Airline Competition: Issues Raised by Consolidation Proposals
(Statement/Record, 02/07/2001, GAO/GAO-01-402T).
In May 2000, United Airlines proposed to acquire US Airways and divest
part of those assets to create a new airline to be called DC Air. More
recently, American Airlines has proposed to purchase Trans World
Airlines (TWA), along with certain assets from United. These proposals
have raised questions about how such consolidation within the airline
industry could affect competition in general and consumers in
particular. There are a number of unanswered questions that the
Congress, the Department of Justice, and the Department of
Transportation need to address in evaluating the proposed mergers. The
proposals by American, TWA, United, US Airways, and DC Air constitute
the most significant recent changes that have occurred in the airline
industry, and the outcome of these decisions could have both positive
and negative effects for consumers for years to come. This testimony
summarized the December report, GAO-01-212.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-402T
TITLE: Airline Competition: Issues Raised by Consolidation
Proposals
DATE: 02/07/2001
SUBJECT: Commercial aviation
Corporate mergers
Competition
Airline regulation
Airline industry
Air transportation operations
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-01-402T
AIRLINE COMPETITION
Issues Raised by Consolidation Proposals
Statement for the Record by JayEtta Hecker, Director, Physical
Infrastructure Issues
United States General Accounting Office
GAO Testimony For the Committee on the Judiciary, Subcommittee on
Antitrust, Business Rights, and Competition, U. S. Senate Hearing Held on
February 7, 2001 Statement Submitted on February 7, 2001
GAO- 01- 402T
1
Mr. Chairman and Members of the Committee: We appreciate the opportunity to
submit this statement for the record on the potential implications of merger
proposals recently announced by major airlines. In May 2000, United Airlines
(United) proposed to acquire US Airways and divest part of those assets to
create a new airline to be called DC Air. More recently, American Airlines
(American) has proposed to purchase Trans World Airlines (TWA), along with
certain assets from United. These proposals have raised questions about how
such consolidation within the airline industry could affect competition in
general and consumers in particular.
Extensive research and the experience of millions of Americans underscore
the benefits that have flowed to most consumers from the 1978 deregulation
of the airline industry, including dramatic reductions in fares and
expansion of service. These benefits are largely attributable to increased
competition-- by the entry of both new airlines into the industry and
established airlines into new markets. At the same time, however, airline
deregulation has not benefited everyone; some communities have suffered from
relatively high airfares and a loss of service due in part to a lack of
competition. GAO has been analyzing aviation competition issues since
enactment of the Airline Deregulation Act. Our work over the last decade has
focused on challenges to competition and industry performance, including
various mergers, the Department of Transportation's (DOT) role,
concentration in select airports, key airline operating and marketing
practices, barriers to entry, small community service, and fares in
dominated markets. 1
The potential shifts in industry structure that would be brought about from
the proposed mergers represent a crossroads for the structure of the airline
industry and the state of competition and industry performance. 2 These
proposed mergers raise numerous public policy issues that require reasoned
responses. Ultimately, the Department of Justice (DOJ) has the primary
responsibility to evaluate these mergers. In its review, Justice considers a
number of factors, including increases in market concentration; potential
adverse effects on competition; the likelihood of new entry; possible
efficiencies or other benefits; whether one of the airlines would fail and
exit the market if the merger failed to occur; and whether a less
anticompetitive alternative exists.
1 See list of related GAO products attached to this statement. 2
Technically, American has proposed to acquire the assets of TWA, which
declared bankruptcy. For presentation purposes in this statement, however,
we will refer to the transaction as a merger.
2
We recently issued a report on the potential effects of the proposed merger
between United and US Airways. 3 That review, using the most recently
available data from DOT on the top 5,000 domestic airline markets, generally
focused on changes in market structures and not on other issues that DOJ
might take in consideration. 4 This statement is based on that report and
our earlier work on airline competition issues, along with initial analyses
of the potential effects of the various proposed transactions between
American, TWA, United, and US Airways. The statement: (1) presents an
overview of potential shifts in industry structure and markets associated
with both the American and United proposals, including information on
markets in which the merged airlines would dominate travel; (2) identifies
key issues associated with American's proposed transactions; and (3)
identifies some critical public policy issues associated with the potential
consolidation in the industry.
In summary:
! If both the United- US Airways merger and American- TWA acquisition are
consummated, new United would have the largest market share of any U. S.
carrier- over 27 percent- and new American would have a 22.6 percent share.
Each proposal could have both harmful and beneficial effects on consumers.
The United and American proposals would each reduce competition in
approximately 300 markets, with each affecting over 10 million passengers.
Each proposal would allow the new larger carrier to dominate (i. e., obtain
a greater than 50- percent market share) more than 100 new markets. However,
the mergers would also each create new competitors where, previously, each
of the merging carriers had less than a 10- percent market share. Each would
provide other benefits to consumers as well, such as creating new online
service in certain markets and possible new routings allowing passengers to
connect over different cities.
3 Aviation Competition: Issues Related to the Proposed United Airlines- US
Airways Merger (GAO- 01- 212, Dec. 15, 2000). 4 We analyzed the most recent
data available from DOT on the top 5,000 city- pair markets, which covered
calendar year 1999. For this statement, we applied the same methodology,
using the same data, as we did in our December 2000 report on the proposed
United- US Airways merger. We recognize that competition or service in
particular markets is likely to change over time with the entry or exit of
different carriers. Carriers may add or reduce service in markets. These
data illustrate the approximate orders of magnitude of the various
transactions. We have not subtracted passengers or markets that may be
affected by DC Air markets or the proposed agreement between United and
American to share the current US Airways shuttle from the data for new
United.
3
! American's proposed arrangements with TWA, United, US Airways, and DC Air
raise a number of significant questions that cannot be answered now, in part
because many of the details of these arrangements are still unknown.
Although TWA has been in poor financial condition for years, the question
remains whether American's purchase of TWA represents the least
anticompetitive means to preserve its assets. Other questions arise about
how the agreements that American has tentatively made with United (regarding
the future of the US Airways Shuttle between Washington, New York, and
Boston and the assets associated with the proposed DC Air) would affect
competition.
! The consolidation in the industry that might result from both the proposed
American and United transactions raises major public policy issues. These
include, but are not limited to, questions about how a more consolidated
industry might further raise barriers to market entry by new airlines, how
the two merged airlines might compete in key markets, whether the merged
carriers would expose the public to greater risks of travel disruptions, and
how service to small communities might be affected.
Background
On May 24, 2000, United and US Airways agreed to merge their operations.
Under the terms of the proposed merger, United would acquire US Airways in a
transaction valued at $11.6 billion. Specifically, United would pay $60 for
each share of common US Airways stock for a total of $4.3 billion and would
assume $1.5 billion in US Airways net debt and $5.8 billion in aircraft
operating leases. According to information from United, the combined company
(“ new United”) would have approximately 145, 000 employees. It
would operate eight hubs in six states and serve a total of 380 airports
throughout the country, reaching communities in every state.
Under the terms of the proposed merger, United plans to divest some of the
assets US Airways possesses at Ronald Reagan Washington National Airport
(Reagan National). These assets would be used to create a new airline known
as DC Air. They include 222 departure and arrival slots, 5 several gates and
related airport facilities, and the operations of an existing commuter
airline.
5 The Federal Aviation Administration limits the number of operations
(takeoffs and landings) that can occur during certain periods of the day at
four congested airports-- O'Hare in Chicago; Reagan National in
4
In January 2001, American proposed acquiring TWA (which declared bankruptcy)
for approximately $3.5 billion, including $500 million in cash, $3.0 billion
in estimated lease assumptions, and $200 million in other financing. In
addition, American also announced that it had agreed with United to purchase
certain assets from United and US Airways, including half of the US Airways
Shuttle between Washington, New York, and Boston, and a 49- percent share of
DC Air. According to information from American, the combined company
(“ new American”) would have approximately 120,000 employees. It
would operate five hubs, nearly 1,000 aircraft, and gain a large number of
slot and gate resources at key airports in the eastern United States.
The consummation of the proposed mergers is subject to approvals by various
regulatory bodies. Both DOJ and DOT have responsibilities for reviewing
airline mergers and acquisitions. 6 DOJ has the authority to review mergers
or stock acquisitions before they take place to determine whether they
violate antitrust laws. Under the Hart- Scott- Rodino Act, an acquisition of
voting securities above a set monetary amount must be reported to DOJ for
prior review. DOJ has the authority to institute judicial proceedings under
the Clayton Act if it determines that a merger or acquisition may
substantially lessen competition in a relevant market or if it tends to
create a monopoly. 7 If DOJ believes any agreement is anticompetitive in
whole or in part, it may seek to block the agreement in federal court. TWA's
bankruptcy proceeding is now before the U. S. Bankruptcy Court for the
District of Delaware. DOT conducts its own analysis of airline mergers and
acquisitions and submits its views and any relevant information in its
possession to DOJ. In addition, when transactions involve the transfer of
international route authority, DOT is responsible for approving such matters
to ensure that they are consistent with the public interest.
Washington, D. C.; and Kennedy and LaGuardia in New York. The authority to
conduct a single operation during these periods at these four airports is
commonly referred to as a “slot.”
6 The merger may also be reviewed by the European Commission and state
attorneys general. 7 Justice's Horizontal Merger Guidelines (United States
Department of Justice and Federal Trade Commission Revision to the
Horizontal Merger Guidelines (Apr. 8, 1997)) describe the process used to
analyze the potential effect of a merger under the Clayton Act. Under the
Hart- Scott- Rodino Act, an acquisition of voting securities above a set
monetary amount must be reported to Justice for prior review. Justice has
the authority to institute judicial proceedings under the Clayton Act if it
determines that a merger or acquisition may substantially lessen competition
in a relevant market or if it tends to create a monopoly.
5
Highlights of Potential Changes in Industry Structure
Although the proposed acquisition of TWA by American would not impact as
many passengers as the merger between United and US Airways, the transaction
itself has the potential for preserving assets in the market. If both the
United- US Airways merger and the American- TWA acquisition are consummated,
new United would have the largest market share of any U. S. carrier- 27.2
percent- and new American would have a 22. 6 percent share (based on revenue
passenger miles, a recognized measure of airline size 8 ). Thus, if both
transactions are consummated, new United and new American would together
control nearly 50 percent of total airline traffic. Many industry analysts
observe that these measures would more than likely not be the end of this
move toward further industry consolidation. Figure 1 compares the percentage
share of total revenue passenger miles that new American and new United
would carry relative to that flown by other major U. S. airlines. Appendix I
shows the relative size of major U. S. passenger airlines as indicated by
common measures of airline market presence, along with the airlines' 1999
total operating revenue.
8 These percentages do not take into account the market share that might be
attributable to DC Air or sharing the US Airways Shuttle. Revenue passenger
miles represent the number of paying passengers transported over each mile.
“Revenue passengers” do not include those who are flying on
frequent flyer award tickets and others who did not pay for their flights
(e. g., airline employees).
6
Figure 1: New American and New United Would Have Nearly 50 Percent of Total
U. S. Domestic and International Passenger Travel
Note: Percentages may not total due to rounding. Source: GAO's analysis of
data from DOT for the 12 months ending June 30, 2000.
In general, American's acquisition of TWA would lead to the decline of
competition in 367 markets-- more than the 290 markets in which competition
would be reduced from the proposed merger between United and US Airways. 9
The number of passengers potentially affected by the new American
restructuring would be 11 million, compared to 16 million potentially
affected by new United. New American would also have a larger increase in
the number of markets they could dominate (161) compared to United (126).
However, the dominated markets associated with proposed American- TWA
arrangement affect fewer passengers than those dominated markets associated
with the proposed United- US Airways merger (4.9 million compared to 6.9
million). The total number of markets that new American would dominate would
be 552 compared with 1,156 that new United would dominate. On the other
hand, new American would
9 As we did in our December 2000 report on the proposed United- US Airways
merger, we define a market as a city- pair. We define a competitor as an
airline that had at least a 10 percent share of the passenger traffic in
that market, based on DOT's 1999 data on the top 5,000 city- pair markets,
which was the most currently available at the time of our analysis.
7
increase competition in more markets than new United (150 compared to 65),
potentially benefiting more than five times as many passengers (15.4 million
compared to 2.9 million).
As a frame of reference for analyzing the competitive significance of the
proposed mergers, we compared them with our analysis of the proposal in 1998
by Northwest to acquire a majority of the voting stock in, and enter into an
alliance with, Continental. 10 In general, the potential number of markets
and passengers who might be adversely affected by either the proposed
United- US Airways or American- TWA mergers are much greater than those that
might have been affected by the Northwest- Continental stock acquisition and
alliance. The number of passengers who could benefit from the American- TWA
merger is roughly comparable to those who could have benefited from the
Northwest- Continental stock acquisition and alliance. Table 1 summarizes
the number of markets and passengers affected by the proposed mergers and
compares them to the markets and passengers that potentially would have been
affected by the Northwest- Continental stock acquisition and alliance.
10 Northwest proposed to acquire a majority of the voting stock in, and
enter into an alliance with, Continental. Northwest and Continental
announced in January 1998 that Northwest was to acquire 8.7 million shares
of Continental's stock. These shares gave Northwest 51 percent of the voting
rights in Continental. In addition, the two airlines were entering into an
alliance that would connect their route systems. A variety of industry
analysts told us they believed that Northwest and Continental would not act
as independent competitors over the long run. As a result, our analysis of
the potential competitive effects of the stock acquisition and alliance
assumed that Northwest and Continental would behave as though they had
merged. See Aviation Competition: Effects on Consumers From Domestic
Alliances Vary (GAO/ RCED- 99- 37, Jan. 15, 1999). Our analysis here largely
parallels our analysis of the NorthwestContinental stock acquisition and
alliance.
DOJ announced a tentative settlement in its antitrust suit opposing
Northwest's purchase of a controlling interest in Continental on November 6,
2000. Under the terms of the agreement in principle, Northwest would divest
all but 7 percent of the voting interest in Continental and would be subject
to significant restrictions on its ability to vote any stock it retains.
8
Table 1: Comparison of Potential Competitive Impact of the Proposed United-
US Airways and American- TWA Mergers with the Proposed Northwest--
Continental Stock Acquisition and Alliance
American- TWA (1999 data) United- US Airways (1999
data) Northwest- Continental (1997 data) Competitive Factor Numbers
of markets Passengers
affected (millions) Numbers
of markets Passengers
affected (millions) Numbers of
markets Passengers
affected (millions)
Markets where competition would decline
367 11 290 16.0 63 2. 0 Newly dominated markets 161 4.9 126 6.9 25 2. 4
Total dominated markets 552 27.5 1, 156 61.1 492 40.7
Markets where competition would increase
150 15.4 65 2. 9 286 15.1 Source: GAO's analysis. If both mergers proceed,
the two new carriers would both compete in 1,106 of the top 5,000 markets.
Competition could be reduced in 267 of those markets where, in 1999, about
10. 3 million passengers traveled. That is, in 267 markets, as a result of
combining what are now separate competitors (i. e., each airline had at
least a 10 percent share of the market) through their proposed merger, one
competitor would no longer be present. However, the data net out markets
where a new effective competitor may be created by the merger (i. e., where
the two merging carriers previously had less than 10 percent but combined
have over 10 percent.) Table 2 shows the number of markets and passengers
that could potentially be affected by a reduction in competition due to the
combined effect of the two mergers.
9
Table 2: Markets Where New American and New United Would Meet and
Competition Could be Reduced Change in the number of competitors Markets
Passengers
(millions)
From 3 to 2 64 2. 6 From 4 to 3 123 3.5 From 5 to 3 3 0.1 From 5 to 4 69 3.
7 From 6 to 5 8 0.4 Total 267 10.3 Note: Figures may not total due to
rounding.
Source: GAO's analysis of data from DOT.
Thus, in 64 of the 267 markets, the two proposed mergers leave new United
and new American as the only remaining competitors. 11 In 1999, about 2.6
million passengers traveled in those 64 markets. In 126 markets where 3.6
million passengers traveled in 1999, new United and new American would be
two of only three remaining competitors.
Conversely, the proposed United- US Airways and American- TWA mergers would
also benefit consumers. In markets where one of the two merging airlines now
has limited market shares, the merger would allow them to create competition
against other airlines. For example, were both mergers to be approved,
approximately 7 million passengers could benefit from gaining an additional
competitor in 105 markets. Additionally, by extending the carriers'
operations to city pairs where only one of the two airlines previously
operated at each endpoint, the merger would create new on- line service
between those communities. 12 Finally, the merger would benefit members of
each airline's frequent flyer programs by expanding the number of
destinations that the members could reach. The airlines also assert that the
proposed mergers would deliver other
11 See app. II for a list of the 64 city- pair markets that, according to
1999 data from DOT, would have only two competitors if both of the proposed
mergers were to be approved. Because competition or service in particular
markets is likely to change over time with the entry or exit of different
carriers, more recent data may show that other airlines could compete in
these markets. We use these numbers of markets generally to illustrate the
orders of magnitude of markets that the mergers may affect.
12 On- line service provides passengers with connecting flight without
requiring them to change airlines. Service that requires passengers to
change airlines to continue their flights (excluding those requiring a
passenger to transfer between a larger airline and its commuter affiliate or
other airlines with which it may have a code- sharing agreement) is referred
to as “interline” service.
10
benefits as well. For example, American and TWA passengers may benefit
through being able to connect to their destination over different hubs.
Proposed Arrangements Between American, TWA, United, US Airways, and DC Air
Raise Questions and Major Competition Issues
American's acquisition of TWA and its purchase of certain assets of United
and US Airways, including a portion of DC Air need to be discussed
separately, as the implications would seem to be quite different. Each
component of American's proposed transactions raise numerous questions.
-- Does American's purchase represent the “least
anticompetitive” means to preserve the presence of TWA's assets in the
market? By many accounts, TWA has been in a difficult financial position for
years. Since 1992, TWA has entered bankruptcy three times. It has failed to
earn an annual profit during the past 12 years. Regardless of whether TWA
would cease operating entirely because of its financial failure, or whether
TWA is purchased by another airline, an independent competitive presence in
the 103 cities that the airline served will be lost. (However, were TWA to
cease operating entirely, the loss of service would likely be temporary, as
the would market adjust to meet the demand for travel.)
Whether the loss of competition from TWA is positive or negative depends on
a number of factors. DOJ will have to review many of those factors,
including increases in market concentration, potential adverse effects on
competition of the transaction, possible efficiencies or other benefits, and
the likelihood of new entry. It is also DOJ's responsibility to determine
whether, for example, absent the merger, TWA's assets would exit the market
if it failed, and whether there is no less anticompetitive alternative. On
the one hand, we recognize that there are many important considerations
involved with preventing TWA from ceasing operations entirely, such as
continuing service to markets and maintaining jobs for its employees. On the
other hand, the question exists about how the loss of TWA's competitive
presence could be mitigated. For purposes of creating more competition in
the U. S. domestic aviation market, would it be better if an airline other
than American bought TWA?
American's purchase of certain assets of United and US Airways, including a
portion of DC Air, raises other significant questions about how competition
may be affected. Several issues appear central to an assessment of possible
anticompetitive impacts of the proposed transactions:
11
-- How would American's purchasing part of DC Air affect competition? As DC
Air was originally conceived in the proposed merger between United and US
Airways, questions arose about whether it would be an independent
competitor, particularly in certain key markets relative to new United. Now
American has proposed to purchase 49 percent of DC Air. Passengers who may
fly on DC Air can now earn American frequent flyer miles instead of miles
with United. Passengers, who may be flying beyond Washington, D. C., can now
connect with online service onto other American flights rather than on
flights operated by United. American's purchase of part of DC Air means that
American, not United, would provide some of the aircraft, crew, and other
support to DC Air.
-- How might American's purchasing part of DC Air affect service to DC Air's
markets? Under the original proposal to create DC Air, the airline was to
serve 44 markets out of Reagan National, most of which are now served by US
Airways. DC Air had expressed a commitment to maintain service to
essentially all of those cities, using the 222 arrival and departure slots
that it would obtain as part of the US Airways divestiture. We do not know
what commitment, if any, American expressed regarding maintaining that
service. We also do not know what agreements, if any, American made with DC
Air to buy out the remaining 51 percent interest in the company or whether
American will push to use the slots at Reagan National for other markets.
-- How would American's sharing shuttle operations with United alter
competition?
American and United are now proposing to form a joint venture to share the
operations of the US Airways shuttle at New York LaGuardia, Boston, and
Washington Reagan National for at least 20 years. The two airlines expect to
coordinate schedules, ticketing, frequent flyer programs, and access to
passenger lounges. We do not yet know how this arrangement might affect
price competition in the market.
-- Does American's adding flights in certain United- US Airways hub routes
enhance competition? As part of the agreement with United, American has
agreed to provide at least two daily flights on five routes for 10 years.
Four of those markets-- between Chicago O'Hare and Charlotte, Los Angeles
and Philadelphia, San Jose and Philadelphia, and Washington and Pittsburgh--
complement American's existing network by originating in one of the
airline's “focus
cities.” However, we do not know what impact the agreement between
American and United will have on competition between the two airlines on
price and service in those markets.
12
Critical Public Policy Issues Associated With the Industry's Possible
Consolidation
Some industry observers have suggested that the American and United
proposals mark the beginning of a new wave of transition. Any industry
consolidation that would be brought about by these proposals raises a number
of important public policy issues for consideration. We highlight some of
these issues-- relating to market entry, competition among the newly merged
airlines in key markets, potential travel disruption, and small community
service-- recognizing that there are also many others.
-- What barriers to market entry might the proposed mergers exert? Scores of
new airlines have begun commercial passenger service since the deregulation
of the industry. Although most failed, other airlines have managed to
compete, and some have done so quite profitably. The most notable example,
of course, is Southwest. Others- such as ATA, AirTran, and JetBlue-- have
also experienced success so far. The success of airline deregulation in
leading to lower fares and better service stems in part from competition
spurred by the entry of new airlines, i. e., low fare carriers are
recognized as providing the primary fare discipline in the marketplace. A
January 2001 DOT report on exclusionary practices concluded that major
airlines have the opportunity and the means to protect their market power by
frustrating new entry. DOT found there had been instances in which
incumbents drove new entrants out of markets by cutting fares and flooding
the market with capacity. Once the new entrant was driven out of the market,
the incumbent sought an increase in fares and reductions in service.
If American and United fly nearly half of the industry's traffic, a key
issue that policy makers need to address is whether or not new low- cost
carriers will be able to enter markets and compete. Because established
carriers will control vast numbers of facilities (including slots and gates)
at key airports, will those new carriers even be able to offer service in
major markets? Will American's and United's sales and marketing efforts
(such as their frequent flyer programs and code- sharing affiliations such
as the Star Alliance and OneWorld) present barriers that are too great for
new entrants to overcome? How effectively will those new carriers be able to
compete if the American and United transactions spur additional
consolidation in the industry, possibly raising entry barriers even higher?
-- Would the transactions between American and United alter how they would
compete in key markets? The proposed United and American arrangements-
including the agreements in which American would share the US Airways
shuttle with United and compete in
13
certain markets between United and US Airways hubs-- raise questions
regarding the extent to which the carriers may compete vigorously. Economic
literature and empirical evidence indicate that when there are fewer firms
in a market and those firms meet in many markets (e. g., citypairs), they
are likely to recognize their interdependence and compete less vigorously.
To identify the orders of magnitude of markets that might be affected by new
United and new American, we examined the number of markets where the merged
carriers would each compete. 13 New American would be a competitor in over
2,100 of the top 5,000 markets, while new United would compete in over
2,900. The new carriers would both be competitors in 1, 106 markets. Table 3
summarizes the combined passenger shares of the two carriers in these
markets.
Table 3: Passenger Shares of New United and New American in Markets Where
Carriers Would Both Operate Combined passenger share of new United and new
American Markets Percent
81- 100% 286 25.9 61- 80 324 29.3 41- 60 323 29.2 20- 40 173 15.6 TOTAL 1,
106 100.0
Source: GAO's analysis of 1999 data from DOT.
In 610 of the 1,106 markets (or about 55 percent), the two carriers would
account for over 60 percent of the traffic. To the extent the two large
carriers recognize their interdependence in these and the other 496 markets
where they would both operate, should the carriers not compete vigorously,
it could adversely affect fares and service.
-- Will the public be exposed to greater risk of travel disruptions, in
light of the merged carriers' breadth of service? Unfortunately, we have
witnessed three relatively recent examples of how carrier's labor
difficulties can greatly disrupt travel: American's 1997
13 As noted earlier, in this and in previous reports, we defined a
competitor as an airline that carried at least 10 percent of the passenger
traffic in a given market. This is the same definition used by DOT.
14
disruption following its purchase of Reno Air, United's difficulties this
past summer, and Delta's current challenges with its pilots. Other labor
groups' contracts with the airlines are also coming up for renewal in the
near future. If the proposed mergers are approved, and either airline
encounters major labor problems, how severely could the public's travel be
disrupted? The aviation system has relatively little unused capacity in it
now, having been operating at or near record load levels for some time. In
general, could the significant integration challenges (not only labor, but
also systems and fleets) presented by the American and United proposals make
the public more vulnerable to network wide disruptions?
-- How might a consolidated industry affect service to small communities?
The quality of air service to smaller communities and the fares that
passengers in those communities pay relative to those paid in larger
communities have been issues that the Congress has been concerned about for
some time. At the same time, one of the benefits of airline mergers and
alliances has been the ability of the larger carrier to provide online
service to increased numbers of destinations. For example, the United- US
Airways merger could improve competition and service in 256 relatively small
markets by providing new online connections. The airlines have also claimed
that small communities would gain greater access to international markets
through their global alliances. However, the mergers could erode service to
many small communities where the merging airlines compete, even if the
service provided is over different hubs. One analyst suggested, for example,
that American might discontinue TWA's current turboprop service between
Bloomington, Illinois, and St. Louis, because American also serves
Bloomington, but using small jet aircraft to and from Chicago. Would a more
dispersed and competitive market structure offer better promise of providing
affordable air access for small and medium sized communities to major US
business centers? How might the potential effect of industry consolidation
on new entry affect small and medium sized communities?
Conclusions
There are a number of unanswered questions that the Congress, DOJ, and DOT
need to address in evaluating the proposed mergers. The proposals by
American, TWA, United, US Airways, and DC Air constitute the most
significant recent changes that have occurred in the airline industry, and
the outcome of these decisions could have both positive and negative effects
for consumers for years to come.
15
This concludes my statement. I would be pleased to answer any questions you
or other members of the Committee might have.
Contact and Acknowledgment
For further information on this testimony, please contact JayEtta Hecker at
(202) 512- 2834. Individuals making key contributions to this testimony
included Steve Martin, Chuck Wilson, Triana Bash, David Hooper, and Joseph
Kile.
16
Appendix I
Combined Domestic and International Measures of Airline Size, 12 Months
Ending June 30, 2000
Revenue passenger enplanements a Revenue passenger
miles Total operating
revenue I
Airline Number in thousands Percent
of total Number in thousands Percent
of total Dollars in millions Percent
of total
Delta Air Lines 106,218,000 18.8 106,849,814 17.0 14,711 16.3 United
Airlines a 87,113,000 15.4 127,455,682 20.3 18,027 20.0 American Airlines b
85,400,000 15.1 114,832,223 18.3 17,730 19.6 Southwest Airlines c 69,056,000
12.2 39,641,182 6. 3 4,736 5.2 US Airways d 56,417,000 10.0 42,898,817 6. 8
8,595 9.5 Northwest Airlines 56,003,000 9. 9 77,324,776 12.3 10,276 11.4
Continental Airlines 44,868,000 7. 9 60,980,078 9. 7 8,639 9.6 Trans World
Airlines 26,271,000 4. 7 26,650,717 4. 2 3,309 3.7 America West Airlines e
19,523,000 3. 5 18,558,027 3. 0 2,211 2.4 Alaska Airlines f 13,694,000 2. 4
11,962,007 1. 9 2,082 2.3 Total g 564,563,000 100.0 627,153,323 100.0 90,316
100.0
New United h 143,530,000 25.4 170,354,499 27.2 26,622 29.5 New American h
111,671,000 19.8 141,482,940 22.6 21,039 23.3 a “Passenger
enplanements” represent the total number of passengers boarding an
aircraft. Thus, for example, a passenger that
must make a single connection between his or her origin and destination
counts as two enplaned passengers because he or she boarded two separate
flights.
a Total operating revenues are for the parent (UAL Corporation). b Total
operating revenues are for the parent (AMR Corporation). c Southwest
Airlines provides only domestic service. d Total operating revenues are for
the parent (US Airways Group, Inc.). e Total operating revenues are for the
parent (America West Holdings, Inc.). f Total operating revenues are for the
parent (Alaska Air Group, Inc.). g Totals may not add to 100 percent due to
rounding. h Totals for new United and new American do not make any allowance
for those operations that might become part of DC Air or sharing the US
Airways Shuttle. I Figures for total operating revenue are for the period
January 1, 1999 through December 31, 1999.
Sources: GAO's analysis of DOT data.
17
Appendix II
Markets in Which Only The Merging Airlines Would Remain As Competitors 14
Albuquerque – Des Moines Atlanta – Peoria Baltimore –
Springfield, MO Boston – Colorado Springs Boston – Peoria Cedar
Rapids, IA -- Tampa Charlotte – Wichita Charlotte – San Jose
Chicago – Washington, D. C. Chicago – Harrisburg Colorado
Springs – Washington, DC Dayton – Ontario, CA Dayton – San
Jose Dayton – Orange Co., CA Denver – Harrisburg Des Moines
– San Antonio Harrisburg – Kansas City, MO Harrisburg –
Los Angeles Harrisburg – San Diego Harrisburg – San Francisco
Harrisburg – Orange Co., CA Hartford – Ontario, CA Hartford
– San Jose Hartford – Los Angeles Hartford – San Francisco
Hartford – Springfield, MO Kansas City, MO – Rochester Las Vegas
– Pittsburgh Las Vegas – Springfield, MO Lincoln, NE –
Philadelphia Los Angeles – Rochester Los Angeles – San Diego Los
Angeles – Santa Barbara Los Angeles – Springfield, MO Madison
– San Antonio Miami -- Seattle Miami – Washington, D. C.
14 Source: GAO analysis of Department of Transportation data on the largest
5, 000 markets in calendar year 1999, which was the latest available at the
time of our analysis. Because competition or service in particular markets
is likely to change over time with the entry or exit of different carriers,
more recent data may show that other airlines could compete in these
markets. The data reflect the Department of Transportation's definitions of
city- pair markets.
18
Newark -- Wichita Omaha – Pittsburgh Ontario, CA – Springfield,
MO Orlando -- Peoria Palm Springs – Los Angeles Peoria –
Washington, D. C. Peoria – Phoenix Peoria – Raleigh/ Durham
Peoria – San Diego Peoria – San Francisco Peoria -- Tampa
Philadelphia – Wichita Phoenix – Springfield, MO Pittsburgh
– Wichita Pittsburgh – Sacramento Pittsburgh – San Jose
Portland, OR – Springfield, MO Rochester – San Diego Rochester
– San Francisco Rochester – Orange Co., CA Sacramento –
Springfield, MO Salt Lake City – Springfield, MO San Diego –
Springfield, MO San Francisco – Springfield, MO Orange Co., CA –
Springfield, MO Springfield – Washington, D. C. Wichita -- Washington,
D. C.
19
Related GAO Products
Aviation Competition: Issues Related to the Proposed United Airlines- US
Airways Merger (GAO01- 212, Dec. 15, 2000).
Reagan National Airport: Capacity to Handle Additional Flights and Effect on
Other Area Airports (GAO/ RCED- 99- 234, Sept. 17, 1999).
Aviation Competition: Effects on Consumers From Domestic Alliances Vary
(GAO/ RCED- 99- 37, Jan. 15, 1999).
Aviation Competition: Proposed Domestic Airline Alliances Raise Serious
Issues (GAO/ T- RCED98- 215, June 4, 1998).
Domestic Aviation: Service Problems and Limited Competition Continue in Some
Markets (GAO/ T- RCED- 98- 176, Apr. 23, 1998).
Aviation Competition: International Aviation Alliances and the Influence of
Airline Marketing Practices (GAO/ T- RCED- 98- 131, Mar. 19, 1998).
Airline Competition: Barriers to Entry Continue in Some Domestic Markets
(GAO/ T- RCED- 98- 112, Mar. 5, 1998).
Domestic Aviation: Barriers Continue to Limit Competition (GAO/ T- RCED- 98-
32, Oct. 28, 1997). Airline Deregulation: Addressing the Air Service
Problems of Some Communities (GAO/ T- RCED97- 187, June 25, 1997).
International Aviation: Competition Issues in the U. S.- U. K. Market (GAO/
T- RCED- 97- 103, June 4, 1997).
20
Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline
Deregulation (GAO/ TRCED- 97- 120, May 13, 1997).
Airline Deregulation: Barriers to Entry Continue to Limit Competition in
Several Key Domestic Markets (GAO/ RCED- 97- 4, Oct. 18, 1996).
Domestic Aviation: Changes in Airfares, Service, and Safety Since Airline
Deregulation (GAO/ TRCED- 96- 126, Apr. 25, 1996).
Airline Deregulation: Changes in Airfares, Service, and Safety at Small,
Medium- Sized, and Large Communities (GAO/ RCED- 96- 79, Apr. 19, 1996).
International Aviation: Airline Alliances Produce Benefits, but Effect on
Competition Is Uncertain (GAO/ RCED- 95- 99, Apr. 6, 1995).
Airline Competition: Higher Fares and Less Competition Continue at
Concentrated Airports (GAO/ RCED- 93- 171, July 15, 1993).
Computer Reservation Systems: Action Needed to Better Monitor the CRS
Industry and Eliminate CRS Biases (GAO/ RCED- 92- 130, Mar. 20, 1992).
Airline Competition: Effects of Airline Market Concentration and Barriers to
Entry on Airfares (GAO/ RCED- 91- 101, Apr. 26, 1991).
Airline Competition: Industry Operating and Marketing Practices Limit Market
Entry (GAO/ RCED- 90- 147, Aug. 29, 1990).
Airline Competition: Higher Fares and Reduced Competition at Concentrated
Airports (GAO/ RCED- 90- 102, July 11, 1990).
Airline Deregulation: Barriers to Competition in the Airline Industry (GAO/
T- RCED- 89- 65, Sept. 20, 1989).
21
Airline Competition: Fare and Service Changes at St. Louis Since the TWA-
Ozark Merger (GAO/ RCED- 88- 217BR, Sept. 21, 1988).
Competition in the Airline Computerized Reservation Systems (GAO/ T- RCED-
88- 62, Sept. 14, 1988).
Airline Competition: Impact of Computerized Reservation Systems (GAO/ RCED-
86- 74, May 9, 1986).
Airline Takeoff and Landing Slots: Department of Transportation's Slot
Allocation Rule (GAO/ RCED- 86- 92, Jan. 31, 1986).
Deregulation: Increased Competition Is Making Airlines More Efficient and
Responsive to Consumers (GAO/ RCED- 86- 26, Nov. 6, 1985).
(394001)
Orders by Internet
For information on how to access GAO reports on the Internet, send an e-
mail message with “info” in the body to
info@ www. gao. gov or visit GAO's World Wide Web home page at http:// www.
gao. gov
To Report Fraud, Waste, and Abuse in Federal Programs
Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm E- mail: fraudnet@
gao. gov Automated answering system: 1- 800- 424- 5454
*** End of document. ***