis is 
far more complex than that, but the gist is to determine 
whether there is anti-competitive harm and whether or not 
anything about the transaction or the nature of the industry 
mitigates that harm.
    With respect to the anti-competitive harms, the DOJ, in the 
context of the airline industry, has examined in the context of 
mergers the following issues: the effect of the merger on 
competition in non-stop city-pair markets, typically routes 
between the hubs of the merging airlines. In many of these 
routes, non-stop air passenger service faces a monopoly. In 
other routes, there is likely to be reduction in service from 
three to two.
    The effect of the merger on competition and connection 
markets. For example, connections from origins or destinations 
east of Colorado in the Midwest to the East Coast destinations 
may have a reasonable--may have as reasonable connection 
options the hubs of the merging firms and Chicago-O'Hare, an 
airport which is seriously congested and constrained.
    In some markets, Delta may be a potential entrant into a 
Northwest market, and vice versa. One example might be the Salt 
Lake City to Detroit market, where Northwest might have 
provided service but for the merger. In addition, there may be 
numerous potential competition opportunities in connection 
markets. The importance of potential competition in an industry 
with rapidly eroding existing competition cannot be 
understated, although such a case is difficult to bring in 
court.
    Competition for contracts is an issue. Northwest and Delta 
may compete vigorously with each other for company contracts, 
particularly where the corporation requires significant travel 
on non-stop routes where the companies--where the firms 
compete.
    The combination may foreclose downstream and upstream 
markets. Specifically, care must be taken to examine the nature 
of any contract vital to the core function of providing air 
passenger service. In particular, contracts between the merging 
parties and vendors and suppliers should be examined to 
determine whether there is a potential that the combined firm 
could foreclose competitors from obtaining vital services. 
These are the issues that DOJ gets. They understand this, and 
DOJ's excellent press release in the United-U.S. Airways 
investigation demonstrates the agency's understanding of these 
issues.
    However, I reserve judgment as to whether these issues, 
apart from the first two listed, are fully understood by the 
current Assistant Attorney General, whose track record in 
bringing enforcement actions in mergers is a panorama of 
inaction, with the notable exception of the Exxon merger and a 
few others.
    So what difficulties did the DOJ staff face in enforcing 
the antitrust laws? Well, there are some issues that will give 
the DOJ staff pause. The first issue is that there is a trend 
in the courts and with the agency administration that 
efficiencies are now the god of antitrust.
    If there are cost savings involved in a merger or any other 
transaction, it is often the case that, whether those 
efficiencies are ethereal, illusory, only stated, not 
cognizable, not verifiable, they are still given the benefit of 
the doubt and the transaction moves forward. It cannot be the 
case, however, in looking at this transaction that one only 
looks at the notions of efficiencies without seeing that they 
are actual efficiencies. Unfortunately that has not been the 
trend, either in the court or in the Department of Justice 
currently.
    Even, however, if we examine the anti-competitive effects 
of the merger at the Department of Justice and look at any 
potential efficiencies, there are some other hurdles. If the 
merger turns out to be anti-competitive, the DOJ may actually 
have to bring an action in court. The courts have made it 
abundantly clear that they no longer follow what is called the 
incipiency standard in Section 7 of the Clayton Act. Whether or 
not the transactions are likely to lessen competition is now 
irrelevant in court, and what matters is only tangible evidence 
that the merger will lessen competition, a nearly impossible 
standard in a forward-looking analysis such as merger review.
    Another issue that is of great importance is the fact that 
current antitrust law, and if I were to challenge a merger, or 
if anybody were to challenge a merger based upon the notion of 
a follow-on merger creating anti-competitive effects, that 
challenge would be thrown out of court. There is no ability for 
the Justice Department to bring a case based upon some 
speculative merger in the future.
    However, there is an ability for the Justice Department to 
determine whether there is in reality follow-on antitrust--
follow-on mergers. They have the potential and are likely to do 
so to engage in civil investigative demands and other 
investigative techniques to ensure, or enable to determine, 
whether Continental and United were, say, merging. If that were 
the case, then you would have to take those transactions as a 
whole to determine the anti-competitive effects.
    However, if the transactions are not sufficiently close 
together, then of course there is no way to bring that kind of 
challenge. So I am sorry, I am running out of time, but I 
wanted to bring these issues up because it is not just the 
transaction that is problematic, it is if this transaction is 
anti-competitive, bringing a challenge to enjoin the 
transaction is inherently problematic.
    Thank you for your time.
    Chairman Kohl. Thank you, Dr. Bush.
    [The prepared statement of Mr. Bush appears as a submission 
for the record.]
    Chairman Kohl. Mr. Anderson, as we discussed in our meeting 
yesterday in my office, the future of Milwaukee's hometown 
airline, Midwest Airlines, is a major concern to me. I believe 
it is crucial to our economy that Midwest remains independent 
and locally owned and operated. As part of a deal that closed 
earlier this year, Northwest Airlines owns 47 percent, as you 
know, but has no operational control of the partnership that 
owns Midwest.
    We also understand that as part of that transaction 
Northwest has an option to purchase the rest of Midwest. If the 
Delta-Northwest deal is completed, we presume that Delta will 
own that share and control that option. Can you assure us that 
you will not exercise that option, Mr. Anderson?
    Mr. Anderson. Well, the entities aren't merged yet so I'm 
not perfectly familiar with the terms of that transaction, but 
I can tell you that it would be our intention to keep them 
independent. The transaction, as I understand it, contemplated 
that Northwest would be a purely passive investor, that they 
don't have any membership on the Board of Directors and the two 
firms act independently. That was the whole idea behind the 
investment, and it would be our intention to maintain that 
position with respect to Midwest.
    Chairman Kohl. So I can take that as something of a near 
certainty?
    Mr. Anderson. Yes.
    Chairman Kohl. Thank you.
    Mr. Anderson, will you pledge, as a major shareholder in 
Midwest, that Delta will do everything it can to maintain the 
independence of operations of Midwest and not take any action 
to interfere with the route structure, frequency, and quality 
of service of Midwest Airlines from its Milwaukee hub?
    Mr. Anderson. Yes.
    Chairman Kohl. After the merger with Northwest, will it be 
Delta's business interest to have Midwest remain as an 
independent and strong airline based in Milwaukee?
    Mr. Anderson. Yes, because the whole transaction is 
predicated upon a domestic alliance with Northwest, with the 
shared Frequent Flyer program, connecting passenger exchanges 
through code sharing, and that was an important part of the 
transaction for Northwest, as I understand it. And that sort of 
alliance relationship is important to Northwest's service 
patterns in the upper midwest because they flow traffic on each 
other, particularly international traffic, since Midwest 
doesn't have an international network.
    So I think the original agreement that Doug put together 
contemplated that it would remain an independent airline. It's 
got a great service reputation. It bakes cookies and does other 
special passenger amenities on its flights, and I think it's 
very well run--a very well-run hometown airline. It would be 
our intention that it would remain that way.
    Chairman Kohl. Finally, gentlemen--Mr. Steenland and Mr. 
Anderson--what is it about Midwest that generates such strong 
approval from customers that I don't think you find in too many 
other airline businesses across the country? What is it about 
their business that you feel cannot, or should not, be emulated 
in your business?
    Mr. Anderson. Well, if it's good customer service, we want 
to emulate it.
    Chairman Kohl. Well, their ratings.
    Mr. Anderson. Right.
    Chairman Kohl. You know, the things that characterize them 
in the competitive markets in which it plays, from time to time 
those things come out and Midwest seems to be somewhere close 
to the very top.
    How about you, Mr. Steenland. What do you think?
    Mr. Steenland. Well, I think Midwest has done an excellent 
job in terms of fashioning itself as the hometown airline. 
Milwaukee travelers are very familiar with it. It has strong 
local roots. It still has members of the Milwaukee community on 
its board. It was a good civic supporter, and I think that 
developed a loyalty and a responsiveness that is admirable.
    Chairman Kohl. Thank you so much.
    Senator Klobuchar?
    Senator Klobuchar. Thank you very much, Chairman Kohl, and 
thank you for allowing me to join this Committee today.
    I know that you testified, both of you. And again, welcome 
to both of you, and also welcome to all the employees from 
Northwest and Delta that are here. I know that both of these 
employee groups stood by their airlines when you went through 
some very difficult financial times and I have their interests 
in mind, as well as the interests of the people of this country 
as we go forward.
    I know this morning when you testified in front of the 
House, a questioned was asked about the number of jobs that 
would be lost as a result of the merger. I think one of you--
maybe it was you, Mr. Anderson--said something about, that it 
would be less than 1,000 jobs.
    Could you elaborate on that?
    Mr. Anderson. That was a very general number. We have not 
done the bottoms-up diligence to determine, you know, how the 
merged airline will look. It was really a guesstimate, an 
estimate of where we think it might end up. But, you know, we 
haven't yet put together the transition planning teams to 
really go department by department and figure it out.
    Senator Klobuchar. You know, there are nearly 12,000 
employees in Minnesota, but there are about 1,300 employees in 
the Eagan headquarters. How do you think these employees' jobs 
will fare?
    Mr. Anderson. The efficiency savings comes from both 
headquarters, so when you look at putting two companies 
together, the efficiencies--those efficiencies will come from 
both headquarters.
    Senator Klobuchar. And so do you still stand by your words, 
I think it was in the merger announcement, where you said that 
Delta and Northwest were committed to retaining significant 
jobs, operations, and facilities in the State of Minnesota?
    Mr. Anderson. Absolutely.
    Senator Klobuchar. All right.
    Mr. Steenland, do you want to comment on that?
    Mr. Steenland. I would concur. That was a joint press 
release and we fashioned those words together. When you look at 
the--clearly, if you start with preservation of the hub, which 
we have signed onto, obviously all of the front-line employees 
at the airports, the pilot base, the flight attendant base, the 
ancillary services necessary to operate a hub, our res. offices 
in Chisholm and in Minneapolis, our information technology 
center, our pilot training center are all activities that will 
need to be part of the combined entity going forward.
    And just the fact that one particular activity or a 
particular service was not named on that list does not mean 
that they will not be included, it just means that's about as 
far as the process has gone so far and that there will be a 
joint transition planning effort under way where we will then 
start getting into some more detail, into some more granular 
efforts where we'll identify some of the additional services as 
to--
    Senator Klobuchar. Mr. Anderson?
    Mr. Anderson. Well, so for just a little bit of history, I 
was actually involved at Northwest with Mr. Steenland 16 years 
ago when we negotiated that covenant with the State of 
Minnesota, so I have a particular closeness to that commitment, 
No. 1.
    No. 2, Minneapolis is a very important part of this 
combined network. It has a significant number of Fortune 200 
companies. I'm on the board of two of them, Cargill and 
Medtronic, in Minneapolis. And it's very important to the 
vibrancy of that hub and to our commitment to Minnesota that 
you make that same corporate commitment to the community. As 
you know how that community works, that's a very important part 
of the Minneapolis fabric. I understand that fabric, and we're 
going to do our very best to live up to that statement in our 
press release.
    Senator Klobuchar. Thank you. And you understand, with 
what's happened with some of these other airline mergers that 
have been referenced and some promises made with TWA and 
others, I'm just concerned about the staying power of these 
commitments. In other words, what will prevent the combined 
airline from laying off workers a year or two from now, you 
know, claiming market forces drove them there?
    Mr. Anderson. Actually, I would answer that by sort of 
flipping it a little bit. You know, the reason why Northwest is 
where it is today is the Republic-Northwest merger. There were 
three international carriers at deregulation: PanAm, TWA, and 
Northwest Orient, a set of three to which you do not want to be 
a member, because you'll recall that both PanAm and TWA 
liquidated because they had no domestic route system, and it 
was a result of the Republic-Northwest merger in 1986 that 
Northwest got a solidified hub position in Minneapolis, 
Detroit, and Memphis. The same thing for Delta.
    So my point is, we almost have to view it in light of what 
our alternatives are, and the idea that you can put two 
airlines together and make it stronger. Because the situation 
with TWA was, the St. Louis hub was probably never a reliable 
hub. It had been the result of a transaction between TWA and 
Ozark when Ozark was not in very good shape. And so by the time 
American had bought it, TWA had been through bankruptcy three 
times and it was actually an asset acquisition, it wasn't a 
merger. Today it doesn't have the local traffic base to really 
support a large hub operation.
    So I would sort of really answer it by saying that this is 
actually the best alternative for those jobs and those 
communities, because in the end the only real job security is a 
sound business plan, when it's all said and done. And what this 
combination allows us to do is be much stronger together, and 
that's really--really--we understand our commitment to 
communities and our employees, and so we look at the landscape 
of what we can do in this fuel environment and the world 
economy, and this is really the best and safest option.
    Senator Klobuchar. You know, you mentioned the fuel 
environment right now. I'm trying to understand this, because 
if oil is $120 a barrel before the merger, there's a good 
chance it's still going to be $120 a barrel for a combined 
carrier. It's going to be the same price. And so could you 
explain why this would make it different?
    Mr. Steenland. The merger will not create an entity that 
will have more negotiating power and will be able to drive a 
lower price with respect to oil. You're exactly right. We'll 
spend $120 a barrel prior to the merger, $120 after the merger.
    Senator Klobuchar. And the fact that, say--because Delta is 
already, what, the third biggest carrier? So I thought you 
might make the argument that now we're even bigger so we can 
get more leverage to get cheaper prices.
    Mr. Anderson. The Federal Government can't even do that 
when they fill the Strategic Petroleum Reserve, so if they 
can't--
    Senator Klobuchar. Yeah, we noticed that. OK.
    Mr. Steenland. But what the transaction does do, is by 
putting the two entities together we're able to generate cost 
savings and revenue benefits not in the form of increased 
fares, that on an annual basis, in our judgment, conservatively 
create a billion dollars of additional value that falls to the 
bottom line. That makes the two entities stronger as a result 
than they would have been if they had stayed independent, and 
that additional benefit helps offset.
    We're not here saying it completely offsets. Oil remains an 
independent, significant challenge to the airline industry 
whether this merger happens or not. But if it does happen, we 
will be in a stronger position to accept that challenge and to 
tackle it than we would have been if we had stayed separate.
    Senator Klobuchar. And so one of my focuses here is to get 
information so the Justice Department can look at this, as well 
as the information we need to enforce our agreements in 
Minnesota. But clearly when I talk to my colleagues about this, 
one of the first things they say is oil prices. And so I just 
think it's very important people realize that that's not really 
going to change, it just creates a challenge.
    And my last one or two questions here is about the point 
that Mr. Mitchell made. The argument is that you're going to 
create this synergy, but you pledge to keep the hubs, you've 
promised to maintain employment, around 1,000 job loss. You're 
still looking at it. But I think, what was the word that 
Chairman Kohl used? Near certainty. I would hope that it would 
not cost that many employees. So could you again go through 
where these synergies are that is going to save these 
substantial costs?
    Mr. Anderson. OK. I'll go on the cost side, and Doug can 
take the revenue side.
    First, is airports. There are many airports around the 
country where we both have significant facilities and the 
overlap, what we call station overlap--you go to a city like 
Los Angeles where Northwest has Terminal 2 and Delta has 
Terminals 5 and 6, we can consolidate into Terminal 5 and 6 and 
basically give back one whole terminal at the airport and still 
be able to accommodate our schedules. So you have the station 
overlap.
    The second thing is, you migrate to one IT platform. Today 
we all operate a multiplicity of technology platforms. Believe 
it or not, airlines are massive IT consumers with decision 
technology and consumer technology, and moving from one--from 
two IT platforms to one IT platform has a significant amount of 
benefit.
    Third, you move to single-commission agreements for sales 
and distribution agreements. We get more purchasing power on a 
combined basis when we're buying--we buy a lot at airlines from 
oligopolists, and having joint purchasing power for aircraft 
engine parts and other suppliers, caterers, is valuable in the 
industry. And then there's the general and administrative 
overhead. And you add all that up and the gross synergies or 
gross benefit is in the $600 to $800 million range on the cost 
line.
    Doug, you could do the--
    Mr. Steenland. On the revenue side, let me just give you a 
very specific example. Delta has no wide-body airplanes that 
have more than 275 seats. Northwest has a fleet of 16 747 400's 
that have 400 seats. We operate some of those 400-seat 
airplanes on routes that would be much more profitably served 
if we had a 275-seat airplane. Delta operates it 275-seat 
airplane on some routes that would be much more profitably 
served if it had a 400-seat airplane. So the optimization of 
our combined fleets over our collective network--Delta has no 
airplanes between 77 seats and 140 seats. We have approximately 
130 airplanes that fit in that size.
    When you optimize the network, employing our combined fleet 
over all of the opportunities that the combined network will 
generate is literally worth hundreds of millions of dollars of 
just efficiency and benefit by better matching the size of 
airplane with the demand of route that we can't do today as 
single and separate entities.
    Senator Klobuchar. Thank you. I don't want to go beyond 
Senator Kohl's midwestern hospitality as a visiting member 
here, but I will save some other questions for the Commerce 
Committee, and especially ones concerning how we try to enforce 
some of the problems that have been made here today.
    Thank you very much.
    Chairman Kohl. Thank you very much.
    We now turn to Senator Hatch.
    Senator Hatch. Well, thank you, Mr. Chairman.
    I will ask a question that Senator Grassley has courteously 
asked me to ask, so I'll just put it out to you folks. He's 
been interested in this issue particularly because Iowa air 
travelers and businesses have never been shy about expressing 
their concerns about the lack of competition in air service to 
Iowa cities, as well as high airfares. Senator Grassley has 
tried to stay on top of things and ask the hard questions when 
airline mergers are proposed and when these competition issues 
arise.
    Now, here's this question, I believe: ``The proposed 
Northwest-Delta merger is poised to offer certain benefits to 
some consumers who will have access to a larger network with 
greater flight frequency and more travel options. However, this 
proposed merger also raises questions as to whether the 
transaction will spark mergers of other air carriers and 
thereby consolidate the airline industry so as to inhibit free 
and fair competition.
    Further, the proposed merger raises questions about the 
effects on the air travel in smaller cities and rural 
communities, both in terms of cost and services.'' 
Specifically, Senator Grassley has heard concerns about 
possible reductions in the number if aircraft flown into Iowa, 
which in turn could lead to reduced or eliminated service as 
well as higher prices. He is very concerned about that.
    As he has said before, ``Competitive air service is 
directly related to the economic prosperity of smaller and 
rural communities. With a weakened economy, even the threat of 
route elimination, cutbacks in service, or higher airfares can 
be extremely detrimental to these communities and their 
economic development.''
    Finally, he says, ``Related to this issue is how the 
proposed Northwest-Delta merger will impact the regional 
partners of these airlines. Regional airlines have been a 
critical component in serving Iowa not only for air travelers, 
but also for jobs in our community.'' He goes on about how Iowa 
is affected.
    So what he wants to know is whether the proposed merger 
will impact essential air service, AIS contracts, and continued 
service in Mason City and Ft. Dodge. You can take a crack at 
that, if you will, in answer to that question.
    Mr. Steenland. Let me take a shot at that, Senator.
    Between Northwest and Delta, we presently serve seven--
actually, yes, seven cities in Iowa. Five are served 
exclusively by Northwest. They are: Sioux City, Ft. Dodge, 
Mason City, Waterloo, and Dubuque. We both serve Des Moines, 
but we serve them to different cities, and we both serve Cedar 
Rapids, and we serve them to different cities. So, there is no 
overlap. We serve our cities over Minneapolis. We expect the 
level of service to continue by being part of a more global 
network as a result of the merger.
    We would expect passengers coming out of these cities to 
have more service offerings. The regional carriers that largely 
provide these services will remain intact. We own two regional 
carriers. The merged carrier will continue to own them. And we 
have a long-term contract with another, and that will also 
remain in effect.
    Senator Hatch. OK. Thank you.
    Let me ask both of you, Mr. Anderson, and you, Mr. 
Steenland, according to the New York Times, Delta has raised 
its fare 6 percent year-over-year, and Northwest increased its 
fare by 2.9 percent from a year ago. However, as we all know, 
fuel prices have increased 28 percent or more on an annualized 
basis over the past 5 years.
    Now, how do you respond to those who believe that this 
merger is a ploy to raise prices? Do you forecast a raise in 
your prices, and how much of a raise will it be in real terms, 
once you factor in inflation and fuel costs?
    Mr. Anderson. You know, as Doug stated in his testimony and 
I stated in my testimony, it's really an end-to-end combination 
between the two carriers.
    Senator Hatch. Sure.
    Mr. Anderson. The industry is incredibly competitive. If 
you--we did an analysis and analyzed the number of city-pair 
markets on what airfares were 30 years ago compared to today. 
If you adjust for inflation, airfares are down about 30 percent 
since deregulation. It is an incredibly competitive 
marketplace, and it will stay an incredibly competitive 
marketplace.
    I think the issue that we face, which is separate and apart 
from this transaction, is I don't think people have a 
fundamental appreciation for what fuel is going to do to this 
industry over the longer term. With crack spreads at $30 and a 
barrel of fuel at $115, there is--you know, we are selling 15 
to 20 airplanes, you know, pretty large airplanes--you know, we 
are a pretty good-sized airline--15 to 20 airplanes, simply 
because the fares have got to reflect the price of oil.
    I don't know how to run a business effectively if the main 
sort of commodity that you have to have to run the business 
goes up, and every other thing we do, we go to the gas pump to 
fill our car or pay our home heating bill, the utility company 
or the oil company charges us full price. We don't do that for 
airline tickets. Over time, ultimately this industry has got to 
be able to recoup that in order to be successful. There's just 
no other way to be able to do it.
    So far we don't have any of the pricing power, and I doubt 
we'll have the pricing power to be able to do that. So the way 
that we deal with it, is we take capacity out. In other words, 
as fuel goes up, more city pairs in the network become 
unprofitable and you drop those city pairs. So I think the 
biggest sort of issue you have with respect to service, 
separate and apart from this merger, which is when fuel is 
moving at these levels, flying that was economic to do at $60 a 
barrel isn't economic to do at $120 a barrel, and that's really 
the challenge that the industry faces.
    Senator Hatch. Well, let me just say to both of you, as I 
look at this merger--and I've been studying it pretty 
thoroughly -it seems to me that they are both complementary to 
each other and that this is a reality we're going to have to 
face in the future. You know, there's a lot of concerns about 
it, as there is in all mergers of huge industries. But unless 
somebody can show some real reasons why this shouldn't go 
through, it seems to me that this may be in the best interests 
of air transportation in this country.
    But I'll keep looking at it. Naturally, I want to listen to 
everybody. I've been in five ``must do'' things this afternoon 
and I have to leave right now for an interview, but I just want 
to personally express my regard for both of you and what you're 
trying to do to keep our country competitive and keep our 
people and our country in the air, as needed.
    Mr. Anderson. Thank you very much.
    Mr. Steenland. Thank you for your support.
    Chairman Kohl. Thank you, Senator Hatch.
    Senator Cardin?
    Senator Cardin. Senator Kohl, thank you very much. Thank 
you for conducting this hearing, and I thank the witnesses for 
being here. This is certainly an area of great interest.
    The information that's been given to me concerning BWI 
Airport, which is the major airport in Maryland, is that there 
are 37 departures daily by the two carriers. None of the 
markets overlap, so if I am hearing your testimony, the people 
of Maryland should not be concerned because the service levels 
will be maintained. So, I start with that.
    But I am mindful of Mr. Mitchell's admonition that this may 
lead to other changes within the airline industry, and am very 
concerned about the process that we go through to look at the 
competitive nature of the airline industry.
    So let me try to understand your logic here for a moment, 
because I am having a little bit of problems with the 
economics. If, in fact, the service levels are going to be 
maintained--and I understand, Mr. Anderson, your point about, 
whether there's a merger or not, there's liable to be changes 
because of cost issues. But as a result of the merger, if the 
service levels are going to be maintained, the hubs are going 
to be maintained, you can't do anything about fuel costs as a 
merged entity, it's still going to be the same unit cost, so 
you mentioned two major areas. You might have some savings by 
closing a terminal building or doing your IT together. But help 
me with the math here. If you're really going to--you're not 
going to fire the front-line workers, and we'll get to the 
other workers in a moment, where do we expect to do this great 
savings that's going to make this combined entity much more 
efficient?
    Mr. Anderson. So take the stand-alone--the way you do a 
classic sort of synergy analysis in an M&A transaction is to 
take the two stand-alone plans and you put a series of 
assumptions in there on fuel and you put the fuel wherever it 
is, and you take the two stand-alone plans as a given. Then you 
analyze what benefits you create by putting them together that 
would be there--but for the combination would not be there.
    But start on the revenue side of the line. Some of these 
pictures--if we just put up any of--just put up any of these. 
In the airline industry there's something called a QSI index, 
it's called a Quality Service Index. It's a very well-known, 
well-understood algorithm that calculates your passenger share 
of the marketplace. Because of code sharing and alliances, we 
have learned over time that, with the display in the CRS 
systems and the way product is distributed, when we connect 
these networks together we will get additional passengers that 
we didn't have before.
    So in a city where we are both, for instance, serving a 
city like Los Angeles, we combine both of our schedules in Los 
Angeles, even though we go to different places, and we increase 
our local share of traffic in that market because we have 
greater presence and greater utility. That's No. 1.
    Senator Cardin. OK.
    Mr. Anderson. All right. Do you want me to keep going or do 
you want--
    Senator Cardin. I understand that point, that you're hoping 
to get greater passenger--
    Mr. Anderson. Yes.
    The second thing is, we create new online unique city pairs 
from end-to-end. You may not think that my example in the 
earlier hearing is, you know, we're going to be one of the best 
ways to get from Lincoln, Nebraska to Key West, Florida, but 
every day there are many passengers that travel collectively 
from these different cities to other cities that, today, Delta 
does not serve or Northwest doesn't serve.
    The best example I can give you of how this works is an 
effort we made when I was at Northwest in the Minneapolis/
Amsterdam market, where we put together a code sharing 
arrangement with KLM in 1993. We started that with four flights 
as week, not even daily service. Today it's three a day, with a 
300-seat airplane. So you went from a market that didn't exist 
to a much bigger market because you're combining networks.
    Senator Cardin. I think you're answering my question. So 
one of the things that might happen as a result of this 
application, there's liable to be conditions attached to this 
merger. It seems to me you are saying that you have little 
concern about a commitment to maintain your employment level, 
your employee benefits, your service levels, your hubs. Those 
are issues that you, based on your assumption, would not 
produce the greater profitability that you envision by a merged 
company. Am I missing something on that or am I correct?
    Mr. Anderson. Well, except for the overhead. I mean, the 
overhead issue--you know, we do have to reduce the dual 
overhead of the two airlines.
    Senator Cardin. And define ``overhead''.
    Mr. Anderson. You have two public companies.
    Senator Cardin. These are the non-front line employees?
    Mr. Anderson. Right. Non-front line.
    Senator Cardin. So they're not being protected. Just so I 
understand.
    Mr. Anderson. Right.
    Senator Cardin. OK. So I understand what you're saying 
there.
    Now, Mr. Steenland, let me ask you a question, and I'll 
come back to Mr. Anderson in a moment. That is, can you give us 
an explanation why the pilots and other workers and unions are 
much more hostile in Northwest toward this merger than those at 
Delta?
    Mr. Steenland. I guess I'd answer that two ways, OK? First, 
let's talk about the pilots. OK. Normally in an airline merger 
transaction, as these deals have been done in the past, the 
transaction gets announced, you wait until closing, and at that 
point in time the effort is under way to take the pilot 
contract--and let's just use the Northwest-Delta example, the 
Northwest pilot contract, the Delta pilot contract--and 
negotiate a single agreement, and then to take the two 
seniority lists and merge them together.
    Senator Cardin. On the seniority lists, you have the U.S. 
Air and America West merger. They never seemed to be able to 
get that worked out.
    Mr. Steenland. Right.
    Senator Cardin. Are you concerned that you can work that 
out?
    Mr. Steenland. Well, we undertook an effort to try to do 
that differently this time. And so at the request of both pilot 
groups, during the negotiation of the transaction the pilot 
groups got together, worked on negotiating a new pilot 
agreement, and worked on negotiating a combined seniority list. 
A new pilot agreement was, in fact, reached, but the pilots, 
working between themselves, were unable to get to a new 
seniority agreement. If that had happened it would have been 
revolutionary. That never would have--that has never happened 
before in airline mergers.
    We went ahead and announced the transaction, but in 
announcing it indicated that we were prepared to go forward and 
to continue that process and to try to get the seniority list 
finished and a combined agreement completed prior to the 
closing, which would also be precedent-setting. The two pilot 
groups are working on that. They issued a statement the other 
day indicating that that was the case, and we are confident 
that, if everybody is acting in good faith, that we will, in 
fact, be able to do that.
    Senator Cardin. Prior to closing. But how about prior to 
the DOJ's review?
    Mr. Steenland. Well, the DOJ's review would have to occur, 
and then the transaction would close.
    Senator Cardin. I understand that. But it would be, I 
think, helpful if there was an agreement between the pilots.
    Mr. Steenland. Well, we agree.
    Senator Cardin. Prior to the completion of the DOJ process 
rather than the closing.
    Mr. Steenland. Yes. Well, it will be almost simultaneous if 
that happens.
    Senator Cardin. And you're optimistic that that will 
happen?
    Mr. Steenland. We will certainly use our best efforts to 
try to bring that about.
    Mr. Anderson. I'm an eternal optimist.
    Senator Cardin. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Senator Cardin.
    Senator Schumer?
    Senator Schumer. Well, thank you, Mr. Chairman, for holding 
this timely hearing. I'd like to say to Mr. Anderson, you 
wouldn't have the job you did unless you were an eternal 
optimist. [Laughter.]
    Mr. Anderson. You probably wouldn't either. [Laughter.]
    Senator Schumer. That is exactly what I was thinking. You 
beat me to the punch. I was going to say, neither would any of 
us. [Laughter.] But in any case, it's good to be here, and I 
thank you for coming.
    I want to really thank Chairman Kohl. He's always on the 
ball with these things, and this is a timely hearing and very 
much appreciated.
    Let me tell you my basic view. I generally think that our 
antitrust policy has been too weak. I think we've seen too much 
consolidation. Even in the airlines industry, mergers in 
general don't appeal to me. I am worried that we'll only have 
three or four big carriers.
    However, my preliminary review of this merger is that it's 
a good one. I will not sign off on it yet. We have a lot more 
to explore. But I think that because there's very little 
overlap in the service between Delta and Northwest and because 
of the changing conditions in the airline industry, as I said, 
on first glance it makes some sense. The negatives seem more 
benign than in other instances and the positives seem more 
real. Obviously with the dramatic increase in fuel costs, fuel 
costs really are a game changer that affects, I think, how one 
would view this deal, because the need to provide efficiencies 
to make up for the dramatic increase in fuel costs is kind of 
large.
    Having said that, some of the other airlines that might 
merge simply to eliminate routes and eliminate competition, you 
have very little overlap of competition and would worry me a 
great deal. So, I don't think anyone who supports this merger 
does not--it does not necessarily indicate you'd support a 
general merging of the airline industry.
    I have two caveats here that I want to be careful with and 
I want to put on the record before I ask questions. First, I 
think it's very important that labor have a seat at the table 
here. I know that some of Northwest's pilots feel that they 
have not been adequately involved in the talks about the 
merger, so I signed a letter with Senator Kennedy and others to 
make sure labor interests from both companies were heard and 
respected.
    Second, and this is vital to me, I worked very hard to 
bring good air service to Upstate New York. We had terrible 
service 10 years ago, and I helped bring some of your 
competitors to New York, particularly Jet Blue and Southwest to 
Upstate, and they make money on those routes because they were 
so under-served.
    We met, Mr. Anderson and I did, yesterday. We went over it 
city by city, and it seems that the effects will be either 
positive or neutral in terms of both flights, number of 
flights, where they go, and jobs. I'm going to hold Delta to 
that, and that is key to, at least for whatever it's worth, my 
view and my support on this. I know you're going to get back to 
me in writing on the things we discussed, Mr. Anderson.
    But, first, to just make it clear, it did seems as we went 
through all of the New York State areas that there would not be 
a cut-back in service or in jobs as a result of this merger. Is 
that correct?
    Mr. Anderson. That's correct.
    Senator Schumer. OK.
    Second, I would like to ask either you or Mr. Steenland 
about the first question, unless you've answered it, because I 
came in late, about the pilot situation.
    Did you answer that already?
    Mr. Anderson. We did, but I will--
    Senator Schumer. You don't have to go over it. I'll look at 
the record. I don't want to take people's time, as long as 
that's been brought up.
    Third, could you comment--one other point I want to make. 
So jet fuel is--you guys are hollering about that, as you 
should. So is the average motorist who drives around Rochester, 
New York, or any other part of New York State.
    But frankly, we have had a policy for 7 years that's done 
nothing about this and the chickens are coming home to roost. 
Frankly, we don't hear a peep out of industry. We hear it when 
you come talk to us, but when some of us say we have to change 
our policy the President's basic view--it's no secret--is, 
what's good for big oil is good for America. It's sure not good 
for Delta Air Lines, Northwest Airlines, or the airline 
industry.
    Yet--maybe because of solidarity among businesses--we don't 
hear anything from you all. I think that's got to change in the 
whole transportation industry, not just the airline industry, 
in terms of this. Sitting at your seat, Mr. Anderson, a year or 
two ago was Mr. Rex Tillerson, then the newly installed--I 
think it was at a hearing that you called, Mr. Chairman--head 
of Exxon-Mobil. He said, we don't believe in alternative 
energy. That's what he said. And, you know, jaws dropped. But 
basically through the friendship of the President and the 
administration, we don't have an alternative energy policy, 
despite the fact that, as I look at my four colleagues here, 
every one of them, including myself, we pushed hard for it.
    We need your help in that. We need you to speak out and we 
need you to speak out on specific policies. Oil companies get 
royalties that they got when oil was $19 a barrel to encourage 
them to explore. They don't need them at $120, whatever it is 
today, a barrel. But when we try to change them, the Chamber of 
Commerce doesn't support us. Now, I understand the oil company 
is a part of the Chamber of Commerce, but neither do we hear 
from anybody else in business, and most of whom are affected 
negatively.
    Would you comment a little on any of the things I said, 
because my time is running out?
    Mr. Anderson. Well, OK. I have, in the past 6 months, at a 
speech at the FAA Forecasting Conference about 6 weeks ago, 
made the very clear statement that jaw-boning OPEC is not an 
energy policy and that this industry suffers because we haven't 
had an energy policy in this country.
    Now it's not just airlines. It's going to fundamentally 
change the fabric of how people live because many people live 
far away from where they work, and we've all grown up with two 
cars and our parents working far away from where we lived. 
That's going to change. So, perhaps our voices haven't been 
loud enough, but we have taken at Delta, and I know Northwest 
has taken a public position in that regard, that's been 
critical for the lack of an energy policy.
    Senator Schumer. But, sir, we need your help on specific 
issues, for instance, the royalty issue. I mean, you know, I 
know that some of your confreres in the oil industry don't like 
it. Or when we say that, you know--well, there are a whole 
variety of policies and we need--rather than saying we need a 
new energy policy--everyone says that except Mr. Tillerson--
    Mr. Steenland. Senator, as an industry we went on the 
record, I think it was last week, and took the position that we 
should stop filling the Strategic Petroleum Reserve at $120 a 
barrel.
    Senator Schumer. Right.
    Mr. Steenland. We had the chairman of the trade association 
testify. We said that's a terrible thing to do. It's just 
simply forcing up price, and we ought to stop right now.
    Senator Schumer. Right. Right. OK.
    Any other comments on anything I said? Because my time is 
up.
    Mr. Steenland. No, sir.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Senator Schumer.
    Senator Feingold?
    Senator Feingold. Well, first I'd like to, of course, thank 
the senior Senator from my State of Wisconsin and Chairman of 
the Subcommittee for calling this important hearing. I share 
Senator Kohl's concerns and questions about how the proposed 
merger will affect the prices paid and the routes available to 
the flying public. From the written testimony, the companies 
estimate that the merger will result in ``over $1 billion in 
annual synergies.'' While there could be savings from 
consolidation of headquarters and from more efficient 
allocation of planes, I fear that ``synergies'' may also be a 
euphemism for increased cost and reduced service in the long 
run.
    So these are obviously serious concerns for my 
constituents, and particularly the ones that read a recent 
Milwaukee Journal Sentinel article headlined ``Northwest-Delta 
Deal Could Yield Fewer, Costlier Flights Around State''. And 
the impact would not just be felt in Milwaukee where Delta and 
Northwest currently compete. The merger would also mean one 
fewer competitor in Green Bay, Appleton, and Madison.
    Smaller communities could be particularly vulnerable. For 
example, Appleton, Wisconsin is currently served by only four 
airlines, including Delta's Comair service to Cincinnati and 
Atlanta, and Northwest's Airlink to Minneapolis and Detroit. 
Despite the companies' expressed desire to retain all service, 
there is speculation that service to some of the network hubs 
will be reduced.
    Specifically, Standard & Poor's suggests that some 
Cincinnati and Memphis hub traffic may be shifted to Detroit or 
Atlanta, respectively. That could leave my constituents in 
Appleton facing the very real possibility of fewer airlines, 
less competition, higher prices, and fewer destinations.
    Mr. Chairman, I'm also concerned about the impact this 
proposed merger would have on employees at Northwest and Delta 
Air Lines. A number of employees have expressed doubt that the 
proposed merger would improve their working environment. The 
machinists union, which represents thousands of employees at 
Northwest, has said ``we firmly believe that this merger is not 
in the best interests of passengers, employees, and the 
communities these airlines currently serve.''
    The Association of Flight Attendants--CWA, which represents 
thousands of Northwest flight attendants, and is working to 
organize thousands of Delta flight attendants has expressed 
concern that, while the executives of both companies have 
promised employees will not be laid off, the companies have 
refused to ``put that commitment in writing''.
    The Northwest Pilots Union has also voiced concerns about 
the fact that Delta and Northwest engaged the Delta Pilots 
Union in reaching a merger deal, while leaving the Northwest 
Pilots Union out of further discussions to date.
    The fact that these concerns have not yet been addressed 
troubles me. All employees and their bargaining representatives 
must be included in pre-merger discussions, and I hope that the 
companies make a concerted effort to reach out to these 
employees and their representatives in the coming days and 
weeks.
    I understand that Senator Kohl has already asked some 
questions with regard to Midwest Airlines. I will not ask 
additional questions on that topic now, but I of course want 
everyone to know, and to have the record reflect, that I share 
Senator Kohl's concerns and support for our home State airline.
    Now, Mr. Anderson, in your written testimony you state, 
``...We have provided a written commitment to honor the 
existing Northwest collective bargaining agreements, consistent 
with applicable law, until any post-merger representation 
issues are resolved.''
    The fact that you have provided this written commitment 
indicates that you may be unable to integrate the Delta-
Northwest work forces prior to the approval of the proposed 
merger, and that you may have various work rules in place 
should the merger go forward.
    Various employees have voiced concern that differing work 
rules could cause resentment among employees and potentially 
result in less cooperation in a newly merged company. If you're 
not able to fully integrate the different employee groups at 
Northwest and Delta, how do you plan to realize the synergies 
and the so-called ``substantial cost savings'' that you and Mr. 
Steenland have testified about today?
    Mr. Anderson. Well, the process under the Railway Labor 
Act, where you have two separate groups of employees, we have a 
legal obligation to--and really a moral obligation--honor those 
collective bargaining agreements until the National Mediation 
Board completes a determination of a single carrier and 
completes a representation--resolves the representation issues 
between the two carriers. So we have a legal obligation to do 
that. Our hope is that we're going to be able to get that done 
with the pilots in pretty quick order.
    Senator, to give you just a little bit of background, the 
way it's historically been done in the airline business is the 
merger is announced, goes through the approval process, and is 
closed and then the process commenced. So if you go back to the 
North Central merger and the Republic merger, that's how it's 
always happened in the industry. What we tried to undertake 
with our pilots, the two pilot groups, was very unusual. We 
think we can get that done. I'm optimistic that, between now 
and the time that we close this transaction, that we're going 
to be able to get that done with the pilot groups.
    With respect to seniority protection, it's both Federal 
law, it's a provision in the merger agreement, and it is 
included in the resolutions of the company at Delta, so we have 
very clear protections on Allegheny-Mohawk seniority 
integration on the front line.
    Last, we set aside a very significant portion of equity in 
the new company for the employees so that the employees share 
in the benefits that get created by the transaction. So, we 
believe that ultimately it provides a more stable place. As I 
said earlier in my testimony, the only true job security in the 
airline business is working for a financially stable and 
durable airline.
    Senator Feingold. Mr. Steenland and Mr. Anderson, I 
understand that both Delta and Northwest have affiliates that 
provide services as part of their networks. What are the plans 
with regard to the regional jet service? Are there any plans to 
merge their operations or shift capacity?
    Mr. Steenland. Northwest owns two regional carriers, Masaba 
and Compass. We have a long-term contract with a third carrier 
called Pinnacle. We have, as a result of this merger, no plans 
to change those arrangements. Those three airlines will remain 
providers of regional service. There might be some back-office 
functions that get made more efficient, but in terms of a 
separate entity continuing to operate the regional service that 
we provide, there will be no change.
    Senator Feingold. Mr. Anderson?
    Mr. Anderson. And we have a wholly owned subsidiary called 
Comair, which is based in Cincinnati and operates a significant 
number of flights out of Cincinnati and JFK, and no change in 
that regard.
    Senator Feingold. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Feingold.
    Mr. Anderson and Mr. Steenland, many airline analysts 
expect that the Delta-Northwest deal is just the first merger 
in a massive wave of consolidation in your industry. Indeed, it 
has been widely reported in the press that other major airlines 
are in merger discussions as we speak.
    Well, the now six major network airline competitors may 
soon be down to four, or even three, legacy carriers dominating 
our skies, and so consumers may be left with little or no 
competition on many routes, with the remaining large airlines 
carving up the country.
    In your view, Mr. Anderson, what's the minimum number of 
legacy airlines necessary for a competitive market? Would three 
be enough? Would two? Would you like to have it all to 
yourself?
    Mr. Anderson. I'm not that optimistic. [Laughter.] You 
know, that's a really hard question to answer. You know, I've 
just been focused on this one. We've been focused on this one 
because, in a classic analysis, a classic combination analysis 
under the U.S. antitrust laws when you just look at the 
Herfindahl-Hirschman Index and you look at the overlap and the 
lack of overlap, this transaction is a transaction that should 
be approved.
    I would note the good point that was made by the Professor 
down at the end of the table, that the legal analysis is to 
look at each of these on a stand-alone basis. I think Mr. 
Schumer may have had it right, which is, this is the right 
transaction. It passes antitrust muster. That doesn't 
necessarily mean anything that follows on would pass antitrust 
muster. So, focusing on this one, this one should be approved.
    Mr. Steenland. I also think, Senator, we can't forget 
Southwest Airlines is out there. They remain the largest 
airline in the United States. They have 20 percent market 
share. In addition to Southwest, we have Jet Blue, we have 
AirTran, we have a recent new entrant in the form of Virgin 
America, and entry in this industry historically has not been a 
problem. There is ample access to gates, facilities. Aircraft 
historically, particularly in times when the manufacturers have 
been wanting to keep their assembly lines going, have been easy 
to finance and so it's an industry where entry is available, 
and historically there has been no lack of it.
    Chairman Kohl. OK. Yes. Mr. Mitchell, then Dr. Bush, would 
you respond?
    Mr. Mitchell. Well, I think that the main point here is 
that this transaction is going to lead to additional 
transactions, which will not solve the airline industry's 
problems at all, will cause tremendous difficulties for 
consumers, not just on the pricing side, but on the customer 
service side. Republic-Northwest took close to 8 years after 
that merger to get customer service levels back to an 
acceptable level. Most consumers today would say we've hit the 
floor in terms of customer service, very broadly defined: 
cancellations, delays, no middle seats, employees looking over 
their shoulders for the next shoe to drop, et cetera, et 
cetera, et cetera. If we see the industry collapse from six 
carriers down to three, virtually all at the same time, this 
will make the Republic-Northwest merger look like a walk in the 
park and we will go below the floor, we'll go into the 
basement, and it will not be for 8 years, it will be for a long 
time after.
    I do not buy into the benefits of this merger at all. The 
evidence has not been put forth in any kind of quantitative 
way, and the structure of the industry will be forever changed, 
to the detriment of the consumer and our economy.
    Chairman Kohl. Yes, sir. Dr. Bush?
    Mr. Bush. The interesting thing about merger is they're 
much like marriages. It is very interesting that in times of 
trouble, it's always nice to have someone to go along in those 
times of trouble with, but it doesn't necessarily make sense. 
When you look back at the history of the airline mergers and 
you look at the economic literature, the history--that 
literature demonstrates that they are typically bad marriages 
for both consumers, and they do not present the synergies, or 
as we call them efficiencies, that the companies purport. 
Rather, what they tend to do is they tend to cause consumer 
injury.
    So when we are looking to save our companies by getting 
them bigger to face international competition, which I find 
ironic, given that they also said that they're having their 
lunch handed to them by LCCs which are not big companies, I 
think they're really tilting at windmills, or perhaps airline 
turbines, because in fact they aren't going to receive those 
synergies. What you're going to have is increased 
consolidation, follow-on mergers because of that consolidation 
whether or not those mergers make sense.
    So you will be left with something like maybe three 
systems, and that is problematic because I'm not convinced that 
this merger--we don't have enough evidence that this merger is 
pro-competitive. We don't have any evidence this merger is pro-
competitive. We have no evidence of efficiencies. We have 
serious problems with respect to overlap. This is not 
necessarily an end to end. There are systems-based competition 
issues here, and therefore this merger requires deeper 
analysis.
    Chairman Kohl. Now, if I understand the two of you, it's 
your judgment that this merger, as well as others that are 
contemplated, the two primary things that are likely to occur 
is that prices are going to go up and service is going to go 
down. Now, I'm sure that Mr. Anderson and Mr. Steenland would 
not see that as the two major characteristics of this merger, 
is that right?
    Mr. Steenland. That's correct.
    Mr. Anderson. That's correct.
    Chairman Kohl. We're not going to resolve that today, are 
we?
    Mr. Anderson. No.
    Chairman Kohl. You both have pretty strong opinions on 
this, don't you?
    Mr. Anderson. Yes. [Laughter.]
    Chairman Kohl. An expressive person. I appreciate that, Mr. 
Anderson. We all do.
    Yes. Ms. Klobuchar?
    Senator Klobuchar. Thank you very much.
    I just want to followup, Mr. Anderson, on some things that 
your predecessor said--I mentioned them in my opening 
statement--at a 2007 Commerce Committee hearing on U.S. Air's 
proposed take-over of Delta. As you know, that proposed merger 
went down a few weeks later. Former Delta CEO Gerald Grinstein 
touched on concerns that Chairman Kohl was just mentioning 
about this consolidation and what it would mean.
    He said, ``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 having those network carriers 
fiercely competing with each other, trying to get into those 
markets?'' Then a few sentences later he said, ``If you approve 
one merger, how are you going to say no to other carriers? You 
will devolve into three network carriers, and once that happens 
you won't get the same level of service.''
    Do you want to respond to that?
    Mr. Anderson. That was in the context of a hostile U.S. Air 
had made a hostile takeover attempt of Delta Air Lines, and 
that hostile takeover attempt required the company to do 
everything it humanly could to try to fight off the hostile 
takeover attempt. Through the help of Congress and the 
Creditors Committee and the Bankruptcy Court, they were 
successful in doing that.
    In that same testimony, Mr. Grinstein also said he's not 
opposed to mergers, he was just opposed to bad mergers. The 
U.S. Air transaction was a bad merger because there was a lot 
of overlap between the U.S. Air network and the Delta network 
on the East Coast.
    Senator Klobuchar. But one of the reasons given for airline 
deregulation was that we would have more competition, and that 
would bring lower fares. Would you agree that if you had more 
competition you'd have lower fares?
    Mr. Anderson. The evidence on deregulation is compelling. 
Just any fare study would show that the real average airfares 
in the United States have gone down and the amount of service 
has gone up.
    Senator Klobuchar. With the number of competitors.
    Mr. Anderson. Well, there's been an awful--there's free 
entry. There's free entry, and unfortunately not free exit in 
this business. There will always be free entry and exit. Virgin 
America is the most recent new entrant into the domestic 
market. You don't have real constraints at any of the airports 
where we operate in terms of access. Airplanes are the most 
easily financed assets in the world because you can always find 
them, you can always move them to a different market, and 
there's always a known value for them.
    So no barriers to entry, free entry into the marketplace, 
and that's not going to change. I mean, Southwest still carries 
30 percent of the passengers and that's not going to change 
after this transaction is approved.
    Senator Klobuchar. You know, speaking of Southwest, we were 
talking about the higher fuel prices. You have argued, both of 
you, that this bigger mega-merger would better able you to cope 
with these fuel prices, but it doesn't seem like all airlines 
agree. The CEO of Southwest told the Wall Street Journal last 
week that his airline's best course of action ``could very well 
be to sit on the sidelines and let others combine.'' Other 
airlines like Jet Blue and Southwest have been subject to these 
same fuel increases, yet they haven't seemed to have made that 
decision.
    Mr. Steenland. Senator Klobuchar, Southwest is in the 
enviable position of having made an extraordinarily successful 
bet--and I underline bet--in terms of fuel hedging. So for this 
year, 2008, I believe it's 75 percent of its fuel needs are 
hedged at about $52 a barrel. So they have been spared the 
tremendous run-up, and it's part of the competitive challenge 
we face because obviously, you know, they've got a benefit in 
that--on that side and we don't. But that's just the way the 
free market works and that's the way competition works.
    Senator Klobuchar. OK. Then my last question here is 
another quote from your predecessor, Gerald Grinstein, at this 
hearing, where I still remember he was arguing vigorously not 
to have this merger. He expressed a concern that during merger 
negotiations all airlines will promise to keep service and 
maintain current levels of employment. Then, in his words, 
``there is no one to enforce'' those promises. He said that 
airlines' promises are ``not a contract, is it? Believe me, 
trust me.''
    You have made commitments today to all of these Senators, 
and under oath, of keeping jobs, hubs, and service. Is it 
possible, however, that you would come back a year or two from 
now and say changed circumstances have forced you to change 
your tune?
    Mr. Anderson. The issue is going to be fuel. Tell me where 
fuel will be. And this merger will not be the result of having 
to make a dramatic change, but whether these carriers merge or 
not, fuel is going to be the determinant of what capacity is 
going to be in this country and what airplanes are going to fly 
where. That is going to be the case before or after the merger.
    Senator Klobuchar. So it is possible that you'd come back 
and say that?
    Mr. Anderson. It's going to depend upon fuel prices, but it 
won't be the result of this merger because the merger is end to 
end.
    Senator Klobuchar. The last thing is, I hope that you will 
join us, as Mr. Steenland mentioned with oil reserves, with 
some of the things that Senator Schumer and I have been trying 
to do with changing our energy policy, because we clearly can't 
keep going the way we're going.
    Mr. Anderson. I agree.
    Senator Klobuchar. Thank you.
    Chairman Kohl. Thank you very much, Senator Klobuchar.
    Before we end the hearing, just on the cost of fuel, you 
think about it all the time, gentlemen. That's the primary 
thing in your business. Why is the price of oil, the price of 
fuel going through the roof, other than China and India, which 
of course is a part of it? But there must be a lot more. What's 
going on, can you tell us?
    Mr. Anderson. Well, I think there are two factors. One, 
part of that increase is refining capacity in the United 
States. We haven't added any refining capacity in the United 
States. In fact, I saw some statistics recently that our 
refining capacity, actual capacity, has been going down.
    The second thing is, there's an enormous amount of 
financial speculation. Because of the issues in the bond and 
stock market, a lot of investment has moved to commodity 
markets. So you see it with corn prices, wheat prices, gold 
prices, oil prices. Oil has had a flood of just not people like 
airlines that are buying it, but people that are just commodity 
traders.
    Chairman Kohl. Some people are making a ton of money.
    Mr. Anderson. Yes. The third factor, Senator, is the weak 
U.S. dollar. So oil is priced in dollars--
    Chairman Kohl. Right.
    Mr. Anderson.--and oil-producing countries do not want to 
bear the devaluation risk or face what they would face if 
prices had historically stayed in supply/demand limits with 
them taking dollars at the weaker international level that 
they're now at. So there is a clear correlation between how the 
dollar trades and how oil trades.
    Chairman Kohl. And isn't it also true that you can 
speculate in this market with very small amounts of money, 5, 6 
or 7 percent margin?
    Mr. Steenland. Margin requirements are clearly less than 
what they would be if you play in the equity markets or 
something like that.
    Mr. Anderson. Right. Because we do that. We hedge. Delta, 
in the past 6 months, we've had to, you know, spend a fair 
amount of money to hedge fuel. The margin calls are a lot less 
than the margin calls if you're in a bond or a stock.
    Chairman Kohl. Well, if we really want to do something 
about this--not that this is the only thing--one thing that we 
know is that if the margin calls were much, much bigger than 
they are now, that would reduce speculation by a ton, wouldn't 
it?
    Mr. Steenland. I think you'd want to make sure that that 
was done across all markets, because if the United States just 
took that position, oil trades in Singapore, oil trades in 
London--
    Chairman Kohl. Absolutely.
    Mr. Steenland. But if it was across the board it would have 
a very positive impact on reducing oil prices.
    Chairman Kohl. So would it benefit our collective societies 
around the world if people at the top of the ladder in 
government would get together and do just that?
    Mr. Steenland. Yes.
    Mr. Anderson. Yes.
    Chairman Kohl. And they should.
    Mr. Steenland. We agree.
    Chairman Kohl. All right.
    Mr. Anderson. Are we optimistic about that?
    Chairman Kohl. That it will happen? I don't know. But 
you're being very clear--
    Mr. Anderson. We'll work with you to try to bring that 
about.
    Chairman Kohl. Well, why would people at the top of 
government collectively not want to do that?
    Mr. Steenland. If you look at--I think it's called the 
paper trades, which is basically people not actually taking 
delivery but simply trading as a trading mechanism, the volume 
of that has skyrocketed over the course of the last 12 to 24 
months.
    Chairman Kohl. Huge.
    Mr. Steenland. Yes.
    Chairman Kohl. So would you like to make another comment?
    Senator Klobuchar. No.
    Chairman Kohl. We want to thank you all for being here 
today. It's been very useful, very helpful. I'm sure we've not 
heard the last word on this.
    Before I close the hearing, very briefly I'd like to enter 
into the record statements from the Association of Flight 
Attendants, Memphis and Minneapolis Chambers of Commerce, and 
the International Association of Machinists & Aerospace 
Workers.
    We thank you, one and all, for being here. This hearing is 
concluded.
    [Whereupon, at 4:17 p.m. the hearing was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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