[Senate Hearing 111-1061]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-1061
 
  THE FINANCIAL STATE OF THE AIRLINE INDUSTRY AND THE IMPLICATIONS OF 
                             CONSOLIDATION

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 17, 2010

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
                 Ann Begeman, Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 17, 2010....................................     1
Statement of Senator Rockefeller.................................     1
    Prepared statement...........................................     1
Statement of Senator Hutchison...................................    31
    Prepared statement...........................................    32
Statement of Senator Dorgan......................................    33
Statement of Senator Johanns.....................................    36
Statement of Senator Lautenberg..................................    43

                               Witnesses

Hon. Susan L. Kurland, Assistant Secretary for Aviation and 
  International Affairs, U.S. Department of Transportation.......     2
    Prepared statement...........................................     3
Glenn F. Tilton, Chairman, President and CEO, UAL Corp...........     5
    Joint prepared statement of Glenn F. Tilton, Chairman, 
      President and CEO, UAL Corp. and Jeffery A. Smisek, 
      Chairman, President and CEO, Continental Airlines, Inc.....     7
Jeffery A. Smisek, Chairman, President and CEO, Continental 
  Airlines, Inc..................................................    14
Robert Roach, Jr., General Vice President, International 
  Association of Machinists and Aerospace Workers................    15
    Prepared statement...........................................    17
Charles Leocha, Director, Consumer Travel Alliance...............    23
    Prepared statement...........................................    24
Daniel McKenzie, Senior Research Analyst, Hudson Securities......    28
    Prepared statement...........................................    30

                                Appendix

Hon. John Thune, U.S. Senator from South Dakota, prepared 
  statement......................................................    59
Susan Fleming, Director, Physical Infrastructure Issues, U.S. 
  Government Accountability Office, prepared statement...........    59
David Cush, President and CEO, Virgin America Inc., prepared 
  statement......................................................    71
Patricia A. Friend, International President, Association of 
  Flight Attendants CWA, AFL-CIO, prepared statement.............    75
Response to written questions submitted to Hon. Susan L. Kurland 
  by:
    Hon. John D. Rockefeller IV..................................    79
    Hon. Barbara Boxer...........................................    79
    Hon. Frank R. Lautenberg.....................................    80
    Hon. Mark Pryor..............................................    80
    Hon. Mark Warner.............................................    81
    Hon. John Thune..............................................    81
Response to written questions submitted to Glenn F. Tilton by:
    Hon. John D. Rockefeller IV..................................    82
    Hon. Barbara Boxer...........................................    82
    Hon. Frank R. Lautenberg.....................................    83
    Hon. Mark Pryor..............................................    83
    Hon. Amy Klobuchar...........................................    85
    Hon. Mark Warner.............................................    85
Response to written question submitted to Jeffery A. Smisek by:
    Hon. John D. Rockefeller IV..................................    86
    Hon. Barbara Boxer...........................................    86
    Hon. Frank R. Lautenberg.....................................    87
    Hon. Mark Pryor..............................................    87
    Hon. Amy Klobuchar...........................................    89
    Hon. Mark Warner.............................................    89
Response to written questions submitted by Hon. John Thune to 
  Glenn F. Tilton and Jeffery A. Smisek..........................    91
Response to written questions submitted to Robert Roach, Jr. by:
    Hon. John D. Rockefeller IV..................................    92
    Hon. Mark Pryor..............................................    93
    Hon. John Thune..............................................    93
Response to written question submitted to Charles Leocha by:
    Hon. Frank R. Lautenberg.....................................    94
    Hon. Mark Pryor..............................................    94
    Hon. Mark Warner.............................................    94
    Hon. John Thune..............................................    95
Response to written question submitted to Daniel McKenzie by:
    Hon. Frank R. Lautenberg.....................................    95
    Hon. Mark Warner.............................................    95
    Hon. John Thune..............................................    96


                   THE FINANCIAL STATE OF THE AIRLINE
             INDUSTRY AND THE IMPLICATIONS OF CONSOLIDATION

                              ----------                              


                        THURSDAY, JUNE 17, 2010

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in Room 
SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. Good morning, everybody. This hearing is 
begun. And we have a full quorum, so we will proceed.
    Kay Bailey Hutchison is with constituents, and she's on her 
way. She's a very, very good person to work with.
    Let me make my opening statement, then Kay Bailey hopefully 
will be here by that time, and then we will go to each of you.
    We have some time pressure this morning, because we have 
a--you've already been canceled once, so you're kind of used to 
this--but, we have a oil spill briefing by Admiral Allen at 
10:50. But, what I'll probably be is a little bit late for that 
so I can stay and ask some questions.
    Do you know what? I'm going to put my statement in the 
record so we can--I mean, it's a brilliant statement, of 
course.
    [Laughter.]
    The Chairman. But, I think it's more important to hear from 
you. So, if you want, you'll get, you know, to grab a copy of 
my statement, you can take it home, put it on the wall.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Air transportation is absolutely essential to our economy. I have 
been working on aviation my entire career, and I have seen just how 
important it is for our communities to be able to move people and 
products anywhere in the world in a short time. In West Virginia, air 
service provides a critical link for many rural communities--giving 
them the tools to compete, fostering economic activity, connecting 
families, and providing access to basic services.
    Unfortunately, even in the best of economic times, the airline 
industry struggles to stay healthy. Over the last decade, two 
recessions, war, and unstable oil prices have created a very fragile 
industry. Airlines have lost $60 billion, eliminated nearly 150,000 
jobs, terminated pensions, seen several major carriers declare 
bankruptcy, and made deep cuts in service to small communities. We need 
a strong airline industry in the United States if we are serious about 
making certain all of our communities have access to the global 
marketplace.
    Today, the airline industry appears to have weathered the worst of 
the financial storms, but the core question is whether it has done 
enough to shore up its bottom-line and survive the next crisis. Will it 
be able to cope with the next spike in oil prices? Can it survive a 
recession in Europe?
    In an effort to become stronger, United and Continental have 
announced their intention to merge, creating the world's largest 
airline--comparable to Delta after its merger with Northwest. If this 
merger is approved, our passenger aviation system will have one less 
global network carrier, and I am not sure if this is good or bad, but 
it is increasingly clear that the current structure is not financially 
sustainable. I do not want to advocate for higher fares, but the truth 
is that brutal competition and too many seats have probably led to 
artificially low fares--the terrible irony is that a weak airline 
industry can be good for consumers.
    Opponents of consolidation argue that it will lead to less 
competition, higher fares, and lower service levels. There is a lot of 
concern from passengers lately about the proliferation of small add-on 
fees--for baggage, food, seat selection, and the latest surcharge, 
proposed a few weeks ago, for peak travel times. These are legitimate 
concerns, and I expect the airlines to address them directly and 
completely.
    I also very much recognize that if we want air carriers to survive 
and grow, to compete with foreign carriers, and continue to offer 
stable jobs in our communities, they need to maintain their financial 
health. If consolidation creates the conditions not only to survive, 
but also to thrive in a competitive global industry--and I hope it 
does--I will support it.
    I do not believe consolidation alone will create a healthy 
industry. We very much need to pass the FAA reauthorization bill to 
modernize the air traffic control system. Nothing will kill this 
nascent recovery quicker than a return to delays, congestion, and 
gridlock in the skies. It is a delicate balance, but we need to find a 
way for air carriers to provide service--including service to small 
communities--in a financially sustainable manner. We have to get this 
right for air travelers, airline workers and for our national economy.
    I want to thank today's witnesses for participating. These are 
complex issues, and I know your experience and perspective will allow 
us to begin answering the tough questions ahead.

    But, we will start, as people are listed here, the 
Honorable Susan Kurland, Assistant Secretary for Aviation and 
International Affairs, U.S. Department of Transportation.

         STATEMENT OF HON. SUSAN L. KURLAND, ASSISTANT

       SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS,

               U.S. DEPARTMENT OF TRANSPORTATION

    Ms. Kirkland. Thank you, Mr. Chairman.
    The Chairman. And pull that mike right up close, please.
    Ms. Kirkland. Thank you.
    Thank you, Mr. Chairman. Thank you for the opportunity to 
appear before you this morning in order to discuss the current 
and future state of the airline industry and the role of the 
Department of Transportation in the industry's ongoing 
restructuring.
    Let me begin with a brief overview of the state of the 
airline industry to provide an understanding of the economic 
environment in which this transaction has been proposed.
    Following several consecutive years of losses, from 2001 to 
2005, the industry returned to modest profitability in 2006 and 
2007, only to confront rapidly increasing fuel costs and then a 
global recession. 2008 and 2009 were some of the most 
challenging years in the history of U.S. aviation, primarily 
because of the global recession that helped push operating 
revenues for the nine largest U.S. carriers down an 
unprecedented 17 percent, year over year.
    While costs also increased significantly during the first 
quarter of 2010, airline revenues have also rebounded, in large 
part on the basis of increased passenger volumes.
    For the second quarter of 2010, most analysts are 
predicting stronger results as passenger and shipper demand, 
that vanished during the height of the global recession, is 
returning across all sectors for all carriers. The turnaround 
from this time last year is encouraging.
    We foresee the industry continuing to evolve along several 
basic trends:
    First, carriers, while conscious of costs, are aggressively 
pursuing new sources of revenue.
    Second, over time, low-cost carriers will continue to 
expand significantly.
    Third, legacy carriers are continuing to seek ways to 
become more efficient producers, including through stronger 
international alliance relationships.
    While I cannot discuss the specifics of the proposed 
United-Continental merger, or any proposed transaction that is 
before us for review, I would like to shed some light on DOT's 
role in the review of an airline merger.
    Since 1989, the Department of Justice has had the lead role 
in reviewing proposed airline mergers. The Department of 
Transportation, using its special aviation expertise, typically 
examines the proposed merger, and shares its analysis and views 
with DOJ's antitrust division. Each transaction that we review 
is considered on a case-by-case basis, consistent with 
antitrust principles and practice.
    Should DOJ decide not to challenge a particular 
transaction, on antitrust grounds, DOT would then consider a 
wide range of follow-on issues that fall within our 
jurisdiction, including international route transfers, economic 
fitness, co-chairing, and possible unfair or deceptive 
practices.
    The Department's consideration of aviation economic policy 
focuses on what is best for a healthy and competitive industry 
for its workers, for the communities, and consumers that it 
serves. I can, therefore, assure you that, in conducting our 
analysis, we are committed to fostering an environment that 
embraces competition and provides consumers with the price and 
service benefits that competition brings.
    Mr. Chairman, this concludes my testimony, and I would be 
happy to answer any questions that you may have.
    [The prepared statement of Ms. Kurland follows:]

 Prepared Statement of Hon. Susan L. Kurland, Assistant Secretary for 
 Aviation and International Affairs, U.S. Department of Transportation

    Chairman Rockefeller, Ranking Member Hutchison, and members of the 
Committee:

Introduction
    I appreciate the opportunity to appear before you to discuss the 
current and future state of the airline industry and the role of the 
Department of Transportation (DOT) in the industry's ongoing 
restructuring. This hearing is in response to the proposed United/
Continental merger, a potential combination that has understandably 
captured the interest of this Committee and the American people.
State of the Airline Industry
    Let me begin with a brief overview of the state of the airline 
industry to provide an understanding of the economic environment in 
which this transaction has been proposed. In the more than 30 years 
since deregulation, market forces have shaped airline fares and 
services. During that time, the industry adjusted to a deregulated 
environment and changing market conditions, facing the expected--
fluctuations in supply and demand--but also the unexpected--terrorist 
attacks, epidemics, and now, with volcanic ash, a natural disaster. 
Through the various business cycles, carriers have taken steps to cut 
costs, manage capacity, and cope with volatile fuel prices. Many have 
adapted well, but not all have succeeded, with an unfortunate number 
having to file for bankruptcy protection and several exiting the 
industry altogether.
    Following several consecutive years of losses from 2001 to 2005, 
the industry returned to modest profitability in 2006 and 2007, only to 
confront rapidly increasing fuel costs and then a global recession. 
2008 and 2009 were some of the most challenging years in the history of 
U.S. aviation, primarily because the global recession helped push 
operating revenues for the nine largest U.S. airlines down an 
unprecedented 17 percent year-over-year. While costs also increased 
significantly during the first quarter of 2010, airline revenues 
continue to rebound in large part on the basis of increased passenger 
volumes.
    Each one of the nine largest U.S. carriers increased their revenue, 
year-over-year, despite the fact that all but one of them decreased or 
held capacity constant. For the first quarter, the nine largest 
airlines, whose revenue totaled nearly $27 billion, collectively earned 
a small operating profit of $17 million, excluding special items. While 
modest, that represented a substantial improvement from the total 
operating loss of over $1 billion during the first quarter of 2009.
    For the second quarter of 2010, most analysts are predicting 
stronger results, as passenger and shipper demand that vanished during 
the height of the global recession is returning across all sectors for 
all carriers. The turn-around from this time last year is encouraging.
    Consumers have reaped enormous benefits in the more than 30 years 
since airline deregulation. During this period, air transportation has 
been transformed from a luxury that few could afford, to a service that 
provides average families and small businesses of America with 
affordable access to destinations across the globe. Adjusted for 
inflation, air fares have continued to decline throughout the 
deregulated era, as new carriers, particularly low cost carriers, have 
entered the market and business models of new entrants and incumbent 
carriers alike have adapted to meet changing consumer needs and brought 
innovations and efficiencies to the marketplace. In expanding consumer 
and business access from local to global, air transportation has become 
an important driver of economic progress for the citizens and companies 
of this increasingly mobile Nation.
    We foresee the industry continuing to evolve along several basic 
trends. First, carriers, while conscious of costs, are aggressively 
pursuing new sources of revenue. Second, over time, low-cost carriers 
have expanded significantly. Third, legacy carriers are continuing to 
seek ways to become more efficient producers, including through 
stronger alliance partnerships.

DOT's Authority to Review Merger Transactions
    I am sure you understand that I cannot discuss the specifics of the 
proposed United/Continental merger, or any proposed transaction that is 
before us for review. However, I would like to shed some light on DOT's 
role in the review of an airline merger.
    The Department of Justice (DOJ) has the lead role in reviewing 
proposed airline mergers, given its statutory authority to enforce the 
antitrust laws. Utilizing its special aviation expertise, DOT typically 
examines the proposed merger and shares its analysis and views with the 
Antitrust Division. This practice is consistent with Congress' 
determination that the deregulated airline industry should generally be 
subject to the same application of the antitrust laws as other 
unregulated industries. Each transaction we review is considered on a 
case-by-case basis consistent with anti-trust principles and practice.
    The purpose of our antitrust laws is to ensure that consumers 
receive the benefits of competition, and this is the prism through 
which the Department analyzes airline mergers. I can therefore assure 
you that the Department is committed to fostering an environment that 
embraces competition and provides consumers with the price and service 
benefits that competition brings.
    We also recognize that the airline industry is very dynamic. 
Cyclical economic conditions, the competitive environment, 
infrastructure access and capacity, and industry innovation all need to 
be taken into account to allow the industry to adapt to rapidly 
changing economic conditions.
    Should DOJ decide not to challenge a particular transaction on 
antitrust grounds, DOT would then consider a wide range of follow-on 
issues that fall within its jurisdiction, including international route 
transfers, economic fitness, code-sharing, and possible unfair or 
deceptive practices.
    As to international routes, the carriers would be expected to apply 
for DOT approval of a route transfer to consolidate the international 
routes they individually hold under one certificate as part of the 
merger process. By statute (49 U.S.C. 41105), DOT may approve a 
transfer of such routes only if we find that it is consistent with the 
public interest. As part of that analysis we must examine the 
transfer's impact on the viability of each airline party to the 
transaction, competition in the domestic airline industry, and the 
trade position of the United States in the international air 
transportation market.
    We would only decide an international route transfer case after we 
had established a formal record and given all interested persons the 
opportunity to comment. If DOT determines that the transfer would be 
contrary to the public interest on competitive grounds or for another 
reason, DOT could disapprove the transfer in whole or in part. 
Alternatively, DOT may condition its approval on requirements that 
would protect the public interest.
    Because a proposed merger of major carriers would involve a 
significant change in the structure of at least one of the existing 
carriers, DOT would institute a fitness review of airline management, 
financials and compliance disposition.
    While the transfer application is pending, the merging carriers 
could request that DOT grant them an exemption from the provisions of 
49 U.S.C. 41105 to allow them to consummate the merger at their own 
risk pending DOT's decision on their transfer application. DOT has 
sometimes approved such exemption requests in the past, conditioned 
upon the air carriers remaining separate and independently operated 
entities under common ownership until the transfer application case is 
decided.
    DOT may also review any code-share arrangements concluded between 
the merging carriers. In DOT's experience, code-share arrangements 
would likely be necessary during the early phases of integration after 
the transaction is closed.
    Finally, at DOT, we take our responsibility for consumer protection 
seriously. For example, if carriers in pursuing or implementing a 
merger were to engage in unfair or deceptive practices, we would not 
hesitate to act to protect affected consumers based on our 49 U.S.C. 
41712 authority.

Conclusion
    Airlines are the circulatory system of national and global 
communities--linking friends and family, suppliers and producers, 
retailers and manufacturers, facilitating business partnerships, and 
fostering educational and cultural exchanges of all types. Every 
American has both a personal and an economic interest in access to safe 
and affordable air travel. It is therefore easy to understand why so 
many people take an interest in airline mergers.
    Our consideration of aviation economic policy focuses on what is 
best for a healthy and a competitive industry, for its workers, and for 
the communities and consumers that it serves. Our goal must be to 
strike what is often a very difficult balance in the face of a complex 
and dynamically changing industry. Importantly, in doing so we must 
also consider the longer term, collective impact on all stakeholders, 
most importantly America's traveling public.
    Mr. Chairman, this concludes my testimony. I would be happy to 
answer any questions you may have.

    The Chairman. Thank you very much, Susan Kurland.
    Glenn Tilton is the Chairman, President, and Chief 
Executive Officer of United Airlines.

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

    Mr. Tilton. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify today as well.
    As I listened to the Assistant Secretary's testimony, I am 
reminded that the status quo for our industry is clearly 
unacceptable. It's extraordinary and insightful that this 
industry has lost some $60 billion and 150,000 jobs in the 
United States in the last 10 years, delivering the worst 
financial performance of any major industry, in 186 
bankruptcies over the last 30 years.
    Both before and after deregulation, this industry has been 
systemically incapable of earning even a modest profit, let 
alone a reasonable return, on the large investment that we have 
made in aircraft, in facilities, and in technology.
    It's ironic, then, that this industry, unable to cover its 
cost of capital, is expected to be, and indeed must be, the 
Nation's engine for economic recovery.
    As leaders, you know the critical role aviation plays, 
nationally, in the communities that you represent, in driving 
commerce and tourism, creating jobs, and contributing to the 
economy. Regardless of our personal perspectives, we can likely 
all agree, serial bankruptcy and the asset distribution of 
failed companies is not an acceptable strategy for an industry. 
We must create economic sustainability through the business 
cycle. And, to that end, our objective at United Airlines 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 
maintain service to communities, large and small, or invest in 
customer service, nor can we create value for shareholders.
    To be profitable, we must successfully compete in the 
global market, as it is today, not as it was 10 years ago, or 
indeed as it was 30 years ago.
    Today, low-cost carriers are very well established, and 
Southwest Airlines will continue to be the country's largest 
domestic airline, in terms of number of passengers, after our 
merger. Today, international competitors have merged, and 
powerful new entrants continue to gain ground. Today, the 
world's largest airlines, measured by revenue, are not American 
or United or Continental, they are Lufthansa and Air France-
KLM, with more than half of all transatlantic capacity and more 
than two-thirds of all transpacific capacity provided by 
foreign carriers.
    United and Continental have taken significant actions to 
improve our performance, competing across both international 
and domestic markets and at the same time finding a way to 
connect small U.S. communities into our respective route 
networks. In this dynamic, highly competitive environment, 
these actions have not been enough. Our proposed merger is a 
logical and essential next step.
    Let me be clear. Without this merger, we would not have the 
1 to 1.2 billion dollars in synergies to improve product, to 
improve service for customers, and the financial means to 
create better career opportunities for our employees. We will 
not be as successful a competitor as we need to be and to 
enable continued economic development. Our merger enhances and 
strengthens service for those who rely on our respective 
networks in nearly 148 small communities and metropolitan 
areas, providing business lifelines and collateral economic 
benefit to those communities that are not traditionally served 
by low-cost carriers.
    Carriers compete vigorously on both price and on service, 
and our merger won't change that reality. There is significant 
low-cost carrier competition at every single one of our hubs, 
including the 15 nonstop routes on which we overlap.
    Over the last decade, ticket prices have declined by some 
30 percent, when adjusted for inflation, including fares to 
small communities. Our expected revenue synergies are derived 
from better service and the expanded network; they're not based 
on fare increases.
    This merger represents excellent value and more 
destinations for consumers. Consumers will continue to benefit 
from intense price competition across the industry, due to the 
prevalence of low-cost carriers, other network carriers, and 
fare transparency enabled by, today, the Internet.
    The competitive landscape has changed. And to be a company 
that attracts and provides value for customers, shareholders, 
and employees, United and Continental have to change, as well.
    Thank you very much, Mr. Chairman.
    [The prepared joint statement of Mr. Tilton and Mr. Smisek 
follows:]

 Prepared Joint Statement of Glenn F. Tilton, Chairman, President and 
   CEO, UAL Corp.; and Jeffery Smisek, Chairman, President and CEO, 
                       Continental Airlines, Inc.

    Good morning, Chairman Rockefeller, Ranking Member Hutchison, and 
members of the Committee.
    Thank you for the opportunity to discuss the benefits and answer 
any questions related to the planned merger of equals between 
Continental Airlines and United Airlines that we announced on May 3. As 
we said at the time, this transaction will enable us to provide 
enhanced long-term career prospects for our more than 87,000 employees 
and superior service to our customers, especially those in small 
communities throughout the United States. Our combined company will be 
well-positioned to succeed in an increasingly competitive global and 
domestic aviation industry--better positioned than either airline would 
be standing alone or as alliance partners.
    This merger will provide consumers access to 350 destinations in 59 
countries around the world. We will offer a comprehensive network in 
the United States, and we will have strategically located international 
gateways to Asia, Europe, Latin America, the Middle East and Canada 
from well-placed domestic hubs throughout the country. We will have 10 
hubs, eight in the continental U.S. (Chicago, Cleveland, Denver, 
Houston, Los Angeles, New York/Newark, San Francisco and Washington 
Dulles) and two others in Guam and in Tokyo. We will continue to 
provide service to all of the communities that our companies serve 
today.
    This merger comes at a critical juncture for the U.S. aviation 
industry, which has confronted extremely difficult business challenges 
for the last decade. During this time, our industry has lost over 
150,000 jobs, and there have been nearly 40 bankruptcies since 2001. 
U.S. airlines have lost a total of $60 billion since 2001.
    While the economy and our industry are beginning to slowly recover 
from the worldwide recession, we continue to be subject to the 
volatility of fuel prices and an intensely competitive environment in 
all of our markets.
    As individual companies, we have taken significant steps to respond 
to these challenges. United went through a bankruptcy restructuring and 
both airlines have become more efficient and reduced our cost 
structures. But to survive, we have also been forced to reduce the 
number of aircraft we fly, the number of destinations we serve and the 
number of people we employ.
    At the same time, we have made significant operational 
improvements. United now ranks as the leading U.S. global airline in 
on-time performance as measured by the Department of Transportation, 
and Continental is regularly recognized in independent surveys for the 
high quality of its customer service. Through our joint venture and 
alliance relationships, we have provided enhanced benefits to our 
customers and achieved substantial synergies.
    While we are proud of these recent improvements at our companies, 
we believe it is clearly in the best interests of our customers, 
employees, shareholders and the communities we serve to bring our two 
airlines together in a merger. This merger will provide a platform to 
build a more financially stable airline that can invest in our product 
and our people to succeed in a highly competitive environment and be 
better able to withstand future economic downturns and challenges. The 
fact is that sustained profitability is the only way to improve service 
and reward employees over the long term.

The Merger Will Benefit Customers
    By bringing together two of the most complementary route networks 
of any U.S. carriers, the merger of Continental and United will give 
travelers expanded access to an unparalleled global network. It 
combines United's Midwest, West Coast and Pacific routes with 
Continental's service in New York/New Jersey, the East Coast, the 
South, Latin America and across the Atlantic.
    Customers will have access to 116 new domestic destinations; 40 
will be new to United customers, and 76 will be new to Continental 
customers. The merger will create more than 1,000 new domestic 
connecting city pairs served by the combined carrier, providing 
additional convenience to customers.
    Our fully-optimized fleets and routes will provide greater 
flexibility, options, connectivity and convenience for customers. This 
improved connectivity and direct service options, as well as improved 
service, are expected to enable the combined airline to generate $800-
$900 million in annual revenue synergies--and these synergies are not 
dependent on fare increases.
    Importantly, the combined airline will be better able to enhance 
the travel experience for our customers through investments in 
technology, the acquisition of new planes and the implementation of the 
best practices of both airlines. The new airline will be more cost 
effective; we expect to realize cost-savings synergies of $200-$300 
million per year, mostly through reductions in overhead such as 
rationalizing our two information technology platforms, combining 
facilities and corporate functions such as finance, marketing, sales 
and advertising.
    We will have one of the youngest and most fuel-efficient fleets 
among the major U.S. network carriers, as well as the flexibility to 
manage our fleet more effectively. With one of the best new aircraft 
order books in the industry, we will also be able to retire older, less 
efficient aircraft. This will result not only in greater efficiency but 
less environmental impact from our fleet.
    Once the merger is complete, customers will also participate in the 
industry's leading frequent flyer program, which will give millions of 
members more opportunities to earn and redeem miles than ever before. 
Through Star Alliance, the leading global alliance network, our 
customers will also continue to benefit from service to more than 1,000 
destinations worldwide.

The Merger Provides Job Stability for Employees
    The past decade has been a tumultuous time for our employees. They 
have faced ongoing uncertainty as the industry has been forced to shed 
tens of thousands of jobs. In fact, in January 2009, the full-time 
equivalent employees for the U.S. airline industry numbered 390,700--
that figure is 151,000--or more than 25 percent--less than the all-
time-high airline employment figure of 542,300. Employees have been 
forced to weather the volatility of oil prices and the challenges of 
terrorist attacks, increased security, a massive recession and 
unforeseen events such as SARS, H1N1 and volcanic ash. Through all of 
this, they have continued to perform at their best, providing our 
customers with clean, safe and reliable air travel.
    We're proud of the work that our employees do every day. The merger 
will offer our employees improved long-term career opportunities and 
enhanced job stability by being part of a larger, financially stronger 
and more geographically diverse carrier that is better able to compete 
successfully in the global marketplace and withstand the volatility of 
our industry.
    We will continue to serve all of the communities that we serve 
today and we expect that any necessary reductions in front line 
employees will come from retirements, normal attrition and voluntary 
programs. Our plan is to integrate our workforces in a fair and 
equitable way. Our focus will be on creating cooperative labor 
relations, including negotiating contracts with our collective 
bargaining units that are fair to the company and fair to our 
employees. United has two members of its collective bargaining units on 
its Board of Directors, and the seats allocated to the collective 
bargaining units will continue to be part of the Board of the combined 
company.
    The merged company's headquarters will be in Chicago. In Houston, 
we will continue to have a significant presence and will remain one of 
Houston's largest private employers. Houston will be our largest hub 
and will continue to be a premier gateway to Latin America for more 
travelers than ever before. Some corporate positions will remain in 
Houston and our CEO will have an office there as well as in Chicago. 
Over time, as our business grows as a result of the merger, we expect 
to see a net gain in jobs in Houston.
    We expect to adopt the best aspects of each company's culture and 
practices. People at both companies have come to know, admire and learn 
from their counterparts in many functions due to our joint venture and 
Star Alliance relationships, and we are confident that we can integrate 
our organizations fairly, effectively, and efficiently.

Service to Small Communities Will Be Enhanced
    As network carriers, we have a long history of serving small- and 
medium-sized communities. United is proud to fly passengers from places 
like Portland, Maine to Honolulu or Charleston, South Carolina to 
Chicago, while Continental's service to and from Houston has been 
instrumental to the growth of the 20 Texas communities served.
    Air travel opens up the world and provides business and leisure 
opportunities to all Americans, no matter where they live. Airlines are 
often the lifeblood of small communities, not only because of the 
economic benefits they provide, but due to their civic and charitable 
contributions and the volunteer activities of their employees. Both of 
our companies are committed community partners with robust corporate 
contributions and responsibility programs and we strongly support our 
employees' volunteer activities.
    The turmoil in our industry has been devastating to many small- and 
medium-sized communities. Since 2000, more than 100 small communities 
have lost all network carrier service. Approximately 50 more have seen 
their service levels cut, losing at least half of their seats.
    Low-cost carriers have not filled this void because service to 
these communities is typically inconsistent with their business model. 
They are more-often dependent on point-to-point, high-density routes 
and often have one-size aircraft, which makes it difficult for them to 
serve these small communities. As a result, approximately 200 of these 
small communities and metropolitan areas, many of which have fewer than 
500 passengers traveling to or from their airports daily, are served 
only by network carriers.
    When we announced our merger, we committed to continuing to provide 
service to all of the communities our airlines currently serve, 
including 148 small communities and metropolitan areas (Chart One). 
This service enables residents of small communities to connect through 
our 8 mainland domestic hubs and travel on to hundreds of destinations 
on thousands of routes worldwide. The combined airline will offer these 
travelers access to 350 destinations in 59 countries.



    Following the merger, 93 of the 116 destinations that would be new 
to either Continental or United passengers would be small communities. 
As a result, a businessperson will be able to fly from Tyler, Texas to 
Sydney, Australia on a single airline.

The Merger Will Enhance Competition
    The potential impact of this merger must be viewed in light of the 
fundamental changes that have occurred in our industry since 2000. The 
increased competition from low cost carriers (LCCs) has been dramatic 
as they have experienced tremendous growth over the past decade. They 
operate profitably at lower unit revenues than traditional network 
airlines, generally due to significant cost advantages related to their 
less costly point-to-point business model. Consequently, their presence 
limits the ability of their competitors to increase fares.
    Industry-wide, LCCs now compete for 80 percent of all domestic 
travelers. In fact, Southwest has grown to become the largest domestic 
airline in the U.S., in terms of passengers and will continue in that 
position after our merger (Chart Two). Over 85 percent of passengers 
traveling nonstop on either Continental or United have an LCC 
alternative. LCCs compete on domestic city-pairs accounting for 77 
percent of United and Continental's combined passengers, and 46 of each 
of Continental and United's top 50 routes, have LCC competition.



    There once was an assumption that LCCs would have difficulty 
competing at the hubs of network carriers. This assumption has long 
since been disproven. LCCs directly compete at all of our hub airports 
and have very large presences at airports adjacent to our hubs, such as 
Hobby in Houston, Akron near Cleveland, BWI near Washington and Midway 
in Chicago. LCCs have market shares in our hub cities ranging from 28 
percent in Cleveland to 50 percent in Denver and San Francisco.
    LCCs are increasingly being used by business travelers and are 
targeting those travelers by providing amenities such as preferred 
seating and boarding access. They are also providing service from the 
United States to international destinations, including Mexico, the 
Caribbean, Latin America and Canada.
    In addition to the growth of LCCs, competition from international 
carriers has increased. Mergers between Air France and KLM; Lufthansa, 
SWISS, bmi, Brussels Airlines and Austrian; British Airways and Iberia; 
and Cathay Pacific and Hong Kong Dragon Airlines have given these 
preeminent global carriers international networks and global reach that 
overshadow those of U.S. network carriers. In 2000, the top two 
airlines in terms of worldwide revenue, American Airlines and United, 
were both U.S.-based. Today, the top two are Lufthansa and Air France-
KLM (Chart Three). In fact, more than half of all transatlantic 
capacity and more than two-thirds of all transpacific capacity is 
provided by foreign carriers. The merged carrier will be able to 
compete far more effectively with foreign carriers and to maintain 
competitive domestic service to cities large and small in the U.S.



    Additionally, well-funded newcomers (such as Emirates and Jet 
Airways) are making inroads into U.S. international routes from 
emerging economies in the Middle East and South Asia. This trend will 
continue, and is a credit to the success of the Open Skies policy as 
these agreements expose U.S. carriers to more competition than ever 
before.
    Price competition in our industry has also increased due to the 
ready availability and transparency of fare information to consumers 
through online sites such as Expedia and Orbitz. Consumers have become 
more savvy and sophisticated as they search for the fare that meets 
their needs. ``[R]aising airfares isn't like raising the price of milk 
. . . the Internet can hunt the cheapest fare worldwide in seconds. If 
one carrier has some empty seats to fill, it will have to cut the price 
because getting something for that seat is better than flying it 
empty'' (Scott McCartney, ``As Airlines Cut Back, Who Gets Grounded,'' 
Wall Street Journal, 6/5/08). Online sites have expanded their business 
models and now offer targeted services to corporations and business 
travelers.
    In short, the changing dynamics of the airline industry have 
resulted in robust competition that maintains significant downward 
pressure on fares. As a result, airfare prices have declined by more 
than 30 percent over the last decade on an inflation adjusted basis 
(Chart Four).



    Especially given this landscape and the relative ease with which 
LCCs can enter into competition with network carriers and other LCCs, 
this merger will not result in a reduction in competition. There are 
only 15 overlapping nonstop domestic routes among the hundreds that we 
fly (and no overlapping international routes). The combined carrier's 
ability to raise prices on any individual overlapping route is 
constrained because each has current nonstop competitors. Moreover, 
extensive competitive connecting service further constrains pricing.
    On each of these 15 nonstop overlapping routes, after the merger, 
travelers would be served by at least one other carrier, but more often 
two, three, four or five. All but two of the overlapping routes are 
served by an LCC and six are served by two LCCs (Chart Five).



The Merger Is A Natural Extension of Our Current Relationship
    About 2 years ago, our companies began an extensive alliance 
relationship. We are both members of Star Alliance, the leading global 
alliance network. Domestically, we have a code-share arrangement, 
frequent flyer reciprocity and shared lounge access.
    We have antitrust immunity for international coordination including 
our A++ transatlantic joint venture that also includes Air Canada and 
Lufthansa. We have an immunity application pending with ANA that 
includes a transpacific joint venture, in connection with the Open 
Skies agreement initialed and soon to be implemented with Japan.
    While these agreements have generated significant synergies and 
customer benefits, they do not provide the cost savings and employee 
and customer benefits of a merger. For example, following a merger, we 
can fully optimize our schedules and integrate our fleets. Our combined 
mainline fleet of more than 700 aircraft of a broad range of sizes and 
mission capabilities will enable the most efficient utilization of seat 
capacity. We will be able to reassign aircraft across the network to 
better meet demand on different routes, yielding a net increase in 
annual passengers and improving the business mix of those passengers 
through the appeal of our broad combined network.
    The merger will also enhance our frequent flyer programs. 
Currently, it is sometimes difficult to obtain reciprocal benefits, 
elite recognition and awards. A combined program would offer more 
benefit to customers as they accrue and redeem awards across our 
combined network on a seamless frequent flyer program.
    Our alliance relationship has given each airline the opportunity to 
know and partially integrate the systems, practices and procedures of 
the other. As a result, it gives us great confidence that we can 
successfully integrate our two companies once the merger closes.

Conclusion
    Each of our companies has a long and proud history of independence. 
Continental and United are among the pioneers in the aviation industry 
and, in fact, have the same founder, Walter T. Varney.
    Although our companies have been performing better since the 
economic recovery began, we analyzed the competitive environment and 
reflected on the volatility that has plagued our industry. As we looked 
ahead, we each strongly believed that our combined future was brighter 
than our standalone future, that this is the right time for a merger, 
and that we have found the right merger partner.
    As we have talked to our customers, our employees and our 
shareholders, we have felt a great sense of excitement about this 
merger. By bringing the best of both organizations together, we believe 
we can not only create a world-class airline with enduring strengths, 
but also serve our customers and communities better than ever, provide 
security and stability for our employees and benefit shareholders with 
a strong financial foundation.
    We look forward to continuing to outline the benefits of this 
merger in Washington, D.C., and throughout the country and the rest of 
the world. But more importantly, we look forward to our people working 
together to create the world's leading airline.

    The Chairman. Thank you, Glenn Tilton. That was not exactly 
an outpouring of optimism. But, when you said you needed to 
make it perfectly clear, you surely did that.
    Mr. Tilton. Thank you very much, Mr. Chairman.
    The Chairman. Yes, sir.
    Now Mr. Jeffery Smisek, who is Chairman, President, et 
cetera, et cetera, of Continental Airlines.

           STATEMENT OF JEFFERY A. SMISEK, CHAIRMAN,

            PRESIDENT, AND CHIEF EXECUTIVE OFFICER,

                   CONTINENTAL AIRLINES, INC.

    Mr. Smisek. Thank you. I'd like to thank the Chairman the 
Ranking Member, and the members of this Committee for the 
opportunity to be here today.
    I want to make four main points: this merger is good for 
employees, it's good for communities, it's good for consumers, 
and it's good for competition.
    Let me start with employees. The volatility and the 
instability of the airline industry have had harsh effects on 
employment in the airline business. Before 9/11, Continental 
had over 54,000 employees. Despite being the only network 
carrier to have grown since 9/11, today, we have less than 
41,000 employees, and we've lost over a billion dollars. Before 
9/11, United had over 100,000 employees, today they have about 
46,000.
    After we merge, our employees will be part of a larger, 
financially stronger, and more geographically diverse carrier. 
This carrier will be better able to compete in the global 
marketplace, and better able to withstand the external shocks 
that hit our industry with disappointing regularity.
    Because of how little we overlap, the merger will have 
minimal effect on the jobs of our front-line employees. We are 
committed to continuing our cooperative labor relations and 
integrating our work forces in a fair and equitable manner, 
negotiating contracts with our unions that are fair to the 
employees and fair to the company. United has two union members 
on its board of directors, and those union board seats will 
continue after this merger.
    The merger will enable us to continue to provide service to 
small communities, communities that many of you represent. But, 
turmoil in our industry has been devastating to many small and 
medium-sized communities. As you know, low-cost carriers have 
not, and will not, serve small communities, as such service is 
inconsistent with their point-to-point business model that 
relies largely on local traffic.
    As a result, over 200 small communities are served only by 
network carriers. As a merged carrier, we plan to continue 
service to all of the communities we currently serve, including 
148 small communities.
    The 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 our 
older, less fuel-efficient aircraft.
    Continental brings to the merger its working-together 
culture of dignity and respect, and direct, open, and honest 
communication. This working-together culture means people enjoy 
coming to work every day, and they give 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 route networks. Our networks 
are so complementary that we have only minimal nonstop 
overlaps, each of which faces significant competition after 
this merger. Over 85 percent of our nonstop U.S. passengers 
have a direct low-cost-carrier alternative. Moreover, low-cost 
carriers compete at all of our hubs and at airports adjacent to 
our hubs. As a result of the robust competition in the U.S., 
airfares have declined by over 30 percent over the past decade, 
on an inflation-adjusted basis.
    We also face significant competition from foreign carriers, 
which themselves have merged to create attractive global 
networks, 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 compete 
effectively against these large foreign airlines.
    In sum, the merger will create a strong, financially viable 
airline that can offer good-paying careers and secure 
retirements to our coworkers, 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 
together in an alliance.
    Thank you very much.
    The Chairman. Thank you, Mr. Smisek.
    And now, Mr. Robert Roach, who's General Vice President--
Transportation, International Association of Machinists and 
Aerospace Workers.
    Please.

          STATEMENT OF ROBERT ROACH, JR., GENERAL VICE

    PRESIDENT, INTERNATIONAL ASSOCIATION OF MACHINISTS AND 
                       AEROSPACE WORKERS

    Mr. Roach. Thank you, Chairman Rockefeller and Ranking 
Member Hutchison, members of the Committee, for the opportunity 
to speak to you today.
    I am General Vice President Robert Roach, for the 
International Association of Machinists and Aerospace Workers, 
the largest airline union in North America. The Machinists 
Union represents more than 100,000 airline industry workers and 
27,000 that could be impacted by this merger at United, 
Continental, Air Micronesia, and regional partner ExpressJet. 
We also are in an alliance with the Japanese Federation of 
Workers Union. And I speak on behalf, not only of the 
Machinists Union, but the International Transport Workers 
Federation, who represents 4.6 million members worldwide.
    We believe that we cannot look at the United-Continental 
transaction in isolation, as the US Airways President has 
already made known his intention to merge with one of the big 
three. The airline industry has been in turmoil since the 
passage of airline deregulation in 1978. Since the airline 
deregulation, pension terminations have cost taxpayers $10 
billion, and participants $5 billion. There have been 162 
airline bankruptcies since 1968, and 150 low-cost carriers 
began operation, but less than a dozen are still providing 
service today. More than 100 communities have lost all 
commercial service in the last 10 years. The industry is crying 
out for some limited, sane reregulation. Maybe we should take a 
step back and not rush to judgment or consolidation.
    Our concern is that we are creating airlines that are too 
big to succeed. Their failure would mean that one of the big 
three would have to be bailed out by the taxpayers. If we--it 
is time we seek a new vision for the future of air 
transportation. Staying the course will only continue the 
industry's downward spiral.
    Albert Einstein said, ``Insanity is doing the same thing 
over and over again, expecting a different result.'' We can now 
close our eyes and believe that repeating the same mistake for 
30 years will eventually bring different results, or we can 
effect real change and have a--an efficient, competitive air 
transportation industry.
    Critics of regulation need only look, in 2007, at the 
hundreds of billions of dollars that the taxpayer paid to now 
regulate the financial community, or the 60,000 barrels of oil 
that is gushing in the Gulf of Mexico, and now we're saying, 
``Let's regulate. We'll have better oversight.''
    The airline business plans--the airline business plans 
today focus on cutting tickets to the bone or putting 
competitors out of business, making a profitable industry 
impossible. The long-term costs of underpricing of tickets is 
too extreme. Pan American, TWA, Eastern, Braniff, Northwest, 
and Aloha Airlines all survived for more than half a century, 
but could not endure the insanity of cutting prices to 
eliminating competition and simultaneously losing billions of 
dollars.
    We have met with both airlines, jointly and separately, 
since the merger was announced. IAM members still have many 
questions unanswered and concerned that need to be addressed.
    To the carriers' credit, they have set up a line of 
communication with the Machinists Union, but we still have not 
received the information that we need to make an informed 
decision concerning this particular merger.
    The merged United-Continental carrier would start out with 
$13.8 billion in debt. What is the business plan to deal with 
that debt structure? Will the merged carrier have any choice 
but to eliminate hubs in order to avoid competing with itself? 
What happens in Cleveland or Washington-Dulles?
    Continental and United represent the latest consolidation 
of airlines in the same alliance. Continental membership in the 
Star Alliance essentially started as a merger on an installment 
plan. Given the prevalence of alliances here at home, what will 
alliances ultimately mean to the traveling public, particularly 
if they lead to further consolidation and route frequencies are 
cut, if not altogether?
    Closing of hub initiates a cascade of job loss that begins 
with airline employees and continues throughout the community. 
Will the merging carriers and the wholesale reshaping of the 
industry harm consumers or routes throughout the United States?
    We have heard the good intentions of the CEOs. And we 
certainly believe that they are good intentions. But, I have 
been through a series of these hearings. I've heard CEOs from 
America West and US Airways, from Northwest to Delta, make the 
same claims, only to find tens of thousands of people lose 
their jobs. I, myself, worked for TWA. And when the alliance--
and when the merger went, on a 363 transaction came, I, among 
tens of thousands of other employees, have lost their jobs, 
like Janet Calabrese, who was a flight attendant and has no 
place to go and no health insurance and no pension.
    So, I ask that this body look at this merger and give it 
close scrutiny. And this merger cannot be at the cost of the 
employees, the flying public, or the Nation that we so all 
love, and the cities and States that these carriers serve.
    Thank you, Mr. Chairman, and we look forward to answering 
any questions you may have.
    [The prepared statement of Mr. Roach follows:]

   Prepared Statement of Robert Roach, Jr., General Vice President, 
     International Association of Machinists and Aerospace Workers

    Thank you, Chairman Rockefeller, Ranking Member Hutchison and 
members of this Committee for the opportunity to speak to you today. My 
name is Robert Roach, Jr., General Vice President of the International 
Association of Machinists and Aerospace Workers (IAM), the largest 
airline union in North America, which recently entered into an alliance 
with the Japan Federation of Aviation Workers' Unions (KOHKUREN). In my 
capacity as a member of the Executive Board and Management Committee of 
the International Transport Workers' Federation (ITF), I had the ITF 
review my prepared testimony and they have given their authorization 
for me to speak on their behalf. My comments today are not only on 
behalf of the 720,000 members of the Machinists Union, but also reflect 
the position of 4.6 million ITF members.
    The Machinists Union represents United Airlines and/or Continental 
Airlines workers in the flight attendant; ramp; customer service; 
reservation agent; fleet technical instructor; maintenance instructor; 
security guard; and food service employee classifications, plus 
customer service agents at United's frequent-flier subsidiary, Mileage 
Plus, Inc. The IAM also represents flight attendants at Continental's 
wholly-owned subsidiary Continental Micronesia and flight attendants at 
Continental and United regional partner ExpressJet Airlines. In total, 
the IAM represents more than 26,000 workers who will be affected by 
this proposed merger. Our bargaining relationship with each airline 
spans many decades.

Perpetual Crisis
    The airline industry has been in continuous turmoil since the 
passage of deregulation in 1978. Merger proponents complain about 
overcapacity as a major reason for industry consolidation, but mergers 
will not address overcapacity. Braniff, Eastern, PanAm, TWA, Northwest 
Airlines, People Express, Aloha Airlines and others have all 
disappeared from the industry landscape, but the problem of 
overcapacity remains.
    We cannot look at the United-Continental transaction in isolation. 
As the Delta-Northwest merger moves toward its completion, the United-
Continental merger takes center stage. Waiting in the wings is a 
possible third merger, perhaps between US Airways and American 
Airlines, each a product of recent consolidation with America West and 
TWA, respectively. We agree with House Transportation and 
Infrastructure Committee Chairman James Oberstar when he wrote the 
Department of Justice stating, ``This merger will move the country far 
down the path of an airline system dominated by three mega-carriers . . 
. If United and Continental merge, another domino in a chain of mergers 
will fall, and there will be strong pressure for further 
consolidation.'' \1\
---------------------------------------------------------------------------
    \1\ Chairman James Oberstar's letter to the Department of Justice, 
May 5, 2010.
---------------------------------------------------------------------------
    Does anyone really believe that having only a few major airlines in 
operation, each with immense market control and offering consumers 
fewer choices, will benefit the country? If one of these mega-carriers 
should fail, how would that impact the country?
    The Machinists Union has serious concerns not only about the 
viability of a combined United/Continental carrier, but also for the 
long-term sustainability of each carrier independently. In fact, our 
concern is for the entire industry, and we do not believe mergers alone 
provide the answers. Congress has spent a considerable amount of time 
debating the issue of entities that are too big to be allowed to fail. 
Our concern is we are creating airlines that are too big to succeed.
    I am not advocating that we maintain the status quo in the airline 
industry. When there are problems, we must seek solutions. But perhaps 
we should take a step back and not rush to judgment or consolidation. 
It is time we seek a new vision for the future of air transportation in 
the United States.
    It was clear to the Machinists Union in 1993 that deregulation had 
failed. The Clinton Administration recognized the problems facing the 
air transportation industry and empanelled the National Commission to 
Ensure a Strong Competitive Airline Industry. One of my predecessors, 
IAM General Vice President John Peterpaul, served on the Commission. 
The Commissioners were charged with investigating and devising 
recommendations that would resolve the crisis in the industry and 
return it to financial health and stability.
    The Committee essentially recommended no substantial regulatory 
changes and believed that market forces would stabilize the industry. 
The IAM's representative on the Commission was the only dissenter, 
arguing that deregulation destabilized the industry and government 
intervention was necessary.
    This country needs the major airlines, or so-called legacy 
carriers. While low-cost carriers fill an important niche, the air 
transportation system would collapse without traditional hub-and-spoke 
carriers. If you want to fly to Europe, Asia, South America or the 
Middle East you will be flying one of the legacy carriers, or another 
nation's airline. As John Peterpaul said, ``Hubs serve as collection 
and distribution centers for air traffic, making it possible to serve 
many more communities than would be feasible with simple linear, point-
to point service.'' \2\ It is a mistake to think that as legacy 
airlines merge and hubs are eliminated that start-ups or low-cost 
carriers are capable of filling the void.
---------------------------------------------------------------------------
    \2\ Dissenting Opinion, by Commissioner John Peterpaul to the 
Report of the National Commission to Ensure a Strong Competitive 
Airline Industry, August 19, 1993.
---------------------------------------------------------------------------
    The Machinists Union's assertion that deregulation had failed to 
deliver on its promises was ignored in 1993 in favor of supporting 
airline industry executives who advocated staying the course. Congress 
now has another chance to make effective changes to this industry.
    United and US Airways' pension terminations alone have cost the 
Pension Benefit Guaranty Board (PBGC) $10 billion and beneficiaries $5 
billion.\3\ Inflation-adjusted salaries for airline employees have 
grown less than 5 percent since 1979.\3\ There have been 162 airline 
bankruptcy filings since 1978,\4\ with bankruptcies accelerating in the 
last decade, including the liquidations of Aloha Airlines, ATA and 
Midway Airlines. Since 1978, 150 low-cost carriers began operations, 
with less than a dozen still providing service today.\4\ More than 100 
communities have lost all commercial air service in the last 10 
years.\4\ The industry has lost more than $60 billion in the last 
decade, and 163,000 industry jobs have disappeared since 2001.\5\
---------------------------------------------------------------------------
    \3\ Airline Deregulation, U.S. Government Accountability Office 
Report GAO-06-630, June 2006.
    \4\ Flying Blind, Demos, 2009.
    \5\ Testimony by ATA President and CEO Jim May Before House 
Appropriations Subcommittee on Transportation, Housing, Urban 
Development and Related Agencies on Aviation Stakeholder Priorities for 
Maintaining a Safe and Viable Aviation System, March 18, 2010.
---------------------------------------------------------------------------
    The so-called low-cost airlines are not immune to the industry's 
problems and are also looking for additional consolidation to help them 
survive. For example, US Airways, which became a low-cost carrier after 
two bankruptcies and a merger with America West Airlines, is now 
aggressively seeking a merger partner. ``Further down the road there's 
a high probability that US Airways will wind up merging with either 
United, Delta or American,'' said US Airways President Scott Kirby.\6\
---------------------------------------------------------------------------
    \6\ US Airways: Merger Probability Is High, by Ted Reed, 
TheStreet.com, June 1, 2010. http://www.thestreet.com/story/10771279/1/
us-airways-merger-probability-is-high.html.
---------------------------------------------------------------------------
    Even Alfred Kahn, the major architect of deregulation, has said, 
``I must concede that the industry has demonstrated a more severe and 
chronic susceptibility to destructive competition than I, along with 
the other enthusiastic proponents of deregulation, was prepared to 
concede or predict.'' \7\
---------------------------------------------------------------------------
    \7\ Change, Challenge, and Competition: A Review of the Airline 
Commission Report, by Alfred E. Kahn, 1993.
---------------------------------------------------------------------------
    This industry is crying out for limited re-regulation.
    Deregulation in this industry--and others--has had disastrous 
effects. Left completely to their own devices, corporations put their 
profits first without regard to the impact it has on the Nation.
    The 2007 financial and housing meltdown was a result of unregulated 
corporate greed in the banking and mortgage industries. Instead of only 
traditional banks offering mortgages, nonbanks were allowed to enter 
the mortgage market. Predatory lenders aggressively targeted 
unqualified borrowers. Investment banks sold mortgage packages to Wall 
Street--all largely unregulated. When the mortgages defaulted--because 
many should never have been made in the first place--Wall Street 
collapsed, and took the rest of the economy with it.
    One only has to look at the news this evening to see the toxic 
results of energy industry deregulation suffocating our Gulf shores. 
Local fishing and tourism industries are being destroyed, not to 
mention the cataclysmic environmental impact. Oversight and enforcement 
of BP's operations were woefully inadequate, in spite of a decade of 
documented safety violations at BP locations across the United 
States.\8\
---------------------------------------------------------------------------
    \8\ Reports at BP Over Years Find History of Problems, By Abrahm 
Lustgarten and Ryan Knutson. Washington Post, June 8, 2010.
---------------------------------------------------------------------------
    Some industries are too critical to the United States to be allowed 
to regulate themselves. The airline industry needs to be stabilized 
because it drives $1.4 trillion in economic activity and contributes 
$692 billion per year to the Gross Domestic Product (GDP).\9\ It is too 
vital to the Nation's commerce to be ignored, taken for granted or left 
to its own destructive ways.
---------------------------------------------------------------------------
    \9\ The World Airline Report, Air Transport World, June 1, 2009 
http://atwonline.com/eco-aviation/article/world-airline-report-0309.
---------------------------------------------------------------------------
    Today, Congress is considering increased oversight of both the 
financial and oil industries to provide more regulation. Such action is 
necessary and long overdue, but it took catastrophes to prompt action. 
There have been three decades worth of evidence that airline 
deregulation has failed. At what point do we take another look at this 
beleaguered airline industry? We need to be forward-thinking before we 
are asked to bailout the airline industry--again.
    It is clear that airline deregulation has failed to deliver on its 
promises of a stable and profitable industry, and staying the course 
will continue the industry's downward spiral. Airline bankruptcies will 
continue, more proud airlines will disappear, employees will continue 
to suffer and passengers will receive less service. Albert Einstein 
said, ``Insanity is doing the same thing over and over again and 
expecting a different result.'' We can close our eyes and believe that 
repeating the same mistake for thirty years will eventually bring 
different results, or we can effect real change and have an efficient 
and competitive air transportation industry.
    I do not propose a complete return to the days of the Civil 
Aeronautics Board and complete re-regulation, but some additional form 
of government involvement is necessary.
    Although I do not agree with everything former American Airlines 
CEO Robert Crandall says about the airline industry, I share his 
opinion that, ``market-based approaches alone have not and will not 
produce the aviation system our country needs'' and that ``some form of 
government intervention is required.'' \10\
---------------------------------------------------------------------------
    \10\ Charge More, Merge Less, Fly Better, by Robert Crandall, The 
New York Times OP-ED, April 21, 2008.
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    The IAM believes fares need to be regulated. We must have fare 
minimums, because if an airline is allowed to charge less for a ticket 
than it costs to provide the service, we will have more airline 
bankruptcies and further consolidation until we have only a single 
airline left in the United States.
    Airline business plans today focus on lowering standards, 
eliminating services and reducing ticket prices to the bone to put 
competitors out of business, making a profitable industry impossible. 
The GAO estimates that median ticket prices have dropped nearly 40 
percent since 1980, although the costs of aircraft, airport leases and 
fuel have increased dramatically.\11\ Employees have been subsidizing 
the low ticket prices. No business can survive if they sell their 
product for less than what it costs to deliver their goods.
---------------------------------------------------------------------------
    \11\ Airline Deregulation, U.S. Government Accountability Office 
Report GAO-06-630, June 2006.
---------------------------------------------------------------------------
    The long-term cost of under pricing tickets is too extreme. Pan Am, 
TWA, Eastern, Northwest and Aloha Airlines all survived for more than 
half a century, but could not endure the insanity of cutting prices to 
eliminate the competition.

Merger Scrutiny
    Although we have met with United and Continental both separately 
and jointly, information has been slow in coming. The Machinists Union 
and our 26,000 members at the two airlines do not have enough details 
about the merger's impact on employees to determine if this merger 
would be in their best interests. The carriers admit that many of our 
most important issues, such as pensions, workforce integration, union 
representation, prevailing wages and working conditions will largely 
remain unresolved until after the Department of Justice rules on the 
merger. To the carriers' credit, they have agreed to a communication 
system through which we can obtain the information to address employee 
concerns, but that does not answer our questions today.
    United Airlines has $8.5 billion in long-term debt,\12\ and 
Continental has $5.3 billion in long-term debt \13\--and they are 
considered healthy by industry standards. The merged entity would start 
out $13.8 billion in debt. What is their business plan to deal with the 
debt structure?
---------------------------------------------------------------------------
    \12\ Continental Airlines 10-K filing with the Securities and 
Exchange Commission, filed 2/17/10.
    \13\ United Airlines 10-K filing with the Securities and Exchange 
Commission, filed 2/26/2010.
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    Merging airlines is much more difficult than just painting planes 
and combining websites. American Airlines' 2001 acquisition of TWA's 
assets resulted in tremendous job loss, employee integration problems 
and the closing of a hub in St. Louis, Missouri. The America West-US 
Airways merger cost the City of Pittsburgh, Pennsylvania its hub, and 
employee integration problems for some classifications persist 5 years 
after the merger. The 2008 Delta-Northwest merger is still far from 
being completed and managements' promises to preserve all front-line 
jobs in the merger were quickly broken.
    With tens of thousands of employees from two different corporate 
cultures involved, jobs are inevitably lost in mergers and integrating 
employees groups is never as smooth as management claims. As with any 
service industry, employees upset with management provide an inferior 
product. How employees are treated in this merger will ultimately 
determine its fate. Southwest Airlines founder Herb Kelleher has said, 
``Happy and pleased employees take care of the customers. And happy 
customers take care of shareholders by coming back.'' \14\ An airline 
merger that does not take employees into consideration has the 
potential to take two viable carriers and create a combined airline 
destined to fail.
---------------------------------------------------------------------------
    \14\ From the Corner Office--Herb Kelleher, by Mary Vinnedge, 
Retrieved from success.com on May 26, 2010, http://
www.successmagazine.com/From-the-Corner-Office-Herb-Kelleher/PAR
AMS/article/390/channel/19.
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Airline Alliances
    Several years ago, the IAM raised concerns with respect to airline 
alliances. In our opinion, these alliances served as a potential 
mechanism for allowing airlines a path around antitrust laws. 
Unfortunately, our concerns have been substantiated. In some cases, 
they have served as the foundation for airlines to consolidate their 
operations. Time and time again, consolidations are announced only 
after both airlines have operated in the same airline alliance 
structure.
    Continental and United Airlines represent the latest consolidation 
of airlines in the same alliance. Continental's membership in the Star 
Alliance essentially started a merger on the installment plan. Given 
the prevalence of alliances here at home, what will alliances 
ultimately mean for the traveling public, particularly if they lead to 
further consolidation and route frequencies are cut, if not altogether 
abandoned?
    The implications for worldwide air travel are even more profound, 
particularly for U.S. consumers. Given the rapid acceleration of 
outsourcing of most job classifications, will alliances result in the 
outsourcing of most domestic work on carriers to workers at airlines in 
other countries? We have already seen thousands of U.S. aviation jobs 
shifted to countries like China, Singapore, and the Philippines as U.S. 
air carriers outsource call centers and maintenance work. Given the 
lack of proper oversight by the FAA, as well as inadequate quality 
control mechanisms, this development should raise alarms for any 
policymaker that sees domestic job security and consumer interests a 
priority.

Effects of the Merger on Hubs
    The effects of a Continental/United merger would be felt most 
resoundingly in the upper Midwest and Mid-Atlantic states. The new 
carrier would most likely eliminate or downsize at least two of its 
hubs, in Cleveland, OH (CLE) and Washington-Dulles (IAD) in order to 
remove excess capacity. Closing hubs initiates a cascade of job loss 
that begins with airline employees and continues throughout the 
community to firms that provide services to the airline.
    In the Midwest, United's leadership position at Chicago-O'Hare 
(ORD) could mean the elimination of Continental's CLE hub operation. 
CLE is only 307 miles from ORD. Continental's CLE hub is the smallest 
of their three hubs and has just recently started to grow again 
following post-9/11 downsizing. United is Chicago's hometown airline 
with unparalleled facilities and routes from ORD. CLE and the northern 
Ohio area have already been suffering greatly from the economic 
downturn and the mortgage crisis, and eliminating a major local 
employer would have drastic effects on the local economy.
    Such a move would dramatically affect air service for the northern 
Ohio area, for which CLE serves as the closest major hub. Large 
corporations with their headquarters in CLE, such as National City 
Corporation, American Greetings, Eaton, Forest City Enterprises, 
Sherwin-Williams Paints, Key Bank and Progressive Auto Insurance would 
lose access to direct domestic and international flights. Communities 
through Michigan, Kentucky, Tennessee, Ohio, Illinois, Wisconsin, and 
other states would lose their regional jet service operated by 
Continental Express, in many cases leaving them only with one airline 
alternative.
    A different situation exists in the Northeast, where United's 
smaller IAD hub is only 215 miles from Continental's EWR ``Global 
Gateway.'' EWR is Continental's primary international hub with nonstop 
service to nearly 100 destinations outside the United States. IAD 
serves as United's primary gateway to Europe, but its size and scope is 
nowhere near matching Continental's EWR operation.
    Due to the large size of the local Washington, D.C. market, it is 
presumed that instead of a full-fledged hub closure, IAD would be 
downsized into a much smaller hub or a large focus city. IAD benefits 
from the fact that there is a perimeter restriction on flights from 
nearby Reagan National Airport (DCA) to destinations more than 1,500 
miles away, which requires most flights to the West Coast to be 
operated out of IAD.
    A Continental/United combination would also concentrate competition 
at many nonhub airports. They would be the largest carrier at Boston 
Logan (BOS), number 3 at New York-LaGuardia (LGA), number 4 at New 
York-Kennedy (JFK), and the second largest carrier in Honolulu, Hawaii 
(HNL) after Hawaiian Airlines. At all of these airports it would be 
necessary to combine personnel and facilities, which would most likely 
result in layoffs.
    We have to ask ourselves if the merging of these carriers and 
wholesale reshaping of the industry will destroy competition and harm 
consumers on routes throughout the United States.
    As details about the combined carriers' business plan emerge, it 
must be closely scrutinized to determine if a merger will result in a 
successful entity or not. We ask Congress to help us determine if this 
transaction will be good for employees and consumers.

Pensions
    The Machinists Union is concerned that employees could lose defined 
benefit pension plans as a result of the merger. Continental ramp 
service, stock clerks and public contact employees all participate in a 
Continental company-sponsored single-employer defined benefit pension 
plan, while their IAM-represented counterparts at United participate in 
the multiemployer IAM National Pension Plan (NPP). Continental's IAM-
represented flight attendants also participate in one of Continental's 
defined benefit pension plans and have negotiated the IAM NPP as a 
contingency plan. United flight attendants do not currently have a 
defined benefit pension plan, and the Pension Benefit Guaranty 
Corporation (PBGC) has prohibited United from sponsoring a single-
employer pension plan.
    The IAM believes that all employees deserve defined benefit pension 
plans. The carriers acknowledged that harmonizing pensions would be a 
complex issue, and although they have given it much thought, they did 
not know how it would be resolved.
    In spite of United abandoning its pension obligations in 
bankruptcy, the IAM fought hard and ensured our members would have a 
replacement defined benefit plan. Just as we did in United's 
bankruptcy, the IAM will not allow our members' retirement security to 
become a causality of this merger.

Collective Bargaining
    The Machinists Union is currently in contract negotiations for all 
eight classifications where we have members at the two carriers--seven 
at United plus Continental flight attendants. United negotiations have 
been ongoing for more than a year, and bargaining with Continental 
began late in 2009.
    Regulatory and shareholder approval are far from certain at this 
point, and the Machinists Union is committed to negotiating new 
agreements to cover our members at each airline. It is premature for 
anyone to talk about combining the carriers' employees, and each 
airline must recognize their responsibility to continue bargaining in 
good faith.

Seniority
    Seniority integration is always a major concern in mergers. 
Although airlines often promise fair and equitable integration of 
seniority, fair and equitable is a very subjective term and should not 
be left up to the carriers to decide. Some past mergers have resulted 
in employees losing decades of seniority--I am one of them. My 
seniority date was changed from 1975 to 2001 after American Airlines 
purchased TWA's assets in bankruptcy.
    Continental Airlines is the product of many past mergers in the 
wake of deregulation, and in some cases seniority was integrated 
unilaterally by the then Frank Lorenzo-led carrier. The Machinists will 
ensure seniority is protected in this merger, but again, this is an 
issue to be addressed after representation issues are resolved. At the 
IAM's insistence, both airlines have agreed not to engage in workgroup 
integration discussions until representation issues are resolved.

History of Sacrifice
    United Airlines employees have suffered greatly through the 
carrier's bankruptcy, the longest and most expensive airline bankruptcy 
in history.
    Immediately after its Chapter 11 filing, United Airlines asked a 
bankruptcy judge to impose 14 percent ``emergency'' pay cuts on IAM 
members. More long-term cuts in pay and benefits cost IAM members $460 
million a year (or $2.644 billion over the life of the agreement). 
United then took steps to cut health benefits for existing retirees and 
filed a motion in court to ask a judge to impose further cuts if 
agreements could not be reached with the retirees' representatives.
    In the summer of 2004 United ceased funding its pension plans, the 
first in a series of steps which ultimately led to the termination of 
its company-sponsored pension plans.
    In January 2005, United once again sought and received 
``emergency'' pay cuts from the bankruptcy court--this time it was 11 
percent. Six months later IAM members gave up another $176 million a 
year to save United. Savings attributable to the termination of IAM 
member's pensions saved United an additional $217 million a year.
    In total, IAM members were forced to sacrifice more than $4.6 
billion for United Airlines. United employees have been subsidizing the 
airline since 2003, and each day without a new contract that sacrifice 
continues.
    Continental Airlines' employees also sacrificed more the $500 
million a year to keep their airline out of bankruptcy during their 
last round of collective bargaining.
    So, employees have the right to question the motives behind this 
merger and fear they would be forced to subsidize it.

Conclusion
    The business plan for the proposed airline must receive close 
scrutiny. The IAM is concerned that the new entity may be too big to 
succeed without some form of industry re-regulation, and failure of 
such a large entity could be disastrous to employees, the industry and 
the general economy.
    As this merger proposal moves forward, the Machinists Union asks 
regulators to take the merger's impact on employees into consideration. 
A combined carrier must offer employees more stability and opportunity 
than are available at the two independent airlines. The merger cannot 
be at the expense of workers who have already sacrificed to keep their 
airlines aloft. United and Continental employees did not accept job 
cuts and wages and benefit changes when their employers restructured 
just to lose out again in a merger.
    The Machinists Union believes that airline mergers should have 
conditions, including requirements that protect employees, consumers 
and taxpayers--all of whom have been hurt by this unregulated industry. 
Employees must have their jobs, wages, benefits and pensions protected. 
If the architects of a merger can guarantee themselves bonuses and 
lucrative severance packages, then they can do the same for front-line 
employees. All cities that the airlines currently serve, not just 
profitable ones, must continue to be served. Pension obligations should 
be upheld in mergers, and consolidation should not be a vehicle for 
airlines to dump their pensions on the PBGC.
    United and Continental would not be seeking to merge today if 
employees had not stepped up to save them in the past. United and 
Continental need to demonstrate how the proposed merger would benefit 
employees, consumers, and the cities and states the airlines currently 
serve.
    Thank you again for the opportunity to speak with you today. The 
Machinists Union recognizes it is in the Nation's interest to have a 
safe, reliable, competitive and profitable air transportation industry. 
We are committed to working with Congress, the Departments of Justice 
and Transportation, and the air carriers to achieve that goal.
    I look forward to your questions.

    The Chairman. Thank you. And good timing.
    Mr. Charlie Leocha, who is the Director of the Consumer 
Travel Alliance.
    Please, sir.

            STATEMENT OF CHARLES LEOCHA, DIRECTOR, 
                    CONSUMER TRAVEL ALLIANCE

    Mr. Leocha. Thank you, Chairman Rockefeller and Ranking 
Member Hutchison, for giving passengers a seat at this table.
    My name is Charlie Leocha, and I am the Director of the 
Consumer Travel Alliance, a nonprofit created to keep the needs 
of consumers in front of legislators, regulators, and staff 
here in Washington. Our Alliance is a member of the Consumer 
Federation of America.
    My testimony today focuses, of course, on United and 
Continental Airlines' proposed merger. According to news 
reports, these airlines are already forming a steering 
committee and establishing teams of employees to delve into 
details of aligning. ``Whoa, Nelly,'' as we say back in my 
neighborhood, ``It ain't a done deal yet.''
    The Consumer Travel Alliance cannot find any public benefit 
from this merger. There are no new destinations, no new savings 
passed on to passengers. We see customer service disruptions 
and more-restrictive frequent flyer programs. Ultimately, we 
believe consumers will be faced with less competition and 
higher prices.
    In addition, thousands of small businesses and corporate 
travelers will face difficult negotiations with a mega-airline 
larger than any our Nation has ever known before.
    The merger plan acknowledges thousands of employee layoffs 
when our economy is already under stress. Our Nation is now 
faced with two forms of consolidation: the traditional merger 
of two airlines, and the development of alliance antitrust 
immunity that allows multiple airlines to operate as one, 
internationally. Neither this merger nor antitrust immunity are 
in the consumer's interest. I don't think that any of us in 
this room can point to even one single public benefit from the 
latest airline mergers. Bankruptcy for both airlines has 
already squeezed costs and capacity out of the system. This 
merger will only squeeze competition out of the system.
    Though Continental and United already work together as 
alliance partners, they still compete aggressively in many 
areas. They fight for corporate and leisure travelers. They 
compete for airline gates. They compete for frequent flyers, 
suppliers, travel agency attention, and much more.
    The Department of Justice should conclude that the proposed 
merger is not in the public interest, just as they did a year 
ago, when reviewing the application from these same two 
carriers for airline alliance antitrust immunity. DOJ's reasons 
for denial included consumer harm, higher fares, elimination of 
competition, and, ultimately, that it was not in the public 
interest. Nor is this merger.
    This union, however, ups the ante. Should this merger be 
approved, the Nation's system of network carriers will be 
effectively reduced to three: Delta, United, and American. This 
trio, even without U.S. Air, which is already rumored to be 
exploring a merger with American, would control more than 70 
percent of the domestic market, if associated regional airlines 
are included. And their alliances would control 85 percent of 
international traffic. We are creating yet another industry 
with companies too big to fail. Have we learned nothing from 
the past 2 years?
    Admittedly, these two airlines have limited overlapping 
routes. However, their impacts on hubs, long- haul routes, 
connecting routes, suppliers, and consumers cannot be measured 
by overlapping routes, alone. The potential impact of this 
merger should be examined through the long-term prism of our 
country with only three major network airlines. It will be a 
consumer nightmare.
    Much has been made of the price discipline exercised by 
low-cost carriers. Maybe so for point-to-point competition. 
But, flights to smaller airports and to international 
destinations served by these carriers and their alliances will 
not face any pricing pressure from low-cost carriers. And that 
connecting traffic is exactly what these hub-and-spoke carriers 
are all about.
    In summary, this continued consolidation may be helping 
large airlines survive in the short run, but, when the economy 
improves, consumers, both leisure and business, will be left at 
the mercy of a government-approved system of airline oligopoly 
with less competition and, ultimately, higher airfares.
    If airline consolidation is allowed to continue, with 
mergers in domestic--of domestic carriers and antitrust 
immunity, the Consumer Travel Alliance predicts that this 
committee will find itself, within the decade, meeting to find 
ways to restore competition that is being eliminated today.
    America's airline passengers thank you for this 
opportunity, and I look forward to questions.
    [The prepared statement of Mr. Leocha follows:]

            Prepared Statement of Charles Leocha, Director, 
                        Consumer Travel Alliance

    Thank you, Chairman Rockefeller for giving passengers a seat at 
this Congressional table and an opportunity to testify about the 
effects on consumers of today's airline consolidation.
    My name is Charles Leocha and I am the Director of the Consumer 
Travel Alliance, a nonprofit created to keep the needs of consumers in 
front of legislators, regulators and their staff. Our alliance is a 
member of the Consumer Federation of America. We are intimately 
involved with the current conference committee negotiation over the FAA 
Reauthorization. We are also working with state regulators, the FTC and 
DOT on privacy issues, travel insurance, pressing consumer issues with 
online and traditional travel agents and in the area of travel rights.
    My testimony today focuses on the effects of the merger of United 
Airlines and Continental Airlines. I will also address the ongoing 
effects of consolidation in the airline industry that has been taking 
place for more than a decade. I am not speaking only for leisure 
travelers who make up more than 80 percent of airline passengers, but 
also for business travelers who provide more than 50 percent \1\ of 
airline revenues.
---------------------------------------------------------------------------
    \1\ PhocusWright.
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    Though these two airlines have many cooperative agreements, they 
still compete aggressively with each other in many ways--for corporate 
and leisure travelers, airline gates, frequent fliers, suppliers, 
travel agency attention and more.
    We believe the Department of Justice and Congress should conclude 
that the proposed merger is not in the public interest, just as they 
did in June of last year, when reviewing the application from these 
same two carriers for airline alliance antitrust immunity.\2\
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    \2\ Joint application to Amend Order 2007-2-16 under 49 U.S.C.  
41308 and 41309 so as to Approve and Confer Antitrust Immunity, 
Comments of the Department of Justice on the Show Cause Order Docket 
OST-2008-0234 pg. 42.
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    DOJ's reasons for denial included consumer harm, higher fares and 
elimination of competition, and ultimately that it was not in the 
public interest. Those same concerns resonate with this corporate 
marriage, but this union ups the ante--approval would make a third 
domestic merger almost inevitable.

The Road to Three Big Carriers
    Should this merger be approved, the Nation's system of network 
carriers will be effectively reduced to three major players--Delta, 
United and, perhaps, a coming mega-carrier formed by the merger of 
American Airlines with another airline. Even without the American 
merger with another carrier, this Delta/United/American triumvirate 
would control more than 50 percent of the U.S. domestic available seat 
miles (ASMs) and revenue passenger miles (RPMs).\3\ Their airline 
alliances would control 85 percent of international traffic.\4\ That 
kind of consolidation might bode poorly for business travelers as well 
as leisure travelers and may lead to another industry with its major 
players considered ``too big to fail.''
---------------------------------------------------------------------------
    \3\ AirlineForcasts.com Commentary: United + Continental is a big 
win for all stakeholders by Paul Mifsud, Carlos Bonilla, Vaughn Cordle, 
CFA.
    \4\ Bureau of Transportation Statistics.
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    A merged United-Continental initially would have about 90,000 
employees and about 700 aircraft, which certainly means higher odds of 
government bailouts or assistance than if the carriers operated 
individually. On the other hand, today, if one of these two airlines 
crumbled, the national air transportation system would shudder, but 
hardly be crippled.

Are There Benefits for Consumers?
    The Consumer Travel Alliance cannot find any tangible consumer 
benefits of this merger and the ongoing consolidation in the airline 
industry. There are no new destinations, no new savings passed on to 
passengers and ultimately consumers are faced with less competition and 
higher prices. Consolidation to this point has already made airline 
signaling of airfare changes easier. This merger will make the process 
of raising airfares even simpler. The continued application of fees and 
the unbundling of airfares will also accelerate with fewer airlines in 
competition with each other. The institution of fees for checked 
baggage, seat reservations, meals and more has been followed by airline 
after airline like a herd of wildebeests crossing a crocodile-infested 
river.
    To be sure, there are plenty of corporate benefits--reducing the 
combined work force, certain economies of scale and increasing 
bargaining power (at the expense of suppliers). But business and 
leisure travelers don't get anything more than what they have been 
experiencing through the already coordinated international schedules, 
shared frequent flier miles and awards and visitation privileges at 
airport clubs.
    Even United and Continental spin-doctors are having trouble finding 
specific consumer benefits from the merger now under consideration. On 
their merger website, they have touted supposed consumer benefits that 
are nothing new. We have all seen the following platitudes they cite 
for decades \5\--
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    \5\ http://www.unitedcontinentalmerger.com/benefits/customers.
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World's Most Comprehensive Network
    In reality, this is no benefit for consumers. At best, the 
Continental/United network remains identical to the current network 
operative through the Star Alliance. Potentially, there will be 
consolidation of overlapping routes. Though few routes overlap, the 
final honest assessment is a reduced network and fewer choices for both 
business and leisure travelers.
    Just as Delta swore that it would not abandon its hub at 
Cincinnati, current Continental statements about the sanctity of their 
Cleveland operations must be taken with a grain of salt. Everyone in 
this room realizes that the reduction of flights were made in 
Cincinnati and that future reductions of flights from Cleveland will be 
made because of consumer demand, or the lack thereof. However, without 
the merger of Delta with Northwest and the proposed merger of 
Continental with United, Cincinnati probably would still be thriving 
and there would be no discussions about downsizing Continental's 
Cleveland operations.

World's Leading Airline
    When has this been a benefit to consumers? The combination will 
have the same planes it currently is flying. The merged carrier will 
have the same frequent flier program that is already aligned through 
alliance membership.

Competitive Fares
    United/Continental claim that 92 percent of their top 50 major city 
routes have low-cost-carrier competition. That competition will 
guarantee low airfares. The real change in competition will be in the 
field of business travel. There, this consolidation will have drastic 
effects on corporation travel programs that depend on hubs where CO/UA 
price competition will be eliminated.
    When corporate travel departments are faced with both a new 
paradigm presented by this merger plus the developing might of 
international alliances that are beginning to negotiate as a single 
entity rather than as a dozen or more separate airlines, competition 
will be further degraded.

Award-Winning Customer Service
    If past history provides any gauge consumers can expect a decrease 
in overall customer service when highly rated Continental merges with 
poorly performing United Airlines. It appears certain the Continental 
passengers will see degradation in the service levels that they have 
come to expect.
    According to DOT's Airline Quality ratings that measure complaints, 
misdirected baggage and on-time arrivals, Continental has ranked at the 
top of the major airlines for the past 3 years (if we take out 
Northwest that merged with Delta). United Airlines has been mired near 
the bottom of the rankings for the past 2 years, only excelled in poor 
customer service by Delta that has not budged from last place even as 
it absorbed the former customer-service champion, Northwest Airlines.
    In fact, customer service will be an unknown as Continental's 
vaunted service is merged with United's marginal service; a chance of 
reduced morale among Continental employees as their contracts are 
reduced to meet United pay levels is expected. From the consumer point 
of view, this bigger-is-better argument has no basis in reality.
    Historically, airline mergers have created a quantum increase in 
customer service problems. Of course all of these problems can be 
``worked out,'' however they subject consumers to additional headaches 
and travel disruption. One of the most frustrating is the consolidation 
of passenger data. Every recent merger from the days of the 
Continental/People Express to the Delta/Northwest mergers has been 
fraught with IT problems.

Industry-Leading Frequent Flier Program
    These programs are already merged from an award-city point of view. 
The most likely result of this merger will be a shift to more 
passenger-unfriendly rules such as hefty co-pays for upgrades. Having 
these frequent flier programs consolidated will allow the Big 3 
airlines to more easily make anti-consumer changes. Competition between 
frequent flier programs is another form of competition that will be 
eliminated.
    The bottom line: If what has happened in the past provides a 
roadmap to consequences of this pending merger, Consumers will see no 
benefits and may face degraded service, less competition, more fees and 
higher prices. Plus, possible changes to current frequent flier rules 
may raise mileage costs for redemption of miles and reduce free travel 
opportunities rather than increase them.

Airline Consolidation by Merger
    This proposed merger of United Airlines and Continental Airlines is 
the latest portion in a continuum of airline consolidation that has 
been slowly taking place over the past decade.
    Mergers have been with the airline business for decades, however 
the size of these mergers is now creating airline behemoths that 
couldn't even be contemplated only a decade ago. Continental merged 
with People Express, Northwest merged with Republic, US Air merged with 
Allegheny, American merged with Reno Air and then TWA and last year 
Delta merged with Northwest to create what is the world's largest 
airline.
    Now, Continental and United stand before the Department of Justice 
and Congress with a merger that will create even a larger airline.
Airline Alliance Consolidation
    As domestic airlines have been merging, internationally mergers 
have also taken place. However, the granting of antitrust immunity that 
allows certain airlines to do unrestricted business together has 
changed the economic playing field.
    It started with the granting of antitrust immunity for Northwest 
Airlines and KLM Airlines back in the early 1990s in order to encourage 
European countries to negotiate Open Skies agreements with the U.S. 
This initial antitrust immunity grant was issued in the ``public 
interest'' for a greater good.
    However, airlines discovered that antitrust immunity added 
significantly to the bottom line and though, today, we have Open Skies 
agreements with most European countries, the alliance antitrust 
immunity has continued to grow, not for the public good, but for 
corporate good.
    These antitrust immunity grants have accelerated with the creation 
of three major airline alliances between the world's largest carriers. 
Lufthansa, United, US Airways, and Singapore airlines and others form 
the Star Alliance. American Airlines, British Airways, Iberia, Finnair, 
Qantas and others make up the OneWorld alliance. Delta, Northwest, Air 
France, KLM, Korean Air and others have created SkyTeam. Already, DOT 
has granted SkyTeam and Star Alliance antitrust immunity and the 
OneWorld alliance has applied for similar antitrust immunity.
    This antitrust immunity allows alliance airlines to work together 
as a joint venture with a separate board of directors. Alliances are 
already jointly coordinating flights, schedules, route planning, 
marketing efforts, advertising, sales campaigns, frequent flier 
programs, catering and maintenance. These alliances are defacto mergers 
of the alliance's international business.

An Increase in Airfares
    This merger needs to be looked at far more expansively than simply 
overlaying one route structure over another and then congratulating 
each other at the lack of overlapping routes. I admit that there are 
few overlapping routes between these airlines. When competition is 
taken out of the market it affects every route that an airline flies 
whether it overlaps with its merger partner or not. Investigators also 
need to examine nonstop flight markets as a separate and distinct 
market from connecting flights between city pairs.

Consider These Scenarios
    First: With one less major network carrier, in an oligopolistic 
industry, the airline system of trial airfares has one less player. 
With one less ``veto vote'' available to reject system-wide fare 
increases the chances of consumers having to pay more in terms of 
airfares and airline fees increases exponentially.
    Second: The merger also needs to be examined in light of today's 
airline alliances that already give Continental/United a joint venture 
for their transatlantic, Latin American and transpacific schedules and 
route structures. These joint ventures provide this merged carrier a 
government-approved system to profit from limited international 
competition and then use that profit to squeeze domestic competitors 
who do not have such government-assisted antitrust immunity provisions 
that virtually guarantee profits on international routes.

Effective Business Travel Monopolies at Select Hubs
    The effects of the United/Continental merger will have far-reaching 
negative consequences for business as well as leisure travelers if it 
leads to a consolidation of the network airlines into three groups. 
When one of these mega-carriers controls the hub of a corporation, 
there is no competitive mega-carrier to limit the dominant hub 
airline's pricing power. Corporate air travel buyers will be forced to 
capitulate. This situation gets even worse when the dominant hub 
airline is linked with an international alliance and that alliance 
demands that corporations bargain with the alliance as a single joint 
venture rather than playing one airline off against another.
    This kind of dominant hub power allows the mega-carrier to control 
prices for consumers and commissions that they pay travel agents. It 
affects far more than only business and leisure travelers. It affects 
new competition as well. Entry into a route that is anchored by a major 
carrier hub on both ends is extremely difficult for would-be 
competitors. Suppliers also face the difficulty of bargaining with the 
dominant mega-carrier from a real position of weakness. The resulting 
situation is anti-small-business in the hub airport community.
    These major carriers also use mergers as a way to consolidate 
control of airport gates and in some cases take-off and landing slots. 
These kinds of gate and slot controls can make penetration by low cost 
carriers very difficult. Washington Reagan only recently has seen new 
low cost carriers (JetBlue will startup in November) because of limited 
take-off and landing slots.
    At Boston Logan Airport, AirTran's operations were limited for 
months because they could only secure one gate while Northwest hoarded 
its gates simply to keep competition out of the airport. As we hold 
this hearing, Southwest Airlines is attempting to gain slots at both La 
Guardia and Washington Reagan so that they can compete with entrenched 
network carriers.
    While many analysts and airline CEOs claim that three is the 
perfect number of large network competing airlines, that perfection in 
terms of competition only works if all three airlines have relatively 
equal strength across all markets. When market power is allowed to be 
concentrated in different hubs, the system is really a divide-and-
conquer strategy. This fortress hub system is being played in every 
city where mega-carriers face minimal competition--Houston, Detroit, 
Minneapolis, and Dallas. Cities where two competing network carriers 
have hubs see much healthier competition--New York City, Los Angeles, 
Chicago.

Low-Cost Carriers, the Competition Antidote
    The only real airline pricing discipline is generated by 
competition from low-cost carriers. The travel industry has documented 
the ``Southwest Effect.'' This is a three-step effect where first, 
lower fares increase demand; second, competing airlines match the 
Southwest fares; and third, sales rise for all airlines in the market.
    This kind of competition can only take place if there are available 
gates at airports and available take-off and landing slots. Both 
factors must be considered carefully by DOJ while examining this 
pending merger as well, just as DOT has when considering recently 
proposed take-off/landing slot swaps between airlines.
    On the transatlantic front, Open Skies agreements with the European 
Union (E.U.) may offer potential avenues for effective low-cost airline 
penetration when the low-cost airlines decide to expand 
internationally. Just as low-cost airlines began their move into the 
domestic market by serving less-popular airports, their expansion into 
transatlantic flying is dependent on a good Open Skies agreement since 
major hubs--Heathrow, Frankfurt, Amsterdam, Paris and Madrid--are 
locked up by the mega-airline alliances.

Conclusions
    From a consumer perspective, this continued consolidation may be 
helping large airlines survive in the short run but when the economy 
improves, consumers--both leisure and business--will be left at the 
mercy of a government-approved system of airline oligopoly with less 
competition and, as a result, according to Department of Justice 
analysis, ultimately higher airfares.
    In the short-term, approval of this merger may not be seen as anti-
competitive, but as a form of welfare for struggling airline 
corporations. In the long term, there is no doubt that effective 
airline competition will be eliminated and that a market with less 
competition is less consumer friendly.
    If airline consolidation is allowed to continue along its current 
path with mergers of domestic carriers and antitrust arrangements for 
groups of international airlines, the Consumer Travel Alliance predicts 
this committee will find itself, within the decade, meeting to find 
ways to restore competition to airline system that is being eliminated 
today.

    The Chairman. Thank you very much.
    And now, Mr. Dan McKenzie, who is an industry analyst from 
Hudson Securities.

                 STATEMENT OF DANIEL McKENZIE, 
           SENIOR RESEARCH ANALYST, HUDSON SECURITIES

    Mr. McKenzie. Good morning. Mr. Chairman and members of the 
Senate Commerce Committee----
    The Chairman. Can--is your machine on, there?
    Mr. McKenzie. OK.
    Mr. Chairman and members of the Senate Commerce Committee, 
it's an honor to be here today. So, thank you.
    As background, I've been helping investors analyze the 
airline industry for 10 years, and my firm does not seek 
investment banking business from the airlines.
    As has been widely reported and recognized, the U.S. 
airline industry, with the exception of low-cost carriers, has 
been a financial failure. We've seen serial bankruptcies in 
successive decades. And the point I would like to leave you 
with is this: While it's natural to think of the industry 
structure as a monopolistic oligopoly or a few competitors that 
act like one, it hasn't behaved that way, and there are reasons 
for why this behavior shouldn't change, looking ahead.
    The second point I would like to leave you with today is 
cost disequilibrium, which reverts to my first point. As long 
as there are low-cost carriers with a 20- to 30-percent cost 
advantage, they are going to try and undercut legacy-carrier 
pricing and take market share. And I don't see this changing, 
looking ahead.
    Or, to put it differently, the day we no longer have a 
competitive industry is the day every airline has the same cost 
structure.
    However, low-cost carriers, which today enjoy widespread 
brand acceptance, have been able to sustain sizable cost 
advantages and, through discounting, drive a shakeout among the 
legacy carriers, a phenomenon I expect will continue.
    The third point I would like to leave you with is that the 
industry is recovering, financially, but it remains vulnerable 
to another spike in crude or another economic downtown. My 
outlook assumes average ticket prices rise 12 percent this year 
and 5 percent next year, which position the industry to finally 
begin reporting modest profits. My forecast will, naturally, 
fluctuate based on the macro-backdrop.
    So, what are the factors that have caused the industry to 
suffer so much? Industry fragmentation is one key. If looking 
at capacity, the top four airlines, in 2000, controlled 66 
percent of the industry capacity. That rose to 70 percent in 
2005, and remains the case today. After the announced United 
and Continental merger, the top four airlines would control 81 
percent.
    But, perhaps the easiest way to think about the industry's 
poor health is to think of it in terms of the real estate 
crisis. People that couldn't afford to buy houses, could. In 
the case of the airline industry, airlines having a junk credit 
rating can, nonetheless, easily go out and buy new planes, 
which, over the past 32 years, has led to brutal competition.
    Just as the tech bubble, the telecom bubble, the real 
estate bubble, and even the commodities bubble have burst, 
there has been a capacity bubble in the U.S. airline industry 
which today is beginning to deflate as a consequence of the 
macrobackdrop volatility. The industry has been undergoing a 
painful transformation. And I'd say that today we're probably 
in the seventh inning.
    Separately, the macro-backdrop has been extremely volatile. 
The reality is, fleet and demand--fleet and personnel plans, 
pardon me, made years ago could not have possibly anticipated 
the demand shock following the calamity of 9/11, a super spike 
in crude, the recent financial meltdown, or worldwide health 
pandemics.
    Some may wonder if deregulation was a mistake. Of course it 
wasn't, with too many benefits to cite. Recall that 
deregulation in the U.S. has led to deregulation globally. 
Boeing, Airbus, all of their suppliers, naturally, the banks, 
aircraft leasing companies, the gaming and lodging industry, 
and travel management companies have all been very big winners.
    So, what does the future look like? The industry is growing 
about 1 percent today, but there are plane orders for delivery 
in 2012 and 2013, and, because capacity drives pricing, the 
additional capacity will impact average ticket prices, further 
out.
    Meanwhile, low-cost carriers will continue to undercut on 
pricing and take market share, where they can.
    And, separately, as long as management teams make promises 
to labor they can't keep, we'll continue to see Chapter 11 
filings. I predict we'll see another Chapter 11 filing sometime 
in the next 5 years.
    But, there is one wildcard here, and that's very volatile 
fuel prices, which represent the Number 1 threat to the 
industry. The debate on speculative trading and commodities is 
not whether it exists, but how best to remedy it. 
Unfortunately, the airline industry is a highly leveraged, high 
fixed-cost business that is reeling from 30 percent of its 
costs getting whipsawed by 50 percent in any given year. And 
the threat of another super spike has curtailed plane orders by 
many legacy carriers.
    Said differently, speculative trading is perverting capital 
spending and investment planning, and, as a result, ultimately, 
perverting economic growth.
    I'll conclude by saying there are a lot of factors that 
have and continue to impact the financial health of the 
industry. Demand is coming back, and finances are improving, 
but there remain a number of structural challenges in place 
that will continue to make the recovery to financial health a 
slow process.
    Mr. Chairman and members of the Commerce Committee, thanks 
again for the opportunity to be here today.
    [The prepared statement of Mr. McKenzie follows:]

    Prepared Statement of Daniel McKenzie, Senior Research Analyst, 
                           Hudson Securities

    Mr. Chairman and members of the Senate Transportation Committee, 
it's an honor to be here today, so thank you. As background, I have 
been helping investors analyze the airline industry for 10 years and my 
firm does not seek investment banking business from the airlines.
    As has been widely reported and recognized, the U.S. airline 
industry, with the exception of low-cost carriers, has been a financial 
failure. We've seen serial bankruptcies in successive decades. And the 
point I would like to leave you with is this: Despite that fact that 
the industry is structured as a monopolistic oligopoly, it hasn't 
behaved as one, and there are a number of reasons for why this behavior 
shouldn't change looking ahead.
    The second point I would like to leave you with today is ``Cost 
Disequilibrium,'' which reverts to my first point. As long as there are 
low-cost carriers with a 20-30 percent cost advantage, they are going 
to try and undercut legacy carrier pricing and take market share. And I 
don't see this changing over my horizon. Or to put it differently, the 
day we no longer have a competitive industry is the day every airline 
has the same cost structure. However, low-cost carriers, which today 
enjoy widespread brand acceptance, have been able to sustain sizable 
cost advantages and through discounting, drive a shakeout among the 
legacy carriers, a phenomenon I expect will continue for the next 
several years.
    The third point I would like to leave you with is that the industry 
is recovering financially, but it remains vulnerable to another spike 
in crude or another economic downturn. My outlook assumes average 
ticket prices rise 12 percent this year and 5 percent next year, which 
position the industry to finally begin reporting modest profits. My 
forecast will naturally fluctuate based on the macro backdrop.
    So what are factors that have caused the industry to suffer so 
much? Industry fragmentation is one key reason. If looking at capacity, 
the top 4 airlines in 2000 controlled 66 percent of industry capacity. 
That rose to 70 percent in 2005 and remains the case today. After the 
announced United and Continental merger, the top 4 airlines would 
control 81 percent.
    But perhaps the easiest way to think about the industry's poor 
health is to think of it in terms of the real estate crisis. People 
that couldn't afford to buy houses could. In the case of the airline 
industry, airlines having a ``junk'' credit rating can nonetheless, 
very easily, go out and buy new planes, which over the past 32 years, 
has led to brutal competition.
    Separately, the macro backdrop has been extremely volatile and has 
hit the industry hard. The reality is, fleet and personnel plans made 
years ago could not have possibly anticipated the demand shock 
following the calamity of 9/11; a super spike in crude to $147; the 
recent financial meltdown; or worldwide health pandemics. Just as the 
tech bubble, the telecom bubble, the real estate bubble, and even the 
commodities bubble have burst, there has been a capacity bubble in the 
U.S. Airline industry which today, is beginning to deflate as a 
consequence macro backdrop volatility. The industry has been undergoing 
a painful transformation and I'd say that today, we're probably in the 
7th inning.
    Some may wonder if deregulation was a mistake. Of course it wasn't, 
with too many benefits to cite. Recall that deregulation in the U.S. 
has led to deregulation globally. Boeing, Airbus, all of their 
suppliers naturally; the banks; aircraft leasing companies; the gaming 
and lodging industry; and Travel Management Companies have all been 
very big winners.
    So what does the future look like? The industry is not growing 
today, but there are plane orders for delivery in 2012 and 2013, and 
the additional capacity will impact average ticket prices further out. 
Meanwhile, low cost carriers will continue to undercut on pricing and 
take market share where they can. And separately, as long as management 
teams make promises to labor they can't keep, we'll continue to see Ch. 
11 filings. I predict we'll see another Ch. 11 filing sometime in the 
next 5 years.
    But there is one wild card here, and that's very volatile fuel 
prices which represent the Number 1 threat to the financial health of 
the industry. The debate on speculative trading in commodities is not 
whether it exists, but how best to remedy it. Unfortunately, the 
airline industry is a highly-levered, high-fixed cost business that is 
reeling from 30 percent of its costs getting whipsawed by 50 percent in 
any given year. And the threat of another super spike has curtailed 
plane orders by many legacy carriers. Said differently, speculative 
trading is perverting capital spending and investment plans, and as a 
result, ultimately perverting economic growth.
    I'll conclude by saying that there are a lot of factors that have 
and continue to impact the financial health of the industry. Demand is 
coming back and finances are improving, but there remain a number of 
structural challenges in place that will continue to make the recovery 
to financial health a slow process.
    Mr Chairman and members of the Commerce Committee, thanks again for 
the opportunity to be here today.

    The Chairman. Thank you very much, Mr. McKenzie.
    I'd like to ask, now, if Senator Hutchison has any 
statement that she'd like to make.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Well, thank you, Mr. Chairman. Let me 
just make a short statement, and then I'll turn it back to you 
for the questions.
    This proposed measure is going to have a dramatic impact on 
my home City of Houston, and certainly on the people who work 
at Continental.
    It's a hard sell in Texas, and I'm disappointed in the 
decision to merge. And I worked very hard to support alliances 
so that we could avoid a merger.
    I've worked hard, during my Senate term, to promote the 
long-term viability of the airlines, whether they're based in 
Texas or anywhere else. And, while I appreciate the fact that 
Houston will remain the largest hub of the new carrier, and 
there have been promises that it will have a bright future, I 
remain concerned about the ramifications to the employees at 
Continental and, of course, to the Houston hub, that is the 
main hub now.
    Continental is a Texas-born carrier with a strong 
reputation. It's well managed. And, Mr. Smisek, you've been a 
part of that management. So, it's a well-run airline.
    United has had a different kind of reputation, and its 
growth and customer service has been more inconsistent.
    So, I will like to ask how you are going to merge these two 
airlines that have different cultures, and how you will also 
move forward. I do think it's going to pass regulatory muster, 
but I think it's going to be difficult.
    I also believe that government should not get in the way of 
business decisions, as long as they're within the law.
    But, let me just say that I am concerned about the overall 
health of the industry with these mega-mergers that we are 
seeing, and if there can continue to be competition. I'm 
interested in what you have said, Mr. McKenzie, about low-cost 
carriers with different cost structures being able to compete 
against the big carriers. But, the big carriers obviously have 
the efficiencies of scale.
    I'm really interested in whether we're going to see fewer 
of the competitive airlines, beyond the big ones, the big 
three, which might eventually be four; I don't know. But, I'm 
just worried about not having competition and a vigorous 
industry, in the big picture.
    So, I will be interested in asking questions. I hate this 
merger, but I don't think it's my place to step in, unless 
there are violations that are found, through the Justice 
Department and Department of Transportation, that will 
certainly give a fair scrutiny to this merger.
    With that, Mr. Chairman, thank you very much, and I'll look 
forward to asking questions.
    [The prepared statement of Senator Hutchison follows:]

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas

    Chairman Rockefeller, thank you for convening today's hearing on 
the financial state of the Airline Industry. It is important that we 
understand the impact of the proposed merger between Continental 
Airlines and United Airlines on consumer air travel, employees, and the 
commercial aviation industry's future.
    This committee has held several hearings on aviation mergers over 
the years. Regardless of the air carriers involved, each proposal is 
almost always full of uncertainty, best case scenarios, and promises of 
better things to come. The Continental/United proposal is no different.
    This proposed merger will also have a dramatic impact on the 
largest city in my home state, Houston, where Continental is 
headquartered.
    Let me be clear: the proposed merger is a very hard sell in Texas. 
I, for one, am extremely disappointed in this decision to merge.
    I have worked hard during my Senate tenure to promote the long-term 
viability of the airlines, whether they are based in Texas or 
elsewhere. While I appreciate the fact that Houston will remain the 
largest hub-airport of the new carrier, and has been promised a bright 
future in the new carrier's network, I remain concerned about the 
ramifications of this decision on the thousands of people who are part 
of Continental and make the Houston area their home.
    Continental is a Texas-born carrier with a strong reputation, as a 
well managed carrier across many lines of business, including labor 
relations and consumer relations. Mr. Smisek, you have played an 
important role in leading Continental and you have been a very 
effective CEO, but you are now merging with a carrier that has a 
reputation and history of labor strife and poor customer service. While 
the merger proposal may look good on paper and will likely pass 
regulatory muster, you are going to have an extremely difficult task 
turning the new carrier into an effectively integrated one.
    With that said, I also understand the need to make prudent business 
decisions. I understand how to run a business. I think the fundamental 
question that has to be asked is, `What is better for Continental and 
Houston in the long-term?'
    If the Continental/United merger goes through, which I expect it 
will, can the collateral increases in service, particularly 
international service, generate enough economic opportunity to create a 
net benefit for Houston in the years to come? Also, if remaining a 
stand-alone carrier would have meant Continental would get marginalized 
over the next decade, then hopefully this business decision is the 
right one. And one that will allow for a stronger carrier with growth, 
longevity and roots in Houston for decades to come.
    I have long held the belief that Government should not stand in the 
way of companies and their ability to grow and expand within the 
parameters of the law. While this proposed merger is difficult for 
Houston, I fully expect it to receive a thorough and fair review by the 
Department of Justice and the Department of Transportation.
    Thank you, Chairman Rockefeller. I look forward to the testimony.

    The Chairman. Thank you, to my distinguished Vice Chair.
    And Senator Dorgan is Chair of the Subcommittee, and I hope 
my witnesses will be patient, because he always says things 
that are worth listening to.
    With that pressure, you may proceed.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Well, also mercifully brief, I hope.
    Let me say that I agree with much of what the Senator from 
Texas just said. I--you know, I--there's no question that our 
economy will not exist the way it is without a robust 
commercial aviation system. And I understand that. All of us 
want the airline industry to be healthy, and to work well, and 
to make money, and to haul people at competitive prices. I 
mean, that's what all of us want.
    I--it's not a secret, I've never been a big fan of mergers. 
I have never felt that we solve problems in that industry by 
getting bigger. And it's not just that industry. But, I do 
think there's always a tension between the interests that the 
carriers have--in any merger, it's the case, there's always a 
tension between the specific interests that led parties to want 
to merge and the public interest. Sometimes they may run 
parallel, but often not. And when they don't, it seems to me, 
the public interest has to be preeminent, here.
    And I--we have had a lot of hearings here, over these years 
that I've served on this Committee, of companies that wish to 
merge. Some have been successful, some have not. In every case, 
the testimony is that this is almost a perfect fit, hand in 
glove. In every case, it is, ``This will be--this will 
represent more seamless transportation, having these two 
companies''--I mean, it has always been the same testimony. 
But, I think that the yardstick with which we must measure, 
here, relates to some of the things that Senator Hutchison 
said. What about competition? Will there remain competitive 
forces in that industry that give passengers an--a decent 
break?
    It--I want to just mention two final things.
    Mr. McKenzie, you mentioned something, at the end, about 
``speculative trading is perverting.'' And I didn't even know 
what the noun was, but I just agree with it.
    [Laughter.]
    Senator Dorgan. Excessive speculative trading is perverting 
everything in this country. And no industry has been hit much 
harder than the airline industry; they're prodigious users of 
fuel, and they're the--I mean, they--we all saw the price of 
oil go to $147 a barrel in day-trading, when demand was down 
and supply was up. There's a perversion of markets here.
    So, I just wanted to mention that. Thanks for being here 
just to say that, if nothing else.
    And the other thing I wanted to say is, if it is the case 
that this merger, when completed, means that four carriers 
essentially carry 81 percent of the load, that is, I think, 
something that augers against more competition, and probably 
augers toward less competition. And I think that's something 
that we have to be concerned about and have to think about. And 
I'm going to ask questions about that, because, while I want 
our major airlines to succeed, I want startups to be able to 
startup and succeed, as well. I want low-cost carriers to have 
competitive juices. And I--you know, so I want the consumer to 
have a fair break, here.
    I come from a State very much like Senator Rockefeller's, 
and we understand this about deregulation. We understand that, 
if you're from my State and you want to travel twice as far, 
you can pay half the price--or if you want to pay--travel half 
as far, you get to pay twice the price.
    For example, if you leave Washington, D.C., and fly to Los 
Angeles, and then compare the price of leaving Washington, 
D.C., and flying half as far, to Bismarck, North Dakota, you 
get to pay twice as much to fly half as far. We understand how 
all that works, those of us who have come from States where you 
don't have major hubs and people traveling between the two 
cities. We also get to pay double passenger facility charges on 
every flight, because we have to fly to a hub, then get on. So, 
we pay it twice.
    So, I have--as you can see, I have a lot of irritants about 
things that we need to work on. I shouldn't shower all that on 
these two companies, necessarily, but I do say that I'm not a 
big fan of mergers. And I think it is up to the companies to 
make the case that this will not inhibit competition, and this 
will--and that this will, in fact, represent the public 
interest, because I think the public interest, first and 
foremost, has to be served here.
    The Chairman. Thank you, Senator Dorgan, very much.
    Let me just start out. There's a couple of things at play 
here. There was such a total split in the testimony. Some 
were--and, Susan Kurland, I'm going to direct this towards you, 
and then I may also ask you, Mr. McKenzie--in other words, the 
union and the passengers said, ``This is a total disaster,'' 
and nothing within their testimony was anything but negative. 
And the airlines said that, ``We're under all of these 
pressures, small startups, low fares,'' and what are they to 
do?
    And what I'd like to ask you is--are two questions. One is, 
we're in a totally different economy. To me, talking about the 
past and mergers is a fair point, as Senator Dorgan made. But, 
today the economics are so unstable, I, myself, can't guess 
when the economy is going to rebound to the extent that--will 
produce healthy American businesses, much less the airline 
business, which has had a--you know, a long history of 
troubles, even in very good times.
    So, that's one question, the economy within which this 
decision is to be made.
    The other is the influence of the low-cost carriers. And I 
don't think we really talk about that, that much. I mean, I 
remember when people were leaving Charleston, West Virginia, 
and they would drive all the way to Cincinnati, which is a long 
trip, in order to get on Southwest, until what we discovered, 
if we'd start advertising our airport as being a good place to 
go, and you don't have to pay overnight expenses at motels, and 
all the rest of it. And actually, then, the airport really is 
strong. We now have six carriers serving the Charleston 
Airport.
    But, could you comment, one, on the economics of mergers? 
Are they different today than they were before? I mean, I've 
heard--been with Glenn Tilton at a number of hearings, in both 
this committee and the Finance Committee, and it's--there has 
always been trouble. How is it that you can do these things, 
run an airline, and have so many fewer people working? On the 
other hand, here are these low-cost airlines. And I have to 
assume they're really eating out the underbelly of a lot of 
these legacy carriers. And I'd like to get your comments on 
that. Because I don't think this should be a black-or-white 
discussion. There are nuances, here. There are facts that are 
inconvenient, here.
    Please.
    Ms. Kurland. Thank you, Mr. Chairman. As you know, our role 
is to provide advice and counsel to the Department of Justice 
in reviewing the merger, and we will be taking a look at the 
full----
    The Chairman. If you can't answer the question, tell me, 
and I'll go----
    Ms. Kurland. No, no. We----
    The Chairman. --to somebody else.
    Ms. Kurland. I'd like to make some comments.
    The Chairman. OK.
    Ms. Kurland. We will be looking at the full range of 
competition, as it affects the networks, the small communities, 
passengers, and the workforce. So, we will be looking at all of 
that.
    In terms of the economic situation in which carriers find 
themselves these days--I think it has been described by several 
of the speakers--we've got so many drivers in their business 
plans that seem to fluctuate. One is the fluctuation in fuel 
prices. Second, carriers have gotten much better over the past 
few years in managing their capacity--they've become much more 
efficient in that. And whether or not they continue on that 
road also has an impact. Then, also, this is an industry where 
demand is volatile.
    So, these are some of the drivers that we see. And, thus 
far, each merger, as it comes--before the Government, we have 
to take a look at--as you acknowledge, at where it is at a 
particular point in time.
    With respect to the low-cost carriers, what we've seen, 
even with the mergers that have occurred, is that low-cost 
carriers have continued to expand significantly. Over the past 
12 years, we've seen that they have been able to almost double 
their domestic passenger share, and in many more markets, 
they've been able to discipline prices much more than they were 
ever able to before.
    So, I hope that provides some answer to your questions.
    The Chairman. Some. And I will continue, when my round 
comes up, with you, Mr. McKenzie.
    Mr. McKenzie. Yes.
    Mr. McKenzie. Yes, thank you, Mr.----
    The Chairman. Senator Johanns.

                STATEMENT OF HON. MIKE JOHANNS, 
                   U.S. SENATOR FROM NEBRASKA

    Senator Johanns. Thank you, Mr. Chairman.
    The Chairman. This is in order of arrival.
    Senator Johanns. Thank you very much.
    Mr. ``Smiss-ick,'' is it?
    Mr. Smisek. ``Smy-zick.''
    Senator Johanns. ``Smyzick''--and Mr. Tilton--Mr. Smisek, 
you went through this, kind of, litany, ``This is good for 
employees, this is good for communities,'' et cetera, et 
cetera. Can you guarantee this Committee, either one of you, 
that no employee will lose their job as a result of this 
merger? Can you just say that to us?
    Mr. Smisek. No.
    Senator Johanns. OK.
    Mr. Smisek. And the reason for that is, although this will 
have very minimal effect on our front-line employees, because 
we have very complementary routes and we overlap a few--only 15 
nonstop domestic markets, and no international markets. In any 
merger, there are redundant jobs in headquarters, and there 
will be employees in headquarters, in both Chicago and in 
Houston, who will lose their jobs as a result of this merger.
    Senator Johanns. Mr. Tilton, is that your assessment, also?
    Mr. Tilton. Well, Senator, there's only one CEO, and this 
witness is not going to be CEO any longer at the conclusion of 
the merger, so I couldn't offer that to you.
    Senator Johanns. Well, and I suspect you'll probably be 
taken care of quite well.
    [Laughter.]
    Mr. Tilton. To be perfectly candid, sir, that wasn't your 
question.
    Senator Johanns. Well, it's not, but I don't equate your 
position to somebody who has----
    Mr. Tilton. Well----
    Senator Johanns. --given 20 years to the company and is 
going to lose their pension.
    Mr. Tilton. Well, Senator--well, no. Sir, nobody's going to 
lose their pension as a result of this merger.
    Senator Johanns. Can you guarantee me that?
    Mr. Tilton. Yes. As a result of this merger, no one is 
going to lose their pension.
    Senator Johanns. OK. Can you guarantee me that no community 
will face service cuts as a result of this merger?
    Mr. Tilton. We have already stated that no community will 
lose service as a result of this merger.
    Senator Johanns. Mr. Smisek, do you agree with that 
assessment?
    Mr. Smisek. Yes, I do.
    Senator Johanns. OK. Competition. You also said that this 
will be good for competition. But, I must admit, I fail to see 
how this is going to be good for competition. I tend to be very 
pro-business, but I fail to see how fewer airlines providing 
services results in a more competitive atmosphere.
    Mr. Smisek. Sure. Let me answer that question. We compete, 
at Continental, on a global scale. We are a U.S. airline, but a 
majority of our capacity is offshore. We are principally a 
business airline. Although we carry leisure travelers, we cater 
to business travelers. I think we do a very good job, and we've 
gotten a very good reputation for service and quality of our 
product.
    We are, however, eking out a hand-to-mouth existence. And 
the reason for that is, our business travelers are being picked 
off, one by one, by large carriers with better networks than we 
can offer them. We are strong on the East Coast, and we have 
good transatlantic service and good service to Latin America. 
We're very weak on the West Coast, and we're weak in the 
Pacific. United is strong on the West Coast and strong in the 
Pacific. It doesn't have a Latin American route network; 
similarly, it is weak in New York.
    Together, we can offer the business traveler, and the 
leisure traveler, a broad integrated global network. So, what's 
happening to us are the Lufthansas of the world and the KLMs of 
the world--Air France-KLMs of the world--the Deltas of the 
world, are picking off our business travelers, one by one.
    And, in this business, we have thin margins in the best of 
years. And if you start losing a few business travelers, you 
start losing money consistently. We lost over a billion dollars 
since 9/11. We lost $282 million last year. All the good things 
in life come from profitability. And with a better network, we 
can offer business travelers that network and improve the mix. 
Nothing in this merger is predicated in fare increases. Nothing 
at all. This is improving the business mix. More business 
travelers on the combined airline, which yields a higher 
average fare onboard the aircraft, because business travelers 
pay more, because they're getting an inventory we're holding on 
until the last minute, because they tend to book at the last 
minute and want to be able to change their flights. It's very 
expensive to us to take that risk of that inventory spoiling 
when the plane takes off without someone in that seat.
    So, we--for us, we're going to be much more competitive 
against the large carriers, but--whether they're U.S. carriers 
or whether they're foreign carriers--and vis-a-vis the low-cost 
carriers, this merger will drive, also, some cost efficiencies, 
which will help us, as well. We won't have duplicative 
advertising budgets, marketing budgets, sales budgets, 
corporate overhead, things like that--technology--that also 
drives from efficiencies, which will help us to continue to 
compete against the staggeringly successful low-cost carriers, 
who will continue, and now have 40 percent of the market share 
in the U.S.
    Senator Johanns. Mr. Roach, let me just move down the 
table, here, and I noticed you were a bit animated when I was 
asking about people losing their jobs and pensions. And I got 
the impression that you might want to weigh in on that.
    Mr. Roach. Yes.
    Senator Johanns. So, I'll wrap up today by giving you an 
opportunity to state your side of this.
    Mr. Roach. Thank you. And----
    The Chairman. In all of 10 seconds.
    [Laughter.]
    Mr. Roach. United and Continental, there's a possibility of 
a lot of people losing their pensions. United Airlines pensions 
were terminated in 2005, and just about everybody lost their 
pensions. We were able to put people on a national 
multiemployer plan. The Continental flight attendants have a 
single employer plan. United flight attendants have a defined 
contribution plan. So, we've been talking to the company about, 
How do you homogenize these plans? They don't have any answers 
to that question.
    You can't take all the United flight attendants and put 
them in the single employer Continental plan, because it would 
cost billions of dollars, and the PBGC just wouldn't allow it. 
So, it's a big question, and people could lose their pensions. 
And I've never seen a merger that--and I've been in this 
business 35 years--where people haven't lost their jobs. And 
they'll say, ``It's not a result of the merger,'' but people 
are going to lose their jobs.
    Senator Johanns. Thank you.
    Mr. Smisek. And their health insurance.
    The Chairman. Thank you.
    Senator Hutchison is next. This is just in order of 
arrival, so don't anybody be offended.
    Senator Hutchison. I would like to follow up on that, 
because I was aware of the United pension plan that went away 
with bankruptcy, but I was one on the front lines fighting for 
Continental to keep their incredibly good legacy pension plan.
    So, Mr. Smisek, how are you going to deal with that issue, 
as the CEO, with such a difference in the level of pension 
plans between the two employers?
    Mr. Smisek. First, let me say, unequivocally, that no one--
no one--will lose their pension plan as a result of this 
merger. This merger will result between 1 and 1.2 billion 
dollars of annual synergies, which will permit us to continue 
to fund the pension plans and continue to provide secure 
retirements for our co-workers.
    Senator Hutchison. Are you going to keep the two separate, 
then? Are you going to keep the legacy plan that Continental 
has, and keep the United plan, whatever it is?
    Mr. Smisek. Our co-workers at Continental who have a 
defined benefit plan will keep their defined benefit plan after 
the merger. Now, as we negotiate, on a workgroup-by-workgroup 
basis, with the unions, the unions may choose to negotiate an 
alternate plan. It may be going into, for example, the IAM 
multiemployer plan. If the IAM represents, for example, the 
flight attendants, it may be different if the AFA represents 
the flight attendants. The unions first have to--the members 
have to determine which union they're going to pick to 
represent them.
    Some workgroups may choose to freeze their defined benefit 
plan, and then, going forward, for the future, for future 
service credit, have a defined contribution plan. For example, 
our pilots have done that already; they froze their defined 
benefit pension plan, they kept all the benefits they had under 
that, and then, going forward, for their service credit, we 
made contributions to their defined contribution plan.
    Last year, Senator, we lost $282 million at Continental, 
but we put $283 million into our employees' retirement plans.
    Senator Hutchison. Mr. Smisek, tell me what the future of 
Houston is going to be in this merger, both the employee base 
as well as the hub system.
    Mr. Smisek. Senator, I believe that the future of Houston 
will be brighter with this merger than it would have been had 
Continental stood alone, because, as I said earlier, we are 
eking out a hand-to-mouth existence. And the hub is a very 
potent hub, very strong hub for us, a good hub, good flows into 
Latin America. The hub will unaffected by this merger; in fact, 
I believe will be benefited.
    You'll notice that we've announced two new nonstop long-
haul routes from Houston--Houston-Auckland and Houston-Lagos--
in part, from the future benefits that we expect from the 
traffic flows from this merger; that gave us the confidence to 
announce those routes on brand new 787 aircraft next year.
    Now, it is true that there are going to be some loss of 
headquarters jobs in Houston, just as there are going to be 
losses of headquarters jobs in Chicago. But, that's in any 
merger, and that's unavoidable. You can't have two CFOs, and 
you can't have, you know, two general counsels, et cetera. You 
can't have two CEOs. So, that happens in any merger. And, you 
know, we will treat people with dignity and respect. We always 
have. We help people find jobs. We pay people severance. We're 
a very good employer, and I think that our reputation shows 
that we show everyone at Continental the dignity and respect 
that they--that they're--that's appropriate, and we're fair to 
people, and we will do so in connection with any jobs that are 
lost in this merger.
    Senator Hutchison. Do you foresee any changes in your very 
strong hub to Latin America that would switch to other places? 
For instance, you've got Houston as very strong to Latin 
America, but do you see changing routes that would then go 
through Chicago or Florida?
    Mr. Smisek. No, there--I think there are great traffic 
flows today through Houston. The merger will just enhance it, 
if you think--just the north-south flows coming down from 
Chicago enhancing the traffic flows, plus the larger West Coast 
presence that we will have to flow from West Coast, through 
Houston, and down. It will also permit us to have nonstop 
routes we haven't had before, such as Houston-Auckland and 
Houston-Lagos, that we've announced, which are, you know, very 
expensive routes for us to do; those are brand new 787, very 
expensive aircraft. But, with the combined traffic flows that 
we anticipate from this merger, we're confident they'll be 
successful.
    Senator Hutchison. The last question in this round is for 
Mr. McKenzie. We have foreign carriers, clearly, that are 
subsidized, which have made it very difficult for American 
carriers to compete effectively. I think that has been part of 
the problems that American airlines have faced, among others. 
But, what do you see causing your scenario, where the low-cost 
carriers are more effective because they have lower costs than 
the big carriers? What do you see changing, other than gasoline 
prices, within the industry system, that would cause you 
concern about the ability for other airlines to be competitive 
in America?
    Mr. McKenzie. Historically, the number-one barrier to 
competition from the low-cost-carrier standpoint has been an 
operating barrier--access to gates, access to facilities. And 
so, you know, if I put my consumer hat on, it would simply be 
more access.
    The one thing I'll say, though, is, whereas the industry is 
in the seventh inning of a transformation, I would say 
Southwest is probably in the fourth or fifth inning of its 
ultimate end game. Every airline is secretive of their network 
plans, if this were a card game, my job as an analyst is to 
peek behind and see what each airline's hand really is.
    And as I look at Southwest's hand, it's in the midst of 
implementing a new revenue-management system, and it's this new 
revenue-management system that I foresee, in the next 2 to 4 
years, that will allow it to go into the smaller communities.
    And so, that's really the next competitive change, if you 
will, domestically, that will impact the industry.
    Senator Hutchison. I'd like to pursue that later, but my 
turn is up.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator Dorgan.
    Senator Dorgan. Ms. Kurland, what's your role here?
    Ms. Kurland. Senator, my role here is to give perspective 
from the Department of Transportation.
    In 1989, the Department of Justice was given the role of 
decider on antitrust merger cases. The role of the Department 
of Transportation is to provide analysis and advice to DOJ, 
using our special aviation expertise. We take a look at the 
competitive landscape, all the issues that go into that kind of 
analysis. The Department of Justice also will ask us specific 
questions, looking for our expertise.
    Senator Dorgan. Ms. Kurland, has the Department of Justice 
turned down any proposed mergers in the last decade that you're 
aware of?
    Ms. Kurland. I would have to look into that, and I would 
have to get back to you.
    Senator Dorgan. But, you're not aware of any.
    The Chairman. You could take a guess.
    Ms. Kurland. Yes, I'm assuming that they have, in the past 
decade. But, again, I would have to get back to you.
    [The information referred to follows:]

    Answer. In October 1998, the Antitrust Division filed suit to block 
Northwest Airlines from buying a controlling stake in Continental 
Airlines. They were the fourth- and fifth-largest U.S. airlines, 
competing on hundreds of routes across the country, and the proposed 
acquisition would have substantially diminished their incentives to 
compete against each other. The Division rejected Northwest's plan to 
put its Continental stock in a ``voting trust'' for 6 years as 
insufficient to prevent the competitive harm likely to result from the 
acquisition. After trial had begun, Northwest announced it was selling 
Continental the shares that would have given it control, and would 
retain only a five-percent share. Because the sale of control back to 
Continental remedied the competitive harm, the Division dropped its 
lawsuit.
    In July 2001, the Division announced its intent to challenge a 
merger between United Airlines and US Airways, the second- and sixth-
largest airlines, after concluding that the merger would reduce 
competition, raise fares, and harm consumers on airline routes 
throughout the United States and on a number of international routes, 
including giving United a monopoly or duopoly on nonstop service on 
over 30 routes. The Division concluded that United's proposal to divest 
assets at Reagan National Airport and American Airlines' promise to fly 
five routes on a nonstop basis were inadequate to replace the 
competitive pressure that a carrier like US Airways brings to the 
marketplace, and would have substituted regulation for competition on 
key routes. After the Division's announcement, the parties abandoned 
their merger plans.

    Senator Dorgan. Let me--thank you--let me ask the two 
airline CEOs--you propose to create, by merger, the world's 
largest airline, right? Will this be the world's largest 
airline?
    Mr. Tilton. Measured in some ways, it will be.
    Senator Dorgan. Right. Can you just very quickly--and then 
I'm going to ask a couple of the other witnesses their 
observations--very quickly, give me the public-interest case 
for this being done. Not the interest of your company, but 
what's--what do you think is the public-interest case to have 
this happen?
    Mr. Tilton. The economic predictability and survivability 
of a national asset, in the best interest of the country, that 
can provide, for the public interest, a U.S.-based network 
carrier as an alternative to robust German carriers, French 
carriers, Asian carriers, that are already consolidating, and 
provide them with a U.S.-based employer that will be able to 
generate wealth in small communities that feed into a 
successful hub in the United States, Senator, such that the 
future doesn't evolve so that Southwest carries all of the U.S. 
passengers to the hubs to be carried abroad by Asian carriers, 
Latin American carriers, and European carriers.
    Senator Dorgan. Mr.--is it ``Lee-o-cha''?
    Mr. Leocha. Yes.
    Senator Dorgan. Mr. Leocha, your assessment of that?
    Mr. Leocha. Well, first of all, when he starts off by 
talking about economic stability, I think they tried that, 
years ago, at AT&T, and eventually the Government broke it up. 
They were very stable, but it wasn't good for consumers.
    And when he--when they talk about foreign competition, you 
have all been involved intimately in the debate over antitrust 
immunity with foreign airlines. These two CEOs are heading an 
airline, or heading airlines, which have antitrust immunity--
broad antitrust immunity--with Lufthansa and their other 
partners, and they already operate their system with one 
central board of directors, like a joint venture. And they have 
the ability to do that.
    So, the merger, right now, is----
    Senator Dorgan. Yes, but--I'm sorry to interrupt you, but 
have the alliances--which is what you're referring to--have the 
alliances, do you think, been beneficial to the traveling 
public, or to passengers?
    Mr. Leocha. I think that the window-dressing on alliances 
looks beneficial, because they allow you to exchange frequent 
flyer miles, they allow you to go into the other person's 
presidents' club, they theoretically give you more seamless 
service. But, in reality, through what is called ``interline 
arrangements''--there are three different levels of the way 
airlines work together. There's an interline arrangement, where 
I can fly on American Airlines and then change over to 
Continental and then change over to Alitalia, and none of those 
people work together, but they'll still pass my bags along. And 
then they have what they call the airline alliances, which is a 
little bit better. And then they've got what they call the 
merged airline, which the airlines think is better for them.
    But, I think that, you know, they've already got this 
power. And I just can't see any additional public benefit to 
this merger.
    Senator Dorgan. Thank you.
    I want to ask a safety question. Given what we've learned 
from the Colgan flight, that deep tragedy that occurred in the 
Colgan flight, and the concerns about, quote, ``one level of 
safety,'' unquote--I don't believe there is one level of 
safety, regrettably, at this point. I worry a great deal about 
that--but, I'd like you to tell me whether, in your carriers 
now, and with a merged carrier, do you believe you can take 
action, with respect to the regional carriers, that will 
guarantee the American public that there's going to be one 
level of safety, no matter what kind of airplane they board?
    Mr. Tilton. So, Senator, you and I have had discussions 
about this on a number of occasions. At our company, we share 
safety. So, our safety professionals and the team responsible 
for our relationship, and the decision as to whether or not to 
use the services of a particular partner carrier, start with 
safety, just as many of the alliances do. If you can't pass a 
safety audit, you are not invited into the Star Alliance. If 
you can't pass a safety audit, you are not invited to be a 
regional carrier partner for United Airlines.
    In the event that you are, you are then subject to periodic 
reviews, a commitment on your part that you will accept the 
best practices that we have at United, where we're very proud 
of our safety record, and you will be an active participant in 
the safety council that exists between our two companies.
    So, to the maximum extent possible, without actually owning 
the enterprise, we are confident that we have transparency of 
safety commitment across the various airlines.
    Senator Dorgan. I asked that question--I understand it's a 
little off topic, and yet related to almost everything that we 
do--and I ask it because what I know about the Colgan crash--
and I know a lot about it; I've held several hearings--is 
frightening. I mean, what we have learned about what went on in 
that cockpit is frightening. I don't know whether it's a one-
time occurrence or something that is much, much more than that, 
but I think there are very serious issues. And I think, in many 
ways, the issues relate to size, because the larger the 
carrier, the more difficult it is to see down here and to 
supervise that regional carrier to make sure there is one level 
of safety.
    Mr. Tilton. Can I follow up?
    Senator Dorgan. Yes.
    Mr. Tilton. You know----
    The Chairman. Senator----
    Mr. Tilton. --I should have included this in my response, 
Senator Dorgan. One thing that I should have mentioned that 
will be in the public interest with robust network carriers 
that are American-based is a responsiveness to the safety 
question that you just posed.
    The Chairman. Senator Lautenberg.
    Senator Lautenberg. Thanks, Mr. Chairman.

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    And, Senator Dorgan, your comment, before, about the 
mergers, the consolidation, you've seen the success in the 
banking industry, as they merged and grew. And it would---- so, 
how can we object to something like this? Something like this 
includes lifesaving and passenger attention that's different 
than any other place.
    And, Mr. Chairman, because of the limited time, I'd like to 
know that the record is going to be kept open for a bit, and 
that the witnesses are expected to respond in very short order 
to the questions that are submitted.
    The Chairman. That's correct.
    Senator Lautenberg. Mr. Smisek, we thank you for the 
wonderful job that Continental has done, the--its contribution 
to the economy in New Jersey, and its--the base of employees. 
And are we satisfied--or, can we be assured that there will not 
be any loss of jobs in the New Jersey region?
    Mr. Smisek. Senator Lautenberg, as I said earlier, because 
we overlap so little with United, the impact on front-line 
employees will be negligible. Our hub at Newark Airport is our 
crown jewel, along with our hub in Houston. We have a fine hub 
in Cleveland, as well, and a small hub in Guam. But, the New 
York traffic flows are significant. The local traffic in New 
York is significant. It is a--it is one of the world's greatest 
business markets. We are principally a business airline. We 
were attractive as a merger partner for United for a number of 
reasons, among those was our Newark hub.
    So, I would anticipate, for Newark, bigger, better, and 
more.
    Senator Lautenberg. At least where we are, and a greater 
number of employees likely in the future.
    Mr. Smisek. Well, with Newark, since it is a constrained 
airport--a slot-constrained airport--what we will be doing is 
upgauging the aircraft at Newark, taking out smaller airplanes, 
putting in larger, long-haul airplanes. And those airplanes 
typically take more employees to handle than smaller aircraft 
do.
    Senator Lautenberg. The--there's so much mystery attached 
to the economic results with the airlines. And as I was looking 
at the material before this meeting, it was noted that, in the 
year 2000, there were 546,000 employees in the industry; 2009 
was 386,000, a decline of 160,000 employees. Now, were these 
people just lolling around? Who were they? Were they the 
mechanics? Were they lesser-trained pilots or--and 
substitutions that were working longer hours? What happened in 
there that can explain that?
    Mr. Tilton. So, Senator, it's in the aggregate that those 
numbers exist, and I suspect that many of them were associated 
with airlines that no longer are with us.
    So, if you have 186 bankruptcies over the period since 
deregulation, airlines come, airlines go. They certainly have 
since the year 2000. And with them go jobs. So, as they fail, 
they take jobs with them.
    Senator Lautenberg. Well, that--as you know, that's a 
principal concern with us here. What we're really hearing is 
that, yes, there will be redundancy, there will be overlap, and 
people will lose their jobs. That's often the mission of a 
merger; and that is, cut costs by cutting personnel or cutting 
wages, whatever.
    Mr. Tilton. So, Senator, as--although Mr. Roach has 
suggested that we're going to have a difficult time fulfilling 
this commitment, we have, nevertheless, said that there is 
nothing in this merger that suggests that any front-line 
employees--just as Jeff said relative to Newark a moment ago--
are going to lose their jobs as a result of this merger, but 
there will be vice presidents, there will be senior vice 
presidents, there will be CFOs, who will lose their jobs, 
because we don't need two of them. But, the job loss as a 
result of this merger will only be minimal.
    Senator Lautenberg. The salary of Captain Sullenberger, 
who's become famous for his bravery and skill--his salary was 
cut 40 percent in recent years--I've talked to him--forcing him 
to take a second job. A recent forum held by the National 
Transportation Safety Board found that qualified and 
experienced airline pilots are going to be in extremely short 
supply in the future.
    Now, how can we expect the type of ability, type of talent 
needed for a healthy and safe aviation industry, with starting 
salaries just over $20,000 a year? It's unreasonable to expect 
that people are going to be attracted to the industry. And if 
they are, do they bring the skill and the personal balance 
that's required in the cockpit of an airplane?
    Mr. Tilton. Well, Senator Lautenberg, I should have 
answered this when Senator Dorgan asked his question, too, 
which is that that's another benefit, I believe, to the public 
good, that if we can stabilize the financing--the finances of--
the financial performance of this industry, we will certainly 
be a better employer, Senator Lautenberg, than we otherwise 
could be. And professions associated with the industry, if--to 
Mr. McKenzie's point--if the industry is profitable, it 
certainly stands to reason, Senator that the industry will be a 
better employer than it is today, as it is unprofitable.
    Senator Lautenberg. Is it possible that airlines can be 
profitable? I mean, we see oil at a relatively low cost. We see 
a shrinkage in the services available to the passengers. We see 
other devices for charging more money, baggage, whether it's a 
mother-in-law or a particular person who accompanies you, 
there's an extra fee, or whatever it is. There's a charge for 
everything.
    I was on a flight one day, and water was three bucks. Now, 
you know, if you need water, you should be able to get it and 
not have to reach into your pocket.
    But, all of these things--is the industry a place--and I 
ran a big company before I came here--a place where we can 
expect profits to emerge without really losing the customer 
base, or without coming back here again and having a merger?
    Mr. Smisek. Senator, there's no question it's--the airline 
business is an extremely difficult business, and we're subject 
to, not only significant variations in our input costs, but 
significant external shocks that affect demand in a material 
way.
    There are carriers that have done--that have been 
consistently profitable, such as Southwest Airlines. And there 
are carriers that have--come and go in this business. This 
merger will provide us with between 1 and 1.2 billion dollars 
of net annual synergies. The goal of this merger is to restore 
us to profitability and to permit us to compete more 
effectively on the global scale. The--that's the global stage 
in which we do compete today. That is the goal of any 
enterprise. We've done a poor job at Continental, since 9/11, 
of being profitable, having lost over a billion dollars. And my 
goal here, in working together with United and merging the two 
companies, is to restore our company to profitability so we can 
have good careers for our employees, solid retirements, and 
continue with good service. And making the investments, because 
we invest a great deal of money in our products, with lie-flat 
seats and audio-video on demand, and DirecTV and in-seat power 
ports. This is very expensive stuff that we have and that we 
invest in to make your travel experience a good one.
    Senator Lautenberg. Mr.----
    The Chairman. Thank you, Senator.
    Senator Lautenberg. --Chairman, I thank you. I leave, with 
one expressed hope, that we do not permit cell phones to be 
operative in airlines.
    Thank you.
    The Chairman. Let me ask Mr. Smisek and Mr. Tilton--I was--
I had Byron Dorgan's job, as Chairman of the Aviation 
Subcommittee, for 10 years before he did, and I've watched a 
lot happen in the airline industry. And I may have a little bit 
different view than some of my colleagues here about this. And 
I've watched--when I came here, there were 25 Class A 
railroads. There are now four. And that's a whole different 
subject, and a whole different subject of--set of emotions. 
But, I do think that airlines genuinely struggle. I don't think 
that they seek to merge just for the fun of it.
    So, I'd like to ask you, each of you, and then I'm going to 
ask the same question of Mr. McKenzie--Do you think, if you 
cannot merge, that one or the other of you, or both of you, 
will go under?
    Mr. Smisek. Mr. Chairman, let me speak first to that.
    Continental is a very good airline. We have great customer 
service, we are well respected in the industry, our customers 
enjoy flying us, our employees enjoy working at Continental. I 
think we do as fine a job we can with the network we have. And 
yet, as I've said before, we are eking out a hand-to-mouth 
existence. And that's not a future that I want for my co-
workers, it's not a future I want for the people who fly 
Continental, it's not a future I want for the communities we 
serve. It's not good for this Nation.
    This is a merger that we need to do at Continental to 
secure our future, which is why we're doing it. You're right, 
nobody merges for the fun of it. They're very difficult to 
accomplish, very difficult to integrate the two companies, 
integrate the two cultures. There's a lot of work ahead of us. 
But, this is something that we need to do at Continental.
    The Chairman. In other words, the----
    Mr. Tilton. So----
    The Chairman. Just a second.
    Either you said that it's not a good future, and therefore, 
there isn't a future, or you said it will continue to be a 
struggle, and we won't want to be--we won't be able to do all 
we want to do.
    Mr. Smisek. It will continue to be a daily struggle for as 
far out as I can see, Senator.
    Mr. Tilton. So, Senator, I'd go back to Senator Dorgan's 
question, and merge it with your own. I'm not using the phrase 
cleverly.
    The benefits to the public, of the company that we seek to 
create, with so few overlaps and so little concern to the 
public, is a merger of two companies that, if they were not 
given the opportunity to do so, would certainly continue to do 
everything that they could to survive and be relevant, against 
the backdrop of the industry environment that the Assistant 
Secretary sketched for us. And I think we would.
    To Senator Hutchison's point, Continental was in bankruptcy 
in 1994, 1995, in a very, very difficult period for that 
company. So, 15 years ago, they went through what the rest of 
the network carriers have gone through since 9/11. During that 
period of time, they built the service culture that the Senator 
referred to, that the rest of us now aspire to. We'll do that, 
Senator. At United Airlines, if this merger is denied, we will 
continue to improve United Airlines, and we'll continue to 
improve United Airlines, just as our colleagues at Continental 
did after their painful bankruptcy.
    Whether or not the next time, Senators, oil goes to 147--
we're both prepared to deal with the eventuality of 147, which 
was actually $170 jet--neither of us can predict. But, what we 
can tell you, if we are one company, we're going to be much 
better prepared to deal with whatever the next shock is, 
because everybody in this room knows one thing is certain: it's 
coming. We'll be better prepared to deal with it as one company 
than either one of us would have been prepared to deal with it 
as two companies.
    The Chairman. Mr. McKenzie, would you comment on my 
question, and that is--they both seem to indicate that they 
could survive, but they couldn't survive with enough confidence 
to meet the future. And I would tend to agree that the future 
is going to hold some--I mean, I think 9/11s will happen. There 
are attempts, constantly. And they're not just from overseas, 
they're also domestic. I think some of those will succeed. The 
American public is frightened very easily. And so--or the 
economics--again, where is our economy going? Is it going to 
take us 10 years to get back to normal, or 5? I don't know. 
But, how do you answer the question of, Will they survive? And 
how do you interpret the word ``survive,'' as they describe it, 
to be, or not be, in the public interest?
    Mr. McKenzie. Sure. So, last fall I was forecasting a loss 
of $400 million for all of 2010 for United. Today, I'm 
forecasting a profit of roughly $400 million. So, the earnings 
volatility in the airline industry is perhaps unlike any other 
industry, and that's simply because of the volatility in crude 
prices. You have 30 percent of the costs getting whipped around 
50 percent, so that does drive a lot of the earnings 
volatility.
    If I look at what these airlines spent back in--when they 
were last making money--1998, 1999, 2000, 2001--they were 
spending about $10- to $15 billion a year on new planes and 
investing in the business. Today, they're spending a third of 
that, because they simply have to be--they have to be pinching 
pennies.
    So, looking ahead, I am not forecasting either of these two 
companies--and, by the way, when you talk about failure, there 
are actually two forms of failure. There's one, which is 
Chapter 11, which is a restructuring, and there's--and the 
other form of failure is Chapter 7, which is liquidation. 
Neither one of these companies would fail in a Chapter 7 
situation. If crude were to go to $147 barrel again, or if we 
go into a double-dip recession, they would probably have to 
restructure as standalone carriers.
    That's not my forecast today, obviously. I think that both 
of these--I think the industry makes probably about $4 billion 
this year, and perhaps, $5- to $6 billion next year. So, we are 
in the path to recovery. But, it is a recovery that is 
vulnerable and fragile.
    The Chairman. OK. I--I'm over my time, but I'm going to 
take my inspiration from Senator Lautenberg, here. One more 
question.
    There's--you can survive--I was president of a private 
college for 4 years, and what we did is, we deferred 
nonessential maintenance, because we were constantly struggling 
to make it. We were always, as they describe it, on the edge, 
trying to survive. And you can survive, as a college. But, then 
it comes to a point where the deferred maintenance catches up 
with you and really bites you because you can't defer it 
anymore, and then you can't afford to do that. Is that what 
they're talking about? Or are they talking about being able to 
survive, even with the so-called deferred maintenance, as 
applied to the aviation industry?
    Mr. McKenzie. It's really----
    The Chairman. When you say ``buying a third fewer 
airplanes,'' things that they generally need to keep up, get 
ahead.
    Mr. McKenzie. That's correct. When I--I guess when I talk 
about ``survival,'' I'm really talking about everything. I'm 
talking about the ability to reinvest in the business and the 
product, the way the airlines should be investing in the 
product, in the business; as well as paying their workgroups, 
you know, what they need to be paid to run the operation; as 
well as generating a return for shareholders and for, you know, 
the people that are actually granting and giving capital to 
this industry.
    The Chairman. I thank you.
    Senator Hutchison.
    Senator Hutchison. I just wanted to go back, Mr. McKenzie, 
to better understand what your comment was about Southwest and 
its ability to compete, and looking at managing its revenue 
system. What do you mean by that?
    Mr. McKenzie. Sure. So--and I'll just start out by saying 
this is speculation on my part, simply because the only people 
that really know what Southwest's network plans are the senior 
management team of Southwest Airlines.
    But, as I try to analyze and anticipate what they're going 
to do, the one observation is, the smallest city that Southwest 
served, historically, has had a population of 220,000 people. 
Their most recent city that they've gone into--Panama City, 
Florida--has a population of roughly 150,000 people. And I view 
that as Southwest sticking its toe in the water with respect to 
service to small communities. And Southwest essentially has 
been able to plug in four of its cities into Panama City. And I 
expect this is a peek into the future of Southwest's network 
planning. And as Southwest retools--Southwest is a very simple 
company--single fleet type, single engine type, a very simple 
operating model--as they become more sophisticated, they will, 
in turn, have the ability to engage in more sophisticated 
network opportunities, those being more of these smaller 
cities.
    Senator Hutchison. Well, they do serve small cities. 
Lubbock, Texas; Amarillo, Texas--they are in those cities. But, 
part of their operating competitive difference has been going 
to different airports--Chicago Midway instead of O'Hare; Love 
Field instead of DFW. So, is that an effective competitive 
potential for keeping, not just Southwest, but other airlines 
that are not the mega-airlines, also competitive and offering 
different options to consumers?
    Mr. McKenzie. Southwest loves markets where fares are $500 
to $1,000, because they will go in and charge $200, and make 
money, hand over fist. And if the fares to small communities--
again, once Southwest develops the sophistication to really 
manage its business to go into more of the smaller markets, I 
think that those smaller markets really do represent an 
economic opportunity for the carrier, over time.
    Senator Hutchison. But, what about alternative airports? I 
mean, is there another potential business model, and also 
traveling-public model, to build the smaller satellite 
airports? For instance, you've got Love Field and Midway, but 
you also have Orange County. Is that something that would 
create a more robust market that would keep us from worrying 
about three or four major carriers all doing the same thing, 
and all of a sudden everybody's prices are $1,000?
    Mr. McKenzie. Understood. Today, Southwest really has less 
need for these alternative airports. And the reason why is 
because it has so much cash. It can afford to go into markets 
and lose money for a long time before it actually becomes 
profitable at that airport. And I'll give you an example--
Boston to Philadelphia, where the walk-up fares were $900, 
today have gotten collapsed. But, these small airports really 
are a rounding error. For Southwest to go into these smaller 
airports at some point down the road, the results on their 
financials really would be a rounding error, because they have 
so much critical mass elsewhere in the United States.
    Senator Hutchison. OK. But, they've built up a mass, now, 
so that they're a player in the fairly big leagues--the next 
tier down, anyway. But, I'm trying to go beyond just Southwest, 
and beyond just worrying about the big airlines. Is there, 
then, a market that has been created that would give consumers 
options from JetBlue, from other smaller airlines that might be 
able to grow and create a more diverse and exciting airline 
economy, so that we don't have to worry about ``too big to 
fail,'' we don't have to worry about just three airlines 
dominating, but that we'd see something new coming up? That's 
what I'm trying to get to--not just Southwest, but moving on.
    Mr. McKenzie. Got it. So, if I understand your question 
correctly, it's really a question about new entrants and the 
possibility of new entrants----
    Senator Hutchison. Using the original Southwest model, but, 
if Southwest is moving on, does that create more capability to 
use these other airports that create a different type of 
traveling experience, and give more options, that could also 
grow?
    Mr. McKenzie. There are a couple of other smaller low-cost 
carriers that have been successful, that have very strong 
growth prospects, and a couple of those airlines are Allegiant 
Air--it's an airline that has been very small, serves the 
markets that--where other airlines don't like to compete. So, 
there are a couple of other examples.
    As far as new entrants coming into the industry and 
offering new services, the barriers to entry are actually quite 
high now, just simply because--in part, regulations; and in 
part because of the financial strength of the airlines that 
exist today that compete.
    Senator Hutchison. Do either of the two CEOs have any 
comment on that, that would help us, looking at these mergers 
in a different light?
    Mr. Tilton. I do, Senator. And we have particular 
experience with it. And we had a very thorough discussion of it 
at the earlier Senate hearing.
    In our larger market of Chicago, Milwaukee is an airport 
that really, I think, is serving an interesting role. Milwaukee 
could actually be--because it could serve the northern Chicago 
suburbs, from a commuting perspective, as effectively as 
O'Hare--could really be another Midway. And what's happening in 
Milwaukee today is an intense competitive struggle for service 
provision in that market by some interesting airlines.
    AirTran and Southwest are competing vigorously in that 
market, and have both announced new service to Milwaukee from 
their disparate places across the U.S. So, AirTran, obviously, 
from the Southeast; and Southwest from, clearly, the Southwest.
    But, there's also a new entrant in Milwaukee that is a 
hybrid of various forms here of participation in the industry, 
and that's Republic. And, as you may know, Republic is, 
historically, a regional carrier, that is a partner carrier of 
ours, that has acquired Frontier. It also acquired Midwest. So, 
in acquiring Midwest, based out of Milwaukee, and acquiring 
Frontier, based in Denver, it amalgamated a series of different 
models--business models, as you say, and is now competing with 
those other two low-cost carriers in Milwaukee.
    And if you're in Lake Forest, Illinois, and you used to 
travel to Midway or you used to travel to O'Hare, you now have 
a third choice, and obviously a very competitive choice, and 
you're the beneficiary of intense competition for a market that 
previously served a smaller overall market and today aspires to 
serve a bigger one.
    Senator Hutchison. Thank you.
    The Chairman. Senator Dorgan.
    Senator Dorgan. Chairman, thank you very much.
    Intense competition is a foreign language to those of us 
that live in some parts of America. We struggle to get a 
carrier to serve. But, it's good to hear it exists somewhere.
    Let me ask about the issue of regional carriers. I've 
already asked you about one level of safety, but let me ask, 
What percent of the passengers that you carry in United and 
Continental are carried on airplanes with your brand and your 
colors, but are, in fact, regional carriers? Do you know that--
what the percent would be now?
    Mr. Smisek. Let me speak for Continental. We have a number 
of carriers that serve as regional carriers for us--
principally, ExpressJet, which has over 200 aircraft. But, 
those are small aircraft; those are 50-seat and 37-seat 
aircraft.
    For the last 12 months, 36 percent of Continental customers 
traveled on one of our branded regional partners. Regional 
partners include ExpressJet, Chautauqua, CommutAir, Colgan/EWR 
(CPA),* Colgan/IAH (non-CPA), Gulfstream CLE/FLA 
(non-CPA), and Cape Air GUM (non-CPA).
---------------------------------------------------------------------------
    \*\ CPA represents Capacity Purchase Agreement.
---------------------------------------------------------------------------
    Mr. Tilton. So, Senator, I'm sure our number is comparable, 
and it is less than half. For United, approximately 34 percent 
of our customers travel on United Express over the last 12 
months.
    Mr. Tilton. That's only in the domestic market. Obviously, 
it's going to be a smaller number----
    Senator Dorgan. That's right.
    Mr. Tilton. Right. If you----
    Senator Dorgan. I'm interested in the domestic market. And 
I'm wondering also, then, if this merger occurs and you become 
the world's largest airline, what percent of your passenger 
traffic in the United States, domestically, will be transported 
by regional carriers? Will it increase or decrease?
    Mr. Tilton. Well, the first thing--I'm not sure that either 
one of us knows that answer, but we'll get it to you.
    [The information referred to follows:]

    Since we are committed to continuing to serve all of the same 
cities that we serve today as the combined airline, the percentage of 
passengers we expect to travel on our regional partners should remain 
in the same range of approximately 33 to 37 percent.

    Mr. Tilton. The first thing we will do is take the two 
fleets, as you and I have discussed, that we will--because you 
were interested in, How are the synergies created if you're not 
going to raise fares?--we'll take the two fleets, and we'll 
make optimal use of the two fleets, which we can't do now, 
because they're the sole province of each one of us. So, if I 
have an aircraft that Jeff can use to better economic purpose 
in Newark, and it's currently in service in Dulles, then we'll, 
obviously, make that swap.
    The extent to which our narrow-body aircraft--our 319s, 
320s, Jeff's 737s and the like--can then be put to service in 
smaller communities. We may actually be able to put larger 
aircraft into service in communities that are currently, for us 
anyway, Senator, 70 seats. And that's really the way that it'll 
work.
    What the markets actually allow us to do there, only, 
frankly, the fellows that Dan McKenzie was talking about a 
moment ago, the network planners, will know, when the 
opportunity presents itself.
    But, I--let me make sure I say this. Regional partners for 
United Airlines, in a merger or no-merger scenario, will 
continue to play a very, very important role in gathering up 
traffic for us to take abroad or to take on, obviously, longer 
flights, because we're not going to fly 319s into those very 
small communities.
    Senator Dorgan. I understand that. And the hub-and-spoke 
system is critical to those areas, such as North Dakota and 
other similar States, to be able to be transported into a hub 
so that we are one stop from anywhere. I understand all that.
    When I ask about the ``one level of safety,'' it relates to 
the question of, How much of the traffic is going to migrate to 
regional carriers, the 50- and the 32-passenger and other kinds 
of airplanes? And do we have the capability to fix that which I 
think is now a problem? I--as I indicated, I don't think there 
is one level of safety, frankly. If I get on an airplane with 
the experience in the cockpit that is one-tenth the experience 
that I would get on a plane, on a 757 that's flying from D.C. 
to Los Angeles, I don't think it's an equivalency. Now, I'm not 
suggesting that you have to put those same number-hour pilots 
in every cockpit, but I am saying that we've had substantial 
evidence in hearings that there's not one level of safety.
    And the other question is--and this doesn't relate to the 
merger, it relates to whether you merge or not--about the issue 
of whether there is liability assumed by carriers who then hire 
a regional to put your brand on their tail. At this point, such 
liability doesn't exist. I believe it should.
    Because if you say, Mr. Tilton--and you've told me this 
before--we're going to insist on one level of safety, we're 
going to insist on the training that we expect for our people--
then I think the liability ought to be assumed by the carrier.
    And this all comes about, Mr. Smisek, because of the Colgan 
crash, and all that we have learned as a result of that. We've 
learned plenty, and much of it is very frightening.
    And my hope is that--with or without a merger---- that we 
begin, in a very aggressive way, to plug these holes and fix 
those issues.
    Let me make one other point. The question that Senator 
Rockefeller asked the two of you really doesn't leave room for 
much of an answer, I think, with the--with an analyst sitting 
here, because my guess is, you've got to say the following:
    If somebody asks, ``How're you doing?'' you've got to say, 
``Great,'' if he's sitting here.
    And, ``How do you expect to do, if you merge?''
    ``Fabulous.''
    ``What if you don't merge? Are you still going to do OK?''
    ``Absolutely. We're in great shape.''
    I mean, you've got to say that to--I mean, you couldn't 
come here, with an analyst sitting there, and give us a tale of 
woe in order to justify a merger, could you? Not that you've 
got a tale of woe, because the analyst says you're making money 
now, which is good.
    Mr. Smisek. No, I am--we're not in great shape at 
Continental.
    Senator Dorgan. But, if the merger----
    Mr. Smisek. We've lost a lot of money. We hope to be able 
to make money on our own, on standalone basis. That's the goal 
of any enterprise. We--you know, we have invested in our 
product. We've been borrowing ever more and more money, and 
borrowing money to pay the money that we owe to other people. 
And we know that, to provide a future for our employees and for 
our customers and for the communities, we need to be 
profitable, and we need to be consistently profitable. And we 
believe--my board believes, I believe--that a merger with 
United Airlines maximizes the chances that we will indeed, not 
only return to profitability, but be able to sustain that 
profitability.
    Senator Dorgan. Well, you're both serious people, and you, 
as I indicated earlier, come here representing your interest. 
There is also a public interest. And the question is, Are they 
parallel? And I--and, you know, that's the issue, it seems to 
me. And I think I was--I was suggesting, the other morning, in 
talking about this, that I won't be here, but perhaps someday 
there'll be a hearing in which American, having merged with 
Delta, and the new United-Continental having merged with U.S. 
Air, will be here to talk about a final merger, and the utmost 
seamlessness in air travel.
    I just--the question is, Where is it too much? I mean, what 
represents that intersection between serving the public 
interest and making certain that we have commercial airlines 
that have the ability to make money out there, serving as much 
of this country as is possible? And--I mean, I don't know the 
answer to all that, but I think--again, the question is--the 
first question I asked, Mr. Tilton, you answered as you saw 
fit--What is the public interest that relates to this 
proposition so that----
    Mr. Tilton. And I think you asked, Senator, the excellent 
question, and I've really done my best to answer it. And I've 
answered it a couple of times, even when----
    Senator Dorgan. I understand.
    Mr. Tilton. --hadn't asked me.
    Senator Dorgan. I was listening.
    Mr. Roach. Well, Senator, I believe that you're 100 percent 
correct, that--where does it stop? And that's why we say there 
must be some slight form of reregulation, because US Airways is 
going to merge with one of the big three, and then somebody--
American will be bigger, and then United--the new United will 
have to merge with Delta to become bigger. Where does it stop? 
And, you know, when you talk about Southwest Airlines making 
money, they pay the highest wages in the industry, they pay 100 
percent medical costs, they do, as Senator Hutchison said, fly 
into a niche market and places where maybe these guys don't 
want to go. In addition to that, they compete on service. You 
see, they compete on service. People get on Southwest Airlines 
and compete on service. But, they're not going to get on 
Southwest Airlines to go to Paris. And so, there's a big 
difference in what happens at Southwest Airlines.
    And just one other point. They manage the business. You 
know, when fuel was $150--when there was--$150 a barrel, they 
were managing that cost. So, there's a big, significant 
difference in matching Southwest Airlines with Continental and 
United, or the new Continental-United. And, you know, we 
represent--just so you know, we represent one-third of the 
employees on Southwest Airlines, so we do have some insight as 
to what's happening over there, contrary to what others may 
think.
    Senator Dorgan. I thank you very much. Southwest did look 
like geniuses as that price of oil went way, way up, and then, 
on the other side of that transaction, they weren't so happy.
    But, at any rate, you--look, all of us want the same thing; 
we want a good commercial air system, in this country, that is 
able to be financially successful, but that treats people in a 
way that gives them the competitive pricing and differentiated 
service, that gives them choices.
    So, Mr. Chairman, thank you for your patience.
    The Chairman. No, thank you.
    I tend to ask, at hearings of this sort, West Virginia--
specifically, Yeager Airport, at Charlestown, is not going to 
be affected. But, I've discussed that with both of you. And 
everybody's very satisfied, back at the airport, that it's not 
going to be affected, so I so stipulate.
    I just--I want to end by asking Mr. Roach--let's say the 
merger is turned down. How does that help the public interest 
and consumers?
    Mr. Roach. Well, as I indicated in my testimony, Senator--
or, Mr. Chairman--is, we are looking for the information to 
find that out. And I believe somebody said it's up to them to 
make the case. They haven't made the case to us. And we're not 
looking at collective bargaining agreements, we're looking 
about the survivability of the carrier. And so, we've asked for 
certain information about the survivability of the carrier, the 
business plan. We want to see both carriers survive, either 
combined or separate, because, without the carrier, there are 
no jobs. But, we need information to make that decision.
    The Chairman. Well, that is a point.
    Mr. Roach. Right. And we need information to make that 
decision, if they're going to survive.
    The Chairman. Well,----
    Mr. Roach. And that's what we've asked for, and there's----
    The Chairman. --you're telling me you're coming here and 
testifying before a very important hearing and saying that you 
need information, and you don't have an opinion as to what 
would happen if they didn't merge----
    Mr. Roach. Well----
    The Chairman. --and stood on their own, and struggled on 
their own, and whatever would happen to them then, and 
therefore----
    Mr. Roach. Well----
    The Chairman. --to your employees.
    Mr. Roach. I have a--I have an opinion. First of all, we 
want to make an informed decision about this particular merger. 
I was of the opinion--and after discussions with several 
people, including Secretary LaHood, in a very public 
discussion--that these alliances, that they were getting 
antitrust immunity for, was the avenue--and that's what they've 
previously testified to--that this was the avenue to 
survivability. And so, now that has changed. Now it's a merger 
that has survivability. But, last year, and 2 years ago, when 
we were challenging the alliances--so these alliances have 
created a simulated merger. I mean, they've moved together at 
airports, they have the alliances--they're all in the same Star 
Alliance. And so, there is a question as to whether or not this 
is in the best interest of the public, or whether Continental, 
that has a certain culture and has been doing things a certain 
way, would be better off by itself. And the same thing--there 
are two different cultures. This is big stuff, because these 
are two different cultures that have to be meshed together, and 
it's going to take 3 to 5 years to at least get that done. And 
what happens in the interim period, when everybody's trying to 
do that?
    So, I don't want to rush to judgment. And so, that's why 
we've asked for the information. Because we were going down one 
track, based on the information we've had previously--
alliances, give them antitrust immunity, and this was all good. 
Now that's changed. And so, my opinion is, we need to make sure 
that this doesn't become one airline, or two airlines, and 
there is no competition, and we're still not making any money.
    The Chairman. OK. I'm not sure I understood that. Maybe 
you, sir, would wish to comment on what would happen----
    Voice. Sure.
    The Chairman. No, no, I'm talking to Mr. Leocha--if the 
merger were denied. What is the benefit to passengers if they 
are living hand-to-mouth? And I've been at this a while, and I 
know pretty well what their struggles are. They've--that's all 
exacerbated now by the economy and uncertainty, generally, 
domestically and in the world. But, what's--what would make--
why would you be pleased if this merger did not take place?
    Mr. Leocha. I thank that, in terms of competition, we have 
an airline system that, right now, operates all of its pricing 
structure based on signaling to each other. And in the old 
days, we had six airlines, and there were six chances that one 
of the airlines would say, ``Nope, I'm not going to raise the 
price,'' and it would come down.
    Now we're down to five airlines, and now we're going to be 
down to four, soon. And every time you do that, what we end up 
with, it becomes--it's an order of magnitude of less 
competition. So, we don't have the competition between the 
different airlines.
    I think that the airlines today--if you look at a big 
chart, and you take all the airlines, and you lay them out, the 
smaller the airline, the more money they're making; the bigger 
the airline, the more money they're losing. And so, it sort of 
gives you a logical look and say, ``Well, maybe big isn't 
better.''
    And so, these two airlines can survive. Continental 
certainly can survive on its own without merging with anyone 
else. They'll come up with a new method. They may use their 
Houston hub to become a great international port and serve as a 
feeder airline for other--you know, other people coming in and 
out of Houston. These are the things that they can do.
    And we need to keep competition in the system. And I'm not 
saying that--you know, I'm not wishing them to fail because I 
don't like them, personally. I like--you know, I've met 
everybody, I like everybody, personally. But, from a consumer 
point of view--and it's--the more people that are competing for 
the consumers' good, the better for the consumer.
    But, also, from the other side, when you look at small 
businesses at the big major hub airlines--or hub airports--
they're going to have a much tougher job when they go to 
negotiate with this big, giant airline, because they're not 
going to be able to--there's not going to be two or three 
caterers left. The caterers are going to be stuck having to 
grow, themselves. They're going to have to remerge to then work 
with the larger airlines.
    The unions have the same problem, because they're trying--
they're going to have to pull their people together.
    So, we're eliminating competition, not only from the 
consumer point of view, we're eliminating competition from the 
small business point of view surrounding the airlines. We're 
removing competition from the union point of view, in terms of 
competing for wages. And it goes all the way down the line.
    So, competition is what the United States has been built 
on. And, unfortunately, the Department of Transportation, over 
the past years, has decided that less competition, in order to 
make life better for the airlines, is the route that we should 
take. However, that has been at the expense of the consumers. 
And right now, yes, there are economic problems. And so, in a 
short-term solution, we're giving them less competition, but, 
in the long run, we're going to be hurting the consumers, and 
we're going to end up with an oligopoly and a small group of 
people controlling international and the local prices. And 
where we have low-cost airlines competing with them, that's--in 
a small part of the market--that will tend to dampen down those 
prices, but only in specific areas.
    So, I'm not wishing them bad just, you know, as a whim, to 
say, ``I don't like it.'' I think that, historically, it points 
to nothing good for the consumers in--that we've learned. And 
when we look at every past airline merger--Republic and 
Northwest, the--TWA and American, even Delta and Northwest--
there are problems. There are major customer service problems 
right now, to this day. And what I do every day, I write about 
travel, I study travel. We get letter after letter from people 
having problems with the larger airlines, as they merge, 
because there are problems in mergers.
    So, it's not all milk and honey. There are real problems, 
and I think that the consumer is going to end up with the short 
end of the stick, even though it might sound good, from a money 
point of view, from the big airlines.
    And I'm really happy that you, you know, gave me the 
opportunity, because I just hear money, money, money, business, 
business, business, but it's only at one side. One you drop 
down to the small business level, the small business guy is 
taking it in the shorts, and the consumer is going to take it 
in the pocketbook.
    The Chairman. Just quickly, Senator Hutchison, do you have 
a question? Because I'm just going to ask----
    Senator Hutchison. No.
    The Chairman. --I'm going to ask the two chief executives 
to----
    Mr. Tilton. So, I----
    The Chairman. --respond to what you've heard.
    Mr. Tilton.--I think one thing that everybody in the 
industry knows is that everybody that is a part of the 
collateral economy of this industry makes money. Jeff and I 
covet the margins of all of our suppliers, all of our 
providers, all of our airports, all of the retailers on the 
concourses. They all do very well. They all know that they do 
very well. All of the avionics companies.
    The entity that doesn't do well in this business is the 
entity that we're talking about right now. I've done my best to 
address the questions, which have been excellent, with respect 
to why I think this is in the public good. And the short answer 
here is, bankruptcies are not in the public interest.
    The Chairman. Mr. Smisek?
    Mr. Smisek. Senator, I don't even know where to begin, but 
I'll keep it short.
    This is a brutally competitive industry. This industry is 
competitive today. It will be brutally competitive after we 
merge. We will have substantial and significant competition on 
all of our overlap routes after this merger. We have 
substantial competition on our routes today, that are 
nonoverlap routes.
    We have--this is--there are--actually, I would disagree 
with Mr. McKenzie--there are low barriers to entry in this 
business, and there are high barriers to exit. They--we tend to 
restructure, we don't tend to go out of business.
    And, as a result, there is a constant overcapacity, which 
leads to lower and lower fares, which is very good for 
consumers, without question, but, for us charging in amounts 
for our business that are below our costs, it's not a good way 
to make money, over the long run.
    This--we do not set prices; the market sets prices. We 
can't set prices before this merger, we won't be able to set 
prices after this merger. This is clearly a competitive--it has 
only gotten more competitive over time, as low-cost carriers 
have entered into hubs. We have low-cost competition in all of 
our hubs, as does United Airlines. And those carriers continue 
to grow and be successful, because they have new employees, 
they have lower wages, they have brand new equipment, they have 
no pensions, or low pension costs, they have low healthcare 
costs, because they have young employees. And we have to 
compete against those lower costs.
    This is an opportunity for us to be able to save costs 
through efficiencies, to generate additional revenues from the 
complementarity of our routes and the greater network that we 
can offer business travelers, and have a chance to make money.
    And that, I think, is good for competition. It's good for 
us to be able to invest in our product and provide good, high-
quality services, to provide improved wages and benefits for 
our employees.
    So, I very much believe that this merger is in the public 
good, and I very much believe this does not lessen competition.
    The Chairman. I thank you for that. I, again, just say that 
I tend to agree with you, perhaps departing from some of my 
colleagues' views on this.
    One thing I wanted to do before closing this hearing, Mr. 
McKenzie, is to restore your reputation. It's good with me, but 
Senator Dorgan, who's one of the best members of this Committee 
and a superb Senator, indicated that the two chief executives 
couldn't answer because you were there. And I think--maybe I 
actually want to bring your reputation down a little bit--I 
don't think you're that terrifying----
    [Laughter.]
    The Chairman. --and that the word ``analyst,'' I don't 
think they were quivering at your being here. So, I just want 
to put that in perspective, because I found that awkward, 
somehow.
    Mr. Smisek. Mr. Chairman, excuse me, could I make one 
technical thing? We've provided the Committee with letters of 
support from around the country, and also from Texas, and I 
would ask, with your permission, they be entered into the 
record.
    The Chairman. Everything.
    Mr. Smisek. Thank you.
    [The information referred to follows:]

    Letters from the following communities and organizations in support 
of the United-Continental merger are retained in Committee files:

        State of West Virginia

        Raleigh County (WV) Memorial Airport

        City of Beckley, WV

        Beckley-Raleigh County (WV) Chamber of Commerce

        City of Fort Walton Beach, FL

        City of Key West, FL

        Greater Miami Chamber of Commerce

        City of Orlando, FL

        City of Pensacola, FL

        City of Waco, TX

        City of Victoria, TX

        City of Tyler, TX

        Tyler, Texas Area Chamber of Commerce

        City of Midland, TX

        City of Lubbock, TX

        City of Laredo, TX

        Greater Killeen (TX) Chamber of Commerce

        City of Corpus Christi, TX

        City of College Station, TX

        Brownsville (TX) Chamber of Commerce

        City of Amarillo, TX

        Amarillo (TX) Chamber of Commerce

        City of Minot, ND

        Minot International Airport

    The Chairman. The hearing is adjourned, and I thank all of 
you for your patience on this important matter.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]


                            A P P E N D I X

 Prepared Statement of Hon. John Thune, U.S. Senator from South Dakota

    Thank you, Mr. Chairman. And I want to thank you for holding this 
hearing. I think this is an important discussion to have not only with 
respect to the merger in front of us, which is awfully important to 
those of us who represent States that are going to be most impacted by 
this, but I think generally speaking the entire aviation industry.
    As I noted when this Committee held a hearing regarding the Delta/
Northwest merger roughly 2 years ago, I suspected that we would see 
more mergers. That being said, in light of the current economic 
environment, I can understand why United and Continental want to do 
this. It, in many respects, becomes a matter of survival in the airline 
business today. But there are many of us who are very concerned about 
the future of the industry, the impacts of this merger and potential 
mergers in the future--particularly when it comes to the rural states 
that many of us represent.
    But I guess my greatest concern has to do with service and cost 
issues, particularly with regard to smaller communities in the network. 
I have witnessed first-hand the changes that have occurred as a result 
of the Northwest/Delta merger and I can tell my colleagues that despite 
assurances to continue to provide ``service'' to rural states--that 
doesn't mean that frequencies will stay the same or that aircraft won't 
be downsized, or that the same level of customer service will exist. 
Ultimately these scheduling and aircraft changes result in higher costs 
and less options for the leisure and business travelers that fly to and 
from South Dakota and other cities across the country.
    So, I certainly understand why United and Continental want to merge 
from a business standpoint. I understand the necessity of trying to 
find some synergies and that many of United and Continental's routes 
don't overlap, but expand or create opportunities for consumers to have 
access to new destinations--both domestic and overseas.
    However, less competition is never good from a consumer's 
perspective and I have concerns both in the short-term and also looking 
long-term about what additional merges mean to the strength of our 
domestic aviation sector, and our economy as a whole.
    Thank you, Mr. Chairman.
                                 ______
                                 
Prepared Statement of Susan Fleming, Director, Physical Infrastructure 
             Issues, U.S. Government Accountability Office

    Mr. Chairman and Members of the Committee:
    We appreciate the opportunity to provide a statement for the record 
on the potential implications of the merger proposal recently announced 
by United Air Lines (United) and Continental Airlines (Continental). 
Earlier this month, these two airlines announced plans for United to 
merge with Continental through a stock swap the airlines valued at $8 
billion. This follows the acquisition of Northwest Airlines (Northwest) 
by Delta Air Lines (Delta) in 2008, which propelled Delta to become the 
largest airline in the United States. The United-Continental merger, if 
not challenged by the Department of Justice (DOJ), would surpass 
Delta's in scope to create the largest passenger airline in terms of 
capacity in the United States. However, as with any proposed merger of 
this magnitude, this one will be carefully examined by DOJ to determine 
if its potential benefits for consumers outweigh the potential negative 
effects.
    Extensive research and the experience of millions of Americans 
underscore the benefits that have flowed to most consumers from the 
1978 deregulation of the airline industry, including dramatic 
reductions in fares and expansion of service. These benefits are 
largely attributable to increased competition from the entry of new 
airlines into the industry and established airlines into new markets. 
At the same time, however, airline deregulation has not benefited 
everyone; some communities--especially smaller communities--have 
suffered from relatively high airfares and a loss of service. We have 
been analyzing aviation competition issues since the enactment of the 
Airline Deregulation Act of 1978.\1\ Our work over the last decade has 
focused on the challenges to competition and industry performance, 
including the financial health of the airline industry, the growth of 
low-cost airlines, changing business models of airlines, and prior 
mergers.\2\ In the airline context, DOJ has the primary responsibility 
to evaluate most mergers in order to carry out its antitrust 
responsibilities.\3\ In its review, DOJ considers a number of factors, 
including increases in market concentration; potential adverse effects 
on competition; the likelihood of new entry in affected markets and 
possible counteraction of anticompetitive effects that the merger may 
have posed; verified ``merger specific'' efficiencies or other 
competitive benefits; and whether, absent the merger, one of the 
airlines is likely to fail and its assets exit the market.
---------------------------------------------------------------------------
    \1\ Pub. L. No. 95-504, 92 Stat. 1705.
    \2\ A list of related GAO products is attached to this statement.
    \3\ Under the Hart-Scott-Rodino Act, an acquisition of voting 
securities and/or assets above a set monetary amount must be reported 
to DOJ (or the Federal Trade Commission for certain industries) so the 
department can determine whether the merger or acquisition poses any 
antitrust concerns. 15 U.S.C.  18a(d)(1). Both DOJ and the Federal 
Trade Commission have antitrust enforcement authority, including 
reviewing proposed mergers and acquisitions. DOJ is the antitrust 
enforcement authority charged with reviewing proposed mergers and 
acquisitions in the airline industry.
---------------------------------------------------------------------------
    This statement presents: (1) an overview of the factors that are 
driving mergers in the airline industry, (2) the role of Federal 
authorities in reviewing merger proposals, and (3) key issues 
associated with the proposed merger of United and Continental. This 
statement is based on two previously issued reports--our 2008 report 
for this Committee on airline mergers and our 2009 report on the 
financial condition of the airline industry and the various effects of 
the industry's contraction on passengers and communities \4\--as well 
as our other past work on aviation issues. In addition, we conducted 
some analysis of the proposed United and Continental merger, including 
analysis of the airlines' financial, labor, fleet, and market 
conditions.
---------------------------------------------------------------------------
    \4\ GAO, Airline Industry: Potential Mergers and Acquisitions 
Driven by Financial and Competitive Pressures, GAO-08-845 (Washington, 
D.C.: July 31, 2008); and Commercial Aviation: Airline Industry 
Contraction Due to Volatile Fuel Prices and Falling Demand Affects 
Airports, Passengers, and Federal Government Revenues, GAO-09-393 
(Washington, D.C.: Apr. 21, 2009).
---------------------------------------------------------------------------
    To identify the factors that help drive mergers in the airline 
industry, we relied on information developed for our 2008 and 2009 
reports on the airline industry, updated as necessary. To describe the 
role of Federal authorities, in particular DOJ and the Department of 
Transportation (DOT), in reviewing airline merger proposals we relied 
on information developed for our 2008 report, also updated as 
necessary.\5\ To identify the key issues associated with the proposed 
merger of United and Continental, we reviewed airline merger documents 
and financial analyst reports and analyzed data submitted by the 
airlines to DOT (Bureau of Transportation Statistics financial Form 41, 
origin and destination ticket, and operations data). We also analyzed 
airline schedule data. We assessed the reliability of these data by: 
(1) performing electronic testing of required data elements, (2) 
reviewing existing information about the data and the system that 
produced them, and (3) interviewing agency officials knowledgeable 
about the data. We determined that the data were sufficiently reliable 
for the purposes of this report. We conducted this audit work in May 
2010 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives.
---------------------------------------------------------------------------
    \5\ GAO-08-845.
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Background
    On May 3, 2010, United and Continental announced an agreement to 
merge the two airlines. The new airline would retain the United name 
and headquarters in Chicago while the current Continental Chief 
Executive Officer would keep that title with the new airline. The 
proposed merger will be financed exclusively through an all-stock 
transaction with a combined equity value of $8 billion split roughly 
with 55 percent ownership to United shareholders and 45 percent to 
Continental shareholders. The airlines have not announced specific 
plans for changes in their networks or operations that would occur if 
the proposed merger is not challenged by DOJ.
    The airline industry has experienced considerable merger and 
acquisition activity since its early years, especially immediately 
following deregulation in 1978 (fig. 1 provides a timeline of mergers 
and acquisitions for the seven largest surviving airlines). A flurry of 
mergers and acquisitions during the 1980s, when Delta Air Lines and 
Western Airlines merged, United Airlines acquired Pan Am's Pacific 
routes, Northwest acquired Republic Airlines, and American Airlines and 
Air California merged. In 1988, merger and acquisition review authority 
was transferred from the Department of Transportation (DOT) to DOJ. 
Since 1998, despite tumultuous financial periods, fewer mergers and 
acquisitions have occurred. In 2001, American Airlines acquired the 
bankrupt airline TWA, in 2005 America West acquired US Airways while 
the latter was in bankruptcy, and, in October 2008, Delta acquired 
Northwest. Certain other attempts at merging in the last decade failed 
because of opposition from DOJ or from employees and creditors. For 
example, in 2000, an agreement was reached that allowed Northwest to 
acquire a 50 percent stake in Continental (with limited voting power) 
to resolve the antitrust suit brought by DOJ against Northwest's 
proposed acquisition of a controlling interest in Continental.\6\ A 
proposed merger of United Airlines and US Airways in 2000 also resulted 
in opposition from DOJ, which found that, in its view, the merger would 
violate antitrust laws by reducing competition, increasing air fares, 
and harming consumers on airline routes throughout the United States. 
Although DOJ expressed its intent to sue to block the transaction, the 
parties abandoned the transaction before a suit was filed. More 
recently, the 2006 proposed merger of US Airways and Delta fell apart 
because of opposition from Delta's pilots and some of its creditors, as 
well as its senior management.
---------------------------------------------------------------------------
    \6\ GAO, Aviation Competition: Issues Related to the Proposed 
United Airlines-US Airways Merger, GAO-01-212 (Washington, D.C.: Dec. 
15, 2000) p. 10, footnote 6.



    Sources: Cathay Financial and airline company documents.
    Since deregulation in 1978, the financial stability of the airline 
industry has become a considerable concern for the Federal Government 
owing, in part, to the level of financial assistance it has provided to 
the industry by assuming terminated pension plans and other forms of 
assistance. Between 1978 and 2008, there have been over 160 airline 
bankruptcies. While most of these bankruptcies affected small airlines 
that were eventually liquidated, 4 of the more recent bankruptcies 
(Delta, Northwest, United, and US Airways) are among the largest 
corporate bankruptcies ever, excluding financial services firms. During 
these bankruptcies, United and US Airways terminated their pension 
plans and $9.7 billion in claims was shifted to the Pension Benefit 
Guarantee Corporation (PGBC).\7\ Furthermore, to respond to the shock 
to the industry from the September 11, 2001, terrorist attacks, the 
Federal Government provided airlines with $7.4 billion in direct 
assistance and authorized $1.6 billion (of $10 billion available) in 
loan guarantees to six airlines.\8\
---------------------------------------------------------------------------
    \7\ PBGC was established under the Employee Retirement Income 
Security Act of 1974 (ERISA) and set forth standards and requirements 
that apply to defined benefit plans. PBGC was established to encourage 
the continuation and maintenance of voluntary private pension plans and 
to insure the benefits of workers and retirees in defined benefit plans 
should plan sponsors fail to pay benefits. PGBC operations are 
financed, for example, by insurance premiums paid by sponsors of 
defined benefit plans, investment income, assets from pension plans 
trusted by PBGC, and recoveries from the companies formerly responsible 
for the plans.
    \8\ The six airlines receiving loan guarantees were Aloha, World, 
Frontier, US Airways, ATA, and America West.
---------------------------------------------------------------------------
    Although the airline industry has experienced numerous mergers and 
bankruptcies since deregulation, growth of existing airlines and the 
entry of new airlines have contributed to a steady increase in 
capacity, as measured by available seat miles. Previously, we reported 
that although one airline may reduce capacity or leave the market, 
capacity returns relatively quickly.\9\ Likewise, while past mergers 
and acquisitions have, at least in part, sought to reduce capacity, any 
resulting declines in industry capacity have been short-lived, as 
existing airlines have expanded or new airlines have expanded. Capacity 
growth has slowed or declined just before and during recessions, but 
not as a result of large airline liquidations.
---------------------------------------------------------------------------
    \9\ GAO, Commercial Aviation: Bankruptcy and Pensions Problems Are 
Symptoms of Underlying Structural Issues, GAO-05-945 (Washington, D.C.: 
Sept. 30, 2005).
---------------------------------------------------------------------------
Airline Mergers Are Driven by Financial and Competitive Pressures, but 
        Challenges Exist
    Volatile earnings and structural changes in the industry have 
spurred some airlines to explore mergers as a way to increase their 
profitability and financial viability. Over the last decade, the U.S. 
passenger airline industry has incurred more than $15 billion in 
operating losses. Several major airlines went through bankruptcy to 
reduce their costs and restructure their operations, while others 
ceased to operate or were acquired. Most recently, U.S. airlines 
responded to volatile fuel prices and then a weakening economy by 
cutting their capacity, reducing their fleets and work forces, and 
instituting new fees, but even with these actions, the airlines 
experienced over $5 billion in operating losses in 2008 before posting 
an operating profit of about $1 billion in 2009.\10\ Furthermore, over 
the last decade, airfares have generally declined (in real terms), 
owing largely to the increased presence of low-cost airlines, such as 
Southwest Airlines, in more markets and the shrinking dominance of a 
single airline in many markets.
---------------------------------------------------------------------------
    \10\ Collectively, U.S. airlines reduced domestic capacity, as 
measured by the number of seats flown, by about 12 percent from the 
fourth quarter of 2007 to the fourth quarter of 2009. As we reported in 
April 2009, to reduce capacity, airlines reduced the overall number of 
active aircraft in their fleets by eliminating mostly older, less fuel-
efficient, and smaller (50 or fewer seats) aircraft. Airlines also 
collectively reduced their work forces by about 38,000 full-time-
equivalent positions, or about 9 percent, from the first quarter of 
2008 to the first quarter of 2010. In addition to reducing capacity, 
most airlines instituted new fees, such as those for checked baggage, 
which resulted in $3.9 billion in added revenue during 2008 and 2009.
---------------------------------------------------------------------------
    One of the primary financial benefits that airlines consider when 
merging with another airline is the cost reduction that may result from 
combining complementary assets, eliminating duplicative activities, and 
reducing capacity. A merger or acquisition could enable the combined 
airline to reduce or eliminate duplicative operating costs, such as 
duplicative service, labor, and operations costs--including inefficient 
(or redundant) hubs or routes--or to achieve operational efficiencies 
by integrating computer systems and similar airline fleets. Other cost 
savings may stem from facility consolidation, procurement savings, and 
working capital and balance sheet restructuring, such as renegotiating 
aircraft leases. Airlines may also pursue mergers or acquisitions to 
more efficiently manage capacity--both to reduce operating costs and to 
generate revenue--in their networks. Given recent economic pressures, 
particularly increased fuel costs, the opportunity to lower costs by 
reducing redundant capacity may be especially appealing to airlines 
seeking to merge. Experts have said that industry mergers and 
acquisitions could lay the foundation for more rational capacity 
reductions in highly competitive domestic markets and could help 
mitigate the significant impact that economic cycles have historically 
had on airline cash-flow.
    The other primary financial benefit that airlines consider with 
mergers and acquisitions is the potential for increased revenues 
through additional demand, which may be achieved by more seamless 
travel to more destinations and increased market share and higher fares 
on some routes.

   Increased demand from an expanded network: An airline may 
        seek to merge with or acquire an airline as a way to generate 
        greater revenues from an expanded network, which serves more 
        city-pair markets and better serves passengers. Mergers and 
        acquisitions may generate additional demand by providing 
        consumers more domestic and international city-pair 
        destinations. Airlines with expansive domestic and 
        international networks and frequent flier benefits particularly 
        appeal to business traffic, especially corporate accounts. 
        Results from a recent Business Traveler Coalition (BTC) survey 
        indicate that about 53 percent of the respondents were likely 
        to choose a particular airline based on the extent of its route 
        network.\11\ Therefore, airlines may use a merger or 
        acquisition to enhance their networks and gain complementary 
        routes, potentially giving the combined airline a stronger 
        platform from which to compete in highly profitable markets.
---------------------------------------------------------------------------
    \11\ Respondents were travel managers responsible for negotiating 
and managing their firms' corporate accounts.

   Increased market share and higher fares on some routes: 
        Capacity reductions in certain markets after a merger could 
        also serve to generate additional revenue through increased 
        fares on some routes. Some studies of airline mergers and 
        acquisitions during the 1980s showed that prices were higher on 
        some routes from the airline's hubs soon after the combination 
        was completed.\12\ Several studies have also shown that 
        increased airline dominance at an airport results in increased 
        fare premiums, in part because of competitive barriers to 
        entry.\13\ At the same time, though, even if the combined 
        airline is able to increase prices in some markets, the 
        increase may be transitory if other airlines enter the markets 
        with sufficient presence to counteract the price increase. In 
        an empirical study of airline mergers and acquisitions up to 
        1992, Winston and Morrison suggest that being able to raise 
        prices or stifle competition does not play a large role in 
        airlines' merger and acquisition decisions.\14\
---------------------------------------------------------------------------
    \12\ See Severin Borenstein, ``Airline Mergers, Airport Dominance, 
and Market Power,'' American Economic Review, Vol. 80, May 1990, and 
Steven A. Morrison, ``Airline Mergers: A Longer View,'' Journal of 
Transport Economics and Policy, September 1996; and Gregory J. Werden, 
Andrew J. Joskow, and Richard L. Johnson, ``The Effects of Mergers on 
Price and Output: Two Case Studies from the Airline Industry,'' 
Managerial and Decision Economics, Vol. 12, October 1991.
    \13\ See Severin Borenstein, 1989, ``Hubs and High Fares: Dominance 
and Market Power in the U.S. Airline Industry,'' RAND Journal of 
Economics, 20, 344-365; GAO, Airline Deregulation: Barriers to Entry 
Continue to Limit Competition in Several Key Markets, GAO/RCED-97-4 
(Washington, D.C.: Oct. 18, 1996); GAO, Airline Competition: Effects of 
Airline and Market Concentration and Barriers to Entry on Airfares, 
GAO/RCED-91-101 (Washington, D.C.: Apr. 16, 1991).
    \14\ See Steven A. Morrison, and Clifford Winston, ``The Remaining 
Role for Government Policy in the Deregulated Airline Industry.'' 
Deregulation of Network Industries: What's Next? Sam Peltzman and 
Clifford Winston, eds. Washington, D.C., Brookings Institution Press, 
2000 pp. 1-40.

    Cost reductions and the opportunity to obtain increased revenue 
        could bolster a merged airline's financial condition, enabling 
        the airline to better compete in a highly competitive 
        international environment. Many industry experts believe that 
        the United States will need larger, more economically stable 
        airlines to be able to compete with the merging and larger 
        foreign airlines that are emerging in the global economy. The 
        airline industry is becoming increasingly global; for example, 
        the Open Skies agreement between the United States and the 
        European Union became effective in March 2008.\15\
---------------------------------------------------------------------------
    \15\ Open Skies seeks to enable greater access of U.S. airlines to 
Europe, including expanded rights to pick up traffic in one country in 
Europe and carry it to another European or third country (referred to 
as fifth freedom rights). Additionally, the United States will expand 
EU airlines' rights to carry traffic from the United States to other 
countries.

    Despite these benefits, there are several potential barriers to 
        successfully consummating a merger. The most significant 
        operational challenges involve the integration of work forces, 
        aircraft fleets, and information technology systems and 
        processes, which can be difficult, disruptive, and costly as 
        the airlines integrate.\16\
---------------------------------------------------------------------------
    \16\ Airlines also face potential challenges to mergers and 
acquisitions from DOJ's antitrust review, which is discussed in the 
next section.

   Workforce integration: Workforce integration is often 
        particularly challenging and expensive and involves negotiation 
        of new labor contracts. Labor groups--including pilots, flight 
        attendants, and mechanics--may be able to demand concessions 
        from the merging airlines during these negotiations, several 
        experts explained, because labor support would likely be 
        required for a merger or acquisition to be successful. Some 
        experts also note that labor has often opposed mergers, fearing 
        employment or salary reductions. Obtaining agreement from each 
        airline's pilots' union on an integrated pilot seniority list--
        which determines pilots' salaries, as well as what equipment 
        they can fly--may be particularly difficult. According to some 
        experts, as a result of these labor integration issues and the 
        challenges of merging two work cultures, airline mergers have 
        generally been unsuccessful. For example, although the 2005 
        America West-US Airways merger has been termed a successful 
        merger by many industry observers, labor disagreements over 
        employee seniority, and especially pilot seniority, are not 
        fully resolved. More recently, labor integration issues 
        derailed merger talks--albeit temporarily--between Northwest 
        and Delta in early 2008, when the airlines' labor unions were 
        unable to agree on pilot seniority list integration. 
        Furthermore, the existence of distinct corporate cultures can 
        influence whether two firms will be able to merge their 
        operations successfully. For example, merger discussions 
        between United and US Airways broke down in 1995 because the 
        employee-owners of United feared that the airlines' corporate 
---------------------------------------------------------------------------
        cultures would clash.

   Fleet integration: The integration of two disparate aircraft 
        fleets may also be costly. Combining two fleets may increase 
        costs associated with pilot training, maintenance, and spare 
        parts. These costs may, however, be reduced after the merger by 
        phasing out certain types of aircraft from the fleet mix. 
        Pioneered by Southwest Airlines and copied by other low-cost 
        airlines, simplified fleets have enabled airlines to lower 
        costs by streamlining maintenance operations and reducing 
        training times. If an airline can establish a simplified fleet, 
        or ``fleet commonality''--particularly by achieving an 
        efficient scale in a particular aircraft--then many of the cost 
        efficiencies of a merger or acquisition may be set in motion by 
        facilitating pilot training, crew scheduling, maintenance 
        integration, and inventory rationalization.

   Information technology integration: Finally, integrating 
        information technology processes and systems can also be 
        problematic and time-consuming after a merger. For example, 
        officials at US Airways told us that while some cost reductions 
        were achieved within 3 to 6 months of its merger with America 
        West, the integration of information technology processes took 
        nearly 2\1/2\ years. Systems integration issues are 
        increasingly daunting as airlines attempt to integrate a 
        complex mix of modern in-house systems, dated mainframe 
        systems, and outsourced information technology. The US Airways-
        America West merger highlighted the potential challenges 
        associated with combining reservation systems, as there were 
        initial integration problems.

The Department of Justice's Antitrust Review Is a Critical Step in the 
        Airline Merger and Acquisition Process
    DOJ's review of airline mergers and acquisitions is a key step for 
airlines hoping to consummate a merger. For airlines, as with other 
industries, DOJ uses an analytical framework set forth in the 
Horizontal Merger Guidelines (the Guidelines) to evaluate merger 
proposals.\17\ In addition, DOT plays an advisory role for DOJ and, if 
the combination is consummated, may conduct financial and safety 
reviews of the combined entity under its regulatory authority.
---------------------------------------------------------------------------
    \17\ The Guidelines were jointly developed by DOJ's Antitrust 
Division and the Federal Trade Commission and describe the inquiry 
process the two agencies follow in analyzing proposed mergers. The most 
current version of the Guidelines was issued in 1992; Section 4, 
relating to efficiencies, was revised in 1997. DOJ has proposed some 
changes in the Guidelines to better reflect its merger review process 
and the public comment period on these changes has been extended to 
June 4, 2010.
---------------------------------------------------------------------------
    Most proposed airline mergers or acquisitions must be reviewed by 
DOJ as required by the Hart-Scott-Rodino Act. In particular, under the 
act, an acquisition of voting securities or assets above a set monetary 
amount must be reported to DOJ (or the Federal Trade Commission (FTC) 
for certain industries) so the department can determine whether the 
merger or acquisition poses any antitrust concerns.\18\ To analyze 
whether a proposed merger or acquisition raises antitrust concerns--
whether the proposal will create or enhance market power or facilitate 
its exercise \19\--DOJ follows an integrated five-part analytical 
process set forth in the Guidelines.\20\ First, DOJ defines the 
relevant product and geographic markets in which the companies operate 
and determines whether the merger is likely to significantly increase 
concentration in those markets. Second, DOJ examines potential adverse 
competitive effects of the merger, such as whether the merged entity 
will be able to charge higher prices or restrict output for the product 
or service it sells. Third, DOJ considers whether other competitors are 
likely to enter the affected markets and whether they would counteract 
any potential anticompetitive effects that the merger might have posed. 
Fourth, DOJ examines the verified ``merger specific'' efficiencies or 
other competitive benefits that may be generated by the merger and that 
cannot be obtained through any other means. Fifth, DOJ considers 
whether, absent the merger or acquisition, one of the firms is likely 
to fail, causing its assets to exit the market. The commentary to the 
Guidelines makes clear that DOJ does not apply the Guidelines as a 
step-by-step progression, but rather as an integrated approach in 
deciding whether the proposed merger or acquisition would create 
antitrust concerns.
---------------------------------------------------------------------------
    \18\ See 15 U.S.C.  18a(d)(1). Both DOJ and FTC have antitrust 
enforcement authority, including reviewing proposed mergers and 
acquisitions. DOJ is the antitrust enforcement authority charged with 
reviewing proposed mergers and acquisitions in the airline industry. 
Additionally, under the Hart-Scott-Rodino Act, DOJ has 30 days after 
the initial filing to notify companies that intend to merge whether DOJ 
requires additional information for its review. If DOJ does not request 
additional information, the firms can close their deal (15 U.S.C.  
18a(b)). If more information is required, however, the initial 30-day 
waiting period is followed by a second 30-day period, which starts to 
run after both companies have provided the requested information. 
Companies often attempt to resolve DOJ competitive concerns, if 
possible, before the second waiting period expires. Any restructuring 
of a transaction--e.g., through a divestiture--is included in a consent 
decree entered by a court, unless the competitive problem is 
unilaterally fixed by the parties before the waiting period expires 
(called a ``fix-it first'').
    \19\ Market power is the ability to maintain prices profitably 
above competitive levels for a significant period of time.
    \20\ United States Department of Justice and Federal Trade 
Commission, Horizontal Merger Guidelines (Washington, D.C., rev. Apr. 
8, 1997).
---------------------------------------------------------------------------
    In deciding whether the proposed merger is likely anticompetitive 
DOJ considers the particular circumstances of the merger as it relates 
to the Guidelines' five-part inquiry. The greater the potential 
anticompetitive effects, the greater must be the offsetting verifiable 
efficiencies for DOJ to clear a merger. However, according to the 
Guidelines, efficiencies almost never justify a merger if it would 
create a monopoly or near monopoly. If DOJ concludes that a merged 
airline threatens to deprive consumers of the benefits of competitive 
air service, then it will seek injunctive relief in a court proceeding 
to block the merger from being consummated. In some cases, the parties 
may agree to modify the proposal to address anticompetitive concerns 
identified by DOJ--for example, selling airport assets or giving up 
slots at congested airports--in which case DOJ ordinarily files a 
complaint with the court along with a consent decree that embodies the 
agreed-upon changes.
    DOT conducts its own analyses of airline mergers and acquisitions. 
While DOJ is responsible for upholding antitrust laws, DOT conducts its 
own competitive analysis and provide it to DOJ in an advisory capacity. 
DOT reviews the merits of any airline merger or acquisition and submits 
its views and relevant information in its possession to DOJ. DOT also 
provides some essential data that DOJ uses in its review. In addition, 
presuming the merger moves forward after DOJ review, DOT can undertake 
several other reviews if the situation warrants. Before commencing 
operations, any new, acquired, or merged airlines must obtain separate 
authorizations from DOT--``economic'' authority from the Office of the 
Secretary and ``safety'' authority from the Federal Aviation 
Administration (FAA). The Office of the Secretary is responsible for 
deciding whether applicants are fit, willing, and able to perform the 
service or provide transportation. To make this decision, the Secretary 
assesses whether the applicants have the managerial competence, 
disposition to comply with regulations, and financial resources 
necessary to operate a new airline. FAA is responsible for certifying 
that the aircraft and operations conform to the safety standards 
prescribed by the Administrator--for instance, that the applicants' 
manuals, aircraft, facilities, and personnel meet Federal safety 
standards. Also, if a merger or other corporate transaction involves 
the transfer of international route authority, DOT is responsible for 
assessing and approving all transfers to ensure that they are 
consistent with the public interest.\21\
---------------------------------------------------------------------------
    \21\ 49 U.S.C.  41105. DOT must specifically consider the transfer 
of certificate authority's impact on the financial viability of the 
parties to the transaction and on the trade position of the United 
States in the international air transportation market, as well as on 
competition in the domestic airline industry.
---------------------------------------------------------------------------
In Creating the Largest U.S. Passenger Airline, a United-Continental 
        Merger May Face Integration Challenges and Analysis of Some 
        Overlapping Markets
    If not challenged by DOJ, the merged United-Continental would 
surpass Delta as the largest U.S. passenger airline. As table 1 
indicates, combining United and Continental Airlines would create the 
largest U.S. airline based on 2009 capacity as measured by available 
seat miles, and a close second based on total assets and operating 
revenue. The combined airline would also have the largest workforce 
among U.S. airlines based on March 2010 employment statistics, with a 
combined 76,900 employees as measured by full-time-equivalent employees 
(table 2). The airlines' work forces are represented by various unions, 
and in some cases the same union represents similar employee groups, 
such as the union for the pilots (table 3). Finally, the combined 
airline would need to integrate 692 aircraft (table 4). The two 
airlines share some of the same aircraft types, which could make 
integration easier.



----------------------------------------------------------------------------------------------------------------



              Table 1.--Total Assets, Operating Revenue, and Capacity of Major U.S. Airlines (2009)
----------------------------------------------------------------------------------------------------------------
                                                    Capacity as measured by
                                                     available seat miles       Total assets    Total operating
                                                          (thousands)                               revenue
----------------------------------------------------------------------------------------------------------------
United-Continental                                                217,166,074    $125,742,402        $28,720,624
----------------------------------------------------------------------------------------------------------------
Delta                                                             197,701,800     195,546,148         28,909,882
----------------------------------------------------------------------------------------------------------------
American                                                          151,772,113      89,629,364         19,898,245
----------------------------------------------------------------------------------------------------------------
Southwest                                                          98,170,797      55,190,553         10,350,338
----------------------------------------------------------------------------------------------------------------
US Airways                                                         70,721,007      28,901,241         10,780,838
----------------------------------------------------------------------------------------------------------------
AirTran                                                            23,304,612       8,649,482          2,341,442
----------------------------------------------------------------------------------------------------------------
Alaska                                                             23,148,960      18,045,385          3,005,999
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of Bureau of Transportation Statistics Form 41 data.




----------------------------------------------------------------------------------------------------------------



                   Table 2.--Full-Time-Equivalent Employees of Top U.S. Airlines (March 2010)
----------------------------------------------------------------------------------------------------------------
    Rank        Airline                       Total full-time-equivalent employees (thousands)
----------------------------------------------------------------------------------------------------------------
1            Delta                                                                                          74.7
----------------------------------------------------------------------------------------------------------------
2            Americana                                                                                      75.2
----------------------------------------------------------------------------------------------------------------
3            United                                                                                         43.7
----------------------------------------------------------------------------------------------------------------
4            Southwest                                                                                      34.6
----------------------------------------------------------------------------------------------------------------
5            Continental                                                                                    33.2
----------------------------------------------------------------------------------------------------------------
6            US Airways                                                                                     29.5
----------------------------------------------------------------------------------------------------------------
7            JetBlue                                                                                        11.2
----------------------------------------------------------------------------------------------------------------
8            Alaska                                                                                          9.2
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of Bureau of Transportation Statistics data.
a Includes American Eagle.




----------------------------------------------------------------------------------------------------------------



                           Table 3.--Union Representation for Various Employee Groups
----------------------------------------------------------------------------------------------------------------
                                                                  Employee groups
                                  ------------------------------------------------------------------------------
                       Pilots                                             Public contact,
                                        Flight           Mechanics        ramp and stores,       Dispatchers
                                      attendants                         and other workers
----------------------------------------------------------------------------------------------------------------
United             Air Line        Association of    International      International        Professional
                    Pilots          Flight            Brotherhood of     Association of       Airline
                    Association     Attendants        Teamsters (IBT)    Machinists (IAM)    Flight Control
                    (ALPA)          (AFA)                                                    Association (PAFCA)
----------------------------------------------------------------------------------------------------------------



                                      Flight                           Fleet        Ticket
                      Pilots        attendants       Mechanics        service       agents        Dispatchers
----------------------------------------------------------------------------------------------------------------
Continental        ALPA          IAM              IBT              IBT           Nonunion      Transport Workers
                                                                                                Union (TWU)
----------------------------------------------------------------------------------------------------------------
Source: United Air Lines and Continental Airlines.
Note: In addition, The International Federation of Professional and Technical Engineers (IFPTE) represent more
  than 260 United engineers and related employees.




------------------------------------------------------------------------



             Table 4.--United and Continental Aircraft Fleet
------------------------------------------------------------------------
               Aircraft                  United    Continental    Merged
------------------------------------------------------------------------
Boeing 737                                                  226      226
------------------------------------------------------------------------
Boeing 747                                   24                       24
------------------------------------------------------------------------
Boeing 757                                   96              61      157
------------------------------------------------------------------------
Boeing 767                                   35              26       61
------------------------------------------------------------------------
Boeing 777                                   52              20       72
------------------------------------------------------------------------
Airbus 319/320                              152                      152
------------------------------------------------------------------------
Total                                       359             333      692
------------------------------------------------------------------------
Source: United Air Lines.

    If not challenged by DOJ, the airlines would attempt to combine two 
distinct networks, United with major hubs, where the airline connects 
traffic feeding from smaller airports, in San Francisco (SFO), Los 
Angeles (LAX), Denver (DEN), Chicago O'Hare (ORD), and Washington DC 
Dulles (IAD) and Continental with hubs in Houston Intercontinental 
(IAH), Cleveland (CLE), Guam (GUM), and New York Newark (EWR), as shown 
in figure 2.



    Source: agpDat, Diio LLC.

    The amount of overlap in airport-pair combinations between the two 
airlines' networks is considerable if considering all connecting 
traffic; however, for most of the overlapping airport-pair markets 
there is at least one other competitor. Based on 2009 ticket sample 
data, for 13,515 airport pairs with at least 520 passengers per year, 
there would be a loss of one effective competitor in 1,135 airport-pair 
markets \22\ affecting almost 35 million passengers by merging these 
airlines (see fig. 3).\23\ However, only 10 of these airport-pair 
markets would not have any other competitors in it after a merger. In 
addition, any effect on fares would be dampened by the presence of a 
low-cost airline in 431 of the 1,135 airport pairs losing a 
competitor.\24\ The combination of the two airlines would also create a 
new effective competitor in 173 airport-pair markets affecting almost 
9.5 million passengers.
---------------------------------------------------------------------------
    \22\ It is generally preferable, time permitting, to assess city-
pair, rather than airport-pair, changes in competition. Some larger 
U.S. cities (New York, Chicago, Los Angeles, Washington, D.C.) have 
more than one commercial airport that can compete for passenger 
traffic. DOJ generally considers the relevant market to be a city-pair 
combination.
    \23\ For this airport-pair analysis, we considered any airport-pair 
market with less than 520 annual passengers to be too small to ensure 
accuracy. We defined an effective competitor as having at least 5 
percent of total airport-pair traffic. This is the same minimum market 
share that we have previously applied to assess whether an airline has 
sufficient presence in a market to affect competition. See GAO-08-845, 
p. 21 and 42.
    \24\ We defined low-cost airlines as JetBlue, Frontier/Midwest, 
AirTran, Allegiant, Spirit, Sun Country, and Southwest.



    Source: GAO Analysis of DOT Origin and Destination Ticket Data.
    Note: All origin and destination airport pairs with at least 520 
passengers. A competitor holds at least 5 percent of market share.

    In examining nonstop overlapping airport pairs between United and 
Continental, the extent of overlap is less than for connecting traffic. 
However, the loss of a competitor in these nonstop markets is also more 
significant because nonstop service is typically preferred by some 
passengers. For example, based on January 2010 traffic data, the two 
airlines overlap on 12 nonstop airport-pair routes, which are listed in 
figure 4.\25\ For 7 of these 12 nonstop overlapping airport-pair routes 
(generally between a United hub and a Continental hub), there are 
currently no other competitors. However, of these 7 airport-pair 
markets, all but the Cleveland-Denver market may have relevant 
competition between other airports in at least one of the endpoint 
cities. For example, passengers traveling from San Francisco (SFO) to 
Newark (EWR) could consider airlines serving other airports at both 
endpoints--Oakland or San Jose instead of SFO and John F. Kennedy (JFK) 
or LaGuardia instead of EWR.
---------------------------------------------------------------------------
    \25\ In March 2010, Continental initiated nonstop service between 
Los Angeles (LAX) and Kahului Airport (OGG) in Hawaii, which is also 
served by United. This compares to 12 nonstop overlaps (7 highly 
concentrated) in the Delta-Northwest merger.



---------------------------------------------------------------------------
    Source: DOT T-100 data.

    If not challenged by DOJ, the combined airline could be expected to 
rationalize its network over time, including where it maintains hubs. 
Currently, the two airlines do not have much market share that overlaps 
at their respective hubs (see table 5). However, it is uncertain 
whether the combined airline would retain eight domestic hubs. There is 
considerable overlap between markets served by United out of Chicago 
(ORD) and Continental out of Cleveland (CLE). For example, 52 out of 62 
domestic airports served by Continental from Cleveland are also served 
by United from Chicago (ORD).



------------------------------------------------------------------------



         Table 5.--Passenger Market Share at Hub Airports (2009)
------------------------------------------------------------------------
   Continental hub     Continental     United hub       United     Total
      airports          share (%)       airports      share (%)     (%)
------------------------------------------------------------------------
Houston (IAH)                   72                             5      77
-----------------------------------                 --------------------
Newark (EWR)                    68                             5      73
-----------------------------------                 --------------------
Cleveland (CLE)                 53                             6      59
------------------------------------------------------------------------
                                 1  Washington                51      52
                                     Dulles (IAD)
                     ---------------------------------------------------
                                 4  Chicago (ORD)             38      42
                     ---------------------------------------------------
                                 6  San Francisco             33      39
                                     (SFO)
                     ---------------------------------------------------
                                 4  Denver (DEN)              29      33
                     ---------------------------------------------------
                                 6  Los Angeles               17      23
                                     (LAX)
------------------------------------------------------------------------
Source: GAO analysis of DOT Origin and Destination ticket data.

    Both United and Continental have extensive worldwide networks and 
serve many international destinations. Between the two airlines, over 
100 international cities are served from the United States. The two 
airlines do not directly compete on a city-to-city route basis for any 
international destinations. Nevertheless, for international routes, 
airlines aggregate traffic from many domestic locations at a hub 
airport where passengers transfer onto international flights. In other 
words, at Newark, where Continental has a large hub, passengers 
traveling from many locations across the United States onto 
Continental's international flights. Likewise, United aggregates 
domestic traffic at its Washington Dulles hub for many of its 
international flights. Hence, a passenger traveling from, for example 
Nashville, may view these alternative routes to a location in Europe as 
substitutable. Continental and United serve many of the same 
international destinations in Europe and the Americas from their Newark 
and Dulles hubs, respectively. These destinations include Amsterdam, 
Brussels, Frankfort, London, Montreal, Paris, Rome, Sao Paulo, and 
Toronto. Similarly, both airlines also serve many international 
destinations from their Midwest hubs--most notably United's hub at 
Chicago and Continental's hub at Houston. Such destinations include: 
Amsterdam, Cancun, Edmonton, London, Paris, San Jose Cabo, Tokyo, and 
Vancouver. In total, according to current schedules, they serve 30 
common international destinations, representing 65 percent of their 
total international seat capacity. Whether service to international 
destinations from different domestic hubs will be viewed as a 
competitive concern will likely depend on a host of factors, such as 
the two airlines' market share of traffic to that destination and 
whether there are any barriers to new airlines entering or existing 
airlines expanding service at the international destination airports.
    To compete internationally, both Continental and United are part of 
the Star Alliance, one of the three major international airline 
alliances.\26\ In 2009, Continental left the SkyTeam Alliance and 
joined the Star Alliance. As part of joining this alliance, the Star 
Alliance members, including Continental, applied for antitrust 
immunity, which allows the member airlines to coordinate schedules, 
capacity, and pricing in selected markets. DOT has authority to approve 
these antitrust immunity applications,\27\ but DOJ may also comment if 
it has antitrust concerns. On June 26, DOJ filed comments that objected 
to immunity for the alliance in some markets and requested some 
conditions, called carve-outs, in which the immunity would not be 
granted. On July 10, 2009, DOT approved the Star Alliance application 
for antitrust immunity but with special conditions, including carve-
outs.\28\ Among the markets not granted immunity were New York-
Copenhagen, New York-Lisbon, New York-Geneva, New York-Stockholm, 
Cleveland-Toronto, Houston-Calgary, Houston-Toronto, New York-Ottawa, 
and U.S.-Beijing.\29\
---------------------------------------------------------------------------
    \26\ An airline alliance is an agreement between two or more 
airlines to cooperate on a substantial level. The three largest 
passenger airline alliances are the Star Alliance, SkyTeam and 
Oneworld. Alliances provide a network of connectivity and convenience 
for international passengers. Alliances also provide a marketing brand 
to passengers making interairline code-share connections within 
countries.
    \27\ 49 U.S.C.  41308, 41309.
    \28\ Department of Transportation, Joint Application of Air Canada, 
et al., Final Order, to Amend Order 2007-2-16 under 49 U.S.C.  41308, 
41309, DOT-OST-2008-0234 (July 10, 2009).
    \29\ In addition, the order modified and placed conditions on pre-
existing carve outs for this alliance.
---------------------------------------------------------------------------
Related GAO Products
    Airline Industry: Airline Industry Contraction Due to Volatile Fuel 
Prices and Falling Demand Affects Airports, Passengers, and Federal 
Government Revenues. GAO-09-393. Washington, D.C.: April 21, 2009.
    Airline Industry: Potential Mergers and Acquisitions Driven by 
Financial Competitive Pressures. GAO-08-845. Washington, D.C.: July 31, 
2008.
    Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms 
of Underlying Structural Issues. GAO-05-945. Washington, D.C.: 
September 30, 2005.
    Commercial Aviation: Preliminary Observations on Legacy Airlines' 
Financial Condition, Bankruptcy, and Pension Issues. GAO-05-835T. 
Washington, D.C.: June 22, 2005.
    Airline Deregulation: Reregulating the Airline Industry Would 
Likely Reverse Consumer Benefits and Not Save Airline Pensions. GAO-06-
630. Washington, D.C.: June 9, 2005.
    Private Pensions: Airline Plans' Underfunding Illustrates Broader 
Problems with the Defined Benefit Pension System. GAO-05-108T. 
Washington, D.C.: October 7, 2004.
    Commercial Aviation: Legacy Airlines Must Further Reduce Costs to 
Restore Profitability. GAO-04-836. Washington, D.C.: August 11, 2004.
    Transatlantic Aviation: Effects of Easing Restrictions on U.S.-
European Markets. GAO-04-835. Washington, D.C.: July 21, 2004.
    Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines 
Are Growing and Profitable. GAO-04-837T. Washington, D.C.: June 3, 
2004.
    Commercial Aviation: Financial Condition and Industry Responses 
Affect Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.
    Commercial Aviation: Air Service Trends at Small Communities Since 
October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.
    Proposed Alliance Between American Airlines and British Airways 
Raises Competition Concerns and Public Interest Issues. GAO-02-293R. 
Washington, D.C.: December 21, 2001.
    Aviation Competition: Issues Related to the Proposed United 
Airlines-US Airways Merger. GAO-01-212. Washington, D.C.: December 15, 
2000.
                                 ______
                                 
  Prepared Statement of David Cush, President and CEO, Virgin America 
                                  Inc.

    Thank you, Chairman Rockefeller, Ranking Member Hutchison, and 
other distinguished members of the Committee, for the opportunity to 
present this written testimony. My name is David Cush and I am the 
President and CEO of Virgin America Inc., a new, California-based low-
fare airline which began operations in August 2007. Currently, Virgin 
America serves San Francisco (SFO), Los Angeles (LAX), New York (JFK), 
Washington, D.C. (IAD), Seattle (SEA), Las Vegas (LAS), San Diego 
(SAN), Boston (BOS) and Fort Lauderdale (FLL). On June 23, 2010, we 
will inaugurate service to Toronto Canada (YYZ) and, in the fourth 
quarter of 2010, Orlando (MCO).
    Virgin America employs more than 1,500 full-time aviation 
professionals throughout the United States, and presently operates a 
fuel efficient fleet of 28 Airbus A320 family aircraft, with plans to 
operate a fleet of up to 44 aircraft by next year. In less than 4 years 
since its launch, Virgin America has captured a host of travel industry 
best-in-class awards, including ``Best Domestic Airline'' by Conde Nast 
Traveler for two consecutive years and ``Best Domestic Airline'' in 
Travel & Leisure World's Best Awards for two consecutive years.
    The proposed merger between United and Continental would create the 
world's largest airline by most measures. This combination presents 
several important public policy issues including, most particularly, 
its effect on competition. How consumers ultimately fare after such a 
merger will largely depend on the ability of those airlines remaining 
in the marketplace to compete effectively with the merged entity. Among 
the issues that will determine whether other airlines will be able to 
provide an effective competitive alternative are access to: (1) those 
airports where the combined entity will have a significant presence and 
(2) corporate travelers who the merged airline, with significantly 
increased capacity and an enhanced route network, will pursue more 
aggressively through corporate discount agreements.
Airport Access
    Turning initially to airport access, market entry by low-fare 
airlines is an essential component for airline competition and the key 
to sustained growth in the industry. Beginning with the Department of 
Transportation's (DOT) groundbreaking 1993 report on the ``Southwest 
Effect,'' \1\ several studies have documented the power of low-fare 
airlines to stimulate aggressive price competition and dramatically 
increase total passenger enplanements after entering a market. 
Moreover, low-fare airlines have a proven track record of creating jobs 
while their legacy network peers have shed positions. According to the 
latest DOT data, the number of full-time employees at low-fare airlines 
grew by more than 14 percent between 2006 and 2010, while the number of 
full-time employees at network legacy airlines shrank by more than 4 
percent.\2\
---------------------------------------------------------------------------
    \1\ U.S. Department of Transportation, The Airline Deregulation 
Evolution Continues: The Southwest Effect (1993), available at http://
ostpxweb.dot.gov/aviation/domesticaffairs.htm.
    \2\ U.S. Department of Transportation, Bureau of Transportation 
Statistics, March 2010 Passenger Airline Employment Down 3.8 Percent 
from March 2009 (May 18, 2010), available at http://www.bts.gov/
press_releases/2010/bts024_10/pdf/bts024_10.pdf.
---------------------------------------------------------------------------
    Nevertheless, the competitive benefits of low-fare market entry are 
limited at a number of airports because of slot controls and 
difficulties securing gates. Although lack of access to airport 
terminal facilities may prove difficult, it can usually be overcome. 
The inability to secure scarce slots and gates, on the other hand, acts 
as an absolute barrier to entry that prevents low-fare airlines from 
providing more choices and lower prices to consumers. This is 
especially the case at several New York area airports and, in Virgin 
America's own experience, Chicago's O'Hare International Airport.
    By way of background, the Federal Aviation Administration (FAA) has 
long utilized a system of slots to manage congestion and delays at 
airports where demand at peak travel times significantly exceeds 
airport capacity. However, as set forth in the High Density Rule (the 
mechanism by which the FAA historically allocated and administered 
slots), it was well settled that ``slots do not represent a property 
right but represent an operating privilege subject to absolute FAA 
control . . .'' 14 CFR  93.223(a).
    The High Density Rule used to be in effect but was eventually 
rescinded at each of the three major New York area airports--JFK, 
Newark and LaGuardia. Between 2006 and 2008 however, following 
overscheduling by airlines and extensive delays, the DOT/FAA issued a 
number of orders re-imposing a system of caps and slots at each of 
these airports, limiting the number of hourly operations and preventing 
airlines from adding new flights during peak periods. These controls 
continue in place today, even though they were imposed as a short-term 
solution to mitigate delays and congestion, with the initial allocation 
of slots based on historic operations at each airport. Consequently, 
the incumbent airlines at these airports have had their large slot 
bases ``grandfathered,'' while new entrants and limited incumbents are 
now limited to whatever relatively low capacity levels they were 
providing during the base period used for the initial allocation of 
slots. Market shares at New York area airports are, therefore, 
concentrated among only a handful of airlines.
    For example, at Newark, one airline--Continental--accounts for more 
than 70 percent of all passenger enplanements and controls most of the 
terminal space and gates at that airport.\3\ Similarly, at JFK, three 
airlines--Delta, JetBlue, and American--account for nearly 66 percent 
of all passenger enplanements; \4\ and at nearby LaGuardia, three 
airlines--Delta, American, and US Airways--control about 70 percent of 
all passenger enplanements.\5\ This concentration of a few airlines 
dominating the U.S.'s largest airline market is a direct result of the 
system of slot controls.
---------------------------------------------------------------------------
    \3\ Port Authority of New York & New Jersey, Newark March 2010 
Traffic Report, available at http://www.panynj.gov/airports/general-
information.html.
    \4\ Port Authority of New York & New Jersey, JFK March 2010 Traffic 
Report, available at http://www.panynj.gov/airports/general-
information.html.
    \5\ Port Authority of New York & New Jersey, LaGuardia March 2010 
Traffic Report, available at http://www.panynj.gov/airports/general-
information.html.
---------------------------------------------------------------------------
    Even before the DOT/FAA imposed the current system of slot controls 
at New York area airports, one airline, JetBlue, received--at no cost--
75 slot exemptions for use at JFK during the controlled period (3 p.m.-
8 p.m.) when the High Density Rule was in effect at that airport. It 
was only after receiving these slot exemptions in 1999 that JetBlue was 
able to very quickly buildup its JFK operations. Although the High 
Density Rule was eventually terminated at JFK, the slots that were 
``grandfathered'' to JetBlue at JFK in 2008 included JetBlue's historic 
operation of these 75 slot exemptions. More recently, JetBlue reached a 
deal to trade 12 slots to American in return for slots at Washington's 
Reagan National--effectively monetizing the windfall that JetBlue was 
awarded in 1999 and controlling its competition at JFK. In a similar 
fashion, Continental last year acquired all 10 of AirTran's slots at 
Newark (where Continental was and continues to be the dominant airline) 
in return for four slots at LaGuardia and six slots at Reagan National. 
As with the example of JetBlue at JFK, the Newark slots that AirTran 
traded to Continental did not have any value to the participants until 
the Federal Government recently created them. However, given that slots 
are a scarce commodity allocated free-of-charge by the Federal 
Government, an airline that did not incur any costs when it initially 
received the underlying slots in the first instance, such as JetBlue at 
JFK and AirTran at Newark, should not now be permitted to trade the 
slots in order to receive a financial benefit, i.e., ``free'' access to 
airports such as Reagan National, which continues to be subject to the 
High Density Rule and where access is generally only available through 
purchases made under the Buy/Sell rule \6\ or Congressionally-created 
exemptions from slot controls.
---------------------------------------------------------------------------
    \6\ The Buy/Sell Rule is codified at 14 CFR  91.221.
---------------------------------------------------------------------------
    Meanwhile, at Chicago's O'Hare International Airport, only two 
airlines--American and United--now account for nearly 80 percent of 
passenger enplanements.\7\ Although slot controls at that airport were 
lifted in 2008 following the opening of a new runway, new entrants have 
effectively been shut out of the airport because of the shortage of 
gates. This barrier has been exacerbated by the unwillingness of 
American and United to relinquish gates to competitors. Indeed, Virgin 
America's long-standing interest in starting service at Chicago's 
O'Hare International Airport has been repeatedly blocked by our 
inability to obtain access to gates at the airport. By holding long 
term leases to valuable gates, the incumbents have reduced the supply 
of O'Hare gates, and are thereby able to pick and choose their 
competition.
---------------------------------------------------------------------------
    \7\ U.S. Department of Transportation, Bureau of Transportation 
Statistics, Airport Snapshots, February 2010, available at http://
www.transtats.bts.gov/airports.asp.
---------------------------------------------------------------------------
    Unfortunately, given existing slot controls in the New York area, 
Virgin America has not been able to grow its New York service above the 
level provided when the airline launched operations there in 2007. 
Similarly, Virgin America has effectively been shut out of Chicago's 
O'Hare International Airport for the reasons discussed above.
    Airport access is further hampered by scheduling practices by large 
incumbents. As the FAA Administrator, J. Randolph Babbitt, recently 
noted,\8\ the Federal Government has been forced to resort to the use 
of ``blunt tools'' such as operational caps, restrictions, and rules to 
counter delays caused by aggressive industry overscheduling, whereby 
airlines compress an unrealistically large number of flights into a 
relatively short time window. In particular, Administrator Babbitt 
identified Atlanta, Chicago, and San Francisco as cities where airline 
scheduling behavior has increased delays. The large incumbent airlines 
that individually operate hundreds of daily flights at these airports 
should, quite properly, be required to adjust their schedules before 
the situation becomes so dire that the Federal Government is left with 
no other choice than to impose operational limitations. Indeed, this 
was precisely the behavior that prompted the DOT/FAA to reintroduce 
caps and slots at the New York area airports between 2006 and 2008--a 
capacity management system which grandfathered the majority of slots to 
large incumbents that were already entrenched at those airports while 
simultaneously erecting an insurmountable barrier of entry to new 
service by low-fare airlines--all to the detriment of consumers.
---------------------------------------------------------------------------
    \8\ Remarks of J. Randolph Babbitt, ``NextGen is Happening,'' 
Aviation Week and Space Technology NextGen Forum (May 20, 2010).
---------------------------------------------------------------------------
    Where Virgin America has launched service, the consumer benefits 
have been measurable and dramatic. For example, JFK--San Francisco, 
JFK--LAX, and Washington Dulles--San Francisco average fares have all 
fallen by nearly one-third since Virgin America entered those markets. 
Moreover, LAX-Boston fares have dropped 29 percent since Virgin America 
entered the market. Similarly, Washington Dulles--LAX and San 
Francisco--Boston average fares have both fallen 23 percent since 
Virgin America began competing in those markets.\9\
---------------------------------------------------------------------------
    \9\ U.S. Origin and Destination Survey via APGDat, www.apgdat.com.
---------------------------------------------------------------------------
    As the Congress considers U.S. airline consolidation and the 
overall state of competition in the industry, great care must be taken 
to ensure that low-fare carriers are provided meaningful opportunities 
to compete with entrenched legacy airlines at capacity-controlled 
airports. Moreover, the Federal Government, acting through the 
Transportation and Justice Departments, needs to continue to keep 
pressure on the airports to assure that new entrants and smaller 
incumbents can provide competition to the well-entrenched incumbents 
which, in a very real sense, can effectively restrict access to these 
airports through their control of gates.
    At bottom, the Federal Government not only has the authority, but 
the responsibility, to take steps to enhance the level of competition 
at airports subject to operating limitations or gate shortages. Many 
studies have been completed since the 1980s detailing the serious 
competitive problems that exist at slot-controlled airports in the 
United States. The findings of these studies are still true today, in 
particular the fact that the secondary market at slot-controlled 
airport is so limited that it has not resulted in any significant 
market entry by new entrants or expansion by limited incumbents. 
Indeed, as the Government Accountability Office, the investigative arm 
of the Congress, warned as far back as 1996, ``[C]ontrol of slots by a 
few airlines greatly deters entry at key airports in . . . New York and 
Washington.'' \10\ Policies that cultivate and enhance low-fare 
competition are necessary to ensure that the objectives of the Airline 
Deregulation Act of 1978 are realized, particularly as the industry 
becomes increasingly consolidated. That statute requires, among other 
things, that the Federal Government consider, as being in the public 
interest, policies that place maximum reliance on airline competition 
as well as provide opportunities for new entrant airlines.
---------------------------------------------------------------------------
    \10\ GAO, Airline Deregulation: Barriers to Entry Continue in 
Several Key Domestic Markets, GAO/RCED 97-4 (Oct. 1996).
---------------------------------------------------------------------------
    Given the increased market consolidation that will result from the 
proposed merger, the Federal Government must begin to address the 
serious access problems at the New York area airports and Chicago's 
O'Hare International Airport. The Federal Government must now begin to 
develop, through a carefully constructed rulemaking, a new pro-
competitive allocation system that will be used going forward at these 
and other airports where demand for access significantly exceeds 
capacity. The current stop-gap measures employed thus far--the short-
term administrative allocation of slots based on historic airport 
operations--have not fostered new competition. To the contrary, such 
measures have conferred a tremendous advantage upon entrenched 
incumbents at the affected airports. These entrenched incumbents are 
inclined to hoard their slot holdings rather than see such slots 
relinquished to competitors, thereby allowing them to control service 
and fares.
    The reality is that all of the ideas and issues concerning the 
allocation of slots at capacity-controlled airports have been on the 
table for the better part of 25 years. During this time, industry 
consolidation has increased and serious access problems have persisted 
at capacity-controlled airports. As a consequence, the Federal 
Government must develop a market-based solution to determine the most 
efficient allocation of slots to airlines that are eager to launch or 
expand service at capacity-controlled airports. Indeed, a variety of 
mechanisms are available to the Federal Government, including auctions 
and peak period pricing to more appropriately align demand with 
capacity. If indeed auctions are utilized, all slots at the affected 
airport should be available for bid, not just a small fraction, to 
avoid conferring an unfair competitive advantage on entrenched 
incumbent airlines at the airports. On the other hand, a mere extension 
of the orders limiting operations at the New York area airports and 
reliance on the status quo at O'Hare International Airport without any 
mechanisms to ensure meaningful access for new entrants and limited 
incumbents is contrary to the pro-competitive objectives of the Airline 
Deregulation Act and will be harmful to consumers in the long run. In 
any event, the Federal Government must resolve the issue of new entrant 
and limited incumbent access at capacity-controlled airports through 
the development and implementation of a market-based solution before 
approving any further slot swaps or industry consolidation.
Corporate Discount Agreements
    Another area of competitive concern that may arise from increased 
consolidation is the enhanced ability of the merged airline to use the 
terms and conditions of corporate discount agreements to increase 
market share vis-a-vis its competitors, particularly new entrants that 
have not yet been able to develop similarly extensive route networks.
    By way of background, a corporate discount agreement is an 
arrangement by which an airline grants discounts to businesses with 
significant amounts of travel in markets served by that airline. In 
return for the discounts, the agreements require the businesses to meet 
predetermined monthly goals for travel on that airline. The amount of 
the discount and the required travel levels reflect the relative 
leverage of the airline and the business in these markets, and provide 
the airline with an opportunity to pursue competitive goals in the 
markets covered by the agreement.
    These agreements may permit the merged airline to increase market 
power and increase market share by means of such agreements in at least 
three ways. First, an airline could use a dominant position in a 
domestic market as leverage to increase market share in other more 
competitive domestic markets at the expense of other competitors who 
lack the airline's market power in the market dominated. Second, a 
similar situation could arise when an airline dominates an 
international market that is important to corporate customers, and uses 
that leverage to increase market share in other more competitive 
domestic markets against competitors that don't enjoy domination of 
such an international market. In each of these two instances, 
consolidation exacerbates the competitive situation by significantly 
increasing the opportunities in which the merged airline can increase 
market share by means of the leverage provided by these agreements.
    In a third instance, an airline may structure an agreement such 
that the level of discount increases as the company's use of the 
airline on a particular route increase. In these situations, the 
competitive impact is most significant on routes where the services 
provided by the merging airlines overlap or where access in a 
particular market is restricted.
    In short, these corporate discount agreements are very powerful in 
the hands of a legacy airline with an extensive route network. Their 
power is significantly enhanced as legacy airlines merge with one 
another and operate more capacity on any given route leaving fewer 
airlines to compete across large networks. As a result, the merged 
legacy airlines will increase their market power to capture greater 
market shares at the expense of new entrants with much smaller 
networks. To the extent that the merged airline can, by use of these 
agreements, increase market share significantly in one or more markets 
at the expense of other airlines, consumers can be harmed if the loss 
of market shares by these other airlines compromises the ability of 
competitors to effectively compete against the merged airline.
    Virgin America appreciates the opportunity to provide this 
testimony and would be pleased to respond to any questions the 
Committee may have concerning these matters.
                                 ______
                                 
  Prepared Statement of Patricia A. Friend, International President, 
             Association of Flight Attendants CWA, AFL-CIO

    Thank you for holding this vital and timely hearing on the proposed 
merger of United and Continental Airlines. My name is Patricia Friend 
and I am the International President of the Association of Flight 
Attendants--CWA, AFL-CIO (AFA-CWA). AFA-CWA represents over 50,000 
flight attendants at 22 U.S. airlines and is the largest flight 
attendant union in the world. We especially thank the Committee for 
inviting us to testify today and giving voice to the concerns of the 
working women and men of these two great airlines about what this 
merger could mean to them.
    As a front line employee in the airline industry for over 40 years, 
I have had a unique perspective on the cyclical and dramatic changes 
that have reshaped the commercial aviation industry and impacted 
thousands of jobs. As the President of a union representing employees 
from legacy or network carriers such as United, US Airways and 
Northwest (Delta); low-cost carriers such as AirTran Airways and 
Spirit; charter carriers such as Miami Air, Ryan International and USA 
3000; to large majors and regional carriers such as Hawaiian, Alaska, 
American Eagle, Mesa and Mesaba, I am here to testify today about an 
aviation industry that is transforming in ironic fashion from a post 
deregulation industry to a consolidated industry that will look like a 
pre-deregulation industry. Seismic changes brought on by airline 
deregulation in the late 1970s caused endless bankruptcies and the end 
to historic airlines such as Pan Am, Eastern, TWA, Northwest and soon 
Continental, Each bankruptcy spelled disaster for airline employees who 
were left behind in the so-called rush to a market based airline 
industry. Thirty-two years later after the 1978 Airline Deregulation 
Act, I testify today about an industry that is in a swift consolidation 
mode. In just five short years, we have now witnessed two major mergers 
at US Airways and America West and at Delta and Northwest. The United 
and Continental merger, if approved, will mean that we have almost cut 
in half the number of major legacy network carriers. Credible news 
reports point to further consolidation on the horizon if the United-
Continental merger is approved. Mr. Chairman, as I indicated, I began 
my flight attendant career 44 years ago and worked under a regulated 
industry that was stable and provided middle class jobs to thousands of 
workers.
    When Congress voted in 1978 to deregulate the industry, the 
Association of Flight Attendants, and other unions, warned of the 
catastrophic results that would soon follow rapid and uncontrolled 
expansion of the airline industry. We knew that airlines would slash 
fares to remain competitive and that employees would be the one group 
who would subsidize the fare reductions through pay cuts, wage 
stagnation and furloughs.
    Lately, I have listened intently to airline CEO's testify before 
this Congress about the drastic need to consolidate the industry in 
order to achieve a sustainable business model. After hundreds of 
airline bankruptcies, thousands of employee furloughs, devastating pay 
and benefit cuts, and 32 years of deregulation experience, it seems 
that airline management has figured it out, albeit in the worst 
fashion, that our Nation needs a stabilized and rational aviation 
industry The irony is that AFA-CWA--for decades--has been the leader in 
calling for a national and rational aviation policy that recognizes the 
vital role the aviation industry plays in our Nation's economy and the 
middle-class jobs.
    Mr. Chairman, the Nation's flight attendants and all aviation 
workers need a stable industry as well. My experience has taught me 
that airline management is transient in nature with airline management 
coming and going and exiting our industry with a bountiful payoff while 
airline workers, who have truly invested in our industry, are left with 
a declining standard of living. Unfortunately one thing has remained 
constant during my career--corporate greed. If anything in that 
category has changed, it's that the amounts that CEOs reward themselves 
every year grows more and more excessive while employees earn less.
    The voices of the workers often take a back seat in these hearings 
and in public pronouncements about the benefits of airline mergers, 
here today to give those of us most invested in this industry--the true 
stakeholders--a voice.
    I have opened my testimony with this perspective because it is a 
story that must be told and it is entirely relevant to the discussion 
topic today.
    As in the case of the mega merger between Delta and Northwest, this 
merger between United and Continental has drawn significant attention 
from the media, communities served by both carriers and once again, 
here on Capitol Hill. The attention focused on what will become the 
world's largest airline, for the time being, is appropriate . . . and 
as before necessary. Once again this merger has led to speculation 
about which airlines will merge next. The remaining airline CEOs 
continued to call for greater consolidation in light of the anticipated 
rises in the cost of fuel. We would like to point out that the merger 
drumbeat started years earlier as airline executives sought greater 
profits following the epidemic of bankruptcies.
    Consumers are rightfully frightened that another airline merger in 
particular, and anticipated consolidation of the industry as a whole, 
will lead to much higher fares and reduced service. We recognize the 
reality that airline fares must increase in order to stabilize this 
industry and provide more stable employment for thousands of aviation 
workers. In order for this industry to survive and stabilize, airlines 
must be able to charge a realistic fare. Airfares in the U.S. have 
fallen from a 1978 average of 10.08 cents per mile to 4.2 cents per 
mile in 2006, adjusted for inflation.\1\
---------------------------------------------------------------------------
    \1\ James Larder and Robert Kuttner, Flying Blind: Airline 
Deregulation Reconsidered; Demos 2009.
---------------------------------------------------------------------------
    To strike this balance between a stable industry and reliable air 
service, we assert today that the increase in consolidation activity 
requires appropriate regulatory oversight to protect the interests of 
employees and passengers. Federal regulators need to consider the 
impact that mega mergers have on the consumers and communities. We hope 
that this committee and other Congressional Committees will exercise 
vigorous oversight responsibilities as well.
    It is unfortunate that while some protections are in place today 
for consumers and communities there are virtually no protections for 
airline workers in this merger. There has been little attention paid to 
the extreme upheaval that mergers create for the thousands of airline 
employees who find themselves unemployed or whose lives are disrupted.
    This loss of protections has been yet another result of the market 
driven industry. There were many important protections in place for 
airline workers prior to the Airline Deregulation Act of 1978; the 
Allegheny-Mohawk Labor Protective Provisions (commonly know as the 
LPPs) were made a condition of government approval of virtually every 
airline merger. The LPPs contained extensive and specific protections--
like displacement and relocation allowances, wage protections, transfer 
and seniority protections, layoff protection, and others--as part of a 
standardized set of provisions designed to shield workers from an 
unfair share of the burden resulting from corporate mergers.
    But since deregulation, there are no real protections from our 
Federal Government to cushion airline workers involved in mergers. 
After Deregulation, airline management successfully lobbied for an end 
to the LPPs, arguing that those matters are ``better left to the 
collective bargaining process.'' And while union contracts did provide 
a level of protection for employees covered by collective bargaining 
agreements, a series of industry bankruptcy filings have severely 
reduced negotiated protections in today's contracts and there remains 
little to no protection for nonunion airline employees.
    Additionally the very employers, who argued to leave these merger 
protections to the bargaining process, now spent millions of dollars on 
union busting--through bankruptcy or other venues--trying to strip the 
provisions in place for decades. And today, as those same employers 
hold press conferences to trumpet the fact that the merger impact on 
employees will be minimal, they often refuse to provide information 
about the impact on the workers in writing.
    Of all the well-developed pre-deregulation rules of the Allegheny-
Mohawk Labor Protective Provisions, only one exists today--a provision 
establishing basic seniority protections in the event of a merger. And 
that provision was only resurrected a couple years ago with the 
advocacy of AFA-CWA and the strong support of Representative Russ 
Carnahan, Senator Claire McCaskill and the 110th Congress.
    After deregulation, Congress was concerned that the massive post 
deregulation restructuring of the airline industry would displace large 
numbers of employees and therefore added the Airline Employee 
Protection Program (EPP) to the Airline Deregulation Act of 1978 in 
order to assist laid-off employees. Unfortunately the almost 40,000 
employees who lost their jobs in the wake of Deregulation never 
received the benefits Congress promised since funding was never 
authorized for the benefits, turning the whole program into a cruel 
joke for airline employees in desperate need of a life line.
    Congress has recognized the need to assist airline employees facing 
the traumatic effects of industry consolidation in the past; we need a 
Federal effort in what is shaping up to be another significant era of 
airline consolidation. As Congress looks into the impact of mergers on 
employees, it should look at the failed EEP as a framework to provide 
meaningful protections to workers in the future.
    Unfortunately, there seems to be more concern for the consumer and 
even the airports, building and route structures of these two airlines 
then there is for the concern of the workers. As we have testified in 
the past, we are not proposing to re-regulate the industry today; but 
we do think that--at a minimum--something needs to be done to shield 
workers from the harshest effects of this merger and future mergers.
    It seems reasonable to assume that within any airline merger there 
will be consolidation; blending corporate offices, the elimination of 
competing of hubs and overlapping routes networks may potentially lead 
to crew base closures. It seems that for airline workers consolidation 
likely translates to unemployment for far too many.
    When Delta merged with Northwest in 2008 the CEOs of both 
corporations testified before this committee that disruptions to 
communities, consumers and employees would be minimal. Yet a mere 2 
years later flight operations at Cincinnati, a former Delta hub, has 
been reduced from 600 flights in 2005 to between 160-170 flights now, 
cutting more than 840 jobs.\2\ Not only has the number of flights been 
cut, there has also been a reduction in seat capacity. Routes once 
flown by aircraft with 150 seats--or more--are now being reduced to 
aircraft with 50 seats. Since the FAA mandates that there must be at 
least one flight attendant for each 50 passengers seats using smaller 
aircraft translates to a loss of two flight attendant jobs.
---------------------------------------------------------------------------
    \2\ Dan Monk and Lucy May, ``Delta to cut 840 jobs at Cincinnati 
airport, reduce flights,'' Dayton Business Journal, March 16, 2010.
---------------------------------------------------------------------------
    We can also look to the America West and US Airways merger to learn 
lessons from past mistakes. The synergies promised by this merger and 
consolidation have not occurred as promised or anticipated. Nearly 5 
years after the America West/US Airways merger the two sides are still 
operating as separate entities. The ``new'' US Airways has closed four 
crew domiciles and displaced several hundred flight attendants, and 
workers at both carriers fly under separate contracts. America West 
flight attendants have not received a wage increase in over 7 years and 
US Airways flight attendants are working under a concessionary 
agreement from previous bankruptcies. What has failed these employees 
is the lack of regulatory oversight in negotiating a combined contract.
    So what can the workers at United and Continental expect as they 
combine their workforce and route structure? While management has 
provided information that is otherwise publicly available, management 
has not been forthcoming about critical and future business plans. 
Accordingly, we are seeking additional detailed information from 
management about the impact this merger will have on our members and 
our Collective Bargaining Agreement at United.
    As witnessed in previous mergers, base or domicile closures can be 
extremely traumatic to employees and their families. Even though 
airlines may offer assistance, the stress of being displaced and forced 
to move to another location can be devastating. These are workers with 
families and homes and who are part of communities. I call on this 
committee to compel United and Continental management to provide more 
information on their plans for current United and Continental base or 
domicile operations.
    United and Continental are partners in Star Alliance, a global 
network of airlines. The Star Alliance, and other alliances, is using 
revenue sharing agreements, code share agreements and joint venture 
schemes to increase their global presence. Traditionally, global 
alliances incorporated an incentive for each airline to provide flying 
using one or the other's aircraft and ground equipment and employees. 
As the operator of a route, the airline collects the majority of 
passenger and freight revenue. In this scenario, employees benefited 
from the arrangement. However, a new type of joint venture goes far 
beyond the typical code share agreements that are prevalent today. 
These new joint ventures threaten the long-term job security of flight 
attendants.
    United is the architect of a new global alliance revenue sharing 
scheme. They have contracted with Aer Lingus to operate a route between 
Dulles International Airport in the Washington, D.C. area and Madrid, 
Spain using Aer Lingus aircraft but employing flight attendants from a 
third-party operator. This has displaced United flight attendants from 
operating this route and United is threatening to expand this type of 
joint venture to other markets.
    We call on this Congress to stop this type of so-called joint 
venture operations by passing H.R. 4788. Do not let United and 
Continental management use this merger as a vehicle to outsource more 
middle-class jobs.
    While we are on the subject of globalized networks and alliances, 
it's time to have a discussion on recent international treaties and 
negotiations between our country and the European Union and China. 
These treaties may have far-reaching implications in the United-
Continental merger, as both carriers provide significant service to 
Atlantic and Pacific markets.
    In the spring of this year, the U.S. and the European Union (EU) 
concluded talks on stage two of the U.S.-EU Open Skies Agreement (Open 
Skies). As this committee is aware, the U.S. and EU reached a 
comprehensive Open Skies Agreement in 2007 and the parties agreed to 
further talks, called stage two. The premise of Open Skies was to 
liberalize flying between any city in the U.S. and any city in the EU, 
including the United Kingdom. Notably, stage two of the Open Skies 
negotiations resulted in landmark labor protection language in that 
treaty that should provide workers some protections in a more 
liberalized environment.
    However, AFA-CWA remains concerned and vigilant that the U.S.-EU 
Open Skies treaty must not provide the framework for the outsourcing of 
U.S. aviation jobs. We were encouraged that our U.S. negotiators and 
this Congress reaffirmed existing U.S. aviation law on foreign 
ownership and control. Those laws must remain in place and protected by 
Congress and the Administration.
    Last week, U.S. and China negotiators began talks for a U.S.-China 
Open Skies-type treaty as well. The talks concluded on June 10, 2010 at 
the U.S. State Department in Washington. While no agreement was 
reached, talks will continue and AFA-CWA's concerns about protecting 
existing U.S. aviation laws and preventing the outsourcing of good 
paying middle class aviation jobs remains front and center. I call on 
this committee to remain vigilant as well.
    We view these treaties today in much the same way we viewed the 
deregulation of our industry in 1978. International flying provides 
thousands of good paying jobs for U.S. aviation workers and we must not 
allow management to use these foreign treaties as a mechanism to 
outsource jobs.
    We also ask this committee to consider the impact this merger may 
have on the contract negotiations underway between the Association of 
Flight Attendants--CWA and United management.
    For almost 6 years the Flight Attendants at United have been 
working under a collective bargaining agreement negotiated while the 
company was in bankruptcy. The flight attendants at United sacrificed 
nearly $2.7 billion in salary and benefit concessions, and that doesn't 
take into consideration effects of the termination their defined 
benefit pension plan that was turned over to the PBGC during United's 
bankruptcy.
    Under the terms of the current agreement, United Flight Attendants 
have received four meager pay increases. The last raise, a modest 1 
percent, was awarded on December 31, 2008. Meanwhile, United's CEO, 
Glenn Tilton, received compensation that increased from $1.7 million to 
$3.9 million.
    We are here today to ask this committee to help to ensure that the 
current contract negotiations, governed by Section 6 of the Railway 
Labor Act are completed in some manner before this merger is finalized.
    Already there have been discussions that the current contract 
negotiations be set aside, since ultimately a new contract will need to 
be negotiated for the combined work group. Unfortunately we have had a 
front row seat and have witnessed what can happen when Section 6 
negotiations are set aside in a merger. When US Airways and America 
West merged in September 2005, the America West flight attendants were 
2 years into their Section 6 negotiations. Section 6 is a section of 
the Railway Labor Act (RLA) and it means that a current airline 
contract becomes amendable and negotiations begin to reach a new 
agreement. The current contract remains in place until a new contract 
is agreed to by the parties and members vote to ratify or approve that 
agreement. The RLA provides a mediation process to guide negotiations. 
The America West flight attendant contract talks were under the 
guidance of a Federal mediator prior to the merger. When the merger was 
announced, the America West negotiators were requested by the National 
Mediation Board to sot aside those negotiations and to focus on 
negotiating a combined contract with US Airways. Negotiations to 
combine contracts between unionized work groups are not governed by the 
RLA or the National Mediation Board.
    After 5 years of negotiations, a combined contract between America 
West and US Airways has not been achieved. As I mentioned earlier, 
America West flight attendants have not received a wage increase in 7 
years and US Airways flight attendants work under a concessionary 
agreement that cut their wages and benefits.
    We cannot allow the negotiation process at United to get delayed as 
a result of this merger. The employees at United made deep sacrifices 
to keep the company flying. It's time for the workers to share in the 
rewards. We must have resolution to the United contract negotiations 
that is satisfactory to the workers there.
    Labor relations at United have been combative. Management insists 
that flight attendants must accept additional concessions to their 
current contract. This is entirely unacceptable to the United flight 
attendants. If the focus of this hearing is on the possible effects for 
consumers--you only have to observe how United is treating its workers 
to understand how the passengers at the ``new'' United will fare; when 
you treat workers as commodities can you really expect a corporation to 
treat their passengers (and customers) as anything other than a 
commodity?
    When this merger of two airlines with very different styles of 
labor relations is approved, there will be representational elections 
between the various work groups at these two companies including the 
flight attendants. United flight attendants are represented by AFA-CWA 
and Continental flight attendants are represented by the International 
Association of Machinists and Aerospace Workers (IAM). These elections 
will be conducted under the procedures defined by the National 
Mediation Board. However, without an open dialog with management, 
contract negotiations that are satisfactorily completed and support 
from labor groups, the integration of these two airlines will not go as 
smoothly as promised by management.
    While much will be made over the coming months about the impact of 
this merger on consumers and communities, I urge you to remember the 
hundreds of thousands of airline employees across this country. Keep us 
in mind as you review this merger and the impact that it will have on 
our lives and our families. We are the ones who have the most to lose; 
and we have the least protection.
                                 ______
                                 
Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                        to Hon. Susan L. Kurland

    Question 1. Proponents of the merger argue that you need to have a 
healthy airline industry as a condition of providing service to smaller 
communities. Opponents argue that the merger will lead to less service 
to smaller communities and/or higher prices. To what extent do you 
believe a United-Continental merger will hurt service to small and 
rural communities?
    Answer. Under deregulation, airlines make their own decisions on 
what domestic routes to serve. With a merger, the merging carriers 
typically seek to rationalize their levels of service, whether to large 
hubs or small communities, sometimes finding efficiencies by adjusting 
their frequencies, using larger or smaller aircraft, etc. In conducting 
our review of the proposed merger, DOT will be looking at carrier data 
indicating what service changes are being proposed, with an eye to 
their potential effects on small communities. Carrier data is still 
being received and it is too early to draw any conclusions on this.

    Question 2. In 2008 the Delta/Northwest merger eliminated one major 
air carrier from the market. US Airways combined with America West in 
2006. Republic Airways has acquired both Frontier and Midwest over the 
past year. In addition, some industry analysts suggest that if this 
merger is successful, it will lead to additional consolidation 
activity. There is speculation American Airlines might merge with 
another carrier. At what point should we begin to worry about too much 
consolidation in the industry?
    Answer. Our experience in the domestic market shows that the level 
of competition depends less on the number of carriers serving a market 
than on the type of carriers serving the market (e.g., legacy carriers 
vs. low-cost carriers). Over the past decade, when carriers 
restructured their operations and reduced services or exited the 
market, low cost carriers in many instances initiated new service or 
expanded existing service into many markets affected by such 
restructuring.

    Question 3. What's different about the industry today that should 
keep us from worrying about the potential effect of the proposed merger 
on fares and service levels?
    Answer. One thing that is different about the industry today than 
ten or fifteen years ago is the steady growth of low-cost carriers. 
Collectively, LCCs now transport approximately one out of every three 
U.S. domestic O&D passengers (up from one-in-five in 2000 and one-in-
twenty in 1990). Low cost carrier presence in markets produces large 
and statistically significant fare decreases and passenger volume 
increases. Adjusted for inflation, fares are lower today than they were 
in 1978.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                         Hon. Susan L. Kurland

    Question 1. What steps is the Department of Transportation taking 
to ensure the retention of the current workforce at both airlines 
should the merger be approved? Is DOT concerned that this merger will 
have a negative impact on U.S. airline jobs?
    Answer. The Department of Justice has the lead role in reviewing 
proposed airline mergers, due to its primary jurisdiction over the 
antitrust laws. We work carefully with that Department by providing 
advice and analysis on airline competition issues. In conducting our 
review of the proposed merger, DOT will be looking at carrier data 
indicating what the projected effects will be on their employment. 
Carrier data is still being received and it is too early to draw any 
conclusions on this.

    Question 2. What steps is DOT taking to ensure that this proposed 
merger does not negatively affect consumer prices or service?
    Answer. The Department of Justice has the lead role in reviewing 
proposed airline mergers, due to its primary jurisdiction over the 
antitrust laws. We work carefully with that Department by providing 
advice and analysis on airline competition issues. In conducting our 
review of the proposed merger, DOT will be looking at carrier data to 
determine if there would be any likelihood of significant fare 
increases in particular markets. Carrier data is still being received 
and it is too early to draw any conclusions on this.

    Question 3. If the merger is approved, will DOT review the safety 
records of the regional airlines partnered with both Continental and 
United when deciding whether to award the carriers an operating 
certificate? What changes has DOT made in the context of reviewing 
safety during the merger approval process following the crash of Flight 
3407 last year?
    Answer. Regional airlines with whom United and Continental code 
share have their own air carrier operating certificates and are under 
continuous surveillance using the Air Transportation Oversight System. 
Although the Colgan accident didn't involve a merger, FAA oversight of 
airline mergers involves thorough inspection of all the airline's 
programs, e.g., maintenance, training dispatch, that are affected by 
the merger. Before the affected programs are approved, FAA must 
determine that they meet regulatory requirements and that the airline 
continues to be capable of operating safely. In some cases, proving 
runs (i.e., observation of actual flight operations) may be necessary 
for FAA to make this determination. Separately, when air carriers 
merge, the Department reviews air carrier fitness and citizenship, as 
well as competition issues.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                         Hon. Susan L. Kurland

    Question 1. One of the biggest public health victories in this 
country was when we banned smoking on commercial aircraft. However, 
electronic cigarettes are now being sold for use on some European 
commercial flights even though evidence exists that these products 
contain carcinogens and respiratory irritants. Does the Department plan 
to explicitly ban smoking of electronic cigarettes on commercial 
airplanes?
    Answer. Smoking of electronic cigarettes is already banned on U.S. 
air carrier and foreign air carrier flights in scheduled intrastate, 
interstate and foreign air transportation. See 49 USC  41706 and 14 
CFR Part 252 (Part 252). Nevertheless, we plan to further address this 
matter in a notice of proposed rulemaking that would amend the existing 
general regulatory language in Part 252 to explicitly ban smoking of 
electronic cigarettes aboard aircraft.

    Question 2. How would a comprehensive national high speed rail 
network reduce congestion in our skyways and help the commercial 
aviation industry?
    Answer. As Secretary LaHood has stated, President Obama has a bold 
vision for high-speed rail within our national transportation system. 
As the network develops, travelers will be able to use it as an 
alternative or companion to air travel. Our goal would be a seamless, 
intermodal travel experience.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                         Hon. Susan L. Kurland

    Question 1. Do fewer main-line carriers lead to reduced 
competition, increased fares, reduced services, and fewer departure 
options at small to medium sized nonhub airports?
    Answer. As a general matter, I believe that competition among the 
domestic carriers is critical to efficient service offerings and 
competitive fare levels. However, our experience in the domestic market 
shows that the level of price competition depends less on the number of 
carriers serving a market than on the type of carriers serving a 
market. For example, as of 2009 LCCs served 456 of the largest 500 
domestic O&D city-pairs on a nonstop basis and they collectively 
transport approximately one out of every three U.S. domestic O&D 
passengers (up from one-in-five in 2000 and one-in-twenty in 1990).

    Question 2. What impact would this merger have on their regional 
partner carriers?
    Answer. While it is too early in the process to draw conclusions, 
among the documents reviewed by DOJ in evaluating the transaction are 
those that detail how the carriers will merge their operations and the 
protections to be offered to stakeholders, including the public and the 
regional carrier partners.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Mark Warner to 
                         Hon. Susan L. Kurland

    Question 1. With the focus of this hearing on airline 
consolidation, and the potential financial stability that would bring 
to the industry, I would be curious to know your thoughts on how that 
could affect the timeline for airline's equipping their planes with the 
equipment necessary to really making NextGen work. Do you see a 
possible connection between the trend toward airline consolidation and 
airlines' ability to pay for the upgrades to these planes needed for 
NextGen implementation?
    Answer. While proponents of airline consolidation argue that fewer 
and financially stronger carriers would be better able to finance 
equipment upgrades needed for NextGen implementation, it is difficult 
to predict the extent to which such upgrading might occur.

    Question 2. What are your thoughts on the current antitrust 
immunity framework?
    Answer. Under  41308 and  41309, Congress has given the 
Department the authority to exempt airlines from the antitrust laws to 
the extent necessary to allow a proposed transaction to proceed, 
provided that the exemption is required by the public interest. 
Antitrust immunity is one tool in today's commercial and regulatory 
environment in which airlines are still subject to regulatory 
restrictions that prevent them from developing the kind of global 
networks present in other sectors. It should only be used when specific 
consumer benefits are not otherwise obtainable. We grant immunity if 
the public interest requires it and the parties to such an agreement 
would not otherwise go forward with the transaction. Our consideration 
of aviation economic policy focuses on what is best for a healthy and a 
competitive industry, for its workers, and for the communities and 
consumers that it serves.

    Question 3. Do you believe that current law works to the benefit of 
airlines and consumers alike?
    Answer. In an industry that is truly subject to marketplace forces, 
we will inevitably see carriers seeking to find greater efficiencies--
which can occur in a variety of forms, including alliances and mergers. 
When necessary to mitigate potential harm while maximizing potential 
public benefit, we have conditioned grants of antitrust immunity to 
include effective and realistic remedies for that potential harm. 
Alliances are one way in which U.S. carriers can effectively and 
efficiently expand their international networks to provide the products 
and services the global marketplace demands. In the cases where the 
Department has granted antitrust immunity pursuant to a rigorous 
competitive analysis, it has found that doing so will provide travels 
and shippers with a variety of benefits, including lower fares in some 
markets, new nonstop routes, improved services, and better schedules.

    Question 4. Do you believe that any changes should be made to 
provisions currently in place?
    Answer. The Administration is not seeking a change in the statutory 
scheme in this area.
                                 ______
                                 
     Response to Written Question Submitted by Hon. John Thune to 
                         Hon. Susan L. Kurland

    Question. When an airline decides to reduce frequency or aircraft 
size to a particular market, what does that generally mean to the price 
of tickets to the traveling public--both leisure and business 
customers.
    Answer. Total capacity offered in a particular air transport market 
plays a key role in determining prices paid in the market, but the 
extent to which it does so depends on the demand characteristics of the 
individual market, the types of airlines serving the market (e.g., 
legacy versus low cost airlines), and the amount of capacity offered by 
each.
                                 ______
                                 
Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                           to Glenn F. Tilton

    Question 1. In bankruptcy United shed all of its defined benefit 
pensions. All except one were transferred to the Pension Benefit 
Guaranty Corporation (PBGC). As part of that transaction, my 
understanding is that you will owe the PBGC $500 million. How and when 
will this be re-paid?
    Answer. As part of UAL's emergence from Chapter 11 bankruptcy under 
its 2006 plan of reorganization, UAL must issue notes to the Pension 
Benefit Guaranty Corporation (PBGC), such notes known as the 8 percent 
Contingent Senior Notes. UAL must issue up to $500 million in total 
principal amount of the 8 percent interest rate notes to the PBGC. UAL 
is to issue the notes in up to eight, equal tranches (or portions) of 
$62.5 million for each tranche. The notes are to be issued in each of 
the eight tranches when a certain financial triggering event occurs, 
with one tranche of notes being issued as a result of a financial 
triggering event.
    A financial triggering event occurs when, among other things, the 
Company's earnings before income taxes, depreciation, amortization and 
rent (known as ``EBITDAR'') is greater than $3.5 billion during the 
preceding twelve months, the triggering event being measured on June 30 
or December 31 of an applicable fiscal year. The financial triggering 
events are measured beginning with the fiscal year ended December 31, 
2009, and ending with the fiscal year ending December 31, 2017. 
However, in the event that the issuance of a tranche of notes would 
result in UAL defaulting under any securities that exist at the time, 
UAL is able to satisfy its obligation to issue the notes by instead 
issuing its common stock with a market value that is equal to $62.5 
million to the PBGC.
    If the DOJ approves this merger, one of the biggest challenges 
you'll face is integrating the work forces of the two airlines. 
Bringing all the employees under comparable contracts will be 
difficult.

    Question 2. What steps do you plan to take to smooth the workforce 
transition?
    Answer. We are committed to fair and equitable, workforce 
integration processes leading to results that are timely and 
transparent. Our focus will be on creating cooperative labor relations, 
including negotiating contracts with our collective bargaining units 
that are fair to the company and fair to our employees.
    Our alliance relationship has given each airline the opportunity to 
observe and interact with the systems, practices and procedures of the 
other. We expect to adopt the best aspects of each company's culture 
and practices. We are confident that we can integrate our operations 
fairly, effectively and efficiently once the merger closes. Many of our 
co-workers have worked closely together on our Star Alliance transition 
and have built productive working relationships. Together, we have an 
exceptional team of employees and we will foster an environment of 
open, honest, communication. We share a deep commitment to clean, safe 
and reliable air transportation and a focus on operational excellence. 
Both companies are committed to driving a performance culture and 
offering market-competitive rewards and compensation to attract and 
retain a highly talented workforce.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                            Glenn F. Tilton

    Question 1. Please describe the impact of the proposed merger on 
the current work forces of both United Airlines and Continental 
Airlines at California airport facilities. Do you anticipate there will 
be workforce cuts for either airline in California?
    Answer. United and Continental Airlines employ approximately 13,800 
people in California and operate at 24 airports across the state, 
including hubs in San Francisco and Los Angeles.
    Because United and Continental have the most complementary networks 
of any two domestic carriers, we expect the impact of the merger on 
frontline employees, including employees at California airports, will 
be minimal., Further, any necessary reductions in frontline employees 
will largely be handled through retirements, normal attrition and 
voluntary programs.
    Long-term, we expect co-workers will benefit from improved career 
opportunities and enhanced job stability by being part of a larger, 
operationally and financially stronger, and more geographically diverse 
carrier better able to compete successfully in the global marketplace.

    Question 2. If so, where and how many will be affected? Will you 
commit to retaining the current workforce in California?
    Answer. See previous answer.

    Question 3. What steps will you take to ensure that current 
employees retain their jobs and their benefits?
    Answer. Again, because of the minimal overlap in our networks, we 
expect any impact on current front-line workforce to be very limited. 
After the merger closes, we are committed to working throughout the 
workforce integration process to ensure that we have fair and equitable 
processes leading to results that are timely and transparent. We will 
work with employees and unions promptly to resolve these issues and 
will communicate the answers as soon as we are able.

    Question 4. It is my understanding that United employs 
approximately 3,300 at its maintenance facility in the Bay Area and 
that the lease on the facility expires in 2013. What is United's long-
term plans for the facility?
    Answer. The current lease on the San Francisco Maintenance Facility 
expires July 1, 2013, with a 10-year option to extend. Today, operating 
as independent companies, United and Continental continually evaluate 
their facilities needs in the context of their ongoing business 
operations. Those types of decisions will continue as United and 
Continental integrate their operations after the merger closes.

    Question 5. Will you commit to a long term extension of the lease 
for the facility and the retention of the current workforce?
    Answer. Because the lease on the current facility is not up until 
July of 2013, it is too soon to comment on the outcome of negotiations. 
As mentioned previously, impact of the merger on frontline employees 
will be minimal.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                            Glenn F. Tilton

    Question. Often in partnership with major airlines, regional 
airlines operate half of all domestic departures and move more than 160 
million of our Nation's passengers each year. This figure could grow 
under the proposed merger of Continental and United Airlines. Will you 
commit to having the new United assume responsibility for the safety of 
any carrier that flies under its brand?
    Answer. With regard to the safety relationship with our airline 
partners, as Mr. Tilton testified at the hearing, United's focus on 
safety is the foundation of our business. This safety focus includes 
our relationships with all of our flying partners, both international 
and domestic, and includes multiple layers of high standards and 
oversight. These layers begin with FAA certification and progress 
through Department of Defense (DOD) quality and safety requirements, 
International Civil Aviation Organization (ICAO) audits, and the IOSA 
(International Air Transport Association Operational Safety Audit) 
program. For our domestic regional airline partners, United also 
continuously monitors safety performance and conducts on-site reviews 
to pursue highest industry standards. We have established a Safety 
Leadership Team to identify and assure a transfer of best practices 
between United's safety professionals and our contract regional 
airlines.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                            Glenn F. Tilton

    Question 1. How will this merger affect your relationships with 
your regional partners and your global code share partners?
    Answer. We do not plan to change these relationships. Our regional 
and code share partners are indispensable to the efficiencies of our 
networks, and they will continue to be so for the combined network. As 
for our international relationships, both Continental and United are 
members of Star Alliance and we have informed the regulators of several 
foreign jurisdictions that our intention is to maintain our 
international code share and alliance arrangements.

    Question 2. Do you plan on consolidating any of your hub airports 
or significantly altering your route structure?
    Answer. This merger will produce synergies and will increase the 
value of the network to consumers, which will in turn produce greater 
demand for the merged airline's hubs than if the two companies remained 
separate. When schedules and fleets are optimized, the enhanced 
efficiency and greater passenger connectivity at each hub will create 
opportunities for growth, not contraction. We will continue to provide 
service to all of the communities our airlines currently serve, 
including 148 small communities and metropolitan areas. The combined 
airline would serve 350 destinations. We estimate that the merger will 
create 1,282 new online city pairs, nearly half of which (626) aren't 
currently served by any single airline.

    Question 3. With a merger, will access to all current hubs 
currently served by Continental and United from Little Rock National 
and Northwest Arkansas Regional remain available?
    Answer. We have committed to continue to serve all of the 
communities we serve today.

    Question 4. How do you plan to integrate your combined route 
structure at these Arkansas airports?
    Answer. Within the limits allowed by the antitrust laws, we have 
begun a comprehensive effort to conduct the detailed planning process 
for combining the two companies after the merger closes. This effort 
includes network planning and operations.

    Question 5. How will this merger enable you to better serve the 
small, nonhub markets?
    Answer. This transaction will enhance and stabilize service to 
small communities and small metro areas. A difficult operating 
environment over the past decade has forced some network carriers to 
reduce service to some small communities and small metro areas. This 
led to a significant contraction of service, leaving many communities 
with a single carrier--or even, in several places, with no carrier at 
all.
    The merger will help to reverse this contraction. The combined 
airline would add new online service and new destinations for small 
communities. Most of the more than 1,000 new online city-pair routes 
that would be created by the merger are comprised of small community 
and small metropolitan areas. This additional connectivity increases 
the options for consumers in these areas to fly to more places.

    Question 6. With this merger, will prices for Arkansas travelers 
become more reasonable and competitive?
    Answer. The airline industry is intensely and increasingly 
competitive, placing significant downward pressure on fares. As a 
result airfares have declined by more than 30 percent over the last 
decade on an inflation adjusted basis. Due to the presence of vigorous 
competition on every route across our combined networks, we do not 
believe that the merger can facilitate any price increases, nor do we 
plan any price increases due to the merger. None of the revenue 
synergies expected from the merger is modeled on a fare increase.

    Question 7. Do you intend on providing any nonstop, direct flights 
from Little Rock or Northwest Arkansas to DCA, DIA, BWI?
    Answer. It is too early in the integration planning process to 
address which new nonstop flights we would add, and when, but we expect 
to be able to add several in the near term enabled by the merger . 
Integration or post-merger planning should indicate new opportunities 
for expansion along underserved routes.

    Question 8. How much revenue will airports lose as a result of the 
merger through leased space? How should airports make up such lost 
revenue?
    Answer. It is too early to state with any certainty specific 
outcomes of the integration process. We do not overlap at our biggest 
facilities, our hubs, and so we do not foresee significant system-wide 
redundancies. Our equipment and passenger volume would require us to 
maintain most of the space that we currently lease. There could well be 
some redundancy of space and function at some airports and we will need 
to economize on space where it is no longer needed. Because of the lack 
of overlap in our networks, reductions in facilities should be minimal. 
We cannot estimate revenue changes for airports nor make suggestions 
regarding their business management plans for their facilities.

    Question 9. Will this merger enable you to address the scope clause 
provisions of your pilots agreement thereby enabling you to bring the 
90- to 100-seat aircraft to the markets that are too big for a 50-seat 
aircraft, but not large enough for a 130+ seat aircraft?
    Answer. Today, United's contracts allow us to fly 70-seat aircraft 
as part of our regional carrier fleet. It is too early at this time to 
discuss possible changes in our fleet mix or scope clauses with various 
represented groups. We will work with the appropriate groups, through 
the negotiation process to determine what mix is good for the company, 
employees and communities we serve.

    Question 10. How will this merger impact your relationships with 
each of your regional partners?
    Answer. We have no plans to change these relationships. Our 
regional partners are indispensable to the efficiencies of our 
networks, and they will continue to be so for the combined network.

    Question 11. How do you plan on integrating your workforce (pilots, 
flight attendants, machinists, etc.) and honoring existing agreements 
with your workforce and respective unions?
    Answer. Team leaders from Continental and United have been meeting 
to discuss the integration planning process. While our leaders' role in 
successfully integrating the two companies is critical, there are labor 
related aspects to the integration that require the full engagement of 
the employees and their union representatives. Continental and United 
understand that management's role in the integration of Railway Labor 
Act employee groups is very limited; it is purely an employee decision 
to be represented by a union, and where comparable employee groups are 
represented by different unions, to decide which shall be the surviving 
representative. We are committed that all integrations be done in a 
fair and equitable manner, in accordance with the RLA, the McCaskill-
Bond Amendment, and with all applicable collective bargaining 
agreements and company policies. We have already begun formal 
discussions to find the best ways to achieve these goals with the least 
amount of disruption with several of our unions. While we recognize 
that it is a difficult and often contentious process, we plan to follow 
the successful examples already established; the ultimate goal is, 
working with the unions and our employees, to finalize integration in a 
fair and expeditious manner.
                                 ______
                                 
    Response to Written Question Submitted by Hon. Amy Klobuchar to 
                            Glenn F. Tilton

    Question. The BP oil spill disaster in the Gulf of Mexico is 
devastating communities all along the coast and throughout the Gulf 
states.What effect, if any, is the BP oil spill having on your airlines 
and the airline industry as a whole? Please be as specific as possible, 
including providing any statistics of which you are aware.
    Answer. United is monitoring the BP oil spill and the impact on 
fuel prices and the refining crack spread. Fuel is the airlines largest 
and most volatile expense, and any changes to this market may impact 
overall financial performance.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Mark Warner to 
                            Glenn F. Tilton

    Question 1. We have spoken about the fact that these two airlines 
have largely complimentary networks, and that the typical effect of 
mergers--loss of service due to consolidation of networks--may not be 
as pronounced in this case. However, the consolidated airline in this 
case would have two East Coast hubs relatively nearby, in Newark and 
Dulles. There have been reports that note that Newark stands to get 
busier and could stand to benefit by swapping out smaller planes in use 
there for larger planes that are currently serving Dulles. Can you 
commit today that Dulles will remain an integral cog in the merged 
airline's operation, and that you will not seek to cut service or 
downsize the hub that serves our Nation's capital?
    Answer. Dulles has been a key hub for United. We have had 
significant growth at Dulles in our international markets, as well as 
domestic service in the eastern United States. In recent years, we have 
added service to 8 international cities from Dulles and it serves as 
our key gateway to Europe, the Middle East and now Africa.
    The Dulles market is a unique and separate market from any of the 
other hubs in the combined carrier. The nation's capital has a large 
local population that supports significant air service both 
internationally, as well as throughout the United States.

    Question 2. One of your strongest arguments for the merger is the 
increased financial stability that the companies--and the industry 
generally--will achieve. Will better financial stability attained by 
the merger allow you to consider again moving forward with plans you 
had to build a new concourse at Dulles?
    Answer. It is too soon to comment on the consideration of specific 
projects, such as facilities at Dulles. Improved financial stability 
will create a sustainable enterprise that will benefit our passengers, 
the communities we serve and our employees. Today, operating as 
independent companies, United and Continental continually evaluate 
their facilities needs in the context of their ongoing business 
operations. Those types of decisions will continue as United and 
Continental integrate their operations after the merger closes.
                                 ______
                                 
 Response to Written Question Submitted by Hon. John D. Rockefeller IV 
                          to Jeffery A. Smisek

    Question. If the DOJ approves this merger, one of the biggest 
challenges you'll face is integrating the work forces of the two 
airlines. Bringing all the employees under comparable contracts will be 
difficult. What steps do you plan to take to smooth the workforce 
transition?
    Answer. We have about 30 separate groups comprised of Continental 
and United leaders who have been meeting to discuss the integration 
planning process. While our leaders' role in successfully integrating 
the two companies is critical, there are labor related aspects to the 
integration that require the full engagement of the employees and their 
union representatives. Continental and United understand that 
management's role in the integration of Railway Labor Act employee 
groups is very limited; it is purely an employee decision to be 
represented by a union, and where comparable employee groups are 
represented by different unions, to decide which shall be the surviving 
representative. We are committed that all labor integrations be done in 
a fair and equitable manner, in accordance with the RLA, the McCaskill-
Bond Amendment, and with all applicable collective bargaining 
agreements and company policies. We have already begun formal 
discussions with several of our unions to find the best ways to achieve 
these goals with the least amount of disruption. While we recognize 
that it is a difficult and often contentious process, we plan to follow 
the successful examples already established; the ultimate goal is, 
working with the unions and our employees, to finalize integration in a 
fair and expeditious manner.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                           Jeffery A. Smisek

    Question 1. Do you believe the flight crew of the Flight 3407 that 
crashed outside of Buffalo, NY was properly trained and followed 
appropriate protocol?
    Answer. Continental and all of our employees are saddened by the 
tragic accident of Flight 3407 and deepest condolences are sent to 
those that experienced loss in this accident. As you may know, the 
National Transportation Safety Board conducted a thorough investigation 
into the accident and issued its final report, which included detailed 
findings and conclusions, probable cause, and recommendations, some of 
which relate to crew training and protocol. While Continental was not a 
party to that investigation and therefore has no first-hand knowledge 
of the bases for the findings and conclusions reached by the NTSB, we 
respect those findings and conclusions.

    Question 2. What safety standards did Continental require its 
regional airlines to meet in order to partner with your airline?
    Answer. Safety is our top priority and always will be. It is 
important to me and to all of us at Continental that members of this 
committee and the public in general understand and appreciate our 
position on this very critical issue. Just a year ago, the U.S. Senate 
Committee on Commerce, Science, and Transportation held a hearing on 
aviation safety as it relates to the relationship between network 
airlines and regional airlines. Captain Don Gunther, Continental's VP 
of Safety, provided testimony on behalf of Continental and addressed 
the issues you raised. Please see Attachment A, information provided by 
Captain Gunther, which expounds on his testimony on these critical 
safety issues and reflects Continental's firm commitment that safety is 
our top priority.

    Question 3. What steps has Continental taken since that crash to 
improve safety at Continental and its regional airline partners?
    Answer. Safety remains our highest priority. All employees at 
Continental, from senior management to front-line employees, are 
dedicated to safety. In addition to our robust internal safety culture, 
of which I am very proud, we remain equally committed to continuing our 
work with all members of the aviation community, including regional 
carriers, to share best practices and support other reform and 
initiatives that will help improve the safety. Please see Attachment A, 
provided by Captain Gunther which details steps we have taken since the 
accident in furtherance of our commitment to safety.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                           Jeffery A. Smisek

    Question 1. Continental's market share at Newark Airport is already 
over seventy percent and if this merger is successful, this share will 
only increase. You've stated that this merger will eventually result in 
the savings of $200 million annually for the airline. Will any of these 
savings come from higher fares for passengers flying in and out of 
Newark Airport?
    Answer. Continental and United have invested billions of dollars in 
people, facilities, and aircraft to compete in the global marketplace, 
including well over $1 billion at Newark Airport. The combined company 
is going to continue to function in a highly competitive marketplace, 
and consumers will benefit from a more comprehensive network that can 
better sustain itself in a volatile marketplace. We expect that 
improved connectivity and direct service options, as well as improved 
service for our customers, will enable the combined airline to generate 
substantial revenue synergies. The combined Continental-United is 
expected to deliver $1.0 to $1.2 billion in net annual synergies by 
2013, including between $800 and $900 of incremental annual revenue. 
None of the network synergies is dependent upon fare or fee increases.

    Question 2. Will you commit to having the new United assume 
responsibility for the safety of any carrier that flies under its 
brand?
    Answer. Safety is Continental's number one priority and will 
continue to be at the merged Continental/United. All employees at 
Continental, from senior management to front-line employees, are 
dedicated to safety. In addition to our robust internal safety culture, 
of which I am very proud, we will remain equally committed to 
continuing our work with all members of the aviation community, 
including regional carriers, to share best practices and support other 
reform and initiatives that will help improve safety of the merged 
Continental/United. Just a year ago, the U.S. Senate Committee on 
Commerce, Science, and Transportation held a hearing on aviation safety 
as it relates to the relationship between network airlines and regional 
airlines. Captain Don Gunther, Continental's VP of Safety, provided 
testimony on behalf of Continental and addressed the issues you raised. 
Please see Attachment A, information provided by Captain Gunther, which 
expounds on his testimony on these critical safety issues and reflects 
Continental's firm commitment that safety is our top priority.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                           Jeffery A. Smisek

    Question 1. How will this merger affect your relationships with 
your regional partners and your global code share partners?
    Answer. We believe this merger will create more opportunities for 
our regional partners than exist today. Continental and United have 
several mutual code share partners, many of whom are also members of 
the industry leading Star Alliance network. We believe this merger 
makes the combined Continental/United a much stronger and more viable 
partner.

    Question 2. Do you plan on consolidating any of your hub airports 
or significantly altering your route structure?
    Answer. This merger will produce synergies and will increase the 
value of the network to consumers, which will in turn produce greater 
demand for the merged airline's hubs than if the two companies remained 
separate. When schedules and fleets are optimized, the enhanced 
efficiency and greater passenger connectivity at each hub will create 
opportunities for growth, not contraction. We will continue to provide 
service to all of the communities our airlines currently serve, 
including 148 small communities and metropolitan areas. The combined 
airline would serve 350 destinations. We estimate that the merger will 
create 1,282 new online city pairs, nearly half of which (626) aren't 
currently served by any single airline.

    Question 3. With a merger, will access to all current hubs 
currently served by Continental and United from Little Rock National 
and Northwest Arkansas Regional remain available?
    Answer. Continental has been committed to service to small 
communities for a long time. The merger announcement does not change 
that commitment. In fact, the merger should allow for more service to 
small communities, not less.
    Note that the combined carrier will serve 148 small communities and 
small metro areas in its network and those destinations will have 
connectivity over combined hubs to worldwide destinations that may not 
necessarily exist today. We have committed to continue to serve all of 
the communities we serve today.

    Question 4. How do you plan to integrate your combined route 
structure at these Arkansas airports?
    Answer. We have begun a comprehensive effort to conduct the 
detailed planning process for combining the two companies after the 
merger closes. This effort includes network planning and operations.

    Question 5. How will this merger enable you to better serve the 
small, nonhub markets?
    Answer. The Continental-United merger will benefit small 
communities, as the combined entity will be able not only to preserve 
but to enhance existing, extensive services to such communities. As 
network carriers, Continental and United have a long history of serving 
small and medium sized communities.
    The Continental-United merger will enable residents of small 
communities to connect through eight mainland domestic hubs and travel 
on to hundreds of destinations on thousands of routes worldwide. The 
combined airline will offer these travelers online access to 350 
destinations in 59 countries. Following the merger, 93 of the 116 
destinations that would be new to either Continental or United 
passengers would be small communities. Passengers from communities in 
Arkansas currently served by Continental, for example, will have new 
service on a single airline to all the destinations that United 
currently serves. Furthermore, none of the few routes on which 
Continental and United currently offer overlapping nonstop service 
involves a small community point.
    The merged Continental and United will continue to provide service 
to all of the communities our airlines currently serve, including 148 
small communities and metropolitan areas. In fact, the merger is likely 
to enable service to additional destinations, for two reasons: (1) by 
improving connectivity at the hubs, the merger will increase demand on 
existing spokes, and (2) by improving efficiency and realizing 
synergies, the merger will increase the probability that we will add 
new spokes to new destinations.

    Question 6. With this merger, will prices for Arkansas travelers 
become more reasonable and competitive?
    Answer. Continental believes there will be more, rather than fewer, 
competitive choices after the merger. We expect that improved 
connectivity and direct service options, as well as improved service 
for our customers, will enable the combined airline to generate 
substantial revenue synergies. None of these network synergies was 
modeled using fare or fee increases. The combined company is going to 
continue to function in a highly competitive marketplace, and consumers 
will benefit from a more comprehensive network that can better sustain 
itself in a volatile marketplace. Additionally, the combined airline 
will be better able to enhance the travel experience for our customers 
through investments in technology, the acquisition of new planes and 
the implementation of best practices of both airlines.

    Question 7. Do you intend on providing any nonstop, direct flights 
from Little Rock or Northwest Arkansas to DCA, DIA, BWI?
    Answer. It is too early in the integration planning process to 
address which new nonstop flights we would add, and when, but we expect 
to be able to add several in the near term as a result of the merger. 
Integration or post-merger planning should indicate new opportunities 
for expansion along underserved routes.

    Question 8. How much revenue will airports lose as a result of the 
merger through leased space? How should airports make up such lost 
revenue?
    Answer. There may be some level of airport leased space 
rationalization once the airlines' operations are combined. However, 
most airport leases incorporate full cost recovery rate making 
methodologies that allow airports to compensate for any reduction in 
leased space or flight and passenger activity.

    Question 9. Will this merger enable you to address the scope clause 
provisions of your pilots agreement thereby enabling you to bring the 
90- to 100-seat aircraft to the markets that are too big for a 50-seat 
aircraft, but not large enough for a 130 plus seat aircraft?
    Answer. The pilot contracts are in negotiation, and the Air Line 
Pilots Association, which represents pilots from United and 
Continental, has already stated that it desires to quickly negotiate a 
joint collective bargaining agreement. Part of that negotiation will 
likely include scope issues. It would be premature to predict what the 
substance or outcome of those negotiations might be.

    Question 10. How will this merger impact your relationships with 
each of your regional partners?
    Answer. We believe this merger will create more opportunities for 
our regional partners than exist today. Continental and United have 
several mutual code share partners, many of whom are also members of 
the industry leading Star Alliance network. We believe this merger 
makes the combined Continental/United a much stronger and more viable 
partner.

    Question 11. How do you plan on integrating your workforce (pilots, 
flight attendants, machinists, etc.) and honoring existing agreements 
with your workforce and respective unions?
    Answer. We have about 30 separate groups comprised of Continental 
and United leaders who have been meeting to discuss the integration 
planning process. While our leaders' role in successfully integrating 
the two companies is critical, there are labor related aspects to the 
integration that require the full engagement of the employees and their 
union representatives. Continental and United understand that 
management's role in the integration of Railway Labor Act employee 
groups is very limited; it is purely an employee decision to be 
represented by a union, and where comparable employee groups are 
represented by different unions, to decide which shall be the surviving 
representative. We are committed that all labor integrations be done in 
a fair and equitable manner, in accordance with the RLA, the McCaskill-
Bond Amendment, and with all applicable collective bargaining 
agreements and company policies. We have already begun formal 
discussions with several of our unions to find the best ways to achieve 
these goals with the least amount of disruption. While we recognize 
that it is a difficult and often contentious process, we plan to follow 
the successful examples already established; the ultimate goal is, 
working with the unions and our employees, to finalize integration in a 
fair and expeditious manner.
                                 ______
                                 
    Response to Written Question Submitted by Hon. Amy Klobuchar to 
                           Jeffery A. Smisek

    Question. The BP oil spill disaster in the Gulf of Mexico is 
devastating communities all along the coast and throughout the Gulf 
States. What effect, if any, is the BP oil spill having on your 
airlines and the airline industry as a whole? Please be as specific as 
possible, including providing any statistics of which you are aware.
    Answer. Continental is monitoring the BP oil spill and will 
continue to do so. Fuel is the airlines largest and most volatile 
expense, and any changes to this market may impact overall operations. 
Aside from the impact on the cost of jet fuel, we have also been 
monitoring the loads on our flights into and out of the Gulf Region. 
While Continental has not seen significant booking reductions for the 
Gulf Region, Continental has seen some limited localized impacts.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Mark Warner to 
                           Jeffery A. Smisek

    Question 1. We have spoken about the fact that these two airlines 
have largely complimentary networks, and that the typical effect of 
mergers--loss of service due to consolidation of networks--may not be 
as pronounced in this case. However, the consolidated airline in this 
case would have two East Coast hubs relatively nearby, in Newark and 
Dulles. There have been reports that note that Newark stands to get 
busier and could stand to benefit by swapping out smaller planes in use 
there for larger planes that are currently serving Dulles. Can you 
commit today that Dulles will remain an integral cog in the merged 
airline's operation, and that you will not seek to cut service or 
downsize the hub that serves our Nation's capital?
    Answer. Dulles has been a key hub for United. They have had 
significant growth at Dulles in our international markets, as well as 
domestic service in the eastern United States. In recent years, we have 
added service to 8 international cities from Dulles and it serves as 
our key gateway to Europe, the Middle East and now Africa.
    The Dulles market is a unique and separate market from any of the 
other hubs in the combined carrier. The nation's capitol has a large 
local population that supports significant air service both 
internationally, as well as throughout the United States.

    Question 2. One of your strongest arguments for the merger is the 
increased financial stability that the companies--and the industry 
generally--will achieve. Will better financial stability attained by 
the merger allow you to consider again moving forward with plans you 
had to build a new concourse at Dulles?
    Answer. Improved financial stability will create a sustainable 
enterprise that will benefit our passengers, the communities we serve 
and our employees. Today, operating as independent companies, United 
and Continental continually evaluate their facilities needs in the 
context of their ongoing business operations. Those types of decisions 
will continue as United and Continental integrate their operations 
after the merger closes. It is too soon to comment on the consideration 
of specific projects, such as facilities at Dulles.

   Attachment A--Supplemental Information from Captain Don Gunther, 
                 Staff VP, Safety, Continental Airlines

    Safety is Continental's number one priority.
    Aviation safety is a shared endeavor that involves all stakeholders 
in the industry, including aircraft operators, manufacturers, airports, 
service providers and the Federal Aviation Administration (FAA). 
Continental is committed to the role that it plays and remains 
committed to working with all members of the aviation community to 
continuously improve the safety of our air transportation system. As 
Mr. Smisek mentioned at the June 16, 2010 hearing, safety is, and will 
always be, the airline's number one priority.
    As I have stated before, the commercial aviation industry operates 
under a regulatory framework which recognizes the FAA as the entity 
ultimately responsible for regulating and overseeing air carrier 
compliance with safety regulations. In fact, Congress has created a 
strong statutory mandate to the FAA to ensure all air carriers are safe 
for passengers to fly. In addition, each carrier is responsible for 
operating its flights safely, is required to uphold its regulatory 
obligations under its operating certificate issued by the FAA, and is 
directly accountable to the FAA through inspections and, if necessary, 
legal enforcement action to ensure safety issues are resolved properly. 
All carriers--mainline and regional alike--must respect the importance 
of compliance with safety regulations in their own right. 
Notwithstanding individual responsibilities, carriers should and do 
work together to promote and enhance, those standards of safety that 
have been developed within the industry.
    There are many ways in which Continental supports this important 
initiative of airlines working together to address safety issues. For 
example, Continental participates in committees and task forces, such 
as the Aviation Safety Information and Analysis Sharing (ASIAS) program 
and the Commercial Aviation Safety Team (CAST). Continental also 
participates in safety forums and meetings where best practices and 
other aspects of the FAA voluntary safety programs (ASAP, FOQA, LOSA, 
and AQP) are shared and discussed. Both mainline and regional carriers 
routinely attend and participate in these programs with the common goal 
of promoting safety.
    Continental's own commitment to safety is carried through to its 
relationships with regional carriers. Prior to entering into a business 
arrangement with a regional carrier, Continental always reviews the 
carrier's status with the FAA and determines whether it has a current 
operating certificate. Continental recognizes the FAA's leadership as 
the body responsible for determining a carrier's fitness to fly safely, 
authorizing the carrier's operation, and promoting and enforcing safety 
standards. In addition, Continental's contracts with regional carriers 
specifically require them to comply with Federal safety standards and 
regulations. Continental also engages in a number of other safety-
specific actions before entering into commercial relationships to code-
share with a regional carrier, and it continues to assess those 
carriers after entering into an agreement.
    For example, with respect to domestic code-share operations, 
Continental has developed and follows a ``Domestic Commuter Code-Share 
Safety Review Program.'' The purpose of the program is to validate the 
safety and compliance status of each domestic regional carrier with 
which it has a code-share arrangement. The objective of the program is 
to ensure, through a systematic program of evaluation, that processes 
exist for complying with the FAA's regulatory framework and that the 
code-share carrier is actually complying with its own compliance 
standards.
    Continental obtains and reviews safety audits performed by highly 
qualified independent entities. These include:

   The International Air Transport Association's (IATA) 
        Operational Safety Audit (``IOSA'').

   The DOD survey, which is an audit performed by the military 
        under the Secretary of Defense to ensure safety compliance of 
        airlines that transport military personnel.

    Pursuant to its Domestic Commuter Code-Share Safety Review Program, 
Continental conducts bi-annual reviews that include:

   Discussions with the code-share partners to review safety, 
        operations and maintenance concerns;

   Noting major changes to the air carrier's fleet, 
        organization or safety program; and

   Reviewing any threats and safety issues of the code-share 
        carrier that may be derived from publications and other means.

    Furthermore, Continental conducts biennial reviews that include:

   Obtaining and reviewing current IOSA Audit Reports;

   Obtaining and reviewing current DOD Air Carrier Survey 
        results; and

   Conducting an on-site visit at the code-share partner's 
        facilities.

    Continental also communicates about code-share operations with 
those regional carriers which operate under its code to discuss various 
industry developments and safety issues. If Continental determines at 
any time that a carrier is having safety issues, it promptly addresses 
those issues with the carrier.
    Additionally, Continental conducts Regional Partner Safety Summits 
twice a year. During the Summits, safety and operational issues 
affecting our airlines are discussed. These Regional Partner Safety 
Summits afford Continental and the regional carriers with which we 
contract the opportunity for open dialogue concerning industry trends, 
best practices, voluntary programs, and strategies for managing and 
enhancing operational safety. A collaborative agenda and allowing ample 
time for open discussion have resulted in lively contributions and 
positive responses from the session participants.\1\
---------------------------------------------------------------------------
    \1\ Continental offers one example of the shared benefits that can 
flow from such collaboration. At a recent summit, Continental shared 
and discussed information about our Line Operations Safety Audits 
(LOSA) program (LOSA is a program for the management of human error in 
aviation operations). Following the summit, Continental provided two 
trained observers to work with a regional carrier that was in the 
process of initiating such a program. This allowed that regional 
carrier to leverage Continental's LOSA experience in conducting its own 
operational safety audit.
---------------------------------------------------------------------------
    The FAA holds each carrier--whether mainline or regional--
responsible for ensuring proper qualifications and training for its own 
flight crews. It would be inconsistent with the regulatory structure 
that Congress established for ensuring aviation safety for any airline 
to require certain elements to be included in the FAA-approved training 
program of another airline, which is separately certificated by the 
FAA. It is recognized throughout the industry that, coupled with 
appropriate oversight by the FAA, the carrier that operates the 
aircraft must develop and implement an appropriate crew qualification 
criteria and training for a specific aircraft.
    Continental reserves the right to choose the carriers with whom it 
maintains a business relationship. Continental will not maintain a 
business relationship with any carrier that does not meet FAA 
standards. Nor will it maintain a relationship with any carrier that 
does not share in its commitment to a robust safety culture. Safety is 
Continental's highest priority in all aspects of its business, 
including the decision to enter into a code-share arrangement with 
another carrier.
    The aviation community understands that safety is not a perfect 
science and requires continuous improvement and innovation. Thank you 
for your consideration.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. John Thune to 
                 Glenn F. Tilton and Jeffery A. Smisek

    Question 1. In your testimony you pointed to this merger allowing 
your combined 700 aircraft fleet to be reassigned to better meet demand 
on different routes, which would result in ``a net increase in annual 
passengers and improving the business mix of those passengers.'' Can 
you tell me how you envision this additional flexibility when it comes 
to increasing annual passengers in South Dakota--or the two largest 
cities that you serve in my state? If I understand your testimony 
correctly, what you are referring to here is increased frequencies or 
expanded aircraft in existing markets that your two respective airlines 
currently serve.
    Answer. It is too soon in the integration planning process to state 
with certainty the new schedule or equipment assignments for the merged 
carrier or for any specific route. Our integration planning includes 
scheduling and optimal equipment reassignment, and will be focused on 
creating additional flexibility for travelers across the network.
    Additional flexibility means greater availability of flights, 
rational use of equipment to accommodate demand, and increased 
passenger choice. Passengers will enjoy substantially increased 
flexibility from the immediate rise in the number of online 
destinations accessible from South Dakota post-merger. As Continental 
currently does not serve South Dakota, the merger will create more than 
forty new domestic destinations that United does not currently serve.

    Question 2. In your testimony you explained how Low Cost Carriers 
(LCCs) have impacted the business model and passenger volumes of 
mainline carriers. Can you explain to me what the approach is generally 
when United or Continental are faced with increased competition from 
one or more LCCs at a nonhub airport--or even LCC competition at a 
nearby nonhub airport that is within a close geographic proximity (less 
than 4 hours by car) of a city that you serve? For instance, if United 
and/or Continental serve a particular airport but a LCC is taking away 
your customer base at another airport, is it your business practice to 
allow that LCC(s) to take away those passengers which reduces the need 
for you to provide a certain level of service or aircraft type at such 
a city, or is your approach to match any price disparity that may exist 
to reduce the amount of lost passengers that would otherwise occur.
    Answer. Continental and United compete vigorously for every 
passenger. As a general rule, a carrier's service patterns are based on 
demand from passengers and each of us competes with other carriers, 
including LCCs, to satisfy that demand. Airports with significantly 
larger traffic volumes enable airlines to operate at a lower per-
passenger cost than smaller airports. Carriers are constantly striving 
to achieve balance between pricing and costs to maintain the passenger 
base and service levels to satisfy demand in each market.
    United's present share of passengers traffic at Sioux Falls is 
approximately 25 percent. Continental does not currently serve Sioux 
Falls, so the merger will not result in a loss of any competition and 
in fact will allow for more online destinations for the community than 
are currently available, including forty new domestic destinations and 
ninety-two international destinations.

    Question 3. From an operations standpoint, can you explain to the 
Committee what generally occurs to the traveling public (leisure and 
business customers) when either of your airlines reduces frequency or 
aircraft size to a market--particularly when it comes to the price of 
tickets?
    Answer. The principal result from changes in frequency or gauge is 
retention of service on a particular route. Over the last 2 years, 
United, Continental and many other carriers have reduced capacity in 
the domestic market as a result of record high fuel costs and the 
economic recession. During that time average fares have continued to 
decline to historic lows. We have continually tried to match our 
capacity with demand. Fares are determined by the market place and in 
this hyper-competitive industry competition has continued to keep fares 
low.
    We are always trying to accommodate demand and meet our costs. Two 
ways we do this is by keeping our fleet ``right sized'' and our 
schedules responsive to the volume of passengers. The point of the 
United-Continental merger is to create a carrier that can provide 
travelers with better access, wider choices, and greater flexibility, 
thereby retaining current passengers and attracting additional ones. We 
think that the enhanced service that we will be able to provide will 
give passengers these benefits, in South Dakota, and at all our 
destinations
    As a company, we do not see continual reduction of our fleet and 
service as a positive strategy for the long term. Therefore, a key 
reason for this merger is to grow our network, providing more service 
options to passengers. While we know we will continue to face 
challenges to our industry from many fronts, we are committed to 
building a sustainable business that will benefit our employees, 
customers, shareholders and the communities we serve.
                                 ______
                                 
Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                          to Robert Roach, Jr.

    Question 1. What are the primary issues you have with the potential 
merger between United and Continental?
    Answer. As the largest airline union in North America, the IAM has 
maintained a long-standing opposition to airline mergers since they 
result in job losses and disruptions for our members. We feel that the 
United/Continental merger will be no different. Despite the promises of 
airline executives, it will result in reduced service, higher fares, 
closed hubs, and job cuts.
    The track record of airline mergers is clear, leaving behind a 
trail of shuttered airport facilities in cities such as St. Louis, 
Pittsburgh, and Cincinnati. Each time, be it with the American/TWA 
merger, the US Airways/America West merger, the Delta/Northwest merger, 
or the current United/Continental merger, airline executives maintained 
that no hubs would be closed and no front line jobs would be lost. This 
fallacy has been borne out in each merger we have seen to date, most 
recently in Cincinnati where Delta has laid off over 800 employees at 
its hub there and has reduced its operations to one concourse from 
three.

    Question 2. What specific issues would you like the airlines to 
work with on as they move forward with the proposed merger?
    Answer. Protecting the interests of the 10,000 IAM members at 
Continental Airlines and the 16,000 IAM members at United Airlines is 
of the utmost importance to this union. One of our primary concerns is 
the subject of pensions. Continental Airlines employees still enjoy a 
single-employer defined benefit pension plan, while United Airlines 
employees had their single-employer plans terminated during that 
company's bankruptcy. The Pension Benefit Guaranty Corporation (PBGC) 
has inherited the liabilities of the United plans and as a result, 
United Airlines is currently barred from sponsoring a single-employer 
pension plan. The company has not yet developed its policy concerning 
merging the retirement benefits of employees at the new airline, but it 
is extremely unlikely that the underfunded Continental plans could take 
on additional pension obligations for United employees. One of the sole 
options for preserving defined benefit retirement plans for the 
employees on the merged carrier is the IAM's multiemployer plan, in 
which our United Airlines members already participate.

    Question 3. To what extent are the airlines working with you as 
they move forward with their merger proposal?
    Answer. The airlines have already established a more cooperative 
relationship with us than we saw in the Delta/Northwest merger, where 
the airline's management team refused to even meet with the IAM 
leadership following their merger announcement. However, because the 
United/Continental merger was put together so hastily, the management 
team has yet to provide us with concrete answers about how work groups 
will be integrated and any possible changes to their route networks.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                           Robert Roach, Jr.

    Question 1. Do you believe this merger will integrate these 
airlines workforce (pilots, flight attendants, machinists, etc.) in a 
manner that will honor existing agreements with between management and 
labor?
    Answer. We do believe that the integration process will be 
conducted in a fair and equitable manner which will preserve the 
current agreements in place until representation issues are settled and 
joint collective bargaining agreements have been negotiated. This, 
however, does not allay the IAM's fears concerning potential job losses 
and loss of retirement benefits.

    Question 2. What major changes do you anticipate?
    Answer. Bringing two airlines together brings such a myriad of 
changes for their employees that it would be impossible to list them 
all here. Among them include transitioning to new computer reservation 
systems, synchronizing maintenance and inflight safety procedures, 
integrating seniority lists, merging collective bargaining agreements, 
developing a new pass travel program, and creating a new brand and 
marketing image. It has also been stated by the company that they 
intend to bring Continental's employee-friendly ``Working Together'' 
culture to the new United, where employees have been laboring under 
concessions extracted during bankruptcy.
                                 ______
                                 
     Response to Written Question Submitted by Hon. John Thune to 
                           Robert Roach, Jr.

    Question. When an airline decides to reduce frequency or aircraft 
size to a particular market, what does that generally mean to the price 
of tickets to the traveling public--both leisure and business 
customers?
    Answer. When an airline reduces its frequency of service or the 
size of aircraft to a particular market, it can have a profound effect 
on pricing in that market. Both leisure travelers and business 
travelers alike will find their access to affordable air service 
diminished, especially in smaller cities such as Sioux Falls or Rapid 
City. Across the United States, these types of cities have already seen 
their mainline jet frequencies replaced with smaller regional 
``express'' carriers. In the wake of the 2008 airline capacity 
reductions, non-hub airports saw their capacity reduced by 11 percent 
over the previous year. The same capacity reductions saw 38 small 
communities lose their air service entirely, according to a study by 
the Government Accountability Office. The same report also showed that 
airports which had experienced a decline in capacity of more than 10 
percent, such as those in small cities, experienced a 21 percent 
increase in airfares when comparing 2007 to 2008.
    For leisure travelers, these increases mean delaying or canceling a 
vacation or visit to family members. For businesses, these costs are 
even more insidious. They constrain growth because firms cannot afford 
to deploy their sales force to other cities to sell their products. 
Their clients and supplies cannot afford to travel to these smaller 
cities to make deals face-to-face. They make it difficult for 
businesses to attract and retain talented employees. Reducing capacity 
is one of the key ways that a merged airline can capture the 
``synergies'' of which airline executives are so fond of proclaiming. 
What these synergies truly entail are fewer flights to smaller 
destinations, on smaller aircraft, at higher fares. These are among the 
many reasons why the International Association of Machinists and 
Aerospace Workers remains opposed to airline mergers.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                             Charles Leocha

    Question. An airline recently announced that it was going to start 
charging passengers to store their bags in the overhead compartment. 
Will the flying public be subjected to more of these arbitrary fees 
just so airlines can make a quick buck?
    Answer. I expect that the airlines will find more and more ways to 
separate fliers from their money. The most important factor is not the 
imposition of fees and new charges, but the refusal of the airlines to 
release these fees to central reservation systems so that consumers can 
compare the total costs of travel.
    Personally, I do not think that the fee approach is good for the 
airlines in the long run, but they have made that decision. Now it is 
Congress' and the DOT's responsibility to make sure that these fees are 
transparent and understandable to the traveling public.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                             Charles Leocha

    Question 1. How will this merger affect relationships between 
mainline carriers and their regional partners and global code share 
partners?
    Answer. If I had a crystal ball, I might be of better help here. 
Regional airline relationships always changing as the mainline carriers 
get better deals from their regional partners. I believe that the same 
safety standards should be applied to the regional carriers that the 
mainline carriers apply to themselves. Unfortunately, that is not 
always the case when the main effort is to save money.
    Global code-share partners will continue to get stronger now that 
the government has agreed to antitrust immunity. From a consumer's 
point of view, this is a massive mistake, but DOT has drunk the airline 
Kool Aid over the objections of Justice.

    Question 2. Do you believe this merger will lead to the 
consolidation of hub airports or significantly alter mainline carriers' 
route structure?
    Answer. There is no doubt that this merger will affect Cleveland. 
It will be downsized as Chicago grows. Perhaps the overcrowding of 
Chicago O'Hare will end up helping Cleveland. However, I expect the 
number of flights and support staffing levels to fall dramatically.

    Question 3. Will it be easier or more difficult for low-cost 
carriers to grow in an ever increasing consolidating industry?
    Answer. If the major airlines end up raising prices significantly, 
it will provide an opening for low cost carriers. Low cost carriers 
will maintain pricing control on major carriers on many popular routes, 
but not on regional and international routes.
    The major airlines are already moving out of routes where they 
compete directly with low cost carriers. They are focused on becoming 
connecting carriers and creating a large money-making international 
business now that alliances have created three large airlines that now 
virtually control international travel. Low cost carriers will have a 
much harder time breaking into the international market.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Warner to 
                             Charles Leocha

    Question. With the trend in airline consolidation, airlines appear 
to be focused primarily on profitability rather than service expansion. 
This focus is accompanied by a desire to ensure full flights, at the 
expense of providing service to some of the smaller communities in our 
country. In my state, a proposed swap of flights between two carriers 
looks like it will lead to elimination of service to a Virginia 
airport--service that is vital to smaller communities in that area of 
the state. I have concerns that airline consolidation could lead to 
similar eliminations of service. What's your take?
    Answer. All airlines will follow their profits. They are in 
business to make money. The subsidies for local airline service will 
continue to be one of the driving factors for regional airlines and for 
the hub and spoke systems. The major airlines are moving to an area 
where they rely on subsidies and the lower costs of regional air 
service and at the same time they use international routes to generate 
additional cash-flow through a system with reduced competition. 
Congress provides a big part of the current airline subsidiaries for 
local service. They can insure continued coverage when it is in the 
local public's interest.
                                 ______
                                 
     Response to Written Question Submitted by Hon. John Thune to 
                             Charles Leocha

    Question. When an airline decides to reduce frequency or aircraft 
size to a particular market, what does that generally mean to the price 
of tickets to the traveling public--both leisure and business 
customers.
    Answer. The change in aircraft size may mean that airfares will go 
up, or it may mean that airfares will go down. Airlines strive to 
maximize their use of aircraft efficiencies. The closer the airline can 
match type of aircraft to a particular route, the better it is for the 
airline's bottom line.
    Sometimes matching aircraft to traffic means reducing flights. 
Other times it means resizing aircraft serving particular airports.
    The size of aircraft and frequency of flights when done properly 
will lower costs and allow airlines to reduce their airfares.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Frank R. Lautenberg to 
                            Daniel McKenzie

    Question. An airline recently announced that it was going to start 
charging passengers to store their bags in the overhead compartment. 
Will the flying public be subjected to more of these arbitrary fees 
just so airlines can make a quick buck?
    Answer. As a traveler, I'm empathetic to the perceived ``nickel and 
diming'' by airlines. These ancillary fees were pioneered by Ryan Air 
in Europe and fine tuned by Allegiant Travel Corp here in the United 
States. The bag storage fee for overhead bin space referenced was 
proposed by Spirit, a low cost and ultra low fare airline whose pricing 
philosophy is to charge a steeply discounted low fare and then via add-
ons, walk a customer back to a higher fare . . . and at the end of the 
day, still charge a lot less than the legacy airlines.
    Looking ahead, I don't believe you'll see this particular ancillary 
fee as the backlash would be too great, but there are other ancillary 
fees that airlines may charge in the future. Jeff Smisek, Continental 
CEO, talks about charging for things people value, which based on my 
conversations with management teams at other airlines, is the 
prevailing industry philosophy behind incremental ancillary fee 
initiatives.
    For example, UAL has an economy plus product, where for an extra 
charge (say $49), you get more leg room. On the other hand, Southwest 
passengers have the option to pay a $10 ``early bird fee'' in order to 
buy themselves the right to be one of the first to board the plane and 
thus, the right to pick their desired seat.
    I suspect we will see incremental fees, but my sense is that they 
will be for things that passengers value. For whatever it's worth, corp 
travel managers have lashed out at airlines over some of the fees; and 
moreover, computer reservation (CRS) systems are not geared to 
accommodate the additional charges that airline would like to push 
through. So the sky is not the limit with these types of fees.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Mark Warner to 
                            Daniel McKenzie

    Question. With the trend in airline consolidation, airlines appear 
to be focused primarily on profitability rather than service expansion. 
This focus is accompanied by a desire to ensure full flights, at the 
expense of providing service to some of the smaller communities in our 
country. In my state, a proposed swap of flights between two carriers 
looks like it will lead to elimination of service to a Virginia 
airport--service that is vital to smaller communities in that area of 
the state. I have concerns that airline consolidation could lead to 
similar eliminations of service. What's your take?
    Answer. Thanks for the question. In short, expansion generally 
results from profitability; losses prompt contraction as airlines cut 
back unprofitable flying (why of course airlines that file for Ch. 11 
shrink). My take is that senior management teams today remain ``shell 
shocked'' by the balance sheet destruction wrought by $34B in losses 
over the past decade; a super spike in crude to $147; and then the 
Great Recession. That is, it's impossible for an airline to grow or add 
new service when it doesn't know what its cost structure will be. Open 
labor contracts and volatile fuel prices represent about 55 percent of 
total industry costs, and depending, this 55 percent has the ability to 
move strongly. So unfortunately for consumers, cost volatility has 
disciplined mgmt teams to focus on profitability vs new service at 
least for the near-term.
    Further out as business models stabilize (i.e., as airlines become 
more profitable), I believe they ultimately will add new service, with 
service to smaller cities balanced by new service internationally.
    As for the slot swap, interestingly, US Airways management tells me 
they approached Southwest first before going to Delta, and that 
Southwest turned them down. We'll see where the slots end up--I suspect 
its not a finished story at this point.
                                 ______
                                 
     Response to Written Question Submitted by Hon. John Thune to 
                            Daniel McKenzie

    Question. When an airline decides to reduce frequency or aircraft 
size to a particular market, whit does that generally mean to the price 
of tickets to the traveling public--both leisure and business 
customers?
    Answer. Senator Thune, sure--if the same number of people want to 
travel, but there are less options available, all else equal, prices 
would rise.
    However, there have been a few factors driving the reduction 
infrequencies and aircraft size:

        1. The worst recession since the great depression has resulted 
        in less people traveling over the past couple of years;

        2. the spike in fuel prices to $147/barrel resulted in billions 
        in losses as the industry was unable to pass along that 
        increased cost of doing business, so the airlines are trying to 
        stabilize balance sheets after losing $34B over the past 
        decade; and

        3. I've been seeing a lot the down gauging in size due to low-
        cost carriers (low-cost capacity) displacing high-cost legacy 
        carriers (high-cost capacity). You may not be seeing that at 
        Reagan National or in South Dakota unfortunately, however, it 
        is occurring at Denver, Milwaukee, and Boston for example.

    If there is a silver lining in the picture, it's that AirTran is 
working hard to turn Milwaukee into a hub, which may be a source of 
low-cost capacity into your state at some point.

                                  
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