[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                            THE PROPOSED
                       UNITED-CONTINENTAL MERGER:
              POTENTIAL EFFECTS FOR CONSUMERS AND INDUSTRY

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

                               (111-120)

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             JUNE 16, 2010

                               ----------                              

                       Printed for the use of the
             Committee on Transportation and Infrastructure






                              THE PROPOSED
                       UNITED-CONTINENTAL MERGER:
              POTENTIAL EFFECTS FOR CONSUMERS AND INDUSTRY

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

                               (111-120)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                                AVIATION

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             June 16, 2010

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure




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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             VERNON J. EHLERS, Michigan
JERROLD NADLER, New York             FRANK A. LoBIONDO, New Jersey
CORRINE BROWN, Florida               JERRY MORAN, Kansas
BOB FILNER, California               GARY G. MILLER, California
EDDIE BERNICE JOHNSON, Texas         HENRY E. BROWN, Jr., South 
GENE TAYLOR, Mississippi             Carolina
ELIJAH E. CUMMINGS, Maryland         TIMOTHY V. JOHNSON, Illinois
LEONARD L. BOSWELL, Iowa             TODD RUSSELL PLATTS, Pennsylvania
TIM HOLDEN, Pennsylvania             SAM GRAVES, Missouri
BRIAN BAIRD, Washington              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              JOHN BOOZMAN, Arkansas
MICHAEL E. CAPUANO, Massachusetts    SHELLEY MOORE CAPITO, West 
TIMOTHY H. BISHOP, New York          Virginia
MICHAEL H. MICHAUD, Maine            JIM GERLACH, Pennsylvania
RUSS CARNAHAN, Missouri              MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii              LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          JEAN SCHMIDT, Ohio
TIMOTHY J. WALZ, Minnesota           CANDICE S. MILLER, Michigan
HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma
MICHAEL A. ARCURI, New York          VERN BUCHANAN, Florida
HARRY E. MITCHELL, Arizona           BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY, Pennsylvania  ANH ``JOSEPH'' CAO, Louisiana
JOHN J. HALL, New York               AARON SCHOCK, Illinois
STEVE KAGEN, Wisconsin               PETE OLSON, Texas
STEVE COHEN, Tennessee               TOM GRAVES, Georgia
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
SOLOMON P. ORTIZ, Texas
PHIL HARE, Illinois
JOHN A. BOCCIERI, Ohio
MARK H. SCHAUER, Michigan
BETSY MARKEY, Colorado
MICHAEL E. McMAHON, New York
THOMAS S. P. PERRIELLO, Virginia
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico
JOHN GARAMENDI, California
HANK JOHNSON, Georgia

                                  (ii)









                        Subcommittee on Aviation

                 JERRY F. COSTELLO, Illinois, Chairman

RUSS CARNAHAN, Missouri              THOMAS E. PETRI, Wisconsin
PARKER GRIFFITH, Alabama             HOWARD COBLE, North Carolina
MICHAEL E. McMAHON, New York         JOHN J. DUNCAN, Jr., Tennessee
PETER A. DeFAZIO, Oregon             VERNON J. EHLERS, Michigan
ELEANOR HOLMES NORTON, District of   FRANK A. LoBIONDO, New Jersey
Columbia                             JERRY MORAN, Kansas
BOB FILNER, California               SAM GRAVES, Missouri
EDDIE BERNICE JOHNSON, Texas         JOHN BOOZMAN, Arkansas
LEONARD L. BOSWELL, Iowa             SHELLEY MOORE CAPITO, West 
TIM HOLDEN, Pennsylvania             Virginia
MICHAEL E. CAPUANO, Massachusetts    JIM GERLACH, Pennsylvania
DANIEL LIPINSKI, Illinois            CHARLES W. DENT, Pennsylvania
MAZIE K. HIRONO, Hawaii              CONNIE MACK, Florida
HARRY E. MITCHELL, Arizona           LYNN A. WESTMORELAND, Georgia
JOHN J. HALL, New York               JEAN SCHMIDT, Ohio
STEVE COHEN, Tennessee               MARY FALLIN, Oklahoma
LAURA A. RICHARDSON, California      VERN BUCHANAN, Florida
JOHN A. BOCCIERI, Ohio, Vice Chair   BRETT GUTHRIE, Kentucky
NICK J. RAHALL, II, West Virginia
CORRINE BROWN, Florida
ELIJAH E. CUMMINGS, Maryland
JASON ALTMIRE, Pennsylvania
SOLOMON P. ORTIZ, Texas
MARK H. SCHAUER, Michigan
JOHN GARAMENDI, California
JAMES L. OBERSTAR, Minnesota
  (Ex Officio)

                                 (iii)











                                CONTENTS

                                                                   Page

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

                               TESTIMONY

Foer, Albert A., President, The American Antitrust Institute.....   111
Friend, Patricia, International President, Association of Flight 
  Attendants-CWA.................................................   111
Gutierrez, Hon. Luis V., a Representative in Congress from the 
  State of Illinois..............................................    33
Horan, Hubert, Aviation Analyst and Consultant...................   111
Kucinich, Hon. Dennis J., a Representative in Congress from the 
  State of Ohio..................................................    36
Mcgee, William, Consultant on Travel and Aviation Issues, 
  Consumers Union................................................   111
Morse, Captain Wendy, Chairman, United Master Executive Council, 
  Air Line Pilots Association....................................   111
Payne, Hon. Donald M., a Representative in Congress from the 
  State of New Jersey............................................    34
Pierce, Captain Jay, Chairman, Continental Master Executive 
  Council, Air Line Pilots Association...........................   111
Roach, Jr., Robert, General Vice President of Transportation, 
  International Association of Machinists and Aerospace Workers..   111
Smisek, Jeffrey, Chairman, President, and Cheif Executive 
  Officer, Continental Airlines..................................    39
Strine, David, Portfolio Manager, Impala Asset Management, LLC...   111
Tilton, Glenn F., Chairman, President, and Chief Executive 
  Officer, United Airlines Corporation...........................    39

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri.................................   140
Cohen, Hon. Steve, of Tennessee..................................   141
Costello, Hon. Jerry F., of Illinois.............................   142
Johnson, Hon. Eddie Bernice, of Texas............................   148
Mitchell, Hon. Harry, of Arizona.................................   152
Oberstar, Hon. James L., of Minnesota............................   153
Petri, Hon. Thomas E., of Wisconsin..............................   158

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Foer, Albert A...................................................   191
Friend, Patricia.................................................   201
Gutierrez, Hon. Luis V...........................................   216
Horan, Hubert....................................................   217
Kucinich, Hon. Dennis J..........................................   234
Mcgee, William...................................................   242
Morse, Captain Wendy.............................................   246
Payne, Hon. Donald M.............................................   248
Pierce, Captain Jay..............................................   250
Roach, Jr., Robert...............................................   252
Smisek, Jeffrey and Tilton, Glenn F..............................   270
Strine, David....................................................   282

                       SUBMISSIONS FOR THE RECORD

Coble, Hon. Howard, a Representative in Congress from the State 
  of North Carolina:.............................................
      Letters in support of the merger...........................   173
      Table listing all received letters of support..............   166
Costello, Hon. Jerry F., a Representative in Congress from the 
  State of Illinois:.............................................
      Letter from the Department of Justice......................     3
      Letters in support of the merger...........................     6
Hirono, Hon. Mazie K., a Representative in Congress from the 
  State of Hawaii, letters in support of the merger..............    83
LoBiondo, Hon. Frank A., a Representative in Congress from the 
  State of New Jersey, letters in support of the merger..........    50
Petri, Hon. Thomas E., a Representative in Congress from the 
  State of Wisconsin, letters in support of the merger...........    29
Smisek, Jeffrey, Chairman, President, and Cheif Executive 
  Officer, Continental Airlines, response to request for 
  information from Hon. Garamendi, a Representative in Congress 
  from the State of California...................................   102

                        ADDITIONS TO THE RECORD

International Brotherhood of Teamsters, Airline Division, Captain 
  David Bourne, Director, written testimony......................   290
Virgin America Inc., David Cush, Predsident and Cheif Executive 
  Officer, written testimony.....................................   294

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
 
THE PROPOSED UNITED-CONTINENTAL MERGER: POSSIBLE EFFECTS FOR CONSUMERS 
                            AND THE INDUSTRY

                              ----------                              


                        Wednesday, June 16, 2010

                  House of Representatives,
                          Subcommittee on Aviation,
            Committee on Transportation and Infrastructure,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 9:30 a.m., in 
room 2167, Rayburn House Office Building, Hon. Jerry F. 
Costello [Chairman of the Subcommittee] presiding.
    Mr. Costello. The Subcommittee will come to order. The 
Chair will ask that all Members, staff and everyone turn all 
electronic devices off or on vibrate.
    The Subcommittee is meeting today to receive testimony 
regarding the proposed United-Continental merger and the 
possible effects for consumers and the industry. I intend to 
give a very brief opening statement and put the rest of my 
statement in the record. And then I will call on Mr. Petri for 
his opening statement. And then we will go immediately to our 
first panel, the Members panel.
    I welcome everyone today to the Aviation Subcommittee 
hearing on the proposed merger between United Airlines and 
Continental Airlines and its potential effects for consumers 
and the industry. In particular, I want to welcome the families 
of Colgan Flight 3407 for being with us today and for their 
steadfast support to improve pilot training and safety in the 
industry.
    Given that we have several panels today, I will be brief 
with my statement and ask Mr. Petri to do the same so that we 
can go to our first panel.
    Last month, United and Continental announced they would 
merge to form an airline that by several measures will be the 
largest airline in the world. United and Continental claim the 
proposed merger will generate up to $1.2 billion in annual 
revenue and will create cost synergies for more effective 
aircraft utilization, a more comprehensive route network, and 
improved operation efficiencies.
    In 2008 this Subcommittee also held a hearing on the merger 
of Delta Airlines and Northwest Airlines. At that time there 
was speculation that other carriers within the industry would 
merge to create a U.S. airline industry dominated by just a few 
mega-carriers.
    Just 2 years later, as many predicted, we are meeting here 
again today to discuss another proposed combination that would 
surpass Delta as the world's largest. This merger would leave 
our U.S. Industry with only four legacy airlines. We all have a 
shared interest in maintaining a safe, reliable, competitive, 
and profitable air transportation system, and we must ask 
critical questions on the long-term implications of continued 
mergers for the future of the industry.
    I am very concerned about how this merger, if approved, 
will affect ticket prices for passengers, how the merger will 
affect pilots, flight attendants, mechanics and employees of 
both airlines, how many employees will lose their jobs or 
receive reduced benefits and wages, and what will happen with 
existing union contracts.
    Less competition generally leads to higher prices, fewer 
choices, and a loss of jobs. I sympathize with the thousands of 
airline employees who have suffered as a result of airline 
financial problems in the past. Many have seen their hard-
earned pensions drop during airline bankruptcies, seniority 
rights disappear, labor disputes go unresolved, wages frozen or 
cut, d jobs lost to outsourcing and consolidation.
    This merger should not take place at the expense of 
consumers or the workers who have already made tremendous 
sacrifices. Unfortunately, past mergers have not always 
demonstrated that consumers and employees will be better served 
by consolidation.
    Therefore, what I want to learn from this hearing is, 
number one, how is this proposed merger different from past 
mergers? And number two, how will this merger really affect 
consumers and employees?
    Currently, both the Department of Justice and the 
Department of Transportation are in the process of reviewing 
the merger. I understand that United and Continental are 
hopeful a decision will be made by the end of the year. 
Although we do not have a government panel testifying here 
today, I trust that the appropriate Federal agencies will make 
certain that this proposed merger receives a thorough review 
and will ensure that it is consistent with the requirements of 
the law.
    Finally, I am interested in hearing from the analysts on 
our second panel regarding the pros and cons of this merger, 
the prospects for future mergers, and whether low-cost carriers 
will be able to effectively keep airfares down in markets 
affected by the merger.
    Before I recognize Mr. Petri for his opening statement or 
remarks, I ask unanimous consent to allow 2 weeks for all 
Members to revise and extend their remarks and to permit the 
submission of additional statements and materials by Members 
and witnesses. Without objection, so ordered.
    Additionally, at my request, the Department of Justice has 
prepared a letter explaining its antitrust review process in 
general. The letter does not deal with this specific merger, 
but it may be helpful to Members of the Subcommittee in 
understanding the process. In addition, we have received 
letters from organizations concerning this specific merger. And 
I will ask unanimous consent that these letters be placed into 
the record. Without objection, so ordered.
    [The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Costello. The Chair now recognizes Mr. Petri for his 
opening statement.
    Mr. Petri. Mr. Chairman, thank you for holding this very 
important hearing. It is important that the Subcommittee use 
this hearing to fully explore the proposed United-Continental 
merger in order to gauge not just its potential effects on both 
companies, and their thousands of employees, but even, more 
importantly, on consumers.
    Since 2001 the airline industry has lost over 150,000 jobs 
and seen over 35 bankruptcies. In today's economy airlines must 
significantly cut costs and increase operating efficiency or 
face closing their doors.
    Over the past decade commercial aviation industry has faced 
a variety of challenges, including terrorist attacks, volatile 
fuel prices, and a massive decline in demand due to the global 
recession. Unprecedented events such as SARS, H1N1 and the 
volcanic ash plume also have added to the industry's woes.
    In addition to these financial strains, U.S. carriers must 
also compete in the world marketplace against financially 
strong competitors; some, national champions. We cannot deny 
that the airline industry is a global industry. Decisions to 
merge over the last few years have in part been driven by the 
need to improve U.S. Carriers' ability to compete on a global 
basis.
    Last month United Airlines and Continental Airlines 
announced their intention to merge. Global competition, the 
struggling economy, and a need to improve operating efficiency 
are cited as the main reasons for this. Since the proposed 
merger was announced, aviation experts, labor groups, consumer 
advocates and other interested parties have commented both for 
and against airline mergers in general and the United-
Continental merger specifically.
    The proposed merger's impact on consumers, competition in 
the marketplace, air service, airfares, and a combined 89,000 
employees has been the subject of a great deal of speculation.
    Today we have before us representatives of the interested 
groups to testify about airline consolidations, focusing on the 
United-Continental merger. We will also hear from the chief 
executive officers of both airlines. It is important that the 
Aviation Subcommittee hear from the interested parties to gain 
a better understanding of the proposed merger of United and 
Continental.
    Procedurally, the merger cannot be completed, as our 
Chairman has just pointed out, without approval from the 
antitrust division of the Department of Justice. That review, 
currently underway for the proposed merger, is a grueling and 
thorough process that ensures that the proposal will not have 
negative consequences on competition.
    In the interest of fairness, I urge the Department to 
continue their tradition of objectivity and impartiality as 
they conduct their antitrust analysis.
    I look forward to hearing from all of our witnesses. And 
before I yield back the balance of my time, I would ask 
unanimous consent that letters of support from various 
Wisconsin interests be included in the hearing record.
    Mr. Costello. Without objection.
    [The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Costello. The Chair thanks the Ranking Member for his 
opening statement, and now recognizes our first panel, our 
colleagues: The Honorable Luis Gutierrez, who is a Member of 
Congress from the Fourth District of Illinois; Mr. Donald 
Payne, who is the Member of Congress representing the Tenth 
District of New Jersey; and Congressman Dennis Kucinich, who is 
on his way, who represents the Tenth District of Ohio.
    Gentlemen, your full statements will appear in the record. 
The Chair now recognizes Congressman Gutierrez.

 TESTIMONY OF THE HON. LUIS V. GUTIERREZ, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Gutierrez. Thank you, Chairman Costello and Ranking 
Member Petri and the distinguished colleagues of the Committee. 
Thank you for inviting me to speak before the Committee on the 
proposed merger of United and Continental Airlines.
    While this merger has generally been greeted with 
enthusiasm, I believe we should not overlook the potential 
serious impact it could have on consumers and the employees. 
For consumers, the issues of airline fees, which we all know 
cover just about everything except the air you breathe on board 
those airplanes, requires further scrutiny.
    In 2009, United and Continental Airlines made $523 million 
in baggage fees alone. Recently, United announced that its 
passenger unit revenue was up almost 25 percent from a year ago 
and topped pre-recession levels. Given this good news for 
United, I believe it is a good time to review the fairness and 
the necessity of excessive fees.
    The airline industry reported $1.2 billion in 1 year in 
extra fees last year. They are almost as out of whack as the 
credit card industry is. I also want to ensure that lower 
customers of frequent flyer programs have easy access to their 
rewards without being misled by the airlines. After receiving 
complaints from residents in my district, I began to look at 
the fine print on these highly promoted programs, which are a 
significant source of revenue for the airlines. Unfortunately, 
I find they lack reliability, honesty, and fairness. If you 
read the fine print you will find, as I did, airlines can deny 
a ticket, change the terms of the awards, charge a fee, and 
even eliminate the program at will. Congress must stand up for 
consumers and protect their interests in the frequent flyer 
mile program.
    I am also deeply concerned with the impact this merger will 
have on United and Continental employees. To keep these 
airlines in business, workers have made serious concessions, 
and their requests deserve consideration.
    Last week I met with United and Continental employees in 
Chicago, and I heard from Christie Shagel, a United Airlines 
flight attendant. She shared with me the following, and I 
quote, Today I am at work 33 percent more, but my savings 
account is depleted. I am forced to sell my town home, I can't 
afford a health-care deductible or meat at the grocery store. 
My family has suffered so United Airlines could succeed, and 
executives have awarded themselves with millions of dollars 
every year that we have struggled for, unquote.
    I also heard from Richard Petrowski, a union shop foreman 
and a 40-year United Airlines employee. He shared with us, 
quote, In the past few years, as so many airlines have cut 
wages and benefits, they realized they could also save money by 
cutting maintenance jobs and contracting out critical aircraft 
maintenance to the lowest bidder. I am not talking about 
changing a light bulb in the laboratory, I am talking about 
critical maintenance, work that if not held to the highest 
standard puts you, your family and my fellow United employees 
at risk.
    United Captain Herb Hunter told me, From an industry 
perspective, perhaps the greatest concern of this Nation's 
airline pilots is the continued outsourcing of pilots' jobs. 
Nearly half the passengers in the United States are now 
carried, most unknowingly, by subcontract airlines. The 
subcontractors are in a continual churn to sell their services 
to the major airlines at the lowest possible cost, violating, 
many times, safety guidelines.
    I think United and Continental have said far too little 
about how this merger will actually affect their frontline 
employees. We do know, however--and this is something that 
causes me great consternation, Mr. Chairman, Members of the 
Committee--we do know, however, that the merger might affect a 
few employees like the chief marketing financial and operations 
officer for Continental Airlines. They stand to receive a 
severance package totaling $27 million if they choose not to 
move to Chicago and join the new United.
    To put this in perspective, $27 million would be a 10 
percent pay raise for each of United's flight attendants, and 
it would be well deserved.
    Before Congress gives this merger a stamp of approval, I 
strongly believe that United and Continental need to bring 
their employees to the table and consider their request. In 
addition, these airlines need to make a commitment to reduce 
ancillary fees and better protect their loyal customers.
    I thank you for allowing me to speak, and end by saying we 
can stand up for the consumers, we can stand up for the 40,000 
employees at United and Continental. They deserve us to stand 
up for them today.
    Thank you so much, Mr. Chairman.
    Mr. Costello. The Chair thanks my friend from Illinois for 
his thoughtful testimony.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Payne.

  TESTIMONY OF THE HON. DONALD M. PAYNE, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Payne. Thank you very much Mr. Chairman, Ranking Member 
Petri, distinguished Members of the Committee. Thank you for 
this opportunity for me to testify, and also it is great to be 
with my colleague here. Generally we are 100 percent on the 
same page. I think that this page might be a little tilted in 
the other direction at this time.
    However, we are certainly here today to discuss the 
proposed merger of United and Continental Airlines. Continental 
Airlines is the largest employer in my city of Newark. I am 
here today to offer my support for this proposed merger. As a 
general policy, though, I am generally concerned about mergers 
because, in instances, it does mean significant reductions in 
jobs, stifling competition, and some of the other situations 
that we heard the previous speaker talk about. However, this 
airline merger is different, in my opinion.
    These two airlines have very complementary routes with very 
little overlap. When there is very little overlap, there is no 
need for significant reduction of employees. This is a fact 
that Continental's CEO has confirmed to me and the other 
Members of the New Jersey delegation. I know that Continental 
has lost $1 billion since the 9/11 attack. And I know that the 
employees have lost jobs and have been forced to accept wage 
reductions and made other sacrifices during this time. This is 
not good for the many Continental employees who live in my 
district.
    However, the airline industry has also struggled with the 
high price of oil and with the impact of the 2008 recession. I 
have met with Continental's CEO Jeff Smisek to discuss this 
merger. And it has been made clear to me and Members of the New 
Jersey delegation that without the merger, Continental cannot 
be assured of a long and prosperous future. They may be able to 
earn a modest profit for some years, but that is not a formula 
for long-term success if they are losing money in the other 
years. Continental seems determined to try to turn their 
fortunes around through this merger. I have talked to Jeff and 
we expect Continental to bring its more favorable labor-
management relations culture to the new airline, as I have 
encouraged him to complete the necessary collective bargaining 
agreements early in the process. I trust that he will conduct 
those negotiations with all the unions with dignity and 
respect.
    The unions will be critical to the long-term success of 
this merger. Employees' wages, retirement securities, and 
health benefits must be a top priority for the new combined 
carrier.
    It is comforting to know that Continental has fully 
respected the decisions of their employees to organize. 
Although it was a hard fought battle, in February of 2010 
Continental's ramp workers made history when ballots were 
counted and the results showed that an overwhelming majority of 
the workers voted to join the Teamsters Union. This was a 
strong testament to the fact that fleet service workers at 
Continental are working to help create an environment that will 
sustain positive relationships between Continental and its 
workers who choose to unionize.
    I believe this merger is good for my city of Newark, and 
for New Jersey, because it will allow for growth of jobs and 
service. Continental's hub in Newark is a crown jewel. It is a 
premier domestic and international gateway to the New York and 
New Jersey region; the Nation's, of course, busiest financial 
hub.
    The Newark International Airport has been one of the 
fastest growing airports during the past two decades, thanks to 
Continental. Without a doubt, the city of Newark and the State 
of New Jersey have benefited from the airline's presence. Over 
the years Continental has not only made significant investments 
in infrastructure at Newark International Airport, but the 
airline's leadership has successfully worked with local 
government to establish job creation programs and promote other 
important growth initiatives in the State.
    Just this summer, there are nearly 75 young people 
benefiting from a summer internship program that allows them to 
learn valuable customer service skills as they spend each day 
working the crowds at the ticket counter.
    I have a long history of supporting Continental because 
they have a long history of supporting Newark and New Jersey. 
Newark is on the verge of a renaissance, and Continental is 
really one of the reasons for that. They have opened new routes 
to South America, Europe, China and Japan. While I have served 
in Congress, the additional new routes have really enhanced the 
airport.
    We have increased use of our airport by business to leisure 
passengers from around the country and around the world. And 
more importantly, we have increased jobs, jobs that come with 
good benefits from both part-time and full-time employees.
    As a Member of Congress and as a Member of the House 
Foreign Relations Committee, I travel the world to carry out my 
responsibilities, I see the other global carriers that 
Continental must compete with. And as much as Continental has 
changed and grown in the last decade, they need to be bigger if 
they are going to compete with British airline Iberia and KLM, 
combined with Air France.
    I realize that Chairman Oberstar and some of my colleagues 
may not agree about the benefits of this merger, but from my 
vantage point, given the current challenging economic 
landscape, the proposed merger between Continental and United 
is the best way to ensure sustainability for the airline 
industry for jobs in our region and to compete with the world 
carriers.
    So with that, Mr. Chairman, I appreciate the opportunity to 
testify before this Subcommittee.
    Mr. Costello. The Chair thanks our colleague and friend 
from New Jersey.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Kucinich.

 TESTIMONY OF THE HON. DENNIS J. KUCINICH, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Mr. Kucinich. Thank you very much, Chairman Costello and 
Members of the Subcommittee. Thanks for this invitation to 
testify on the proposed merger of United Airlines and 
Continental Airlines.
    In hindsight it is easy to see that the merger is a 
culmination of Continental's efforts over the past 2 years to 
integrate its operation with United. But a year ago, 
Continental was insisting that it did not need to merge; 
rather, the company pursued antitrust immunity to join United 
and 20 other airlines in the far-reaching Star Marketing 
Alliance, and United and other airlines in the Atlantic, plus a 
joint venture for trans-Atlantic travel.
    Over the strenuous objections of the Department of Justice 
which speared substantial consumer harm, Continental received 
antitrust immunity and now can engage in flight code sharing, 
coordinate reservations and frequent flyer plans, and under the 
joint venture can even share revenues. Now Continental and 
United are back, pursuing a merger they said last year was not 
necessary.
    When last month the proposed merger was announced, and at 
the request of the mayor of Cleveland, I directed staff of the 
Domestic Policy Subcommittee of the House Oversight and 
Government Reform Committee, which I chair, to investigate its 
legal and policy implications. In addition to the significant 
antitrust concerns, which I will briefly outline here, we found 
the troubling possibility that Continental may not have been 
completely forthright with Congress and regulators with respect 
to its marketing alliance and joint venture last year or the 
proposed merger before us today.
    Yesterday I sent a document request to Continental that is 
directly relevant to significant concerns produced by the 
inquiry, and discussed below, regarding the legality of the 
proposed merger under section 7 of the Clayton Act and the 
Horizontal Merger Guidelines, the merger's advisability as a 
matter of policy, and the veracity of Continental's and 
United's representations regarding the merger's purposes and 
likely effects.
    When Continental pursued antitrust immunity for its 
marketing alliance and joint venture, key stakeholders 
concluded that the alliance was in lieu of a full-blown merger. 
Senator John Cornyn stated last month at a Senate Judiciary 
Subcommittee hearing that Continental officials informed him 
that the alliance and joint venture was an attractive 
alternative to Continental merging with United. Continental had 
explained to Senator Cornyn that a merger ``wasn't in the best 
interest of shareholders, employees or the communities 
Continental serves''; antitrust immunity for the alliance and 
joint venture ``would provide much of the benefit of a merger 
without the labor integration and financial risk''; and, 
``Houston and Cleveland would be some of the biggest losers in 
terms of jobs'' in the event of a merger.
    Senator Cornyn and others wrote the Department of 
Transportation supporting antitrust immunity on the grounds 
that it was preferable to a full-scale merger between 
Continental and United that could lead to flight reduction and 
job losses. Yet only one year later, after receiving government 
support for its entry into a marketing alliance, Continental is 
now pursuing a merger.
    Is Continental's change in business strategy just a 
coincidence? I find that hard to believe. It is more likely 
that this was their plan all along. Their apparent willingness 
to make whatever representations necessary to garner support 
for its plan cast doubt on both Continental's stated 
motivations for the present merger and its intended postmerger 
conduct.
    Continental and United have stated they have no present 
plans to close hubs or reduce services but, instead, plan to 
moderately decrease overhead costs and more substantially 
realize between $800 million and $900 million of revenue gains 
by more effectively routing network customers through hubs for 
more profitable business and international flights and more 
efficiently deploying New United's larger fleet. Not 
surprisingly, Continental does not list cutting flights or 
raising fares as a means to revenue growth.
    Market observers, including some who support the merger, 
take a different view. First, they doubt the magnitude of the 
merger specific efficiencies. A substantial portion of the 
claimed network efficiency may have already been realized by 
Continental joining United in the Star ATI and the A++ joint 
venture. Moreover, analysts point out that the purported cost 
and revenue synergies of the past airline mergers have almost 
never materialized. And, despite the theoretical ability of 
low-cost and regional carriers to enter markets exited by 
merging airlines, service cuts and loss of hubs have been a 
common consequence. Most analysts flatly predict that my city, 
Cleveland, would lose its hub and the communities formerly 
served by hub will not be supplied either New United service 
out of surviving hubs or low-cost carriers entering the market.
    Perhaps more troubling is the way industry analysts believe 
new United may increase its profitability by eliminating up to 
10 percent of its post-merger capacity and in raising fares. 
According to many merger supporters, the industry's tens of 
billions of dollars of losses since deregulation are largely a 
product of destructive competition among airlines that has led 
to overcapacity and artificially low prices. The New United and 
the industry in general would profit from the decreased number 
of market participants in efforts to reduce capacity and raise 
fares.
    While sustained profitability for our domestic airline 
industry is important, Mr. Chairman, I don't believe that 
destructive competition is the cause of the industry's ills, 
and fear that as a remedy consolidation may well be worse than 
the disease.
    First, increased fares and declines in service are 
prototypical examples of the adverse competitive effects of 
exercise of market power. Revenue gains based on these 
practices are not merger-related efficiencies under the law.
    Second, it is possible that if any efficiency gains do 
materialize, they will be realized through the Star Alliance 
and the A++ joint venture. DOJ should carefully analyze the 
efficiencies from the alliance and joint venture and whether 
its fears regarding the possible anticompetitive effect of 
those immunized arrangements have materialized before it even 
considers approval of a full-pledged merger.
    In addition, there are a number of other possibilities for 
anticompetitive behavior that could be exacerbated by further 
industry consolidation, such as the merger of American Airlines 
and U.S. Airways that is predicted to occur if United and 
Continental merge. Others include increased market power 
negotiations with bulk-buying business clients, increased 
leverage to force concessions from vendors, travel agents, and 
even localities which may feel more pressure to provide 
publicly funded infrastructure and facilities.
    Finally, the size of the new United could raise the 
prospect of systemic importance if not systemic risk to the 
economy. Even if the new United is not officially considered, 
quote, too-big-to-fail, unquote, it would certainly be big 
enough to exert increased power over regulators.
    If the current financial crisis has taught us anything it 
is the difficulty in predicting ex ante the myriad ways in 
which immense and concentrated corporate entities can leverage 
their corporate power to the detriment of citizens.
    Mr. Chairman, Assistant Attorney General Christine Varney 
has explained that the administration's pursuit of vigorous 
antitrust enforcement in this challenging era will involve the 
development of competition policy based not simply on the case 
before it, but on consideration of, ``the overall state of 
competition in the industries which we are reviewing'' 
including consideration of market trends and dynamics, and not 
lose sight of the broader impact of antitrust enforcement. It 
will be important, Mr. Chairman, for this Subcommittee to hold 
the administration to that promise. While traditional antitrust 
enforcement would examine the danger that the competition would 
immediately be reduced between city pairs that have been served 
by both incumbent airlines, such a limited analysis is not 
sufficient because it does not adequately capture trends and 
dynamics in the industry. DOJ should consider whether the new 
United will exercise market power to the detriment of consumers 
through the adoption of anticompetitive practices outlined here 
and elsewhere.
    I really thank the Chair for his indulgence and Members of 
the Committee for the opportunity to testify, and thank you.
    Mr. Costello. The Chair and Members of the Subcommittee 
thank you for your testimony.
    And, gentlemen, we thank all of you for taking time out of 
your busy schedule to offer testimony to the Subcommittee this 
morning.
    We recognize that there are a number of other hearings 
going on with other Committees, and out of respect for your 
schedule and time commitment, we thank you and would ask that 
the next panel come forward to offer their testimony. Thank you 
again.
    Mr. Costello. The next panel will consist of both of the 
CEOs of United Airlines and Continental: Mr. Glenn F. Tilton, 
who is the Chairman, President and CEO of the United Airlines 
Corporation; and Mr. Jeffrey Smisek, who is the Chairman, 
President and CEO of Continental Airlines.
    Gentlemen, we appreciate you coming before the Subcommittee 
today to offer your testimony. As you know, your entire 
statement will appear in the record. We would ask you to 
summarize your statement in approximately 5 minutes, and then 
we will give you an opportunity for myself and other Members of 
the Subcommittee to ask questions and to follow up.

  TESTIMONY OF GLENN F. TILTON, CHAIRMAN, PRESIDENT AND CEO, 
  UNITED AIRLINES CORPORATION; AND JEFFREY SMISEK, CHAIRMAN, 
         PRESIDENT AND CEO, CONTINENTAL AIRLINES, INC.

    Mr. Costello. So with that, the Chair now recognizes Mr. 
Tilton.
    Mr. Tilton. Good morning Chairman Costello, Ranking Member 
Petri and Members of the Committee. We appreciate the 
opportunity to offer our comments this morning.
    Let me start by simply saying that the status quo for our 
industry is clearly unacceptable. It is extraordinary and 
insightful that this industry has lost some $60 billion and 
150,000 jobs in the United States in the last ten years, 
delivering the worst financial performance of any major 
industry, along with 186 bankruptcies over the last 30 years. 
Both before and after deregulation, this industry has been 
systemically incapable of earning even a modest profit, let 
alone a reasonable return, on the large investment that we have 
made in aircraft, facilities, and technology.
    It is ironic that this industry, unable to cover its cost 
of borrowing, is expected to be and indeed must be a key 
enabler of the country's economic recovery. As leaders, you all 
know the critical role our industry plays nationally in the 
communities that you individually represent, creating commerce, 
tourism, jobs and contributing to the overall economy. 
Regardless of one's personal perspective, we can likely all 
agree serial bankruptcies and the asset distribution of failed 
companies cannot be an acceptable industry strategy. We must 
create economic sustainability through the business cycles.
    And to that end, our objective at United has been very 
consistent: to put our company on a path to sustained 
profitability. Without profitability we cannot provide a stable 
environment for the employees that Mr. Gutierrez mentioned. We 
cannot maintain service to communities, large or small, or 
invest in customer service, nor can we create value for our 
shareholders. To be profitable, we must successfully compete in 
the global market of today, a very different market than the 
market of ten years ago or, indeed, the market of 30 years ago.
    Today, low-cost carriers are very well established across 
the United States. And Southwest Airlines will continue to be 
our country's largest domestic airline in terms of number of 
passengers carried after the United-Continental merger. Today, 
in the marketplace of today, international competitors have 
merged and powerful new entrants continue to gain ground across 
the globe. Today, the world's largest airlines, measured by 
revenue, are Lufthansa and Air France-KLM with more than half 
of the trans-Atlantic capacity and more than two-thirds of the 
trans-Pacific capacity provided by foreign carriers.
    United and Continental have taken significant actions to 
improve our performance, competing across both international 
and domestic markets, and, at the same time, finding a way to 
connect small U.S. communities into our combined route network. 
In this dynamic, a highly competitive environment, these 
actions have not been enough.
    Our proposed merger is a very logical and essential next 
step toward our objective of sustained profitability. Let me be 
very clear: Without this merger we would not have the $1 
billion to $1.2 billion in synergies to improve products and to 
improve service for our customers, nor would we have the 
financial means to create better career opportunities for our 
employees. We would not be as successful a competitor as we 
need to be to enable economic development across the country.
    Our merger enhances and strengthens service for those who 
rely on our network in nearly 148 small communities in 
metropolitan areas, providing business lifelines and collateral 
economic benefit to those communities that they otherwise would 
not have. Carriers compete vigorously on both price and 
service, and our merger will not in any way change that 
reality. There is significant low-cost carrier competition at 
every single one of our hubs, including the 15 nonstop routes 
on which we overlap.
    Over the last decade ticket prices across the United States 
have declined by 30 percent, adjusted for inflation, with fares 
to small communities also declining. Our expected revenue 
synergies are derived from better service and expanded network; 
they are not based on fare increases. This represents excellent 
value in more destinations for consumers across the country. 
Consumers will benefit from intense price competition across 
the industry due to the prevalence today of low-cost carriers, 
other network carriers, and fair transparency.
    The competitive landscape has changed, and to be a company 
that attracts and provides value for customers, shareholders, 
and employees, our two companies also have to change. We are 
creating the leading global airline with the platform for a 
healthy company, a profitable company that can compete in the 
realities of today's global marketplace, provide job 
opportunities and provide vital connectivity for the many 
customers and communities that together we serve.
    Thank you very much, Mr. Chairman.
    Mr. Costello. The Chair thanks you, Mr. Tilton.
    The Chair now recognizes Mr. Smisek.
    Mr. Smisek. Good morning. I want to thank the Chairman, the 
Ranking Member, and the Members of this Committee for the 
opportunity to be here today.
    I want to make four basic points. This merger is good for 
employees, it is good for communities, it is good for consumers 
and it is good for competition.
    Let me start with employees. The volatility and instability 
of the airline industry have had harsh effects on employment. 
Before 9/11, Continental had over 54,000 employees. Today, 
despite being the only network carrier to grown since 9/11, we 
have less than 41,000 employees and we have lost over $1 
billion. Before 9/11, United had over 100,000 employees. Today 
it has about 46,000.
    After we merge, our employees will be part of a larger, 
financially stronger, and more geographically diverse carrier. 
This carrier will be better able to compete in the global 
marketplace and better able to withstand the external shocks 
that hit our industry with disappointing regularity. Because of 
how little we overlap, the merger will have minimal effect on 
the jobs of our frontline employees.
    We are committed to continuing our cooperative labor 
relations and integrating our workforces in a fair and 
equitable manner, negotiating contracts with our unions that 
are fair to the employees and fair to the company. United has 
two union board members, and those union board seats will 
continue after this merger.
    The merger will also enable us to continue to provide 
service to small communities, many of which you represent. The 
turmoil in our industry has been devastating to many small- and 
medium-size communities. As you know, low-cost carriers have 
not and will not serve small communities, as such service is 
inconsistent with their point-to-point business model that 
relies largely on local traffic. As a result, over 200 small 
communities are served only by network carriers.
    As a merged carrier, we plan to continue service to all the 
communities we serve, including 148 small communities. The 
merger will be good for consumers as well. The combined airline 
will offer consumers an unparalleled global, integrated 
network, and the industry's leading frequent flyer program. It 
will have the financial wherewithal to invest in technology, 
acquire new aircraft, and invest in its people and its product. 
We will have a young and fuel-efficient fleet, and our new 
aircraft orders will permit us to retire our older, less fuel-
efficient aircraft.
    Continental brings to the merger its working-together 
culture of dignity and respect and direct, open, and honest 
communication. This culture causes an environment where 
employees enjoy coming to work every day, and as a result, give 
great customer service. United brings to the merger talented 
employees who are delivering industry-leading on-time 
performance.
    The merger will also enhance competition. Continental and 
United have highly complementary route networks. Our networks 
are so complementary that we have only minimal nonstop 
overlaps, each of which faces significant competition after the 
merger. Over 85 percent of our nonstop U.S. passengers have a 
direct low-cost carrier alternative. Moreover, low-cost 
carriers compete at all of our hubs and at airports adjacent to 
our hubs.
    As a result of the robust competition in the U.S., airfares 
have declined by over 30 percent over the past decade on an 
inflation-adjusted basis.
    We also face significant competition from foreign carriers 
which themselves have merged to create attractive global 
networks, including Air France-KLM, the Lufthansa group of 
companies, and British Airways Iberia. The merged Continental-
United will enable us as a U.S. carrier to compete effectively 
against these large foreign carriers.
    In sum, the merger will create a strong, financially viable 
airline that can offer good-paying careers and secure 
retirements to our co-workers; great customer service in an 
unparalleled network to consumers; and reliable service to 
communities. The merger will provide us with a platform for 
sustained profitability and position us to succeed in the 
highly competitive domestic and global aviation industry, 
better positioned than either of us could be alone or together 
in an alliance.
    Thank you very much.
    Mr. Costello. The Chair thanks you.
    And let me start with a few questions. In my opening 
statement, I expressed my concern, and you have heard from both 
the Members who testified here before us today, and I think 
every Member of this Subcommittee is concerned about the 
employees at both airlines, what happens to them.
    We know what has happened in past mergers. And we have 
heard your testimony, Mr. Smisek, that there will be minimal 
effect on the employees. And Mr. Tilton, you state in your 
written testimony that you maintain that any necessary 
reductions in frontline employees will come from retirements, 
normal attrition, and voluntary programs.
    Can you make a commitment to this Subcommittee that in fact 
the combined workforce, if the merger does go through, that 
there will not be layoffs, that people will not lose their jobs 
as a result of the merger?
    Mr. Tilton. I can speak, certainly, to the effect of the 
merger despite all of the external shocks that this industry 
has experienced that has resulted in the numbers that Jeff 
shared with you, the decline in employment at his company and 
the decline in employment at our company. This merger will not 
have a negative effect on our level of frontline employment; in 
fact, it should give us the opportunity to grow frontline 
employment through the growth of the two companies themselves, 
absolutely.
    Mr. Costello. Mr. Smisek.
    Mr. Smisek. Glenn is correct. Now, I will say that because 
in any merger in headquarters jobs, overhead jobs, there is 
only one CEO, there is only one CFO, there is only one general 
counsel, et cetera. There will be reductions in headquarters 
jobs, as there would in any merger. But the vast majority of 
jobs at the combined airline are frontline jobs, and because we 
are so complementary we do not expect any significant effect on 
employment on frontline jobs.
    Mr. Costello. In the Delta-Northwest merger in 2008, when 
they announced the merger, they also indicated that the pilot 
union had reached an agreement with the union prior to 
announcing the proposed merger. Is there a reason why that this 
wasn't done in this proposed merger with the pilot unions of 
the respective airlines?
    Mr. Smisek. Sure. Let me speak to that if I could. This 
merger came together very quickly. We learned that United 
Airlines, through pressure, of course, was in negotiations to 
merge with another carrier, and United was the right strategic 
partner for Continental. So we needed to move swiftly, and we 
did so over about a 3-week period. That swiftness was such that 
the processes for reaching agreements during collective 
bargaining agreements with our pilots or other work groups 
could not move that swiftly.
    We are in the process, and you will be hearing from our 
pilots on the next panel, we are in the process of working 
together with the pilots' union and hope to reach a joint 
collective bargaining agreement promptly. It is my strong 
desire to reach joint collective bargaining agreements as 
promptly as possible with all work groups.
    Mr. Costello. It is my understanding that both United and 
Continental units for the Airlines Pilots Association formed a 
special committee to discuss potential merger issues in 2008. 
And you just indicated basically that there wasn't enough time, 
that this came about quickly. If they formed a committee in 
2008, and this proposed merger comes, the announcement, 2 years 
later, can you explain that?
    Mr. Tilton. So, Mr. Chairman, it is probably fair to say 
that the attention of our pilot union, the same as Jeff's, was 
largely focused in the run-up to Jeff's reengagement with 
myself on another transaction. So during that period of time we 
didn't have any further conversations relative to a merger with 
Continental. And as Jeff appropriately says, we were having a 
discussion with another company. And our pilots' union had a 
very distinct point of view about the difficulties associated 
with that transaction potentially, and they were focused on, as 
we were, the issues associated with that transaction rather 
than this one. And that is just a reasonable thing to have had 
happen.
    Now, let me be very clear. They also made it clear to me 
that they preferred this transaction rather than that one, but 
we weren't preparing for it, Mr. Chairman.
    Mr. Costello. Some United retirees and other stakeholders 
have made note of the fact that both of you have indicated that 
the merger would generate $1.2 billion in synergies. And since 
United shed its obligation for employee pensions during 
bankruptcy, they are wondering if, with this merger, if in fact 
it takes place, is there any hope that employee pensions might 
be restored with the merged carrier? And they want to know how 
they are affected.
    Mr. Tilton. So, Mr. Chairman, you may recall that during 
the bankruptcy, the action taken relative to defined benefit 
plans was actually taken by the PPGC itself, and that was at 
their discretion. Along with the decision to guarantee at the 
PPGC guaranteed level, the defined benefit plans that the PPGC 
assumed responsibility for was a condition that a defined 
benefit plan at United per se not be restored. We replaced 
those pensions, those defined benefit plans, with defined 
contribution plans.
    We find ourselves in a situation where the two companies 
have slightly different retirement plans. We will work very 
hard together to make sure that the retirement plans that we 
put together for all employees are the best that they can be.
    Mr. Costello. So the short answer to those who lost their 
pensions with the bankruptcy, how will they be affected?
    Mr. Tilton. That will be unchanged. For the current 
retirees, there is no provision in the merger that will affect 
the retirement plans of current retirees.
    Mr. Costello. So they should not hold out hope that they in 
fact will see any of their----
    Mr. Tilton. I don't see any reversal of the decision made 
by the PPGC, Mr. Chairman.
    Mr. Costello. The Chair now recognizes the Ranking Member, 
Mr. Petri.
    Mr. Petri. Thank you very much, Mr. Chairman. The Chairman 
of our Full Committee often eloquently says the number one job 
of our Committee is to ensure, first and foremost, that safety 
in the traveling public is observed. And we have, as the 
Chairman pointed out, some representatives here of the Colgan 
flight from Newark to Buffalo. Sixty billion dollars of losses 
since 2001 as an industry puts an awful lot of pressure on the 
whole system. We have been fortunate, we have the most 
remarkable safety record overall. And I know--or certainly hope 
you are committed to maintaining that. But it has to be hard 
and puts a lot of pressure on frontline employees and others, 
as we saw with the Colgan crew and the difficulties that they 
had to operate under as individuals flying long hours and so on 
to make their work schedules and all the rest.
    And I just wonder if you could comment on any effect this 
would have or what--we have been having a lot of hearings, we 
are working on legislation to try to put standards in place. 
But of course, if the resources aren't there at the end of the 
day, it is very difficult to maintain standards. And I just 
wonder if you could talk about any implications this might have 
for safety or for the traveling public, or for the safety of 
employees as well.
    Mr. Smisek. Sure. Safety is always the number one priority 
of Continental Airlines, and will be the number one priority of 
the combined United.
    I would also like to, in honor of the Colgan families who 
are here today, express my condolences for their loss. That was 
a tragic accident and it saddened all of us throughout the 
industry and at Continental.
    This merger will not affect safety. Safety is important 
before the merger, safety will be important after the merger. 
Certainly, having a profitable carrier is something that one 
would rather have than a carrier that consistently makes losses 
and is eking out a hand-to-mouth existence. But no matter what 
level of profitability or loss, we are always focused on safety 
because that is the most important thing in the aviation 
business.
    Mr. Tilton. So, Congressman, let me simply add--echo what 
Jeff said emphatically: Regardless of how few dollars there may 
be, dollar one always goes to safety. But that having been 
said, I think you make an excellent point. I don't think 
anybody in the room would conclude that an economically fragile 
and systemically unprofitable industry is a benefit to safety. 
That can't be good. There is no way that anybody can suggest 
that that is a good thing for safety and security.
    So our view is that the more economically robust the new 
company can be, obviously the more resources we can dedicate to 
everything that is important to all of our constituents, 
including safety. We have a relationship with our regional 
carriers that is a partnership in safety. We share best 
practice, we conduct safety audits, we hold them to a high 
standard, and we value the fact that they appreciate that we 
have available to them at United a standard of safety that is 
of benefit to them as a learning. So we also are in a position 
to be able to do that. We will be able to do that more so as a 
new company.
    Mr. Petri. One other question, I wonder--or area, I wonder, 
if you could each expand on. You touched on it briefly. But 
this is a global industry now, particularly for the major 
carriers. And we face very robust international competition, 
many of it in some ways with the more favorable environment 
because of government support or whatever and less competitive 
domestic markets and all the rest than we face in the United 
States.
    Could you discuss how we can prevent or how we can--what we 
can do to become--or how this merger will affect our 
international possibilities for competitiveness? I know we have 
links and alliances with international competitors, but we 
don't want those to end up being ultimately international 
takeovers. We would like to see American, robust, global 
competition.
    Mr. Tilton. We couldn't agree with you more, Congressman. 
And as Jeff said in his testimony in his prepared remarks, the 
majority of our competition across the Atlantic and across the 
Pacific is now foreign carrier. And we face competitors who 
have usurped the traditional positions of the network carriers 
in this country to become the number one and number two 
carriers in global markets: Air France-KLM, Lufthansa, who have 
already gone through significant consolidation. And, of course, 
now we have the announced BA Iberia.
    Our view is we have to have the same scope, scale, and 
economic robustness that they have to be able to offer a 
competitive response to the consolidation that has taken place 
across the Pacific, across the Atlantic, and in fact in Latin 
America as well. And we do think that this company will give us 
the opportunity to do that.
    Mr. Smisek. Congressman, that is correct. This is a global 
business, and we need a global scope and global scale in order 
to effectively compete. What we are finding is large carriers, 
especially large foreign carriers, offer a greater scope, a 
greater scale than we do. And they are picking off our 
passengers one by one, particularly picking off our business 
passengers.
    And in Continental, we are principally a business-oriented 
airline. We carry all passengers, leisure passengers and 
business passengers, but where we make our money is business 
travelers. We orient our product towards that. We orient our 
service towards that. And these large foreign carriers are 
being very successful in taking our passengers. And by 
combining, we will be able to be in a position competitively to 
compete effectively with them and to continue to compete in the 
United States, of course, against the robust competition that 
we find ourselves with today.
    Mr. Costello. The Chair thanks the Ranking Member, and now 
recognizes the gentlelady from Texas, Ms. Johnson.
    Ms. Johnson of Texas. Thank you very much, Mr. Chairman. I 
have not taken a position on this merger, but I am very 
concerned about what most passengers are concerned about, and 
that is the employees.
    In your joint testimony you state that customers must have 
access, will have access to 116 domestic destinations, and that 
small communities will continue to be served.
    Ms. Johnson. And that sounds good, but my question is, who 
will be serving these communities? And do you intend to 
subcontract out domestic groups that serve our smaller 
communities.
    And I would like to have both of you comment on that.
    Mr. Smisek. Let me address that, Congresswoman.
    This merger will be very good for our employees. It will 
provide them with good jobs--careers, and not just jobs; and 
retirements, secure retirements, and not just hope. It will 
provide us with the synergies that will permit us to continue 
to invest in our employees. And I have made it very clear that 
the wealth creation of this merger, that I intend to share that 
with all work groups, whether they are unionized or not.
    In terms of service to communities, we allocate the 
aircraft that we have at the mainline carrier, the larger jets, 
depending upon the demand of the routes. And for smaller 
markets, we often use regional affiliates that we contract 
with, because those routes cannot bear a large mainline 
aircraft, a 124-seat or a 160-seat aircraft, but rather a 50-
seat aircraft or, in United's case, say, a 70-seat aircraft. 
And we will continue to do that.
    But what matters the most is the air service, because those 
regional carriers have employees, as well. And they will 
benefit, our regional carrier affiliates will benefit, our own 
employees will benefit from this merger.
    Mr. Tilton. So, Congresswoman, said in a similar way, the 
reason that the low-cost carriers do not serve those 
communities that you refer to and the 148 that we spoke to is 
because they don't have the flexibility of access to the 
aircraft that Jeff mentioned. So 737s won't be flying to Minot, 
North Dakota, to pick up passengers and connect them to Denver, 
but our 50-seat regional jets will. And that is how they will 
get to Denver and then get on to wherever they may be flying, 
domestically or internationally. And that is the way that the 
networks work.
    So, for the most part, you know, the low-cost carriers will 
not offer service to those communities if we weren't in a 
position to economically do so.
    Ms. Johnson. Thank you.
    Mr. Tilton, I am much more familiar with Continental than I 
am the other airline, United. And you have built a reputation 
in the last 10 years of having a culture that is very 
supportive of passengers, and the employees seem to be quite 
pleased and happy.
    When you combine the pilots and complete this merger, what 
will be your position on the pilots' authority? Will they come 
together prior? Or do you plan to----
    Mr. Tilton. Congresswoman, I have only been in the industry 
for fewer than 8 years, so some of that relative to 10 years 
was probably--I was doing something else at the time.
    But, as Jeff said a moment ago, our pilot leadership is 
going to be given the opportunity to speak to their views of 
this combination and the extent to which they perceive it to be 
of benefit to the pilot profession and the two combined pilot 
groups.
    In answer to the questions that we had previously, although 
it has been a relatively short period of time, Congresswoman, 
they have had a good bit of opportunity to come together and to 
discuss their ambitions for the combining of their work groups. 
And I have to say on behalf of Jeff and myself, they have done 
a very good bit of work in a very short period of time. And I 
know they will share that with you when they come up here next.
    So that is made easier by, Congresswoman, the fact that 
they are represented by the same union. Across the other 
spectrum of our work groups, the two companies have different 
unions representing work groups, such as the flight attendants 
and ground workers and mechanics.
    So the first order of business there is going to be a 
determination, or at least an important order of business there 
is going to be a determination of which union ultimately is 
going to represent those professions in the new company. 
Because the workers are going to have to decide, they are going 
to have to choose between the different unions. So that is 
something that is going to have to be sorted out that, 
obviously, the pilot group is not going to have to attend to, 
because they are represented by ALPA, both.
    Ms. Johnson. Thank you.
    Now, I am basically a passenger, as you know, like the 
majority of American people in this business. And when I get on 
an airline, I want to be sure that the pilots are happy and 
healthy, that the attendants are happy and healthy, and that 
that plane has been serviced appropriately.
    Where do you get those planes serviced and maintained?
    Mr. Smisek. Congresswoman, you and me both. We are most 
interested in safety and the professionalism of our crews.
    Our aircraft are serviced by a combination of our own 
employees and outside contractors. We use GE, we use Rolls 
Royce, we use Goodrich, we use HAECO, we use AAR. We use a 
number of very professional companies.
    We are very focused on not only maintenance for safety but 
maintenance for dispatch reliability, as well; making sure, 
when you get on that aircraft, that there isn't a problem, that 
it gets off on time, because we are a networked business and 
all those flights connect.
    So you and I share the same desires. And, as a result, we 
are very focused on all the things that you have pointed out.
    Mr. Tilton. Across the United States, Congresswoman, our 
line maintenance organization is represented by the 
International Brotherhood of Teamsters. We have a large 
maintenance base in San Francisco, a significant maintenance 
base in San Francisco, also represented by that labor union.
    But, as Jeff said, we also have maintenance partners 
worldwide. And because, as Jeff has also said, we are a global 
carrier, we use the opportunity to have our maintenance 
performed all across the world.
    Ms. Johnson. Is there code sharing across the world with 
the U.S.?
    Mr. Tilton. Do we co-chair across the world?
    Ms. Johnson. Code share.
    Mr. Tilton. Yes, we do.
    Ms. Johnson. Now, you also mentioned in your testimony that 
there would probably not be any changes, most especially in the 
front-line employees. What about the back-line?
    Mr. Smisek. Well, Congresswoman, what you refer to are the 
headquarters. In any merger, there are efficiencies as a result 
of job redundancies in headquarters jobs. And we will have the 
typical efficiencies in any merger when you have two 
headquarters, two people doing the same job. There will be 
reductions in jobs both in Houston and Chicago. And there will 
be jobs, as well, that will move from Houston to Chicago, and 
there will be jobs that remain in Houston.
    But the vast majority of jobs will remain as they are today 
because we are such complementary carriers and we have so 
little overlap, that the front-line employees are largely 
unaffected.
    And the number of headquarters employees who are affected, 
although we have not determined the precise number at this time 
because we are early in the process of integration planning, 
that will be a relatively small number as measured against the 
total number of employees that the combined carrier will have.
    Ms. Johnson. Will you use retirement? Or how would you 
handle the people you have to cut?
    Mr. Smisek. We always prefer if we have employees who 
retire or through attrition or through voluntary programs. And, 
also, for employees whose jobs are affected, we will assist 
them in finding other jobs, hold job fairs, assist them in all 
ways we can for them to find other employment.
    Ms. Johnson. Thank you.
    Thank you very much, Mr. Chairman.
    Mr. Costello. The Chair thanks the gentlelady and now 
recognizes the gentleman from New Jersey, Mr. LoBiondo.
    Mr. LoBiondo. Thank you very much, Mr. Chairman, for 
holding this hearing.
    And, Mr. Tilton and Mr. Smisek, thank you for being here, 
as well as the other panelists.
    I want to say at the outset that I support this merger in 
the strongest of possible terms. I think that my colleagues, 
once they have the opportunity to review all the facts and the 
situation, will also agree with me.
    The merger of these two carriers will create a much 
stronger, much more sustainable airline that will be better 
able to survive in a struggling economy and succeed in an 
increasingly competitive market. It will enable dramatically 
needed new investment and products and services, and result in 
much more efficient flight operations to more destinations--
something that I don't think anyone can dispute and something 
that we all want to see.
    And, finally, it will vastly improve passenger convenience. 
I share the concern of some of my colleagues about the impact 
of the mergers on the workforce. Mr. Tilton, Mr. Smisek, I 
think you have answered that adequately and put it very well. 
But with little overlap, there should only be a negligible 
impact on this, as you have said.
    The merger will have a tremendous benefit in my State, and 
I think that is great. But, more importantly, I think it will 
have a tremendous benefit for aviation in the United States of 
America, which has been under assault, as we have heard the 
numbers of declining employees, since September 11th.
    And what do we want to see? Do we want to see our airlines 
go under while British and Iberia and KLM and all the rest of 
them suck up our passengers and people that could possibly work 
for us? Do we want to see our employees go by the wayside so 
foreign airlines can hire more of their people? And I think 
that is exactly what we are facing if we don't understand the 
consequences of this.
    So, while it will have a big impact on New Jersey, the 
bigger, more important, beneficial impact will be on the United 
States of America. It will open up many more destinations 
around the world and, I think, will allow for all kinds of 
economic growth and job opportunities.
    I have 23 letters from New Jersey businesses and 
organizations in support of the merger. And, Mr. Chairman, I 
ask unanimous consent that these letters be made a part of the 
record.
    Mr. Costello. Without objection.
    Mr. LoBiondo. I thank you.
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    Mr. LoBiondo. And, Mr. Smisek, you talked about this, as 
did Mr. Tilton, but I would like you to touch on it a little 
bit more, about the ability of Continental to, on its own, 
effectively compete against large, combined European carriers. 
And if this merger were not to take place, what are those 
implications for you?
    Mr. Smisek. Congressman, we are very proud at Continental 
of the carrier that we have created. Our culture has permitted 
us to work together and provide great customer service and a 
great product for our customers.
    However, we are simply too small to compete effectively on 
the global stage that we find ourselves. We are finding greater 
and greater difficulty attracting and retaining our business 
customers and our other customers. We are facing increasing 
competition, not only here in the United States but, as you 
mentioned, abroad, with powerful foreign competitors who are 
well-financed, sometimes subsidized by governments, and who are 
profitable and can invest in their products and services, 
outstripping our own.
    It is very important for us to merge with United and put 
ourselves in a position jointly to be able to compete 
effectively on the global stage.
    At Continental, although I am very proud of Continental, I 
think we have done a very good job, candidly, Congressman, we 
are eking out a hand-to-mouth existence. And that is not a 
future that I want for my employees, it is not a future that I 
want for my customers, it is not a future I want for the 
communities we serve, it is not a future I want for aviation in 
the United States.
    Mr. LoBiondo. Thank you for that answer.
    In closing, Mr. Chairman, I think it is right to be asking 
all the tough questions from the Committee Members, those who 
may be concerned. But I think if we have blinders on and are 
very shortsighted about the opportunity that we have here to 
create a stronger company, protecting jobs, protecting safety, 
keeping jobs here, that some future aviation Subcommittee is 
going to come back in the future and look at why United and 
Continental, if a merger were declined, had to witness some 
great demise. And I don't think that is an overstatement, based 
on what has happened in the aviation industry.
    I thank you both for being here. And I urge my colleagues 
to look at the positive benefit that this is going to create.
    Mr. Costello. The Chair thanks the gentleman and now 
recognizes the distinguished Chairman of full Transportation 
and Infrastructure Committee, Chairman Oberstar.
    Mr. Oberstar. Thank you, Mr. Chairman, for a contrasting 
view to that of my dear friend from New Jersey.
    The airways are the common heritage of all Americans. They 
are not the private estate of corporations engaged in airway 
service, in passenger service. The purpose of the deregulation 
act of 1978--and I was in this room, where it was voted on--was 
not to consolidate aviation but to expand competition, to take 
government out of the business of determining rates and market 
entry.
    In the first 5 years after deregulation, there were 22 new 
entrants into airline competition. But by the end of 8 years, 
there were only five of those new entrants left. Ten years, 12 
years later, there was only one. And it, too, has been absorbed 
by U.S. Airways.
    What we saw just recently was a further step in that 
consolidation, when the previous Justice Department looked the 
other way, sort of brushed aside my objections that approval of 
Delta at Northwest would result in a cascade of mergers. That 
has happened. You have proposed one. You did not object to 
Delta-Northwest because you were waiting in line with your own 
hat in hand.
    The third will be American Airlines and a domestic partner. 
And the result will be, with your international co-chairing 
partners, three global mega carriers that will dominate the 
world airways. There will be little choice for passengers, 
little choice for cities, little choice for competition.
    You will concentrate on long-haul service, which you have 
already said and which I have pointed out in my letter to the 
Justice Department. I will quote from my letter, that, ``The 
networks of United and Continental overlap on 13 routes between 
some of America's largest markets: the New York Metropolitan 
area; Washington, D.C.; San Francisco; Los Angeles; Denver; 
Houston; Chicago; and Cleveland, among others. Two carriers 
also compete in a number of international markets. That 
competition will be gone.''
    The Justice Department expressed its concerns over 
reduction in competition between United and Continental. Last 
year, you applied for antitrust immunity to collaborate on 
service and fares in a large number of international markets. 
The Justice Department's comments on the application concluded 
that, ``Fares are likely to increase by roughly 15 percent on 
routes where the number of nonstop competitors decreases from 
two to one and roughly 6 percent on routes where the number of 
nonstop competitors decreases from three to two. Competition 
will be significantly diminished in limited-entry markets, such 
as China, where United and Continental today present the best, 
and in some cases the only, service alternatives. Domestic 
competition between United and Continental may also be 
affected.''
    The purpose of deregulation was not to assure that you have 
the gravitas in this or that market, but that there be 
competition. And, instead, what has happened is sheer 
avoidance, manic avoidance of competition. You have said it 
already in your testimony: There is too much capacity in this 
market.
    You guys hate competition. You want to be the competitor 
who dominates the market, each one of you, not just you--
Northwest, Delta, American, all the rest. I have seen it over 
all the years of deregulation.
    This is a blow to small-market service. It is a blow to air 
travelers. It is going to result in increase in fares and 
costs. And the purpose of deregulation is not to line the 
pockets of the big carriers but to give Americans more choices, 
lower cost, more opportunities. And what we have seen with the 
consolidation in the airline business is less of everything: 
less competition, higher fares, less service, $4 billion paid 
in baggage fares last year, for goodness sake.
    This is a terrible injustice to the purpose of the 
deregulation act, and I will continue to vigorously oppose it.
    Thank you, Mr. Chairman.
    Mr. Costello. I thank the Chairman for his comments and 
remarks, and I think he made his position very clear.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    And thank you, gentlemen, for being with us.
    Let me generously lace my first question with local 
interests back home. I represent the area that includes the 
Piedmont Triad International Airport, both having service 
provided by Delta and Continental.
    My question is, gentlemen, how will this merger affect 
airports that have seen a decrease in passenger service as a 
result of the current dismal economy? And, if approved, would 
this merger provide the opportunity for communities such as the 
one I represent to attract additional service?
    Mr. Tilton. Congressman, as Jeff and I have both said, we 
serve 148 small communities, and those 148 small communities 
have already made their case for service. As the economy 
improves, both of us are always mindful of opportunities that 
new markets might provide. And here very recently, certainly 
speaking on behalf of United, we have commenced service to 
small communities that we had not previously served.
    We are mindful, actually, of something quite different from 
what Mr. Oberstar mentioned a moment ago. Low-cost carriers are 
actually lowering their sites for new market entry to markets 
that previously may have been right on the margin of interest 
to them. So we are now finding ourselves in markets such as 
Greenville, South Carolina, which is not a trivial market but 
not a market that qualify as hub status. We are finding that 
those markets are now beginning to be competed vigorously, as 
well.
    So, as the economy improves, I think markets such as that 
you represent----
    Mr. Coble. Greensboro, North Carolina.
    Mr. Tilton. --Greensboro, North Carolina, are going to find 
themselves the object of service and opportunities from both of 
our companies, and certainly from the merged company.
    Mr. Coble. Good. I thank you for that.
    Mr. Tilton. You bet.
    Mr. Coble. And you concur, I presume?
    Mr. Smisek. I do. We are always responsive to market 
demand, but, certainly, markets in all communities are better 
served by healthy carriers that have a future than carriers 
that are eking out hand-to-mouth existence.
    Mr. Coble. Thank you for that.
    Gentlemen, has the development of the three international 
airline global alliances over the past 15 years had a positive 
or a negative impact on competition, pricing, and customer 
service?
    And is it your opinion that--well, strike that. Let me ask 
you a different way. Are three alliances enough or sufficient 
to ensure future competition?
    Mr. Tilton. As one of the founding members of the Star 
Alliance, I think that the alliances certainly serve the 
purpose of giving consumers the opportunity to fly across the 
globe with a multitude of different carriers who happen to 
belong to the same alliance, but able to do so seamlessly on 
the basis of the entry of one carrier's ticketing into that 
alliance.
    So United can be your entry into the Star Alliance, and a 
businessperson can make a multi-segment journey across the 
world and travel on three of our partner carriers, return to 
their place of business. I think that has been great for 
business. I think it has been good for business productivity. I 
think it has been good for consumers.
    Whether or not ultimately there are going to be three I 
think goes back to Jeff's point that it is a very, very dynamic 
market and we see things constantly changing.
    One of the phenomena that we are seeing here recently, 
Congressman, is decisions made by companies such as Jeff's, by 
Continental, to actually accept an invitation from United to 
depart an alliance where Continental was perceived to be a 
small participant in that alliance and come to the Star 
Alliance. And 2 years ago, we made that invitation to 
Continental. Continental accepted the invitation, left SkyTeam 
and came to Star, to the benefit of Star.
    But I think alliances are going to continue to be 
intrinsically competitive themselves, trying to bring the best 
carriers into the alliances.
    Mr. Coble. I thank you for that.
    Mr. Smisek, you concur?
    Mr. Smisek. I do. Alliances have been very good. For my 
business, entry into Star has been good.
    Recognize that those within the alliances, those are 
alliances of competitors. We compete with each other even 
though we are inside an alliance. The alliance assists us in 
offering destinations on a single ticket through carriage of 
baggage that we ourselves could not offer.
    They can be highly beneficial. For example, we recently 
announced nonstop service from Houston to Auckland in New 
Zealand. We did that in a couple of contexts: one, Star 
Alliance, because their New Zealand is a member of the Star 
Alliance and we are going into a hub even though we compete 
with Air New Zealand; and, secondly, the traffic flows that we 
expect from our merger gave us the confidence to launch that 
nonstop route, which will be on a new 787 Boeing aircraft 
manufactured here in the United States.
    Mr. Coble. I thank you gentlemen.
    Mr. Chairman, I was going ask about how it would affect the 
employees of each company, but I think that has been adequately 
addressed. And I yield back.
    Thank you for being with us, gentlemen.
    Mr. Costello. The Chair thanks the gentleman and now 
recognizes the gentlelady from Hawaii, Mrs. Hirono.
    Ms. Hirono. Thank you, Mr. Chairman.
    This Committee is particularly concerned about the impact 
of this merger on employees, on customers, and on competition. 
And on the issue of competition, of course it is the Department 
of Justice that has the major responsibility to determine in a 
very complicated antitrust analysis as to the impact of this on 
lowering of competition.
    How long do you think the DOJ's review will be, regarding 
your proposed merger?
    Mr. Smisek. Congresswoman, we expect a very professional 
and very thorough review from the Department of Justice, as one 
would expect. They are a very professional organization. We are 
being responsive to all of their requests for information. And 
we would anticipate to be in a position to close this merger by 
year end.
    Ms. Hirono. Considering that this is going to be one of the 
largest aviation mergers ever and the fact that when 
Continental came in and requested an antitrust exemption and 
apparently the Department of Justice had some concerns about 
that, do you have any concerns about their approving this kind 
of a large merger?
    Mr. Smisek. Well, Congresswoman, I can't speak to the 
Department of Justice's thought processes with regard to our 
application for antitrust immunity for the Atlantic Plus-Plus 
joint venture, which is, I believe, what you are referring to.
    But I will recognize that joint ventures deliver some 
degree of revenue benefits, some degree of cost savings, but 
not the efficiencies of a merger. And, therefore, from the 
Department of Justice's perspective, I would imagine that the 
concern there had to do with the difference between a joint 
venture and a merger, where you can obtain significant 
efficiencies and consumer benefits from a merger that are not 
obtainable from a joint venture.
    Ms. Hirono. Well, that leads me to my next question, which 
is that, when Continental came in for their antitrust 
exemption, the testimony was that antitrust immunity would 
provide much of the benefit of a merger without the labor 
integration and financial risk. So that was your testimony only 
a year ago. By ``your,'' I mean your company.
    So what changed, that suddenly you are saying, well, all of 
these risks aren't there?
    Mr. Smisek. No, ma'am. The risks are there, Congresswoman. 
The risks are there, without question. The risks are there in 
any merger.
    The joint venture and our entry into Star Alliance has been 
very good for Continental and has provided additional revenue. 
It has been necessary but not sufficient. We have continued to 
lose money and we have continued to be in a position of being 
concerned about our future.
    The merger will add significant revenue benefits, 
principally from our ability to improve the business mix 
onboard our aircraft. There is nothing in the merger synergies 
that is conditioned on fare increases, but rather improving the 
business mix, creating a network that is more attractive to 
business travelers and improving the mix of business travelers 
onboard our aircraft, and also optimizing our two fleets across 
the 10 hubs that we will have.
    So the merger is additive to a joint venture. We were 
hoping that Star Alliance would be sufficient to return us to 
profitability. It clearly is not. Last year, we lost $282 
million, after having lost money the year before that. And 
since 9/11, we have lost a billion dollars. That is not a 
future I want for my coworkers.
    Ms. Hirono. Well, I appreciate the fact that both of you 
have testified on the benefits of this kind of a merger. And 
before I continue, I would like to ask the Chair's permission 
to submit for the record four letters from Hawaii supporting 
this merger, including one from the Governor of the State of 
Hawaii.
    Mr. Costello. Without objection.
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    Ms. Hirono. I personally have not made a decision regarding 
this merger. I do expect that the Department of Justice will be 
very, very vigilant in its antitrust analysis.
    I am reading the testimony of the American Antitrust 
Institute, and they pose a very interesting possibility. And 
that is that this Committee should hold some hearings, 
retrospective hearings, on the Delta-Northwest merger. Because 
when that merger was brought to this Committee, there were 
various kinds of positive impacts, and we are not sure--I am 
not sure whether these impacts have been realized.
    So their suggestion is that we have such hearings and then, 
perhaps, to hold off on going forward with this merger or 
supporting this merger until we can find out what the Delta-
Northwest merger resulted in.
    Do you have any comments about that kind of a suggestion?
    Mr. Tilton. You know, I do, Congresswoman. I think every 
transaction that you are asked to consider is considered in the 
context of a particular time and place and in a particular 
economic reality of the moment.
    If you think about the concern, the appropriate concern of 
all the Members who have asked us about the effect here of a 
proposal that Jeff and I make that will bring some measure of 
economic stability to the new company, as the new company has 
to confront the extraordinary--the extraordinary--economic 
shocks that this industry has had to confront, either post-
deregulation or post-9/11, making a commitment in the context 
of an environment that is certain to change within 30 days of 
your making any such commitment is a challenging proposition.
    What Jeff and I are saying is that this combination will be 
positive for consumers. It will be positive for communities. It 
will be positive for employees. It will be positive for 
shareholders.
    What Jeff and I cannot tell you is what the next unexpected 
event might be and what the next economic shock might be and 
how our companies or the new company will respond to that. And 
making no representations here, either Jeff or myself or our 
colleagues at Delta, you would have to go over and say, what 
else changed from the point that they were before you?
    Ms. Hirono. Mr. Chairman, I know my time is up, but as to 
that, yes, we realize that circumstances change, and that is 
why your coming and reassuring us that everything will be 
positive--I mean, circumstances can change. And I think that is 
where our concerns rise. Thank you.
    Mr. Tilton. And my point is, we will be better able to meet 
those circumstances with this combination than we otherwise 
would.
    Mr. Costello. The Chair thanks the gentlelady and now 
recognizes the gentleman from Tennessee, Mr. Duncan.
    Mr. Duncan. Well, thank you, Mr. Chairman, and thank you 
for calling this hearing on this very important matter.
    I am sorry that I didn't get to hear your earlier 
testimony. I was in another Committee. But I think almost 
everyone agrees that the country would be better off with more 
airlines instead of fewer and more competition instead of less. 
On the other hand, if the refusal to grant this merger is going 
to result in one or both of these airlines going out of 
business, then that would certainly not be a good thing either.
    But I have these concerns. We have two briefing papers. One 
from the majority says, ``Concerns have been raised that a 
merger of United and Continental could result in substantial 
increases in fares.'' And the minority briefing says, ``The 
Department of Justice's most recent antitrust analysis, with 
the support of empirical data, economic studies, and precedent, 
generally assumed that air fares increased by approximately 15 
percent in markets where the number of nonstop competitors 
decreases from two to one.''
    Knoxville, where I am from, is fortunate to have probably 
more airlines than any city anywhere close to our size, larger 
or smaller. Though we don't have any low-cost carriers, so-
called low-cost carriers, so we get some extremely high prices, 
particularly on the flights from Knoxville to Washington.
    And I remember a few years ago, when I Chaired this 
Subcommittee, we had a hearing in Wichita, and the staff told 
me later that it cost $1,000 for me to fly round-trip from 
Knoxville to Wichita coach. And that same weekend in The 
Washington Post they had had an advertisement advertising a 
round-trip ticket to Madrid, Spain, and two nights in a hotel 
for $389.
    And so, you know, people have a hard time understanding how 
all these fares come about. And I was just wonder, maybe you 
have already given some assurances about these fares, but I 
would like to hear what you have to say about the lack of 
competition in some of these smaller or medium-size cities.
    But, also, several years ago, I was told that each one-
penny increase in jet fuel or aviation fuel costs the aviation 
industry as a whole $200 million. Now, many people feel that 
there is going to be such restrictions put on the offshore oil 
production that the price of fuel is going to go way up. And I 
am wondering, have you all given that any consideration? And 
what effect would a doubling of jet fuel or aviation fuel have 
on your companies?
    Mr. Tilton. It is a rather multi-part question, I guess.
    Mr. Duncan. Yes, sir.
    Mr. Tilton. I will take the back end.
    A dramatic escalation in the price of fuel would likely 
eliminate the prospect of economic recovery for the industry 
this year, which, as advertised now, and we agree, as the 
incipient economic recovery in our markets, we are seeing the 
return of business travelers.
    But were that to happen, it would have such a collateral 
effect on overall GDP that, in all probability, it will put the 
cork in the bottle of economic recovery in business travel, and 
we could be back into one of the challenges that I mentioned to 
your colleague a moment ago that we systemically face that only 
stronger economic enterprises can actually survive.
    So that would be a very bad thing, irrespective of my hedge 
book and my colleagues' hedge book, where we have tried to lock 
in a price that even by historic standards is a high price. I 
mean, if our average hedge price is a $70 barrel of crude oil, 
that is not an inexpensive consideration for that most 
important cost input.
    You know, one way of thinking about that is, those bags 
that we heard so much reference to here a little while ago 
weighing, let's say for discussion's sake, 50 pounds apiece, 
they consume a tremendous amount of jet fuel. And the idea that 
they should be transported for free when they are transporting 
that amount of jet fuel is debatable.
    Mr. Smisek. We spend more on fuel at Continental than we do 
for our employees worldwide, our airplanes worldwide, our 
facilities worldwide. So a doubling of jet fuel would obviously 
be devastating to Continental and to the entire industry.
    As to pricing, first, let me be clear that this merger is 
not predicated on fare increases. The synergies are not 
predicated on fare increases. The merger is not predicated on 
capacity reductions. This is a brutally competitive industry, 
particularly in the United States, where low-cost carriers have 
essentially 40 percent of the market and continue to grow. Air 
fares have dropped 30 percent over the past decade on an 
inflation-adjusted basis. We have lost, over at Continental, 
over a billion dollars since 9/11.
    So, certainly, we are currently charging amounts that are 
clearly below our costs. We need to change the business mix at 
Continental, bring more business travelers into our system, who 
do pay a higher price because they consume inventory that we 
hold open until the very last moment, and we run the risk of 
that inventory spoiling--that is, the aircraft taking off 
without someone in that seat.
    And that is an expensive risk for us to take, and, 
therefore, the business traveler who books at the last minute 
and wants to be able to change at the last minute and take a 
later flight or an earlier flight pays for that privilege, 
compared to the leisure travelers who book far earlier than 
that and pay a much lower fare. Because we, as a company, are 
taking a much less business risk with respect to those people 
than we are with holding the seats out until the last.
    But I can assure you, this is a very competitive business. 
We do not have a single market in the United States where we 
overlap. And we only overlap on 15. There is not a single 
market where the number of competitors is reduced to just one. 
So that is not going to occur in this merger.
    Mr. Duncan. All right. Well, thank you very much. There is 
not an easy business out there, but I think your business has 
to be one of the most difficult in the world, with so much that 
is beyond your control--the natural resource problem, the 
weather problem, and so forth. But thank you very much.
    Mr. Lipinski. [Presiding.] Thank you, Mr. Duncan.
    The Chair will now recognize himself for 5 minutes.
    As Chicagoland's only Member of this Committee, a top 
priority of mine is working to enhance and improve the region's 
transportation network. And since Chicago is the transportation 
hub for the Nation, what is good for Chicago in many ways is 
good for the Nation. So I believe that this merger, if 
implemented correctly, will benefit the Chicago region.
    In addition, it has the potential to be good for O'Hare 
Airport and the O'Hare Modernization Program, which is 
definitely, without question, good for our Nation's air 
traffic.
    However, there are a number of critical issues that need to 
be examined as this process moves forward. For instance, we 
clearly need to consider the merger's impact on consumers, 
including how the proposal would impact pricing and service. 
Chairman Oberstar carefully went through these issues, and I am 
sure that we will hear more about that. And we have spoken a 
little bit--you have provided in your testimony some answers on 
that.
    We also need to look at the impact the merger would have on 
jobs, especially with respect to job loss and to benefits. And, 
finally, we also need to make sure, I believe, that there is a 
commitment by the new United, the merged airline, to projects 
that increase system capacity, especially the O'Hare 
Modernization Program.
    So I want to start on that last point. Right now, OMP, 
O'Hare Modernization Program, most critically would provide 
parallel runways and will reduce delays by 75 percent at 
O'Hare. Two runways have already been completed. One runway 
project is currently being worked on. And there are three more 
runway projects remaining to be done.
    So I want to ask Mr. Tilton, are you committed, if this 
merger goes through with this new airline, or are you committed 
in general, to moving this critical program forward, 
specifically with respect to the three remaining runway 
projects at O'Hare?
    Mr. Tilton. Congressman, as you know, we have been 
supporters from the beginning of the modernization and the 
expansion of O'Hare. We are supportive of the runway 
development, the two that have been developed and the 
additional runway capacity.
    It goes significantly to something that Jeff mentioned in 
his remarks, that we are indeed and have been for quite some 
time the number-one on-time carrier, network carrier in the 
United States. Much of that has been enabled, Congressman, by 
the modernization and the development of those new runways at 
O'Hare.
    Before we get to, perhaps, the follow-on question, there 
are issues associated with the modernization of O'Hare that go 
to facilities that we think are perhaps no longer necessary. 
And those are terminal facilities and the expansion of terminal 
facilities in the current economy. But as you also know, we are 
at the table negotiating those issues with Mayor Daley and with 
Ms. Andolino. And I think that those discussions are going to 
be constructive and good for Chicago and good for O'Hare.
    Mr. Lipinski. Well, you mentioned the terminal project, but 
are you----
    Mr. Tilton. Yes.
    Mr. Lipinski. --committed to the three runway projects when 
United----
    Mr. Tilton. Yes. United, given the current economic 
circumstances we face, thinks those runways are justified.
    Mr. Lipinski. The other question that I wanted to get to is 
the impact on employees. Because, certainly, you understand the 
concern with the uncertainty that employees face at United and 
Continental. We have seen other mergers, and sometimes the 
impact on the employees certainly has not been what was 
expected; it has been detrimental to the employees. United's 
bankruptcy, the employees certainly paid a high price in that 
for allowing United to continue to operate.
    I want to focus specifically here on pensions, because I 
understand--and this has been touched on a little bit already--
that the defined benefit plans no longer could exist at United 
Airlines after the bankruptcy. Now, some Continental employees 
do have defined benefit plans. There are going to be problems 
with putting all of the employees together in a merged airline.
    Will it be possible for the Continental employees to keep 
their defined benefit plans, or is this forbidden by the 
bankruptcy settlement?
    Mr. Smisek. Congressman, let me speak to that.
    Yes, Continental's defined benefit plans will continue 
after the merger. And we have received confirmation from the 
Pension Benefit Guaranty Corporation to that effect.
    As we go forward, as we negotiate joint collective 
bargaining agreements with each of our collectively bargained 
units, we will obviously be discussing a broad range of wage 
and benefit items, including the form of their pensions and 
amounts of pensions. Those defined benefit plans could change. 
For example, our own pilots union, in negotiations, determined 
to freeze their plan and go to a defined contribution plan, 
which we have been funding since that was negotiated.
    Last year, we at Continental lost $282 million, but 
nonetheless we put $283 million into our employees' retirement 
plans.
    Mr. Lipinski. Does this mean, then, that there is a 
possibility that United--if the merger goes through, former 
United and former Continental employees now in the merged 
airline will have different pension plans? I just want a better 
understanding of what this will mean.
    Mr. Tilton. Well, it does, Congressman.
    If you think about it--we were saying earlier on, for 
example, our IAM-represented employees have a multi-employer 
plan that it is supported by the IAM. It was a product of the 
negotiations during the bankruptcy. The IAM represents 
employees at both companies.
    How the employees choose to be represented, just using 
their multi-employer plan as an example, in a course of their 
representation choices will determine whether or not more or 
fewer employees are given the opportunity to be beneficiaries 
of that plan. But that is a function of, at the end of the day, 
which union represents which employees at the end of the 
decisions made by the employees on that matter.
    So there are significant differences across the two 
employee groups. And the process, that will be made transparent 
to employees when they make it their selections.
    Mr. Lipinski. Well, I certainly believe, as we move forward 
with this in consideration of the merger, that this is going to 
be a critical piece of it. The more things, if possible, that 
can be worked out with the employees, the better off we will be 
and I think the, certainly, greater likelihood of this merger 
moving forward. But I think that is something that we have to 
continue to keep our eye on.
    With that, the Chair will now recognize--the gentleman from 
Arkansas is not there. We will go back over to the Democratic 
side here. The Chair will recognize the Chair of the Surface 
Transportation Subcommittee, Mr. DeFazio.
    Mr. DeFazio. Thank you, Mr. Chairman.
    Gentlemen, I will read you two quick statements, and then 
you tell me how this merger I think is in reaction to this, but 
how it is going to solve this problem.
    Alfred Kahn: ``I must concede the industry has demonstrated 
more severe and chronic susceptibility to destructive 
competition than I, along with other enthusiastic proponents of 
deregulation, was prepared to concede or predict.''
    And then former American Airlines CEO Robert Crandall: 
``Market-based approaches alone have not and will not produce 
the aviation system our country needs and that some form of 
government intervention is required.''
    I think your merger reflects that. Is this going to solve 
the problem once and for all of this cutthroat, deregulated, 
race-to-the-bottom industry?
    Mr. Smisek. Congressman, I am not sure it will solve all 
the ills of the aviation industry. I don't hold it to such a 
high standard.
    What we are trying to do is to create an entity that can be 
profitable, that can withstand the external shocks, that can 
offer a future and some stability to our employees, that can 
reverse the trend of the employment loss that this industry has 
suffered, particularly since 9/11.
    Mr. DeFazio. OK. Well, that is good.
    Quick, Mr. Tilton, because I have several other questions.
    Mr. Tilton. Congressman, I don't think that the merger is 
going to be able to resolve many of the structural issues that 
lead to the cutthroat competition that you mention, such as the 
absence of apparent barrier to entry that allows a significant 
number of new entrants to come into the business and fail 
repeatedly but, in the process of so doing, destroy tremendous 
value. And they destroy value collaterally--employee value, 
shareholder value, and even, for that matter, community value, 
because they come and they go.
    Mr. DeFazio. OK. So there might be something in the 
statement by Bob Crandall, some form of government intervention 
might be required.
    And I guess that gets to my second point--I am sorry to 
interrupt, but I have very little time--Mr. Smisek, you said 
safety would not be affected. And, actually, I didn't take that 
as positively as you might think, because I would hope it would 
be.
    And I would reference both the chairs of your Master 
Executive Council, when they are talking about, ``Passengers do 
not want air travel that is provided by the lowest bidder. They 
want and deserve safe and reliable transportation provided by 
the network carrier of their choice.'' That was Captain Jay 
Pierce. And then, ``When a passenger buys a ticket from United 
Airlines, they deserve to have United pilots at the controls. 
This merger presents the opportunity to put an end to 
management's preoccupation with outsourcing.'' That was Captain 
Wendy Morse.
    Will this merger lead to any reduction in outsourcing or 
any improvement in who you contract with?
    Mr. Tilton. Congressman, we don't really perceive at United 
that the regional carriers that are our partners and are really 
the entry level into the industry for coworkers of our 
employees as being outsourcing. You know, United is not going 
to fly an A319 or a 320 to Minot, North Dakota, to collect 
those passengers----
    Mr. DeFazio. Right. But we are paying someone $18,000, 
$20,000 a year with a low number of hours to be the pilot. I 
mean, we tried to deal with that through government 
intervention in the FAA bill and in the safety bill.
    Mr. Tilton. Right. Right. All I am saying----
    Mr. DeFazio. You are being pulled down by people who are--
you may well require a higher standard, but you have to compete 
with these----
    Mr. Tilton. Well, and, as I said, Congressman--I know you 
are in a hurry--as I said, we spend a lot of time talking to 
our regional partners about the very things that you just 
mentioned a moment ago, and that is taking our safety 
practices, sharing them with them, and expecting them to abide 
by them.
    Mr. DeFazio. OK.
    Mr. Smisek, would we see, perhaps, we wouldn't go to the 
lowest bidder for outsourcing in the future and require a 
higher standard, or are we going to have to wait until we pass 
legislation to require more hours, more experience, et cetera?
    Mr. Smisek. We support all improvements in safety in this 
business. Safety is incredibly important, as you know. However, 
the combined carrier will not be flying mainline aircraft into 
small cities----
    Mr. DeFazio. No, I understand.
    Mr. Smisek. --because demand won't be there. So that 
service will always be provided by third parties.
    Mr. DeFazio. Well, you could operate a subsidiary that 
provided that service, or you can contract--there are different 
levels of contracting.
    Mr. Smisek. Sure, sure. I appreciate that. But our practice 
at Continental and our practice at United and our practice as a 
combined carrier would be to use third parties to do that. But 
we are very committed to safety for ourselves, for our regional 
carriers. And we, like United, share best practices with them.
    Mr. DeFazio. OK. Well, I am out of time, Mr. Chairman, but 
I just want to say I think there are a lot of people out there 
trying to run airlines well and safely and with respect for 
their employees, but what we have seen is this pattern of 
destructive competition. And it may be a transient entrant who, 
you know, goes away, or it may be other people who persevere 
longer but they drag down the standards.
    And I think the industry should wholly support setting a 
much higher floor that everybody has to meet, and then there is 
no competitive disadvantage among any of the industry for any 
level of service out there. And I hope you would both support 
that.
    Thank you, Mr. Chairman.
    Mr. Lipinski. Thank you, Mr. DeFazio.
    Congressman Boswell has been called away, but he asked me 
to express his serious concerns that contractual arrangements 
with pilots, flight attendants, and other labor groups be 
worked out in fairness and completely fulfilled.
    At this point, the Chair will recognize the gentleman from 
Ohio, Mr. Boccieri.
    Mr. Boccieri. Thank you, Mr. Chairman.
    Thank you both, gentlemen, for your testimony today.
    While I may not be as long in tooth as some of the Members 
here in the Committee who have experienced deregulation and 
such, I know that, from my experience in the State legislature 
and past airline mergers that have affected Ohio, to put it 
mildly, it has not gone well. Dayton, Columbus, Wilmington, 
Cincinnati have all experienced significant service and job 
loss, and a movement, if not complete outsourcing, of these 
jobs.
    And I remain concerned, while I have not taken a position 
on this, I remain concerned that this business model that is 
now being proposed would put added strain on the hub in 
Cleveland, especially after so many taxpayer dollars have been 
funded to expand the facility, as well as corporate investment. 
But I remain concerned about that.
    I want to just hone in on one thing. I am really concerned, 
and I have not been convinced by the testimony thus far, that 
by reducing the number of competitors--both of you are 
competitors currently--that we are going to increase 
competition. And we may be setting up a scenario of too big to 
fail.
    Can you give a brief comment to that?
    Mr. Smisek. Certainly, Congressman.
    I think what we are creating is a carrier not too big to 
fail but big enough to succeed. We compete on a global scale. 
We compete with large foreign airlines. We compete with large 
domestic airlines, for example like Delta or American. And we 
are putting ourselves in a position through this merger to be 
able to successfully compete.
    I do not believe that competition is reduced by this merger 
because this is a brutally competitive industry as it is. It is 
today. It will be after this merger. There are essentially no 
barriers to entry; there are high barriers to exit. This 
industry does not earn anything on its invested capital. We 
have lost billions of dollars.
    Mr. Boccieri. Sure. Can you name one legacy carrier outside 
of bankruptcy that have merged where they have actually 
produced lower costs, lower operating costs, and have not had a 
significant reduction.
    Mr. Smisek. Well, let me speak to what Delta Airlines--and 
we will leave the capacity reduction aside for the moment, 
because that, I believe, was caused by the global recession, 
not by the merger. But you will need to speak directly to Delta 
executives about that.
    But they have been on the public record saying that they 
believe that the synergies from their merger will be 
approximately double what they anticipated. And that gives me 
great hope at Continental. I am not saying we will be able to 
deliver that in this merger, but so far what they are claiming 
publicly is their merger has been very successful, both in cost 
efficiencies and in revenue generation.
    Mr. Boccieri. Hubert Horan provided testimony here, and I 
just want to read to you because I think it is pretty 
prescient. He said, ``United's own public statements 
acknowledge that the merger will not reduce costs to 
disadvantaged versus low-cost carriers or more efficient legacy 
competitors, and that the industry does have financial 
problems, but those problems will not be solved by suspending 
antitrust laws so business strategies that have moved into 
obsolescence can exercise artificial market power.''
    Again, he is suggesting that the costs are not going to be 
reduced and that this is going to put an added strain on you to 
cut corners down the line. How do you respond to that?
    Mr. Tilton. By its very nature, Congressman, it is sort of 
a contradictory statement. We have already established that 
there are going to be the elimination of overhead redundancies 
that are clearly going to reduce cost. So, on the one hand, we 
have a question as to, are you going to be sympathetic to the 
concerns of employees whose jobs are going to be eliminated 
because there is only going to be one headquarters? On the 
other hand, we have a statement that says that is going to be 
insufficient in the context of cost reduction.
    Whether or not the network hub-and-spoke model is obsolete 
and redundant is yet to be established. And creating a company 
that is going to have the hub structure that we have and the 
ability to optimize the hub structure that we are going to 
create from Newark to Washington to Cleveland to Houston to 
Chicago to Denver to San Francisco and to Los Angeles, to 
connect small communities into those hubs, is really the 
premise upon which we think we are going to succeed.
    Mr. Boccieri. Sure.
    Mr. Tilton. But if somebody thinks that the business model 
has failed, it actually doesn't go to the point of the 
proposition of the merger.
    Mr. Boccieri. Well, the big money is where the 
international carriers are shuttling folks back from vacations 
over in Europe.
    Mr. Tilton. Right.
    Mr. Boccieri. But, more specifically to your point, Mr. 
Tilton, we talked about outsourcing jobs, and safety is a big 
issue for me, after having lived through testimony from the 
Colgan crash here, where the pilot, under the NTSB after-
actions report, showed that they weren't even trained in their 
own safety equipment that that airplane was required to have 
for saving the day.
    And right now we have 1,400 pilots furloughed by United, 
but you are flying routes from Washington, D.C., to Spain with 
foreign pilots. Can you guarantee me that those pilots are 
trained, educated, and have the same experience level, as well 
as the other air crew members that are aboard that aircraft, 
that our own domestic air carriers have?
    Mr. Tilton. That relationship with Aer Lingus is analogous 
to our offering our code on Aer Lingus as a code share partner, 
if one thinks about it, and telling a passenger, ``You can book 
on United, but you will fly on Aer Lingus,'' or, ``You can book 
on United, sir, but you will fly on Lufthansa,'' or, ``You can 
book on United, but you will fly on US Air.'' And that is a 
function of the reciprocal agreements that this industry has. 
It is a part of the joint venture that we have across the 
Atlantic with four participants in it: Air Canada, Lufthansa, 
Continental, and United. We share that.
    I take for a given that my Aer Lingus partner is as 
committed to safety as I am. And with Aer Lingus being the 
operator of that flight and United being the marketer, it is a 
relationship that is symbiotic between the two of us, and I 
ensure that they are.
    Mr. Boccieri. Well, I am glad you share that, but I don't 
know if I share that, and I don't know if many other pilots 
who----
    Mr. Tilton. Well, but think of the interrelationships that 
we have across the business, where all of that code is shared.
    Mr. Boccieri. I am OK with that, but, you know, if you 
asked your customers if they would prefer an American pilot 
versus an international pilot flying them from the United 
States over to Europe--because when you fly back from Europe, 
those are mainly American pilots, correct?
    Mr. Tilton. No, sir. If they are flying on Lufthansa, they 
are German pilots. If they are flying on BA, they are British 
pilots. If they are flying on ANA, they are Japanese pilots.
    Mr. Boccieri. Are Aer Lingus pilots United pilots?
    Mr. Tilton. No, they are Aer Lingus pilots.
    Mr. Boccieri. OK. That is my point.
    Thank you, sir.
    Mr. Lipinski. Thank you, Mr. Boccieri.
    The Chair now recognizes the gentleman from California Mr. 
Garamendi.
    Mr. Garamendi. Thank you for the testimony today. And also 
let me congratulate you on a new way to describe job loss as 
synergies. Very unique. Your PR folks should be congratulated.
    I do have some questions that are specific to safety. The 
San Francisco maintenance facility was discussed earlier today. 
It is my understanding that you are, in fact, at United moving 
jobs away from that maintenance facility to China, Singapore 
and the Philippines; is that correct?
    Mr. Tilton. So as I said in my response to a prior 
question, we have long had----
    Mr. Garamendi. No, no. Get directly to answer this. Are you 
moving jobs out of San Francisco to foreign countries for 
maintenance purposes?
    Mr. Tilton. We have overseas maintenance facilities that do 
maintenance work for the company and have for quite some time.
    Mr. Garamendi. You did not answer my question. Please do 
so.
    Mr. Tilton. There are no plans to move any further jobs out 
of San Francisco, if that is your question.
    Mr. Garamendi. My question is very simple. Are you moving 
jobs out of San Francisco to foreign facilities, yes or no; and 
if so, how many?
    Mr. Tilton. No, we are not moving jobs out of San Francisco 
today to foreign facilities.
    Mr. Garamendi. Did you do so yesterday?
    Mr. Tilton. Yes.
    Mr. Garamendi. How many?
    Mr. Tilton. We have a maintenance facility in Beijing that 
is the maintenance facility for our 777 facility--for our 777 
fleet, and it is a joint venture between Lufthansa and Air 
China.
    Mr. Garamendi. Does the FAA regularly inspect that 
facility?
    Mr. Tilton. That is FAA's responsibility without a doubt.
    Mr. Garamendi. That is not the answer to my--that is not 
the question I asked.
    Mr. Tilton. Well, that is a question better posed to the 
FAA.
    Mr. Garamendi. It is posed to you because it is your 
responsibility.
    Mr. Tilton. Well, my view is the FAA fulfills its 
obligation and its responsibility with respect to such 
facilities, yes.
    Mr. Garamendi. Then you must be aware of earlier testimony 
before this Subcommittee that the FAA doesn't regularly inspect 
to the same degree that----
    Mr. Tilton. No, I am not aware of that testimony.
    Mr. Garamendi. We will get the testimony for you.
    Mr. Tilton. I would appreciate that.
    Mr. Garamendi. With regard to the question of continued 
outsourcing, the question about pilots was asked. I want to 
follow up on that question. Are foreign pilots in the left and 
right seats of the United airline jets?
    Mr. Tilton. Are foreign pilots----
    Mr. Garamendi. Aer Lingus or any other foreign pilot?
    Mr. Tilton. On our airplanes?
    Mr. Garamendi. Yes.
    Mr. Tilton. No.
    Mr. Garamendi. Thank you.
    One final question. Could you describe the personal 
benefits that the two of you will receive as a result of this 
merger, specifically golden parachutes and the like?
    Mr. Tilton. So I think I know I have made the decision 
already, I don't know that Jeff has, that anything that I might 
receive is going to be converted into shares of the new company 
and deferred until such time as I eventually retire from my 
board seat.
    Mr. Garamendi. And the estimated value of that?
    Mr. Tilton. It will largely depend on how successful the 
new company is and indeed whether the new company is formed, 
Congressman.
    Mr. Garamendi. I would like have specific information on 
that, and I would not like to have to receive that from the SEC 
filings. So if you could deliver it personally.
    Mr. Tilton. I will do so. I have already filed it, as a 
matter of fact.
    Mr. Garamendi. Thank you. And you will be able to deliver 
it to me. Thank you.
    Mr. Smisek. Congressman, my compensation is set by my human 
resources committee, which consist of independent directors. My 
arrangements regarding becoming CEO of United have not yet been 
negotiated. That is a process that is going to go through both 
Continental's human resources committee and the compensation 
committee of United Airlines. The amount of compensation that I 
will receive thus has not been determined.
    Mr. Garamendi. What is your present compensation?
    Mr. Smisek. I receive no salary whatsoever, sir. I have 
waived that until Continental is profitable. I am also not 
eligible for a bonus as a result of my waiver of my salary.
    Mr. Garamendi. And stock options?
    Mr. Smisek. I have no stock options, sir.
    Mr. Garamendi. And you are receiving any benefits?
    Mr. Smisek. I am participating in long-term performance 
programs, the pay-out of which is dependent on the amount of 
profit sharing that we share with our employees, as well as the 
stock price.
    Mr. Garamendi. I thank you.
    Thank you very much, Mr. Chairman.
    Mr. Costello. [Presiding.] The Chair thanks the gentleman 
and would ask any Members present if they have additional 
questions. I understand that Mr. Boccieri does.
    Mr. Boccieri. Thank you, Mr. Chairman.
    One follow-up question that came to my mind. My synapses 
aren't working as quickly as they used to at 41. But you had 
suggested that Aer Lingus pilots are trained as well as 
domestic aircraft commanders, pilots and captains on board our 
aircraft. How can you make that assumption when your own 
regional carriers aren't training to the same level as legacy 
carriers? We found this in constant NTSB reports. We found this 
over and over and over again. Explain to me how you draw that 
connection when your own regional carriers cannot commit to the 
same level of experience level that you have been training your 
pilots.
    Mr. Tilton. So back to the relationship between the network 
carriers and our regional partners, as I have said, and Jeff 
has echoed, our safety management organization works together 
with our regional partner management organization to ensure 
that the safety processes that we hold to best practice at 
United share it with the regional carriers. We audit them; we 
audit them together with the FAA. We share information with the 
FAA relative to our work with the regional carriers. We are 
mindful of the risks associated with new anything, new 
employees of any type, so we are mindful of that, we understand 
that. But as Jeff has said a moment ago, they are necessary, 
they are important.
    So just bear with me for a second. With respect to our 
relationship with all of our foreign partners, you have to 
think about it, all of them, All Nippon, Air China, Singapore 
Air, Lufthansa, all of British Midland, Austrian Air, all the 
carriers with whom we share code across the entire Star 
Alliance, we, either from an IATA perspective, the global 
international association carriers, all of the safety 
authorities that exist in all of those countries, we have to 
set a safety standard for the entire industry worldwide 
regardless of the nationality of pilots. That is the essence of 
the alliance structure. And we will fly a passenger across four 
or five of those carriers. And we know we are making an implied 
commitment to the training of all of those carriers, which is 
why, Congressman, to get into the Star Alliance or to get into 
a code-sharing agreement, you have to be approved across a 
spectrum of safety considerations before you are approved.
    Mr. Boccieri. Mr. Tilton, the after-actions report from the 
NTSB for the Colgan crash showed that the regional air carrier 
in part of their syllabus did not teach the pilots how to 
recover from a full stall. They taught only stall recognition 
through a stick shaker, not a stick pusher. What happens if the 
aircraft goes into a full stall recovery and what were the 
pilot's reaction, that was not part of the training syllabus. 
When asked they said it wasn't part of the FAA's requirement. 
So what we have seen--Colgan has said this wasn't part of the 
FAA requirement, so what we have seen is now where airlines had 
reached for the stars in terms of their training, they are now 
reaching for the minimums in some of these regional carriers.
    And I have grown very concerned about this over my term on 
this Committee. But I want you to say to this Committee and for 
the record that you know that those aircraft that are flying 
out of Washington, D.C., while we have 1,400 grounded pilots in 
your airline, if they are trained, and you know for certain 
that they are trained to recover from a full stall.
    Mr. Tilton. So all of our foreign carriers, all of the 
foreign carriers with whom we do business, are trained to a 
level that is satisfactory to both the FAA, to ourselves, to 
ourselves, and to their respective safety jurisdictions in 
their countries.
    Mr. Boccieri. Mr. Smisek, was Colgan Air training to your 
satisfaction?
    Mr. Smisek. No, it was not.
    Mr. Boccieri. And why did you keep them as one of your 
carriers?
    Mr. Smisek. We were not aware of that training deficiency. 
That is the responsibility of the Federal Aviation 
Administration. We expect all of our regional carriers----
    Mr. Boccieri. That is your responsibility. That is your 
responsibility.
    Mr. Smisek. Let me tell you that we are very concerned with 
safety. We did not train those pilots, we did not maintain 
those aircraft, we did not operate the aircraft. We expect them 
to be safe, we expect the Federal Aviation Administration to do 
its job, we expect that you do your job----
    Mr. Boccieri. Well, we expect you to do your job too, sir.
    Mr. Smisek. And I expect me to do my job.
    Mr. Boccieri. You need to make sure that your domestic 
carriers in these international agreements that you are going 
to be making, outsourcing jobs and outsourcing training and 
doing all the other stuff that is going to move this type of 
level of expertise off our coast, needs to be maintained. I 
can't sit here and guarantee as a representative of the people 
from Ohio who fly on your airline and fly on other airlines to 
be certain that this level of training is going to be 
maintained if we are going to be getting into these big 
agreements, too big to fail, with other international carriers.
    Mr. Smisek. We are very focused on safety. The training of 
pilots across the globe is a responsibility too great for 
Continental Airlines. We do not have the resources. Each 
jurisdiction has its Federal regulators; each jurisdiction has 
its regulation over safety. We participate and share our best 
practices.
    But if you take a look at Star Alliance, Star Alliance has 
rigorous requirements for joining and rigorous requirements for 
safety. And I am confident in the safety of all the Star 
Alliance carriers.
    What you point to was a problem. There is no question about 
it. And everyone in the aviation business, and I personally and 
everyone at Continental, regrets that training failure at 
Colgan. That has been identified and will be, I am confident, 
corrected. And we need to make sure we all share your concern 
with safety. Safety is the most important thing that we have. 
But we can't possibly be responsible with the limited resources 
we have for the safety of every carrier in the globe and every 
carrier that is out there. We can be responsible for our own 
safety. We can certainly share our best practices, and we do 
so. And we support all improvements in pilot training, and we 
support regulatory reform within the Federal Aviation 
Administration if that is what is required for oversight for 
U.S. carriers.
    Mr. Boccieri. We are going to get to that reauthorization 
bill. We are going to make sure that it is mandatory that 
pilots know how to recover from a full stall.
    Mr. Smisek. And I would support that.
    Mr. Boccieri. Thank you.
    Mr. Costello. That Chair thanks the gentleman. And I was 
going to make that very point that is the reason why we passed 
legislation through both the Committee and out of the House, 
that when we come out of conference, we are going to have a 
reauthorization bill that has the Airline Safety and Pilot 
Training Improvement Act, which will in course raise the 
standards for pilots at the regional carriers as well. We 
recognize that the both United and Continental and some of the 
other major carriers do not hire at the lower standard even 
though they can, but many of the regionals do. And that is what 
we found with Colgan, and that is what we have found with other 
regional carriers.
    And I would just interject as well and agree with the 
gentleman that while it is the FAA's responsibility, it is also 
your responsibility as CEOs of airlines that contract with 
regional carriers to make certain--not just rely on the FAA, 
but to make certain that these regional carriers are hiring 
pilots that have training in excess of the minimum requirements 
as opposed to the minimum even after we increase the minimum 
requirements in the conference report.
    With that, the gentleman from California Mr. Garamendi is 
recognized.
    Mr. Garamendi. Mr. Chairman, thank you. And thank you for 
bringing up that last point. You gave me an opportunity to cool 
down a little bit.
    I heard the most astounding testimony I have heard in my 34 
years, that the chief executive officer of an airline that 
contracts for services to provide services to that airline, in 
this case Continental--and I did not hear this from United, and 
pleased I didn't hear it--that it is not your responsibility to 
ascertain the safety of the pilots with which you contract.
    Mr. Smisek. Sir, I did not say that.
    Mr. Garamendi. I am delighted to hear you did not say that. 
Could you specifically tell me what your responsibility is with 
regard to the qualifications of those pilots with whom you 
contract on your flights?
    Mr. Smisek. We do expect, we do require all of our regional 
carriers to be safe carriers. Colgan in this instance had a 
training failure. It resulted in a terrible accident, which we 
regret tremendously.
    We are as focused on safety as you are, sir. We expect 
safety, we require safety. You have to understand, however, 
that there are limitations on the resources. Since all airlines 
contract with large numbers of other airlines, for example in 
code shares, we do rely on the requirements and the safety 
audits of IATA, on the Federal Aviation Administration, we have 
our on-line safety audits, safety audits that Star Alliance 
conducts with respect to its other carriers as well.
    Mr. Garamendi. I am particularly concerned about the 
domestic situation because that is where the accident occurred, 
that is where the training was inadequate. I would like to have 
you specifically in writing present to me and to the Committee 
exactly what you and United do to ascertain the quality and the 
safety record and training record of those pilots with whom you 
contract in your hub-and-spoke situation.
    Mr. Smisek. Sure, we will do so.
    Mr. Tilton. And we will be delighted to do that. We will go 
beyond that. We will actually give the Congressman a report on 
the nature of our best practice transfer; on the nature of the 
relationship between the two safety organizations, the regional 
carrier safety organization and ours; the extent to which we 
have on occasion found them wanting, and suggested that until 
something was addressed, we would be suspending any contractual 
services of a particular sort with them. So we will be glad to 
do that.
    Mr. Garamendi. And I would hope that would also include the 
specific actions that your airlines take to verify individual 
pilots.
    Mr. Smisek. We will do so.
    Mr. Tilton. We will be glad to do that.
    [The information follows:]

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    Mr. Garamendi. Thank you.
    Mr. Costello. The Chair thanks the gentleman from 
California and now recognizes the gentleman from Michigan Dr. 
Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman. And before I ask 
questions, I will just comment on the Colgan situation.
    I read the transcript, and I think beyond the training 
issue was the issue of the lack of competence of the 
individuals. It made me shudder to read the cockpit transcript 
and observed the conversation back and forth. They were totally 
preoccupied with personal issues and not with flying the plane. 
And so I think it is not just a matter of training, it is a 
matter of hiring responsible individuals. And I think anyone 
who reads that transcript would realize that was a good share 
of the problem.
    I just want to comment. We have had some other airlines 
coming together, and I understand all the advantages of 
airlines combining and working together and the many different 
ways they do that. But I am afraid what I have seen is that 
there is something lost every time we get some airlines going 
together.
    A very recent case, I won't give specific names, but one 
airline that I thought was operating very, very well, and I got 
to tell you, everyone in the Congress is an expert on flying in 
the airlines because we do it every week ad infinitum. There is 
an airline that I thought was really operating very well was 
combined with a very large airline which had not operated as 
well, and now the combination of the two is not operating very 
well in a number of cases, so I won't get into specifics.
    I really caution you, make sure that you are improving 
service for the public. And I know it is easy for you to say, 
yes, yes, yes, of course, that is our business, that is what we 
should do. That is not what happens in too many cases. And I 
want to warn you about that. And I hope you will give 
assurances that you will conduct frequent surveys of your 
frequent flyers and of the general public as well to evaluate 
how well you are doing in that of combining the two, because I 
am just astounded that the number of what I call poor judgments 
being made by executives who didn't even bother to understand 
the culture of the company they were absorbing and have lost 
some very good people, but above all have lost a lot of good 
spirit, and the public is the worse for it.
    I am not convinced that all this combining of airlines is 
really that advantageous. It may reduce cost of the passengers 
very slightly, it may result in you making more money, which is 
your goal of course, but I am not sure the overall picture is 
really all that great. And I just wanted to caution you on that 
from my perspective, but also give you an opportunity to rebut 
what I have just said.
    Mr. Tilton. Well, what you just said may well present a 
competitive opportunity for Jeff and myself.
    Mr. Ehlers. It may well be. I know that Continental has had 
a very good history in the last decade of being extremely well 
run under the CEO that really renovated it. And I fly all the 
airlines. Unfortunately, being in Grand Rapids, Michigan, we 
have just about every airline under the sun flying in and out 
of there, so we have a large choice, and we exercise that 
choice depending on the service we get.
    Do you have anything to say, Mr. Smisek.
    Mr. Smisek. Sure, Congressman. You are right, we are well 
known for our customer service. I have been in Continental 
since the turnaround 15 years ago and have been part of all the 
decisionmaking at Continental during that 15-year period. We 
are very attuned to customers. We have corporate advisory 
boards, we bring in frequent flyers, we participate in a flyer 
talk forum. We are very attuned to our customers, and that is 
how we get the reputation for customer service.
    But largely, Congressman, our reputation for customer 
service is built around the culture of Continental Airlines. We 
work together very well. We may have disagreements. Working 
together does not necessarily mean saying yes; what it means is 
listening respectfully to someone's position, treating each 
other and our customers with dignity and respect. And as a 
result--and being honest and open and direct. And as a result 
we do give very good customer service.
    And I anticipate the combined carrier, that with our 
combined cultures--United has very, very good people. They are 
delivering tremendous operational performance today. They have 
a fine product, they have great facilities, they have very good 
people. We will combine that into a culture of dignity and 
respect, which they have today, which we can bring together, 
and we can have a carrier that will have wonderful customer 
service.
    The reason I am so confident that we can deliver on the 
synergies is I am confident in the team that I will build, I am 
confident in the culture that we will have, and I am confident 
in the customer service that we will focus on.
    Mr. Ehlers. Well, if you are so great, why are you even 
doing this?
    Mr. Smisek. Because alone we are too small. We compete on a 
global stage, and we are too small. We are a global carrier, 
but a small one, and we need to be big enough to succeed 
against our large foreign and large domestic competitors.
    Mr. Costello. The Chair thanks the gentleman from Michigan.
    Mr. Ehlers. Well, Mr. Chairman, I just want to offer my 
services to you at some point to go in the planes and just ask 
people about what they think.
    Mr. Smisek. That would be great.
    Mr. Ehlers. I did this last week.
    Mr. Tilton. I will take you up on that.
    Mr. Ehlers. I didn't initiate it, but someone else in the 
airplane did sitting in the front row of first. And, of course, 
all the people in first were frequent flyers who said, this 
airline used to be good, what happened to it?
    Mr. Tilton. We appreciate both the competitive opportunity 
that you have advised us of, and we certainly appreciate the 
offer of your services.
    Mr. Ehlers. OK. But at any rate, this one individual said 
it, and the next person said, yeah, I agree with that, and 
pretty soon the entire first class section was saying it has 
really gotten lousy.
    Mr. Smisek. We have a great competitive opportunity. I 
appreciate the heads up.
    Mr. Ehlers. That company has something to worry about.
    Thank you. I yield back.
    Mr. Costello. The Chair thanks the gentleman from Michigan.
    And, gentlemen, thank you for your testimony today before 
the Subcommittee. And with that we will dismiss this panel and 
ask the next panel to come forward. Thank you.
    Mr. Costello. I will begin to do the introductions for this 
panel. Captain Wendy Morse is the chairman of the United Master 
Executive Council, Air Line Pilots Association. Captain Jay 
Pierce is the chairman of the Continental Master Executive 
Council, Air Line Pilots Association. Ms. Patricia Friend, the 
international president for the Association of Flight 
Attendants, CWA. Mr. Robert Roach, Jr., general vice president 
of the Transportation International Association of Machinists 
and Aerospace Workers. Mr. Albert Foer is the president of the 
American Antitrust Institute. Mr. Hubert Horan, who is the 
aviation analyst and consultant. Mr. William McGee, consultant 
on travel and aviation issues, Consumers Union. And Mr. David 
Strine, who is the portfolio manager, Impala Asset Management, 
LLC.
    Ladies and gentlemen, as you know, we will put your entire 
statement in the record. We would ask that you summarize your 
testimony in a 5-minute period. And that will allow both 
myself, Mr. Petri and other Members to ask questions.
    With that, the Chair will recognize now Captain Wendy 
Morse. Captain Morse.

   TESTIMONY OF CAPTAIN WENDY MORSE, CHAIRMAN, UNITED MASTER 
  EXECUTIVE COUNCIL, AIR LINE PILOTS ASSOCIATION; CAPTAIN JAY 
  PIERCE, CHAIRMAN, CONTINENTAL MASTER EXECUTIVE COUNCIL, AIR 
    LINE PILOTS ASSOCIATION; PATRICIA FRIEND, INTERNATIONAL 
PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS-CWA; ROBERT ROACH, 
 JR., GENERAL VICE PRESIDENT OF TRANSPORTATION, INTERNATIONAL 
  ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS; ALBERT A. 
   FOER, PRESIDENT, THE AMERICAN ANTITRUST INSTITUTE; HUBERT 
    HORAN, AVIATION ANALYST AND CONSULTANT; WILLIAM McGEE, 
CONSULTANT ON TRAVEL AND AVIATION ISSUES, CONSUMERS UNION; AND 
 DAVID STRINE, PORTFOLIO MANAGER, IMPALA ASSET MANAGEMENT, LLC

    Ms. Morse. Good morning, Chairman Costello and other 
Members of the Subcommittee. I am Captain Wendy Morse, chairman 
of the United Master Executive Council of the Air Line Pilots 
International. We have more than 7,700 active and laid-off 
pilots at United Airlines, and I appreciate the opportunity to 
speak before the Subcommittee regarding the United-Continental 
merger as proposed.
    Over the past decade the airline industry has experienced 
the worst economic storm in the history of commercial aviation. 
An unprecedented series of financial shots have taken their 
toll on airline service and on employees. Bankruptcies, 
employee layoffs, contractual concessions and outsourcing have 
all been well chronicled. The proposed merger between United 
and Continental represents not only an opportunity for both 
airlines, but a possible sea change in the economic direction 
and customer satisfaction for the airline industry. How this 
merger is handled will determine whether it has changed for the 
better.
    This choice could not be clearer, and a recent history of 
airline mergers provides a vivid picture of which path to 
choose. We are not traveling down uncharted territory. The 
obvious path to success, should it be selected, has already 
been established. The advantage of the knowledge of what has 
worked and what hasn't worked must be recognized.
    The Delta-Northwest merger in which the company worked out 
a mutually satisfactory contract with the pilots has been a 
resounding success. It has exceeded initial estimates for 
financial synergies, leading to a more viable company that 
provides greater service for the flying public and provides 
greater employment certainty for its employees. The America 
West-U.S. Airways merger in which management failed to 
negotiate contract terms in advance is still run as two 
separate companies. Mired in lawsuits, America West-U.S. 
Airways has failed to realize the advertised synergies, even 
though the merger took place more than 5 years ago, and 
continues to have its share of unresolved labor issues, which 
benefits neither the company nor the consumer.
    One axiom in the service industry stands as a beacon of 
truth: Take care of your employees, and ultimately they will 
take care of the customers, and the business will take of 
itself. It is imperative that the combined United-Continental 
establish a management team not only capable of running the 
airline well, but also that cultivates a culture where the 
combined entity provides the revenue and capital generation for 
a great product.
    In order for this merger to be successful, there must be a 
joint collective bargaining agreement with assurances for 
wages, working conditions and job protections that are 
commensurate with the professionalism that our pilots exhibit 
each and every day. Thanks to the professionalism, commitment 
and financial sacrifice of pilots and other employees, our 
airline has weathered numerous challenges and now flourishes, 
but there are still challenges ahead.
    One of the biggest for the pilots of United and 
Continental, and indeed for the airline piloting profession, is 
the industry's continued drive to outsource as much flying as 
possible to an ever-shifting collection of the low-cost 
subcontractors. Last year United Airlines laid over 1,437 
highly experienced pilots, their jobs outsourced to these low-
cost subcontractors. The average United Airlines passenger now 
has a 50/50 chance that their flight is being operated by 
United Airlines. This philosophy, which puts profits ahead of 
safety and the traveling public, must come to an end.
    While United Airlines has been on the Hill saying all the 
right things, seeking approval, I speak for the United pilots 
when I tell you that our contribution must be recognized in 
order for this merger to be successful and the synergies to be 
realized. We ask that as you consider the benefits this 
transaction will have for the industry and for consumers, you 
also measure whether managerial actions are consistent with 
their words.
    United and Continental managements now stand at the 
threshold of what could be a great airline, one that sees 
sustainable profits and will also provide unmatched service to 
our customers. A combined United-Continental could establish a 
new paradigm in commercial aviation, one where management and 
labor work together to establish a solid, profitable airline, 
where employees are properly compensated and where job security 
is not a constant concern.
    As key stakeholders, the United pilots stand ready to 
embark on this new business opportunity. Our favorable 
participation will lead to a stable, sustainable airline. This 
in turn will produce an unprecedented level of success for 
United stakeholders and an exemplary level of service for the 
flying public. I thank you.
    Mr. Costello. The Chair thanks you, Captain, and now 
recognizes Captain Pierce.
    Mr. Pierce. Good morning, Mr. Chairman, Ranking Member 
Petri and Members of the Committee. I am Captain Jay Pierce, 
chairman of the Continental Airlines Master Council of the Air 
Line Pilots Association International. Thank you for the 
opportunity to speak regarding the proposed Continental-United 
merger. I am particularly thankful that you have taken the time 
to consider the effect this proposed merger may have on labor.
    I began my aviation career in the United States Army in the 
late 1970's and have been a professional airline pilot for over 
25 years. I am in my second term serving in the Continental 
Pilot Group as its chairman. And as a Continental pilot I can 
assure you that I have been trained to recover from a full 
stall.
    I tend to think in terms of opportunities, risks and 
rewards. I believe that this merger will be an exercise in all 
three. The questions that have to be answered are, will the 
opportunities produce success; who will assume the risks; and 
finally, who will reap the rewards?
    To some, the initial value created by participating in the 
merger will allow for claims of success. However, if creating a 
story for Wall Street simply through participation is the goal, 
that bar is set very low. None of us should accept the 
philosophy of mediocrity as the standard for success. If done 
correctly this merger can strengthen our airlines and help 
resurrect a failing industry. This is the opportunity.
    Our merger partner United's financial performance has been 
in critical condition, and although ours is better, has been 
in--could be considered somewhat anemic. Over the last decade 
network carriers have reported over $60 billion in net losses. 
Since deregulation there have been over 180 airline 
bankruptcies. Historical greats, such as Pan American, CWA and 
Eastern, have become extinct. Thousands of employees have lost 
their jobs, shareholder value has been erased, and communities 
have suffered. The industry is broken and is badly in need of 
an overhaul.
    Continuing down the well-traveled path of economic 
irrationality does not bode well for the traveling public, 
shareholders, or for the long-term interest of airline 
employees. It is incumbent on us to find rational solutions. I 
believe that a properly executed merger can be a better 
solution for the industry than consolidation by failure.
    Going third in this round of airline consolidation provides 
us an opportunity to examine what has worked and what has 
failed. It is clear to see that the difference between marginal 
success and real success can be tied directly to labor, and 
more specifically pilot labor. In a merger it is not the 
executives, the bankers or the lawyers who assume the risk; it 
is the employees, and it is labor. If we must carry the risk, 
we must share in the rewards.
    I cannot guarantee that this merger will be successful, but 
I can with all certainty predict its downfall if our pilots do 
not support the path our managements have chosen. The merger is 
expected to produce over $1 billion in airline synergies. If 
the merger is successful, that success will be determined by 
the strength of the new entity, the value added to 
shareholders, and, even more importantly, by the pride of the 
airlines' labor force. This pride can only be regained by first 
returning to labor what has been lost through years of 
concessions. As irrational as it is to continue to foster a 
failing industry, it is equally irrational to use the benefits 
derived from a merger to simply enrich those who put the deal 
together or to continue to throw good money after bad with ill-
conceived business plans that reward only those at the top.
    It is also important that this merger provide benefits for 
passengers. We should use this opportunity to reexamine 
subcontracting and outsourcing. When a passenger books a trip 
with Continental from Houston to Newark and then beyond, they 
have an expectation that the entity they purchased the ticket 
from is responsible for their travel experience. Network 
carriers should be operational airlines, not merely ticket 
agents.
    Our passengers have a right to receive one level of service 
and one level of safety from the beginning of their journey to 
their final destination. To achieve that single platform 
experience, flights must be operated under the operational 
control of the network carrier and therefore be crewed by 
pilots working under contract with that airline. As Continental 
employees we bring an award-winning culture of customer service 
to an industry marked with sharp declines in customer 
satisfaction. We bring strong job protections that limit the 
outsourcing of flying to its lowest bidder. If done in the 
right fashion, this merger can bring the best of Continental to 
the United name.
    In closing, I would like to remind you that Continental 
Pilot Group did not search out or solicit this merger. We are, 
however, cognizant of the fact that if done correctly, this 
could be an opportunity to create a great airline, one enriched 
by Continental's culture, with a route structure capable of 
transporting customers to almost anywhere in the world and a 
pilot group unmatched in professionalism and experience. Thank 
you for your time, and I look forward to your questions.
    Mr. Costello. The Chair thanks you, Captain Pierce, and now 
recognizes Ms. Friend.
    Ms. Friend. Thank you, Chairman Costello, Ranking Member 
Petri and the Members of this Committee, for giving AFA-CWA, 
the world's largest flight attendant union, the opportunity to 
testify on this proposed merger of United and Continental 
Airlines.
    The voices of the workers often take a back seat in these 
hearings and in the public pronouncements about the benefits of 
airline mergers. I am here today to give those workers a voice. 
As a United flight attendant for 43 years and the president of 
AFA-CWA for 15 years, I have had a unique perspective on the 
dramatic changes that have reshaped the commercial aviation 
industry and eliminated thousands of jobs.
    Lately I have listened to airline CEOs testify before this 
Congress about the need to consolidate the industry in order to 
achieve a sustainable business model. After hundreds of airline 
bankruptcies, thousands of employee furloughs, devastating pay 
and benefit cuts, destruction of pensions and 32 years of 
deregulation, it seems that airline management has figured it 
out, albeit in the worst fashion, that our Nation needs a 
stabilized and a rational aviation industry.
    Mr. Chairman, the Nation's flight attendants and all 
aviation workers also need a stable industry. The consumers are 
rightfully concerned that airline mergers will lead to higher 
fares and reduced service. We agree. But we also recognize the 
reality that airline fares must increase in order to stabilize 
this industry, provide a robust air transportation system, and 
provide more stable employment for thousands of aviation 
workers.
    To strike this balance between a stable industry and 
reliable air service, we assert today that the increase in 
consolidation activity requires appropriate regulatory 
oversight to protect the interest of employees and consumers. 
But while some protections are in place today for consumers and 
communities, since deregulation there are virtually no 
protections for airline workers. Of all the well-developed, 
prederegulation rules of the Allegheny-Mohawk Labor Protective 
Provisions, only one exists today, a provision that establishes 
basic seniority protections in the event of a merger.
    After deregulation the Congress was concerned that massive 
postderegulation restructuring of the airline industry would 
displace large numbers of employees. So in order to assist 
laid-off employees, they added the Airline Employee Protection 
Program to the Deregulation Act of 1978. Unfortunately, the 
almost 40,000 employees who lost their jobs in the immediate 
wake of deregulation never received the benefits that Congress 
promised since funding was never authorized for the benefits.
    As Congress looks into the impact of mergers on employees, 
it should definitely look at the failed EEP as a framework to 
provide meaningful protections to workers in the future.
    As we have testified in the past, we are not proposing to 
reregulate the industry, but we do think that at a minimum 
something needs to be done to shield workers from the harshest 
effects of this merger and all future mergers.
    So what can the workers at United and Continental expect as 
they combine their workforce and route structure? While 
management has provided information that is otherwise publicly 
available, management has not been forthcoming about critical 
and future business plans. I call on this Committee to compel 
United and Continental management to provide the information on 
their plans for current United and Continental employee-based 
and hub operations.
    In addition to the proposed merger, United is the architect 
of a new global alliance revenue-sharing scheme. They have 
contracted with Aer Lingus to operate an international route 
for them using Aer Lingus aircraft, but employing flight 
attendants from a third-party operator. We call on this 
Congress to stop this type of so-called joint venture scheme by 
enacting H.R. 4788. We call on you to not let United and 
Continental management use this merger as a vehicle to 
outsource more good middle-class jobs.
    We also ask this Committee to consider the impact this 
merger may have on the contract negotiations under way between 
the Association of Flight Attendants, CWA and United Airlines. 
For almost 6 years the flight attendants at United have been 
working under a collective bargaining agreement that was 
negotiated while the company was in bankruptcy. They sacrificed 
nearly $2.7 billion in salary and benefit concessions in 
addition to the loss of their pension. We are asking your help 
to ensure that the current contract negotiations are 
satisfactorily resolved before this merger is finalized.
    We will not allow the negotiation process at United to be 
delayed as a result of this merger. The employees at United 
Airlines make deep sacrifices to keep the company flying, and 
it is time for the workers to share in those rewards. While 
much will be made over the coming months about the impact of 
this merger on consumers and communities, I urge you to 
remember the hundreds of thousands of airline employees across 
this country. Keep us in mind as you review this merger and the 
impact that it will have on our lives and our families. We are 
the ones who have the most to lose, and we have the least 
protection.
    I thank you for your time, and I look forward to your 
questions.
    Mr. Costello. The Chair thanks you, Ms. Friend, and now 
recognizes Mr. Roach.
    Mr. Roach. Thank you, Chairman Costello, and Ranking Member 
Petri, and Members of the Committee, for the opportunity to 
speak to you today. My name is Robert Roach, Jr. I am the 
general vice president of the International Association of 
Machinists and Aerospace Workers, the largest airline union in 
North America. The Machinists Union represents over 27,000 
employees that could be adversely affected by this merger at 
Continental Airlines; the flight attendants, Air Micronesia, a 
subsidiary of Continental; the flight attendants, Express Jet, 
a regional partner of United and Continental; and fleet and 
passenger service, as well as other classifications at United 
Airlines.
    We echo Chairman Oberstar's statement when he wrote to the 
Department of Justice, this merger will move the country far 
down the path of an airline system dominated by three 
megacarriers. If United and Continental merge, another domino 
in a chain of merges will fall, and there will also be 
additional consolidations to help them survive. Already the 
president of U.S. Airways of the regional--of a low-cost 
carrier has announced that if this merger goes through, that 
his airline will soon follow suit.
    We cannot look at the United-Continental transaction in 
isolation. The airline industry has been in turmoil since the 
passage of airline deregulation in 1978. The Machinists Union 
argued against deregulation. Our predictions have come true. 
Deregulation in this industry and others has had disastrous 
effects. In 2007, the financial and housing meltdown was a 
result of unregulated corporate greed in the banking and 
mortgage industries. Looking daily at the news reports about 
the catastrophe in Louisiana and the Gulf Coast, with oil 
spilling out, ruining the lives of people down there, we can 
tell that deregulated industries only operate in their own best 
interest and not the interest of the consumers or their 
employees.
    The airline industry needs to be stabilized because it 
drives $1.4 trillion in economic activity and contributes $692 
billion per year to the gross national product. It is too vital 
an industry to leave to its own destructive devices.
    It is clear that the airline industry has failed to deliver 
on the promises of a stable, profitable industry, and staying 
the course will only continue the industry's downward spiral. 
Albert Einstein, the great scientist, said, ``Insanity is to 
continue to do the same thing over and over again and expect a 
different result.''
    Can we allow the airlines to continue to consolidate and 
merge and continue to lose money, lose employees, destroy 
cities and States with their supposed service without some sort 
of regulation to protect those interests? Even Alfred Kahn, the 
major architect of deregulation, said, ``I must concede that 
the industry has demonstrated a more severe and chronic 
susceptibility to destructive competition than I, along with 
other enthusiastic proponents of deregulation, was prepared to 
conceive.''
    The industry is crying out for limited reregulation. Does 
anyone really believe that having only a few major airlines in 
operation, each with immense market control and offering 
consumers fewer choices, will benefit the country? If one of 
these megacarriers should fail, how will that impact the 
country?
    The Machinists Union has serious concerns not only about 
the viability of a combined carrier, United-Continental, but 
the industry in general. Although we have met both airlines 
jointly and separately since the airline merger was announced, 
IAM members still have many questions unanswered and concerns 
that need to be addressed.
    We estimate that United, the merger--the merger of United 
with Continental carrier would start out with $13.8 billion in 
debt. What is the business plan to deal with that debt 
structure? Will the merged carrier have any choice but to 
eliminate hubs in order to avoid competing with itself? Closing 
hubs initiates a cascade of job loss that begins with airline 
employees and continues throughout the communities to the firms 
that provide services to the airline. Will the merging of these 
two carriers and wholesale reshaping of the industry destroy 
competition and harm consumers?
    As details about the combined carrier business plan emerge, 
it must be closely scrutinized to determine if the merge will 
result in a successful airline or not. We ask Congress to help 
determine if this transaction will be good for employees. The 
carriers admitted that homogenizing pensions is a complex 
issue, and although they have given it much thought, they do 
not know how it will be resolved.
    The Machinists Union will not allow a member's retirement 
security to become a casualty of this merger. United Airlines 
has passed billions in pension liabilities to the American 
taxpayer already. The Machinists Union is currently in contract 
negotiations. For all eight classifications we have members of 
the two carriers. It is premature for anyone to talk about 
combining the carriers' employees, and each airline must 
recognize a responsibility to continue bargaining in good 
faith.
    I would like to say that all the past mergers--U.S. Airways 
and America West, which is now being said we are going to 
another carrier, has operated as a separate carrier for 5 
years. Although your announcements that Delta is working fine, 
Delta is working as a separate carrier in many of its 
classifications.
    And let me just say very quickly in closing that I am a 
product of one of these mergers. I was at TWA. My seniority was 
changed from 1975 to 2001. And we heard the same predictions, 
the same predictions that we hear from all CSOs and CEOs, that 
these airlines were not going to lay anybody off, that we were 
going to continue to service. St. Louis is a ghost town. The 
people in Kansas City have lost their jobs. As Mr. Tilton 
testified, planes are going over to China to be maintained.
    It is time to put a stop to this. Enough is enough. We need 
to reregulate the airline and put a halt to this airline merger 
until we have a stable airline industry.
    Thank you, Mr. Chairman. I look forward to your questions.
    Mr. Lipinski. [Presiding.] Thank you, Mr. Roach.
    The Chair now recognizes Mr. Foer.
    Mr. Foer. Thank you, Mr. Chairman, Members.
    Since most of my analysis today closely resembles my 
testimony before this Committee 2 years ago, my first 
recommendation, as foreshadowed by the gentlewoman from Hawaii, 
is that Congress ought to hold retrospective hearings on the 
Delta-Northwest merger. Has it accomplished its stated 
objectives? Were the projected efficiencies obtained? Has 
competition been adequately protected? Is the American consumer 
better off or worse off? I don't have the answers, but there is 
no question that the answers would be invaluable in our efforts 
to predict what the implications of the United-Continental 
marriage are going to be. Indeed, it might make sense to 
actually delay the consummation of this merger until a fully 
credible study of the prior merger can be taken into account.
    The essential points of my written statement are the 
following. One, this is an industry in which there are 
substantial network effects, but the incremental costs of 
expanding an already large network may offset the network 
benefits.
    Two, the industry is already concentrated on a national 
basis, but this generalization underestimates the market power 
that is present at most hubs and on most routes.
    Three, a merger of this magnitude will in all probability 
lead to at least one more merger of similar size, and that will 
leave the U.S. domestically with three national network 
carriers, plus Southwest, and a fringe of other low-cost 
carriers.
    And four, this merger will itself likely lead to 
rationalizing capacity by closing or scaling back hubs, 
probably in the Midwest, which will harm a significant number 
of consumers.
    Now, these considerations require us to ask whether the 
four, or more likely three, national networks that will emerge 
from this process will be sufficient to provide a satisfactory 
range of choice and service and sufficient competition to keep 
prices close to cost. Standard antitrust analysis focuses on 
horizontal overlaps between airport pairs and, in certain 
markets, between city pairs. If an origin and destination route 
is served by only a few airlines, and the merger will leave the 
particular market more highly concentrated, then the DOJ will 
likely and properly require a divestiture or some other 
arrangement with respect to that route as a condition of 
approving the transaction. This is necessary, but it is not 
sufficient, especially if we look at competition among the 
systems and not merely within specific route pairs.
    Much has been made over the role of low-cost carriers in 
preserving competition. Southwest clearly influences prices 
wherever it competes, and there may be an effect even when 
Southwest is perceived as a potential competitor. But Southwest 
and the other low-cost carriers have found their success by 
competing indirectly rather than directly with the networks. 
They are called low-cost carriers in large part because they do 
not bear the cost of large networks. They do not offer the same 
type of one-stop shopping, frequent flyer benefits or airport 
amenities as network carriers. So decisions about the future of 
domestic air transportation should not rest on the concept that 
Southwest will always play its current role. Its strategies 
could change, its management could make mistakes. It could 
choose to relax under the price umbrella of a tight oligopoly 
of network carriers.
    The ultimate question is whether the public will be 
satisfied with three domestic and three global air 
transportation systems. There is little, if any, empirical 
knowledge that says how many systems are needed to provide a 
workable degree of intersystem competition. There is 
substantial data, both empirical and theoretical, that suggests 
that competitive problems increase as the market becomes highly 
concentrated. There is substantial experience with domestic air 
mergers that suggest how difficult they are to execute 
successfully, how few efficiencies have resulted from big 
carrier mergers, and how minimal entry has been at the network 
level.
    To the extent there is doubt about the United-Continental 
merger, it should be resolved as essentially a public policy 
question: Are we willing to interfere with private business 
decisions in order to preserve the few competing systems at the 
possible expense of whatever efficiencies might realistically 
be lost?
    We suggest that the magnitude and certainty--and I am just 
about finished--of these proclaimed efficiencies should be 
analyzed with great skepticism, and must be laid against 
inefficiencies due to other diseconomies of scale and scope, 
the cost of consummating the merger, and the reduction of 
competition arising from the merger. From a public perspective 
there should be no reason to rush to a decision on whether to 
allow United and Continental to merge, and it would make 
particularly good sense to examine the effects of the most 
recent similar merger, Delta and Northwest, before opting for 
further consolidation.
    Thank you very much.
    Mr. Lipinski. Thank you, Mr. Foer.
    Mr. Horan.
    Mr. Horan. Mr. Chairman, the United-Continental merger and 
the ongoing airline consolidation process creates four major 
problems for consumer and industry efficiency. I believe all 
four problems have a common cause the Committee needs to 
address going forward.
    Problem number one, as documented in Exhibit 1 of my 
testimony, is the overwhelming evidence that anticompetitive 
market power created by North Atlantic consolidation has 
already created consumer welfare losses in excess of $5 billion 
a year. These consumer welfare losses will be much worse in a 
few years after the implementation of United-Continental and 
American-British Airways.
    Problem number two is that United-Continental is part of a 
well-planned, three-phase process to consolidate the entire 
legacy network business so that a permanent cartel of three 
too-big-to-fail collusive alliances control 80 percent of the 
overall U.S. aviation market, including 100 percent of the 
transatlantic and transpacific. In the North Atlantic phase 1, 
the DOT handed exclusive control of all intercontinental 
traffic to and from the United States to three companies. In 
phase 2 those three companies used that artificial market power 
to force the other three domestic legacy airlines out of 
business. Phase 3 began last year with the Japan ATI cases that 
are designed to create the same type of multibillion-dollar 
consumer welfare loss as we have already seen on the North 
Atlantic. Continental-United is an integral part of all three 
phases and can't be evaluated as an isolated event.
    Problem three is the domestic market power threat. United-
Continental will not cause immediate price increases in the 
local Chicago-Houston market, but broad categories of U.S. 
consumers are at risk. Legacy network carriers cannot survive 
without a strong, secure source of the international traffic 
that is the heart of their business model. When DOT gave three 
legacy companies exclusive control over all of this traffic, 
the DOT issued a de facto death warrant for legacy companies 4, 
5 and 6. The Delta-Northwest merger eliminated number 4; the 
current merger eliminates number 5 and is designed to cripple 
or kill U.S. Airways, number 6, who has no hope of independent 
survival even though it is the most efficient of all the legacy 
carriers.
    The destruction of competitors in forced mergers where 
companies can be acquired for pennies on the dollar are market 
power abuses every bit as serious as the cartel pricing you see 
in international markets.
    Consumers also face the threat of oligopoly service 
reduction in hundreds of smaller cities once this control of 
the legacy 80 percent of the market shrinks from six to three 
carriers, a threat that will not be addressed or mitigated by 
low-cost carrier expansion.
    Problem number four is that these mergers cannot be 
justified on efficiency synergy grounds, the heart of the CEO's 
arguments earlier, and are strictly motivated by the potential 
for increased anticompetitive market power. No previous merger 
between large airlines has ever produced a material reduction 
in unit operating cost, no previous merger between large 
airlines has ever produced large enough synergies to justify 
the enormous implementation costs of these mergers, and the 
vast majority of airline mergers since deregulation have been 
dismal financial failures. There is no evidence that the PR 
claims about the Delta-Northwest merger producing multibillion-
dollar synergies are true.
    The single root cause of these four consumer inefficiency 
problems is the DOT's willful refusal to obey or enforce 
longstanding antitrust law. Antitrust law is not a barrier to 
any airline consolidation that can demonstrate public benefits, 
be they efficiency gain, service expansion, or lower prices, 
and that does not create or enhance artificial market power. 
But the evidence in this and in every previous case has been 
either nonexistent or fraudulent.
    The DOT refused to conduct the legally required Clayton Act 
market power test in any previous case. The DOT has not only 
willfully ignored the evidence of growing anticompetitive 
pricing that I have documented in my testimony, but they failed 
to collect any evidence on pricing or entry barriers 
whatsoever. The DOT simply made the false assertion the North 
Atlantic is a fully contestable market, even though there 
hadn't been new entry in 23 years.
    Every DOT ATI decision is based on completely fraudulent 
public benefits evidence, directly violating the horizontal 
merger guidelines requirements for verifiable, case-specific 
evidence that is neither vague nor speculative. The public 
benefits in each case rely on the completely false DOT claim 
that eliminating competition actually reduces prices in certain 
markets and does so automatically regardless of market or 
competitive conditions. And the DOT has used this ``prices fall 
whenever we reduce a competition'' rule to nullify the legal 
requirement for verifiable, case-specific evidence of public 
benefits in all future cases.
    The Committee and Congress must address this core problem 
that is DOT nullification of evidence-based antitrust 
enforcement means that airline competition is no longer being 
determined by consumers and investors in the marketplace in 
accordance with the Airline Deregulation Act, it is being 
determined by government bureaucrats working at the behest of 
politically powerful incumbent companies. The Committee cannot 
allow this merger review to proceed without full assurance 
there will be rigorous, independent scrutiny of the core 
synergy and market power claims, and, more importantly, the 
review cannot proceed until the DOT's nullification of 
evidence-based antitrust enforcement has been clearly rejected, 
and the irreconcilable split that exists today between the DOT 
and DOJ approaches to antitrust has been resolved.
    Mr. Horan. And my last point, the Committee must intervene 
in the current U.S.-Japan ATI case, where the DOT has clearly 
signaled they have no intention of enforcing the law, plans to 
rubber-stamp a massive reduction in trans-Pacific competition 
that is going to weaken U.S. competitiveness and basically use 
multibillion-dollar consumer price increases in order to 
protect inefficient foreign carriers such as Japan Airlines.
    Thank you, Mr. Chairman.
    Mr. Lipinski. Thank you, Mr. Horan.
    The Chair will now recognize Mr. McGee.
    Mr. McGee. Thank you, Mr. Chairman and Members of the 
Committee. Good afternoon. My name is William J. McGee, and I 
appear before you today as a consultant on travel and aviation 
issues for Consumers Union, the nonprofit publisher of Consumer 
Reports. I thank you for the opportunity to express our deep 
concerns about the proposed merger between United Airlines and 
Continental Airlines.
    Just as we have seen with banking and other businesses, we 
are now seeing the airline industry evolving into an oligopoly, 
and some carriers are rapidly approaching the too-big-to-fail 
threshold. In this environment, those who previously decried 
any form of assistance to financially struggling carriers would 
reverse that argument, claiming a mega-carrier, such as United-
Continental, will be too big to fail. And they would be right; 
a shutdown would have immediate and adverse effects throughout 
the country.
    When the U.S. Airline industry received a $5 billion 
bailout in 2001, it was argued that airlines were essential to 
America's economy, infrastructure, security, and defense. 
Consumers Union agrees. Yet what we have been witnessing is an 
incredibly shrinking airline industry. With this merger, in 
less than 20 years we will have seen the demise of seven major 
brands in the United States: Pan Am, Midway, Eastern, TWA, 
America West, Northwest, and now Continental.
    While others can speak to the adverse effects on labor, the 
travel and tourism industries, and a host of suppliers, I will 
focus my comments on the potentially adverse effects upon 
passengers.
    In February 2001, the General Accounting Office reported on 
airline consolidation and identified several potential threats 
to consumers. We can't predict with absolute certainty how the 
United-Continental merger ultimately would affect consumers, 
but we can examine the recent historical record to see how 
passengers were affected by American's acquisition of TWA's 
assets in 2001, US Airways' reverse merger with America West in 
2005, and Delta's acquisition of Northwest in 2008.
    Unfortunately, the record for consumers is not good. In 
addition to the too-big-to-fail argument, we have identified 
other key problems that emerged. More details are available in 
my written testimony.
    One, less choice and fewer flights: Historically, we have 
not seen a merger among major carriers that has not led to 
reductions in service. United-Continental states it will 
maintain 10 hubs, eight of them in the continental United 
States. What we do know is that other mergers between major 
airlines eventually led to hub closures and flight reductions, 
despite promises to the contrary.
    Consider that TWA's former hub in St. Louis saw a reduction 
in total passenger traffic from 23 million in 2002 to 12 
million in 2009. America West's former hub in Las Vegas has 
shrunk as well. And although the full effects of Delta-
Northwest have yet to be seen, Delta's hub in Cincinnati is 
already experiencing cutbacks.
    Meanwhile, consumers on many routes are losing the 
opportunity that some airline executives suggest to ``vote with 
their feet,'' where there is no effective competition.
    Two, loss of service: It seems apparent the United-
Continental merger would mean some cities, particularly smaller 
cities, would lose nonstop air service, if not all air service. 
The more mega mergers that are approved, the higher the 
probability that additional cities will lose service.
    Three, higher fares: A July 2008 report from the GAO 
concluded that mergers and acquisitions can be used to generate 
greater revenues through fare increases. Some analysts argue 
low-cost carriers will fill the void, but, one, there is no 
guarantee they will do so, and, two, even when a low-cost 
carrier enters a former hub, prices fall only on selected 
routes, not on all routes.
    Four, reductions in service: Airline mergers tend to be 
contentious, and this case involves two mature companies. 
United was founded in 1926, Continental in 1934. So, therefore, 
a clash of corporate cultures is virtually guaranteed, 
particularly after layoffs.
    These sterile corporate terms--downsizing, right-sizing, 
outsourcing, off-shoring, furloughing--really mean two 
workforces will experience more trauma and jockeying for 
position on blended seniority lists. Inevitably, this will lead 
to employee morale issues and slowdowns due to melding of 
policies, procedures, and technologies.
    Five, fewer start-ups: Greater concentration of market 
share has a negative effect, according to a 2001 DOT report. It 
noted instances in which incumbent airlines drove new entrants 
out by cutting fares and flooding the market with capacity, 
only to later increase fares and reduce service.
    Six, less resistance: Since deregulation in 1978, we have 
repeatedly seen how one major carrier will initiate a fare 
increase and then watch if rivals will match. If enough key 
players resist, then the fare hike will be withdrawn. This same 
principle has applied to introducing airline fees and even to 
service initiatives. In a smaller industry, the likelihood of a 
rival carrier resisting a new fee or airfare increase will 
dissipate.
    Seven, widespread disruptions: With greater concentration, 
the United States faces a much greater threat of travel 
disruptions. Imagine the nationwide effects of a labor action 
or FAA grounding at a combined United-Continental, which 
analysts estimate would control nearly a fifth of all domestic 
airline seats. Even a 24-hour loss of service would have severe 
consequences.
    Eight, raising the stakes: Since the approval of the Delta-
Northwest merger, some proponents of the United-Continental 
merger argue that ``fair is fair.'' That is why executives from 
American Airlines may soon appear before this very Committee 
seeking a merger with U.S. Airways, which, of course, just 
merged with America West in 2007. Ironically, this sudden 
leapfrogging in the airline ranks has not been due to genuine 
growth, expanding service, and creating jobs, but to reductions 
in service.
    It seems only fair to ask what the end game is here. At 
what point will this merger mania subside? Today we are told 
the domestic airline industry can only support only three large 
network airlines. How long before we are told that number has 
been reduced to two or one? Before further consolidation is 
approved, Consumers Union feels there should be more discussion 
about the airline industry's ultimate goals and how those goals 
affect U.S. consumers.
    Thank you. And I look forward to your questions.
    Mr. Lipinski. Thank you, Mr. McGee.
    Mr. Strine?
    Mr. Strine. Thank you, Mr. Chairman and Members of the 
Committee.
    Like you, investors in the capital markets have heard 
different arguments about why or why not mergers should take 
place in the U.S. airline industry. The balance of these 
arguments and the resulting policy impact how the market prices 
risk and sets the cost of capital for the airline industry.
    To help you with your analysis, I will provide you with a 
perspective from the financial markets. So long as the airlines 
source their funding from the debt and equity capital markets, 
the boards of directors and management teams have fiduciary 
duties to their shareholders and creditors. In keeping with 
that duty, it is incumbent upon them to manage risk and work to 
enhance returns on invested capital.
    While managing costs and delivering products that customers 
value are important, making strategic structural decisions that 
permit their companies to adapt to changing market conditions 
are also critical. The airline industry is in dire need of 
lowering its financial risk and its cost of capital, and 
consolidation is one part of the solution.
    By several objective measures, the performance of the 
industry, including Continental and United, has been abysmal. 
The regularity of loss and failure goes unrivaled in corporate 
America. For example, looking at the performance over the past 
decade, we can see that the industry has reported an aggregate 
loss of about $68 billion, there have been 58 bankruptcies, 
about 130,000 jobs lost, and defined benefit pension plans were 
offloaded to the Pension Benefit Guaranty Corporation. In 
addition, the average age of the fleet increased to about 11 
years.
    To cap it all off, the value of the XAL, which is the New 
York Stock Exchange airline index, has dropped by about 77 
percent since 2000. Taken as a whole, the body of evidence 
supports the need for profound change. The leadership at United 
and Continental are trying to address this need.
    The poor financial performance of the industry through a 
full business cycle can be attributed to its high fixed-cost 
structure, overleveraged balance sheets, low barriers to entry, 
higher barriers to exit, fragmentation, and fierce competition 
from low-cost carriers and recently consolidated, well-funded 
international carriers in Europe, the Middle East, Asia, and 
Latin America. These factors contribute to the higher cost of 
capital, which limits growth.
    Over the past year, airline asset-backed debt has 
frequently garnered yields over 10 percent. In one debt 
transaction, United paid 17 percent. Further, in the autumn of 
2009, every major network carrier except Delta issued equity at 
steep discounts in transactions that were highly dilutive to 
shareholders, which also raises the cost of capital. To this 
day, the weighted average cost of capital remains well into the 
double digits because of the significantly overleveraged 
balance sheets.
    Over the long term, value can only be created when the 
return on capital exceeds its cost. This is a fundamental 
financial goal the airline industry has never been able to 
achieve through a full cycle.
    Now, consolidation is certainly not a cure-all, but it is 
self-help. While the United-Continental merger is far to small 
to significantly change the competitive dynamics of the 
industry, given that the two carriers combined only produce 
about 18 percent of the available seat miles and they have de 
minimis route overlap, their focus on improving efficiency and 
creating synergy is a step in the right direction toward 
financial stability.
    Although labor costs are likely to rise, as they typically 
do in mergers and after reductions and bankruptcy, the scale of 
the combined entity should enhance purchasing power with 
suppliers and the global network should be more attractive to 
high-yielding corporate customers.
    In addition, although United-Continental may gain 
additional corporate customers, which should improve their 
yield mix, it would be wrong to conclude that the merger would 
stop the domestic yield deterioration, which has been going on 
for the last 30 years due to the continued growth of low-cost-
carrier market share. Over the last 10 years, network-carrier 
market share has dropped by 33 percent.
    In conclusion, as you weigh policy objectives for the 
airlines, you may want to consider the benefits from having 
airlines in a better position to generate a return on invest 
capital in excess of their cost of capital through a full 
business cycle.
    The balance of positions which seek to socialize aspects of 
the airline industry without social funding versus those that 
promote growth in the free market will contribute to how the 
market prices airline capital risk and measures the required 
rate of return to justify growth.
    The ability to generate more consistent returns on equity 
and free cash flow is the path to repairing balance sheets and 
longer-term financial stability. Only then will there be a 
solid foundation for increased capital expenditures, rising 
wages, and increased service.
    Thank you.
    Mr. Lipinski. Thank you, Mr. Strine.
    I would like to thank the witnesses for their testimony.
    We will now move on to Members' questions. And I will begin 
with the distinguished gentleman from Minnesota, the Chairman 
of the Full Committee, Mr. Oberstar.
    Mr. Oberstar. Thank you, Mr. Chairman.
    And I want to join his compliments to the panel for their 
splendid testimony.
    Vice President Roach, your very personal witness to your 
own experience, I remember it so well, of TWA. You are right, 
it did hollow out. St. Louis, it did empty out--Kansas City. 
The result of the acquisition meant the sale of their nonstop 
service between St. Louis and London Heathrow, which Mr. Icahn 
sold to American Airlines for $400 million. It should never, 
never have acquired value in a marketplace. These are rights 
given in the public interest for the public convenience and 
necessity, not for the personal enrichment of the carrier.
    And American made that money back in about a year. But St. 
Louis lost its connection to the world beyond, and an awful lot 
of people lost their jobs in the process. And, ultimately, TWA, 
one of the great proud carriers of years and decades past, was 
absorbed by American and now has to beg O'Hare for service to 
the whole country. That is the encapsulated summary of mergers 
and bigness.
    Yeah, ``too big to fail.'' United-Continental, as one of 
our witnesses just said, would control a fifth of the domestic 
market share, 115 billion of available seat miles. That is 
enormous capacity control.
    I asked several years ago, and I think Mr. Foer may recall 
this: Why would anyone, would any carrier spend $150 million on 
a 747 when, for $50 million, you can buy a whole fleet? Do you 
remember what I had referenced to, Mr. Foer? Checchi and Wilson 
acquiring Northwest. For $50 million, they bought a whole fleet 
of 747s. And it took an airline that had $2 billion in equity 
and $1 billion in debt and turned it just the exact 180 
degrees, $2 billion in debt and less than $1 billion in equity, 
and put it on a path towards the brink of bankruptcy.
    Now, this bigness and this merger mania, they spent 6 
months looking for other carriers to acquire until they 
realized they needed to manage an airline. And all of you who 
have been captains, flight attendants, the maintenance 
personnel, all have seen this happen in the industry. Bigness 
leads to neglect and to difficult labor relations and to lower-
quality service.
    Now, Mr. Foer, your testimony said, I predicted, along with 
many others, that a merger for Delta-Northwest would lead to a 
merger between United and Continental. I put it just the 
opposite of your testimony, your exact words, but that is what 
you meant. And that is what has happened.
    Now, isn't it likely that the next shoe will drop if this 
one is approved--that is, American, US Airways, BA, Iberia, and 
Czech Airways, and JAL--and then have you three global mega 
carriers, right?
    Mr. Foer. Right. Basically, right now, on the international 
scene, we have three airlines operating under a variety of 
brand names. And I have been told by somebody in a position to 
know that, in those alliances, once there is antitrust 
exemption, the multiple companies can operate as if they are a 
single company.
    And so, why not face the reality? The reality is we are 
down to three international, global companies, supposedly 
competing against each other, but, you know, to the extent 
possible, they avoid head-to-head competition, just as 
domestically.
    Mr. Oberstar. They are just carving up the international 
pie, really, is what they are doing.
    Mr. Foer. Right.
    Mr. Oberstar. And with antitrust immunity, which they are 
all desperately seeking, which I opposed for United, and which 
they will want now with--and you have cited the U.S.-Japan 
case. ANA wants antitrust immunity for their alliance with 
United. Well, there is no competition in an antitrust-immuned 
alliance. And you will see fares goes up, service go down, more 
traffic concentrated on the most profitable routes, and the 
medium- to small-size hubs, the non-hubs in the United States 
get further downsized. That is really what happens.
    You said, hold retrospective hearings on Delta-Northwest. I 
will tell you what it has led to: baggage fees, $3.8 billion in 
baggage fees by the carriers, half of which are attributable to 
the Delta operation. You know, the next step is they are going 
to figure out how to charge us for printing out our boarding 
passes at home, how to charge us for our own paper that we use.
    They are very good at this. They have little people who 
work day and night, they are little gnomes, in their economics 
and finance departments. And they work night and day, figuring 
out how to squeeze more money out of this turnip they have in 
their hand. And I am determined that won't happen.
    Stable, profitable does not mean ever bigger and fewer. Who 
was it that said that airlines are looking for stability and 
profitability? That doesn't mean that there should be fewer of 
them.
    They are always talking about rationalizing capacity. Mr. 
Horan, was that you who used that term? Rationalizing capacity, 
consolidating, too much capacity in the market. That wasn't the 
purpose of deregulation. We didn't say that they were going to 
take the government out of deciding market entry and pricing so 
that the airlines could consolidate and have more power. We 
wanted more competition in that marketplace, right?
    Mr. Roach, didn't your members, and, Ms. Friend, didn't 
your members have more options, more choices in the previous 
era? Have the machinists union and the AFA ever had to face 
each other in a consolidation in an election?
    Mr. Roach. Not yet.
    Mr. Oberstar. Not yet. Well, if I have my way, you are 
never going to do it. I am doing my darnedest to make sure that 
that outcome doesn't happen.
    In a hearing in this room in 1990--and I was Chair of that 
Aviation Subcommittee, and Mr. Petri, Bill Clinger was the 
ranking Republican on the Committee at the time. And I asked 
Secretary Sam Skinner, the Secretary of Transportation--this 
hearing was on airline finances and mergers and acquisitions. 
And I said, how many carriers really constitute competition in 
the marketplace? And the Secretary said, ``Well, I think two.'' 
Really? Then he stopped, ``Well, maybe three,'' he said. That 
is where we are headed, and that is not good.
    What I hear from the Uniteds and the Continentals and 
American and the rest of them is, ``There is plenty of 
competition. Just look at what Southwest does to the 
marketplace. They drive the prices down. And legion are my 
constituents lining up to use Southwest Airlines frequent flyer 
miles to fly to London and Paris.'' They don't fly there. They 
are not in the world competition. You are all right.
    Thank you.
    Mr. Lipinski. Thank you, Mr. Chairman.
    The Chair will now recognize Mr. Petri.
    Mr. Petri. Well, thank you.
    Thank you all for your testimony. It is very helpful.
    I guess I have a couple of questions. One for Mr. Strine: 
You talked about--and I have heard about low barriers to entry 
in the aviation industry because you can just lease a plane and 
have access to an airport and get in business. But what are the 
high barriers to exit that you refer to?
    Mr. Strine. That references basically to the bankruptcy 
laws. Through the Chapter 11 process, we see companies who have 
pursued a path which was basically a failing business model 
survive. And, you know, I think today you have heard a lot 
about destructive competition. That law, in itself, is 
something that keeps a company alive and keeps capacity in a 
market that was failing capacity. So that is the high barrier 
to exit.
    Mr. Petri. And, second, you analyze the industry and its 
competitiveness and so on for a living. When you stand back and 
look at it, here is a very, very, very profitable industry for 
a lot of--not for the airlines, but for the auto rental 
companies, for the fixed-base operated airports, for the hotel 
business, for all kinds of people who have figured out how to 
make money from people traveling. But the airlines don't. And 
probably the people leasing the planes to them are making a lot 
of money.
    But, for some reason, this center of loss seems to be among 
the--if the $68 billion figure is at all accurate, it is on the 
ones who are generating profit for everyone else on a systemic 
basis.
    What is different about that segment of the overall 
aviation transportation business that causes it to lose when 
everyone else is doing pretty well, or at least seems to be 
doing a lot better?
    Mr. Strine. Well, there are several factors that contribute 
to the poor financial performance. One is that the industry has 
a very high fixed-cost structure. So, as we inevitably move 
through economic cycles, they cannot cover their costs with the 
revenue they can generate, given the amount of supply and 
demand in the market. It is as simple as that.
    You know, if you look at the capital expenditures that are 
required and the debt that is baked into these companies, they 
have overleveraged themselves. And the interest expense that 
they pay on the assets, the aircraft or the aircraft rental 
fees that they pay, contribute to the high fixed-cost 
structure.
    So, to finance a business which is highly asset-intensive 
is expensive. And when you have a structure that doesn't 
generate enough revenue to cover the cost, the cost of capital, 
meaning the interest expense, goes up, which is the irony of 
all this.
    I think everybody wants to see a stronger industry; it is 
how you get there. One of the drivers will be the cost of 
capital. The more financially stable the industry is, the lower 
the cost of capital will be, which will then provide a lower 
hurdle for growth.
    Mr. Petri. Now, one last thing. You would assume, if there 
had been a huge consolidation in industry and just a few big 
global players, that they would have more pricing power, and 
ticket prices would go up and they would make money. But what 
seems to be happening is that prices have been steady or even 
declining, and it is an increasingly better buy for the 
traveling public.
    So what is wrong, from the point of view of these people 
trying to create monopolies? Or will there be a pot of gold at 
the end, from their point of view? Will they eventually extract 
monopoly profits?
    Mr. Strine. To apply that specifically to this merger, I 
think that the aim, if you listen to what the companies are 
arguing, is that they think they will get a better share of the 
corporate traveler, which is a higher-yielding customer, which 
will improve their mix and improve their yield.
    But I think when you look at the competitive structure, it 
is really, from a financial standpoint, it is important to look 
at it holistically and globally. I mean, certainly 
domestically, there is low-cost competition, there are 
companies that come and go. Internationally, we have seen 
consolidation in Europe. There has been a lot of consolidation, 
now Air France-KLM. British Airways and Iberia are merging. 
Deutsche Lufthansa has purchased both Swiss and Austrian over 
the past 2 years.
    In Latin America, there is only one airline, outside of 
Brazil, that basically controls the whole region; that is LAN 
in Chile. And in Asia--in China, there are only three major 
carriers in China. You have Air China in Beijing, China 
Southern in Guangzhou, and China Eastern in Shanghai. And they 
have been consolidating.
    So part of the analysis has to be, the companies here are 
going to be competing for international travelers against those 
foreign entities. And I think that is something that we 
shouldn't ignore.
    Mr. Petri. Thank you.
    Mr. Lipinski. Thank you, Mr. Petri.
    The Chair will now recognize himself.
    During the testimony of Mr. Tilton and Mr. Smisek, I had 
raised the issue of what is going to happen with the employees. 
And judging by the prior experience with airline mergers and 
what has happened to employees--and Mr. Roach raised the 
experience that he has been through--I understand that there is 
a lot of uncertainty about the future of a merged airline, what 
is going to happen to the employees.
    And I had also raised the point that I think that, if there 
were, as this moves forward, this consideration of the merger 
moves forward, if there are agreements that can be worked out 
with the unions, it certainly would make this a much smoother 
path to the merger being approved.
    So I wanted to know, thus far--I wanted to ask Captain 
Morse, Captain Pierce, Ms. Friend, and Mr. Roach, have you been 
at the table thus far, as the merger has been discussed? What 
have you learned, if you have? If you have or if you hadn't, 
what are the answers that you are waiting for?
    So I just wanted to throw that general question out there, 
and we will start with Captain Morse and go down the line. I 
just want to know what has happened so far and what do you want 
to see happen.
    Ms. Morse. I would begin by saying we have started the 
process. We have negotiated an expense reimbursement provision 
that isn't quite enough but it is a step in the right 
direction. We don't think the employees should have to pay for 
the expenses of the merger. It is the CEOs that decided they 
wanted to merge, not the pilots, not the employees. So that was 
a step in the right direction, but just a very small step.
    We see indications that the managements are interested in 
doing the right things, but until we actually see what they 
propose at the negotiating table, we are working on a 
transition agreement. That transition agreement would be more 
of a standstill type of agreement.
    As we process down that path, our next step would be a 
joint collective bargaining agreement. And whether we will get 
to that quickly or not will be really the indication of how 
well this merger will go. If we do not get to it quickly and, 
to quote Captain Pierce, if management doesn't learn the word 
``yes'' and learn it relatively quickly, then the merger will 
be unsuccessful.
    So, as we proceed down the path, we see great opportunity 
here to lead, but we can't lead by ourselves. We must lead with 
the managements of the company to make it a successful merger. 
We see the right steps, but time will tell whether those steps 
are really taken.
    Mr. Pierce. And I would agree with Captain Morse that the 
steps----
    Mr. Lipinski. Would you pull the microphone closer?
    Mr. Pierce. Yes, sir.
    I would agree with Captain Morse that, so far, since May 
3rd, when the announcement was made, we have seen steps by 
management that would lead to cautious optimism, in terms of 
information sharing, in terms of working toward a transition 
agreement.
    I will say that the two pilot groups, United MEC and the 
Continental MEC, are working very well together. We have, I 
would say, outstepped our management counterparts, in terms of 
doing our due diligence and creating an environment for 
success.
    It has to be a sequential order. There has to be a certain 
order of things to occur that we have agreed upon. We are going 
to negotiate this transition agreement, and once that is 
complete, we will move to the joint collective bargaining 
agreement. And once that is complete, we will move to 
finalization of the seniority list integration.
    Each of those steps will be tests for our management groups 
to ensure that they are participating, good-natured, in good 
faith. And if they don't participate in good faith, then things 
won't progress. And as things don't progress, then they don't 
hit their synergies, they don't meet their obligations, they 
don't meet their commitments. It is very much in the hands of 
labor and our management counterparts, working together, if 
this is going to succeed.
    Mr. Lipinski. Thank you.
    Ms. Friend?
    Ms. Friend. Well, I am afraid we have no optimism at all. 
We have been at the bargaining table with this management team 
on an open and amendable agreement that was reached in 
bankruptcy for well over a year now. We have made no progress. 
The company has not moved on their opening concessionary 
proposals.
    Since they have announced the merger, they have been 
unwilling to discuss with us the expense reimbursement for what 
it will cost the employees to participate in putting this 
merger together. They have been unwilling to talk to us about 
what we refer to as a ``fence agreement,'' which allows for 
separate operations while we work through these issues.
    In fact, they have been unwilling to talk to us at all 
about the merger, other than to provide us with information 
that is publicly available that we could simply read in the 
newspaper.
    So, a very difficult labor-management relationship has not 
improved, nor have the executives of United Airlines given us 
any indication that they would like to improve it. So, any 
synergies that they hope to get from a combined flight 
attendant workforce are very, very far on the horizon and will 
not happen unless there is a change in attitude.
    Mr. Lipinski. Thank you, Ms. Friend.
    And, Mr. Roach, I know you were shaking your head 
immediately when I started asking questions. So I am afraid you 
are going to have a similar response here to Ms. Friend.
    Mr. Roach. Yeah, we have the unique--the machinists union 
has the unique--we have bargaining relationships on both 
carriers. And we have met separately and with both management 
teams. We have asked a lot of questions, and they don't have 
any answers. They have been willing to meet, and they continue 
to say they will give us the answers.
    Our concerns are obviously about pensions. We worked very 
hard during the bankruptcy to maintain pensions, during the 
bankruptcy, and getting the IAM National Pension Plan. We 
worked very hard on Continental to maintain a single-employer 
plan. And there is a lot of work. We have met with the PBGC, 
and they have expressed that there is a lot of work in trying 
to go through that process. And they haven't started, and they 
said they have thought about it but they don't have any 
answers.
    We are concerned about the regional partner, ExpressJet, we 
represent. They operate on United and Continental. What happens 
to them? What happens to the subsidiary of Air Micronesia?
    We are concerned about the overall business plan, that this 
is not too big to succeed and that we create this monster 
airline with two different, separate cultures that cannot be 
put together.
    Again, Northwest-Delta are not together. There are big 
problems over there. And their morale is down, and the 
employees are not happy. And there has been no integration. 
Although it is portrayed in the public as it is, that is not 
the case.
    And so we want to see the business plan. We want to see 
that this carrier can survive. We have asked for the 
information. They said it is forthcoming, and we look forward 
to it. But beyond the collective bargaining agreement, we want 
to make sure the carrier can survive and be successful. Having 
a good contract and no job means nothing.
    And so, if they build this carrier and the carrier fails 
because they are unable to pull it together, I guess there is 
an old cliche, ``When the camel dies, we all walk.'' And we 
don't intend to walk. We want to see the thing survive. So, we 
need information.
    Mr. Lipinski. Thank you.
    And I can't emphasize enough how important it is that these 
issues are worked out.
    With that, I will yield back, and I will now recognize the 
gentleman from Ohio, Mr. Boccieri.
    Mr. Boccieri. Thank you, Mr. Chairman.
    I just have a quick question for the two gentlemen who seem 
to be on opposing sides with respect to their testimony. Mr. 
Strine and Mr. Horan, just if you could balance this out with 
your comments.
    Mr. Strine, in your conclusion, you said that, ``The 
ability to generate more consistent returns on equity and 
increase free cash flow is a path to repairing balance sheets 
and longer-term financial stability.''
    However, Mr. Horan, from his testimony, has a very 
different picture or world view, suggesting that any merger 
between network airlines will produce modest connecting revenue 
gains, but without major growth of their hubs, significant 
sustainable revenue synergies are impossible.''
    Can you guys balance those two comments out, please?
    Mr. Strine?
    Mr. Strine. Well, I think when you look at returns of a 
company, you have to start with revenue, and you need to think 
about what drives revenue. And what drives revenue is supply 
and demand and price.
    And what is clear to us all is that the revenue has not 
been sufficient to cover the costs, the operating costs of the 
business and the interest expense of the business. So there 
have been losses, and the retained earnings have been negative. 
So the companies, to keep going, have borrowed more and more 
money over the years.
    And, as those balance sheets become more laden with debt 
and overleveraged, the cost of borrowing and the cost of equity 
rises. And that constrains growth. So the hurdle rate for 
growth becomes higher, so growth becomes more difficult.
    Mr. Boccieri. Sir, I don't want to get into a theoretical 
debate, but please explain to me how reducing the number of 
competitors actually increases competition.
    Mr. Strine. I am not arguing that, that it does.
    Mr. Boccieri. OK.
    Mr. Horan?
    Mr. Horan. I think you have summarized my argument quite 
well. The core claim that these companies are making is that 
this is good for the public, this is good for consumers, this 
is good for the long-term health of the industry, because it 
will create measurable economic benefits in terms of network 
synergies or cost reductions.
    I believe both of those claims are fundamentally false. I 
believe, if you look at historical record, there is no evidence 
of anyone else having found this. I believe, if you look at the 
historical record of how networks work, you can create network 
synergies in a case where you build up a large hub--when TWA 
and Ozark merged in 1983, there were huge network synergies. 
You can create network synergies in an environment where the 
merged carrier suddenly creates a new ability to expand, grow 
into new markets, things like that.
    I used to run these networks; I know where to look. And 
what I am saying is, there is no evidence in this case or from 
any public statement that they are going to do any of those 
things that would enhance what are legitimate network 
synergies.
    And the cost side, the cost of putting these companies of 
this size and these levels of complexity together runs into the 
billions. We have already heard plenty of testimony on the 
collective bargaining issues that need to be resolved. Those 
are expensive. And, equally important, the integration of the 
maintenance systems, core to all the safety concerns raised by 
many people today; the integration of the reservation and other 
financial infrastructure.
    All of those costs are 100 percent certain. They occur 
right away. Do you save because you don't need two general 
counsels? Yes, but that is pretty trivial, and it is down the 
line.
    Mr. Boccieri. Do you think----
    Mr. Horan. So I am just saying, if do you a simple cash 
flow--you know, United claimed, after 3 weeks of negotiation, 
their PR staff said, ``We will get cost reductions equal to 0.6 
percent of our combined operating costs.'' And I am just saying 
that any person with common sense would look at that and say, 
that is what the PR guys are saying before the collective 
bargaining process has started and before you have done the 
hard, messy work of integrating maintenance systems and 
reservation systems. Chances are the cost synergies will be a 
big negative number.
    Mr. Boccieri. Do you think that previous mergers with the 
unintended consequences of these unforeseen costs that have 
been added have led to, sort of, farming out of some of these 
routes and some of the domestic routes to the low-cost 
carriers?
    Mr. Horan. Well, people were discussing American-TWA, which 
was justified on the exact same kinds of synergies we are 
talking about today. There were no new hubs created. There was 
no expansion that was going to happen. It was just that somehow 
one plus one was going to equal three. And no one in the 
government scrutinized that.
    And, again, that is my message for the Committee. You 
pointed out the, sort of, difference in the arguments in what I 
am saying versus what the CEO is saying. The issue for the 
Committee is, you have to have absolute confidence that the DOJ 
is going to run through those very critical synergy efficiency 
claims.
    And, by golly, if they are proven to be true and Mr. Tilton 
and Mr. Smisek have found opportunities that every past airline 
manager failed to find, and that Continental management, who 
had been saying, you know, ``We don't want to do a merger 
because it is too risky for our shareholders, and that is not 
really where the benefits are, and it would be a bad thing,'' 
he has found things that his previous management couldn't 
find--God bless him, if the synergies are honestly there, they 
are verifiable, they ought to be able to proceed. Because then 
what Mr. Strine is saying is those are legitimate things, that 
would improve efficiency, that is self-help.
    But if those efficiencies aren't there, it begs the basic 
question, well, what about all these anticompetitive problems? 
Isn't that what you are really going after, and isn't all the 
synergy stuff just a smokescreen?
    Mr. Strine. Can we take a simple example to maybe elaborate 
on this?
    Let's say you were running an airline and you were going to 
purchase 50 aircraft from Boeing. And then you were a much 
larger airline, and you were then going to purchase 100 
aircraft from Boeing. Do you think you would get a lower price 
if you were purchasing 100? Do you think you would get a better 
deal on your service, your maintenance, et cetera? The scale, 
in terms of their purchasing power with suppliers, should have 
some benefits.
    Mr. Boccieri. Too big to fail, right.
    Mr. Horan. Could I just quickly reply to that, sir?
    The idea that an airline the size of United Airlines isn't 
big enough to compete and it needs to be bigger to be efficient 
is one the more ludicrous claims that anyone has made in this 
industry in the last half-century.
    And the example I keep going to is that Mr. Tilton and Mr. 
Smisek ought to fly to Moscow and sit down with the Russians, 
and tell them what a terrible mistake they made when they broke 
up Aeroflot. It had such scale economies, it not only did all 
the commercial aviation, it did the military and the crop 
dusting. But they broke it up with this silly notion that, 
while you wouldn't have the scale economies on ordering pencils 
and legal pads, benefits from competition and spurring 
innovation would greatly offset the reduced scale with many 
smaller companies.
    And, again, it comes back to a factual point. If the scale 
economies, which is the synergy claim that Mr. Smisek and Mr. 
Tilton are making, are really there, which no one else has 
found, great. If they are not--but this is a factual question 
that objective people can sort through fairly easily.
    Mr. Strine. The fact is, United already did go bankrupt, 
and they are still here.
    Mr. Horan. Yeah. Right. Look at the financial performance 
of U.S. airlines in the last 15, 20 years. There is almost a 
perfect negative correlation: Smaller airlines have earned the 
kind of return for their shareholders that Mr. Strine is taking 
about, and the big, entrenched ones do not.
    Mr. Boccieri. Well, I appreciate that. And I know that did 
receive some government taxpayer dollars right after September 
11th.
    Captain Pierce, I just want to comment. I know you talked 
about that your training would have prevented--or would have 
prepared you to recover from a full stall. And I concur that 
the legacy carriers have done a great job with training and the 
expertise that they have added.
    I want to see that same level of commitment now with the 
regional airlines. Not all, you know, have been deficient like 
Colgan have. But we certainly want to see that higher standard 
be maintained. And we are going to require the FAA, but we want 
to make sure that the companies do so, as well, because they 
are ultimately in charge of the training requirements.
    Mr. Costello. [Presiding.] The Chair thanks the gentleman 
and now recognizes the gentleman from California, Mr. 
Garamendi.
    Mr. Garamendi. Thank you very much, Mr. Chairman.
    Chairman Oberstar has gone on and on about efficiencies at 
Northwest and Delta. I have my own story, Chairman. Due to the 
lateness of our session and the cancellation of the United 
flight out of National, I had to jump on a Northwest-Delta 
flight via Minneapolis on a through-flight presumably to 
Sacramento. It was about $990, as I recall, for that one-way 
ticket.
    When I got to your part of the world, Mr. Chairman 
Oberstar, I got off the plane and found out that it stopped, I 
wasn't going to go any further, and I was dumped in 
Minneapolis-St. Paul for the night. All well and good, they 
handed me a ticket for the next flight out the next morning. I 
went to pick up my ticket, I went to get on the flight, and I 
wasn't booked, much to my surprise and angst.
    Eventually, I was able to get on the very last seat, which 
I suspect may have been a pilot seat that somehow would cause a 
delay somewhere else. Anyway, the way in which the system 
worked was a telephone call--the computers didn't work at all, 
which should have been obvious since I didn't have a seat. But 
the only way they did it was by telephone to somebody that they 
found in, I guess, Atlanta. So much for the efficiency issue of 
mergers.
    But that is just a personal problem. My real concern is one 
of safety all the way around. I was astounded by the 
information given by the two CEOs about who is going to make 
sure that the maintenance in China, Singapore, and the 
Philippines was of quality, as though they had no 
responsibility themselves for that; it was, in fact, an FAA 
responsibility. No, that is not the case.
    Similarly, with regard to the quality of the pilots and 
other personnel on those regional airlines that contract, in 
this case, with United or with Continental, it is the 
responsibility of the management of both United and Continental 
today, to say nothing going forward, it is their responsibility 
to provide assurances that the highest quality maintenance, 
wherever it may be, San Francisco or Shanghai or wherever, is 
done.
    Those are my comments. And I will do everything I can to 
hold the management responsible for the quality of the pilots 
as well as the quality of the maintenance facilities.
    Finally, with regard to the issue going forward of the 
financials on the merger and whether, in fact, the Justice 
Department is looking at it, Mr. Chairman, I might recommend, 
based upon what we just heard, the testimony, that we invite 
the Justice Department to come and testify as to what they have 
found with regard to the issue of synergies of all kinds. And 
if they are not even looking at them, we might want to beat 
them over the head and ask them to look at those, and, in fact, 
are there real synergies or is it just one way to put smoke up 
in the air.
    I don't have any further questions. If any of the 
participants would like to jump in with my remaining 1 minute 
and 35 seconds, do so.
    Ms. Morse. I think we both would.
    With regard to the outsourcing of flying that you both 
spoke so eloquently about earlier, we have a very good 
mentoring program that has worked for certainly more than the 
25 years, probably since our inception in 1926. And that 
mentoring program is where a senior captain mentored the more 
junior first officer.
    Today, we have a different scenario, where we have 1,437 
people on the street, highly experienced pilots that are not 
working, when instead we have less experienced pilots. You 
can't train for that. We have a mentoring program, and we 
should have a flow down and a flow up.
    As the CEOs indicated, we don't have those airplanes to put 
on those routes. Well, last I checked, they have yokes and 
ailerons and rudders. And there is no reason why we can't fly 
those airplanes. We are very capable of flying those airplanes. 
And to say that that is the solution to the problem, is ``we 
don't have that size aircraft,'' is ludicrous.
    The people that mentored us were the people whose very 
pensions were taken away. And we are going to have to solve for 
both the outsourcing problem and the disparity in the pensions 
as we move forward.
    Mr. Pierce. And I would add on top of Captain Morse that, 
you know, the FARs, the Federal Aviation Regulations, for 
training standards and for flight time and duty regulations 
basically set a baseline of acceptability. For years and years 
and years, ALPA contracts have increased those levels of 
safety, those levels of training. And what we saw through the 
concessionary period that began post-9/11 is that those were 
areas that got degraded in our contracts.
    Now, as we rebuild those contracts, we are going to have to 
pay more attention to reparations, the training standards and 
through flight time and duty time. And I hope we have your 
support, as well, in pushing through the training standards 
language that ALPA supports as well as the flight time and duty 
time regulations that have been stalled for so long and, you 
know, were born by Captain Babbitt over a year ago and do not 
seem to be making much progress.
    Mr. Garamendi. Mr. Chairman, just a very brief comment.
    We had two CEOs here. I have been sitting on a dais like 
this for some 35 years, and I can really recognize BS and being 
shined on. And I know that I was shined on, if not inundated 
with BS.
    There is a very, very serious problem here, in my view, 
about safety. And when they tell me that it is the FAA's 
responsibility, and when they claim, and then backed away from 
it, that it is not their responsibility to the quality of the 
people they contract with--that is, the airlines and the people 
that are then hired by those regional carriers--I know that 
something is seriously wrong.
    And I, for one, have been too long at this game, not in 
this particular chair but in chairs in California, to listen to 
that kind of thing and find it acceptable. And they have said 
they are going to respond to me. They had better.
    Thank you, Mr. Chairman.
    Mr. Costello. The Chair thanks the gentleman.
    And let me mention to the gentleman that we invited the 
Justice Department to send representatives over to testify 
today. It is their standard practice when they are reviewing a 
case that they decline to testify. They have sent a letter to 
us just explaining the procedure that they will follow in 
reviewing the proposed merger.
    And I will tell the gentleman that we will take your 
comments from the record and write a letter to the Justice 
Department, telling them that we specifically want them to 
concentrate on the synergies that are claimed by the CEOs on 
this proposed merger.
    Mr. Garamendi. Thank you, Mr. Chairman.
    Mr. Costello. The Chair would ask Members if they have any 
other questions, comments.
    And, if not, the Chair would recognize the Chairman of the 
Full Committee, Chairman Oberstar, for closing comments.
    Mr. Oberstar. Thank you, Mr. Chairman.
    This has been a most enlightening and valuable hearing, 
especially this panel, with some very specific issues involved 
raised by mergers. And, of course, rather standard testimony we 
expected, I almost could have written it, with the two CEOs.
    But before I make a closing observation, Mr. Foer and Mr. 
Horan--Mr. Foer, you said, ``Standard antitrust analysis 
focuses on horizontal overlaps. It is necessary but should not 
be considered sufficient.''
    Mr. Horan, you observed, ``The Committee needs to address 
the root cause of these problems: DOT's nullification of 
longstanding antitrust law and evidentiary requirements.''
    Both comments go to the heart of the issue that we are 
dealing with here and in the Delta-Northwest merger, 
acquisition, however you want to phrase it.
    What are your suggestions for--just want your verbal 
response and then put something in writing as you think about 
it. How can we restructure the DOT role in the antitrust 
proceedings to give it more weight, give it more force in the 
calculations done on these antitrust proceedings?
    Because the antitrust law is limited, as you say, 
horizontal overlaps. I had to ask the Justice Department in the 
Delta-Northwest situation whether they would consider the 
domino effect, the downstream effect of a Delta-Northwest 
merger on other possible mergers, and it was like pulling 
teeth, but eventually they said, yes, we would give that 
consideration. They didn't say it would be a factor, didn't say 
it would be a decisive factor.
    But the antitrust role is very--it is like a 
straightjacket. It is very limited. The DOT has wider latitude 
in these matters, but they, nonetheless, have gone on to 
approve antitrust immunity, along with Justice, for 
international alliances.
    So what are your thoughts about how we can rephrase that 
authority? What provisions could we include in future 
legislation?
    Mr. Foer. Mr. Chairman, I don't think the answer is with 
giving DOT a larger role. DOT had the role all by itself after 
deregulation, and it blew it. And Congress said, OK, let's let 
the antitrust division handle these matters. DOT provides 
information that is very important.
    It is not that the law, the antitrust law, is necessarily 
that narrow. It has been interpreted in a very narrow way for 
30 years.
    The Justice Department and the FTC have put forward for 
public comment revised horizontal merger guidelines. And in 
that, they recognize the role of incipiency, for instance. 
Section 7 of the Clayton Act is an incipiency statute. It is 
supposed to stop mergers before they become dangerously 
anticompetitive. And that is a trend, it is a prediction.
    I don't think that that has been the way either of the 
agencies have been interpreting the law sufficiently in the 
past, but the law is there. And pressure from Congress to 
utilize the law to its fullest is what is needed.
    And I think that the agencies are capable of looking at not 
only the merger before it, but recognizing salami tactics and 
recognizing that companies interact on a strategic basis, and 
when one goes forward and changes the structure of the 
industry, the others have to respond. I think that that can be 
taken into account by antitrust, but it hasn't been.
    Mr. Oberstar. And it should be.
    Mr. Horan, do you think there is not much more we could do 
with DOT?
    Mr. Horan. I agree that the law as written is not the 
problem. There are no obstacles in the law to considering the 
actual economics of the applicant's proposed a merger, but they 
refuse to do that.
    The problem is that deregulation of the airline industry, 
Mr. Chairman, you understand this as well as anyone, was 
designed specifically on the concept that all other laws that 
apply to all other deregulated industries designed to create a 
level playing field and protect consumer interests--such as 
antitrust laws, consumer protection laws, and labor laws--were 
always intended to apply to the deregulated airline industry.
    The problem is that the Department of Transportation has 
been gutting the antitrust laws in response to the lobbying 
efforts of companies like United, Delta, and Continental. Those 
companies would like to distort competition to hurt the US 
Airways, hurt the Northwests, hurt the Southwests, hurt the 
JetBlues. And the Department of Transportation is a willing 
participant.
    And I am saying, consumers are already paying $5 billion a 
year in higher fares solely attributable to artificial pricing 
power, and the Department of Transportation's major objective 
right now is to make sure those same kind of anticompetitive 
pricing impacts hurl into the Pacific. They are doing 
everything possible to stop scrutiny of those cases. They do 
not want evidence presented.
    I have had applications to examine the core claim of these 
Japan cases--the network synergies. I used to run a hub, the 
biggest hub in Tokyo, at Northwest. I was the person who 
developed antitrust immunity networks. I can evaluate this 
claim. If I am not the best-qualified person on the planet to 
look at it, I am in the top five.
    The Department of Transportation said, ``No, absolutely 
not. We cannot have anyone evaluate trans-Pacific network 
synergies. We are creating a new rule that says only lawyers 
can do it. Mr. Horan, you may not evaluate this claim.'' So I 
am saying they are going to any length to say, ``No, we don't 
want any scrutiny of these clients.''
    And so, just go back and allow verifiable scrutiny in 
accordance with the Horizontal Merger Guidelines, and I think 
you have solved two-thirds of the problem right there. 
Unfortunately for DOT, you would also bring the airline 
consolidation movement to a grinding, screeching halt. Because 
without the suspension of those antitrust laws, none of this 
would have happened.
    Mr. Oberstar. Well, you are quite right. From down there 
somewhere in the podium where I sat in 1978 and rubbed my worry 
beads about this deregulation, now, what is going to be the 
outcome here, we anticipated that the Carter Justice Department 
would ride herd on any mergers that might result. We didn't 
count on Carter losing the election, Reagan winning, and the 
Reagan Justice Department never meeting a merger it didn't 
like.
    But the argument made today and 2 years ago by Delta-
Northwest was, ``We need to be big, we need to really be big in 
the marketplace.'' And I think you have said, the notion that 
United is not big enough to compete in the domestic and 
international market is, I will concur, ludicrous.
    But the language of the applicable provision of the 
antitrust code is, ``Any activity affecting commerce in any 
section of the country, the effect of such acquisition may be 
substantially to lessen competition or tend to create a 
monopoly.'' There is a large, how shall I say, judgmental 
opportunity in those words that has not been used in so many 
years by the Justice Department as to be flaccid. And it needs 
to be--the people who are administering this law need to be 
strengthened and need a backbone and need to be encouraged.
    And that is why I am looking for something that we can--our 
Committee doesn't have jurisdiction over the judiciary, but we 
do have over DOT. And I am looking for some way that we can 
strengthen the hand of DOT in this process.
    Look, what it has led to, the bigness, bigness has led to 
$2.7 billion in baggage fee collections for 2009. That is 10 
carriers. Of those 10 carriers, Delta and Northwest combine for 
one-third of the total, $766 million in baggage fee 
collections.
    That is what big business has given you: more market power 
in the domestic marketplace, more suppression of passengers and 
travelers and communities. It hasn't given you more choices. 
Maybe it will give you a few more choices on United or Delta, 
but not more choices for all travelers and consumers. It has 
led to job loss, it has led to a shift of employment from one 
city to another and downsizing and--well, I am now being 
repetitive.
    So I just want to say this is a terrible, awful, no-good 
thing, and the Justice Department ought to turn it down. And I 
will continue to do everything in my power to make that happen, 
because I think this is the very antithesis of deregulation and 
will lead to--the moment this thing is approved, I will draft 
and introduce legislation to reestablish market regulation by 
the government of airlines.
    Mr. Costello. The Chair thanks the gentleman.
    And I was going to----
    Mr. Oberstar. Maybe you shouldn't. It is just going to give 
you more headaches.
    Mr. Costello. I was going to mention that maybe what 
deregulation has led to because of the Justice Department is 
possibly reregulation. And we have discussed that on more than 
one occasion. And it may be something that we will have to move 
forward on, depending on what the Justice Department does.
    Ladies and gentlemen, thank you. We appreciate you offering 
your testimony today. I think Chairman Oberstar and others have 
summarized the issues. You heard in my opening statement, you 
heard from many of the Members deep concerns concerning safety, 
concerning the workforce, a number of other issues. And we will 
urge the Justice Department to specifically look at those 
issues in reviewing this proposed merger.
    Again, we appreciate your testimony.
    And the Subcommittee stands adjourned. Thank you.
    [Whereupon, at 1:38 p.m., the Subcommittee was adjourned.]

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