[Senate Hearing 111-657]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-657

    THE UNITED/CONTINENTAL AIRLINES MERGER: HOW WILL CONSUMERS FARE?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 27, 2010

                               __________

                          Serial No. J-111-95

                               __________

         Printed for the use of the Committee on the Judiciary





                  U.S. GOVERNMENT PRINTING OFFICE
61-688 PDF                WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001





                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         JON KYL, Arizona
RICHARD J. DURBIN, Illinois          LINDSEY O. GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
            Bruce A. Cohen, Chief Counsel and Staff Director
                  Matt Miner, Republican Chief Counsel
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
CHARLES E. SCHUMER, New York         ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     CHARLES E. GRASSLEY, Iowa
AMY KLOBUCHAR, Minnesota             TOM COBURN, Oklahoma
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
       Carolina Holland, Democratic Chief Counsel/Staff Director
                 Jace Johnson, Republican Chief Counsel










                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Cornyn, Hon. John, a U.S. Senator from the State of Texas........     2
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    85

                               WITNESSES

Bush, Darren, Associate Professor of Law, University of Houston 
  Law Center, Houston, Texas on behalf of the American Antitrust 
  Institute......................................................     7
McGee, William J., Consultant, Consumers Union, New York, New 
  York...........................................................     9
Smisek, Jeffery, Chairman, President and Chief Executive Officer, 
  Continental Airlines, Houston, Texas...........................     6
Tilton, Glenn F., Chairman, President and Chief Executive 
  Officer, United Airlines, Chicago, Illinois....................     4

                         QUESTIONS AND ANSWERS

Responses of Darren Bush to questions submitted by Senator Kohl..    29
Responses of Bill McGee to questions submitted by Senator Kohl...    36
Responses of Jeffery Sisek to questions submitted by Senator Kohl    40
Responses of Glenn F. Titlon to questions submitted by Senator 
  Kohl...........................................................    49

                       SUBMISSIONS FOR THE RECORD

Bush, Darren, Associate Professor of Law, University of Houston 
  Law Center, Houston, Texas on behalf of the American Antitrust 
  Institute, statement...........................................    55
Cush, David, President & CEO, Virgin America Inc., Washington, 
  DC, statement..................................................    73
Lee, Sheila Jackson, a Representatives in Congress from the State 
  of Texas, prepared statement...................................    86
McGee, William J., Consultant, Consumers Union, New York, New 
  York, statement................................................    94
Tilton, Glenn F., Chairman, President and Chief Executive 
  Officer, Jeffery, Smisek, Chairman, President and Chief 
  Executive Officer, United Airlines, Chicago, Illinois, joint 
  statement......................................................   101
Woolfson, Aaron, TelSwitch Inc., Stockton, California, statement.   112

 
    THE UNITED/CONTINENTAL AIRLINES MERGER: HOW WILL CONSUMERS FARE?

                              ----------                              


                         THURSDAY, MAY 27, 2010

                               U.S. Senate,
     Subcommittee on Antitrust, Competition Policy,
                               and Consumer Rights,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:15 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Klobuchar, Hatch, and Cornyn.

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

    Chairman Kohl. Good afternoon to one and all. We welcome 
you here today. Our hearing today will examine the latest salvo 
in the recent wave of airline mergers, the merger between 
United and Continental Airlines. This merger will combine the 
two airlines that rank No. 4 and 6 in terms of domestic revenue 
into one of the world's largest airlines.
    The two airlines' CEOs claim that the deal was ``built to 
pass'' antitrust scrutiny because the two airlines' routes do 
not overlap substantially and the low-cost carriers will 
constrain their ability to raise prices. However, fundamentally 
this merger will reduce the number of national network 
airlines.
    Two years ago we had six. After this merger we will have 
four. So we need to ask the question: At what point do we reach 
``a tipping point'' for competition?
    At the outset, I should stress that we consider this merger 
with an open mind and do not reflexively oppose or support the 
merger. We are mindful of the difficulties faced by the airline 
industry today. In the last decade, the airline industry has 
faced unprecedented challenges from the devastating tragedy of 
9/11 and crippling increases in fuel prices to bankruptcies and 
a drop in travel due to the economic downturn.
    We all have an interest in seeing a profitable airline 
industry so that hundreds of communities all across America can 
continue to see frequent and reliable air service so essential 
to economic growth.
    At the same time, we must recognize the problems also faced 
by air travelers today. Consumers are understandably frustrated 
by crowded flights, disappearing leg room, frequent delays, and 
puzzling prices. Once free services that passengers took for 
granted, like checked bags, telephone reservations, and 
blankets and pillows, today are available only for a fee on 
most carriers. Is this decline in service an inevitable 
consequence of the industry's need for profitability?
    So we must ask critical questions: How will the loss of 
competition between these two national systems impact airfares 
and service? Will a combined United/Continental be a stronger 
competitor to the previously merged Delta/Northwest? Or will 
the large network airlines remain dominant in the airline 
industry today across the country and internationally? Will the 
low-cost carriers be able to step in and fill the competitive 
void? Or will they feel less competitive pressures to keep 
fares low or compete by offering things like free checked bags? 
And how will small and medium-size cities fare after this 
merger at the very time that they most need frequent and 
inexpensive air service for their economic health?
    So at this point, we recognize that both you, Mr. Tilton, 
and you, Mr. Smisek, have a special duty to your shareholders 
to create the most viable and the most robust airline possible. 
This is the foundation of our free market economy. On this 
Subcommittee, however, we also have an additional 
responsibility, which is to the public: to protect consumers 
and to ensure that travelers are protected by true competition 
among airlines.
    We need to be sure that the announcement that we have all 
heard flight attendants say at the end of a flight, ``We know 
that you have a choice among airlines,'' does not become as 
obsolete as airlines like Northwest, TWA, PanAm, America West, 
and now perhaps Continental.
    Before asking Senator Cornyn for his remarks, I would like, 
without objection, to enter into the record the statement of 
Representative Sheila Jackson Lee of Texas.
    [The prepared statement of Ms. Jackson Lee appears as a 
submission for the record.]
    Chairman Kohl. Senator Cornyn.

STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF 
                             TEXAS

    Senator Cornyn. Thank you, Mr. Chairman, for convening this 
important hearing. Last year, when I talked to Continental 
Airlines representatives about the possibility of a merger with 
United, we were told that it would not be good for Houston and 
that Houston and Cleveland would be some of the biggest losers 
in terms of jobs.
    Of course, at that time there was a different objective in 
sight. It was the Star Alliance which Continental pitched as an 
alternative to a merger. A merger, Continental explained then, 
was not in the best interest of its shareholders, employees, or 
the communities it serves. An alliance was an alternative, we 
were told, that would provide much of the benefit of a merger 
without the labor, integration, and financial risks. In arguing 
for membership in Star Alliance, Continental's representatives 
told us that a merger would have a very negative impact on jobs 
in Houston where, of course, Continental is headquartered.
    Now we are hearing a different point of view. Continental 
wants to merge with United. Now Continental argues that a 
merger with United would benefit Houston in the long run 
because Houston will be the largest hub for the largest airline 
in the world. I hope over time this forecast of long-term 
benefits to Houston comes true. But right now, three things 
appear to be clear. The 3,000 Texans who work for Continental 
in Houston are in jeopardy of losing their jobs. This risk 
extends further to the many contract workers and support 
personnel whose jobs depend on Continental's Houston offices. 
Even if the hub expands, these headquarters jobs may well be 
gone.
    Second, the merger will have an impact--and I would like to 
hear from the witnesses on this topic, and the others that I 
have mentioned--on competition, especially with regard to 
routes to and from Houston. Mr. Smisek was kind enough to meet 
with me yesterday, and we talked a little bit about the issues 
I have just raised, as well as this one. But my information 
is--and certainly the witnesses are free to correct me if I am 
wrong--that the new United will be the only airline flying 
nonstop from Houston's Bush Intercontinental Airport to 
Washington, D.C., Los Angeles, and San Francisco. On each of 
these routes, the merger eliminates a competitor and leaves 
Houston-based travelers with fewer choices.
    And I cannot help but ask--and I would love to hear the 
witnesses' testimony--why the decision was made to move the 
corporate headquarters to Chicago. There is a certain well-
known Chicagoan who now lives and works in Washington, D.C., 
down at the other end of downtown. But I look at Houston, and 
Houston has a lower tax rate, lower commercial real estate 
costs, lower costs of living, and certainly a business-friendly 
environment. And so I would be interested to hear the 
considerations that were in play in determining that the 
corporate headquarters of a merged United and Continental would 
leave Houston and go to Chicago.
    Of course, Continental has a proud history as a Houston-
based airline, and I hope the airline's deep ties to Houston 
survive this merger. I look forward to working with my 
colleagues to minimize any harm that this merger does to 
airline competition and, thus, the consumer in terms of the 
price they pay for tickets. We will look to ameliorate and 
minimize the impact on the airlines' employees if at all 
possible. I would be interested in your proposals to do that 
from your perspective. And certainly I am interested in 
avoiding and minimizing any harm this may do to the Texas 
economy.
    Our unemployment rate in Texas is 8.2 percent. We are 
grateful that it is not as high as the national average, but 
the prospect of seeing Texans unemployed as a result of this 
merger is not a happy one.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Mr. Cornyn.
    We would like now to introduce our panel of distinguished 
witnesses. Our first witness to testify will be Glenn Tilton. 
Mr. Tilton is chairman, president, and chief executive officer 
of United Airlines. Before joining United in September of 2002, 
Mr. Tilton was vice chairman of the board of directors of 
Chevron Texaco.
    Next we will be hearing from Jeffery Smisek. Mr. Smisek is 
chairman, president, and chief executive officer of Continental 
Airlines. In 1995, he left private practice at Vincent and 
Elkins and joined Continental Airline as senior vice president 
and general counsel.
    Next we will be hearing from Professor Darren Bush. 
Professor Bush is an associate professor of law at the 
University of Houston Law School, and he has written and 
consulted extensively on issues concerning the intersection of 
antitrust and regulated industry.
    Finally, we will be hearing from Bill McGee. Mr. McGee is a 
consultant on travel investigations for Consumer Reports and 
other Consumers Union publications. He is former editor-in-
chief of Consumer Reports' travel letter and has received 
numerous awards for his journalism work.
    Let me ask all of our witnesses now to stand, raise your 
right hand as I administer the oath of office. Do you affirm 
that the testimony you are about to give before this Committee 
will be the truth, the whole truth, and nothing but the truth, 
so help you God?
    Mr. Tilton. I do.
    Mr. Smisek. I do.
    Mr. Bush. I do.
    Mr. McGee. I do.
    Chairman Kohl. Thank you.
    First we will be hearing from Mr. Tilton.

  STATEMENT OF GLENN F. TILTON, CHAIRMAN, PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, UNITED AIRLINES, CHICAGO, ILLINOIS

    Mr. Tilton. Thank you very much, Chairman Kohl, Senator 
Cornyn, members of the Subcommittee. I appreciate the 
opportunity to testify today on the merger of my company, 
United Airlines, and Continental Airlines.
    Our merger creates a more viable and sustainable enterprise 
at a time when the status quo for this industry is clearly 
unacceptable. Strong U.S. commercial aviation will be a key 
enabler of our country's economic recovery. As leaders, we know 
well the role that aviation plays nationally and in the 
communities that you represent in creating and driving commerce 
and tourism, jobs and contributing to the national economy.
    That said, for an industry that plays such an important 
role, we are, nevertheless, an industry with losses of some $60 
billion and 150,000 jobs in the last 10 years, delivering the 
worst financial performance of any major industry in the United 
States over the last 30 years.
    Both before and after deregulation, the industry has been 
systemically incapable of earning even a modest profit, let 
alone a reasonable return on the significant investment we have 
made in aircraft, facilities, and technology. In this 30-year 
period, the industry has suffered 186 bankruptcies, with 
devastating impact on employees, investors, and suppliers, and 
the communities we serve.
    One thing upon which we can likely agree regardless of our 
differing perspectives, serial bankruptcies is not an 
acceptable industry strategy. We must create economic 
sustainability for this industry through the business cycle. 
Our objective at United has been consistent: to put our company 
on a path to sustained profitability. Without profitability, we 
cannot provide a stable environment for employees. Without 
profitability, we cannot grow or maintain service to 
communities, large or small. We cannot invest in customer 
service, nor can we create value for shareholders. To be 
profitable, we must successfully compete in the global 
marketplace of today, not the market of 10 years ago, not the 
market of 20 years ago, and certainly not the market of 30 
years ago.
    Domestic competition has intensified, and low-cost carriers 
are today very well established. Southwest Airlines will 
continue to be the country's largest airline in terms of 
passengers after our merger. Consumers will continue to benefit 
from the prevalence of low-cost carriers and fare transparency 
that ensures intense, fierce competition across this industry.
    International competitors have merged, and powerful new 
entrants continue to gain ground. Just 10 years ago, the 
world's two largest airlines measured by revenue were American 
and my company, United. Using that same measure, the largest 
airlines today are Lufthansa and Air France/KLM, with more than 
half of all trans-Atlantic capacity and more than two-thirds of 
all trans-Pacific capacity being served by foreign carriers.
    Our two companies, United and Continental, have taken 
significant action to improve our performance in this highly 
competitive environment. As network carriers, we provide 
service and compete in both the international and the domestic 
market, and at the same time connect small communities into our 
route networks. We are realigning our base businesses to better 
match current and future market realities, using every 
opportunity at our disposal to strengthen our companies by 
maximizing our existing alliance and our international joint 
ventures.
    Our proposed merger is an important and, indeed, a logical 
next step toward profitability. Building on our improved base 
businesses, our combined airline will continue to operate more 
efficiently, better manage costs, and realize market 
opportunities by fully optimizing our nearly 700 aircraft 
across our combined network.
    Carriers compete vigorously on both price and on service, 
and our merger does not change this reality. Over the last 
decade, ticket prices have declined, adjusted for inflation, by 
some 30 percent, with fares to small communities also 
declining. The revenue synergies we expect to achieve from this 
merger are driven by better service and our combined expanded 
network. They are not based on fare increases. This is 
excellent value for consumers who now have more access to more 
destinations across the globe.
    Importantly, our merger enhances and strengthens service to 
nearly 148 small communities and metropolitan areas. The 
expanded network will provide collateral economic benefit for 
those communities and will result in better travel options for 
consumers who rely on our networks. Low-cost carriers have not 
traditionally served these important communities.
    The global commercial aviation business has fundamentally 
changed, and that means that we must evolve to continue to be 
globally relevant and provide connectivity for the many 
customers in the communities that we serve.
    When Jeff and I announced our merger earlier this month, 
perhaps Chicago's Mayor Daley said it best when he endorsed our 
transaction by saying, and I quote, ``That is what this merger 
is all about. You respect the past, you understand the present, 
but you always look to the future.''
    Thank you very much for the opportunity to testify, Mr. 
Chairman.
    [The prepared statement of Mr. Tilton appears as a 
submission for the record.]
    Chairman Kohl. Thanks a lot, Mr. Tilton.
    Mr. Smisek.

  STATEMENT OF JEFFERY SMISEK, CHAIRMAN, PRESIDENT AND CHIEF 
    EXECUTIVE OFFICER, CONTINENTAL AIRLINES, HOUSTON, TEXAS

    Mr. Smisek. Thank you, Chairman Kohl and Senator Cornyn. I 
want to also thank this Committee for the opportunity to 
discuss this merger.
    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 by 
talking about employees first.
    The volatility and instability of the airline industry have 
had harsh effects on employment. Before 9/11, Continental had 
over 54,000 employees. Despite being the only carrier to have 
grown, the only network carrier to have grown since 9/11, we 
have less than 41,000 employees today, and we have lost over $1 
billion. And United, United had over 100,000 employees before 
9/11 and has about 46,000 employees today.
    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 effects on the jobs of our front-line employees. We are 
committed to continuing our cooperative labor relations and to 
integrating our workforces in a fair and equitable manner and 
negotiating contracts with our unions that are fair to the 
employees and fair to the company.
    United has two union members on its board of directors, and 
the board seats allocated those unions will remain when we 
combine the companies.
    The merger will also enable us to continue to provide 
service to small communities--communities that 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 
models that rely 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 to provide service to all 
of the communities we currently serve, including 148 small 
communities.
    This merger will be good for consumers as well. The 
combined airline will offer consumers an unparalleled 
integrated global network and the industry's leading frequent-
flyer program. It will have the financial wherewithal to invest 
in technology, acquire new aircraft, invest in its people, and 
invest in its product. We will have a young and fuel-efficient 
fleet, and our new aircraft orders will permit us to retire 
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 creates a workplace where people 
enjoy coming to work every day and, therefore, deliver great 
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 networks, creating over 1,000 
new domestic connecting city pairs, expanding integrated 
network service to hundreds of destinations, and improving 
access and services to millions of consumers. Our networks are 
so complementary that we have only minimal nonstop overlaps, 
each of which faces significant competition after the merger. 
Additionally, over 85 percent of passengers traveling nonstop 
on either Continental or United in the U.S. today have a direct 
low-cost carrier alternative. Moreover, low-cost carriers 
compete at all of our hubs and at airports adjacent to our 
hubs, like Hobby and Midway.
    As a result of the robust competition in the U.S., airline 
fares have declined by more than 30 percent over the past 10 
years on an inflation-adjusted basis. We also face significant 
competition from foreign air carriers, which themselves have 
merged to create attractive global networks, such as 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 provide enhanced competition against these large 
foreign airlines. In sum, the merger will create a strong, 
financially viable airline that can offer good-paying careers 
and secure retirement to our co-workers, great customer service 
and an unparalleled network to consumers, and reliable service 
to communities. The merger will provide us with a platform for 
sustainable profitability and position us to succeed in the 
highly competitive domestic and global aviation industry, 
better positioned than either airline could be alone or as 
members of an alliance.
    Thank you very much.
    [The prepared statement of Mr. Smisek appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. Smisek.
    Mr. Bush.

     STATEMENT OF DARREN BUSH, ASSOCIATE PROFESSOR OF LAW, 
UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, TEXAS, ON BEHALF OF 
                THE AMERICAN ANTITRUST INSTITUTE

    Mr. Bush. Thank you, Mr. Chairman, Senator Cornyn from the 
great State of Texas in which I reside, and other distinguished 
members of the Committee. I want to thank you for giving me the 
opportunity today to speak about the potential anticompetitive 
of the proposed merger of United and Continental. I speak today 
on my behalf and on behalf of the American Antitrust Institute, 
but not on behalf of the University of Houston. And I speak in 
my capacity as a former trial attorney at the Antitrust 
Division of the Department of Justice, as an economist, and as 
a law professor who has studied this industry extensively.
    It has been approximately 2 years since the Committee held 
a similar hearing on the merger of Delta Air Lines and 
Northwest Airlines. Since that hearing, little has changed for 
the better in this industry, except that the pressure to 
consolidate has increased in the wake of this previous merger, 
and the pending transaction reflects what I believe to be the 
start of yet another merger wave.
    Rather than rehash my written testimony, I want to signal 
to you not the things that might be problematic with the merger 
specifically, but also more broadly things that are problematic 
in bringing an antitrust case against any transaction, any 
merger before a court.
    With any merger, the ultimate question posed by the 
Department of Justice or the Federal Trade Commission is 
whether the proposed merger will harm consumers. The analysis 
is far more complex, but the gist is to determine whether there 
is anticompetitive harm and whether or not anything about the 
transaction or the nature of the industry mitigates that harm.
    With respect to the anticompetitive harms in the airline 
industry, we typically examine nonstop city-pair markets, 
typically routes between the hubs of the merging airlines. Here 
you will see reductions in service from three to two and in 
many instances two to one. In those instances, consumers face a 
monopoly, no choice, restricted output, increased fares.
    I understand the notion taken from the great antitrust 
case, U.S. v. Philadelphia National Bank, that speculative 
benefits in international markets do not cure domestic 
anticompetitive conduct.
    There is also an effect of the merger on competition in 
connection markets. For example, connections from origins or 
destinations east of Colorado in the Midwest to east coast 
destinations may only have as reasonable connection options the 
hubs of the merging firms and the hubs of Northwest and Delta. 
This means that the connection markets in the Midwest are 
already constrained or are increasingly going to be 
constrained.
    In many instances, United will be--or is currently a 
potential competitor to Continental. One example might be the 
nonstop service from Intercontinental to LAX, which United 
currently does not serve. However, United serves as an 
important disciplinary mechanism even if it does not currently 
service that route because it could potentially serve that 
route, therefore disciplining fares within the market.
    Air passenger service may also be diminished. Northwest's 
merger with Delta already served to reduce the number of 
systems from which customers can choose. This merger may create 
or enhance dominance at many cities throughout the United 
States, including Newark, Houston, Chicago, L.A., Washington, 
Denver, and Cleveland. Competition for millions of passengers 
traveling to and from these cities may decrease, resulting in 
higher fares or reduced service. In many instances, low-cost 
carrier competition does not reduce that concentration or 
mitigate it in any way. As we have seen from many instances in 
the airline industry, there is a potential for retaliatory 
strikes against low-cost carriers when they enter major hubs.
    These issues, at least as raised in the DOJ's excellent 
press release in the U.S. Airways investigation, are fully 
understood by agency staff. I reserve judgment as to whether 
such issues are fully understood by the current administration. 
It is not clear whether the prior administrations understood 
them given the free pass received by the Northwest/Delta 
merger. In its press release in Northwest/Delta, the DOJ stated 
that ``two airlines currently compete with a number of other 
legacy and low-cost airlines in the provision of scheduled air 
passenger service on the vast majority of nonstop and 
connecting routes where they compete with each other.'' The 
implication of this statement was that in some markets there 
would be a substantial loss of competition, but the DOJ 
statement never identified how many or which markets were to be 
sacrificed for the sake of these proclaimed efficiencies.
    The press release continued: ``In addition, the merger 
likely will result in efficiencies such as cost savings in 
airport operations, information technology, supply chain 
economics, and fleet optimization.'' And ``Consumers are also 
likely to benefit from improved service made possible by 
combining under single ownership the complementary aspects of 
the airlines' networks.''
    This does not tell us anything about the basis upon which 
the DOJ rendered its decision. It does not tell us anything 
about what anticompetitive markets were examined. It only talks 
about the speculative nature of efficiencies. In that sense, 
efficiency seems to be king in the airline industry and in 
antitrust without regard for anticompetitive effects.
    I would like to continue this discussion about that. I know 
my time has expired.
    [The prepared statement of Mr. Bush appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Mr. Bush.
    Now we will hear from Mr. McGee.

STATEMENT OF WILLIAM J. MCGEE, CONSULTANT, CONSUMERS UNION, NEW 
                         YORK, NEW YORK

    Mr. McGee. Thank you, Chairman Kohl, Senator Cornyn, 
members of the Committee. 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.
    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: PanAm, Midway, Eastern, TWA, 
America West, Northwest, and now Continental.
    While others can speak to 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 cannot fully 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, U.S. Airways' reverse merger with America 
West in 2005, and Delta's acquisition of Northwest in 2008.
    Unfortunately, the record for consumers is not good. We 
have identified 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 ten 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 the Delta/Northwest merger have yet to be seen, 
Delta's hub in Cincinnati is already experiencing cutbacks. 
Meanwhile, consumers on many routes are losing the opportunity 
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, A, there is no 
guarantee they will do so; and, B, even when a low-cost carrier 
enters a former hub, prices fall only on selected routes, not 
on all routes.
    Four, reductions in service quality. Airline mergers tend 
to be contentious. In this case it involves two mature 
companies. United was founded in 1926 and Continental in 1934. 
So, therefore, a clash of corporate cultures is virtually 
guaranteed, particularly after layoffs. These sterile corporate 
terms--downsizing, right-sizing, outsourcing, offshoring, 
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 startups. Greater concentration of market share 
has a negative effect, according to a 2001 DOT report that 
noted instances in which incumbent airlines drove new entrants 
out by cutting fare 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. In a smaller 
industry with fewer players, the likelihood of an arrival 
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, too big to fail. Just as we have seen with banking 
and other businesses, we are now seeing the airline industry 
evolving into an oligopoly of 800-pound gorillas. Those who 
previously decried any form of assistance to financially 
struggling carriers would reverse that argument, claiming a 
mega carrier such as United/Continental would be too big to 
fail. And they will be right. A shutdown would have immediate 
and adverse effects throughout the country.
    Nine, 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 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 three large network airlines. How long before we are 
told that number has been reduced to 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.
    [The prepared statement of Mr. McGee appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. McGee. We will now 
conduct a round of questioning of 8 minutes before I turn to 
other Senators.
    Mr. Tilton, United's proposed merger with Continental is 
the second major airline merger in the last 3 years. In 2008, 
Delta and Northwest Airlines merged, and many industry 
observers are now predicting that another one perhaps between 
American and U.S. Airways may soon follow. So what were once 
six major network airline competitors at the beginning of 2008 
will now be four, perhaps someday soon only three. Consumers 
may be left with little or no competition on many routes, with 
the remaining large airlines carving up the country.
    In your view, Mr. Tilton, what is the minimum number of 
legacy airlines necessary for a competitive market? Is it 
three? Is it two? Is it one? What is the tipping point, Mr. 
Tilton?
    Mr. Tilton. Thank you very much, Chairman Kohl, for the 
question. I think that the term ``legacy airline'' is 
instructive. Legacy airlines are working hard to get to the 
point where we are no longer referred to as legacy anything. 
This is an industry that is in need of innovation. It needs to 
embrace change.
    I do not know what the disposition of strategy will be for 
either of those two companies. I know that certainly they have 
both said the consolidation would be of benefit to the industry 
as a whole. One of those two companies has said, I think quite 
clearly, that they do not perceive the need to be part of the 
merger activity. The other has said that it may well be a 
benefit to them. I think that the Senators know that our 
company was engaged in conversations with that particular 
company prior to the re-engagement of conversations with 
Continental.
    I think it is left really to the strategy and discretion of 
the individual company and the hubs that they serve. This is a 
hyper-competitive business with very, very low barriers to 
entry. New entrants such as Virgin America or JetBlue are being 
created where opportunity is perceived to exist in this 
industry on a continual basis. I suspect that given the 
opportunity for aircraft manufacturers to put their product 
into service, into this marketplace, they will continue to do 
so. In the event of the failure of one of those new entrants, 
the assets are simply moved on into the possession of another 
airline, which is a unique quality of this business.
    So I do not think that there is any worry here that 
competition is going to be lessened by the combination of two 
companies who do not overlap in the main and are committed to 
using the combined network to increase frequency of service 
rather than reduce it.
    Chairman Kohl. Mr. Bush, what is your opinion about Mr. 
Tilton's argument that this merger will have no negative impact 
in terms of competition and prices and quality of service? How 
do you feel about that?
    Mr. Bush. Not too well, Mr. Chairman, and here is why. I 
think that you cannot discount the competitive effects, even in 
the number of markets where you do have hub-to-hub service. You 
will be restricted to one carrier in many cases, two carriers 
in another. I think of the slogan of Aeroflot, the monopoly 
airline in the Soviet Union: ``You have made the right 
choice.'' There is only one choice here for consumers.
    I also take with great skepticism the notion that this 
merger will enhance efficiencies in any way. We have had 
consolidation in this airline industry for quite some time, and 
we have not seen any change. Instead, what we have is a cycle 
of economic violence where we start with a merger which leads 
to some sort of economic crisis, then some sorts of 
bankruptcies, followed by further consolidation, and the 
proclamations that there will be greater efficiencies.
    If you continue to do the same thing over and over again 
and it does not produce any different results, then why do we 
expect that it is going to be better next time? It is like two 
people getting married with high credit card debt thinking that 
getting married will create some efficiencies yet will somehow 
change their pattern of behavior. That is not innovation.
    I also do not think that low-cost carriers will mitigate 
any of the anticompetitive effects of this transaction for 
several reasons. One, we have a history in this airline 
industry of low-cost carriers entering routes and the majors 
adding capacity and reducing fares and the low-cost carriers 
scurrying away. With rare exception, low-cost carriers are not 
all that great at entering hub-to-hub routes and quite 
rightfully fear, and so do the financers who back these LCCs.
    We also should note a great question for the Department of 
Transportation. What does it take to be an LCC? There is a 
great deal of startup costs. Six months' operating losses have 
to be on hand. You have to have cash on hand. You have to 
secure the planes, train the pilots, get the gates. Low-cost 
carrier entry is not easy and will not mitigate the 
anticompetitive effects of this transaction.
    Chairman Kohl. Mr. Tilton, in your press release when you 
announced the merger, you estimated that the merger would 
result in net annual savings by 2013 in the amount of $1 to 
$1.2 billion, including between $800 and $900 million in 
incremental annual revenues and $200 to $300 million in net 
cost synergies. On the revenue side, Mr. Tilton, your testimony 
says that the $800 to $900 million in increased revenues will 
not come from higher fares, so where will you get that $800 to 
$900 million of additional revenue?
    Mr. Tilton. It will come from the network efficiencies that 
Mr. Bush suggests do not exist. When we combine our two 
networks together and then apply our 700 aircraft optimally to 
that network, we are able to gain significant efficiency from 
the difference between our two fleets. If Jeff and his company 
are flying a 757 on a route that would be better served if it 
were regauged up to a 767, we have the 767 in our fleet and 
Jeff does not have it in his, then the flexibility that we gain 
by being able to use that aircraft in a better service for that 
particular hub is part of the synergy creation across our 
network.
    We simply bring these two networks together. We combine the 
fleets. We optimize the use of the fleets. We take those 
aircraft in both our regional service and our mainline service, 
and we are able to fly those aircraft to communities that one 
of us serves rather than the other in an optimal way. And it 
simply is a flexibility or an efficiency, Senator, that we do 
not have today independent of one another.
    Chairman Kohl. I hear what you are saying and it may be 
true, but those are savings. That is not a revenue increase.
    Mr. Tilton. Well, it is revenue the way that we account 
for. We account for revenue, so it may be an efficiency in the 
revenue performance of the airline, but it is not a cost 
reduction. It is an efficiency improvement or enhancement to 
the network, nor is it a fare increase.
    Chairman Kohl. I would like to turn now to the Ranking 
Member on this Committee, Senator Orrin Hatch from the State of 
Utah.
    Senator Hatch. Well, thank you, Mr. Chairman.
    For Mr. Tilton and Mr. Smisek, when evaluating any airline 
merger, the first and most obvious question from the antitrust 
perspective is whether the merger will result in an increase in 
fares or a reduction in flights. I would like to take a moment 
to focus on the latter, the number of flights.
    According to your statements, a merged airline will 
maintain ten domestic hubs. Is that right?
    Mr. Smisek. We will have eight mainland domestic hubs, 
Senator.
    Senator Hatch. OK. Some have argued that this approach will 
simply not be cost-effective and that at some point one or more 
of these hubs will be downgraded, eliminating options for the 
consumers in those markets. Now, this is particularly likely if 
there are market redundancies between the two hubs. The 
scenario that sticks out the most and has gotten the most 
attention is the potential overlap between the Cleveland and 
Chicago hubs.
    Is it unreasonable to argue, as some have, that the 
Cleveland hub will see a reduction in service due to its 
proximity to the Chicago hub? And what about the Newark and 
Washington hubs as well?
    Mr. Smisek. Well, let me address that, if I could. I think 
the best way to look at this is how those hubs would fare if we 
were not to do the merger and let me use Continental as an 
example. We have built over the years a carrier of which I am 
greatly proud. I think we do a very good job, and we get awards 
for greater customer service. We are, however, Senator, eking 
out a hand-to-mouth existence, and as far out as I can see, we 
will continue to eke out a hand-to-mouth existence. By merging 
with United, we will be creating a carrier that, with the 
network we will have, which is fundamentally not overlapping, 
the ability for us to attract and retain business travelers and 
general consumers as well and our frequent flyer program, we 
can create a carrier that will have a future and a future 
profitability, which is good for communities and good for us to 
be able to continue air service.
    With respect to Cleveland, I know how important good air 
service is to the city of Cleveland. I have met with Mayor 
Jackson. It used to be my OLI city where I used to go up and do 
relations between Continental and Cleveland. I know the 
community well; I know the people well. I know how important 
the air service is. And we will continue to provide good air 
service to every community that we currently serve.
    The future air service is going to be dependent not on us 
but on demand. And if you can tell me where the economy is 
going or you can tell me what external shocks we will suffer, 
then I can help predict that. But it is very difficult to know 
that at this point. We are always responsive to demand. We work 
very closely with local officials, with local businesses, 
particularly in Cleveland, because we want to continue to 
generate the demand that will permit us to continue to provide 
high-quality air service to Cleveland.
    Senator Hatch. Well, I can tell you right now, if we keep 
spending like we are here in Congress, the economy is going to 
go into the--I do not want to say it, but it is not going to go 
into a good position, we will put it that way.
    Did you have any comments, Mr. Tilton.
    Mr. Tilton. I would simply say, Senator Hatch, that the 
domestic hubs for United--Dulles and Chicago, Denver, San 
Francisco, Los Angeles--are extraordinarily important markets. 
Depth of market is important for any hub to continue to be a 
hub. Those markets have significant business travel demand in 
them, so I do not think there is any jeopardy whatsoever to 
those hubs, including the Dulles hub, Senator, that has done 
remarkably well for United Airlines since our restructuring.
    Senator Hatch. OK. Mr. Bush, in your testimony, you argued 
that the entry of low-cost carriers into airline markets is 
unlikely to mitigate the negative impact this merger will have 
on competition. I would like to explore that just a little 
further because, as I understand it, the market share of low-
cost carriers has almost doubled in the last 12 years, moving 
from less than 20 percent in 1998 to almost 40 percent today. 
Indeed, their share of the market has grown steadily without 
any significant decline or even plateau.
    Now, this has taken place even as the airline industry has 
become more consolidated. If that trend continues, it seems 
fair to me to assume that low-cost carriers will eventually and 
at a time in the not too distant future control a majority of 
the market. Now, if that is correct, isn't it reasonable to 
conclude that competition, particularly the price competition 
that the networks receive from low-cost carriers, will negate 
many of the harms you and others have predicted about this and 
other network airline mergers? Or are you arguing that the 
penetration of low-cost carriers into the market will soon be 
on the decline if more consolidation takes place?
    Mr. Bush. I will answer that with a simple yes, I am 
arguing a bit of both. Here is the issue: The issue is that 
when low-cost carriers enter markets, with rare exception they 
are not looking to take on hubs. They are looking for easier-
out airports, like Midway. Southwest makes it a moment of pride 
to say we are not going to go into congested airports. When you 
have time-sensitive passengers, typically business passengers, 
they prefer certain airports to others, and in that sense they 
will not choose the low-cost carrier.
    Certainly in certain hubs low-cost carriers have made 
entry. The big story in the airline industry is AirTran at 
Atlanta, and what the airline industry learned from that, if 
you are--sorry--a legacy carrier, is, Oh, my goodness, that 
cannot happen to us. We cannot have a low-cost carrier right 
next to us as a side-by-side hub carrier. And airlines that are 
legacy carriers take great pains to avoid that kind of issue by 
capacity responses, pricing responses. They have frequent flyer 
programs. The larger the network, the easier it is to drive out 
low-cost carrier competition.
    Senator Hatch. Do either you, Mr. Tilton or Mr. Smisek, 
have any----
    Mr. Tilton. I suspect, Senator Hatch, that Southwest 
Airlines, were they here, would likely take some exception to 
the characterization of their growth strategy as it has been 
described by Mr. Bush. As I said, they are the largest carrier 
in the United States. After our merger, they will still be the 
largest carrier in the United States today. And in sharp 
contrast to legacy carriers, they have shown a steady, steady 
pattern of growth. They have shown an ability to accommodate 
change in their strategy. They are building a more complex 
proposition to customers, which includes frequent flyer and 
loyalty schemes and even connections to international carriers, 
both North and South, with codesharing ventures with Mexico and 
Canada.
    They compete in L.A., one of our important strategic hubs, 
in a very vigorous way, I would suggest to Mr. Bush, and they 
continue to grow in a very satisfactory way for them in an 
important hub for us--in Denver.
    Chairman Kohl. Go ahead, Senator Hatch.
    Senator Hatch. I can only be here--I have to get to the 
Intelligence Committee, but let me just ask one last question. 
It is fairly long, but I would like to ask to Mr. Tilton and 
Mr. Smisek. It is something that concerns me.
    Mr. Bush and others have argued that further consolidation 
among the network carriers could negatively impact downstream 
and upstream markets specifically among those industries that 
compete to provide products and services to airlines. I would 
like to hear your response to those arguments, and to 
paraphrase the argument, because airlines tend to contract with 
outside vendors and suppliers for a number of services, those 
vendors will see their bargaining power reduced if there are 
fewer purchasers on the market.
    In his written testimony, Mr. Bush mentioned the 
possibility of the new merged airline exerting undue pressure 
to extract favorable terms from the air travel websites like 
Orbitz or Expedia. You could presumably add vendors like food 
services, equipment manufacturers, and others to the mix, I 
suppose. It seems intuitive that eliminating buyers in these 
markets, which is what happens when these mergers take place, 
can harm competition.
    Are these legitimate concerns? And I would just ask you why 
and why not.
    Mr. Tilton. So, Senator Hatch, this is an industry that has 
lost some $60 billion over the last 10 years. It is an industry 
that envies the margins that the vendors that Mr. Bush is 
worried about have for their businesses. I am always a little 
surprised at the presumption of power that is ascribed to a 
business that has suffered 186 bankruptcies since deregulation 
and is having a difficult time paying its economic rent.
    Any sharing of our expenses that I could get from our 
vendors beyond that which I already have I will vigorously 
pursue, and I doubt very seriously that it will go to the 
viability of those vendors.
    Senator Hatch. Thank you.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thanks, Senator Hatch.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Chairman. Thank you 
for holding this hearing. Two years ago, I remember I was not 
yet on this Committee, but you allowed me to sit in and ask 
questions on the hearing about the Northwest and Delta merger. 
And during those hearings, we discussed how that merger would 
decrease competition, our concerns about that merger. I cared a 
lot about it since Northwest Airlines is in my home State--was 
in my home State. And I remember part of the discussion we had 
during that hearing was that that merger could usher in a wave 
of consolidation in the aviation industry. And I think that 
that prediction--I remember making it at that hearing--appears 
to be head on. And so my focus today is really going to be 
about two things that matter to people. One is fares and one is 
jobs.
    And I wanted to start, I suppose, with you, Mr. Tilton and 
Mr. Smisek. One of the advantages that has been sold about this 
merger is that there is no overlap between your flight 
networks. This is what you have said. Even so, I think Mr. Bush 
has talked about the effect that this could have on consumers, 
elimination of flights, decreased services, and potentially 
increased fares as we have less competition. Could you comment 
on that?
    Mr. Tilton. In our opening statement, Senator, we both 
mentioned that this merger is not predicated or calculated on 
fare increases. The benefits of this merger are efficiencies 
that we would gain by combining our networks and being able to 
use our combined 700 aircraft more flexibly across the combined 
network, a fleet that we cannot now share, and that includes 
actually the deployment of our regional jet contracts as well.
    So from a fare increase perspective, as Jeff said in answer 
to a previous question, this is an intensely, fiercely 
competitive industry, regardless of what you might 
hypothesize----
    Senator Klobuchar. But don't you think there are certain 
parts of the country where there is less competition where you 
do not see the benefits of this competition and you have higher 
fares?
    Mr. Tilton. Well, from the perspective of my company, 
Senator, we are competing across our network by Southwest 
Airlines and low-cost carriers to the tune of about 85 percent 
of the total network. So we are disciplined on fare increase 
possibilities very effectively by competition. So there is not 
an instance across our hubs. There is not an instance--and I 
think the financial record of the industry clearly shows this--
where we have significant pricing power at our sole discretion.
    Senator Klobuchar. Mr. Bush, do you want to comment on this 
about the fares? I just tend to see that in a lot of our rural 
areas or towns that tend to be more dominated by one airline. 
As we get more and more consolidation, we get less fare 
competition and higher fares.
    Mr. Bush. That is precisely correct, Senator. When you 
have--and this is why I mentioned the issue with connection 
markets as well. These smaller communities are not ones that 
are typically going to be served by low-cost carriers, for 
example. Those will not mitigate the market power that would be 
inherent in these connections, and in particular in certain 
city pairs, hub-to-hub markets as well.
    The other issue is that when we had this hearing a couple 
years ago about Northwest/Delta, you had the same sorts of 
arguments with respect to the benefits of the transaction. I 
recall very specifically this notion that there would be fleet 
rationalization. I recall very specifically that that would 
somehow yield a billion dollars' worth of savings and that we 
have what seems to be Groundhog Day here again, that we have 
the same argument.
    I am curious as to why we think that these efficiencies 
will somehow pass on to consumers and that this will somehow 
benefit these markets when there has been no indication that 
these efficiencies have saved the airline industry in the past. 
We have had merger upon merger upon merger, and the airline 
industry is not better.
    We can ask why that is, and the answer is probably because 
the airline industry has chosen, rather than innovate--there 
have been technological efficiencies which have driven fares 
down. Do not get me wrong. But they have not chosen to innovate 
their way out of these problems. Instead, they have chosen to 
merger their way into more problems.
    Senator Klobuchar. I want to just switch--and I can do some 
questions on this for the record--to just this jobs issue. One 
of the things when Richard Anderson was here from Delta, when 
we had that hearing, he actually made some commitments about 
keeping certain hubs open in our State, keeping certain jobs 
there for Delta and has worked very hard to keep those 
commitments. And I guess just on behalf of some of the workers 
that are here, Mr. Tilton and Mr. Smisek, are you willing to 
commit to some numbers--actually, Delta put numbers out there 
last time--and a commitment or at least a general assurance 
that reductions will be minimal?
    Mr. Smisek. Senator, we believe that this merger will have 
very little effect on our front-line employees because of the 
complementarity of our routes. I will not speak so much to the 
Delta/Northwest transaction, but we have a great deal less 
overlap than they did.
    With respect to headquarters jobs, there will be some 
reduction in headquarters jobs, but that is a fairly small 
number of jobs compared to the jobs that will be both preserved 
and I believe over the long term created as we create an 
enduring and profitable enterprise.
    With respect to your concern on service to small 
communities as well, I think small communities are better 
served by this merger than they would be absent this merger 
because their service depends--they are dependent on network 
carriers for that service. As Mr. Bush has conceded, low-cost 
carriers will never serve those markets. It is antithetical to 
their business model. We are the only carriers that can and 
will serve it because we need to gather those customers and 
bring them through our hubs. They are far better served with 
carriers that have a future, that are stable, that can 
withstand the shocks to our industry, that can invest and 
innovate, invest in their products and in their people, than 
they would be having us drift along at the very edge of 
existence day by day eking out a hand-to-mouth existence.
    Senator Klobuchar. So just on the first topic of jobs, you 
believe that the reduction in workforce would be minimal?
    Mr. Smisek. I think it will be small compared to the 86,000 
people or 87,000 people that we will jointly employ. I believe 
in the long run there will be job growth because with the power 
of this network and our ability to attract and retain high-
yield business travelers, just as, for example, yesterday 
Continental announced a new route from Houston, Houston to 
Auckland, which is facilitated by this merger, by the traffic 
flows that we will get from this merger as well.
    Senator Klobuchar. One of the challenges of this merger 
will be integrating employee programs, especially pensions. In 
2006, United had to take the painful step of defaulting on its 
pension obligations, which hurt many employees. And I want to 
make sure that the merger will not create another situation 
like that. Could you comment on how this merger will affect the 
pension obligations of both companies, Mr. Tilton?
    Mr. Tilton. Well, actually, as Jeff said, this merger will 
put us in a position to be able to have the appropriate 
conversations with the various unions who represent our workers 
across the two companies. They will be competing for 
representation rights. In some instances, our employees are 
represented by different unions. We have agreements with our 
respective unions that are slightly different, but in the main, 
we will be talking to our represented employees, our front-line 
employees, about a means by which they can benefit in, benefit 
from the synergies that we ascribe to the merger. Absent the 
merger, Senator, we will not be in a position to be able to do 
that with $1.2 billion in new dollar value to the companies, 
and the companies, as Jeff said a moment ago, would have a 
lesser economic future, undoubtedly, with which we would then 
be in a position to discuss with our employees that lesser 
economic future than the one that the merger provides.
    Senator Klobuchar. So you think that this will not 
negatively, adverse----
    Mr. Tilton. This will not negatively adverse.
    Senator Klobuchar. OK. Thank you.
    Chairman Kohl. Thank you so much.
    Senator Cornyn.
    Senator Cornyn. Thank you.
    Mr. Tilton and Mr. Smisek, what I think the contradiction 
that we are seeing and feeling is this. Certainly we respect 
your business acumen and your recognition of the hard economic 
realities of your business, and I do not think anyone begrudges 
your trying to do your job and be accountable to your board of 
directors and to your shareholders. I will stipulate to that.
    What concerns me is the suggestion that in the process of 
reducing competition on certainly some routes where there is 
very little competition already that the consumers will not see 
an increase in their costs. It seems to me that anytime you 
reduce competition in this way, the costs for the consumer are 
likely to go up. Obviously, there is a negative impact if not 
on the--I think you called it, Mr. Smisek, the front-line jobs, 
but the 3,000 people who work at the corporate headquarters in 
Houston I think are going to feel this pretty significantly. 
And, it seems to me, when you have reduced competition, the 
quality and the incentives for high-quality service are 
diminished.
    So while I understand, Mr. Tilton, you said that a lot of 
the benefits you see with this merger are going to be based on 
efficiencies--Mr. Smisek mentioned that to me as well 
yesterday--isn't it true that, for example, in the Houston to 
Washington, Houston to Los Angeles, Houston to San Francisco 
route, Cleveland to Denver, where in each of those routes there 
are three airlines that fly nonstop, by eliminating one of 
those three competitors by consolidation here, there are going 
to be two choices for consumers, which enhances the likelihood 
that you will be able to raise prices, which will cost 
consumers more money and that the benefits of more robust 
competition will be lost? Can you help me reconcile these?
    Mr. Smisek. Sure, I would be happy to and would ask Glenn 
to join in.
    In terms of the routes that you are describing, the 
competitors are low-cost competitors, and low-cost competitors 
not only do they comprise 40 percent of the market today and 
have continued to grow and have been profitable, but they exert 
a powerful disciplining factor on our ability to raise prices. 
And we have the inability to raise prices before this merger. 
After this merger, we will have an inability to raise prices. 
The fact is that this is a brutally competitive industry. It 
shows in our results, billions and billions of dollars of 
losses for the industry since 9/11, a billion to Continental 
alone. And this merger, sir, I believe does not reduce 
competition.
    Senator Cornyn. Well, Mr. Smisek, let me just interject 
there. For example, if I want to fly from Houston to 
Washington, D.C., this chart, which I understand we got--I 
think we got it from you or your associates--lists Continental, 
Southwest, and United as the carriers that fly nonstop. So when 
I am in Houston and I want to come to Washington, D.C., after 
this merger, I will have two choices. I will fly on Southwest 
or I will fly on the consolidated United and Continental. 
Explain to me why that does not drive up costs for the 
consumer?
    Mr. Smisek. Sir, there is something well documented in the 
economic literature--I think Mr. Bush can attest to it--called 
the ``Southwest effect.'' When Southwest is in a market, I can 
guarantee you there is a discipline in the pricing. Not only 
Southwest but Frontier, Virgin America, JetBlue, there is a 
plethora of low-cost competition across this industry.
    Mr. Tilton. Let me if I could, Senator.
    Senator Cornyn. Please.
    Mr. Tilton. So perhaps tying up some segments of the 
conversation, one of the things that we have seen most 
recently, both Jeff and myself, at Continental and United, is 
the emergence of the new Delta into markets such as Chicago 
where previously Delta had perceived that it would be 
uneconomic for them to test the Chicago market, but now with 
the combination of Northwest and Delta, they have decided that 
the Chicago market is a market of some attraction to them and 
they will add another network carrier into Chicago, which had 
historically been if not the sole province of United and 
American, hotly contested between those two carriers, but also 
Northwest to a lesser extent connecting to the Senator's State. 
Now, from the east coast of the United States, the newly 
strengthened Delta is providing competition along our hub 
structure that it had not previously--had apparently been 
unable to do or had not been emboldened to do.
    So this is anything but a cartel. Irrespective of how many 
``legacy carriers'' there are going to be, we prefer to refer 
to them as ``network carriers'' given the unique role that they 
play in the marketplace.
    The other thing that I would offer that I do not think Mr. 
Bush mentioned--if he did, he mentioned it in passing--is costs 
inevitably rise in this business, regardless of the carrier. 
They rise for AirTran, they rise for JetBlue, they rise for 
Southwest. The way that they mitigate those costs in their 
business model, Senator, is they grow. And to be perfectly 
candid with you, they have to grow. They have to continue to 
grow or costs will catch up with them.
    So low-cost carriers are going to continue to grow because 
that is the essence of their business model.
    Senator Cornyn. It is not like the farmer who suffers 
losses every year but tries to make it up in volume.
    Mr. Tilton. No, they do not try to make it up in volume. 
They grow and they try to grow in a way that, frankly, 
continues to be contributive to their profitability in the 
main.
    Senator Cornyn. I could not help myself when I met Mr. 
Smisek in my office-- he was nice enough to come by, and we 
talked about why Chicago, and he told me he only owned one 
sweater, and I told him, well, that is, you know, another good 
reason to move the headquarters to Houston. It is a business-
friendly town, low taxes, no income tax in Texas, right, Mr. 
Smisek? No state income tax. But in all seriousness, what was 
the rationale for moving the headquarters to Chicago as opposed 
to Houston?
    Mr. Tilton. So, Senator Cornyn, as you may know, I have 
spent two tours of duty with Texaco in Houston. I was the 
president of Texaco Refining and Marketing in Houston. I was 
the president of Texaco USA in Houston. You know that my new 
company, Chevron, has a significant presence. You may know that 
the Continental employees are in the Chevron building. So I 
have every appreciation for the benefits of doing business in 
Houston, Texas. And that is why we will have a significant 
presence in Houston, a significant head office, headquarter 
presence. I would hypothesize just that, that the technological 
functions of the new company, such as information technology, 
would be very, very logically headquartered in Houston simply 
because of the tremendous resource that the Houston 
technological economy provides for recruitment in that segment 
of the business.
    So we will continue to keep a commitment to Houston, and we 
will be a significant employer in Houston, and that hub is 
going to continue to grow. So from a Bush perspective, it is 
going to continue to be a significant employer, the new company 
will continue to be a significant employer.
    In the intervening years between our first discussions 
relative to the possibility of a merger that were actually 
mooted by $172 jet fuel and a collapse of the credit markets, 
in the intervening 2 years, we made a commitment to a new 
operating center in the Willis Tower in Chicago. And as time 
progressed, I assured the citizens of our city, the leaders of 
our city, and the representatives here in this city of our 
State and our city, that that amounted to a commitment to the 
city of Chicago regardless of what we might do. And as you 
know, Senator, we were in discussions with another company when 
Jeff reengaged, and in that context, in that transaction, had 
that come to pass, the headquarters of the new company would 
have been in Chicago.
    So from my perspective, it was simply something I was not 
willing to take off the table.
    Senator Cornyn. Well, let me ask one last question, if I 
may, Mr. Chairman, and I will ask this on behalf of all of the 
Members of Congress who fly on United and fly on Continental. 
Will you retain your flight to DCA?
    Mr. Smisek. Emphatically.
    Mr. Tilton. Guaranteed.
    Senator Cornyn. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Cornyn.
    Trying to cut through to some extent as much as we can all 
the complexities of what is being done in the industry and 
understanding, as you have said, that you are just trying to 
get ahead of the curve if you can because you have lost so much 
money over the years, isn't one of the basic intentions, hopes, 
and goals, to get to the point as soon as you can when you are 
able to charge customers what you need to charge them to make a 
buck? Isn't that what it is all about?
    Mr. Smisek. Well, Mr. Chairman, it is not so much in 
raising fares from our perspective, but we are in a global 
business. We are a global airlines. We compete with large 
foreign airlines. We compete heavily for high-yield business 
traffic. From Continental's perspective, we are becoming 
marginalized every day. That is why we joined Star Alliance, 
which has been beneficial to us. It has been necessary, but not 
sufficient to restore us to profitability. A large portion of 
the revenue synergies of this transaction are predicated on 
improving the mix on board our aircraft, not so much the price 
of any given ticket but the mix of more business travelers, 
because business travelers, because of their necessity to 
travel quickly and at the last minute, are willing to pay a 
higher fare. And that business mix will be beneficial, and 
rather than having those business travelers fly on Air France/
KLM or fly on British Airways/Iberia, they will fly on the 
combined Continental/United and that will help restore us to 
profitability.
    Chairman Kohl. What you said is, yes, that is right, we are 
trying to get to the point where our mix of travelers will get 
us more money.
    Mr. Smisek. Making a profit would be a good thing.
    Chairman Kohl. And, you know, I understand where you are 
coming from. I have been in business all my life. And I think 
we are getting confused in some of the very involved 
conversation here using words that are important and 
meaningful, but they tend to some extent to obscure what we are 
talking about here. You want to put yourself in a position, as 
you should, where you are able to get as much as you can in a 
marketplace from a traveling consumer, not because you are 
trying to gouge them but because you are trying to make some 
money. And one of the ways in which that is traditionally, 
classically, inevitably done in business is to deal with the 
competition in a way that allows you to do that. I mean, this 
is Business 101. Isn't that right, Mr. Tilton
    Mr. Tilton. Yes, I think it is, and I think the thing that 
it would be--it would be a worthwhile discussion, uncomplicated 
discussion, with Messrs. Bush and McGee, is that the American 
consumer today receives tremendous value, extraordinary value 
from this industry, I mean exceptional value for money. Fares 
have declined 30 percent since deregulation adjusted for 
inflation. Spectacular value. The hubs serve a purpose that is 
really unique to the provision of service to small communities. 
No hubs, no point-to-point connectivity from Minot, North 
Dakota. It simply does not happen.
    So the combination of business models, Senator, in this 
business, network carriers, hubs, of great economic benefit to 
the host city hub, tremendous economic benefit to a city such 
as Chicago on a collateral basis, on a full economic GDP basis, 
and point-to-point carriers which have grown tremendously 
create business model choices and, indeed, even configuration 
choices. AirTran offers business class. Southwest does not. A 
tremendous choice for the consumer.
    In Milwaukee today--in Milwaukee today--which I am sure you 
are very keenly aware of--there are three low-cost carriers 
vying for the customers' affections in that city: Midwest, 
Southwest, and AirTran. And my company is vying for the 
opportunity to connect those people in Milwaukee over O'Hare to 
Tokyo. It is a different business proposition. Regardless of 
that, the citizens of Milwaukee are very well served today as a 
function of that hyper-competition for their business.
    Chairman Kohl. I understand.
    Mr. Tilton. And we would like to make a profit doing it.
    Chairman Kohl. What you are trying to accomplish, you and 
all the other airlines, is to have a situation come about--and 
I think this merger is part of that thought--where there is 
only so much competition around so that you can all still make 
some money. And inevitably that means that some of these others 
have to go by the wayside. There may be, you know, a somewhat 
more sophisticated way to do it, but there are too many 
airlines competing for the available business, which force you 
to drop your prices below profitability. And this is in the 
national interest here. We are not talking here to denigrate 
what you are doing in any way. Until that happens, you are 
going to continue to lose money. So you desperately go about 
trying to be as efficient as you can, and that is to your 
advantage. But ultimately you need to be in a position so that 
you do not have so many competitors vying for that dollar, 
which they are forcing you to charge prices that are below your 
ability to make some money. Is that right, Mr. Tilton?
    Mr. Tilton. I think the point that Jeff was making, Mr. 
Chairman, is we are resigned to the hyper-competitiveness of 
the domestic market. The domestic market is going to continue 
to be hyper-competitive, and I frankly do not think that that 
is going to change. The domestic market for a network carrier 
serves a different purpose than it does for the three carriers 
that I mentioned in Milwaukee. The domestic market for the 
network carriers is a provider of passengers in the main to the 
international market. Where the network carriers have the 
opportunity to realize your ambition for us, making a profit 
and covering our costs and being able to return something to 
our various stakeholders--our employees, our shareholders, and 
our communities--is through really our ability to compete with 
the now more competitive, as we have already said, Air France/
KLM, Lufthansa, and the trans-Pacific carriers, as we should, 
because that is our role. That is really what we do. The fact 
that we have lost competitive position in those foreign 
markets, in those international markets, to carriers who 
continue to also have new entrants, such as Emirates and Etihad 
from the Middle East, is really where we are going to compete. 
We are going to compete in the long-haul market. You know, we 
are now going to be, Jeff was going to be, United now will be, 
we are going to be the launch customer for 787s. We are going 
to be the launch customer for 787s. Jeff has ordered 25, Glenn 
has ordered 25. At the end of the day, if we cannot make this 
work, Boeing is not going to sell us any 787s. We are going to 
put them into service and serve those long-haul international 
markets as a function of our ability to gather up customers and 
feed them into the hubs across the United States, all eight of 
them. That is how we are going to make money.
    Chairman Kohl. All right. Before we go any further, we 
would like to acknowledge the presence of Sheila Jackson Lee, 
the distinguished Congresswoman from Texas. We are honored by 
your presence here today.
    Senator Hatch.
    [No response.]
    Chairman Kohl. I would take comments from anybody, but I 
still want to put out the point of view that what drives your 
customer attractiveness today is price. There are other things, 
but price is relentless in your ability to attract customers. 
And your price is determined by your competition. If there were 
not any competition in Milwaukee, Mr. Tilton, the price would 
go up considerably. We understand that. That is just the way it 
works. And that is the way it works with you all. And you push, 
as you need to push, and hopefully to wake up one day and have 
much of your competition evaporate so that you would be in a 
position not to gouge the customer but simply to charge him or 
her an amount of money that will enable you to make a profit. 
As long as there are competitors next door at the next gate 
charging less than you, you have got a big problem. If that 
competitor is gone, you do not have such a problem.
    Now, how we get there I do not know. Someday do we have to 
have maybe just one or two airlines that are regulated by the 
Government and, you know, you are allowed to make a reasonable 
profit like utilities? Does that make any sense to you fellows, 
offering the best service you can to customers but not at a 
loss?
    Mr. Smisek. Senator, no, sir, that does not--I think that 
consumers have benefited tremendously from airline 
deregulation. I think Glenn has summed up very well who we are. 
We are different from low-cost competitors domestically. We are 
a global airlines serving a global market, competing against 
large foreign airlines. We can do that effectively. We can do 
that as long as we have the ability to invest in a product like 
the 787, flat-bed seats, AVOD, all the things that we need to 
do to attract and retain high-yield business travelers. Both 
United and Continental are principally a business airline. We 
are attractive to a broad range of consumers, but we are 
principally business airlines. It is a differentiated product. 
We do a very good job of it. This merger will put us in a 
position to create a network that will be far more attractive 
to corporate travelers than either of our networks could be 
alone. And I believe we will generate sufficient synergies to 
not only restore us to profitability but be able to sustain 
that profitability, which, of course, is good not only for this 
Nation but certainly for our employees and the communities we 
serve and ultimately for consumers as we offer them a broad 
global network.
    Chairman Kohl. All right. Any other comments? Mr. McGee, 
what would you like to say?
    Mr. McGee. Yes, Mr. Chairman. I wanted to agree with Mr. 
Tilton before when he was speaking about the different models 
in the domestic airline industry. There is no question that the 
business model of a low-cost carrier is much different than the 
network or legacy carriers, and I think that speaks to what we 
are talking about here today, what we are talking about in 
merging and combining two legacy airlines that in many ways 
compete head to head. If we lose that competition, I think we 
are going to see two things. One is based on the historical 
record where we have seen it before. One is that in some cases 
low-cost carriers will probably come in and on those specific 
routes fares will drop. But because of the very business model 
of low-cost carriers, they are not as ubiquitous as legacy 
airlines.
    For example, St. Louis, as I mentioned before, the former 
TWA hub, has lost almost 50 percent of the flights that it 
operated 9 years ago. In certain cases, Southwest came into St. 
Louis, and it was good news for the citizens of St. Louis 
because on those routes fares went down and service was 
restored. But on many other routes, they lost service. They 
certainly lost nonstop service on some routes, and fares went 
up on routes where there was no meaningful competition.
    So it is how we sort through these two very different 
business models. Southwest and other low-cost carriers are 
usually very, very deliberate and specific about where they 
fly, as was pointed out earlier. And that is very different 
than the model of a hub-and-spoke airline that says, OK, we are 
now going to be focused in this area and, you know, we are 
going to spread out from there and cover a broad geographical 
region.
    So when we keep referring to the decrease in fares, I think 
two points should be made. One is that decrease in fares has 
been driven by low-cost carriers, but it is also very specific. 
It is not in all routes. There is tremendous imbalance in terms 
of fares. Certain areas of the country, as the Senator noted, 
particularly in the Northwest, in rural areas, smaller cities, 
fares have not gone down because, you know, they are not served 
by JetBlue or Virgin America.
    And then the other point to make is that over the last 2 
years, we have seen another form of fare increase in the form 
of the fees that the airlines have instituted. The Department 
of Transportation recently noted that in 2009 airlines 
generated $7.8 billion in the very fees that you referred to 
before for things like calling reservations, checked bags, now 
even talking about in some cases carry-on bags. That is a 42-
percent increase over 2008, and we would argue that in many 
ways that is another form of a fare increase.
    Chairman Kohl. Well, what is going to be, in your opinion, 
the impact of this merger on those fees?
    Mr. McGee. Well, again, wherever we have seen less 
competition, we have seen less resistance for airlines to 
resist measures like this. We see it--you know, as I mentioned 
briefly in my testimony, there is a certain checks and balances 
with more competitors. Many, many times over the years we have 
seen fare increases nationwide or almost nationwide. An airline 
will raise fares, and then the industry sort of holds its 
breath for 48 hours or 72 hours to see who matches, who does 
not match. We keep talking about reducing the size of the pool 
of airlines that have the ability to match or not match, 
introduce fees, not introduce fees, resist fees, and it applies 
not just to fares and fees, but also even to service. For 
years, Continental resisted an industry-wide trend by being the 
only airline to offer meal service in economy class. 
Eventually, you know, they were unable to do that. American 
resisted the trend to reduce seat pitch, the distance between 
seats, and offered more leg room, and that failed. Currently 
Southwest is resisting the fee efforts in many ways, 
particularly with baggage fees.
    Whether or not they will be successful long term, we do not 
know, but what we do know is that with fewer major carriers to 
resist such efforts, obviously that will have an effect on 
consumers.
    Chairman Kohl. Any other comments, gentlemen? Anything at 
all? Mr. Bush.
    Mr. Bush. Just a couple things, Mr. Chairman. I want to go 
back to this notion that low-cost carriers are going to be able 
to discipline the merger and the anticompetitive effects of the 
merger. In particular, I think Mr. Tilton had mentioned the 
Southwest effect in certain of the routes where we are 
consolidating from three to two or two to one. And Southwest, 
if we consider the Southwest effect, it is in the city pairs--
we were talking about city pairs, like flying from Houston to 
Washington. But, in fact, there is another type of antitrust 
market that we really talk about when we do these kinds of 
investigations, and that is an airport pair--Intercontinental 
to National. When I flew out, it was a $1,400 ticket from 
Intercontinental to National, which speaks to something about 
fare increases. If I flew from Hobby to Baltimore on Southwest 
to BWI, it was $900. So there is disparity between, you know, 
competition on city pairs and airport pairs.
    Now, Southwest could potentially discipline even a greater 
fare increase from Intercontinental to National, but it is not 
a parallel; it is not one to one. So, yes, there is a Southwest 
effect. It does not discipline completely anticompetitive 
effects of the transaction, nor does it discipline in all 
markets.
    Chairman Kohl. Mr. Tilton?
    Mr. Tilton. So it seems to me that it strains credulity to 
argue in favor of consolidation that has taken place in this 
industry as if it were constructive consolidation, and we all 
know that there were liquidations. Those companies did not 
consolidate of their own free will. They failed. And those 
brands are not around any longer, in the rather glib way in 
which they were described to have joined with another carrier. 
They failed, and they were absorbed. That is precisely what 
happened, very unfortunately, to TWA in St. Louis.
    As I said in my prepared remarks, serial bankruptcy is not 
a strategy for an industry that is going to benefit any 
constituent--not consumers, not employees, not shareholders, 
and not consumers. And to give testimony without regard for the 
systemic economic failure of this industry that is as important 
to this country as it is, there is not one single thing that 
can benefit from the continued economic fragmentation and 
fragility of this industry. Not one thing.
    Chairman Kohl. No argument, but doesn't that at least 
provoke the argument that we would be better off with fewer 
airlines, nationally regulated, with rules and regulations to 
force them to offer certain levels of service and allow them to 
make certain amounts of reasonable profit?
    Mr. Tilton. Senator Kohl, at the point of 1978, I was young 
in my career in the oil and gas industry and not worrying about 
being able to pay the economic rent of the industry. So I have 
come from an industry that was sufficiently robust to have a 
discussion of a very different sort relative to consolidation, 
and consolidation in that industry was about being able to 
afford the multi-billion-dollar capital investments that the 
industry is required to make to an industry that has a very 
difficult time turning on the lights.
    My understanding is that, even pre-deregulation, this was 
an industry that did not fare well. It did not do well pre-
deregulation either. Certainly the consumer, you know, the 
constituent represented by the two gentlemen to my far left, 
has fared very, very well post-deregulation. Certainly the 
consumer has fared extraordinarily well. The proliferation of 
new business models, the proliferation of choice, I really only 
point to Milwaukee as an excellent example, and the choices 
abound. Transparency of fares. When I first came into the 
industry, my question relative to bags is why we ever 
transported them for free. And certainly at $172 jet fuel, I 
could not fathom why we were transporting them for free. And 
yet we competed very vigorously by an airline across 83 percent 
of our network that makes it a point of advertisement that they 
will transport them for free. So you have got tremendous 
choice.
    So I believe that this market can sort itself out, but I do 
not believe in the veiled guided hand of comments that have 
been made to the left as to we ought not re-regulate it but we 
ought to sort of regulate it.
    Chairman Kohl. Mr. Bush.
    Mr. Bush. I hear this argument a lot about ruinous 
competition. I have read about it in the economic literature 
quite extensively, and it is usually an impetus for antitrust 
immunity. The notion is that somehow competition will kill us 
all.
    If that is the case in an industry, one has to question the 
underlying economics of the industry, because everywhere else 
in the world and in every other product market one can 
typically think of, competition actually helps consumers and 
actually helps innovation and actually helps foster economic 
growth.
    It is kind of puzzling that this industry, which I do not 
consider very competitive--unless I compare it to railroads--
would be considered in such a fashion that would be ruinous to 
have competitors. Therefore, what we need to do is consolidate, 
and this is what industry spokespeple have said, this is what 
CEOs have said. It makes sense to reduce the number of 
competitors so we can engage in what is called yield 
management. We can eliminate the lower fares and stack our 
planes with higher-paying, time-sensitive business passengers. 
I do not see why that is a reasonable argument that ought to 
win the day.
    Chairman Kohl. Last comment, Mr. Tilton.
    Mr. Tilton. The business models are all very different. The 
business models are compelling for the consumer. I am competed 
on 83 percent of the domestic market by Southwest today. Our 
two companies will compete. We will continue to be competed 
very vigorously not only by Southwest but also by Midwest, also 
by AirTran, also by JetBlue, also by Virgin America. The 
consumer in this country is blessed, and deregulation has 
really made it possible for them to have the cornucopia of 
choices they have.
    Chairman Kohl. Very good. I think you have brought an awful 
lot of light and information to this whole issue by your 
presence today. We want to thank you for being here. With that, 
we will conclude the hearing. Thank you again.
    [Whereupon, at 3:47 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 
