[Senate Hearing 113-826]
[From the U.S. Government Publishing Office]
S. Hrg. 113-826
THE AMERICAN AIRLINES/US AIRWAYS
MERGER: CONSOLIDATION,
COMPETITION, AND CONSUMERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
----------
MARCH 19, 2013
----------
Serial No. J-113-9
----------
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
S. Hrg. 113-826
THE AMERICAN AIRLINES/US AIRWAYS
MERGER: CONSOLIDATION,
COMPETITION, AND CONSUMERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2013
__________
Serial No. J-113-9
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
98-440 PDF WASHINGTON : 2017
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Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking
CHUCK SCHUMER, New York Member
DICK DURBIN, Illinois ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona
Bruce A. Cohen, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
AMY KLOBUCHAR, Minnesota, Chairman
CHUCK SCHUMER, New York MICHAEL S. LEE, Utah, Ranking
AL FRANKEN, Minnesota Member
CHRISTOPHER A. COONS, Delaware LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut CHUCK GRASSLEY, Iowa
JEFF FLAKE, Arizona
Craig Kalkut, Democratic Chief Counsel
Rob Porter, Republican Chief Counsel
C O N T E N T S
----------
MARCH 19, 2013, 10:03 A.M.
STATEMENTS OF COMMITTEE MEMBERS
Page
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota.. 1
Lee, Hon. Michael S., a U.S. Senator from the State of Utah...... 3
statement.................................................... 191
WITNESSES
Witness List..................................................... 43
Horton, Thomas, Chairman, President, and Chief Executive Officer,
American Airlines and AMR Corporation, Fort Worth, Texas....... 6
prepared statement........................................... 44
McGee, William J., Consultant, Consumers Union, New York, New
York........................................................... 11
prepared statement........................................... 64
Moss, Diana L., Ph.D., Director and Vice President, American
Antitrust
Institute (AAI), Washington, DC................................ 9
prepared statement........................................... 53
Parker, Douglas, Chairman and Chief Executive Officer, US Airways
Group, Tempe, Arizona.......................................... 7
prepared statement........................................... 44
QUESTIONS
Questions submitted to Thomas Horton by:
Senator Blumenthal........................................... 90
Senator Klobuchar............................................ 80
Senator Lee.................................................. 85
Questions submitted to William J. McGee by:
Senator Klobuchar............................................ 82
Senator Lee.................................................. 88
Questions submitted to Diana L. Moss by:
Senator Blumenthal........................................... 91
Senator Klobuchar............................................ 81
Senator Lee.................................................. 87
Questions submitted to Douglas Parker by:
Senator Blumenthal........................................... 92
Senator Klobuchar............................................ 78
Senator Lee.................................................. 83
ANSWERS
Responses of Thomas Horton to questions submitted by Senators
Blumenthal, Klobuchar, and Lee................................. 93
Responses of William J. McGee to questions submitted by Senators
Klobuchar and Lee.............................................. 102
Responses of Diana L. Moss to questions submitted by Senators
Blumenthal, Klobuchar, and Lee................................. 108
Responses of Douglas Parker to questions submitted by Senators
Blumenthal, Klobuchar, and Lee................................. 116
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
Alioto, Joseph M., Attorney, San Francisco, California, statement 133
Allied Pilots Association (APA) Government Affairs Committee,
Capt. Robert Coffman, Chairman, statement...................... 135
American Federation of State, County and Municipal Employees
(AFSCME), Utah Local 1004, Patty Rich, Executive Director,
March 14, 2013, letter......................................... 316
Anoka County, Minnesota, Scott Schulte, County Commissioner,
March 14, 2013, letter......................................... 192
Association for a Better New York (ABNY), Jennifer Hensley,
Executive Director, March 8, 2013, letters..................... 200
Association of Flight Attendants (AFA), Veda Shook, International
President, statement........................................... 131
Association of Professional Flight Attendants (APFA), Laura R.
Glading, President, statement.................................. 139
Association of Professional Flight Attendants (APFA) et al.,
March 18, 2013, joint letter................................... 189
Austin-Bergstrom International Airport, Texas, Jim Smith,
Executive Director, March 18, 2013, letters.................... 234
Bingman, Hon. Brian, President Pro-Tempore, Oklahoma State
Senate, March 8, 2013, letters................................. 209
Business Travel Coalition (BTC), letter to United States
Department of Justice and United States Department of
Transportation, March 19, 2013................................. 128
Cameron County, Texas, County Judge Carlos H. Cascos, CPA, March
18, 2013, letters.............................................. 242
Central West Virginia Regional Airport Authority, R. Edison Hill,
Chairman, March 15, 2013, letter............................... 318
Charlotte, North Carolina, Hon. Anthony R. Foxx, Mayor, March 15,
2013, letter................................................... 195
Charlotte Chamber, Charlotte, North Carolina, Bob Morgan,
President and Chief Executive Officer, March 13, 2013, letter.. 194
Charlotte Regional Partnership, Ronnie Bryant, C.Ec.D., F.M.,
H.L.M., President and Chief Executive Officer, March 14, 2013,
letter......................................................... 196
Chicagoland Chamber of Commerce, Gerald J. Roper, President and
Chief Executive Officer, March 15, 2013, letter, statement..... 178
City of Abilene, Texas, Hon. Norm Archibald, Mayor, March 11,
2013, letters.................................................. 231
City of Austin, Texas, Hon. Lee Leffingwell, Mayor, March 15,
2013, letters.................................................. 236
City of Brownsville, Texas, Hon. Tony Martinez, Mayor, March 13,
2013, letters.................................................. 240
City of Cedar Rapids, Iowa, Hon. Ron J. Corbett, Mayor, March 8,
2013, letters.................................................. 164
City of College Station, Texas, Hon. Nancy F. Berry, Mayor, March
12, 2013, letters.............................................. 285
City of Corpus Christi, Texas, Hon. Nelda Martinez, Mayor, March
11, 2013, letters.............................................. 244
City of Dallas, Texas, Hon. Michael S. Rawlings, Mayor, March 18,
2013, letter................................................... 252
City of Dubuque, Iowa, Hon. Roy D. Buol, Mayor, March 4, 2013,
letter......................................................... 168
City of Fort Worth, Texas, Hon. Betsy Price, Mayor, March 14,
2013, letter................................................... 256
City of Killeen, Texas, Hon. Daniel A. Corbin, Mayor, March 8,
2013, letters.................................................. 264
City of Laguna Vista, Texas, Hon. Susie Houston, Mayor, March 15,
2013, letters.................................................. 266
City of Laredo, Texas, Hon. Raul G. Salinas, Mayor, March 13,
2013, letters.................................................. 270
City of Los Angeles, California, Hon. Antonio R. Villaraigosa,
Mayor, March 18, 2013, letter.................................. 145
City of McAllen, Texas, Hon. Richard F. Cortez, Mayor, March 18,
2013, letters.................................................. 279
City of Midland, Texas, Hon. W. Wesley Perry, Mayor, letters..... 283
City of Philadelphia, Pennsylvania, Hon. Michael A. Nutter,
Mayor, March 18, 2013, letter.................................. 219
City of Philadelphia City Council, Pennsylvania, Darrell L.
Clarke, President, March 15, 2013, letter...................... 216
City of Phoenix, Arizona, Hon. Greg Stanton, Mayor, and City of
Tempe, Arizona, Hon. Mark W. Mitchell, Mayor, March 15, 2013,
letter......................................................... 144
City of Port Isabel, Texas, Hon. Joe E. Vega, Mayor, March 15,
2013, letters.................................................. 291
City of San Antonio, Texas, Hon. Julian Castro, Mayor, March 18,
2013, letters.................................................. 299
City of Sioux City, Iowa, Hon. Robert E. Scott, Mayor, March 11,
2013, letters.................................................. 174
City of South Padre Island, Texas, Hon. Robert N. Pinkerton, Jr.,
Mayor, March 13, 2013, letters................................. 275
City of Texarkana, Texas, Hon. Bob Bruggeman, Mayor; City of
Texarkana, Arkansas, Hon. N. Wayne Smith, Mayor; Texarkana
Airport Authority, John Jarvis, Chairman; March 19, 2013,
letter......................................................... 233
City of Tulsa, Oklahoma, Hon. Dewey F. Bartlett, Jr., Mayor,
March 11, 2013, letters........................................ 213
City of Tyler, Texas, Hon. Barbara R. Bass, Mayor, March 8, 2013,
letters........................................................ 307
City of Waco, Texas, Hon. Malcolm Duncan, Jr., Mayor, March 8,
2013, letters.................................................. 309
City of Waterloo, Iowa, Hon. Buck Clark, Mayor, March 7, 2013,
letter......................................................... 176
City of Wichita Falls, Texas, Hon. Glenn Barham, Mayor, March 12,
2013, letters.................................................. 311
Coffman, Capt. Robert, Chairman, Allied Pilots Association (APA)
Government Affairs Committee, statement draft.................. 228
Corpus Christi International Airport (CCIA), Fernando (Fred)
Segundo, A.A.E., Director, Department of Aviation, March 12,
2013, letters.................................................. 246
Crown, Lester, Chair, Transportation Committee, Civic Committee,
Commercial Club of Chicago, and Henry Crown and Company, March
15, 2013, letter............................................... 180
Dakota County Regional Chamber of Commerce, Minnesota, Ruthe
Batulis, President, March 13, 2013, letter..................... 193
Dallas Regional Chamber, Texas, Ambassador James C. Oberwetter,
Retired, President and Chief Executive Officer, March 13, 2013,
letters........................................................ 248
Des Moines Airport Authority, Iowa, Donald L. Smithey, Executive
Director, March 7, 2013, letter................................ 167
Dubuque Regional Airport, Robert A. Grierson, A.A.E., Manager,
March 6, 2013, letter.......................................... 166
East Texas Regional Airport, Roy H. Miller, Jr., A.A.E., Airport
Director, March 7, 2013, letter................................ 253
Eastern Iowa Airport, The, Tim Bradshaw, A.A.E., Airport
Director, March 12, 2013, letters.............................. 169
Ferriss, Bruce, and Barbara Ferriss, Spokespersons, Association
of Professional Flight Attendants (APFA), and Former TWA Flight
Attendants, statement.......................................... 150
Florida Chamber of Commerce, David Hart, Executive Vice
President, March 18, 2013, letter.............................. 159
Fort Worth Chamber of Commerce, Texas, Bill Thornton, President
and Chief Executive Officer, letters........................... 254
Greater Miami Convention and Visitors Bureau (GMCVB), William D.
Talbert III, President and Chief Executive Officer, March 15,
2013, letter................................................... 161
Greater Philadelphia Chamber of Commerce, Pennsylvania, Robert C.
Wonderling, President and Chief Executive Officer, March 15,
2013, letter................................................... 218
Greater Phoenix Chamber of Commerce, Arizona, Todd Sanders,
President and Chief Executive Officer, March 13, 2013, letter.. 142
Greater Phoenix Economic Council, Arizona, Barry Broome,
President and Chief Executive Officer, March 13, 2013, letter.. 143
Gregg County, Texas, County Judge Bill Stoudt, March 7, 2013,
letters........................................................ 260
Houston Executive Airport, Andrew D. Perry, A.A.E., Executive
Director, letter to Hon. Amy Klobuchar, a U.S. Senator from the
State of Minnesota, March 13, 2013............................. 258
Houston Executive Airport, Andrew D. Perry, A.A.E., Executive
Director, letter to Hon. Michael S. Lee, a U.S. Senator from
the State of Utah, March 18, 2013.............................. 259
Illinois Manufacturers' Association (IMA), Gregory W. Baise,
President, letter.............................................. 179
Jack Brooks Regional Airport, Beaumont, Texas, Alex Rupp, Airport
Director, March 19, 2013, letters.............................. 238
JetBlue Airways Corporation, Robert C. Land, Senior Vice
President Government Affairs and Associate General Counsel,
March 18, 2013, letter......................................... 182
Kanawha County, West Virginia, W. Kent Carper, Commissioner,
March 15, 2013, letter......................................... 322
Land, Robert C., Senior Vice President Government Affairs and
Associate General Counsel, JetBlue Airways, March 18, 2013,
letter......................................................... 221
Laredo International Airport, Texas, Jose Luis Flores, Airport
Manager, March 13, 2013, letters............................... 268
Los Angeles Area Chamber of Commerce, California, Gary Toebben,
March 18, 2013, letter......................................... 147
Los Angeles County Economic Development Corporation (LAEDC),
David Flaks, Chief Operating Officer, March 13, 2013, letter... 148
Lubbock Preston Smith International Airport, James W. Loomis,
A.A.E., Executive Director, March 15, 2013, letters............ 273
McAllen International Airport, Texas, Philip K. Brown, Director
of Aviation, March 18, 2013, letters........................... 277
Midland International Airport, Texas, Marv Esterly, Director of
Airports, March 18, 2013, letters.............................. 281
Miami-Dade County, Florida, Hon. Carlos A. Gimenez, Mayor, March
18, 2013, letter............................................... 163
New York Building Congress (NYBC), Richard T. Anderson,
President, March 18, 2013, letter.............................. 202
North Texas Commission, Mabrie Jackson, President and Chief
Executive Officer, March 6, 2013, letters...................... 289
Partnership for New York City, Kathryn S. Wylde, President and
Chief Executive Officer, March 15, 2013, letter................ 203
Pennsylvania Chamber, Gene Bar, President and Chief Executive
Officer, March 15, 2013, letter................................ 215
Rio Grande Valley Partnership, Texas, Julian Alvarez, President
and Chief Executive Officer, March 15, 2013, letters........... 293
Salt Lake Airport Authority Board, Utah, Mike Zuhl, Member,
letter......................................................... 317
San Angelo Regional Airport, Texas, Luis E. Elguezabal, A.A.E.,
Airport Director, March 18, 2013, letters...................... 295
Shannon, Hon. T.W., Speaker, Oklahoma State House of
Representatives, March 14, 2013, letter........................ 208
Sioux Gateway Airport, Iowa, David Bernstein, Board President,
March 11, 2013, letters........................................ 172
South Padre Island Chamber of Commerce, Texas, Roxanne Guenzel,
President and Chief Executive Officer, March 18, 2013, letters. 303
State Chamber of Oklahoma, Fred S. Morgan, President and Chief
Executive Officer, March 11, 2013, letters..................... 206
State of Arizona, Hon. Janice K. Brewer, Governor, March 15,
2013, letter................................................... 141
State of North Carolina, Hon. Pat McCrory, Governor, March 13,
2013, letter................................................... 197
State of North Carolina, Sharon Decker, Secretary, Department of
Commerce, letter............................................... 198
State of Oklahoma, Hon. Mary Fallin, Governor, March 6, 2013,
letter......................................................... 205
State of Texas, Hon. David Dewhurst, Lieutenant Governor, March
18, 2013, letter............................................... 272
State of Texas, Hon. Rick Perry, Governor, March 19, 2013, letter 257
State of West Virginia, Hon. Earl Ray Tomblin, Governor, March
22, 2013, letter............................................... 320
Straus, Hon. Joe, Speaker, Texas State House of Representatives,
March 13, 2013, letters........................................ 305
Tulsa Regional Chamber, Michael S. Neal, C.C.E., C.C.D.,
President and Chief Executive Officer, March 14, 2013, letters. 211
U.S. Airline Pilots Association (USAPA), Gary Hummel, President,
March 18, 2013, letter......................................... 199
U.S. Airline Pilots Association (USAPA), Capt. Gary Hummel,
President, statement........................................... 313
Village of Rosemont, Illinois, Hon. Brad Stephens, Mayor, letter. 181
Waterloo Regional Airport, Iowa, Bradley Hagen, Airport Director,
March 7, 2013, letter.......................................... 177
Wonderling, Robert C., President and Chief Executive Officer,
Greater Philadelphia Chamber of Commerce, Pennsylvania, March
15, 2013, letter............................................... 138
ADDITIONAL SUBMISSIONS FOR THE RECORD
Submissions for the record not printed due to voluminous nature,
previously printed by an agency of the Federal Government, or
other criteria
determined by the Committee, list.............................. 324
Ferriss, Bruce, and Barbara Ferriss, Spokespersons, Association
of Professional
Flight Attendants (APFA), and Former TWA Flight Attendants,
additional
submission:
http://twajustice.com/senate_exhibits.html................... 324
Mitchell, Kevin, Chairman, Business Travel Coalition, statement:
http://judiciary.house.gov/hearings/113th/02262013_2/
Mitchell%2002262013.pdf.................................... 324
Moss, Diana L., Ph.D., Director and Vice President, American
Antitrust
Institute (AAI), additional submission:
http://www.antitrustinstitute.org/ antitrust/sites/default/
files/ AAI_BTC_USAir-AA_White%20Paper_8-7.pdf.............. 324
THE AMERICAN AIRLINES/US AIRWAYS
MERGER: CONSOLIDATION,
COMPETITION, AND CONSUMERS
----------
TUESDAY, MARCH 19, 2013
United States Senate,
Subcommittee on Antitrust, Competition Policy
and Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:03 a.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Amy
Klobuchar, Chairman of the Subcommittee, presiding.
Present: Senators Klobuchar, Schumer, Blumenthal, Lee,
Graham, and Flake.
Also present: Senator Cruz.
OPENING STATEMENT OF HON. AMY KLOBUCHAR,
A U.S. SENATOR FROM THE STATE OF MINNESOTA
Chairman Klobuchar. Okay. We will call the hearing to order
today for the Antitrust Subcommittee. I want to thank everyone
for being here today for my first Subcommittee hearing as the
Chairman of this Subcommittee, and Senator Lee, who is the
Ranking Member, is an old hand at this, but we thank all of you
for coming today.
I have long been concerned about the consolidation in the
airline industry. For me it was highlighted in 2008 when my
hometown airline, Northwest Airlines, merged with Delta. At
that time, it was widely predicted that that merger would usher
in a wave of consolidation, and several mergers later, here we
are with a large deal that would combine two of the Nation's
largest network carriers. Five years ago, we had six major
carriers, and should this merger be approved, we will be down
to three.
On February 14th, Valentine's Day, American Airlines and US
Airways announced their proposal to merge. If the merger goes
through, the new American Airlines would be the Nation's
largest carrier and result in the four top airlines controlling
approximately 80 percent of the domestic airline market, and
that includes Southwest.
I approach this hearing with an understanding of the
enormous challenges that the airlines industry has faced over
the years. The attacks on September 11th, ever-increasing fuel
costs in a volatile market, and the economic downturn have all
put airlines to the test. There is also significant global
competition which creates incentives to merge. I get that. But
I also know that a strong and vibrant airline industry is
critical to our country. Safe, reliable, and affordable air
travel is essential to communities large and small. Strong air
service attracts businesses and tourists, and that results in
economic growth and jobs.
But given how critical the airline industry is to the U.S.
commerce and to public safety, we need to be vigilant in
examining any potential challenges this merger might create,
particularly in the context of affordability and accessibility
of air service.
With this merger coming on the heels of major airline
consolidation--that would be Delta/Northwest, United/
Continental, Frontier/Republic, and Southwest/AirTran--this
Subcommittee and the Justice Department must review the
concentration in the industry and what that means for services
and prices, as well as airport accessibility in less popular
but just as important destinations, particularly in rural
areas.
Baggage fees, change fees, and seating fees are pervasive
and increasing in the industry. Last year, legacy carriers took
in more than $10 billion in fees. With fewer competing
airlines, can we expect even more of these extra charges? Are
the few low-cost carriers that remain enough to keep what would
be the three legacy carriers in Southwest in check? And we need
to know that fewer airlines will not mean fewer flights and
diminished services for the airports that are not the major
hubs.
There will always be ample competition between major cities
like New York, Chicago, and Los Angeles. We all know that. But
what about cities like Minneapolis or cities like Cincinnati,
Memphis, Milwaukee, and Pittsburgh? What about a city like
Rochester, Minnesota, home of the Mayo Clinic, that is
currently served by American Airlines? Service to all
metropolitan areas and mid-size and small cities is more
important than ever. Yet we have seen reduced service to
certain mid-sized cities.
We appreciate the goals here, the stated promise of
complementary flight networks, increased efficiency, and
offering more options for customers. But consumers have a right
to be skeptical. When we have one fewer choice on that matrix
of flight options while searching for fares on the Internet,
consumers cannot help but wonder: Would an added competitor be
fighting a little harder to get my business at a lower price?
Or would an added competitor be able to offer me more
convenient flight times connecting through a different hub?
More important than the convenience issues is the potential
impact on jobs. It is no small feat that the major unions here
have supported the merger. Still, what we have seen with past
airline mergers gives us reason for caution. I will say my home
State of Minnesota was fortunate in that we retained most, but
not all, of the jobs in Minnesota following the Delta/Northwest
merger. Delta is a major employer in our State, and we are
proud of that. But in the wake of similar mergers, not every
State has been so lucky.
Mr. Parker and Mr. Horton, we understand and appreciate
your reasons for advancing this merger. It is good for your
bottom lines, and at the end of the day, you have to answer to
your shareholders, and you are competing in a global
marketplace. But on this Subcommittee, we have to get answers
for the people of this country. Whether it is the American
family looking for an affordable trip to Disneyland or looking
to visit their grandma in Pittsburgh, or whether it is a small
business owner looking for the best frequent flyer program,
they want as many possible choices, and they want choices at
affordable prices. And they want to know that no airline or no
small group of airlines gains a stranglehold on the market.
That is the reason we are here today, and I look forward to
hearing your thoughts and the thoughts of our other two
witnesses, and we thank you for being here.
I now turn it over to the Ranking Member, Senator Lee.
OPENING STATEMENT OF HON. MICHAEL S. LEE,
A U.S. SENATOR FROM THE STATE OF UTAH
Senator Lee. Thank you, Madam Chair. Thanks to all of you
for joining us today.
The U.S. airline industry touches the lives of almost every
American in some way or another. These airlines allow us to
travel for business and for leisure, to meet new people and to
reunite with loved ones.
Air travel is also an important element of our national
infrastructure, and it is critical to our economy. One in eight
American jobs depends in one way or another on travel and
tourism, and analysts estimate that U.S. travel expenditures
will total more than $850 billion in 2013.
For all these reasons, Congress must take seriously any
activity that will seriously and materially affect the airline
industry.
Our country has benefited greatly from airline deregulation
ever since that began in 1978. Government control of this
industry, like Government management of any private enterprise,
had unfortunate results. In the years since deregulation,
airfares have dropped substantially, and options for travelers
have simultaneously expanded. These benefits are the result of
free market competition and will continue as long as the
industry remains robustly competitive.
Despite the positive benefits of deregulation, the story of
our Nation's airlines in recent decades is not one of unbroken,
unmitigated success. Uneven earnings, volatile fuel costs, and
structural changes have led to a long succession of airline
bankruptcies. As Federal agencies have provided assistance and
assumed responsibility for many pension plans, as a result of
those airline bankruptcies, the financial stability of the
airline industry is one of special concern.
To help cope with changing circumstances, airlines have
turned to consolidation. In the last decade alone, we have seen
no fewer than six significant airline mergers in this country,
and today we consider the seventh major merger, which would be
an $11 billion transaction.
The combined American and US Airways would employ nearly
120,000 people, would have 2012 revenues of almost $40 billion,
and fly 950 jets to approximately 900 locations. The merger
would leave only four airlines with significant national
networks, and those carriers would control over 80 percent of
the domestic market.
As a result, our Subcommittee, which is tasked with
oversight in competition policy and consumers rights, must
conduct a thorough examination of this transaction.
The Department of Justice will, of course, review the
proposed merger under the Hart-Scott-Rodino Act, applying an
analytical framework set forth in the horizontal merger
guidelines to assess the anticompetitive effects of reduced
competition in relevant markets, identify any increased
barriers for entry on future competitors, and consider
efficiencies and benefits that may flow from this
consolidation.
As I have noted in previous hearings on this Subcommittee,
several principles guide my approach to antitrust law. Most
importantly, we must remember the late Robert Bork's insight
that the purpose of our antitrust laws is to maximize consumer
welfare. We seek, therefore, to protect competition rather than
to protect competitors.
Government may sometimes have a proper role in ensuring
that a company does not obtain undue market power, but it is
important for Federal agencies to--it is improper, rather, for
Federal agencies to pick winners and losers in the marketplace,
and absent evidence that a transaction will substantially
reduce competition and thereby harm consumers, I believe
Government intervention is usually unwarranted.
Mergers are an essential element of our rapidly changing
economy, often creating significant efficiencies and helping to
ensure that resources are put to their most productive possible
use. I believe this merger holds the promise of cost savings
through combining complementary assets, reducing duplicative
operating expenses, and integrating computer systems as well as
airline fleets. In a competitive market, consumers benefit from
such efficiencies in the form of higher-quality services, like
an expanded route network at lower prices.
Likewise, some industry experts suggest that the domestic
market will benefit if comprised of a few large but
economically stable and competitive airlines.
Others, however, have expressed concern that a post-merger
American, the largest domestic carrier, could exercise undue
market power, leading to higher prices and even reduced
services to certain communities in America. They argue that
past airline mergers have created capacity reductions and price
increases on some routes from the combined airlines' hubs.
Many of my constituents in Utah complain about high fares
flying into and out of Salt Lake City. Critics fear that this
merger will likewise allow American to raise prices on certain
of its routes and that, despite barriers to entry, will provide
other--and that increased barriers on entry will prevent other
carriers from providing competitive discipline.
As one example, they note that just a few miles down the
road from here at Reagan National Airport, a combined American
and US Airways would control nearly 70 percent of all passenger
gate slots, making effective competition from rivals very
difficult to achieve.
These are important issues, and I thank Senator Klobuchar,
the Chair of this Subcommittee, for holding this hearing. By
carefully weighing the evidence and engaging in rigorous
analysis, we help ensure a competitive marketplace that
maximizes consumer welfare and in the end allows our economy to
thrive. I look forward to hearing the testimony from each of
you today, and I thank you for being here.
Chairman Klobuchar. Well, thank you very much, Senator Lee.
I first want to note that we have received written
testimony as well as numerous submissions for the record,
including letters from local communities, a joint letter from
several labor unions involved in the merger that support it--
that is, the Association of Professional Flight Attendants, the
Transport Workers Union, the Allied Pilots Association, US
Airlines Pilots Association, and Association of Flight
Attendants.
We also have testimony from the Business Travel Coalition,
and we also have testimony from the TWA flight attendants who
have some concerns, and many other submissions. All materials
will be included in the record, and the record will remain open
for 1 week following the hearing for any additional
submissions.
[The information referred to appears as submissions for the
record.]
Chairman Klobuchar. Now I would like to introduce our panel
of witnesses.
Our first witness to testify will be Mr. Douglas Parker.
Mr. Parker has been chairman and chief executive officer of US
Airways since 2005. Before joining US Airways, Mr. Parker
served as president and CEO of American West Airlines.
Actually, he will be the second witness to testify even though
he is first in the line.
Our first witness to testify will be Mr. Thomas Horton, who
is the chairman and chief executive officer of AMR Corporation
and American Airlines. He is also the current chairman of the
oneworld Global Airline Alliance. Prior to becoming CEO in
2011, Mr. Horton served as president of AMR and American and
also held a number of positions with the airline. Before that,
he served as chief financial officer and vice chairman of AT&T.
Our third witness testifying today is Dr. Diana Moss, the
director and vice president of the American Antitrust
Institute, as well as adjunct faculty in the Department of
Economics and Interdisciplinary Telecommunications Program at
the University of Colorado at Boulder. Prior to joining AAI in
2001, Dr. Moss was a senior staff economist at the Federal
Energy Regulatory Commission.
Finally, we have with us Mr. William McGee. Mr. McGee is a
journalist, writer, and consumer advocate who serves as a
consultant on aviation and travel issues for Consumers Union.
He is a former editor-in-chief of Consumer Reports' travel
letter. He is also a member of the Department of Transportation
Future of Aviation Advisory Committee.
Thank you for appearing before our Subcommittee today. I
now ask all of our witnesses to rise and raise their right hand
as I administer the oath.
Do you affirm that the testimony you are about to give
before the Committee will be the whole truth, the truth, and
nothing but the truth, so help you God?
Mr. Horton. I do.
Mr. Parker. I do.
Ms. Moss. I do.
Mr. McGee. I do.
Chairman Klobuchar. Thank you.
Now we will begin our testimony with Mr. Thomas Horton.
STATEMENT OF THOMAS HORTON, CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, AMERICAN AIRLINES AND AMR CORPORATION, FORT
WORTH, TEXAS
Mr. Horton. Good morning, Chairman Klobuchar, Senator Lee,
and Members of the Subcommittee. I appreciate the invitation to
testify and would like to explain why this merger will have
such a positive outcome for our customers, our people, and our
financial stakeholders.
Thanks to the extraordinary efforts of our people, many of
whom are with us here today, American is on the verge of
completing one of the most successful corporate restructurings
ever. We have renegotiated debt and leases, optimized our fleet
and facilities, and have achieved certainty and stability with
labor contracts in place with each of our labor unions. We have
also strengthened our network and our oneworld Alliance
partnerships and invested in leading products and services and
a new and modern fleet to better deliver for our customers.
We expect our bond holders to receive a full recovery and
the former AMR shareholders to own a share in the combined
company, with additional upside if the stock appreciates in
value.
This is quite an unusual outcome. We are proud of this
result, and now that we have put our own house in order, our
merger with US Airways will create a new American Airlines, a
global competitor worthy of our name as America's flag carrier.
Flying under the iconic American Airlines brand, it will be
positioned to compete not just against other domestic carriers
but against the best the world has to offer.
Our journey to this day has been challenging, to say the
least. Over the past decade, our industry has experienced
extraordinary economic headwinds. While almost every other
legacy carrier used the bankruptcy process early on to lower
their costs, American fought valiantly to avoid doing so.
In 2003, American and our unions reached consensual
agreements to reduce costs without having to file for
restructuring. However, our major competitors subsequently went
down the restructuring path, surpassing the savings we
achieved, which gave them a singular--a significant advantage.
We also experienced a new wave of powerful competition from
the growth of low-cost carriers, and importantly, Delta,
Northwest, United, Continental, Southwest, and AirTran further
strengthened their positions through mergers.
In the face of this competitive challenge, we made great
progress in expanding our international alliances, finally
securing antitrust immunity for our own joint ventures with
oneworld Partners, British Airways, Iberia, Japan Airlines, and
LAN Airlines. We signed the largest ever aircraft order, and we
now have 500 new aircraft on order and options for 500 more,
which will dramatically improve fuel efficiency, reduce
emissions, and offer state-of-the-art comfort for our
customers.
Despite these efforts, however, our costs remained
uncompetitive, and after a decade of losses that reached $12
billion, in November 2011 our board concluded that the way
forward was to restructure as most of our competitors had done.
As difficult as restructuring has been, it was the right
decision. We began with the explicit philosophy that the
restructuring would be fair and equitable within the company.
We started by shrinking senior management by a third. While we
achieved substantial cost savings through long-term agreements
with our labor unions, we were still able to grant pay
increases and provide retirement incentives to reduce the
involuntary job losses.
We also worked with our Creditors' Committee, including the
PBGC, to assure that the accrued pension benefits to our people
will be paid rather than handed over to the PBGC, as others
have done.
The hard work developing our network, our products, and our
customer experience helped us achieve record revenue, topping
our U.S. peers in year-over-year revenue growth for 6 straight
months is 2012.
Once we had a line of sight on how strong the restructured
American could be, we concluded it was the right time to
consider a merger. Hence, last summer, in collaboration with
our board and our Creditors' Committee, American began to look
at merger alternatives using a fact-based, disciplined process.
Everyone involved, including labor unions at both companies,
and our Ad Hoc Committee of bond holders agreed that a merged
American and US Airways would deliver a range of benefits and
improve stability in our industry that greatly needs it.
Last month, we announced a deal that would give American's
financial stakeholders 72 percent and US Airways' shareholders
28 percent of the combined company. The new American will take
flight in what continues to be one of the most intensive--
intensely competitive industries in the world, and there is
nothing the people of American want more than to put American
back on top as a fierce competitor and set a new standard of
excellence, and that is exactly what this merger will do.
I am optimistic about our future and pleased to partner
with my long-time friend Doug Parker to make that vision a
reality.
Thank you again for this opportunity to address the
Subcommittee, and I stand ready to answer your questions.
[The prepared statement of Thomas Horton appears as a
submission for the record.]
Chairman Klobuchar. Thank you, Mr. Horton.
Mr. Parker.
STATEMENT OF DOUGLAS PARKER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, US AIRWAYS GROUP, TEMPE, ARIZONA
Mr. Parker. Good morning, Chairman Klobuchar, Ranking
Member Lee, Members of the Subcommittee. Thank you for the
opportunity to testify today about the merger of US Airways and
American Airlines, creating the world's best airline through a
combination that will be good for competition, consumers, and
choice.
My name is Doug Parker. I am chairman and chief executive
officer of US Airways. Our team operates over 3,000 flights per
day, connecting some 80 million passengers per year to more
than 200 communities large and small, primarily through our
hubs in Charlotte, Philadelphia, Phoenix, and here in
Washington, DC. I want to begin by thanking all of our
employees who are here today to support this merger, including
pilots and flight attendants in uniform from American and US
Airways, who know that this transaction represents a brighter
future for our 100,000 employees. I am proud to be here
representing them and extremely grateful for their support, so
thank you all very much.
This merger will benefit our customers, our employees, our
shareholders, and the communities we serve by integrating the
complementary networks of American Airlines and US Airways into
something better than either airline can offer on its own. It
will enhance competition in what is already a vigorously
competitive marketplace. Passengers and communities will
benefit from more and better service. Employees will receive
improved pay, benefits, and job security. And our shareholders
will benefit from the improved financial stability of the
combined company. Because of these benefits, the combination
has attracted unprecedented support from the employees and
labor unions of both companies, the financial markets, and the
communities we serve.
Consumer demand is the driver for this combination, airline
passengers want broader networks capable of getting them to
more places more efficiently. In response to that demand, Delta
merged with Northwest and United merged with Continental.
Southwest responded to the same consumer demand when it
acquired AirTran. All three transactions were cleared by the
Justice Department because those combinations created
substantial passenger benefits with minimal competitive
overlap. By combining American and US Airways, the new American
Airlines will build the network that passengers have told us
they want, one that will compete more effectively with the
other networked airlines as well as low-cost carriers.
The benefits of the new American Airlines stem from the
complementary nature of our operations. Out of over 900
domestic nonstop routes, American Airlines and US Airways have
only 12 nonstop overlaps. By combining these networks, we will
provide thousands of passengers better alternatives by creating
over 1,300 new connecting opportunities and the potential to
access numerous cities worldwide served by one carrier but not
the other.
Domestic airline markets will become even more competitive.
Although it will be the largest airline in the United States,
the new American Airlines will have less than 25 percent of
domestic available seat miles and will compete against the
nationwide networks of Delta, with 21 percent share; United,
with 19 percent; and Southwest, with 19 percent. The new
American Airlines will also compete against Southwest's
significant lower cost structure and a host of actual smaller
but fast-growing, lower-cost airlines, including Jet Blue,
Spirit, Allegiant, and Virgin America.
US Airways has historically provided extensive air service
to small and medium-sized communities, and the new American
Airlines will continue that commitment as service for smaller
communities that was not economical becomes possible thanks to
the traffic flows across the broader network.
The best example of our commitment to smaller communities
is the hub we have built here at Reagan National Airport where
we use a large majority of our slots to serve small and medium-
sized communities to ensure the benefits of our network extend
beyond connecting large cities to the Nation's capital.
The new American Airlines will also be a stronger financial
company. We expect to generate over $1 billion in net
synergies, primarily due to increased revenues from new
passengers, taking advantage of the broader network and the
improved service. That improved financial performance will
provide American's bankruptcy creditors an enhanced opportunity
for full recovery. That financial stability will also provide
very significant benefits to our employees, including better
pay and benefits, more jobs, and greatly improved job security,
and better opportunities for advancement.
Antitrust review of these issues is important, and we have
been and will continue to work with the Justice Department to
demonstrate the competitive benefits of this proposed merger.
We appreciate the opportunity to address these issues with the
Subcommittee today and commit to working with you in your
oversight capacity.
I will be happy to answer any questions at the right time.
Thank you very much.
[The prepared statement of Douglas Parker appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much.
Dr. Moss.
STATEMENT OF DIANA L. MOSS, PH.D., DIRECTOR AND
VICE PRESIDENT, AMERICAN ANTITRUST INSTITUTE,
WASHINGTON, DC
Ms. Moss. Thank you. I would like to thank Madam
Chairwoman, Senator Klobuchar, Ranking Member Senator Lee, and
the Members of the Subcommittee for holding this hearing on the
proposed merger of US Airways and American.
Chairman Klobuchar. Is your mic on?
Ms. Moss. My mic is on now. I apologize.
Chairman Klobuchar. Excellent. Thank you. You do not have
to address us again.
Ms. Moss. It is an honor to appear here today. My testimony
is based on a white paper that was jointly produced by the
American Antitrust Institute and the Business Travel Coalition.
We conclude, based on analysis using publicly available
information, that the proposed deal raises significant
competitive issues that could result in harm to consumers.
I would like to make briefly just a number of major points.
First, by way of overview, the merger comes in the wake of
six major mergers in recent years. It will speed the
transformation of the industry from one in which hubs were
designed to accommodate multiple airlines to just a few large
systems, one of which includes the legacy-like Southwest, which
may not longer exert much significant competitive discipline.
In this environment, low-cost carriers and regionals would have
difficulty thriving. The merger will increase concentration at
the national or systems level, enhancing the ease with which
the big four carriers can tacitly coordinate on systemwide
capacity tightening in order to maintain fares.
Combining the two networks would also create functional
strongholds throughout the U.S., including major airports on
the eastern seaboard, in the Midwest, and West that are
important for providing connecting service to eastern and
western destinations.
My second point is the importance of considering the
effects of previous legacy mergers. The similarities between
USAir and Delta/Northwest and United/Continental make a very
strong case for why a postmortem analysis should inform this
merger. Several routes affected by those deals are among the
largest city pair markets in the U.S. Both mergers
substantially eliminated competition on key hub-to-hub routes,
many of which experienced the exit of low-cost carriers and
regionals and also pre- to post-merger fare increases. Such
post-merger effects have come under strong public scrutiny, and
similarities between these and the USAir deal make a strong
case for why the merger deserves a careful look.
A third issue is that the combination is likely to affect a
number of important route-level markets. Over one-half of the
overlap routes potentially affected by the merger would be
entirely or nearly monopolized. Similar to previous mergers,
USAir would create a dominant firm that could raise fares and
restrict service, particularly since the carriers are likely
each other's closest competitors. The merger could also
increase the risk that the remaining few legacies on affected
routes could coordinate on fares or capacity, and low-cost
carriers would no longer have as strong an incentive to
maintain aggressive pricing.
Fourth, low-cost carriers can no longer be relied upon to
save the day for legacy mergers. The dwindling stock of LCCs
make them increasingly unreliable as a source of competitive
discipline in the industry. They may find it more difficult to
enter and discipline legacy-dominated hubs. And in cities
affected by the proposed merger where LCCs have a presence at
secondary airports, that service may not provide good
substitutes for consumers.
Fifth, many mid-sized communities have seen flight
frequencies reduced as a result of previous mergers. Evidence
from previous deals indicates that carriers have driven traffic
to large hubs, probably to feed global operations. That has the
potential side effect of starving routes involving smaller
cities.
Choice and availability are very important variables in the
antitrust analysis of transportation networks. Mergers that
force consumers in smaller communities to use less convenient
connecting service or travel longer distances to other airports
are legally cognizable effects of a merger.
Sixth, there is an ongoing debate over efficiencies in
airline mergers. This includes economic analysis showing that
cost savings dwindle as networks get larger and the effects of
increased ``hubbing'' on congestion and costs. Post-merger
system integration problems should also be considered since
they impose costs on the merged company that may be passed on
to customers.
In network industries, it is tempting to sell a merger on
the basis of ``out of market'' efficiencies or savings that may
occur in a part of the system that is far removed from where
competitive harm is inflicted. Given the magnitude of harm that
could flow from this combination, efficiencies should be tied
directly to adversely affected markets.
Finally, the latest round of airline industry consolidation
has been accompanied by carriers aggressively unbundling their
prices--their products. However, price transparency for
ancillary services is currently lacking. That means ancillary
fees go largely undisciplined by market forces and prevent
consumers from efficient comparison shopping for air travel
offerings.
The proposed merger would further reduce the rivalry that
creates incentives for sellers to engage in price transparency,
instead enhancing the ease with which airlines can tacitly
agree on ancillary fees.
In sum, the merging parties bear a heavy burden in
demonstrating that their merger would not be harmful to
competition and consumers.
Thank you for this opportunity to testify, and I stand
ready to answer your questions.
[The prepared statement of Diana L. Moss appears as a
submission for the record.]
Chairman Klobuchar. Thank you very much, Dr. Moss.
Mr. McGee.
STATEMENT OF WILLIAM J. MCGEE, CONSULTANT, CONSUMERS UNION, NEW
YORK, NEW YORK
Mr. McGee. Thank you, Chairwoman Klobuchar, Ranking Member
Lee, and Members of the Subcommittee.
This is not the first time in recent years that this
Subcommittee is examining a merger between two major domestic
network airlines and hearing the fears and frustrations of
passengers as our Nation's commercial aviation industry becomes
ever more concentrated. No doubt today's hearing is invoking
deja vu for many of us here. Indeed, such hearings have become
almost a biennial or triennial event over the past decade as we
have watched the eight major network airlines of 2001 dwindle
down to four in 2010. And if this merger goes through, there
will be three. The US Airways brand will be retired, joining
Continental, Northwest, America West, TWA, Pan-Am, Eastern, and
the many others that have disappeared in the deregulated era.
Once again we are being told that this merger is the key to
saving the airline industry, that if only American and US
Airways be allowed to join forces, order will be restored to a
chaotic business, that an unprofitable industry will operate in
the black, that consumers will be better served, and that
somehow with fewer, rather than more, major airlines
competition will be miraculously enhanced. Frankly, we are not
so sure.
We are concerned that allowing American and US Airways to
combine could bring great harm to millions of airline
passengers and numerous communities. We are concerned that
there could be reduced service with fewer flights on some
routes, elimination of nonstop service, and replacement of
mainline jets with outsourced regional carriers, as has
happened with past airline mergers.
We are concerned that entire cities and even regions could
lose the vital transportation links provided by hub operations.
Analysts already are speculating about the future of US Airways
hubs in Philadelphia, Charlotte, and Phoenix.
Civic leaders can attest to how recent mergers have harmed
communities that used to be served by TWA's former hub in St.
Louis, America West's former hub in Las Vegas, Delta's
shrinking hub in Cincinnati, and Continental's former hub in
Cleveland.
We are concerned that higher fares could result on routes
where healthy competition is lost as fewer airlines mean less
reason to resist fair hikes. Again, we have seen it happen with
other airline mergers.
We are concerned that service quality could fall as less
competition means less incentive to innovate and improve.
Compound that with the difficulties of uniting two work forces,
two fleets, two operational systems, and two business cultures.
Meanwhile, two frequent-flier programs would become one with a
much larger pool of passengers fending for fewer available
seats and upgrades.
We are concerned that as the few remaining major airlines
hunker down around their fortress hubs, it could become
increasingly difficult for startup carriers to enter the market
and provide effective new competition. And we are concerned
that as the major airlines become bigger and fewer, they
increasingly will be regarded as ``too big to fail.''
We have witnessed an incredibly shrinking airline industry
in the years since the Federal Government gave the airlines a
$5 billion bailout in 2001, and each successive merger just
raises the stakes. Could the President or Congress stand idly
by if a bankruptcy filing, a labor action, a safety violation,
or some other event threatens to disrupt up to 25 percent of
our Nation's commercial airlift?
We are also concerned about where this is all heading. Will
consolidation stop at the water's edge, or will the laws
prohibiting foreign ownership of U.S. airlines be repealed so
that soon we are discussing proposed mega mergers between U.S.
carriers and British Airways or Lufthansa or Air France/KLM?
We are pleased that the Justice Department's Antitrust
Division is investigating, and we hope this Subcommittee will
encourage and support a thorough investigation. We do not
prejudge the legality of this merger. The airlines should have
a full opportunity to make their case to the Justice
Department. But as we explain in greater detail in our written
statement, assurances from the airlines should be regarded with
skepticism if they run counter to the airlines' profit-making
business incentives. There is no substitute for competition to
keep an airline from raising fares and reducing service if
doing so will increase its profits.
A merger of this magnitude can dramatically change the
structure of the market and fundamentally alter profit-making
incentives in ways that take them further away from keeping
fares low and improving service.
At the conclusion of its investigation, we hope the Justice
Department will fully explain its reasons for whatever actions
it concludes is called for so there will be no room for doubt
that we are being fully protected under the law.
Our commercial airlines are as vital to America's economy
and security as our telecommunications networks and our
interstate highways. The stakes could not be higher for airline
passengers facing fewer and fewer choices in a market that has
become ever more concentrated.
Thank you. I will be happy to answer any questions you may
have.
[The prepared statement of William J. McGee appears as a
submission for the record.]
Chairman Klobuchar. Thank you, all of you, for your
thoughtful testimony.
I want to start with you, Mr. Parker and Mr. Horton. The
most basic concept of antitrust law is that when there are
fewer competitors to get customers' business, what happens is
that prices tend to rise, services tend to decline.
As you know and as pointed out by Dr. Moss and Mr. McGee,
we have a great wave of consolidation in the airline industry
over the past 5 years. With this merger we would be down to
only three network carriers.
In your view, what is the minimum number of network
carriers necessary for a competitive market? Would two be
enough? What is the tipping point? And how would you argue that
your merger in any way defies the basic concept that we see
prices go up and services decline?
Mr. Horton. I will maybe start. We think that this enhances
competition and that it creates another global airline on par
with Delta and United. So it creates a competitive
counterweight to those two big airlines.
And, indeed, you know, the new American will compete in a
global marketplace, so we do not just compete with Delta,
United, Southwest, Jet Blue, the low-cost carriers here at
home; but we also compete with the likes of Lufthansa and
Emirates and Singapore around the world. So we think this is
about creating a more competitive industry.
Chairman Klobuchar. But it is true that since 2000, there
has only been one new carrier, I think, in our country--Virgin
America--that has entered. And when you mention these other
carriers, I think the concern is--we have Sun Country in
Minnesota. We are proud of them. But there really has not been
a new carrier that has been viable since the year 2000. Don't
you think there are many barriers to entry that make it hard
for new airlines to get in to compete?
Mr. Horton. I think if you look over the last many years,
there have been new entrants into the industry. Jet Blue is, of
course, a great example of a company that sprang up the early
part of the last decade and has been very successful and grown
nationwide. So I think there are ample opportunities and
capital available for new airlines to enter the market.
Chairman Klobuchar. I note that Jet Blue is only 5 percent
of the market, though, and we have now these three major
carriers.
Mr. Parker, do you want to respond?
Mr. Parker. I would just add to Tom's comments and say,
first off, again, noting how complementary our two networks
are, so by putting our two airlines together we create a third
competitor to--actually, a fourth competitor to what are now
three airlines larger than ours--United, Delta, and Southwest.
And it allows more competition, not less, only 12 routes
overlapping out of 900. By putting these two networks together,
we will be able to provide better service, more efficient
service to consumers.
I would also note that in the $1 billion of synergies that
I noted in our analysis, there is not one assumed fare increase
in there. The synergies are not built upon assumed fare
increases, rather on what I just said, putting two networks
together that allow us to attract more customers and to attract
customers in a more efficient way.
And then the only other note I would make on the barriers
to entry, the reality is that, you know, there are no barriers
to entry today in this industry that are new in the past. I
think capital is a barrier to entry. This is a very tough
business where the legacy airlines have struggled for many
years to actually return--to make a return on capital. Those
that have have been more low-cost carriers. And I would note
that those that exist today are growing much faster than the
legacy airlines are, than the network carriers are, the
Allegiants, the Alaskas, Hawaiian, Spirit, Virgin America,
Frontier, Jet Blue, Sun Country. That is where all the growth
is. And while there may not be any new ones added of late,
there are plenty out there. It is an intensely competitive
business, and this just allows us to compete better against
those airlines.
Chairman Klobuchar. Okay. And as we know, a lot of that
competition tends to be between these major metropolitan areas,
and that is a concern I think Dr. Moss did a good job of
raising, and that is this idea that for these mid-sized major
metropolitan areas, they are not seeing as much of that
competition, and just hear me out on this recent study.
A research engineer from MIT's International Center for Air
Transportation found that between 2007 and 2012, nearly 1.7
million yearly departures were removed from the U.S. domestic
system, and that a disproportionate share of cutbacks happened
in non-large hub airports. We are talking about the non-L.A.,
non-New York. Only 40 percent of U.S. departures last year were
flown in non-large hub markets compared with 44 percent in
2007. Network carrier flights were cut on average by 27 percent
in smaller U.S. airports. Pittsburgh, which I mentioned before,
is a good example of that. They are adding headquarters and
their economy is actually picking up, but they have seen a
number of these flights go down and the loss of service after
the US Airways/American West merger.
So in your testimony, you make a renewed commitment to
serve small and medium-sized communities, where appropriate,
increase service and additional destinations. Can you please
explain the qualifying language and get at this issue of while
there is competition in these major cities, in many of our mid-
sized cities we are seeing less?
Mr. Parker. Yes. Let me go first, Tom.
I was happy to hear your comments that you believe that
service to mid-cities is more important than ever. We agree.
And what I would like to point out is the way that those cities
are served is through hub-and-spoke carriers. The way that mid-
sized and smaller communities receive air service is by having
hub-and-spoke airlines like US Airways, like American, that fly
into those cities and then connect people on to other markets.
There is not enough demand in many of those cities for nonstop
point-to-point service. It needs to fly through hub-and-spoke
carriers.
So in order for us to better serve small and mid-sized
communities, we need strong and vibrant hub-and-spoke carriers,
and that is what this merger does. It takes two strong hub-and-
spoke carriers, but builds one that is even stronger and
provides even more connections. It allows, for example, for the
people of Rochester, Minnesota, to now connect on the new
American Airlines to Hilton Head, South Carolina. US Airways
does not fly to Rochester. American does not fly to Hilton
Head. But together we will. And it provides more connections
for people in communities like that, and there are 1,300 such
examples like that in this merger, people that do not have the
ability to connect between two cities that now will in 1,300
different examples.
Chairman Klobuchar. Okay. I am going to ask just one more
question, mostly because I am afraid Senator Schumer will ask
this question if I do not when he comes, because we both have
worked a lot on these fee issues. And I think that it was
brought up by our witnesses here on the right side of the table
that there are issues with transparency with these fees. In
fact, I cited in my opening statement that we have seen $10
billion in 2012 alone for things like baggage fees, change
fees, seating fees. And while we look at how these mergers in
the airline industry have affected prices and there can be
arguments that some ticket prices have gone down but the fees
have been going up. And I think Dr. Moss was arguing that these
mergers might make it even more difficult to make it
transparent and how do you respond to that. And then I will
turn it over to Senator Lee.
Mr. Horton. Maybe I will kick it off, Doug. We think that
the unbundling of fares that you cite has actually been
constructive and good for customers because it allows them to
select the services they want and pay for what they want, and
those who do not want to have to pay for bags or other things
do not have to pay for that and can just buy the base fare. In
fact, one of the most successful low-cost carriers, Spirit, has
taken that approach to a whole new level.
I would say about fares in particular, you know, fares have
been--fare increases, including fees, have been very
restrained. So if you go back to the early part of the last
decade, go back to 2000, airfares, including fees, are up about
20 percent. Fuel prices are up 3 times, almost 3 times. And
that 20 percent is less than the actual rate of inflation. So
we think the airline industry has done a pretty good job of
providing value even in the face of sharp increases in input
costs.
Chairman Klobuchar. And on my next round, I will let you
guys respond to that, but I will turn it over to Senator Lee.
Thank you.
Senator Lee. A number of commentators have expressed
concerns about the impacts that the proposed merger could have
on certain so-called hub airports. For example, the new merged
combined American Airlines would have nearly 70 percent of the
available slots at Reagan National Airport. Critics suggest
that this combined power could allow the new American Airlines
to raise prices because competitors would not be able to
compete effectively in those airports. So I have got a couple
of questions for Mr. Horton and for Mr. Parker on this point,
and I will ask you to answer these in that order on each of
these.
Given that Reagan National Airport is known as a closed
airport, one in which the number of slots is fixed and it is
unlikely to change, at least anytime in the immediate
foreseeable future, would American's dominant share of
available slots give it, in your opinion, an undue advantage in
the marketplace that could lead to increased prices as a result
of that undue influence on the market?
Mr. Horton. Well, we do not think so, and that is because
the Washington area, of course, is served by three airports,
and if you look at the market as a whole, taking into account
all three airports, the new American would have something on
the order of 25 percent of the capacity. So we think it is a
robust and competitive marketplace.
Senator Lee. Mr. Parker.
Mr. Parker. I agree completely. I would point out, even in
Reagan the number of slots I do not think is the right measure
to look at for capacity. It is actually the number of seats.
Because we serve so many small and mid-sized communities out of
Reagan versus our competitors, the number--while we have about
two-thirds of the slots at Reagan, we have about 50 percent of
the seats. And as Tom notes, this is a market that is intensely
competitive, not just because of Reagan but because of
Baltimore--because of BWI and Dulles. And when you add those
together, the new American would be smaller than United, about
the exact same size as Southwest Airlines in this market.
Senator Lee. You are not suggesting the slot question is
irrelevant, though? You are just suggesting it is perhaps
mitigated by the number of seats?
Mr. Parker. Oh, absolutely not, I am not suggesting it is
irrelevant. It is an issue that should be addressed, and we are
happy to have it addressed. I believe that as the Committee and
the Justice Department look at the slot issue, they will come
to the same conclusion we have, which is the slots that are
utilized by--that will be utilized by the new American are used
to provide service to smaller communities, that if other
airlines were given those slots, they would not go to similar
size communities, they would be flown to larger markets. I
think that would be bad for consumers.
Senator Lee. Okay. The second part of my question on this
slot issue relates to what happened last year when USAir and
Delta executed a swap agreement for a number of slots at
LaGuardia and at Reagan National. I believe USAir, in
connection with that agreement, had to give up 16 slots at
Reagan, capping USAir's market concentration at 55 percent. So
that leads to the question in my mind: How many slots is the
merged entity prepared to divest? And would you support having
another FAA blind auction for those slots?
Mr. Parker. We do not believe it would be good for
consumers for us to divest any slots. Again, if US Airways or
the new American were asked to divest slots, we would, by
definition, divest those that are the least lucrative to the
airline. Those would tend to be service to smaller communities,
to mid-sized communities--that we enjoy serving, that we want
to continue to serve, but we would be precluded from serving
it. Those slots would go to another carrier that--the slots
that you mentioned, by the way, that were auctioned off, Jet
Blue acquired those. They now serve with those Tampa, Florida,
Orlando, San Juan--very large communities. That is where
additional slots divested from us would likely go to, very
large communities, and small communities would be disserviced.
Senator Lee. With flights to airports that are already
getting a lot of service, in other words?
Mr. Parker. Pardon me?
Senator Lee. With flights to airports that are already
getting a lot of----
Mr. Parker. Already intensely competitive, already have a
lot of service, yes, sir.
Senator Lee. Mr. Horton, do you have anything to add to
that point?
Mr. Horton. I think the trading of slots is representative
of a dynamic, competitive marketplace. And, in fact, American
leases some DC slots to Jet Blue, and Jet Blue leases some
slots at JFK to American. So I think it is reflective of a
dynamic and competitive marketplace.
Senator Lee. The 2010 Horizontal Merger Guidelines state:
``A primary benefit of mergers to the economy is their
potential to generate significant efficiencies and, thus,
enhance the merged firm's ability and incentive to compete,
which may result in lower prices, improved quality, enhanced
service, or new products.''
At the same time, the guidelines also make clear that
antitrust officials should credit merger-specific efficiencies,
that is to say, those efficiencies likely to be accomplished,
with the proposed merger and unlikely to be accomplished in the
absence of either the proposed merger or another means of
having comparable anticompetitive effects, only in those
circumstances.
So what merger-specific efficiencies would you anticipate
from this transaction?
Mr. Horton. Well, Senator, as I described earlier, American
Airlines has embarked on a very successful restructuring here
to reduce our costs, reduce our debt, and indeed, create a
vibrant and competitive airline.
Our restructuring has been unique in that it has really all
been about renewal and growth built on our new order for
aircraft or 500 airplanes on order. So it has really been about
building and growing creating a new global competitor.
We view the merger with US Airways very much as an
extension of that, and so as a consequence, we see a much more
efficient airline going forward. And there will be efficiencies
to be had in the combination of the two airlines as we think
about putting together the headquarters staff, the IT systems,
and those sorts of things.
Senator Lee. The guidelines also make clear that the
efficiencies that have resulted that have been proven from past
mergers are those that are most likely to be credited. Can you
point to any efficiencies that have been obtained as a result
of past mergers, for example, from the American/TWA merger of
2001 that can support your argument there?
Mr. Horton. Sure. Really the most obvious and clearest is
that you do not need two headquarters functions, so you can
largely eliminate that redundant staffing.
Senator Lee. Anything to add to that, Mr. Parker?
Mr. Parker. Yes, well, I think we have efficiencies both
for consumers in the ability to connect to more markets much
more efficiently--as I noted, you know, markets such as
Rochester to Hilton Head, markets such as Dubuque to Yuma--that
customers cannot get to on either American or US Airways today
that they would now be able to connect efficiently on. Those
are real efficiencies that drive the majority of the synergies.
On the cost side, as Tom noted, we receive other
efficiencies, things like management reductions, IT systems
that we are able to consolidate; you know, two systems become
one; facilities in certain airports where, you know, we happen
to be in different parts of the airport, we consolidate. Those
are the largest cost efficiencies. But it is primarily revenue
driven by getting more customers onto the combined airlines
than either of us can generate independently by being more
efficient.
Senator Lee. Thank you.
Mr. Parker. Thank you.
Chairman Klobuchar. Thank you. I just have one followup
question to Senator Lee's good round of questions about the
slots at Reagan.
Mr. Parker. Yes.
Chairman Klobuchar. And he has rightly pointed out, the
combined airline would have up to 67 percent or 70 percent of
the slots. He asked you some questions about divesting, and you
rightly pointed out that sometimes these slots go to airlines
that then fly to major metropolitan areas as opposed to serving
some of the hubs that I voiced my concern about.
Well, what if all this happened, what if the DOJ required
the purchaser of the divested slots to serve unspecified small
or medium-sized markets? Wouldn't that be a way of getting
around it?
Mr. Parker. Well, they would probably have to be
subsidized, because the fact of the matter is we at US Airways
could not serve those markets if we did not have a hub to
connect passengers over. There is not enough demand in those
small communities for point to point traffic alone. We would
not be able to serve the smaller-community markets without the
connections that we have across the DC hub. So without those
connections, I cannot imagine how an airline would be
profitable serving those routes.
Chairman Klobuchar. How about if it was medium-sized
markets? It might be a little different?
[Laughter.]
Mr. Parker. Okay, look. We would have to look at it
market----
Chairman Klobuchar. No, seriously----
Mr. Parker. We would have to look at it market by market,
Senator----
Chairman Klobuchar [continuing]. Small towns, but not every
flight going to L.A.
Mr. Parker. Again, we are happy to discuss this and work
through it. I just will tell you my concern, is that any
airline that is promising they will fly to those routes will
not be able to be profitable and will not be there long because
they do not have the connections that we have at US Airways
that makes it profitable. So, therefore, any mandate that
someone serve those routes I would suggest would be very
difficult for them to honor over time because they would not
have the connections that the new American will have over DC.
Chairman Klobuchar. Okay. Dr. Moss, do you want to respond
to that?
Ms. Moss. Yes, I think a couple of points are worth making.
First of all, any slot divestitures that would be sought by
DOJ, potentially sought by DOJ as a remedy for competitive
concerns and issues, if they are small and non-lucrative-
related divestitures or relate to small and non-lucrative
markets, then they are not, according to the Horizontal Merger
Guidelines, as Senator Lee points out or has referenced, those
are not particularly good candidates for divestiture.
The whole purpose of divestiture in a merger is to identify
assets that are viable assets, that are viable, robust assets
that, if they were spun off to a different party in the market,
whether it is an incumbent or a new entrant, would be able to
maintain robust competition in the market. Divesting assets
that feed small communities I think is--those are not
particularly viable assets, as we have just heard, and thus do
not make particularly good divestitures to cure competitive
problems at these hubs where we see increased levels of
dominance.
Chairman Klobuchar. Okay. Thank you.
Mr. McGee.
Mr. McGee. Yes, thank you. I think there is another point
to be made when we are discussing slots, particularly at slot-
constrained airports like Washington National, LaGuardia,
O'Hare, Kennedy, and that is, how are the network carriers
using those slots? A Department of Transportation Inspector
General report a few months ago pointed out that 61 percent of
all domestic departures for the four largest network airlines
in the United States--that is American, United, Delta, and US
Airways--61 percent are now outsourced to regional carriers. So
that is a staggering statistic when you put that in
perspective, that six out of every ten departures are regionals
operating on behalf of the four largest, not mainline service.
So, you know, the Regional Airline Association boasts that
most of the departures between Washington and New York every
morning--obviously no one could call those underdeveloped
markets or rural markets--are operated, in fact, by regionals.
And so the question is: Are we using these slots, you know, to
their full maximum? And, you know, obviously the increased
reliance on regional carriers raises all kinds of issues, not
just about service and safety but about the best use of public
resources and, of course, environmental effects as well.
Chairman Klobuchar. Okay. Thank you.
Senator Grassley. Yes, I am going to use part of my 7
minutes to make a little statement before I ask questions.
Currently, there are two airlines serving five airports in
Iowa. There will be some benefits to the proposed US Airways/
American Airlines merger. However, the merger needs to be
evaluated to determine that the transaction will not
consolidate airlines so as to inhibit fair competition.
A question, rhetorical: What is the effect on air travelers
in small cities and rural communities both in terms of costs
and services? That is a big issue for me.
Iowans ask me about the availability of flights, about more
options in terms of air carriers that serve Iowa and about
reasonable and competitive airfares. Specifically, I am
concerned that this merger could potentially lead to key route
eliminations to Iowa, and there are some of these key routes
that I am really interested in.
Competitive air service is directly related to the economic
prosperity of our smaller and rural communities. Now that we
have a weakened economy, even the threat of route elimination
and cutbacks in services or higher airfares can be harmful to
these communities and their economic development.
The U.S. trustee in American Airlines' bankruptcy has
objected to the terms of management compensation. I have had
concerns with multi-million-dollar payouts to executives in
previous bankruptcies while they were going through that
process. The trustee should see that these types of payments
are being scrutinized so that they meet the Bankruptcy Code's
standard.
Now to my questions, and it is all about travel and
competition. Tell me about the impact--and these will be to
both Mr. Horton and to Mr. Parker. Tell me about the impact of
the proposed merger on services to my State of Iowa. How will
the merger impact specific routes? And are you envisioning any
reduction or elimination of flights to any of the Iowa cities
currently serviced by your airways? We will start with you, Mr.
Parker.
Mr. Parker. Thank you, Senator. No, we are not--again,
because these two networks are so complementary, as we put
these two airlines together our intent is to keep all the
airplanes, keep all the people, retain service to all the
markets we serve today independently, and just do--and because
of that, that is where the value is created, actually, is by
putting the two networks together that exist today and being
able to connect more people to more places.
Senator Grassley. Mr. Horton, have you got anything to add?
Mr. Horton. I would just add, Senator, that we have been
proud to serve Iowa for decades, as I think you know, and we
would plan to serve Iowa for many decades to come.
I do think it is important to point out for small
communities having American and US Airways come together as the
new American is actually helpful. And the reason I say that is,
you know, American Airlines today has some 240 destinations
around the world. Combined, the new American will have some 340
destinations. Those are just more points that we can serve out
of small communities, and that just creates more traffic flow
and, therefore, makes those markets more durable in the long
run.
Senator Grassley. Okay. What are the opportunities, if you
have gone this far in your thinking about the merger, under the
combined airline for any increased services to Iowa
communities?
Mr. Parker. Well, as Tom stated, again as we put the two
networks together, it provides opportunities because we now
have more hubs for more service to differing cities. Nothing as
of yet that we have planned, Senator, but as you optimize
networks, it certainly creates more opportunities than American
had independently because you now have the US Airways network
to combine with, there is already service to that city. So it
certainly provides more opportunities for growth.
Senator Grassley. Okay. Mr. Horton, I will ask you the next
question because, obviously, if you folks are talking mergers,
you probably have got the same idea about what it will have on
the questions I am asking. So what is the impact on airfares
for Iowa travelers? And that question could be asked for a lot
of rural communities not only in my State but a lot of other
States?
Mr. Horton. Well, Senator, I think that is an important
question. It is the right question. In our view, this is
creating enhanced competition in the U.S. because today you
have two really big global airlines--United and Delta--and this
creates a third as a competitive counterbalance to that. And,
of course, we have Southwest who today is a very large carrier
in the U.S. So there is a lot of competition, but we think this
creates competition on a global scale that did not exist
before.
With respect to airfares, as I mentioned earlier, I do
think it is important to look at the record, and the record
over the past decade or so since these mergers have taken place
is one where airfares, including fees, have actually grown less
rapidly than the rate of inflation. At the same time, you know,
oil prices have risen dramatically.
So I think the industry has done a pretty good job of
keeping a cap on fares.
Senator Grassley. Beyond the questions I have already asked
you and the answers you have given, could you tell me, as you
study your merger, what other specific benefits my Iowa
constituents will see on the proposed merger if it goes
through?
Mr. Horton. I will give you one simple example, which I
think everybody here can appreciate. Most of us are probably
members of frequent flier programs. The new American/US Airways
combined frequent flier program will have 100 million members,
so that is 100 million people who are now going to have more
utility, more ability to earn and burn those frequent flier
miles across a much broader network, 300 destinations
worldwide, 6,700 flights a day. So that is an improvement for
100 million people.
Senator Grassley. Do you have anything to add?
Mr. Parker. Yes, just connecting markets, Senator. You
know, as you have noted, American today serves a number of
cities that are not served by US Airways: Dubuque, Sioux City,
Cedar Rapids, Waterloo, all served by American, not served by
US Airways. However, American does not serve Yuma or Flagstaff,
which US Airways does. So you cannot get from Dubuque or Sioux
City to Yuma or Flagstaff. You will be able to now. You will be
able to get to Burlington, Vermont. Those citizens of Iowa will
be able to get to places they could not get to before because
the US Airways network has markets that American did not have,
and US Airways now will be able to--will have markets that
American did not have.
Senator Grassley. Thank you, Madam Chairman.
Chairman Klobuchar. Thank you, Senator Grassley.
Senator Schumer.
Senator Schumer. Thank you. First, I want to compliment our
Chair on her first hearing since assuming leadership of this
extremely important Committee. It is shaping up to be a good
one.
Second, I want to tell her, no, I am not going to ask about
baggage fees. I trust----
[Laughter.]
Senator Schumer. I trust my colleagues in the airline
industry will continue to keep the promises they have made to
me and others, and that is good. So I am going to ask much more
about New York concerns today.
US Airways and American are both very important airlines to
the State of New York. Both companies service not only our
downstate hubs but also the somewhat smaller though equally
important regional airports throughout the State.
I have two priorities with respect to this merger.
First, it is critically important to me that New Yorkers
continue to have access to a wide breadth of options for
services to and from our airports, like Buffalo, Rochester,
Syracuse, and Islip; and then the smaller--and Albany. And then
our smaller airports, like Binghamton, Ithaca, Newburgh,
Watertown, Elmira, as well as, of course, the metropolitan
airports of Islip, Westchester, JFK, and LGA. So we have a lot
of issues out there.
Second, it is equally important that service is competitive
in terms of both the cost and quantity of the flights. In any
situation where the number of players in a market is reduced
due to consolidation, we need to look very carefully at the
consequences that consolidation will have on competition, jobs,
and service to consumers, and this merger is no different. The
consolidation should only be cleared for take-off if we can be
sure it would not mean higher fares or poorer service or a
reduction in New York jobs. And I am sure many of my colleagues
feel the same way about the issues in their States.
So I would like to ask you, Mr. Parker, a few questions
about what New Yorkers can expect from a combined US Airways/
American Airlines. I would ask you to keep the answers brief,
and I do want to say you have always been accessible and open
to the concerns that we have had, which I very much appreciate.
American, when you left New York, it was sad.
[Laughter.]
Mr. Horton. We left New York, Senator.
Senator Schumer. Yes. But you have a large commitment to
New York, and we very much appreciate that.
So, first, to Mr. Parker, will you commit to maintaining
New York jobs of both US Airways and American Airlines? You
have a huge presence, both airlines, in our State.
Mr. Parker. Right. Yes, thank you, Senator, and thanks for
the recognition of our commitment. We love flying in and out of
New York. We love working with you, and we will continue to do
so. As we have said, this merger is about putting together two
networks that are highly complementary and not reducing
service. We have commitments to that to our employees through
no-furlough contracts--through no-furlough commitments. We are
happy to make those commitments because we have no intention of
reducing service.
Senator Schumer. That is super. Okay. Well, you answered
the second one. Will you commit to maintaining service at the
locations across New York State which are currently serviced by
your two airlines?
Mr. Parker. Yes, sir.
Senator Schumer. Great. Will you commit to maintaining JFK
as a hub for American?
Mr. Parker. Yes, sir.
Senator Schumer. Great. Okay. So that is great, and you
have told me--both of you have told me those answers face to
face. I am glad to get them on the record and very much
appreciate it. Companies are good when they are efficient. We
just want to make sure there is enough competition still out
there and that there is enough service.
The second question relates to National Airport, because
the other aspect of the merger that has garnered a lot of
attention is National Airport here in DC. Currently, US Airways
provides service between DCA and several regional New York
airports: Buffalo, Rochester, Syracuse, and Islip. As I
understand it, a combined US Airways/American would control
more than 60 percent of the slots at National. And I have heard
serious concerns expressed by one of your competitors, a New
York company, Jet Blue, about the market dominance of a
combined USAir/American, so I would like to enter a letter they
sent to me on the topic with some specific New York information
into the record, Madam Chair.
Chairman Klobuchar. Without objection, so included.
[The letter appears as a submission for the record.]
Senator Schumer. And now I have a few questions about DCA
specifically.
Last year, when US Airways and Delta executed a slot swap
agreement for slots at LaGuardia and National, the FAA required
US Airways to give up 16 slots at Washington National, which
captured a market, I think, at 55 percent. Given that a
combined US Airways and American would control significantly
more, it would seem that you would need to divest slots in
order to ensure competition. And I understand the Ranking
Member and the Chair asked about slots, but I would just like
to hear it again. What is your position on slot divestiture?
How many slots does US Airways propose to divest? And would you
support an FAA blind auction?
Mr. Parker. Yes, Senator, we would not propose divesting
any. We believe that would not be good for competition. But we
understand it is of interest, that DCA is of interest, and we
will continue to work with this Committee and with the
Department of Justice to make our case and listen to other
views.
Senator Schumer. Okay. Well, one of my concerns is--and I
think you mentioned it--that you might give up the slots to
serve the regional airports, an airport like Islip where you
have pretty good service right now. You did not mention Islip,
but regional airports.
Mr. Parker. I did not.
Senator Schumer. So I want to make sure that your
obligation to allow competition of DCA and your obligation to
serve regional markets, you do not feel they are mutually
exclusive.
Mr. Parker. Well, we absolutely do need slots to fly in and
out of DC, and absent slots, it will certainly result in a
reduction in service somewhere, Senator. But, again, we are
happy to work through this and talk to others. We were happy to
work with you to start the Islip successful. We are happy to
have that service. We do well in those markets. We would like
to continue flying all the places we fly out of DC. We
obviously would not be able to do that if we did not have all
the slots we have today.
Senator Schumer. Great. Okay. One final question. Much of
the service USAir operates is utilizing small regional
aircraft, but not only for what we agree is important service
to small communities, where small aircraft are necessary; these
large aircraft slots are often being used to fly smaller
aircraft to larger airports. So if you could elaborate on this.
What is the breakdown--and you can submit this in writing if
you do not have it at your fingertips--of small aircraft versus
large jets running service from DCA to larger airports? And
what can you say to assure us that with a combined airline you
will not use small aircraft in large aircraft slots in a way
that would further reduce capacity and competition by reducing
the number of available seats, driving up prices paid by
consumers?
Mr. Parker. Okay. We will submit that in writing. I will
just note in addition to Mr. McGee's comments that the smaller
aircraft allow us to serve smaller communities.
Senator Schumer. Yes. That is good.
Mr. Parker. And any effort to reduce the number of small
aircraft flying around is going to be inconsistent with the
Committee's desire to seek service to small communities. But we
will submit to you in writing----
Senator Schumer. You just do not want to see the small
planes go into the large cities and neglecting the smaller
cities.
Mr. Parker. Understood.
Senator Schumer. That is all. Does that make sense to you?
Mr. Parker. Yes, sir. We will submit it to you in writing.
Yes, sir.
Senator Schumer. Thank you, Mr. Parker and Mr. Horton, and
I thank the other witnesses for their being here and their
testimony as well.
Mr. Parker. Thank you, Senator.
Mr. Horton. Thank you, Senator.
Chairman Klobuchar. Thank you, Senator Schumer.
Senator Flake.
Senator Flake. Thank you. I want to just say what a
pleasure it has been to have US Airways headquartered--first
America West and now US Airways in Phoenix, in Arizona. We have
benefited tremendously from it. You have been great corporate
citizens. Great to see you here, Mr. Parker, and Mr. Johnson
behind you, and other pilots that I have flown a lot with, and
flight attendants and others.
All of us have experienced in elementary school when your
best friend moves away, this time to Dallas, and with all these
promises that they will write or that they will visit and
everything else----
Mr. Parker. I am going to write you, Senator.
[Laughter.]
Senator Flake. But, you know, the thing I was never able to
do at that time was put our friends under oath.
[Laughter.]
Senator Flake. And we have managed to do that here.
Mr. Parker. Noted.
Senator Flake. But I know that promises are promises, and
you have to--you know, the reason mergers happen, there are
economies of scale that have to be taken into account. But
certainly in Arizona we are concerned, obviously, about the
level of commitment that has been there and that it will be
maintained. Particularly, it is a little concerning when you
have as major hubs Dallas, Los Angeles, and Phoenix. How will
you manage that? It seems that the proximity of those hubs is
close enough that it is going to be difficult to maintain the
same level of service.
Mr. Parker. Okay. Well, thank you, Senator, and thank you
for the remarks. I love Arizona like you do, and what I am
happy to report to you is this merger is good for Arizona, much
like when we merged America West and US Airways, and the people
of Arizona at the time were a little worried about what it was
going to mean to America West Airlines and the service they had
there. It just made it better. Because of the merger of America
West and US Airways, we gave the people of Arizona more
opportunities to fly more places. This merger is going to do
that yet again.
The Phoenix hub is a critical piece of US Airways'
profitability. It will be a critical piece of American
Airlines' profitability. We will just be able to provide more
service to the people of Arizona, and I feel really very, very
good about that.
The headquarters issue is one that is always difficult in
situations like this, not one that we took lightly, of course,
but one that we had--you know, we did what we needed to do to
make sure that this was--you know, we have to pick one. And the
reality is American Airlines has been headquartered in Dallas-
Fort Worth for quite some time, and we thought that was the
right place to keep the American Airlines headquartered. But,
again, not done lightly. We expect to retain a large corporate
presence in Tempe as well. We have just renewed our lease on
our headquarters, and we expect to maintain that facility and
have it fully staffed with management personnel, because we are
committed to Arizona. We are committed to the community. We
will still be a huge partner in the community. I assure you I
will still be coming to visit you and your colleagues because
we love Arizona and it is important to us.
But it is also the right business decision. The Phoenix hub
is extremely important. Dallas, by the way, as you know, is 900
miles away. And the L.A. situation is just a very different
type of flying. American uses Los Angeles largely as a gateway
to Asia. It is about half the size of the connecting hub, the
connecting facility that we have in Phoenix. So they are
completely complementary, and we do not see any reason that
anyone in Arizona should be concerned about the merger. Indeed,
I think it is very good for Arizona.
Senator Flake. In Phoenix, the taxpayers of Phoenix have
spent considerable money upgrading facilities at Sky Harbor
with the Sky Train and other things, and I know there is
concern with this merger, that that will continue. You have
talked some about it, but can you talk about any growth
opportunities that exist out of the Phoenix hub with this
merger?
Mr. Parker. Well, again, what I can tell you right now is
the plan is to put the two airlines together as they currently
exist, and we are--you know, growth is obviously something in
the future that is harder to predict. What I can tell you is
whatever growth opportunities exist today in Phoenix, they are
greater with this merger because there are so many more markets
that American serves that we do not. There are international
possibilities that I know are very important to the State that
we have not been able to accomplish at US Airways on a stand-
alone basis that become more viable now with the combination
with American. Again, no promises on that, but they are much
more viable than they were with US Airways stand-alone.
So I think there is a lot--the potential for growth is much
greater. I am certain of that.
Mr. Horton. Senator, I would just add to that, you know,
American is a founding member of the oneworld Alliance. I am
the chairman of oneworld. And one of the things we have found
over the years is that we tend to flow oneworld international
connections into our big hubs in North America. So I think down
the road those are the sort of opportunities we would want to
have a look at as to whether, you know, companies like BA and
Japan Air Lines and others would have opportunities to put
flights into US Airways' hubs that are now part of the new
American.
Senator Flake. There has been a lot of talk about the DCA
slots here. How will that relate with this merger in terms of
slots--or flights between Phoenix and DCA?
Mr. Parker. I do not believe it will have any impact.
Those, as you are well aware, Senator----
Senator Flake. That was self-interested question.
[Laughter.]
Mr. Parker. I have seen you on the flight several times.
But you have also helped the people of Arizona get those
flights, which we appreciate. Those are exemptions, beyond-the-
perimeter rule, and, again, I do not believe--although I guess
it is up to the Justice Department to decide--that those are at
risk.
Senator Flake. Right. Well, thank you. I am out of time.
Thank you, Madam Chair.
Chairman Klobuchar. Thank you very much, Senator.
Senator Blumenthal of Connecticut.
Senator Blumenthal. Thank you, Madam Chairman, and my
congratulations and thanks to you for your first Subcommittee
hearing, and thank you to all of the witnesses for being here
today and for your cooperation, both Mr. Horton and Mr. Parker,
in providing information leading to this hearing.
I think the concern here really is with the impact on
consumers and passengers, not only from our States but others
around the United States, and obviously the picture is bigger
than just the industry insofar as it is here today. It really
is a global issue where we confront competition in the United
States against airlines that are, in effect, creatures of their
governments. They are subsidized by their governments. They
compete unfairly. And I use that term advisedly, not in a legal
sense, but in the sense of their ability to use the vast
resources of their governments to, in effect, buy new airplanes
and set prices that are unfair to our airlines, which I think
is one of the reasons why we have seen consolidation and
increasing concentration in the industry and the creep of
consolidation that threatens consumers in our country.
So I very much understand the economics of this merger and
the reasons that it makes sense on paper, on the ground, and in
the air. At the same time, I think that the Department of
Justice has to be vigilant about the industry not only for the
sake of your passengers but also other airlines where the
threat of consolidation may be on the horizon.
So let me begin my questions in terms of the outlook and
interests of our passengers by asking about Connecticut's
passengers and consumers. I would like a commitment, Mr.
Parker, that service will be maintained at its current levels
or increased at both Bradley and Tweed airports.
Mr. Parker. Yes, sir. Again, that is our intention. That is
what we would commit to do at the time of the merger. I do want
to be cognizant in all these cases that, you know, part of the
reason there is skepticism about the airline's ability to do
this is that others that came before us and made commitments,
that people feel like they were not--feel as though they were
not kept. What I can tell you is what I have continued to say
here, which is the value of this merger is putting these two
airlines together, flying everywhere we fly today. So I am
happy to commit that once we put the airlines together, we will
continue to fly the places we continue to fly today, in
Connecticut as well, with just one caveat: that conditions
change, of course, and there may be something that allows us--
that requires us because of market conditions to change. But
that is always the case. That is certainly the case in the
stand-alone. There is nothing in this merger in any of the
markets we serve that would lead us to discontinue service, and
that is certainly the case in Connecticut.
Senator Blumenthal. What you are saying, in effect, is if
passengers or consumers decide they do not want to go to
Washington from Bradley anymore, you will not continue to fly
airplanes----
Mr. Parker. Precisely--or if the cost of fuel gets so high
it is too expensive to carry passengers that far, absolutely.
But precisely what I----
Senator Blumenthal. But your present expectation and your
commitment is to continue to fly at the present levels of
service to both Tweed and Bradley?
Mr. Parker. Yes, sir.
Senator Blumenthal. And one of the proposals I have seen--
and probably you have considered--is to increase the service,
as a matter of fact, into Tweed insofar as a flight to
Washington, DC, may be plausible or feasible. Could you comment
on that possible route?
Mr. Parker. I do not have that date in front of me,
Senator, to know exactly. I would like to get back to--I will
get back to you on that and see what indeed might make sense
there.
What I know is the airline does well flying to Tweed, and
we are happy with the service we have there today. I am not
certain about growth opportunities, but we will get back to
you.
Senator Blumenthal. What I would suggest is that the
increasing economic activity in the New Haven area,
particularly involving bioscience and biotech, may justify that
kind of flight from Washington to Tweed, and I would appreciate
your getting back to me about it.
Mr. Parker. Yes, sir, we will. We would like to fly
anywhere that we can do so profitably and enjoy the service we
already have to Tweed. Thank you.
Senator Blumenthal. Maybe then I can ask both of you
whether you see yourselves as competitors on any particular
routes. In other words, generally you have said you are not
flying the same routes; therefore, you are not competing with
each other. Are there any routes where you are presently
competitors?
Mr. Horton. Well, as Doug maybe mentioned earlier, it is a
unique merger in that it is very complementary and there is
very little overlap in the network. So today the combined
company operates some 900 routes, and on only 12 of them do we
directly overlap. So that is, I think, unique distinct from
prior mergers in the industry.
Senator Blumenthal. Where among those 12 routes do you see
yourselves as really going head to head?
Mr. Horton. Well, we are competitive on all of them, but,
you know, airlines are a network business, as you know, so even
where we do not have a direct overlap, of course, we are
competing via connections over hubs. And that is why the
industry is so dynamic and so competitive, and that is why
fares have been, you know, so restrained over the years. There
is just so much competitive activity in the industry.
Senator Blumenthal. Do you agree, Mr. Parker?
Mr. Parker. Yes, sir. We absolutely are competitors today.
We compete vigorously against each other. But we have two route
networks that are not--that independent are not as capable of
competing against the larger carriers as we will be together.
So I think by putting this together, we create a stronger
competitor to the rest of the industry.
Senator Blumenthal. In the past, Mr. Parker, I believe
USAir has resisted raising fares when other airlines have done
so, and I guess one of the concerns that we may have is that
the merger might lessen the downward pricing pressure that that
past conduct has created. Do you foresee a change in that
pricing behavior or conduct?
Mr. Parker. I do not see anything in the merger that would
change pricing behavior at all. Indeed, all it will do is allow
the put the prices on more markets across the United States.
Senator Blumenthal. And, Ms. Moss, maybe I could ask you
your perspective on fair prices as a result of consolidation.
Do you see an impact on the prices of these two airlines
generally, and in particular, on any particular routes?
Ms. Moss. Thank you. I think that these two airlines are,
in fact, head-to-head competitors. They are each other's
closest competitors on a number of routes. In our white paper,
we have a table that presents the results of the overlap
analysis. So, yes, there are definitely routes that will be--
where competition will be significantly eliminated, several
mergers to near monopolies, several mergers to monopoly, and
antitrust analysis, you know, is very good at sort of
predicting what the effects of eliminating head-to-head
American are. That is sort of a direct effect. And so the
statistics show that.
I think the important point also is that, based on the
Delta/Northwest analysis and United/Continental where we saw
elimination of competition, substantial elimination of
competition on some very important routes in the United States,
we did see some fare increases, and some pretty significant
ones. We also saw very few fare decreases, but in addition, we
saw the carriers driving traffic to large hubs. And it is a
very similar fact pattern, here and in comparison to the last
two mergers. And I think that we really, for the good of
aviation policy, competition policy, public policy, and
American consumers, we have to inform what goes on in this case
from what has happened in the past. And certainly at a route-
specific level, that is what we see. And at a national systems
level, you know, with very few large systems, you certainly
increase the probability that the airlines will simply follow
each other on capacity decisions, keeping capacity tight to
maintain fares, and as part of sort of a tacit agreement, and
there is a lot of that already. There are quotes all over the
press from other airlines indicating that they want capacity
discipline to maintain fares. So there is quite a bit of
evidence out there already and empirical economic analysis that
shows this.
I think, finally--I do not want to run over my time, but,
finally, I think the broader perspective here is really, really
important. The airlines want to compete in the global system,
and I understand that. That is where the business is going, and
that is where the dollars are. We are really stuck, though, we
a very fundamental tension over expanding globally without
sacrificing domestic consumers. And that is what is happening
here. We are expanding globally to compete in the global arena,
fair enough, but we have to find a way not to sacrifice U.S.
consumers on the altar of global competition. And this all sort
of comes out of the driving traffic to big hubs, cutting
service to small communities. You know, not everybody travels
internationally. I was just in Vermillion, South Dakota, where
a bunch of little farmers came to a conference, some of whom
had never been on an airplane before. Those are the kinds of
consumers I think that we have to----
Senator Blumenthal. Farmers are not so little.
[Laughter.]
Ms. Moss. I think we have to----
Chairman Klobuchar. Speak for your own farmers, Senator.
[Laughter.]
Chairman Klobuchar. Sorry, but continue, Dr. Moss. I could
not resist. He was making fun of farmers.
Senator Blumenthal. I meant in importance, not in size.
Chairman Klobuchar. All right. Okay.
Dr. Moss.
Ms. Moss. So I think global competition does not equal
domestic competition, and we have to make sure that we maintain
competition in the U.S. and for U.S. consumers. And essentially
what I hear here are concessions and promises to maintain
service in New York and in Connecticut and in Arizona.
Basically what you are getting here are up-front commitments to
condition the merger. And if that is what is going to happen,
then we have to ask ourselves, well, then--that is sort of a
regulatory approach to approving the merger. Why not just have
good antitrust policy in place that looks hard at the merger
and determines whether it is going to eliminate competition and
harm consumers?
Senator Blumenthal. Well, my time has expired, but I really
appreciate that very thoughtful answer and very much appreciate
the testimony of Mr. Parker and Mr. Horton. Thank you very
much, Mr. McGee, as well.
Thank you.
Chairman Klobuchar. Thank you.
Senator Cruz is a Member of the Judiciary Committee, but
visiting our Subcommittee since his State has been mentioned a
few times here. Senator Cruz.
Senator Cruz. Well, thank you Madam Chairman, and thank you
to each of the witnesses for being here. And if I may express
my apologies to my friend from Arizona, and at the same time
express to Mr. Parker that I am looking forward very much to
welcoming you and your colleagues to be new Texans.
Mr. Parker. Thank you very much.
Senator Cruz. And I think you will find the State quite
welcoming and an environment that celebrates your coming to our
State and joining us.
My focus for a long time has been and I think the focus of
all of us should be on economic growth and on ensuring that the
economic growth in our country returns to historic levels and
remains strong going forward. And so the question that I would
like to pose to both Mr. Horton and Mr. Parker focuses on the
impact of this merger on growth, both from the perspective of
the great many employees that both companies currently have,
and then, second, from the perspective of consumers. And so I
would like to start, Mr. Horton, by asking--obviously,
American, headquartered in Texas, has a great many jobs in
Texas, which we are grateful for, but American has had
challenging financial circumstances in recent years. And I
would like to get your views both on the negative impacts that
would flow to American if this merger were not approved. I
think it is widely expected to be approved, but I would like
your views on the negative repercussions if it were not, and on
the flip side, on the positive benefits to the many thousands
of men and women who work at American right now if this merger
is approved.
Mr. Horton. Thank you, Senator, and I would also like to
welcome my good friend Doug Parker to the great State of Texas.
I can affirm that he does own cowboy boots. I have seen him
wear them.
Senator Cruz. That is the best news I have heard today.
[Laughter.]
Mr. Horton. I do think the merger is good for American
Airlines in every way. American has embarked on a very
difficult restructuring here, but it has been a very successful
restructuring, and what has set it apart from other
restructurings, in addition to the creditors getting full
recovery, is that it has been about renewal and growth--it was
built upon the largest aircraft order in the history of the
industry--and about reinvesting in our products and services,
and our customers have certainly taken note of that. So it has
been about growth. And I think what is great about the USAir
combination is it is really about extending that strategy and
extending to--and creating a new global leader in the aviation
industry and one that will be headquartered in Dallas-Fort
Worth. So we are very excited about that.
I do think the new American will be strong and vibrant, and
I said that independent of a merger, I think we would have been
strong and vibrant, but I think we will be that much stronger
and that much more forceful of a global competitor combined
with US Airways. So I think it is nothing but good for
American, and I think it is good for the State of Texas. I
think it is good for the Dallas-Fort Worth area.
Senator Cruz. A followup question that I would ask of both
of you. In my view, the surest protection of consumers is
vigorous competition, and the question I would ask both Mr.
Parker and Mr. Horton is: Post-merger, in your judgment, what
would make the new American a more effective competitor and
able to compete more vigorously with other airlines in terms of
prices, in terms of service, in terms of ultimately providing
consumers with a better product?
Mr. Horton. Well, I will start. I think, you know, aviation
is a very important industry. It is a vital industry for the
U.S., and it is an industry where we have not in the U.S.
been--I think it is fair to say we have not been a global
leader because of the turmoil over the last decade. And, you
know, the U.S. invented aviation, so I think we should have the
very best airlines in the world.
So that is what this is really about, is creating an
airline that is not only the largest but can be the best in the
world, and will have the financial capacity and the financial
wherewithal to invest. And that is what we are going to go do.
Mr. Parker. Thanks, and if I can, I will start actually
with a comment on your first question to Tom, which was on the
economic growth. I happen to believe this is one of the great
economic growth stories in business today. We are taking two
companies and putting them together and creating so much
economic value that it is shared virtually everywhere. You
know, as Tom mentioned in his opening comments, the creditors
of American Airlines, American Airlines is going to come out of
bankruptcy, and people are going to be paid in full. That is
absolutely unheard of in airline bankruptcies. It is happening
because of this merger, that those creditors are going to get
paid back 100 cents on the dollar.
The employees of American and US Airways are going to work
for a stronger, more vibrant company that can pay them more and
provide them, you know, better benefits and more security,
which is why they are so supportive.
And then to segue to your second question, as to consumers,
we are creating a competitor to two other airlines, which is
where the value comes from, is by attracting more consumers to
our airline combined than we could independently. And because
of that, that value is then what is shared with the creditors
of American, the shareholders of US Airways, the employees of
both companies.
So, again, it is, in terms of economic growth, I think a
very good success story, and as it relates to consumers, a
great story as well.
Senator Cruz. Very good.
Thank you, Madam Chair.
Mr. Parker. Thank you, Senator.
Mr. Horton. Thank you, Senator.
Chairman Klobuchar. Thank you very much, Senator Cruz.
I have a few more questions. I promised to go back to you,
Dr. Moss, and Mr. McGee on this ticket price issue. And, of
course, as we all know, it is not just ticket prices; it is
also the fees. There seems to be some disagreement. This is not
just about USAir and American about where we are with ticket
prices, and I do not want to put words in your mouth, Dr. Moss,
but I think you argued that, depending on the route, depending
on the city, that some prices have increased significantly
depending on how much competition there is. And then also, I
would like you to respond to Mr. Horton's point about the fact
that fuel costs have gone up even more than the ticket prices
have gone up in these areas and how we get a grasp on where we
really are for the cost to the American consumer during this
time of great consolidation. Dr. Moss.
Ms. Moss. Yes, fare prices are probably one of the most
controversial topics you can find when it comes to pricing.
Certainly fuel costs are a huge part of what an airline
incurs to do business, and fuel price volatility is a big
factor. But airlines have become very good at hedging that risk
and managing their fuel portfolios.
There are other inputs costs, obviously, that factor into
fair prices, and we are not talking about ancillary fees. Those
are all unbundled and separate at this point and very non-
transparent as far as consumers are concerned.
The analysis that we have done does account for fuel costs
and does show that, above and beyond fuel cost increases, there
are fare increases that are above average at some of these
origin and destination airports on these large hub-to-hub
routes.
On a lot of these very large routes, there is very, very
limited competition, in some cases just two carriers. After the
merger of these guys and of United/Continental and Delta/
Southwest, some routes were monopolized. There is very little
incentive for firms in a duopoly, where there are just two
firms, or a monopoly----
Chairman Klobuchar. Just for the record, you are not just
talking about tiny towns; you are talking about major----
Ms. Moss. Oh, no. We are talking about major hub-to-hub
routes where there is limited, very limited competition. And if
you eliminate a competitor in a small market, meaning very few
competitors, the chances are you are going to get price
increases. And we have seen that. Our analysis has shown that.
So the fact pattern is there, and there are a lot of
similarities, and I think those similarities really need to be
duly noted and investigated by the DOJ when they look into this
merger.
Chairman Klobuchar. Thank you.
Mr. McGee.
Mr. McGee. Yes, thank you Senator. I think in many ways
what we really have is two different domestic industries,
because you have to look at routes on whether or not they are
served by low-fare carriers. As 20 years ago the Department of
Transportation pointed out with a famous report on this--``The
Southwest Effect,'' as it was dubbed. In reference to what
Senator Blumenthal was speaking about earlier, I am a resident
of Connecticut as well, and Connecticut sort of crystallizes
this issue, because on routes where there is low-fare
competition with Southwest, there is pressure to keep fares
down. On routes where major network carriers compete head to
head without low-fare competition across the country, what we
see is that, in fact, prices have increased, and they continue
to increase. And this is borne out every quarter by the
Department of Transportation quarterly airfare reports.
And so, you know, added to that there is increasing
evidence that Southwest itself, which is, you know, often
pointed out as the low-cost leader, and fairly so, that
Southwest's fares have increased as well over time.
There has been a lot of discussion about, you know, over
time fares going down, and, you know, there is evidence for
that, there certainly is. What has not been discussed are the
fuel surcharges, and, of course, as you point out, the
ancillary fees on top of that. So we are very much comparing
apples and oranges in many cases.
But you really have to dig down to look route by route
almost to see where consumers are benefiting, and, again, where
there is no low-fare competition, consumers do not benefit.
Chairman Klobuchar. Okay. Any response?
Mr. Parker. We welcome the analysis. We understand, as we
said at the beginning, that the scrutiny of this is important,
and we welcome it, and we believe that the result of that
analysis will be a recognition of what we described here, which
is that this is a merger that is good for competition, that
should be approved, and that is good for the United States.
I would also just mention, as it relates to our customers,
what we are trying to do here is provide more to our customers.
We do not have the ability to connect people or to get people
to as many places as some of our larger competitors. By
combining we do. We cannot be in business if we do not provide
good service to our customers, and this will allow us to
provide better service to customers than either of us can
independently.
Chairman Klobuchar. Okay. I wanted to followup a little bit
on that as you were talking about the nine routes and that
there is not significant overlap between the airlines, but one
of the things that we looked at is how you do compete right
now, and that would be how US Airways and American compete, and
I will just give you one example. A lot of the general public
who may not get businesses playing for their flights, they look
for lower-cost flights by going through hubs because they found
out that if they maybe make a stop somewhere, they get a
cheaper rate. And so an example, USAir charged $549 for
connecting service between Dallas and Washington National,
which is far less than the $1,500 for American's nonstop
service, just an average we saw right now. It is nearly $1,000
cheaper.
So do you believe there still will be these kinds of
competitive rates when you see this merger where regular people
choose to take some kind of ridiculous route sometimes or go
through a hub instead of going direct just to save money? How
is that going to affect that part of the competitive market in
the merger?
Mr. Horton. Well, certainly direct routing is of more value
to a customer than one where you have to stop at a hub, so it
stands to reason that it would be priced differently. But I
think there are--there will be any number of connecting
opportunities to compete against any nonstop flight. So you
take an example like that, and somebody could also connect over
Atlanta on Delta or Chicago on United. There are just other
ways to do it, and there are literally thousands of those
competing alternatives in the marketplace, which is why, you
know, fares in the industry have not grown as fast as
inflation. It is just a very, very competitive marketplace.
Chairman Klobuchar. A response from Dr. Moss or Mr. McGee.
Ms. Moss. Yes, I think you have to be careful when you sort
out nonstop service, which is typically a distinct market, for
connecting service. There are different ways to get places, but
I think to pull in something that Bill said earlier, we really
cannot underemphasize the critical role of the low-cost carrier
here. Low-cost carriers in the past have provided a really
important source of discipline, and that includes, you know, on
nonstop routes and also connecting routes. I mean, a lot of
people will take connecting routes on a low-cost carrier to get
from Point A to Point B. Others will fly a legacy airline to
get from Point A to Point B. It depends on you as a consumer.
But low-cost carriers in an environment where there is
increasing legacy consolidation are really going to have a
tough time providing that discipline. You know, they are going
to behave less like little mavericks, like AirTran and Jet Blue
and others in the industry in the past, and they are going to
face this critical decision about whether to continue to be
aggressive and take share from the legacies or whether to just
follow what the legacies are doing in terms of their pricing
policies. And that is really the critical juncture I think that
we are at, and that is what we risk losing by increasing the
solidification of most of the market with the legacies and
leaving the low-cost carriers with less than 10 percent of the
national market. I do not think we can rely on them to sort of
save us all from higher prices.
Chairman Klobuchar. And I think that the numbers are now
that the Big Four would each have about 20 percent market
share, including Southwest in that, and then the next largest
would be Jet Blue with 5 percent, Alaska with 3.9 percent, and
the remaining airlines with less than 2 percent. Is that right?
Ms. Moss. I think that--yes, that is----
Chairman Klobuchar. And that is one of the reasons that
Senator Lee and I are asking for the GAO to do a study of the
entire industry beyond just this merger in terms of the effect
all of this consolidation is having on pricing, is having on
competition and service to consumers, which I hope will be
helpful.
Just two more followups, and then I will turn it over to
Senator Lee. First of all, the integration if the merger were
to occur. I know that, Mr. Parker, US Airways had a long
transition in merging with America West, and there were some
glitches. We will not go into all of it right now, but if the
merger is approved, what are you going to do to ensure that
these problems do not occur again for consumers?
Mr. Parker. Well, putting together two airlines we
recognize is not an easy task, but the good news is both of us
have done it once before and have learned a lot through that.
More importantly, the fact that we have agreement with all of
our employees, our labor unions, on how they will integrate
makes this dramatically easier. It is one of the more difficult
parts of integration, which, thanks to hard work on their part
and working with us, we already have largely resolved. So that
will help tremendously.
But then as it relates--so now you are left really with
kind of systems integration, which certainly is difficult as
well. But like I say, we have learned a lot through our
experience at America West/US Airways, and I will let Tom speak
for himself, but I know that they at American have done the
same. We have a great team we are going to put together between
the two airlines, and it is our primary focus going forward
making sure that we integrate in a way that is done efficiently
and without disruption.
Chairman Klobuchar. Mr. Horton.
Mr. Horton. Well, we have learned a lot not only from our
own experience but also from what we have seen with Delta/
Northwest, United/Continental, and Southwest/AirTran. And so we
will seek to take the best of those practices and put them in
place as we pursue the integration.
We already have integration planning underway. Doug and I
lead up a transition team, and so we are working hard to make
sure that when the deal is closed later this year, we can hit
the ground running. And our focus is 100 percent on getting
this right for our customers.
Chairman Klobuchar. Thank you.
To end on a positive note here for everyone, tomorrow we
are holding a hearing in the Commerce Committee about airline
safety, and since the last FAA reauthorization, the airlines
have been participating with the FAA, as you know, and
Secretary LaHood on improving safety. I would like to say that
I just saw that 2012 was the best in safety history, according
to the International Air Transport Association. And we always
know anything can happen. As I was sitting on my USAir flight
yesterday in a bad storm to a bad storm, everything went well.
But we all think of that every time we get on a plane. And just
to end with how you see these mergers as affecting airline
safety.
Mr. Parker. Well, first, thank you for the comments. We are
extremely proud of our people and what they have accomplished
over time. It is by far the most safe form of travel and will
continue to be so. This merger, of course, will have all the
benefits that I stated, but first and foremost, we will be
ensuring safety. We will work closely with the FAA to move to
one operating certificate. We will take our time and make sure
we do that well. The FAA will ensure we do as well. We work
extremely well with the regulator because we share a view on
how critically important it is for the safety of our customers
and consumers. So we will work through that. It will take
something on the order of a year and a half actually before we
get to one certificate because it is so important and most
consumers will not see that. You will see more of one airline
flying. But it will be two separate airlines until we are all
certain and the FAA is certain that we have our procedures and
policies coordinated well enough that we can move to one FAA
operating certificate.
Chairman Klobuchar. Thank you.
Mr. Horton.
Mr. Horton. Yes, I would just second Doug's comments. We
are very proud of our safety record. It is our highest calling
in the airline business, and we are very proud of our people
who deliver that every day.
Chairman Klobuchar. Okay. Anything more, before I turn it
over to Senator Lee, on any of my questions I had of the
airline executives? Dr. Moss, Mr. McGee.
Ms. Moss. I just have one quick point on efficiencies, and
I think it is the system integration stuff that really has been
the skeleton in the closet for previous mergers. We have seen
in United/Continental, in Delta/Northwest, and the America
West/USAir merger. You know, when DOJ looks at efficiencies,
they want to see stuff on the table. They want to see merger-
specific efficiencies, and they want to see that they are
cognizable, meaning that they are really going to be realized.
And a lot of these system integration problems kind of pop out
of the bushes after the merger has been consummated, and we
have now seen enough of this and have enough of a track record
to be able to say, okay, that is probably something we should
be expecting to happen. And I think it is important then to
balance or account for those very probable system integration
problems at the time the merger is reviewed, because they cut
significantly into the efficiencies that are promised by the
airlines. And if they cut significantly into them and those
costs are passed on to consumers, then the efficiencies are not
as great as they were originally forecasted to be.
So I think this is something new that we are going to have
to--or, you know, that antitrust analysis should be accounting
for.
Chairman Klobuchar. Thank you very much.
Mr. McGee.
Mr. McGee. Yes, thank you. One other thing that we wanted
to point out is we are concerned at Consumers Union not just
about the micro effects of this specific merger, which we have
detailed today, but also the macro effects. Even on the pricing
issue as we talked about, you know, the fact is when you have
three network carriers as opposed to six or seven or eight, you
know, we have seen in the past with fare increases, for
example, that one or two airlines would match a fare increase
and others would not, and the fare increase would be rescinded.
We have seen it with new innovations.
So the effects of this merger would have been very
different 7 or 8 years ago had we not had all of these other
mergers. And so we just do not want that to be lost in all of
this.
You know, the argument has been made, well, you did it for
the others, why not do it for us? But with each successive
merger and with this rapid consolidation of the industry, the
industry continues to change and, in our view, it just raises a
lot of disturbing questions for consumers.
Chairman Klobuchar. Thank you very much to all of you.
Senator Lee.
Senator Lee. Thank you.
Dr. Moss, first of all, I would like to commend you on your
opening statement being exactly 5 minutes, no more.
[Laughter.]
Chairman Klobuchar. He actually turned to me during it and
said that is amazing.
Senator Lee. A military-like precision there.
So in conducting antitrust analysis, our Subcommittee often
looks to whether and to what extent there may be barriers to
entry in a particular marketplace, barriers that might prevent
a competitor from coming into the marketplace and providing
some market discipline.
When the barriers to entry are minimal, then new
competitors or existing rivals find it, you know, relatively
easy to get into the market, and they have more of an ability
to emerge and to compensate for any concentration of market
power. On the other hand, where there are significant barriers
to entry, that becomes less possible.
So what do you see as the greatest barriers to entry into
the airline industry?
Ms. Moss. That is a really good question, and entry can be
a very powerful thing, just like efficiencies can be. You know,
if mergers create anticompetitive effects and potential harm,
then the first thing we look to, obviously, is, well, will
entry discipline price increases post-merger? And will
efficiencies, for example, have countervailing effects to the
adverse effects of higher prices, reduced service, lack of
choice, et cetera, et cetera.
I think the biggest barrier to entry, as this industry
further consolidates, is concentration itself, concentration
meaning, you know, just a couple of airlines dominating large
hubs. It really is a big wall to scale for a small potential
entrant to get into a market where they are going to have to
scrabble and scrape to get slots, to get gates, to get
ticketing space, baggage handling, all this kind of stuff--all
the pieces of the puzzle that need to be in place for an
airline to offer service.
I think as concentration increases at hubs, it becomes less
inviting, less easier for smaller carriers to get in. And that
is exactly what we have seen. We used to have hubs that really
were very friendly and conducive to multiple airlines serving
them. And as consolidation has occurred, those hubs have shut
down and--not shut down in a literal sense, but shut out
potential competitors.
Now, with that said, airlines are in the unique position of
having very fungible assets where they can move aircraft around
and go to profit centers, go to markets that are very lucrative
and very profitable. That is what you want to see. You would
ideally like to see that in the wake of a merger that creates
price increases. The question is: Is that harder to do today
than it was 6 years ago before six mergers went through?
Probably yes. And that we need to, I think, look very carefully
at.
And as the fringe of competitors shrinks down with the low-
cost carriers and the regionals, they are really facing much,
much higher barriers to entry, which could potentially help
consumers.
Senator Lee. Okay. So the barriers to entry that you would
see that might be attributable to this merger, should it go
through, are you saying that would be felt most acutely in
these hubs?
Ms. Moss. I think if the hubs become more consolidated--and
we have shown that to be the case in many major airports--then,
yes, I think it will be harder.
Senator Lee. Any other barriers to entry that you can point
to that would flow naturally from this merger if it were to
proceed?
Ms. Moss. Well, I think that is the major one. And that is
at sort of the route-specific level. If you look nationally, I
think you are also looking at potential barriers to entry,
because low-cost carriers do not really operate as large
national footprint-type systems, and it will be difficult for
them to expand their operations to try and horn in on that
market, to try and get a foothold in that market to compete on
a broader level.
Senator Lee. I understand that you have testified in the
past with regard to a number of other mergers in the airline
industry, and you have recommended against them and,
nonetheless, the Department of Justice, under Republican
administrations and Democratic administrations, has approved
those that you have testified against. Is it your opinion that
the Department got it wrong in those cases?
Ms. Moss. I do not want to say that the Department of
Justice got it wrong. I think the DOJ does very, very good,
solid, exhaustive analysis in these airline merger cases.
I think what has happened is perhaps beyond the ability of
antitrust to sort of address on a really comprehensive basis.
We have had a series of mergers that have sort of put this ball
into motion to allow the carriers to compete globally, which we
discussed just a few minutes ago, and that is fine. I mean,
again, those are lucrative markets, and they want to compete
and expand globally.
The question is: What does that do for the domestic
markets? And we do see some very negative tradeoff effects
between expanding globally and serving American consumers in
the form of more competition.
I am not sure that the Department of Justice has the
ability to even, you know, take that larger view of how
consolidation is changing sort of a moving target in the
industry. It is a bigger sort of policy issue, aviation policy
issue, I think that we need to keep our eye on very carefully.
Senator Lee. Okay. Thank you.
Let me shift to Mr. McGee. That leads into my next question
for you. The Department of Justice has in the past focused much
of its attention on the routes, on what a particular merger
might do to routes, the concern being that if an airline
through consolidation is able to achieve dominance over a
flight between City A and City B, that there will be too much
market concentration, they will be able to dominate the price,
increase prices there, and competition will not be able to step
in and effectively keep prices under control and thereby
protect consumer welfare.
In the case of this merger, as I understand it, of
approximately 900 routes that would be covered by the combined
airline, only about a dozen or so overlap between the two
partners in this proposed merger. So does that suggest that at
least that part of the antitrust analysis suggests that this is
mostly okay?
Mr. McGee. No, I think, you know, Consumers Union has some
concerns about the analysis being a little narrow in that
sense. Certainly it is important to look at head-to-head,
nonstop competition, and that is certainly probably the first
thing you would look at. But, you know, as Mr. Horton pointed
out----
Senator Lee. But that aspect of it you would concede is not
a red flag, I mean, 900 routes, 12 overlap?
Mr. McGee. Relatively. I mean, obviously, if you live in
those cities or you do business in those cities, it is
certainly a big concern. But I was going to say, as Mr. Horton
pointed out earlier, we are talking about network carriers
here. So, you know, you can basically pick any two points on
the domestic map and say that, you know, these two carriers
have a fair shot at competing over their hubs because of, you
know, the geographic penetration.
So, in other words, in order to get, you know, from
Savannah to, you know, Milwaukee, you may choose to do it
through Charlotte, or you may choose to do it through, you
know, Atlanta with Delta, or you may--I am not even sure if,
you know, American would serve that through Miami. But,
clearly, you know, there are a whole plethora of options.
So when you are looking at network carriers, you really are
looking at a much, much bigger scope, and I guess the question
is, you know, how closely is the DOJ looking at that?
Senator Lee. Okay. Thank you.
We have talked a lot today about consumer welfare, and we
have acknowledged the fact that the best way to protect
consumer welfare is through robust competition, making sure
that within the marketplace and within the market that we are
examining that there is effective, strong competition. You
know, in response to questions about competition, proponents of
the merger have suggested that this transaction, if approved,
if it proceeds, will have important pro-competitive effects.
I would like to just sort of close by giving Mr. Horton and
Mr. Parker a chance to respond to some of the statements that
have been made on the other side of this and sum up by
providing in brief form what you think are the benefits to
competition and consequently to consumer welfare that could be
achieved through this merger.
Mr. Horton. Well, maybe I will start. I think a strong U.S.
airline industry is important to the U.S. economy and is
important to all Americans. And I do think that consolidation
has been part of creating a healthier U.S. industry more able
to invest on behalf of our customers. You certainly see that at
American. I think you will see it at the new American.
It is about choice. You know, this merger will create more
choice for customers, more ability to fly to more places, to
connect more dots on the map and create a third, truly global
competitor to the big U.S. airlines we compete with, but also
the global airlines that we compete with. This is a globally
competitive industry now.
So I think it is about creating more choice, more
opportunities for customers, and we think that is good for
American, we think it is good for US Airways, we think it is
good for America.
Senator Lee. Mr. Parker.
Mr. Parker. Well, that was well said by Tom. I would just
like to also follow on thanking you for your comments about the
importance of our business. Some do not understand how
important the airline business is to the U.S. economy. As you
noted, one in eight jobs is in some way tied to the airline
business. It is a vitally important business that needs the
ability to compete, and we need to have strong and vibrant
competitors. Either of our airlines could compete
independently. No one is here suggesting that we could not.
What we are saying is we can compete better together. We can
provide better competition, we can provide better service to
consumers once merged. And I think that is good, as Tom noted,
for the country, for consumers, and that is why we are here.
I do want to come back a little bit, if I can, to the
question that you asked Dr. Moss about barriers to entry. The
reality is there are no barriers to entry in this business.
Because we have worked so hard to modernize our fleets at the
larger airlines, there is a large amount--there are large and
inexpensive aircraft for any entrepreneur that wants to go buy
a fleet of airplanes cheaply, the airplanes are out there. If
you just go ask your favorite entrepreneur why they do not go
do that, you know, they will not tell you, ``Oh, because I
cannot find airplanes.'' They will not tell you, ``Oh, because
I cannot fly the routes I want to fly.'' They will tell you,
``Because I cannot make any money doing it.'' It is too
intensely competitive, and you cannot cover your costs of
capital by starting up a new airline, not because of barriers
to entry but because it is so competitive you cannot make any
money.
Senator Lee. I assume some would add to that, though, the
regulatory burden is so----
Mr. Parker. That is part of it. It is expense as well, yes,
sir. It is expenses----
Senator Lee. Lawyers are not cheap, as it turns out.
[Laughter.]
Mr. Parker. Yes. But, no, honestly I would encourage you to
go ask any entrepreneur why it is, and that is what you will
hear. You will hear that it is expensive, it is highly
regulated. But mostly they will tell you, ``Why would I want to
invest now in that business? It is too competitive.''
So, anyway, with that said, I will just come back to where
Tom ended up, which is we think this is great for--we know it
is great for our two airlines, for the employees of both
airlines, and we know it is great for consumers, because we are
going to create a stronger airline that provides customers more
choice.
Senator Lee. Okay. Thank you.
Thank you, Madam Chairman.
Chairman Klobuchar. Thank you, Senator Lee.
Thank you to all our witnesses. This concludes the hearing.
I wanted to thank my staff, Caroline Holland, who previously
worked with Senator Kohl, who is our staff director; Craig
Helcott, my counsel; and also Maria Lavadeer for their work on
this. And I know Senator Lee has staff working diligently on
this as well. I want to thank them for their work. And I want
to thank the witnesses for appearing today. You have provided
meaningful insight into this merger and the challenges that are
faced by the companies in an ever-competitive international
market, but also as has been pointed out, the challenges that
are faced by consumers as we try to look at these things not
only in terms of the airlines' ability to compete in a global
market and the reason that would create incentives for merging,
but also what is going to happen then to people not just in the
smaller markets but also actually in some major metropolitan
markets and to make sure that they get the service they need,
that fares are kept at an affordable level, and that our
airline industry, which is, as we have pointed out, so
important to our country that it benefits everyone in this
country.
So that was one of the reasons we wanted to see this GAO
study because we think it will be important to look at it not
just in the context, as Dr. Moss pointed out, in one merger,
but also in the context of the entire industry.
I want to thank everyone for attending. As I said, the
record will remain open for a week for any remaining
submissions or testimony. Thank you very much. The hearing is
adjourned.
[Whereupon, at 12:07 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows.]
A P P E N D I X
Additional Material Submitted for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Additional Submissions for the Record
A list of material and links can be found below for Submissions for the
Record not printed due to voluminous nature, previously printed by an
agency of the Federal Government, or other criteria determined by the
Committee:
Ferriss, Bruce, and Barbara Ferriss, Spokespersons, Association of
Professional
Flight Attendants (APFA), and Former TWA Flight Attendants,
attachments:
http://twajustice.com/senate_exhibits.html
Mitchell, Kevin, Chairman, Business Travel Coalition, statement:
http://judiciary.house.gov/hearings/113th/02262013_2/
Mitchell%2002262013.pdf
Moss, Diana L., Ph.D., Director and Vice President, American
Antitrust
Institute (AAI), additional submission:
http://www.antitrustinstitute.org/ antitrust/sites/default/
files/
AAI_BTC_USAir-AA_White%20Paper_8-7.pdf
[all]