SPEAKERS CONTENTS INSERTS Tables
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67–330
2000
STATE OF COMPETITION IN THE AIRLINE INDUSTRY
HEARINGS
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JUNE 14 AND JUNE 23, 2000
Serial No. 126
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
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HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
HEARING DATES
June 14, 2000
June 23, 2000
OPENING STATEMENTS
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Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary
WITNESSES
Baker, Bob, vice chairman, AMR Corporation, DFW Airport, Texas
Dempsey, Paul, University of Denver College of Law
Fitzgerald, Hon. Peter, a U.S. Senator From the State of Illinois
Geils, John, Village President, Bensenville, IL
Goodwin, James, chairman and CEO, UAL Corporation
Gordon, Mike, mayor, El Segundo, CA
Jackson, Hon. Jesse, Jr., a Representative in Congress From the State of Illinois
Johnson, Robert, chairman and CEO, DC Air
Kahn, Alfred, Robert Julius Thorne professor of political economy, Emeritus, Cornell University
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Karaganis, Joe, Karaganis & White
Leonard, Joe, chairman and CEO, AirTran Airways, Inc.
McFadden, Nancy E., General Counsel, United States Department of Transportation
McInerney, Marianne, executive director, National Business Travel Association
Nannes, John, Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice
Quinn, Ken, partner, Winthrop, Stimson, Putnam & Roberts, Washington, DC
Rill, Jim, partner, Howrey, Simon, Arnold & White, Washington, DC, on behalf of AMR Corporation
Roddey, Jim, chief executive, Allegheny County, Pennsylvania
Slaughter, Hon. Louise, a Representative in Congress From the State of New York
Walker, Tom, commissioner, Department of Aviation, City of Chicago
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Wolf, Stephen, chairman, US Airways
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Baker, Bob, vice chairman, AMR Corporation, DFW Airport, Texas: Prepared statement
Dempsey, Paul, University of Denver College of Law: Prepared statement
Fitzgerald, Hon. Peter, a U.S. Senator From the State of Illinois: Prepared statement
Geils, John, Village President, Bensenville, IL: Prepared statement
Goodwin, James, chairman and CEO, UAL Corporation: Prepared statement
Gordon, Mike, mayor, El Segundo, CA: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary: Prepared statements
Jackson, Hon. Jesse, Jr., a Representative in Congress From the State of Illinois: Prepared statement
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Jackson Lee, Hon. Sheila, a Representative in Congress From the State of Texas: Prepared statements
Johnson, Robert, chairman and CEO, DC Air: Prepared statement
Kahn, Alfred, Robert Julius Thorne professor of political economy, Emeritus, Cornell University: Prepared statement
Karaganis, Joe, Karaganis & White: Prepared statement
Leonard, Joe, chairman and CEO, AirTran Airways, Inc.: Prepared statement
McFadden, Nancy E., General Counsel, United States Department of Transportation: Prepared statement
McInerney, Marianne, executive director, National Business Travel Association: Prepared statement
Nannes, John, Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice: Prepared statement
Quinn, Ken, partner, Winthrop, Stimson, Putnam & Roberts, Washington, DC: Prepared statement
Rill, Jim, partner, Howrey, Simon, Arnold & White, Washington, DC, on behalf of AMR Corporation: Prepared statement
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Roddey, Jim, chief executive, Allegheny County, Pennsylvania: Prepared statement
Slaughter, Hon. Louise, a Representative in Congress From the State of New York: Prepared statement
Walker, Tom, commissioner, Department of Aviation, City of Chicago: Prepared statement
Wolf, Stephen, chairman, US Airways: Prepared statement
APPENDIX
Material submitted for the record
STATE OF COMPETITION IN THE AIRLINE INDUSTRY
WEDNESDAY, JUNE 14, 2000
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to call, at 10:20 a.m. in Room 2141 Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
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Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Steve Chabot, Bob Barr, Asa Hutchinson, James E. Rogan, Mary Bono, John Conyers, Jr., Barney Frank, Robert C. Scott, Melvin L. Watt, Jr., Zoe Lofgren, Sheila Jackson Lee, Maxine Waters, and William D. Delahunt.
Staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Jon Dudas, deputy general counsel-staff director; Daniel M. Freeman, parliamentarian-counsel; Joseph Gibson, chief antitrust counsel; Sheila F. Klein, executive assistant to general counsel; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; Terry Shawn, deputy press secretary; James D. Farr, financial clerk; Ann Jemison, receptionist; Julian Epstein, minority chief counsel and staff director; Perry Apelbaum, minority general counsel; Cori Flam, minority counsel; and Dena Graziano, staff assistant.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. Today the committee holds the first of two oversight hearings on the state of competition in the airline industry. The airlines' fare differentials and uneven quality of service indicates the lack of competition in this industry. No one knows this better than Members of Congress who spend a lot of time on airplanes.
But an Associated Press story dated June 3, 2000, illustrates my point. It sets out how one airline treated its passengers during a weather delay.
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''About 200 passengers on the United Airlines flight bound for Washington, DC, sat on the runway at O'Hare International Airport for more than eight hours Friday.
''Flight 1806 was scheduled to take off at 1:44 p.m. The wheels finally left the tarmac at 9:53 p.m. The plane was forced to return to the gate twice, once to refuel and once to replace crew members who had been on duty too long under Federal Aviation Administration rules.
''There were no meals available to the passengers during the delay, but a United spokesman said the flight crew passed out granola bars stored on the plane for unexpected delays.
''Some passengers were allowed to make brief trips into the terminal when the plane was called back, but most remained on board during the delay, the United spokesman said.''
Now, despite disagreements that I have had with the airlines, I surely don't expect them to control the weather. But eight hours crowded into an airplane with nothing but a granola bar seems excessive to say the least.
More importantly, it demonstrates a lack of competition. If this business were truly competitive, does anyone think that any airline would allow their customers to suffer through this kind of ordeal? Of course not. If these customers have a lot of other choices, they would never put up with this kind of treatment.
So what is going on out there? On May 21, I announced this hearing in a press conference in Chicago. The Suburban O'Hare Commission, a group of local governments in my district called a press conference to announce the release of a report entitled, ''If You Build It, We Won't Come.''
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The title refers to a January 17, 1995, letter sent to then Illinois Governor Edgar by the heads of a number of airlines, including the Big Seven, indicating that if a third airport were built in Chicago, these airlines would not use it.
Isn't that odd? One would think if there were vigorous competition in the industry, the airlines would be clamoring for more capacity.
More importantly, this signature piece of evidence falls into a broader pattern tending to show the lack of competition among the airlines in one another's hub.
My good friends, Village President John Geils of Bensenville, Illinois, and Joseph Karaganis, the attorney for the Suburban O'Hare Commission, will provide us with further details on that later.
That is the topic I hope to address in this hearing. Three days later, United Airlines announced it was going to acquire US Airways. Needless to say, that is not something that strikes me as injecting increased competition into the industry, notwithstanding the proposed spin-off of DC Air. The Justice Department is already suing to block Northwest's proposed acquisition of the controlling stake in Continental for similar reasons.
So, I felt it was necessary to add the merger as a topic in this hearing. Let me just say that based on what I have heard so far, the competitive implications of this merger are troubling and I believe it deserves rigorous scrutiny from the Department of Justice's Antitrust Division. I also want to ensure that United's employees, many of whom reside in my district, are treated fairly.
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Those are our two main topics today. However, I want members to know they are not limited to those topics. They may fairly ask questions about any subject within the general realm of airline competition.
In that vein, let me say a word about predatory pricing. Many new entrant airlines complain that established airlines try to drive them out of business by using predatory pricing. The Department of Justice is suing American Airlines over allegations that it uses this practice. The Department of Transportation has long been considering enforcement guidelines in this area. I don't want to comment on the specific merits of either of those matters, but I do want to applaud both agencies for attempting to address this problem.
I also want to say a word about our witness list. It is largely made up of critics of the major airlines and the United-US Airways merger. Several of the major airlines were invited to participate today but declined to do so because they preferred to attend the Senate hearings, for whatever other reasons. In order to accommodate them and balance the presentation overall, we will have a second hearing on Friday, June 23rd at which they will be able to present their views.
So, where do I find myself in all this? The airline industry today, for the most part is not vigorously competitive. Too many routes are dominated by one carrier. Until that changes, consumers will have little choice. We are only going to get more competition if we build more capacity and that means more airports.
In my hometown, the airlines have long resisted the building of a third airport. But they can't forever forestall the future. The new airport is coming in Chicago and they will come in other places across the country. When that happens, we will see more competition and no consumer will sit on the runway for 8 hours.
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I look forward to that day and I look forward to the testimony of our witnesses today and next week.
With that, I am pleased to turn to Mr. Conyers, the ranking Democrat, for his opening statement.
[The prepared statement of Mr. Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today, the Committee holds the first of two oversight hearings on ''The State of Competition in the Airline Industry.'' The airlines' fare differentials and uneven quality of service indicate the lack of competition in this industry. No one knows that better than Members of Congress who spend a lot of time on airplanes.
But an Associated Press story dated June 3, 2000 illustrates my point. It sets out how one airline treated its passengers during a weather delay:
About 200 passengers on a United Airlines flight bound for Washington, D.C. sat on the runway at O'Hare International Airport for more than eight hours Friday. Flight 1806 was scheduled to take off at 1:44 p.m. The wheels finally left the tarmac at 9:53 p.m. . . . The plane was forced to return to the gate twice, once to refuel and once to replace crew members who had been on duty too long under Federal Aviation Administration rules. There were no meals available to the passengers during the delay, but [a United spokesman] said the flight crew passed out granola bars stored on the plane for unexpected delays. . . . Some passengers were allowed to make brief trips into the terminal when the plane was called back, but most remained onboard during the delay, [the United spokesman] said.
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Now, despite the disagreements that I have had with the airlines, I don't yet expect them to control the weather. But eight hours crowded into an airplane with nothing but a granola bar seems excessive to say the least. More importantly, it demonstrates a lack of competition. If this business were truly competitive, does anyone think that any airline would allow their customers to suffer through this kind of ordeal? Of course not. And if these customers had lots of other choices, they would never put up with this kind of treatment.
So, what is going on out there? On May 21, I announced this hearing in a press conference in Chicago. The Suburban O'Hare Commission, a group of local governments in my district, called the press conference to announce the release of a report entitled ''If You Build It, We Won't Come.'' The title refers to a January 17, 1995 letter sent to then Illinois Governor Edgar by the heads of a number of airlines, including the Big Seven, indicating that if a third airport were built in Chicago, these airlines would not use it. Isn't that odd? One would think that if there were vigorous competition in the industry, the airlines would be clamoring for more airport capacity. More importantly, that signature piece of evidence falls into a broader pattern tending to show the lack of competition among the airlines in one another's hubs. My good friends, Village President John Geils of Bensenville, Illinois, and Joe Karaganis, the attorney for the Commission, will provide us with further detail on that later.
That is the topic that I had hoped to address in this hearing. Three days later, United Airlines announced that it was going to acquire US Airways. Needless to say, that is not something that strikes me as injecting increased competition into the industry notwithstanding the proposed spinoff of DC Air. The Justice Department is already suing to block Northwest's proposed acquisition of a controlling stake in Continental for similar reasons. So, I felt it was necessary to add the merger as a topic in this hearing. Let me just say that, based on what I have heard so far, the competitive implications of this merger are very troubling, and I believe that it deserves rigorous scrutiny from the Department of Justice's Antitrust Division. I also want to ensure that United's employees, many of whom reside in my district, are treated fairly.
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Those are our two main topics today. However, I want Members to know that they are not limited to those topics, and they may fairly ask questions about any subject within the general realm of airline competition. In that vein, let me also say a word about predatory pricing. Many new entrant airlines complain that established airlines try to drive them out of business by using predatory pricing. The Department of Justice is suing American Airlines over allegations that it uses this practice, and the Department of Transportation has long been considering enforcement guidelines in this area. I do not want to comment on the specific merits of either of those matters, but I do want to applaud both agencies for attempting to address this problem.
I also want to say a word about our witness list. It is largely made up of critics of the major airlines and the United-US Airways merger. Several of the major airlines were invited to participate today, but declined to do so because they preferred to attend a Senate hearing. In order to accommodate them and balance the presentation, we will have a second hearing on Friday, June 23, at which they will be able to present their views.
So, where do I find myself on all of this? The airline industry today for the most part is not vigorously competitive. Too many routes are dominated by one carrier. Until that changes, consumers will have little choice. We are only going to get more competition if we build more capacity and that means more airports. In my home town, the airlines have long resisted the building of a third airport. But they cannot forever forestall the future. A new airport is coming in Chicago, and they will come in other places across the country. When that happens, we will see more competition, and no consumer will sit on the runway for eight hours. I look forward to that day, and I look forward to the testimony of our witnesses today and next week.
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With that, I will turn to Mr. Conyers for his opening statement.
Mr. CONYERS. Thank you, Chairman Hyde, for calling the hearings as well. I concur with you in many parts of your opening statement.
I want to welcome our witnesses, my old Reverend, Representative, Attorney Jessie Jackson, Jr., Representative Slaughter, Senator Fitzgerald, we are please to have you here as well.
Ladies and gentlemen, the Clinton administration has overseen the greatest industry consolidation in history. Every year we break records on the aggregate dollar value of the consolidations, which in recent years have exceeded a trillion dollars.
In other words, mergers and takeovers are on the increase. I understand that many argue that the Sherman and Clayton Acts require us to scrutinize this activity in a vacuum and determine if a particular merger or joint venture will result in increased prices, decreased output or constrained consumer choice.
But antitrust law asks the larger question. In fact, the all-important HHI Index requires that we look with a critical eye on excessive concentration as too much concentration per se, which means that competition cannot thrive.
I fear that this may be happening not just in the airline industry but also in the financial and entertainment industries as well.
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The deregulation of the airline industry in the 1970's was supposed to create greater competition and lower prices for consumers. Despite, or perhaps because of deregulation, the airline industry has seen the creation of noncompetitive markets in many cities.
Almost all of us have had the experience of flying into a hub airport, Pittsburgh, Cincinnati, Chicago, Detroit. You make a plane reservation, but there is almost no choice in airline carrier. The fare seems unreasonably high compared to other destinations.
Hub airports are dominated by one large air carrier. It is the only game in town and we all know what it means. As with all monopolies, the result is usually higher prices and bad service.
Even when an airport is not a hub, other facts can lock up markets. Realities dictate that there are a limited number of gates and landing slots at airports. Without a slot and a gate, an airline obviously can't operate.
Slots and gates are valuable commodities, but air carriers have tied up access with long-term contracts. As a result there are few opportunities for low-cost competitors to enter an airport.
This harms consumers first and foremost. The evidence indicates that consumers benefit the most when low-fare airlines enter a market.
For example, since Southwest Airlines began service at Baltimore-Washington Airport in 1993, fares decreased 22 percent and passenger traffic increased 124 percent. Likewise, the entry of Frontier Airlines at the Denver International Airport caused fares to fall 21 percent on average at that airport.
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We need policies that will enable low-fare competitors to enter airports and bring competition to those monopoly and oligopoly markets. Airline deregulation also requires stepped-up enforcement of our antitrust laws.
The announced merger between United-US Airways is just the latest in a wave of mega-mergers that we have seen throughout many sectors of our economy, including telecommunications, agriculture, health insurance, and pharmaceuticals.
I am concerned that the United-US Airways merger could trigger a spate of other airline mergers which could cut in half the number of U.S. air carriers.
The Wall Street Journal noted that the top three airlines, United, American and Delta, now control 56 percent of the U.S. traffic and could merge with others to control 85 percent or more. American Airlines and Delta Airlines have already engaged in merger talks, and American is also weighing a possible bid for Northwest Airlines.
United and US Airways have proposed several divestitures that will increase competition in certain markets and create the only minority-owned airline in the country. These proposals are steps in the right direction, but they don't address the overall issue of how the increasing number of mergers affects our economy.
I need to know what the Department of Justice is going to do, whether they will exercise their duty and review with care the United-US Airways merger as well as other proposed mergers to preserve free and open markets and the benefits that flow from them.
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Thank you very much.
Mr. HYDE. Thank you, sir.
Our first panel consists of three of our congressional colleagues, all of whom have been very active on airline issues.
First, we have Senator Peter Fitzgerald of my home State of Illinois. Senator Fitzgerald is a graduate of Dartmouth College and the University of Michigan Law School. Before coming to the Senate, he practiced banking law, served as general counsel for a multi-bank holding company, and served on the boards of a number of banks.
He was first elected to the Senate in 1998 and he served on the Agriculture, Energy, and Small Business Committees.
On the issue we are considering today, he has been of enormous help to me. I really appreciate his contribution.
Next, we have Representative Jesse Jackson, Jr., from the Second District of Illinois. Representative Jackson is a graduate of North Carolina A & T State University, the Chicago Theological Seminary, and the Illinois College of Law.
Before coming to Congress, he was very active on civil rights issues, serving as the National Field Director of the Rainbow Coalition. He has co-authored, in addition, two books with his dad. He was first elected to Congress in 1994. He serves on the Appropriations Committee.
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Although we come from different parties, he, too has been of enormous help to me. He has been a significant force on this issue.
I might simply say that he at one time at a rally in Chicago's southwest suburbs, he mentioned the fact that an airplane can't fly unless it has a right wing and a left wing. I guess I don't need to tell you which wing I am or which wing he is. But I will tell you, we are both attached to the same fuselage.
Finally, we have Representative Louise Slaughter of the 28th District of New York. She has bachelor's and master's degrees from the University of Kentucky. Before coming to Congress she served in the Monroe County legislature, as an aide to former Governor Cuomo, and in the State Assembly.
She was first elected to the House in 1986 and she serves on the Rules Committee. Like Senator Fitzgerald and Representative Jackson, she is a long-time champion of airline consumers. We sure do welcome you here, Louise.
Well, we welcome all of you. We will adhere to our normal practice of not questioning Congressional colleagues so you may move on to your other commitments. If you could hold your presentations to approximately—and we say that with some flexibility—5 minutes, your full statements will be made a part of the record.
We will start off with you, Senator Fitzgerald.
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STATEMENT OF HON. PETER FITZGERALD, A U.S. SENATOR FROM THE STATE OF ILLINOIS
Mr. FITZGERALD. Well, thank you very much, Chairman Hyde. I appreciate that introduction and I appreciate your friendship. I know we have traveled together many times from Chicago's O'Hare Airport to Washington National and have had a chance to talk about these issues as we have waited on the tarmac.
But I appreciate the opportunity to testify before you. Ranking Member Conyers, I appreciate the opportunity. All the members of the committee, my friend, Congressman Jackson, thank you very much for being here, and Representative Slaughter, thank you all very much.
Obviously, the merger between US Airways and United Airlines is of particular interest to the people in the City of Chicago and the State of Illinois, as United is based in the City of Chicago and is in fact, along with American Airlines, a dominant carrier at Chicago's O'Hare.
America and United together have 83 percent of the Chicago O'Hare aviation market.
As the Congress and the Department of Justice begin this process of reviewing this merger, and I understand the Department of Justice will be undertaking a review as a matter of course, I have noticed that the executives from the two airlines that are merging have told analysts and reporters that they don't anticipate any antitrust problems cropping up because, as they have pointed out, there is ''very little network overlap between US Airways and United.'' That was a quote of United President, Ronald Duda, made in Aviation Daily on Thursday, May 25th.
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I would agree with them. There is very little overlap between the networks of those two airlines. But let's examine this lack of overlap. In fact if you think about it and you go around and look at the different parts of the country. You look at Chicago where United and American are dominant. You look at Detroit where Northwest is dominant. If you look in Minneapolis-St. Paul where Northwest is dominant, if you look at Texas where America Airlines at Dallas-Fort Worth has a fortress hub. If you look at Atlanta where Delta has a substantial control of the market, there is remarkable little overlap anywhere in the country in aviation.
We have this system of fortress hubs whereby seven airlines have carved up the Nation's aviation market like apple pie.
The question I think we need to ask is whether when the airlines talk about the friendly skies, are they talking about being friendly to each other or being friendly to consumers. Have the friendly skies become a little bit too cozy as far as competition is concerned?
Now, if we had another industry that was carved up like this, let's just make an analogy. Let's talk about the fast food industry. There is a lot of overlap in the fast food industry. You go into any town in America practically, of any size, and you will find a Burger King and a McDonalds, maybe a Dairy Queen, a Hardee's or some other chain.
Imagine for a moment that we had a regional monopoly system whereby the fast food market was divided around the country so that same Burger King had the Northeast, McDonalds had the South, Hardee's had the Midwest, Popeye's or somebody else had the West, we wouldn't put up with that. In fact, we wouldn't put up with that in any other industry. We would be asking questions about it.
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But in my judgment it has been far too long that this fortress hub system has gone on in America without Congress stepping in and exercising its proper oversight authority.
Now, Alfred Kahn, who we all remember as the father of airline deregulation, he said recently that, ''I said we should deregulate the airline industry; I didn't say we should abolish the antitrust laws.''
But we have to think now whether the airlines are using arguments peculiar to the aviation industry to argue that they have to have a regional monopoly at a fortress hub and that there can't be competition. Airlines don't work without these fortress hubs.
We have to take a look and see if that is really the case. Why can't we have a city where several airlines have a hub?
I am very fortunate in that I represent the Chicago area where we are lucky to have two major carriers, United and American, instead of just one. Most other parts of the country just have one major airline.
Finally, alluding to that letter that you talked about, Chairman Hyde, I brought with me a copy of that letter. This was several years ago on January 17, 1995, when we, you and I and others in the State had been supporting building a third airport in the Chicago area as a means of bringing in more competition.
Remarkably, United and American who nobody says has to use that third airport; they can keep using O'Hare, they have been doing anything and stopping at nothing to prevent the construction of a third airport in Chicago.
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In fact, they went out and solicited other airlines that have almost no interest in aviation in the Chicago area, such as Alaskan Airlines, American West Airlines, based in Phoenix, Continental based in Cleveland, Houston and Newark.
They brought all these airlines in and wrote this letter, whereby, to our then-Governor, Jim Edgar, they said if you build a third airport, we will collectively refuse to use that airport, if you build a third airport.
Now, is this itself not an anti-competitive manifesto, when we can have major airlines around the country collectively refusing to compete? What other industry would we allow to behave in such an anti-competitive manner? I can't imagine it happening in any other industry.
So, I want to compliment this committee for finally bringing our attention to this issue. It is high time that Congress exercised its proper oversight authority. We cannot continue to abdicate our responsibility for regulating this market and making sure that it is clear of antitrust violations and not controlled in an anti-competitive manner.
Thank you very much, Mr. Chairman and members of the committee.
[The prepared statement of Mr. Fitzgerald follows:]
PREPARED STATEMENT OF HON. PETER FITZGERALD, A U.S. SENATOR FROM THE STATE OF ILLINOIS
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INTRODUCTION
Chairman Hyde, Representative Conyers, and members of the Committee, thank you for inviting me here today to discuss competition—or the lack of competition—in the airline industry, a subject that is very important to my constituents in Illinois.
Chairman Hyde, I would like to take this opportunity to thank you personally for your consistent leadership on this issue, and for your foresight in convening this hearing.
UNITED-US AIRWAYS MERGER
Given the recent announcement by UAL, the parent company of number-one ranked United Airlines, that it intends to purchase US Airways, the sixth largest U.S. airline, the timing of this hearing could not be better. If approved, this would be the biggest airline consolidation in U.S. history, leaving United with control of about 27 percent of all flights in the U.S. market—almost double the market share of its next largest competitor, American Airlines.
Needless to say, a deal of this size raises serious questions about how it will affect competition. With one less competitor in the marketplace, and with United controlling so many coveted routes, will fares go up? Will service to less profitable destinations be cut back or eliminated? Will smaller competitors be squeezed out of markets and airports? Will air travelers have more choices, or fewer? Will such a merger force other airlines to follow suit, resulting in three or four ''mega airlines'' that dominate the U.S. market?
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These are all relevant questions, but the overarching question is this: Is United's merger with US Airways in the flying public's best interest? Because I am concerned that the friendly skies are becoming too cozy from a competitive standpoint, I join Chairman Hyde in calling on the Department of Justice to conduct a rigorous examination of this proposed consolidation.
THIRD CHICAGO AIRPORT
Mr. Chairman, as you know, I am no stranger to aviation issues. Since being elected to the Illinois State Senate in 1992, I have supported building a third airport in the Chicago area.
I support a third airport because I believe O'Hare International Airport—which serves as a major hub for both United and American—has reached its capacity. In other words, it's out of room. It simply cannot handle any more flights without exacerbating already intolerable delays.
In April of this year, the Federal Aviation Administration reported that only about two-thirds of flights into O'Hare arrived on time, and only about 70 percent of flights departed on time. So while O'Hare may no longer be the world's busiest airport, it remains one of the most delay plagued in the country.
And there is a hefty price tag attached to these delays—for business travelers, in terms of wasted time sitting on the tarmac waiting to take off, or in the air circling the airport waiting to land, and for the airlines themselves, in terms of wasted fuel, exhausted and angry passengers, and additional overhead expenses.
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Unfortunately, I am afraid these problems are only going to get worse. Despite my opposition in the Senate—and your opposition, Mr. Chairman, in the House—Congress this year passed legislation, signed into law by President Clinton in April, phasing out the cap on the number of flights allowed to take off and land at O'Hare. This cap, known as the High Density Rule, was put in place by the Federal Aviation Administration in 1969 to limit delays.
The result of lifting the flight restrictions is predictable. The Chicago Tribune reported in April that, by the end of this summer, ''air traffic in and out of O'Hare could expand as much as 20 percent, adding 500 flights to the current 2,500 a day.'' And the number of flights at O'Hare will only increase when the flight caps are completely removed by the summer of 2002. All of this, of course, comes on top of the Federal Aviation Administration's recent projection that the number of passengers traveling aboard commercial airlines will increase exponentially over the next decade, growing from 664.5 million in 1999 to more than 1 billion in 2011.
If O'Hare cannot manage its current load of flights, how on earth can it possibly expect to absorb the additional flights that will be required to meet future air travel demand? The answer is it can't. O'Hare is out of capacity, and a third Chicago-area airport needs to be built, and needs to be built soon.
SOC REPORT
So what is stopping the State of Illinois from building a third Chicago-area airport, an airport that has been in the planning stages for over 15 years? The answer may be the influence of the airlines themselves.
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A recent report by the Suburban O'Hare Commission (SOC), a group representing more than one million residents who live in communities surrounding O'Hare, alleges that there is a lack of competition at O'Hare and other major airports due to the airlines' efforts to preserve and expand their ''monopoly power'' at ''Fortress Hub'' airports. The report, entitled ''If You Build It, We Won't Come: The Collective Refusal of the Major Airlines to Compete in the Chicago Air Travel Market,'' provides credible evidence that there is a de facto agreement among the ''Big Seven'' airlines that each airline will stay out of the other's Fortress Hub cities. According to this report, conspiring to carve up the market in this way violates federal antitrust laws and costs the nation's air travelers billions of dollars each year in artificially high air fares.
The SOC report also alleges that the airlines' tacit agreement not to compete in each other's Fortress Hub markets explains why sixteen airlines signed a letter to then-Illinois Governor Jim Edgar on January 17, 1995, saying, essentially, if you build a third airport, we won't use it. With O'Hare at or near capacity, and with United and American controlling over 80 percent of all flights at O'Hare, you would think the other airlines would be falling all over themselves for a chance to compete in the Chicago market. The fact that the airlines are fighting to block additional capacity—and all but ensure United and American's dominance in Chicago—leads me to believe that, as far as real competition is concerned, they are merely keeping up appearances.
CONCLUSION
In closing, I would like to thank the members of the Suburban O'Hare Commission for producing this report and bringing it to Congress' attention.
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The Suburban O'Hare Commission's report and the proposed consolidation of United and US Airways offer Congress, this committee, the Department of Justice, and the Department of Transportation an excellent opportunity to examine the state of competition in the airline industry, in individual markets, and at individual airports. If it is found that competition is lacking, it may be necessary for Congress to intervene with legislation to ensure that vigorous competition is able to flourish in every market and at every airport.
Thank you, Chairman Hyde and members of the committee, for this opportunity to present my views. I look forward to working with the Committee as this issue develops.
Mr. HYDE. Thank you, Senator Fitzgerald.
Now, the gentleman from Chicago, Representative Jesse Jackson.
STATEMENT OF HON. JESSE JACKSON, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. JACKSON. Thank you, Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. I want to thank you for the opportunity to present my concerns about monopoly abuses in the airline industry——particularly the apparent agreement by the major airlines not to compete in each other's fortress hub markets.
I know much of the discussion today will focus on the recently announced merger between United and US Airways and the potential responsive mergers between other major airlines. That these mergers are anti-competitive and should be prohibited is, from my perspective, self-evident.
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But I believe that we have a much bigger problem to address today. That is the existing monopoly environment in the airline industry. The major airlines have currently created a monopolistic system of fortress hubs that represent a blatant violation of Federal antitrust laws.
Moreover, if Government estimates are correct, these current monopolies and this current monopolistic abuse at fortress hubs are costing travelers billions of dollars a year in excess fares.
Myriad studies, including some by the Federal Aviation Administration, the General Accounting Office and other Federal, State and local agencies, outline egregious anti-competitive practices by our leading airlines. These studies conclude that fortress hubs stifle competition and gouge consumers.
We all know that Northwest owns Minneapolis and Detroit, that Delta owns Atlanta and Cincinnati, that American and United own Chicago, that US Airways owns Pittsburgh, that American owns Dallas.
Because the major fortress hubs are located in thriving urban business centers, one would assume the market would invite competition. One would assume, therefore, that United would, under normal circumstances, wish to compete with Delta in Atlanta, or that Delta would, under normal circumstances, wish to compete with United and American in Chicago, et cetera.
But we do not have normal circumstances here. That is why we don't see the airlines coming before Congress complaining about their inability to compete with their rivals. Instead, we have a collective decision by the major airlines not to compete in each other's hub markets.
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The metropolitan Chicago market presents a textbook example of this geographic market allocation and anti-competitive collusion. Perhaps the most startling proof comes from the airlines' chief executive officers themselves.
Senator Peter Fitzgerald talked about it briefly. In letters to two Illinois Governors, the top 16 airline CEOs emphatically state that they will refuse to use the proposed new Chicago airport. The CEOs told Governors Edwin and Ryan, and I quote,
''We are writing to express our concern about further planning and development of the so-called third Chicago airport, (an airport that would increase capacity of the region).
''It is our understanding that the State of Illinois will not proceed with the construction of a third airport without the support of the airlines.
''This letter is intended to inform you that the airlines oppose further planning and construction of this facility.''
How clear can they be? In precise, almost threatening terms, United and American Airlines, the dominant carriers at O'Hare, in concert with their fellow members of the Air Transportation Association, have jointly declared their collusive effort to stop new capacity in an already constrained market.
The fortress hub monopoly system has many negative consequences, of course. One is higher fares. The General Accounting Office has warned us for years that concentration of market power has led significantly to higher prices than would otherwise be the case with aggressive competition.
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In two recent studies, the State of Illinois concluded that travelers at O'Hare alone pay in the order of $700 million per year in over-charges compared to the national average because of the lack of significant competition. Extended nationally, monopolistic overcharges are likely to exceed several billion dollars per year.
The Secretary of Transportation in my home State, Kirk Brown, often tells his real life story about anti-competitive fares. Secretary Brown lives in Springfield, Illinois, which is between Chicago and St. Louis. There is no direct air service from Springfield to Washington, DC. He must fly either through Chicago or St. Louis.
Now, if he buys a ticket at Springfield and catches a commuter flight to either city, the total roundtrip fare from his home to DC and back is $490. However, if he drives to St. Louis or Chicago and catches a direct flight from either hub, his fare on the same plane is $1,207. In short, the longer trip is much cheaper because St. Louis and Chicago are competing for his service. Whereas in either hub, competition is almost nil.
But the traveler is not the only victim of the fortress hub system. Once again Chicago illustrates other widespread adverse consequences of this illegal conduct.
One, communities near a fortress hub suffer severe environmental impacts. The O'Hare area communities are adamantly opposed to airport expansion because it would subject them to more noise, pollution, congestion and safety hazards.
Two, communities located greater distances from airports suffer serious economic decline. As you know, Chairman Hyde and I each represent part of Chicago and its suburbs. There are roughly equal numbers of people living in the south suburbs which I represent and in the northwest suburbs which the chairman represents.
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However, during the past ten years, 80 percent of the new jobs created in the Chicago region were in Mr. Hyde's district while my district continued to lose jobs.
Tragically, the Federal Government has assisted in the growth and expansion of fortress hub monopoly systems and its resulting impacts.
Congress' response has been inadequate. Rather than taking steps to promote competition, Congress last year approved a Band-aid solution by adding slots to our Nation's busiest airports. Predictably, most of these new slots have gone to the hub's dominant carriers, thus strengthening existing monopolies.
The administration's lack of action, however, is even more disturbing. The Federal Government, through the Airport Improvement Program and the Passenger Facility Charge, awards or authorizes the expenditure of billions of dollars for airport development. Yet it is clear that little effort has been made by the Department of Transportation to ensure that these billions of Federal taxpayer dollars are used to enhance competition or to deter monopolies.
Indeed, since Congress approved the PFC's in 1990 as a means to fund new airport construction in places such as Chicago, there has been no new airport built in the United States.
Conversely, the evidence strongly suggests that the Department of Transportation, under Secretary Slater, has acted in collusion with the major airlines to fortify hub monopolies and to discourage competition.
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This neglect of the antitrust implications of Federal airport funding policy is vividly illustrated by the administration's bizarre actions relative to, once again, Chicago.
First, Secretary of Transportation Rodney Slater and FAA Administrator Jane Garvey have repeatedly denied planning and development funds for a new regional airport, despite Garvey's declaration that the country needs ten new airports the size of O'Hare, just to meet today's aviation demands.
Second, Secretary Slater and Administrator Garvey continue working with Chicago on O'Hare's so-called ''world gateway program'' to expand and solidify the dominance of United and American in the region.
In short, the Federal Government is blocking potential competition while funneling billions in taxpayer dollars to expand existing monopolies. This is disgraceful and unacceptable behavior by our Federal Government.
Sadly, I feel that the proposed mega-mergers in the airline industry will only make matters worse, because it will only compound the problems we now see resulting from a concentration of market power in the hands of too few.
The key to breaking up aviation's geographic cartel and de facto monopolies and per se violations of antitrust laws is to build new airports that will increase capacity and competition, not provide cover for monopolistic corporations.
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I am submitting to the committee several recommendations for follow-up by the committee. I will not go into these here, but I will ask for your serious consideration in future deliberations on this matter.
Once again, Mr. Chairman and members of the committee, I thank you for your time.
Mr. HYDE. Well, I thank you, Representative Jackson, for a very helpful statement.
[The prepared statement of Mr. Jackson follows:]
PREPARED STATEMENT OF HON. JESSE JACKSON, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. Thank you for the opportunity to present my concerns about monopoly abuses in the airline industry—particularly the apparent agreement by the major airlines not to compete in each other's Fortress Hub markets.
I know much of the discussion at today's hearing will focus on the recently announced merger between United and US Air and the potential responsive mergers between other major airlines. That these mergers are anti-competitive and should be prohibited is self-evident.
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But I believe that we have a much bigger problem to address today. That is the existing monopoly environment in the airline industry. The major airlines have currently created a monopolistic system of Fortress Hubs that represents a blatant violation of federal antitrust laws. Moreover, if government estimates are correct, these current monopoly abuses at Fortress Hubs are costing air travelers billions of dollars a year in excess fares.
Myriad studies, including some by the Federal Aviation Administration, the General Accounting Office, and other Federal, State and Local agencies, outline egregious anti-competitive practices by our leading airlines. These studies conclude that Fortress Hubs stifle competition and gouge consumers.
We all know that Northwest owns Minneapolis and Detroit; Delta owns Atlanta and Cincinnati; American and United own Chicago; US Air owns Pittsburgh. Because the major Fortress Hubs are located in thriving urban business centers, one would assume the market would invite competition. One would assume therefore that United would—under normal circumstances—wish to compete with Delta in Atlanta; Delta would—under normal circumstances—wish to compete with United and American in Chicago, et cetera.
But we do not have normal circumstances here. That's why we don't see the airlines coming before Congress complaining about their inability to compete with their rivals. Instead, we have a collective decision by the major airlines not to compete in each other's hub markets.
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The Metropolitan Chicago market presents a textbook example of this geographic market allocation and anti-competitive collusion. And perhaps the most startling proof comes from the airlines Chief Executive Officers themselves. In letters to the last two Illinois Governors, the top sixteen airlines' CEOs emphatically state that they will refuse to use a proposed new Chicago airport. The CEOs told Governors Edgar and Ryan, and I quote:
''We are writing to express our concerns about further planning and development of the so-called Third Chicago Airport. It is our understanding that the State of Illinois will not proceed with the construction of a third airport without the support of the airlines. This letter is intended to inform you that the airlines oppose further planning and construction of this facility.''
How clear can they be? In precise, almost threatening, terms, United and American Airlines, the dominant carriers at O'Hare—in concert with their fellow members of the Air Transport Association (ATA)—have jointly declared their collusive effort to stop new capacity in an already constrained market.
The Fortress Hub monopoly system has many negative consequences, of course. One is higher fares. The General Accounting Office (GAO) has warned us for years that concentration of market power has led to significantly higher prices than would otherwise be the case with aggressive competition. In two recent studies, the State of Illinois concluded that travelers at O'Hare alone pay on the order of seven-hundred-million dollars per year in overcharges—compared to the national average—because of the lack of significant competition. Extended nationally, monopolistic overcharges are likely to exceed several billion dollars per year.
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The Secretary of Transportation in my home State of Illinois, Kirk Brown, often tells his real-life story about anti-competitive fares. Secretary Brown lives in Springfield, Illinois, which is between Chicago and St. Louis. There is no direct air service from Springfield to Washington D.C. He must fly either through Chicago or St. Louis. Now, if he buys a ticket in Springfield and catches a commuter flight to either city, the total round-trip fare from his home to D.C. and back is about $490. However, if he drives to St. Louis or Chicago, and catches a direct flight from either hub, his fare on the same plane is $1,207. In short, the longer trip is much cheaper because St. Louis and Chicago are competing for his service, whereas in either hub competition is almost nil.
But the traveler is not the only victim of this Fortress Hub system. Once again, Chicago illustrates other widespread adverse consequences of this illegal conduct. One, communities near Fortress Hubs suffer severe environmental impacts. The O'Hare area communities are adamantly opposed to airport expansion because it will subject them to more noise, pollution, congestion and safety hazards. Two, communities located great distances from airports suffer serious economic decline. As you know, Chairman Hyde and I each represent a part of Chicago and its suburbs. There are roughly equal numbers of people living in the south suburbs, which I represent, and the northwest suburbs, which Chairman Hyde represents. However, during the past ten years, eighty percent of the new jobs created in the Chicago region were in Mr. Hyde's district, while my district lost jobs.
Tragically, the Federal Government has assisted in the growth and expansion of the Fortress Hub monopoly system—and its resulting impacts. Congress' response has been inadequate. Rather than taking steps to promote competition, Congress last year approved a band-aid solution by adding slots at our busiest airports. Predictably, most of these new slots have gone to the hub's dominant carriers, thus strengthening the existing monopolies.
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The Administration's lack of action, however, is even more disturbing. The Federal Government—through the Airport Improvement Program (AIP) or the Passenger Facility Charge Program (PFC)—awards or authorizes the expenditure of billions of dollars for airport development. Yet it is clear that little effort has been made by the Department of Transportation to ensure that these billions of federal taxpayer dollars are used to enhance competition and to deter monopoly. Indeed, since Congress approved the PFCs in 1990 as a means to fund new airport construction in places such as Chicago, there has been no new airport built in the U.S. Conversely, the evidence strongly suggests that the Department of Transportation, under Secretary Slater, has acted in collusion with the major airlines to fortify hub monopolies and to discourage competition.
This neglect of the antitrust implications of federal airport funding policy is vividly illustrated by the Administration's bizarre actions relative to, once again, Chicago. First, Secretary of Transportation Rodney Slater and FAA Administrator Jane Garvey have repeatedly denied planning and development funds for a new regional airport—despite Garvey's declaration that the country needs ten new airports the size of O'Hare just to meet today's aviation demands. Second, Secretary Slater and Administrator Garvey continue working with Chicago on O'Hare's so-called ''World Gateway'' program to expand and solidify the dominance of United and American in the region. In short, the Federal Government is blocking potential competition while funneling billions in taxpayer dollars to expand existing monopoly. This is disgraceful and unacceptable behavior by our Federal Government.
Sadly, I fear that the proposed mega-mergers in the airline industry will only make matters worse. Because it will only compound the problems we now see, resulting from a concentration of market power in the hands of too few.
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The key to breaking up aviation's geographic cartel—and de facto monopolies—and per se violations of antitrust laws—is to build new airports that will increase capacity and competition, not provide cover for monopolistic corporations.
I am submitting to the Committee several recommendation for followup by the Committee. I will not go into those here, but I would ask for your serious consideration in future deliberations on this matter. Once again, Mr. Chairman and Members of the Committee, I thank you for your time.
CONCLUSION AND RECOMMENDATIONS
Based on my own survey, and the findings of several federal, state and Chicago-area studies, I conclude that the evidence is overwhelming that the major airlines have developed a Fortress Hub system that enables individual airlines to dominate geographic markets and charge exorbitant monopoly supported air fares. I further conclude that as part of their program to maintain and expand this illegal system, the major airlines have acted in concert not to compete in each other's Fortress Hub markets for lucrative business travel markets—with the result that business travelers are overcharged billions of dollars per year. Finally, I conclude that this Fortress Hub system constitutes a per se violation of federal antitrust laws. Given these conclusions, I make the following recommendations to this Committee:
It is obvious that the proposed and potential ''mega-mergers'' should be stopped.
I respectfully ask that the Committee join with me in asking the Department of Justice to initiate an investigation into the collective refusal of the Big Seven airlines to compete against each other in each other's Fortress Hub markets.
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I respectfully ask that the Committee join with me in asking the Department of Justice to initiate a civil action in federal court to break up the Fortress Hub geographic market allocation by the major airlines and to prohibit the collective refusal of the major airlines to compete in each other's Fortress Hub markets.
I respectfully ask that the Committee join with me in asking the state Attorneys General to bring civil damage actions to recover treble damages for the billions of dollars per year in overcharges imposed on travelers as a result of Fortress Hub system.
I respectfully ask this Committee to join with me in a request to the Department of Justice and the Department of Transportation that no further federal funds (either Airport Improvement Program funds or Passenger Facilities Charges) be authorized or approved at O'Hare until there have been full public hearings and public consideration of the antitrust implications of the proposed alterations to O'Hare.
I respectfully ask that the Committee join with me in seeking major reform of the federal aid process to airports to insure that the federal funds are used to promote competitions and to discourage maintenance and growth of Fortress Hub monopoly power.
I respectfully ask that the Committee join with me in the following recommendation to the Department of Transportation: Until completion of construction of a new Chicago regional airport, the existing capacity of O'Hare should be reallocated from its current dominance by United and American into a shared capacity allocation program that reserves a significant share of O'Hare's capacity (e.g. 40%) for new competitive entrants. And by new competitive entrants, I do not mean affiliates of United and American.
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Mr. HYDE. Now, as at the wedding feast at Cana, we save the best wine to last. We are saving our best witness to last.
Ms. SLAUGHTER. How kind of you, Mr. Chairman.
Mr. HYDE. You will forgive me for that ranking, won't you, both of you? Good. Louise Slaughter.
STATEMENT OF HON. LOUISE SLAUGHTER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Ms. SLAUGHTER. Mr. Chairman, thank you very much for the kind welcome. Mr. Conyers and other members of the committee, I am delighted to be here this morning.
I thank you, Mr. Chairman, for these hearings. Without your leadership, many communities in this country would be shut out of this debate. I hope to speak for them, although I will concentrate on my own district of Rochester that I know and love the most.
Rochester struggles with some of the highest airfares in the Nation. We don't have a hub. We are just out there trying to survive. My big fear is that this merger as it is proposed will be a sham.
Mr. HYDE. Louise, you mean Rochester, New York, don't you?
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Ms. SLAUGHTER. Yes.
Mr. HYDE. In the Midwest, we think of Rochester as Minnesota sometimes.
Ms. SLAUGHTER. It never occurs to me.
We think it may be a sham. It will have a devastating impact on many regions of the country, including my own.
What am I afraid of? I am concerned that this merger will substantially reduce airline competition, particularly in the Northeast for communities like Rochester and all of New England.
Right now, US Airways provides 43 percent of our flights in and out of Rochester. If US Airways is swallowed up by United, I worry that constituents will have obviously fewer choices, wretched service, and a pricing structure that would make a mafia don blush.
What is more, we hear of more mergers being contemplated that would essentially reduce the industry to three major airlines.
My community has learned the hard way that economic development cannot occur without affordable, accessible air transportation. We know that a sound economy in many ways depends on the ability to move goods and people where they need to go at a reasonable rate. Over the last few years, many firms in my area have moved out or have chosen to expand in other regions of the country because of the exorbitant airfares and the inability to get a decent flight schedule.
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I should say that my community is the top per capita exporting community in the United States with Fortune 500 companies such as Kodak, Xerox, Gleason, Bausch & Lomb, or Johnson & Johnson.
Rochester is typical of many of the midsize cities served by United and US Airways. To be blunt, deregulation really failed us and gave to the airlines the ability to choose who in the United States would be the economic winners and who would be the economic losers.
During the 1980's, 13 air carriers served our region, affording us good choices and a competitive environment that produced reasonable fares. Now we have a handful with US Airways as the dominant carrier.
Just recently, too, I read in the Times that four airlines over the weekend had all raised their prices together. I said to a friend of mine at the Department of Justice back in the old days we used to call that collusion. What do you call that now?
He said ''free enterprise.''
If you compare the prices of airline tickets out of Rochester, what will you find? We have two carriers that will take us to Chicago. They charge within a penny of each other. Competition may not really be the answer.
To go from Rochester to Chicago roundtrip is $1260, a fare that usually draws a gasp from the audience. It is just about three trips to Europe. This is not a position that Rochester ever thought it would find itself in. As I said, we are the largest per capita exporting city in the United States.
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Of equal importance are our hundreds of small and midsize high technology firms that have been growing in our region over the past several years and were noted just last week in an article in The New York Times.
But this success is by no means certain if the major airlines are allowed to continue to gouge the upstate fliers. I have been tackling this problem in Congress on many fronts and am proud to report some progress.
There is a new low-fare carrier named Jet Blue which will begin service to our community this summer and several carriers have announced expanded service with the regional jets in months ahead.
We think that progress will come to a screeching halt, however, should the proposed merger go forward. The fact that we even have a Jet Blue and a Southwest are remarkable in this era when new entrants are greeted with such hostility.
Today, Rochester has three daily non-stop jet flights between the Reagan National Airport and Rochester. We are told that the DC Air, the spin-off of this merger, will continue to give us three daily flights. But, take note, the number of seats available would be cut by more than half on the regional plane. Demand will remain the same. But with fewer available seats, the prices will surely rise.
We also have 11 express flights that come into Dulles Airport. They are wind-up airplanes that charge full prices. Seven are on United. The other four are on US Airways and those four will certainly disappear in the merger, further reducing service between this area and mine.
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This notion that a new carrier called DC Air will somehow increase competition has been ridiculed by virtually every independent analysis of the proposed merger.
From what I can surmise, DC Air won't actually compete on any of United's routes. I have requested that the General Accounting Office shed some light on the true impact of this merger and look forward to their analysis.
Meanwhile, United will take over US Airways' most valuable Washington commodity, the shuttle to New York and to Boston. What is more, DC Air will provide fewer flights out of Reagan National than US Airways currently does. So some of US Airways' valuable takeoff and landing slots will apparently go unused.
Finally, DC Air will be known as what is called a virtual airline. It leases many of its planes. It will compete with the pilots and flight attendants from United. The management will pretty much be the same.
Even worse, DC Air will pay United for the use of its ground personnel such as mechanics and gate attendants. These fixed costs should surely dispel any notion that anyone might have that DC Air will provide any low-cost competition to US Air.
If this Congress and the administration are serious about improved competition in the airline industry, and it is questionable, we cannot turn these valuable slots over to another major carrier with the potential to gouge the flying public.
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When these slots are first distributed in what I consider a colossal mistake on the part of the Department of Transportation, DOT made clear to the airlines that the slots were Government property, owned by the American people.
The Government reserved the right to reclaim them at a future date to promote fair competition. With the growing move by large airlines to consolidate such action to reclaim the citizens' property, it is long overdue.
I am willing to bet that Jet Blue and Southwest and other airlines would love to complement their upcoming flights with service to go to National Airport if only given the opportunity. Jet Blue could bring low fares and more flights to our region, as Southwest is doing, but Jet Blue and other low-cost carriers are going to be locked out of National Airport if DC Air is handed their valuable takeoff and landing rights.
It doesn't have to be this way. Southwest Airlines has proven in the past that when a low-cost carrier enters an expensive airline market, it spurs increased competition that benefits the consumer with cheaper fares.
On a final note, Mr. Chairman, higher airfares take a human toll. I have received heart-rending letters from constituents whose lives have been altered because they couldn't afford an important airline flight.
Consider the daughter who can't afford to be at the bedside of her dying mother, the homesick college student who can't afford to fly to see her parents for the weekend, and the grandparent who can't afford to fly to a grandson's graduation from high school.
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A lack of competition in the skies means high air fares and poor service. I thank you once again, Mr. Chairman, for looking at this merger closely.
Mr. HYDE. Thank you very much, Representative Slaughter and to you, Representative Jackson, as well. We do not submit you to the ordeal of questioning, so you may be excused, with our compliments.
The entirety of your statement will be made a part of the record. Thank you very much.
[The prepared statement of Ms. Slaughter follows:]
PREPARED STATEMENT OF HON. LOUISE SLAUGHTER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Mr. Chairman, I want to thank you for holding these hearings. Without your leadership, many communities would be shut out of this debate. The community I represent, Rochester, New York, struggles with some of the highest air fares in the nation. My big fear is that this merger may be a sham—a sham that will have a devastating impact on many regions of the country, including my own.
What am I afraid of? I am concerned that this merger will substantially reduce airline competition, particularly in the Northeast for communities like Rochester. Right now, US Air provides 43 percent of our flights in Rochester. If US Airways is swallowed by United , I worry that constituents will face fewer choices, wretched service, and a pricing structure that would make a mafia Don blush. What's more, we hear of more mergers being contemplated that would essentially reduce the industry to three major airlines.
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My community has learned the hard way that economic development cannot occur without affordable, accessible air transportation. Over the last few years, many firms and businesses have either moved out or chosen to expand in other regions of the country because of exorbitant airfares and the inability to get a decent flight schedule.
Rochester is typical of many mid-sized cities served by United and U.S. Airways. To be blunt, deregulation failed us. During the 1980's, thirteen air carriers served our region, affording consumers choices and creating a competitive environment that produced reasonable fares. Now, we have only a handful of airlines, with US Airways the dominant carrier. Compare the prices of airline tickets out of Rochester and what will you find? They are within a penny of each other!
This is not a position Rochester thought it would ever find itself in. We are the largest per capita exporting city in the U.S. Last year, 1.2 million people flew out of our airport. The 28th District is the proud home of a number of Fortune 500 companies such as Eastman Kodak, Xerox Corp., Bausch & Lomb, and Johnson & Johnson. Of equal importance are the hundreds of small and mid-sized high technology firms that have been growing in our region over the past several years. But this success is by no means certain if major airlines are allowed to continue to gouge Rochester flyers.
I have been tackling this problem in Congress on many fronts and am proud to report some progress. A new low cost carrier, JetBlue, will begin service to our region this summer, and several carriers have announced expanded service with regional jets in the months ahead. This progress would come to a screeching halt, however, should the proposed merger go forward.
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Today, Rochester has 3 daily nonstop jet flights between Reagan National and Rochester. We are told that DC Air, the spin-off of this merger, will continue to give us 3 daily flights. But take note: the number of seats available would be cut by more than half! Demand will remain the same, but with less supply, prices will rise. Currently, there are 11express flights between Rochester and Dulles. Seven are on United and the other 4 commuter flights are on US Airways. These four will certainly disappear in the merger, further reducing service between this region and Rochester.
This notion that a new carrier, DC Air, will somehow increase competition has been ridiculed by virtually every independent analysis of the proposed merger. From what I can surmise, DC Air won't actually compete on any United routes. I have requested that the General Accounting Office shed some light on the true impact of this merger, and look forward to their analysis.
Meanwhile, United will take over US Air's most valuable Washington commodity, the shuttle to New York and Boston. What's more, DC Air will provide fewer flights out of Reagan National than US Air currently does. Some of US Air's valuable takeoff and landing slots will apparently go unused. Finally, DC Air will be what's known as a ''virtual airline''—leasing many of its planes, complete with pilots and flight attendants, from United. Even worse, DC Air will pay United for the use of its ground personnel, such as mechanics and gate attendants. These fixed costs should dispel any notion that DC Air will provide any ''low cost'' competitive alternative to US Air.
If this Congress and the Administration are serious about improved competition in the airline industry, we cannot turn these valuable slots over to another major carrier with the potential to gouge the flying public. When these slots were first distributed, DOT made clear to the airlines that slots were government property, owned by the American people. The government reserved the right to reclaim them at a future date to promote fair competition. With the growing move by large airlines to consolidate, such action is long overdue.
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I am going to bet that JetBlue would love to compliment its upcoming New York City-Rochester flights with service that could continue to National Airport, if only given the opportunity. JetBlue would bring low fares and more flights to the region. But JetBlue and other low-cost carriers are would be locked out of National Airport if DC Air is handed those valuable take-off and landing rights. It doesn't have to be this way. As Southwest Airlines has proven in the past, low cost carrier enters an expensive airline market, it spurs increased competition that benefits the consumers with cheaper fares.
On a final note, Mr.Chairman, high air fares take a human toll. I have received heart rending letters from constituents whose lives have been altered because they could not afford an important airline flight. Consider the daughter who cannot afford to fly to the bedside of a dying mother; the homesick college student who cannot afford to fly to see her parents for the weekend and the grandparent who cannot afford to fly in for her grandson's graduation from high school. A lack of competition in the skies means high air fares and poor service. Thank you for looking at this merger closely.
Mr. HYDE. The next panel consists of three Government witnesses from the departments that have the responsibility for maintaining competition in the airline industry.
On behalf of the Department of Justice, we have Mr. John Nannes, a Deputy Assistant Attorney General in the Antitrust Division of the Department of Justice. He is a graduate of the University of Michigan Law School, after which he clerked for Judge Roger Robb of the DC Circuit, and Justice William Rehnquist of the Supreme Court of the United States. He spent three years at the Antitrust Division in the mid-1970's and then after that he spent many years in private practice. He took his current position in 1998.
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On behalf of the Department of Transportation we have its General Counsel, Ms. Nancy McFadden. She is a graduate of San Jose State University and the University of Virginia School of Law. Before entering Government, she was in private practice with the Washington office of O'Melveany and Meyers. From 1993 through 1995 she was with the Department of Justice serving as assistant to the Attorney General and Principal Deputy Associate Attorney General. She has served in her current position since 1995.
Joining Ms. McFadden is Mr. Paul Galis, the Deputy Associate Administrator for Airports at the Federal Aviation Administration. He has served with the FAA since 1968. From 1979 to 1999 he was Director of the Office of Airport Planning and Programming. He took his current position in August of 1999. Mr. Galis appears today for the purpose of answering questions only. He will not present a separate statement.
We welcome all of you. We certainly look forward to your testimony.
We will start with you, Mr. Nannes.
STATEMENT OF JOHN NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. NANNES. Mr. Chairman and members of the committee, I am pleased to appear before you today to discuss certain important competition issues relating to airline hubs.
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I understand, also, that members of the committee are interested in considering the implications of the proposed transaction between United and US Airways.
As I am sure you can understand, the Antitrust Division cannot comment on the specifics of any transaction that it is currently investigating, although in my written testimony and orally, if time permits, I will try to describe for you how the Division analyzes airline mergers generally.
With respect to hubs, for half a century the airline industry was subject to substantial Federal regulation. After deregulation in 1978, industry responses were swift. Carriers began to consolidate their operations at airports forming hubs.
The hub system has become the dominant business model for most of the major domestic airlines. Such a hub system provides some important benefits for local and connecting passengers. Local passengers benefit because the hub carrier will operate many spoke routes, which means that passengers will be able to obtain nonstop service to many cities.
Connecting passengers benefit not only from the frequency of flights, but also from the ability to chose among routing alternatives offered by various airlines. A passenger seeking to travel from Washington to San Diego, for example, may find service is offered by multiple carriers, each via those carriers' respective hubs.
Notwithstanding those benefits, though, the dominance of spoke routes by hub carriers gives rise to concern about the exercise of market power by those carriers on those routes. There will usually be at least two carriers providing nonstop service on spoke routes that connect two carriers' hubs.
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But on other routes, there may well be no carrier providing nonstop service other than the hub carrier. Studies have shown the carriers generally can and do charge higher fares on hub routes where they face less competition than on routes that are more competitive.
Once an airline has established a hub at an airport, several structural and strategic factors combine to present high entry barriers to any other airline that might try to enter spoke routes emanating from that hub.
Today, hub carriers often account for more than 70 percent and sometimes for more than 80 percent of passengers at their respective hubs. There is no reason to think the situation is likely to change in the short run.
The hub system can present competitive issues under either section 1 or section 2 of the Sherman Act. Section 1 prohibits contracts, combinations, and conspiracies that restrain trade.
Price fixing agreements and market allocation agreements are examples of the kind of collusive conduct that are particularly injurious to consumers.
One of the most significant section 1 cases that the Division has recently brought involved the pricing practices of airlines, often from their hubs. The complaint alleged that the carriers had used their computer reservation systems to negotiate fare changes. A consent decree now prohibits certain practices that the airlines had used to reach agreements on fares.
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Section 2 of the Sherman Act prohibits monopolization and attempts to monopolize. Generally speaking, even a firm with a dominant share of the market does not violate section 2 unless it engages in some form of exclusionary conduct.
In the airline industry, concerns have been expressed that hub carriers engage in exclusionary practices to keep low-cost carriers, known as LCCs, out of their hubs. The Division takes these concerns very seriously, precisely because LCCs may offer the only realistic prospect of competition to hub carriers in precisely the markets that suffers from the lack of competition.
A hub carrier may therefore have a strong incentive to engage in predatory practices to drive LCCs out of its hub markets and to send a strong signal to others that might consider entry that the same response awaits them if they try.
If a LCC begins service on a hub carrier's spoke route and the hub carrier engages in predatory conduct that drives the LCC out, the hub carrier has benefitted in many ways. Not only has it driven the LCC out of that particular route, but it has also probably discouraged the LCC from expanding to serve other cities from that hub. Not only has this LCC been driven away, but all other LCCs contemplating entering that hub will see what fate awaits them if they dare to venture in.
Thus, predatory practices directed at a single LCC in a single spoke route can protect the hub carrier's ability to charge high fares in other spoke routes it dominates.
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The Division has filed suit again American alleging monopolization and attempted monopolization at its Dallas-Fort Worth hub in connection with alleged predatory practices directed at LCCs. The case is still in discovery and trial is scheduled for the spring.
In my prepared statement I have explained the standards that the Division uses to evaluate air carrier mergers and acquisitions.
The Division has announced that it will investigate the proposed transaction between United and US Airways. Assistant Attorney General Joel Klein has indicated that this will be a thorough and far-reaching investigation.
Mr. Chairman, this concludes my prepared remarks. I will be happy to respond at the appropriate time to any questions that you or other members of the committee may have.
Mr. HYDE. Thank you very much, Mr. Nannes.
{The statement of Mr. Nannes follows:]
PREPARED STATEMENT OF JOHN NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. Chairman and members of the Committee, I am pleased to appear before you today to discuss certain competition issues involving the nation's airlines. I know that this hearing was originally intended to consider implications of the hub-and-spoke system that emerged in the aftermath of deregulation, but I understand that the members are also interested in considering the implications of the proposed transaction between United and US Airways. While the Antitrust Division cannot comment on the specifics of any transaction that it is currently investigating, we fully understand the committee's interest in knowing how the Division analyzes airline mergers generally. Therefore, I propose first to review the circumstances that have produced the hub-and-spoke system, then to identify competitive issues that are presented by that system, and, finally, to review the standards that the Division utilizes in evaluating mergers and acquisitions among air carriers.
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I. EVOLUTION OF THE HUB-AND-SPOKE SYSTEM
During the Great Depression, Congress enacted a number of statutes that subjected major industries to substantial governmental regulation. Building largely upon the statutory regime first enacted in 1887 to regulate railroads, various industries, including other transportation industries such as trucking and airlines, were subjected to restrictions with respect to markets they could enter or exit, prices they could charge, and acquisitions they could make. In most instances, those decisions were subject to prior review and approval by an administrative agency, such as the Interstate Commerce Commission or what became the Civil Aeronautics Board (''CAB'').
While the premise of such regulation was that regulatory agencies could restrain anticompetitive behavior by regulated industries and thereby protect the public interest, regulated industries and the public became dissatisfied with regulation. Regulated companies balked at having to obtain regulatory approval every time they wanted to change service or alter price, and consumers complained that agencies often seemed to reflect the views of the industry they regulated, rather than the public interest.
This dissatisfaction culminated in a series of regulatory reform initiatives in the 1970s that reflected a congressional determination that consumer welfare could be enhanced by reducing regulation and allowing consumers—through their buying decisions in the marketplace—to identify products and services they desired and the price that they were willing to pay. Thus, Congress enacted a number of deregulatory statutes that curtailed regulation and allowed formerly regulated industries far greater latitude in determining markets to serve and prices to charge.
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Following on the heels of a number of deregulatory experiments conducted by the CAB, Congress enacted the Airline Deregulation Act of 1978, which moved the domestic air transportation industry from government regulation to a new era of competition. Carriers were permitted to enter and leave domestic markets without governmental authorization and to set prices and conditions of service. Such behavior would thereafter be subject to the antitrust laws, but the CAB retained jurisdiction over mergers and acquisitions and its authority to prohibit unfair practices.
Industry responses to deregulation were swift. While the prior regulatory regime had resulted in carriers largely providing point-to-point service, with deregulation they began to consolidate their operations at airports, forming what came to be known as hubs. A hub carrier combines ''local'' passengers (those originating at or destined to the hub) with ''connecting'' passengers (those not originating at or destined to the hub but traveling via the hub) on the same flight. This allows the hub carrier to serve more cities from their hubs (known as ''spoke'' routes) and offer greater frequency of service with its fleet of aircraft than had been possible with point-to-point service.
The hub system has become the dominant business model for most of the major domestic airlines. Such a hub system provides some important benefits for local and connecting passengers. Local passengers benefit because the hub carrier will operate many spoke routes, which means that passengers will be able to obtain nonstop service to many cities. Also, because the hub carrier combines local passengers with a substantial number of connecting passengers on its flights, it is likely to offer more flights to any spoke city than other carriers (with the possible exception of a spoke city that is another carrier's hub). Connecting passengers benefit not only from the frequency of flights, but also from the ability to choose among routing alternatives offered by various airlines. A passenger seeking to travel from Washington to San Diego, for example, may find that service is offered by multiple carriers, each via its respective hub(s).
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Notwithstanding these benefits, the dominance of spoke routes by hub carriers gives rise to concerns about the exercise of market power by those carriers on those routes. There will usually be at least two carriers providing nonstop service on spoke routes that connect two carriers' hubs, but on other routes there may well be no carrier providing nonstop service other than the hub carrier. Connecting service may be a reasonable alternative for some passengers, especially for those leisure passengers willing to endure the longer travel time that connecting service usually entails, but the absence of competing nonstop service can be especially problematic for business passengers, who often are in a hurry and generally place a higher value on minimizing travel time. Hub carriers can identify such ''time-sensitive'' passengers and discriminate in the fares they charge them. Studies have shown that carriers generally can, and do, charge higher fares on hub routes, where they face less competition, than on routes that are more competitive.
Once an airline has established a hub at an airport, several structural and strategic factors combine to present high entry barriers to any other airline that might try to enter spoke routes emanating from that hub. By providing more departures to more destinations, the hub carrier can attract a disproportionate share of the hub airport's passengers. This happens for several reasons, including the preference of many travelers to use the carrier with the most flights in a city pair (so that the passenger can change departure times if travel plans change), marketing programs (such as frequent flyer programs) that create loyalty incentives for consumers to concentrate their travel on the dominant airline in their home city, and travel agent commission practices that create incentives for travel agents to encourage their customers to use the hub carrier. A hub carrier often also enters into contracts with local businesses that provide incentives for the businesses to concentrate their travel on the hub carrier. All of these factors serve to discourage entry into a hub carrier's spoke routes, especially by other carriers with similar cost structures.
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There is little dispute that hub carriers dominate service at their respective hubs. Today, hub carriers often account for more than 70 percent and sometimes for more than 80 percent of passengers at their respective hubs. There is no reason to think this situation is likely to change in the short run.
II. COMPETITIVE ISSUES PRESENTED BY THE HUB SYSTEM
The hub system can present competitive issues under either Section 1 or Section 2 of the Sherman Act.
Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies that restrain trade. Price-fixing agreements and market allocation agreements are examples of the kinds of collusive conduct that are particularly injurious to consumers. One of the most significant section 1 cases that the Division has recently brought involved the pricing practices of airlines.
In 1992, the Division sued eight airlines and their tariff publishing company for unreasonably restraining trade in violation of section 1. The complaint alleged that the carriers had used computerized fare dissemination services to negotiate fare changes, to trade fare changes in some markets for changes in others, and to exchange assurances concerning implementation of those changes.
Although each of the major domestic carriers offers service in thousands of city pair markets, the Division found that carriers had varying preferences as to the prices that should be charged in any particular city pair. Preferences may differ for any of a number of reasons, including the importance of a route to the carrier's hub operations. A carrier might be very interested in the fare level in city pair A–B if it operated many daily frequencies and be less interested in the fare level in city pair C–D if it operated only one or two. Yet, city pair C–D might be very important to another carrier and city pair A–B less so. The Division found that the airlines had used computerized fare dissemination systems to work out trades: ''I'll go along with an increase in A–B if you go along with an increase in C–D.'' A consent decree now prohibits certain practices that the airlines had used to reach agreements on fares.
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Section 2 of the Sherman Act prohibits monopolization and attempts to monopolize. Unlike section 1, which requires some form of agreement between two or more persons, section 2 focuses on single firm conduct. Generally speaking, even a firm with a dominant share of a market does not violate section 2 unless it engages in some form of exclusionary conduct. The law does not penalize a person for obtaining a monopoly through superior skill, foresight, and industry. However, if a person seeks to maintain a monopoly through exclusionary conduct or there is a dangerous probability that a person will obtain a monopoly through exclusionary conduct, the Division may sue under section 2.
In the airline industry, concerns have been expressed that hub carriers engage in exclusionary practices to keep low-cost carriers (LCCs) out of their hubs. The Division takes these concerns very seriously precisely because LCCs may offer the only realistic prospect of competition to hub carriers in precisely the markets that suffer from a lack of competition. The Division has found that major carriers are not likely to challenge another carrier at its hub by offering point-to-point service (except on a spoke route from their own hubs). The advantages that a hub carrier enjoys at its hub make entry of that sort unlikely. But LCCs, with their lower cost structures, may be able to offer service on a hub carrier's spoke routes notwithstanding the hub carrier's advantages.
A hub carrier may therefore have a strong incentive to engage in predatory practices to drive LCCs out of its hub markets and to send a strong signal to others that might consider entry that the same response awaits them if they try. The airline industry has characteristics that may make such a strategy particularly attractive to a hub carrier. If an LCC begins service on a hub carrier's spoke route and the hub carrier engages in predatory conduct that drives the LCC out, the hub carrier has benefited in many ways. Not only has it driven the LCC out of that particular route, but it has also probably discouraged that LCC from expanding to serve other cities from that hub. And not only has this LCC been driven away, but all other LCCs contemplating entering that hub will see what fate awaits them if they dare to venture in. Thus, predatory practices directed at a single LCC in a single spoke route can protect the hub carrier's ability to charge high fares in other spoke routes it dominates.
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The Division has filed suit against American alleging monopolization and attempted monopolization at its Dallas/Ft. Worth hub in connection with predatory practices directed at LCCs. The case is still in discovery, and trial is scheduled for next spring.
III. EVALUATING MERGERS AND ACQUISITIONS AMONG AIR CARRIERS
During the first years following deregulation, antitrust jurisdiction was divided between the Division and the CAB. While airlines were generally subject to the antitrust laws, the CAB retained sole jurisdiction to review mergers and acquisitions. The CAB was presented with a number of proposed mergers in the late 1970s and into the 1980s. When Congress sunset the CAB in 1985, it temporarily transferred merger review authority to the Department of Transportation (''DOT''). In ensuing years, the Division submitted comments to the DOT in some merger proceedings and supported many of the DOT's decisions. But the DOT approved two mergers that the Division opposed: the acquisition of Ozark by TWA in 1986 and the acquisition of Republic by Northwest in the same year. Both of those transactions involved carriers that operated hubs at common airports; the merging carriers in each transaction thus provided the only nonstop service in many city pairs. The DOT predicted that entry or the threat of entry by other carriers into the affected markets—potential competition—would prevent non-competitive performance by the merged entities. A subsequent study by Division economists found that potential competition had not prevented fare increases and service reductions.
The DOT's jurisdiction over mergers terminated effective December 31, 1988, after which time the Division assumed responsibility for airline merger review, although we continue to work closely with the DOT, given its substantial expertise with respect to the airline industry. In reviewing airline mergers, the Antitrust Division applies Section 7 of the Clayton Act, which prohibits the acquisition of stock or assets ''where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.'' Section 7 reflects the congressional judgment that merger enforcement should be able to arrest anticompetitive transactions in their incipiency, to forestall the harm that would otherwise ensue but be difficult to undo. Thus, merger enforcement standards are forward looking and, while we often consider historic performance in an industry, the primary focus is to determine the likely competitive effects of a proposed merger in the future.
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The Division and the FTC have jointly developed Merger Guidelines that describe the inquiry they will follow in analyzing mergers. ''The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise.'' Merger Guidelines 0.1. As suggested by the language of Section 7 itself, we usually start by seeking to define the relevant product or service (''line of commerce'') and geographic (''section of the country'') markets in which the parties to a merger compete and then determine whether the merger would be likely to lessen competition in those markets.
The purpose of this inquiry is to ascertain whether, with respect to a product or service offered by the merging parties, there are alternative products and services to which customers could reasonably turn if it were assumed that the merging parties were the only suppliers of the product or service and sought to increase prices. Once relevant markets are defined, we look at various factors in order to determine whether the transaction is likely to have an anticompetitive effect.
In performing this analysis, the Division considers both the post-merger market concentration and the increase in concentration resulting from the merger. As a yardstick for concentration, we utilize the Herfindahl-Hirschman Index (''HHI''), which is calculated by summing the squares of the individual market shares of all the participants. The Division will presume that mergers in highly concentrated industries that produce more than a small increase in concentration are likely to create or enhance market power or facilitate its exercise, unless other factors, such as the prospect of entry by other firms, make that unlikely.
We apply this basic approach to analysis of air carrier transactions. In this industry, the definition of product/service market and geographic market converge: relevant airline markets are likely to consist of scheduled airline service between a point of origin and a point of destination, generally referred to as city pairs. This market makes intuitive, as well as economic, sense. A passenger desiring to fly from Washington to San Francisco for a business meeting or a vacation is unlikely to regard a flight from Washington to Minneapolis as a reasonable alternative in the event the fare from Washington to San Francisco is increased. Thus, we should be concerned about a transaction that significantly raises concentration levels in city pair markets.
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The relevant market may, however, be narrower than all scheduled airline service in a city pair. Carriers can serve a city pair market on a connecting basis or a nonstop basis. If the only available service offered by carriers in a city pair is connecting service, there may be various routes that passengers regard as reasonable alternatives and from which they will choose based on fare, elapsed travel time, and other factors. However, there are many city pairs that are served by some carriers on a nonstop basis and others on a connecting basis, which poses the following question: is a passenger having the ability to take a nonstop flight likely to regard connecting service as a reasonable alternative, such that he or she would switch from nonstop service offered by one carrier to connecting service offered by another carrier if the first carrier raised its fare? Chances are that passengers traveling for leisure—on vacation perhaps—are more likely to consider switching; their demand is said to be more elastic. However, passengers making business trips are significantly less likely to regard connecting service as a reasonable alternative—they are often in a hurry and may place a higher value on getting to their destination in a hurry—so that a carrier offering the only nonstop service has power to raise fares without losing these passengers to another carrier's connecting service. Thus, there may be circumstances in which a transaction will be competitively problematic because of its impact on nonstop service in city pair markets, even if other carriers provide service in those markets on a connecting basis.
Therefore, in considering the antitrust implications of a particular transaction, the Division looks at the effect in all city pair markets served by both of the carriers involved in terms of (1) nonstop service and (2) nonstop and connecting service. We have found, not surprisingly given the operation by carriers of hubs in the post-deregulation world, that the transactions most likely to be problematic are those that involve carriers with hubs at the same airport or at airports in the same metropolitan area. These carriers are likely to serve many of the same city pairs and, especially in spoke markets, they may be the only two carriers, or two of a very small number of carriers, providing service.
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That is not to suggest, however, that transactions involving carriers that do not have overlapping hubs may not also present problems. Carriers with hubs in nearby cities are often the dominant carriers—usually on a connecting basis—for a significant number of city pairs in their region. And even when carriers' hubs are substantial distances apart, it is often the case that they are the only two carriers providing nonstop service between their respective hubs. The Division has challenged, for example, the acquisition by Northwest of a controlling interest in Continental, even though the carriers do not operate hubs at the same airports. Our complaint alleges that the acquisition would lead to higher ticket prices and diminished service for millions of passengers, especially those traveling on routes dominated by the two airlines. Northwest and Continental are each other's most significant competitors—and sometimes the only competitors—for nonstop airline service between cities where they operate their hubs. The case is scheduled for trial later this year.
Once overlapping city pairs have been identified, the Division looks at the number of other carriers serving each of the markets and at the nature of that service, often by resorting to data that carriers report periodically to the DOT. This allows the Division to calculate market shares and focus further analysis on those city pairs in which pre-merger concentration levels suggest post-merger structure conducive to the creation or enhancement of market power.
As the Merger Guidelines indicate, however, the analysis does not end there. Pre-merger market shares are a useful tool for predicting future market shares of the incumbents in a market, but they do not take account of the possibility of entry by additional competitors. The prospect of potential competition can constrain the ability of incumbents to raise price or reduce output below a competitive level. Indeed, the possibility of potential competition was the linchpin for many of the DOT's decisions approving mergers between carriers. Potential competition, it was said, could be relied upon to discipline carriers, even those with dominant market shares: if a dominant carrier sought to raise fares above competitive levels or reduce service below competitive levels, new carriers could easily enter, especially if they already had some operations at the affected airports. Airplanes were the quintessential mobile asset, it was said, and ground facilities could be easily leased or subleased. Believing that noncompetitive behavior would attract entry, it was claimed that dominant incumbents would price competitively and offer competitive levels of service. Hence, the DOT reasoned that market shares—and the presumptions of market power that accompany them—were of relatively little use in airline merger analysis. The airline industry became the poster child for contestable market theory.
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The Division does not subscribe to this entry analysis. It simply does not conform to the facts in a post-deregulation world consisting of hub airports. For all of the reasons I mentioned earlier, hub economics are powerful. In these circumstances, carriers with comparable cost structures to the hub carrier generally find it unattractive to take the hub carrier head on, and LCC entry in the affected markets, if it occurs at all, is likely to be limited and gradual. Under our Merger Guidelines, the Division considers whether entry into the affected markets is so easy, in the sense that it would be timely, likely, and sufficient in its magnitude, character and scope, that it will likely deter or counteract the competitive effects of concern. With respect to transactions between major air carriers with substantial overlaps in markets in which they are the dominant providers of service, it is unrealistic to expect that the prospect of potential competition can fully address the competitive problems of concern.
Finally, the Division will consider and take into account airline-specific business practices and characteristics that can affect merger analysis, especially those that differ from most other industries. Airline fare data is available instantaneously not only to consumers, but also to the airlines themselves, which can act as a disincentive to fare reductions. Airlines frequently propose general or systemwide price increases, which may be more likely to ''stick'' as the number of major carriers diminishes. Carriers have developed loyalty programs that tie passengers and travel agents to them at their hubs, making entry into those hubs more difficult. And, airlines apply sophisticated computer modeling techniques and ticketing restrictions to identify passengers to whom they can charge higher fares, a form of price discrimination. The Division will consider these and other factors, in seeking to determine whether any proposed transaction threatens substantially to lessen competition.
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IV. CONCLUSION
Mr. Chairman, competition in the airline industry is critical for the millions of people who depend on air travel in their business life and in their family life. If the Division concludes that hub carriers are engaging in collusive or monopolistic conduct or propose anticompetitive mergers that threaten to deprive consumers of the benefits of competitive air service, I assure you that the Antitrust Division will take appropriate enforcement action.
Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or other members of the Committee may have.
Mr. HYDE. Ms. McFadden?
STATEMENT OF NANCY E. MCFADDEN, GENERAL COUNSEL, UNITED STATES DEPARTMENT OF TRANSPORTATION
Ms. MCFADDEN. Thank you, Mr. Chairman. Ranking Member Conyers and members of the committee. I appreciate the opportunity to come before this distinguished committee to discuss the state of airline competition and to describe the Department of Transportation's role in reviewing airline mergers and acquisitions.
I am always pleased to join my colleague, Deputy Assistant Attorney General, John Nannes.
At the outset, I must make the same cautions that John Nannes did. Of course, I know you understand that we cannot discuss the specifics of the proposed United-US Airways transaction, but we certainly understand the committee's great interest in this matter.
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Let me assure you that we will maintain our commitment to preserving airline competition, in order to assure that consumers throughout the United States benefit from airline deregulation, and we assure you that this proposed transaction, indeed any major transaction, will be thoroughly examined by the Department of Transportation with the goal of preserving competition in the airline industry.
The structure of the airline business today reflects Congress' decision to deregulate the industry in 1978. The airlines, as has been discussed, literally reshaped their point-to-point systems into hub-and-spoke systems.
Operating at a hub does create efficiency advantages for the carrier and service advantages for many travelers. But it also clearly creates competitive disadvantages for non-hubbing airlines.
Hub and spoke systems enable airlines to serve the maximum number of city pair markets with a minimum number of airplanes and to maximize traffic flow by consolidating connecting passengers with different destinations on each flight.
However, an airline operating at a hub gains such great competitive advantages on the spoke routes it operates that other airlines without a hub at one end point of such a spoke route find it hard to compete with the hubbing airline.
The resulting lack of competition in many hub routes usually causes fares in hub markets to be higher than fares in comparable non-hub markets. We have found that in general airlines are reluctant to compete at the hubs operated by other airlines. For this reason, low-fare airlines, we have found, are the best hope for competition at the major airlines hubs.
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We believe, as we discussed with the committee before, that some hubbing airlines may have engaged in practices intended to further foreclose competition in their hub markets.
My written testimony describes a number of other developments since deregulation which have reshaped the industry—the wave of airline mergers in the 1980's, creeping globalization and the development of international alliances, and the more recent phenomenon of domestic alliances.
In the 1990's we also saw increased focus on the value of new airline entrants, especially in dominated hub markets, and the difficulties faced by those new entrant carriers.
As you know, the Department of Transportation has taken a number of steps to promote competition and protect against anti-competition practices.
Mr. Chairman, thank you for your comments in that regard.
Now, I paint this backdrop of the deregulated environment and the state of airline competition to make two points.
First, we have learned a lot about the airline industry over the past 15 to 20 years. We have a greater understanding now of how airlines act and react in a deregulated environment.
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Second, the Department of Justice and the Department of Transportation particularly over the past seven and a half years, have shown the ability and will to work to preserve airline competition, often working hand in hand with Congress.
Now, let me briefly describe the role that the Department of Transportation plays in the review of airline mergers and acquisitions.
The DOT will conduct its own analysis of the merger and submit its views and any relevant information in our possession to the Department of Justice as we have done in past cases. This process is, of course, confidential.
In addition, with respect to the proposed merger, we have some separate regulatory authority and must grant our approval before some parts of the transaction may go forward.
First, the parties have announced plans to spin off most of their operations at Reagan National Airport to a new airline. This new airline must obtain economic operating authority from the Department as well as safety authority from the FAA.
Second, the proposed acquisition will also involve the transfer of US Airways international route authority in some limited entry markets. Here, too, the Department of Transportation must first approve the transfer. We may approve a transfer only if we find that it is consistent with the public interest.
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Third, the Department of Transportation has the obligation to protect consumers from unfair and deceptive practices by airlines. In carrying out that responsibility, we will review the merger's arrangements to ensure that the rights of consumers are protected.
Mr. Chairman, in closing, let me reaffirm our commitment to continuing our effort to ensure that consumers benefit from airline deregulation and let me assure you that the need to ensure competition will guide our review of the United-US Airways transaction.
Thank you and I, of course, will be pleased to answer any questions of yours or the committee. As you noted, Mr. Galis is here as well to answer questions.
[The prepared statement of Ms. McFadden follows:]
PREPARED STATEMENT OF NANCY E. MCFADDEN, GENERAL COUNSEL, UNITED STATES DEPARTMENT OF TRANSPORTATION
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to come before the Committee to discuss the state of airline competition and to describe the Department of Transportation's role in reviewing airline mergers and acquisitions. The principal subject of this hearing is concern about the inadequacy of airline competition at hubs dominated by one or two airlines, such as O'Hare. With respect to the announcement by United Airlines and US Airways of a major merger proposal, on behalf of Secretary Slater, I want to assure the Committee that this proposed transaction, indeed any major transaction, will be thoroughly examined by the Department of Transportation with the goal of preserving competition in the airline industry.
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My testimony today will focus on three aspects of airline competition: the background to the current state of competition in the airline industry, with a focus on the development of hubs that are dominated by one or two carriers; the Department's role in reviewing airline mergers and acquisitions; and the factors that we will look at in analyzing a merger or acquisition.
The structure of the airline business today reflects Congress' decision to deregulate the industry in 1978. Congress correctly determined that the public would obtain better service and fares if airlines had to respond to consumer demands and competition. Congress therefore phased out the economic regulatory regime that had long authorized the Civil Aeronautics Board to dictate where airlines could fly and what they could charge.
In responding to market demands and the need to improve their efficiency, airlines reshaped their linear—point to point—route systems into hub-and-spoke systems. Hub-and-spoke systems enable airlines to serve the maximum number of city-pair markets with a minimum number of airplanes and to maximize traffic flow by consolidating connecting passengers with different destinations on each flight. Operating at a hub creates service advantages for many travelers, since it gives travelers at hub cities many more flights and enables airlines to offer more service in markets that do not have enough traffic to sustain non-stop service. On the other hand, an airline operating a hub gains such great competitive advantages on the spoke routes at its hub that other airlines without a hub at one end point of such a spoke route find it hard to compete with the hubbing airline. The resulting lack of competition in many hub routes usually causes fares in hub markets to be higher than fares in comparable non-hub markets.
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The Suburban O'Hare Commission report rightly notes that airlines are reluctant to compete at the hubs operated by other airlines. In our view this results from the competitive advantages created for the hubbing airline by its operation of many more flights and service to many more destinations than other airlines and the high cost that any other airline would incur in establishing a competing hub at the same airport. However, some hubbing airlines may have engaged in practices intended to further foreclose competition in their hub markets. For this reason, we are informally investigating several cases where a hubbing airline has allegedly attempted to eliminate competition in hub markets through predatory-type behavior.
Another development in the first years after deregulation was new entry—quite a few firms entered the airline business (or began interstate service for the first time). Relatively few survived the 1980's, but one of those that did—Southwest Airlines—has since expanded its low-fare operating strategy throughout most of the country. Two other entrants of that era—America West and Midwest Express—are also operating successfully today.
The 1980's saw a wave of airline mergers. At that time, federal law still required all such transactions to obtain the prior approval of the Department of Transportation. The Department approved almost all of the merger proposals submitted to it before the complete phasing-in of deregulation ended the Department's approval authority over airline mergers and acquisitions. Since the end of 1988, the Department of Justice has been responsible for determining whether mergers and acquisitions in the airline business should be challenged as anticompetitive.
In the 1990's, airlines developed new strategies for delivering their services. They viewed the ability to offer a broader network of services as critical. This led to the creation of alliances in both domestic and international markets that included code-sharing arrangements and frequent flyer program reciprocity.
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The development of international alliances has been part of the larger process of globalization. Responding to this increasing globalization, the Clinton-Gore Administration has worked hard to open up international markets to competition and entry by U.S. airlines. In the last seven and one-half years, the United States has reached open skies agreements with forty-six countries that allow any U.S. airline to serve points in those countries from any U.S. point and to set fares free of government regulation. As a result of these successful efforts, we have seen the development of global airline alliances that have promoted competition in thousands of city-pair markets throughout the world.
More recently, major U.S. airlines began forming alliances with one another. In 1998, United planned an alliance with Delta, Northwest with Continental, and American with US Airways. These domestic alliances were different from the international alliances. The latter usually created new networks by linking route systems of U.S. and foreign airlines on an end-to-end basis and involved airlines that could not enter each other's domestic markets due to the constraints of bilateral aviation agreements. The alliances between U.S. airlines, on the other hand, involved airlines that already had the authority to enter any domestic market. These alliances were potentially more problematic.
In the face of these proposed domestic alliances, Congress enacted legislation requiring the major airlines to submit to the Department of Transportation any joint venture agreements between them that covered frequent flyer programs, code-sharing, and wet leases. The Department has used that authority to obtain modifications that eliminated potentially anticompetitive features in joint venture agreements. In addition, the Justice Department filed suit against Northwest's acquisition of the major block of Continental stock. The other two alliances—the United/Delta and American/US Airways alliances—have not gone beyond frequent flyer reciprocity arrangements and provisions for the reciprocal access to airport executive lounges.
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In the 1990's, we also saw increased focus on the value of new airline entrants, especially their presence in dominated-hub markets, and the difficulties faced by those new entrant carriers. Congress has addressed this issue most recently in several pro-competition provisions in AIR–21, the FAA reauthorization act signed into law in April of this year. And DOT has taken a number of steps to promote competition and protect against anticompetitive practices.
As a result of all these developments, we have an industry that, for the most part, has proven deregulation to be a success. But deregulation can only be successful for the consumers it was meant to benefit if there is adequate competition in the airline industry. To ensure that airline competition continues, close scrutiny of the proposed merger between United and US Airways is critical for the country's airline travelers.
We cannot, of course, discuss the merits of the proposed transaction. However, we understand the Committee's interest in this matter, and so I would like to describe generally how the Department examines any such transaction. Both the Department of Justice and the Department of Transportation have responsibilities for reviewing the proposed transaction between United and US Airways.
The Justice Department is responsible for enforcing the antitrust laws and determining whether mergers and acquisitions in the airline industry should be challenged on competitive grounds. As you know, the statute now governing airline mergers, section 7 of the Clayton Act, prohibits mergers and acquisitions that may substantially lessen competition in any relevant market or tend to create a monopoly.
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As the agency with transportation expertise, the Department of Transportation will conduct its own analysis of the merger and submit its views and any relevant information in its possession to the Justice Department, as we have done in past cases. This process is confidential. We have asked United and US Airways to provide us all the information necessary to thoroughly analyze the transaction. In doing that analysis, we will also rely on the fare and traffic data periodically reported to us by the airlines.
In addition, the Department has separate regulatory authority and must grant its approval before some parts of the transaction may go forward. First, the parties have announced plans to spin off most of US Airways' operations at Washington Reagan National Airport to a new airline. This new airline must obtain economic operating authority from the Department as well as safety authority from the FAA. In determining whether to grant economic operating authority, we will determine whether the firm is ''fit, willing, and able'' to perform air transportation and comply with applicable legal requirements. In making fitness determinations, we review an airline's financial resources, managerial capabilities, and compliance disposition. The FAA, under its safety authority, conducts a separate, comprehensive safety fitness analysis of the new carrier before issuing the Air Carrier Certificate and Operations Specifications.
Second, the proposed acquisition will also involve the transfer of US Airways' international route authority in some limited-entry markets. Here too, the Department must first approve the transfer of US Airways' certificate authority, under 49 U.S.C. 41105. We may approve a transfer only if we find that it is consistent with the public interest. The Department by statute must specifically consider the transfer's impact on the viability of the parties to the transaction, on competition in the domestic airline industry, and on the trade position of the United States in the international air transportation market. The Department will also examine any other public interest issue raised by the transfer.
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The Department will only decide whether to approve the transfer of the international route authority after it has established a formal record and given all interested persons the opportunity to comment on the proposed transfer. The Department's discussions with the Justice Department on the overall merger will include a discussion of the competitive effects of the transfer of US Airways' international routes. If the Department determines that the transfer would be contrary to the public interest on competitive grounds or for another reason, the Department may disapprove the transfer in whole or part. Alternatively, the Department may condition its approval on requirements that would protect the public interest.
Third, the Department additionally has the obligation to protect consumers from unfair and deceptive practices by airlines. In carrying out that responsibility, we will review the merger's arrangements to protect the rights of consumers. For example, the merger may well affect the existing reciprocity benefits available to members of the United and US Airways frequent flyer programs. We will look at whether the airlines will give consumers reasonable notice and an opportunity to adjust to any changes in such programs. If we find that the provisions in their frequent flyer agreements fail to provide adequate notice and an opportunity to obtain award travel, we will ask the airlines to modify the agreements. Accordingly, we have asked United and US Airways to provide us with their relevant frequent flyer program reciprocity agreements, and their plans for accommodating their members concerning any potential changes.
Finally, I would like to outline the factors we will consider in our competitive analysis of the proposed United/US Airways merger. We will be looking at the merger's likely impact on competition in all relevant markets. We will examine such issues as whether the acquisition will substantially reduce competition in relevant markets because other airlines either do not offer effective competition now or will be unlikely to enter if United raises fares or reduces service. A key question will be whether the proposed spin-off of US Airways' operations at Reagan National to DC Air will create an effective competitor in the Washington, D.C. markets affected by the merger.
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The relevant markets include city-pair markets, both those served by the parties with nonstop flights and those served with connecting flights. In examining the markets affected by the merger, we may well consider flights operated by United from one airport in the same metropolitan area as competing with flights operated by US Airways from a different airport in the same area. If a significant number of travelers strongly prefer to use one airport, the relevant markets may also include routes between specific airports. In analyzing whether entry by other airlines into markets served by the combined airlines is likely, the Department will examine whether the combined market share of the merging airlines will become large enough at individual cities to discourage entry by other airlines. We must also consider whether airport facilities will be available to airlines wishing to enter markets served by United and US Airways.
We will additionally investigate whether the relatively large size of the airline created by combining United and US Airways will make entry into the industry by new airlines more difficult. We will also examine the potential competitive reactions of other airlines.
Looking at the merger's competitive effects will carry out Congress' judgment that market forces, not government regulators, should determine the routes flown by airlines and the fares charged by airlines. But market forces will enable consumers to obtain the best service at the best price only as long as the airline industry is competitive.
Members of Congress and local communities have understandably expressed concern about whether the service now provided by US Airways will be maintained after its acquisition by United. For example, some communities have questioned whether they will continue to have access to nonstop flights to Reagan National. We cannot directly answer these questions, since we cannot predict United's long-term plans for operating the combined business, and we have no way to guarantee that United or DC Air would maintain existing levels of service. Nor can we know whether other airlines—existing or new—might choose to inaugurate new services to these communities. Under deregulation, each airline decides for itself which routes it will fly and what fares it will charge. However, together with the Justice Department, we will seek to ensure that the proposed merger does not diminish competition and prevent other airlines from entering and competing in markets where United may reduce service or raise fares. The key question in determining whether the United/US Airways acquisition will lead to better or worse service and fares for consumers is whether the combined airline will face competition and therefore must meet the demands of consumers. The Justice Department will address that question by applying the antitrust laws. We at the Department of Transportation will provide the Justice Department with the results of our own analysis of that question.
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Mr. Chairman, knowing of your interest in the development of a third airport at Chicago, let me provide an update on that situation. The FAA and the State of Illinois continue to meet periodically to try to find an acceptable course. At a January 27 meeting with the FAA, representatives of the State presented a revised proposal. The State indicated it would now like to proceed only with landbanking to preserve the Peotone site for future airport development, with airport construction timed and phased as actual aviation demand develops. On May 23, the FAA advised the Illinois Department of Transportation (IDOT) that the FAA would begin the preparation of an EIS for site approval and landbanking only. It was understood that, once the EIS is completed, the State will fund landbanking and no federal funding will be involved. Most recently, on June 1, FAA and IDOT officials met to discuss the preparation of an EIS for the State's landbanking proposal.
The goal of the EIS will be to make a case that it is feasible and prudent for the State to reserve and landbank a new site for future capacity insurance rather than depend solely on existing airports to meet long-term needs. It was agreed at the meeting that no airport infrastructure is currently proposed by IDOT. The EIS will evaluate infrastructure concepts at a broad brush level sufficient for site viability, but not at a detailed level for infrastructure approval. Subsequent EISs will be required for any FAA approvals related to infrastructure.
In conclusion, I wish to reaffirm our commitment to ensuring that consumers throughout the United States continue to benefit from airline deregulation. That will require us to continue our efforts to promote airline competition. The need to ensure competition will both guide our review of the United/US Airways transaction and guarantee that we will carefully examine its potential impact, and it will underpin the use of our other economic regulatory authority over the airline industry.
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Thank you Mr. Chairman. This completes my prepared statement, and I would be pleased to respond to your questions and those of the Committee. Accompanying me is Mr. Paul Galis, Deputy Associate Administrator for Airports, who will be pleased to answer questions on the FAA's review of proposals for a third airport at Chicago.
Mr. HYDE. Thank you, Ms. McFadden.
Mr. Conyers?
Mr. CONYERS. I don't have any questions at the moment. I will be back, though.
Mr. HYDE. All right. The gentleman from Pennsylvania, Mr. Gekas.
Mr. GEKAS. I have no questions at this time. Thank you, Mr. Chairman.
Mr. HYDE. Very well. The gentlelady from California, Ms. Waters?
Ms. WATERS. I have no questions at this time. Thank you.
Mr. HYDE. The gentleman from Virginia, Mr. Goodlatte.
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Mr. GOODLATTE. Thank you, Mr. Chairman. I will be brief.
I would like to know if any of the panel members would comment on the situation in some of the very smaller airports that receive commercial service. I have three of them, actually four in some respects, but basically three in my Congressional District.
I wonder if you might comment on your prognosis for the future of air service in those areas, in addition to the high costs that they are facing.
Ms. MCFADDEN. Congressman, let me just make a brief statement and then Mr. Galis, who directs the Airports Office at the FAA, may want to comment as well.
As you know, we have considered this issue and have worked with people like Congresswoman Slaughter and others like you and a number of your colleagues from the State of Virginia, to focus on what we can do to increase service to smaller airports and the under-served parts of this Nation.
It has been a difficult problem. It has been one that we have tried to work collectively with communities and with the airlines to try to increase service. We have found that supporting new entry airlines is one of the best ways to increase service to smaller airports.
Paul?
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Mr. GALIS. I would only add to that that coming from kind of a funding background, being in the administration of the AIP program, PFL program and so forth, that we see particularly under Air-21 the ability to direct additional funding to the smaller airports in the system.
So, I think to the extent that the airport infrastructure that is required to accommodate, and guarantee airports that they are capable of accommodating, that service, we see that as a real benefit, but no direct subsidy to any airline.
Ms. MCFADDEN. Congressman, I neglected to mention the program that Congress, in fact, has recently guaranteed additional funding for, which is the Essential Air Service Program which is directly related to trying to serve underserved and smaller airports in the country.
Mr. GOODLATTE. Thank you. Thank you, Mr. Chairman.
Mr. HYDE. Mr. Berman?
Mr. Jenkins?
Mr. JENKINS. I have no questions.
Mr. HYDE. Mr. Scott?
Mr. SCOTT. Thank you, Mr. Chairman.
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To follow up with the questions from my colleague from Virginia, in some of the smaller airports you have to get a critical mass of operation to even make the operation worthwhile. If you don't have a lot of demand to support two different airlines, will competition be the best tool to help the consumer or would, I guess, more support for the one airline that is there coupled with some regulation on their fares be more likely to produce better fares?
Mr. NANNES. Congressman, you raise a very good and a very difficult question. There may, as a practical matter, be certain communities where the traffic flow is such that economically it is simply unrealistic to expect that multiple carriers will find it profitable to serve that community.
Certainly, there are hopes that over time, and I understand there are certain developments with respect to regional jet aircraft, that the operating cost to provide service to particular communities may come down and make more economic going forward in the future service that might not have been economic in the past.
But ultimately I think we have to recognize the possibility that there may be some communities where the traffic flow is just so small that as a practical matter, short of subsidy, one carrier may be the most that a community can expect.
Mr. SCOTT. If you have only one carrier, how do you realistically expect competition to keep the fares down? I can fly from my hometown in Newport News to Washington, I can almost go to California for the same cost. If you have no competition, they can charge whatever they want.
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Without the hammer of competition, if you agree it is not realistic to expect competition, what do you do? In the old days, you just regulate the cost. You tell them what they can charge. It is enough to make a profit, and that is it.
Without that regulation, how do you get the costs down to something more reasonable?
Mr. NANNES. As a practical matter, the problem you raised is exactly why we think competition is important because when there is only one carrier serving a market, that carrier is unconstrained by competitive forces. Although ultimately, it has to price at a level that is attractive to at least some customers or it will price itself out of the market and be unable to make money.
But the paradigm sometimes comes down to relying upon the market, as ineffective as it may be in certain circumstances, to bring in competitive service or impose some form of regulation. I think as a general proposition reliance on market factors is better, but there may indeed be some circumstances where that doesn't offer a solution that is terribly attractive from a public policy point of view.
Mr. SCOTT. My final question: Are you able to comment on Reverend Jackson's allegation that the airlines colluded in not coming to a new airport, if it were built in Chicago?
Mr. HYDE. The gentleman from Virginia is giving Holy Orders to Jesse Jackson. He is not a reverend, yet. That is his dad. Is he? Oh, I stand corrected. For goodness sakes. Oh, yes, he went to theological school. That is right.
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Mr. SCOTT. Well, I was aiming at ''representative'' anyway.
Mr. HYDE. Please go ahead.
Mr. NANNES. Congressman, I prefer not to comment on it except to say that the Department of Justice has received a copy of a report by intergovernmental authorities in the O'Hare area that contains references to the matter that the Congressman raised. We are taking a look at the report now.
Mr. HYDE. The gentleman from Arkansas, Mr. Hutchinson.
Mr. HUTCHINSON. Thank you, Mr. Chairman.
I want to ask a question of Ms. McFadden. Representative Jackson, in his comments earlier, and I noted that you were in the room listening, made reference to the hub market and a collective agreement by the airlines not to compete in each other's markets.
That appeared to me to be a very strong statement and allegation. Have you reviewed that in your Department and is there any evidence to support any type of agreement or understanding between the airlines not to compete in each other's markets?
Ms. MCFADDEN. Congressman, as Deputy Assistant Attorney General Nannes stated, we have received the same report that Congressman Jackson was referring to. We are reviewing it as well.
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Both the Justice Department testimony and my testimony outlined some of the trends we see happening with respect to hub markets. But in terms of specific allegations about agreements or collusion, we are going to be reviewing the report.
Mr. HUTCHINSON. I think it is broader than the report. The report referred to the Chicago market, didn't it?
Ms. MCFADDEN. That is correct.
Mr. HUTCHINSON. I think the statements were much broader than that in reference to Memphis and Dallas and all the hub areas that the major airlines have as their primary area of dominance and that they do not intrude in the other hubs of the other airlines.
That is the implication I got from the statement. Is there any evidence of that that you are aware of in a broad scope.
Ms. MCFADDEN. Well, under the authority that the Department of Transportation has, and I know we have discussed this subject before, to look into anti-competitive practices, our focus has been on the anti-competition practices that we have seen evidence of concurring new entrant or low-fare carriers.
In terms of broader allegations, I cannot say that we have either had an investigation or done a review. The allegations that Congressman Jackson was talking about in the broader review would probably fall under the antitrust laws.
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Mr. HUTCHINSON. Mr. Nannes, do you want to comment on that? Have you reviewed that or have any evidence of such collective agreements?
Mr. NANNES. Congressman, let me respond to it this way and see if it will perhaps be helpful. We certainly are at a state of affairs today where predominately at hub airports there is a single hub carrier. But it was not always that way. In the years since deregulation there have been a number of instances where more than one carrier has endeavored to establish a hub at the same airport.
In the 1980's in a couple of circumstances, the Department of Transportation approved mergers between carriers that had hubs at the same airport. TWA and Ozark both had hubs at St. Louis. Republic and Northwest both had hubs at Minneapolis.
In other circumstances there have been some pretty bitter battles between hub carriers that have resulted in one carrier finding it uneconomic to remain hubbing in a particular airport.
Mr. HUTCHINSON. So that didn't remain, that there would be two major airlines at one hub?
Mr. NANNES. The circumstance I was thinking about, for example, would be the competition between carriers like Delta and Eastern at Atlanta or American and Braniff at Dallas-Fort Worth or United and Continental at Denver.
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In certain instances what appears to have happened is that two carriers endeavored to ''duke it out'' hubbing at the same airport and one carrier determined ultimately that it was uneconomic for it to remain there as its hub.
Mr. HUTCHINSON. You are just saying competition worked and the result was there was only one carrier dominant in that hub?
Mr. NANNES. I am simply suggesting that there could be explanations for the fact that there are some airports that only have a single hub carrier that are not necessarily suggestive of collusion, although that obviously doesn't rule out the possibility that there might be something of an untoward sort.
One has to be careful about the conclusions one draws from simply the fact.
Mr. HUTCHINSON. Let me ask one final question, Mr. Nannes. You mentioned that you are going to conduct, through the Department of Justice, a thorough and far reaching review of the proposed merger between United and US Airways. Will that thorough and far reaching review include a review of the T–2 joint venture between the airlines and any anti-competitive consequences on pricing as a result of that?
Mr. NANNES. Actually, Congressman, we are taking a look at that T–2 venture and we are doing so independent and prior to the announcement of the United-US Airways transaction. So, that is ongoing and it is independent of the merger review that we will be conducting.
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Mr. HUTCHINSON. Thank you, Mr. Chairman. I yield back.
Mr. HYDE. Thank you. The gentlelady from California, Ms. Lofgren.
Ms. LOFGREN. Thank you, Mr. Chairman. I was going to ask as well about the T–2 venture and its potential impact on its competitors, Expedia, Travelocity and others. I don't know if you are at liberty to actually discuss that matter since at least from press reports I understand your office is looking into the whole thing.
But I am wondering whether the proposed merger would have an impact of further consolidating information at the T–2 site to the detriment of competitors and whether that is part of your review and whether you are at liberty to discuss this at all at this point.
Mr. NANNES. Congresswoman, I am not certain about one factual issue which would be helpful in responding fully to your question. I am under the impression that even under the T–2 venture that it would be open to all carriers who chose to participate by providing fare information to the venture.
If that is the case then it is not immediately obvious to me how a merger between two carriers would increase the information going to the joint venture because it may have it in either event.
Ms. LOFGREN. But, if I may, there are a couple of issues here. One is the merger and relationship, the competitive relationship between the various airlines and one is the implication for other businesses, for example travel agents, Travelocity, Expedia and others who are in the business of providing consumer services to airline passengers and the potential antitrust implications for those businesses.
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Mr. NANNES. For that reason, I think it is useful to understand that we will look at the issues presented by that T–2 venture independent of the review of the merger. But when we do look at a merger, we look at all of the consequences and all of the potential effects throughout the markets.
So, even if we were not looking at T–2 specifically, we would take into account any competitive implications for ticket distribution that would be presented by a merger.
Ms. LOFGREN. Thank you very much.
Mr. HYDE. The gentlelady from Texas.
Ms. JACKSON LEE. Mr. Chairman, I would like to have my turn after the gentlelady from California.
Mr. HYDE. The gentlelady from California has graciously waived her turn. So, you are on.
Ms. JACKSON LEE. Thank you very much. I would be delighted then. I thought that she was waiting to be next.
First, let me thank the chairman for this hearing. I hope that we will have more of these because I think that this is an extremely important area and in light of the focus of the Department of Justice in other areas such as technology, I imagine that it has raised a great deal of concern.
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I am looking at a statement of mine, which I ask the chairman unanimous consent to have this statement in its entirety submitted into the record.
Mr. HYDE. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Thank you Chairman Hyde and Ranking Member Conyers for convening hearings on the ''State of Competition in the Airline Industry.''
These are critical antitrust matters of substantial interest to Americans as we begin the 21st century.
Today, the Committee will consider testimony regarding major antitrust issues that face America. Although it will be helpful to focus on the recent United-US Airways merger, we will also discuss the impact of ''fortress hubs'' and airport capacity. Unavoidably, questions will be raised about whether litigation involving Airline mergers hinders or helps consumers in accessing reasonable, affordable prices.
Congress substantially deregulated the airline industry in 1978. Since that time, the industry has experienced numerous mergers and bankruptcies. Today, the industry is significantly more concentrated than it was before deregulation, and airline prices for businesses travelers who cannot buy in advance are quite high. It is true that competition actually occurs along individual routes between pairs of cities. Along specific routes, the markets are much more concentrated. In most city pairs, one of the major carriers has the dominant market share.
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Some believe we need more regulation. Others adamantly suggest that the problems in the airline industry arise from inadequate enforcement of antitrust laws against industry practices like predatory pricing. I look forward to a candid and informative discussion of this Committee's oversight responsibility to ask whether the antitrust laws are being properly enforced in the industry.
We must also address the issue of fortress hubs and airport capacity. The antitrust concern focuses on the so-called development of ''fortress hubs.'' Most airlines have some form of a hub and spoke system. For example, Delta has a hub in Atlanta, United and American have hubs in Chicago, and US Airways has a hub in Pittsburgh. Clearly, if a traveler wants to fly on one of these airlines, he or she usually has to take a connecting flight through the hub.
The term ''fortress hubs'' typically refers to allegation that major airlines are controlling a dominant share of the flights at a hub airport. By gaining a dominant share of flights, the airline may gain the ability to control the prices of flights from that Hub, particularly for business travelers. Although the evidence of such practices may or may not lead to higher prices for consumers, we must carefully evaluate the entire effect of so-called hub dominance on competition.
Finally, we must review the global antitrust issues that concern the airline industry such as mergers. On May 24, United Airways and US Airways announced that they intended to merge. Because such a merger necessarily affects the hub dominance issue, we shall examine this issue today with the distinguished group of panelists from the industry and government.
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There two are among the six largest airline in the country. United is primarily an east-west coast carrier. U.S. Airways is primary a north-south carrier along the east coast. In recent years, U.S. Airways has had financial troubles because of heavy debt and high labor costs. The largest overlap between the carrier occurs in Washington. Because of that, companies have proposed to spin off part of their Washington operations to a newly created airline, DC Air.
Although I recognize we all must exercise some restraint in commenting on an ongoing merger, the United-US Airways merger raises interesting policy issues regarding pricing that Americans need to know. If the government decides to investigate the effect of the merger, consumers have a right to hear the policy issues behind the likelihood that such a transaction would exacerbate the hub dominance problem.
We must keep on open mind as we examine these issues. Other acquisitions in the industry have raised similar concerns, but the effect on consumers has not necessarily been clearly understood. For these reasons, I look forward to the testimony on this matter before any possible action is taken.
Thank you.
Ms. JACKSON LEE. I will just take from it a notation that the industry today is significantly more concentrated than it was before deregulation. Airline prices for business travelers and others, in fact, are extremely high for those who cannot buy in advance.
I remember dealing with constituents who had a death in the family and the enormous hurdle that they had to overcome their death travel benefits. But the horror that they experienced in having to get an immediate travel opportunity.
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There is a debate about this because there is the proposal for more regulation and others say that it is part of the market.
Forgive me for missing your testimony, being detained on the Floor, but I would just like to explore that question with both of you as it relates to how do we respond to the public about the efforts of dereg and what happened and that we have what seems to be less competition in light of-and I think this is part of all industry-in light of the fact that we are seeing the opposite side of the spectrum in these huge mergers.
Do you believe that short of your responsibilities with respect to antitrust, can the market work these problems out?
Ms. MCFADDEN. I think Congresswoman that you have put your finger on the exact tension that we see. We have seen a lot of benefits from deregulation in terms of the industry and at the same time we have seen that the Department of Transportation has called them ''pockets of pain'' throughout the country.
We have seen areas where we have definitely seen decreased competition. That is why we have been trying to be so vigilant to be sure that there is a level playing field, not to protect individual competitors, but to protect competition.
That is also why we focused so much on ensuring that new entrant carriers, low fare carriers, have a reasonable chance, a fair chance, to be able to compete.
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But it is a difficult problem. We have said, and the analysis that the Department of Transportation has done has shown that there really are benefits of deregulation that should not be lost in the picture, but definitely we need to focus on the problems that we have seen in increasing consolidation and lack of competition in certain areas and the problems that have been identified by this hearing in terms of hub markets.
Mr. NANNES. Congresswoman, I would just add one factor to the mix. I think Ms. McFadden addressed it very well. There are periods in our Nation's history where we have gone back and forth between regulation and reliance on free markets.
I think generally the experience of our country is that we do better with less regulation, relying on the marketplace to offer consumers alternative choices. But essential in that calculus is that there is public policy expression through appropriate antitrust enforcement. Because to deregulate without antitrust is to really leave the field unoccupied and to put consumers at considerable risk.
It seems to me that it is not insignificant to observe that since the Department of Justice became responsible for airline mergers in 1988, but for the Continental-Northwest transaction, there has been no major transaction proposed between two major carriers until recently.
Even with respect to the Continental-Northwest transaction, that is a matter that the Department is litigating in court.
I think it is also important to recognize that the enforcement action that the Antitrust Division filed with respect to American Airlines in Dallas-Fort Worth is an important statement about what we believe with respect to entry conditions in the airline industry.
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So, I think it is important that people understand that antitrust enforcement is very necessary to ensure the benefits of competition and, but for appropriate antitrust enforcement, with respect to regulation it could rise again.
Ms. JACKSON LEE. Let me thank you for those responses. Hopefully, the nuts and bolts of this hearing is one that we may have others or another, and that there be no final conclusions, and I certainly can't speak for my colleagues, but that we look to the mix.
I know there are representatives of the airline industry who probably look in horror at any potential resulting regulatory authority but I believe that it is crucial that we deal with this from the perspective of a mix. How do we fix the problems?
I note in particular, and I would like you to comment on it, the fortress hubs or the hub concept. There are many important values to having a hub. It certainly is valuable to those of us who live in hub cities.
We covet that hub position because it gives you added access. So, what does that do to others that are not, and I compare it to the idea of local transportation where neighborhoods come to me and say, ''Congresswoman, I can't get from one block to the next on the local transit system. I can get out of my neighborhood to downtown, but I can't get around in my neighborhood.''
You have that impact where local travelers on airlines can't get around their State or in their region. How do you intend or portend with a study to look at those issues and to fix that as an area of concern along with the costs? Will you be looking at an overview of all the broken parts of it and then begin to fix it piece by piece?
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Mr. NANNES. Congresswoman, we can look at those issues that are presented to us in the context of any particular transaction. We are, at the Department of Justice, a law enforcement agency and don't have general study authority.
Ms. JACKSON LEE. However, if it impacts on competition, I assume that it would come under your——
Mr. NANNES. If it impacts on competition either with respect to a particular transaction or the area that is of increasing interest——
Mr. HYDE. The gentlelady's time has expired.
Ms. JACKSON LEE. Could he finish his sentence? I would appreciate it, Mr. Chairman.
Mr. HYDE. All right, surely.
Mr. NANNES. I was simply going to say that we do take a look at those issues, even apart from mergers and acquisitions with respect to trying to set up entry conditions so that low-cost carriers can enter service where they think it is economic to do so without drawing a predatory response.
Ms. JACKSON LEE. Thank you very much. I think the exploration of this issue is important. Thank you.
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Mr. HYDE. The gentleman from Michigan, Mr. Conyers.
Mr. CONYERS. Thank you so much. I wanted to remind our witnesses that there is a little low-cost competitor airline called Pro-Air in Detroit which is not a financial giant, obviously, but they are trying to get into, probably, Reagan National Airport or somewhere.
I was just wondering how those kind of day-to-day struggles, they think they are being squeezed, I have no way of knowing myself, what are the routes of access and how do you review those kinds of grievances?
Ms. MCFADDEN. Congressman, we have had experience in a number of different ways with new entrant, low-fare carriers in terms of the problems that they face as to allegations of predatory-type behavior both the Department of Justice and the Department of Transportation have taken action to try to address that problem, either with respect to specific cases or specific investigations and what we are doing in terms of broader policy.
With respect to trying to facilitate at airports, gates, and that kind of thing, we also have had a role in trying to work with airports to make sure that new entrants have some kind of reasonable opportunity to compete at those airports.
We issued a study and a guide to airports in terms of their obligation to make sure that they give reasonable accommodation to all carriers and not just the ''big guys.'' We have worked with individual airlines on their individual problems.
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So, we have tried to do a number of things to level the playing field.
Mr. CONYERS. I am glad to hear that. I think it is important that those kinds of considerations, even though they are a garden variety, day-to-day, they are still pretty important in terms of this low-cost competitor actually surviving in the kind of market that we find existing today.
Thank you very much.
Mr. HYDE. Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman.
Are there different things your two agencies look at pursuant to the underlying laws that govern your review of an airline merger like this United-US Airways proposed merger? If there are different issues, what are the differences? Can either one of the agencies stop the merger? Does the law allow you to look at the impact on employees? Do you have discretion to do that? Do you have a process for looking at the impact on employees in considering this merger?
Mr. NANNES. Congressman, until the 1980's the Department of Transportation or its predecessor was the agency that was responsible for review of air carrier mergers and acquisitions.
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Subsequent to that time the authority under the old Federal Aviation Act sunset. That responsibility reverted, then, to the Justice Department. So, we kind of have the front line responsibility for reviewing mergers and acquisitions in the airline industry.
Not to speak for Ms. McFadden, but the Department of Transportation has both independent authority with respect to certain issues and a role to play in providing us with information with respect to our review. But transactions between major carriers are likely to involve carriers that have some international route authority. That international authority cannot be transferred without Department of Transportation review.
So, we work with one another in seeing to it that we have the benefit of what the other can bring to the table with respect to the particular issues that rest predominantly with one of the agencies rather than the other.
Ordinarily, in the context of our antitrust review we have a competition mission. We look at competition issues, rather than issues that relate to other policies or other constituencies. So, as a general matter we look at competition rather than the other kinds of issues that you referred to.
Ms. MCFADDEN. Congressman, because our review of the transfer of international routes is done under a broader standard, it is done under the public interest standard and not just a pure antitrust standard, we have interpreted that to include allowing us and giving us the latitude to look at the impact on an employee. We have done that in some previous route transfers. I think we would probably do the same thing with respect to this proposed merger.
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Mr. HYDE. The gentleman from North Carolina, Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
I will try to be brief because I know the chairman is going to try to get to the next panel.
I just have one question to Mr. Nannes. Most of the public comments up to this point from the airline industry or the airline executives at United and US Airways suggest that they believe that this proposed merger would not violate antitrust laws because there is a minimum of overlap.
That is kind of a, you take a look at what is existing in place and you look retroactively at what has existed in the past.
My question is whether there is anything in existing antitrust law or existing case law that interprets antitrust law that allows the Department of Justice to take a more prospective look at the potential impact that this could have by the elimination of a potential competitor.
Is there anything in existing law or precedent that allows that kind of prospective look into the future?
Mr. NANNES. Congressman, let me answer the question, if I can, more generally, particularly in reference to the airline industry, so I am not commenting on any particular transaction. But the answer to your question is most assuredly yes.
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Under section 7 of our Clayton Act, the merger inquiry that we undertake is forward-looking. We are trying to predict the competitive consequences of a specific transaction that is under review.
Mr. WATT. But are you predicting it based on a look at the existing state of affairs, or are you predicting this impact based on the possibility that these two merging parties could in the future be potential competitors and generate more competition?
Mr. NANNES. Right. We try to make a predictive judgment and there have been cases in lower courts and in the U.S. Supreme Court that recognize that we can take into account potential competition and, in appropriate circumstances, it is a basis for halting the transaction if there is a concern that the acquisition by one entity of another would eliminate potential competition that the acquired entity would have provided in the marketplace, but for the acquisition.
There are a number of criteria for application of that doctrine, but it is indeed recognized in court precedent and it is something that we take into account when we are reviewing a proposed merger or acquisition.
Mr. WATT. Thank you, Mr. Chairman.
Mr. HYDE. Thank you. I have asked Mr. Frank and he has been generous enough to say he has no questions. Mr. Delahunt, somewhat less forthright, says that he has no questions and looks forward to the day when Mr. Conyers is chairman and will give him plenty of time.
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Mr. FRANK. Well, Mr. Chairman, I certainly would want to be in on that one, too.
Mr. HYDE. You are too late.
I just have a couple of questions, if I may. Ms. McFadden and Mr. Galis, Congressman Jackson and I have recently asked the General Accounting Office for an audit of the use of the Passenger Facility Charge monies and other Federal monies at O'Hare Airport.
Will the Department of Transportation cooperate fully with the General Accounting Office in that audit?
Ms. MCFADDEN. Mr. Chairman, absolutely, and in fact I think Mr. Galis had an introductory interview with General Accounting Office and made that pledge to them just yesterday.
Mr. HYDE. I probably should state that I have been very unhappy with that charge. I voted for it back in the days when I was more credulous and I thought that it was going to go for a third airport even though it was kind of a fantasy to have it in Chicago.
But nonetheless, anything to take the pressure off of O'Hare, and so I voted for it. Of course, that is the last thing it would be used for now. So, I think we ought to look at it and see what it was for and what the law says and what it is being used for.
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Ms. McFadden, in 1998 the Department of Transportation announced proposed enforcement guidelines on predatory pricing, but they still haven't been finalized. I am wondering if it is unrealistic to expect they ever will be?
Ms. MCFADDEN. Mr. Chairman, I wouldn't characterize it as being unrealistic at all. The Department received over 5,000 comments on those proposed guidelines. In addition the Transportation Research Board put forth a report that addressed in part those guidelines and we have been working on revising those guidelines to try to address the legitimate concerns that were raised about the proposal.
I wouldn't want to preempt the Secretary in terms of his decision about any final decision, but I don't think I would term it unrealistic at all to suggest that we will be finalizing those guidelines.
Mr. HYDE. Very good.
Mr. Galis, what is your position on the capacity of O'Hare? Is it full or isn't it? What level of delay are you willing to accept in making that judgment?
Mr. GALIS. Mr. Chairman, I believe presently the amount of delay that is experienced at O'Hare, based upon, I think, a 1998 study, indicates that they are incurring about 5.8 minutes of delay per operation, which we believe is acceptable. It is kind of on the threshold of being congestion.
But we feel that four minutes of average delay is acceptable and that anything less than six minutes is also acceptable, although obviously it is approaching the threshold of congestion.
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We believe that the annual service volume that has been at the airport for quite some time continues to be at the same level. With the PFC projects that we have funded there and the AIP projects that we have funded there, we don't believe that we have detracted from the levels of capacity at the airport.
Mr. HYDE. What have you funded with the PFC, what aids to greater service, other than improving the retail shops?
Mr. GALIS. Well, basically we have funded rehabilitation projects, taxiway projects and projects that basically have been rehabilitative, rather than adding any additional capacity to the airport.
We don't believe we have changed the condition of the airport to add any capacity that would allow additional operations.
Mr. HYDE. Is O'Hare at capacity or not?
Mr. GALIS. I don't believe so, no sir.
Mr. HYDE. You think we can take some more aircraft? How many a year go in and out of O'Hare?
Mr. GALIS. I am not sure, sir.
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Mr. HYDE. I have heard it is 980,000 in a year.
Mr. GALIS. That is about right.
Mr. HYDE. We claim the busiest airport in the world. I know Atlanta claims that, too. But you think there is more room? You have no idea how many more flights we can shoe-horn into O'Hare?
Mr. GALIS. No sir, I don't. But I believe there is room for additional capacity, yes sir.
Mr. HYDE. Mr. Jackson and I and Senator Fitzgerald sent a report over to the Justice Department called ''If You Build It, They Won't Come.'' It outlines our approach to the problem that we think has resulted in dividing up the country among the various big seven and giving them dominance in their own selected places and all to the detriment of the consumer.
The question answers itself, but I must ask it, you will review that with great care, will you not, and if there is any action called upon, you will consider that and you will keep us posted?
Mr. GALIS. Yes, Mr. Chairman. We are actually looking at that report right now.
Mr. HYDE. Very good. All right.
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Mr. Delahunt, do you want to ask something?
Mr. DELAHUNT. No, I don't, Mr. Chairman. But Representative Slaughter has asked me to submit a letter from the machinist members of the United Airlines along with some almost 1400 signatures indicating their opposition to the proposed merger between United Airlines and US Airways.
I ask permission to submit this petition.
Mr. HYDE. Without objection, it will be made a part of the record.
[The information referred to follows:]
TO ALL IT MAY CONCERN:
The proposed merger between United Airlines and US Airways has created a lot of frustration for the International Association of Machinist/Employee owners of United Airlines. A large portion of the IAM members are concerned by appointed Board Member, John Peterpaul, voted for the merger and has not had the common courtesy to inform the membership what attracted him to vote for the merger. We have serious doubts that he is representing our best interests, some feel he has placed his own interests in the forefront of this endeavor.
Mr. Peterpaul was not elected by the members of the IAM and is obviously out of touch with the UAL Employee/Owners. This membership feels the IAM Leadership, who appointed him to the Board of Directors of United Airlines has failed to guide and direct Mr. Peterpaul in his decision. The Mechanics at the Indianapolis Maintenance Center have collected over 1350 signatures that oppose the merger as it has been explained and feel that mechanics at UAL have sacrificed more than our fair share in the past 6 years of the ESOP. We believe that the proposed transaction would not have been possible without the sacrifices given by the so called ''Employee Owners'', who genuinely feel we have no say in the merger or any of the decisions in the past 6 years.
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All UAL Employees throughout the system that we have spoken with feel that we are buying US Airways and do not feel that a ''Standard dovetail'' of seniority should apply due to ESOP sacrifices and our loyalty to this Company. The Pilots have already voiced their concerns about seniority and the Mechanics are just as concerned. The IAM has failed to inform the media of the total dissatisfaction and turmoil created since the merger announcement. We applaud Mr. Dubinsky's decision to oppose the merger and question seniority issues.
Sincerely,
| The Machinist Members of United Airlines |
IAM EMPLOYEES PETITION
We the employee owners and members of the International Association of Machinists and Aerospace Workers (IAM) at United Airlines (UAL), having signed this petition believe UAL has taken steps in the past weeks that are detrimental to our investments in the Company. We also believe that our IAM appointed UAL board representative, Mr. John Peterpaul, is failing to represent our best interests!!! Mr. John Peterpaul voted in favor of the UAL / US Airways merger/acquisition and this action shows total disregard for our interests in UAL. Our main interests are: 1) Seniority, 2) Employee Stock Ownership Program, 3) eliminating ''B'' scale pay progressions. We believe that all of these investments contributed to the enormous profits UAL has enjoyed and that the MERGER/ACQUISITION WILL DESTROY EVERYTHING THAT ALL UAL EMPLOYEE'S HAVE WORKED SO HARD TO ACCOMPLISH!
We want the IAMAW to take the following actions:
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1) To remove Mr. John Peterpaul immediately from the board of directors.
2) We demand the right to vote on our new IAM board member and future members.
3) In the event that UAL pilots form a financial agreement to consummate this merger/acquisition, we want the IAM to acquire the same or better agreement for the IAM membership.
4) We want the IAM and UAL management to add language to the merger/acquisition agreement that will protect our investment issues prior to the merger/acquisition
[NOTE: The 1400 signatures were too lengthy to reprint here but are on file with the House Judiciary Committee.]
Mr. DELAHUNT. Mr. Chairman, I wanted to bring to your attention that there is some good news coming out of Chicago. There is a report today in the Boston Globe that the Red Soxs have an eye on Sammy Sosa. So, I just thought I would bring it up.
Mr. HYDE. I have absolutely no comment to make on that. I want to thank you for a very helpful testimony. Thank you very much.
Now, our third panel consists of eight public and private witnesses who represent a variety of perspectives on airline competition issues.
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I want to again reiterate that we invited the major airlines and they chose not to come for various reasons. But adequate representation of their side of this case will be at the next hearing on the 23rd of this month. So, we will hear from the airlines on the 23rd.
First, we have my good friend, Mr. Joseph Karaganis, a partner in the law firm of Karaganis and White. He is a graduate of the University of Chicago Law School. He then clerked for U.S. District Judge Hubert Will. He has been in private practice since 1968 and has extensive expertise in environmental and aviation matters. He appears here today on behalf of the Suburban O'Hare Commission.
Next we have Professor Paul Dempsey, a professor of law and director of the Transportation Law Program at the University of Denver. He is a graduate of the University of Georgia and its law school and has graduate degrees from the George Washington University Law School and McGill University in Canada. Professor Dempsey is widely recognized as an expert in aviation law, an area in which he has written and spoken widely. He is also vice chairman and director of Frontier Airlines.
Next we have another of my good friends, Mr. John Geils, the Village President of Bensenville, Illinois. He is the owner of Geils Funeral Home, a family-owned business which has served the communities of Bensenville and Wood Dale, where I lived, for over 100 years. We are speaking of his family business. He has served as Village President since 1985. He is chairman of the Suburban O'Hare Commission. He has a long and distinguished career in which he has also served in leadership positions in the Illinois Municipal League and the DaPage County Mayors and Managers Conference.
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Next, we have Mr. Mike Gordon. I was hopeful that Ms. Waters would do the honors, but apparently, she was called away, so I will do that. Mr. Gordon is the mayor of El Segundo, California. He is a partner in his own polling and fund-raising firm. Before starting that business he served on the staff of the California State Assembly as executive director of the California Democratic Party. He was first elected to the El Segundo City Council in 1996 and began his two-year term as mayor in April of 1998. In that position, he has been very active in airline issues.
Next, we are very pleased to have Professor Alfred Kahn, the Robert Julius Thorne Professor of Political Economy, and Emeritus at Cornell University. He has a bachelor's and masters degrees from New York University and a Ph.D. from Yale. In his distinguished career he has been the chairman of the Department of Economic at Cornell, chairman of the New York Public Service Commission, chairman of the Civil Aeronautics Board, and chairman of the President's Council on Wage and Price Stability. When he served as chairman of the Civil Aeronautics Board in the late 1970's he was instrumental in the passage of airline deregulation legislation. For that accomplishment he is rightfully known as the father of airline deregulation.
Next we have Mr. Joe Leonard, chairman and chief executive officer of AirTran Airways. He is a graduate of Auburn University. He is a 30-year veteran of the airline industry, serving as an executive with Boeing, Northwest Airlines, American Airlines, Eastern Airlines, and the Aerospace Division of Allied Signal. He took his current position in January of 1999.
Next we have Ms. Marianne McInerney, the executive director of the National Business Travel Association. She is a graduate of the University of Dayton. Before taking her current job she served in the Bush administration at the Peace Corps and the Federal Housing Finance Board. She also worked at World Vision and the United Way of America.
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Finally, we have Mr. Jim Roddey, the chief executive of Allegheny County, Pennsylvania. Mr. Roddey is a graduate of Texas Christian University. After a tour with the Marine Corps, he has had a long career in business serving with Business Records Management, Star Cable Associates, Production Masters, Inc., Wexford Health Sources, and Allegheny Media. He has been active in politics over the years and was elected Allegheny County's first chief executive in 1999.
This is a very distinguished panel. You have been very patient waiting for the other testimony to be completed. I would prayerfully suggest you try to limit your statements to five minutes. We won't have any draconian penalties if you don't, but we would like to get through with everybody and get a chance for questions.
We have a problem with our lighting system, so it may be green when it should be red. We will admonish you if you go over too far.
In any event, Mr. Karaganis.
STATEMENT OF JOE KARAGANIS, KARAGANIS & WHITE
Mr. KARAGANIS. Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee, thank you for the opportunity to present the views of the Suburban O'Hare Commission to the Judiciary Committee on the problem of fortress hub monopolies in the airline industry.
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The Suburban O'Hare Commission is the author of a report, and I want to clarify it for the record, that covers not only the Chicago area as a case study, but covers the national fortress hub system and makes the assertion that the fortress hub system has geographically carved up the Nation into geographic markets for the big seven airlines.
The concern I had in listening to the testimony today, and I also listened on C-Span last night to the testimony of two major airline executives who were urging the merger of US Airways and United. I felt as though I was going through an exercise of Alice in Wonderland.
Let me give you some examples of that. I won't go over. My prepared testimony is in the record and I won't go over the report on ''If You Build It, We Won't Come'' because I think you ought to examine that and its allegations.
There is no doubt, and I don't think there is any question as to the fact that the big seven have carved up the Nation into fortress hubs, nor is there any doubt, if anybody has any debate about it, that as a result of those fortress hubs certain categories of travelers, very significant categories of travelers, are paying billions of dollars a year in excess fares.
Now, the question was asked by Mr. Hutchinson, and I want to address that: What evidence do you have that these folks are actually colluding? Number one, we have the evidence in spades in the Chicago market. We have their letter that says they are concluding, ''we do not want new competition in the Chicago market.''
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Number two, I happened to have served as a special prosecutor in DuPage County, Illinois. What I have is a batch of evidence that we have recently filed in DuPage County in the Circuit Court, which is under seal at the request of the airlines, that graphically displays the anti-competitive efforts by United Airlines to keep competition out of the Chicago market, chapter and verse, memo quotations, you name it.
I would ask the committee to request from the DuPage County Circuit Court a release of this sealed information so that the Judiciary Committee and the Department of Justice can consider it.
Number three, I hope the committee understands, and when I hear the Department of Justice and the Department of Transportation say, oh, they are looking at these allegations, I was here two years ago. I made the same points that we are making now two years ago. In two years we haven't heard word one from the Department of Justice. In two years we haven't heard word one from the Department of Transportation.
The Department of Transportation and the Department of Justice, to their credit, are attacking one of the symptoms of this problem, and that is the predatory pricing.
If there is plenty of capacity, a new entrant comes in and the big boys try and squeeze them out. We know that situation. The problem exists, and to the credit of the Department of Justice, they are trying to address it.
But the Department of Transportation and the Department of Justice are totally ignoring what we refer to as ''the elephant in the corner.'' They are totally ignoring the fact that the big seven has carved up the Nation.
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They are ignoring the relationship between antitrust law enforcement and another major segment of the Federal policy that Congressman Jackson was alluding to.
At the same time as we have the law enforcement tool of the antitrust laws, we have the funding tool of the Federal Aviation Program. The Department of Transportation, as Congressman Jackson has said, is on the one hand preventing new competition by deterring the construction of new airports, particularly the example we give is in south suburban Chicago where they have sat on new airport development for years.
At the same time, there is a current, proposed project, and you can pick your number, the project values are quoted at somewhere between $6 and $10 billion to expand O'Hare and expand the United and American monopoly at O'Hare.
I understand you are going to have the airlines in here next week. Ask them who gets the lion's share, the central control for the alliances with respect to the new development at O'Hare. Two names: American and United. The so-called spoke airlines are going to be off in the distance.
What we have been saying and what the Department of Transportation appears not to recognize is that, we agree, yes, there are costs involved in hub and spoke competition, but, question one: Is there a market that is attractive, pick your town, Atlanta, Chicago, is there a market that is attractive to compete? Yes, there is. They are not competing.
Congressman Hyde asked a question of the Department of Transportation and that is: Is O'Hare out of capacity. Anyone who goes to O'Hare in the last three years knows that we no longer refer to Fortress O'Hare as Fortress O'Hare. We refer to it as Camp O'Hare. It is a camp because hundreds of cots are put out every night because there are cancellations all across the country. People are jammed there.
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I was there yesterday. We waited six hours to get on a scheduled flight. Why? Because we are out of capacity. When people give you numbers, let us be specific. Let us back it up.
I just heard the Department of Transportation tell you that the capacity of an airport is measured by a delay level of four minutes, but we might let it go up to six minutes in certain circumstances.
In 1995, the Department of Transportation gave you a report that said in 1994, delays at O'Hare were 11 minutes per operation, double the acceptable level. And they are higher today. You don't need a computer to figure out that O'Hare is at capacity. So with the growth that is projected, we don't need to talk about a new airport 20 years from now. We need to talk about a new airport ten years ago and one that ought to be under construction today. Thank you.
Mr. HYDE. Thank you, Mr. Karaganis.
[The prepared statement of Mr. Karaganis follows:]
PREPARED STATEMENT OF JOE KARAGANIS, KARAGANIS & WHITE
Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. Thank you for the opportunity to present the views of the Suburban O'Hare Commission to the Judiciary Committee on the problem of Fortress Hub monopoly in the airline industry. My remarks here today are not directed at the proposed United/US Air merger and the likely domino mergers of American, Northwest, Delta and others in a spasm of mega-mergers likely to follow. That those proposed and prospective mergers should be rejected as monopolistic should be self-evident.
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Instead I ask this Committee to focus on the situation in the Fortress Hub world as we know it today. I have just finished participating in a study of the Fortress Hub system on a national scale—with metropolitan Chicago as a case study—to determine whether the existing Fortress Hub violates federal antitrust laws. The results of that study are detailed in a report by the Suburban O'Hare Commission (SOC) entitled If You Build It, We Won't Come: The Collective Refusal Of The Major Airlines To Compete In The Chicago Air Travel Market. I believe a copy of that report has been made available to members of the Committee and I will not repeat the specific details here.
I would like to summarize the findings and recommendations of the SOC study. SOC's major findings include:
There is de facto arrangement among the ''Big Seven'' airlines—Northwest, United, American, Delta, US Air, Continental and Trans World—not to compete in each others hub market—the Fortress Hub system.
Fortress Hub Monopolies are costing American air travelers billions of dollars annually in monopoly-induced higher fares, especially the fares charged to time-sensitive business travelers. The cost of Fortress O'Hare monopoly to Chicago area travelers is several hundred million dollars per year.
The Big Seven's geographic market allocation violates the nation's antitrust laws—based on clear and repeated Supreme Court decisions which have condemned arrangements to carve up geographic markets horizontally..3
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In Chicago, the clear violation of the antitrust law is demonstrated by the abandonment by major airlines of meaningful competition with United and American at O'Hare and the announcement that they would not use a South Suburban Airport if built.
Chicago and its officials are not immune from antitrust law liability for helping the major airlines avoid competing with the United/American cartel at O'Hare.
Federal taxpayer funds may have been used to suppress competition and violate antitrust laws in the Chicago market.
The Clinton administration has not only looked the other way in not bringing antitrust enforcement action to break up the Fortress Hub system, but has affirmatively assisted Chicago and United and American in blocking significant new competition from entering the region by blocking development of a new regional airport in metro Chicago.
Billions in federal taxpayer subsidies are being used to expand United and American's Fortress Hub monopoly at O'Hare. The federal DOT is ignoring the antitrust problem in authorizing and distributing federal subsidy dollars for airport construction.
The lifting of slot limitations will not allow significant competition to enter the Chicago market. Instead—as predicted by Senator Fitzgerald and Congressman Hyde and Congressman Jackson—the lifting of the slots will be accompanied by massive increases in delays and by United and American simply expanding their monopoly control at the airport.
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Construction of a new runway for ''delay reduction'' is simply a subterfuge to expand the size of United and American's Fortress Hub operation at O'Hare. Building a new runway at O'Hare will make the monopoly problem—and resultant air fare overcharges—even worse. Moreover, it will doom the economic viability of the new South Suburban Airport.
Based on these findings, SOC recommends:
An investigation by the U.S. Attorney General and U.S. Attorney for Northern Illinois into activities by the airlines, the city of Chicago, consultants and other third parties which have been used to protect and expand the Fortress Hub system nationally—and in particular to prevent new airport development in the metro Chicago region.
A civil action by the Attorney General and U.S. Attorney here to break up the Fortress Hub system and to compel the major airlines to stop their refusal to compete in metro Chicago.
Action by state Attorneys General to recover treble damages for fliers who were charged billions of dollars in excess fares as a result of the Fortress Hub system..4
A Government Accounting Office and Department of Justice audit of federal taxpayer funds or subsidies that abetted the antitrust violations, particularly efforts to kill the South Suburban Airport.
Governor Ryan should hold fast to his promise not to permit any additional runways at O'Hare. To allow additional runways would simply enhance and expand the monopoly power of Fortress O'Hare and doom the opportunity to bring new competition into the region by the South Suburban Airport.
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The withholding of U.S. Transportation Department of any more federal funds for expansion of the United and American duopoly at Fortress O'Hare and a reformulation of federal policy for federal taxpayer subsidies for airport development to insure expansion of competition.
A clear statement by Republican and Democratic candidates for President to state their positions on Fortress Hubs, especially O'Hare and the role of the federal government in either breaking up Fortress O'Hare or building new capacity for new competition at the South Suburban Airport.
Subsequent to the issuance of the SOC report, there were two noteworthy events that merit the Committee's attention. First, the venerable Chicago Tribune openly acknowledged what we have all known: The major airlines have colluded to establish a monopolistic Fortress Hub system and that this Fortress Hub monopoly system imposes huge overcharges on the business traveler.
Second, the same Chicago Tribune recently published a major article detailing the deceptions which have taken place in the joint Chicago/airline campaign to defeat a new airport and to prevent new competition from entering the region.
I ask that both articles—along with two related articles from the Southtown Economist—be placed in the record.
Finally, let me make a few unsolicited suggestions that may assist the Committee and the Department of Justice in their efforts in this matter:
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Retain a lawyer of David Boise's talent and skill to head up the investigation and any enforcement action. The same talent, energy, and creativity which the Department of.Justice directed at the Microsoft matter should be directed at the Fortress Hub monopoly.
Subpoena the records of the Air Transport Association on these matters. The ATA has apparently been a major vehicle for developing and enforcing the Fortress Hub system and preventing new airport development.
Subpoena the records of the airlines on these matters. Do it now and soon to avoid destruction of documentary evidence.
67330a.eps
67330b.eps
67330c.eps
67330d.eps
Mr. HYDE. Professor Dempsey?
STATEMENT OF PAUL DEMPSEY, UNIVERSITY OF DENVER COLLEGE OF LAW
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Mr. DEMPSEY. Chairman Hyde and Representative Conyers, distinguished Congressmen, my name is Paul Dempsey. I am professor of law at the University of Denver. I am also on the Board of Directors of Frontier Airlines. But I am not here to represent Frontier today. I am speaking my own views.
Yesterday I saw the chairman of United Airlines indicate that the merger, the acquisition of US Airways, would be in the consumer's best interest. I want to point out what you all know. The major airlines have made every effort possible to thwart the competition goals of deregulation since the Airline Deregulation Act was promulgated in 1978. They have done so in a multitude of ways.
They have hoarded landing slots, sub-leasing them to friendly carriers, or in the United Airlines proposed case, selling them to a friendly carrier. These are the same airlines that argue that slot restrictions at Heathrow and at Narita ought to be swept aside to provide them with competitive access.
They have entered into long-term exclusive gate agreements at airports to block new entry or to make it prohibitively expensive. They have entered into majority in interest clauses at airports so that even airports that want to build new infrastructure to accommodate new entrants are hamstrung from doing so.
They have entered into exclusive agreements with regional feeder carriers prohibiting them from connecting with competitors, thereby monopolizing the feeder traffic at major hub airports.
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They have bought travel agents with commission overrides to monopolize the city pairs radiating from hubs. They have engaged in predatory capacity dumping and below-cost pricing when new entrant airlines have dared to enter markets to provide consumer relief. They have used their political power to block the ability of governments to build new airports.
Every credible study of hub concentration shows that fares are considerably higher in concentrated hubs than they are in competitive markets. According to the General Accounting Office, they are at least 27 percent higher. According to the DOT, they are 19 percent higher. The ability to charge monopoly prices at hub airports offsets the inefficiencies of hub operations in terms of wasteful labor, equipment and infrastructure utilization and fuel consumption. It is telling that the only airline that has consistently been profitable and has the lowest cost does not hub.
United Airlines has said, you must look at our merger in isolation. Just look at the city pairs that overlap, that is all you should look at.
That is precisely what the Interstate Commerce Commission and the Surface Transportation Board did in the railroad industry, the consequence of which is that although we had about 20 railroads prior to deregulation, we are down to essentially four today.
If you look at them in the aggregate, which I argue you should, and you look at United Airlines' acquisition of US Airways, America's proposed acquisition of either Delta or Northwest, and Northwest's proposed acquisition of Continental, if all of that happens, the four largest airlines in the United States will control 87 percent of the traffic.
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That is higher levels of concentration than existed in 1938 when the airline industry was originally regulated, when the market share of the big four was 82 percent, or in 1978, when the airline industry was deregulated, when the market share of the big four was only 59 percent.
What can you do? What should you do? I would respectively recommend you consider six possibilities. First, mandate a nine-month moratorium on airline mergers until the Department of Transportation and the General Accounting Office have had ample opportunity to evaluate and to report to Congress on the impact to consumers.
Second, require the Department of Transportation to issue its final policy on unfair competitive practices and revise computer reservation system regulation within 90 days. Those things have been pending now for more than 2 years.
Third, eliminate the ability of airlines to buy or sell public resources such as landing slots in international routes.
Fourth, declare travel agent commission overrides and airport majority in interest clauses per se violations of the Sherman Act.
Fifth, revoke the antitrust immunity conferred upon airlines to fix prices and ration capacity in international markets.
Finally, if Congress can mandate non-discriminatory connections between telecommunications companies, it can do so between transportation companies as well. In so doing, competitors will be better able to provide relief to consumers in small and medium-sized communities throughout the Nation.
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Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Professor.
[The prepared statement of Mr. Dempsey follows:]
PREPARED STATEMENT OF PAUL DEMPSEY, UNIVERSITY OF DENVER COLLEGE OF LAW
INTRODUCTION
Rationing scarce resources has never been an easy task. In a market system, resources are allocated to their highest valued use based upon the law of supply and demand—consumers bid for goods they want through the pricing system; producers promptly provide them to those bidding highest.(see footnote 1) Public resources, particularly infrastructure built by government for public use, are typically rationed by government.
At many congested airports, where capacity arguably exceeds demand, governments have divided runway utilization into time-defined segments known as slots. A slot is the right to take off or land an aircraft at an airport—in effect, a ''reservation'' for takeoffs and landings.(see footnote 2) By the end of the 1990s, more than 130 airports around the world were slot controlled.(see footnote 3) In the United States, four major U.S. airports are slot-constrained by federal decree—Chicago O'Hare, Washington National, and New York LaGuardia and Kennedy. A number of others (such as John Wayne Orange County Airport, California) are slot controlled by local airport authorities, usually for purposes of reducing noise.
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Landing slots are similar to gates in the sense that both carry with them the economic equivalent of an operating certificate. Without a slot and a gate, an airline cannot operate. Where there is a finite number of such gates or slots, their value lies, in part, in their ability to create, on the one hand, or circumscribe, on the other, competition.(see footnote 4) Therein lies the rub. Deregulation was supposed to eliminate operating certificates as barriers to entry.(see footnote 5) Yet slots and gates are today's equivalent of operating certificates. The ability to hoard landing slots and gates translates into the opportunity to erect barriers to entry and monopolize markets. In the American Airlines-British Airways alliance proceeding before DOT, the Justice Department noted:
Moreover, where service in a market is constrained by slot availability, a hub carrier with access to a large pool of slots has even greater ability to respond to entry in [an anticompetitive] way because the entrant will be unable to add capacity on its own.
American's president has referred to such strategic responses as ''predatory scheduling.'' The net result of ''predatory scheduling'' is to discourage new entry in the first place, or to render it unprofitable where it occurs.(see footnote 6)
Market monopolization (and the consumer exploitation thereby enabled) has been the Achilles Heel of airline deregulation.(see footnote 7) The U.S. General Accounting Office [GAO] has observed:
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Barriers to entry persist in the airline industry. Access to airports continues to be impeded by (1) federal limits on takeoff and landing slots at the major airports in Chicago, New York and Washington; (2) long-term, exclusive-use gate leases; and (3) ''perimeter rules'' prohibiting flights at New York's LaGuardia and Washington's National airports that exceed a certain distance. While these operating barriers can potentially affect any airline, they primarily affect airlines that were started after deregulation. The newer airlines are affected the most because the established carriers hold nearly all of the slots, are usually the beneficiaries of exclusive-use gate leases, and have their hubs located close enough to LaGuardia and National that their operations are not limited by perimeter rules.(see footnote 8)
Landing slot restrictions were originally imposed to reduce air traffic congestion and delays. Though technological improvements and traffic management improvements over the ensuing decades have eliminated much of the original justification for such regulations at many airports, and despite the fact that they effectively thwart efforts to achieve airline entry and pricing deregulation, they stubbornly linger on.
New justifications have been advanced for their retention. Environmentalists fear the elimination of slot restrictions will blast residents with noise.(see footnote 9) Small communities fear slot elimination will cause them to lose access to congested airports. Incumbent airlines which have spent millions of dollars hoarding slots, and lending institutions, which have used slots as collateral for airline loans, object to their removal on economic grounds. Though landing slots may well be a regulatory anachronism, they remain tenaciously embedded in aviation culture.
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Several approaches have been attempted to ration slots, and each has produced its own set of problems:
Governments or airports have distributed them to carriers via regulatory fiat.
Governments have allowed airlines to divide them up by according antitrust immunity to scheduling committees.
Governments have revoked slots from incumbents, or created a pool of new slots, for distribution to new entrant airlines, foreign carriers, or to provide service to small communities.
Governments have allowed the bartering of slots.
Governments have transferred slots to airlines, and allowed them to buy and sell slots in the market.
One promising rationing mechanism which has not been widely applied is ''peak period'' pricing, whereby carriers pay more for slots when demand is high, and less for slots when demand is low.
THE HIGH DENSITY SLOT RULE
Promulgated in 1968, the U.S. Department of Transportation's [DOT] High Density Rule(see footnote 10) designated several airports (i.e., Chicago O'Hare, New York's LaGuardia, Kennedy and Newark, and Ronald Reagan Washington National [National]) as high density airports and regulated the number of permissible hourly Instrument Flight Rule [IFR] operations (take-offs and landings).(see footnote 11) The authority to take-off or land a single aircraft is referred to as a ''slot''. Thus, a round-trip flight to and from an airport requires two slots.
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The 1968 High-Density Traffic Airport Ruleaddressed air traffic congestion on the east coast. Although not part of the high density rule, the FAA for a number of years controlled operations at several airports. Additional airports were added for several years after the 1981 PATCO air traffic controller strike. This has occurred at Atlanta, Boston, Chicago O'Hare, Dallas/Ft. Worth, Denver, Newark and Philadelphia. In order to reduce administrative oversight, also beginning in 1968, the U.S. government(see footnote 12) conferred antitrust immunity to scheduling committees, comprised of air carriers, to allocate slots among themselves. Because the scheduling committees were heavily dominated by incumbent airlines, required unanimity, and there were no deadlock-breaking mechanisms, new entry was often stifled. Scheduling committees occasionally reached an impasse in order to resist efforts for new entry. Occasionally, the FAA intervened, as it did in order to give New York Air slots to inaugurate an east coast shuttle.(see footnote 13)
Beyond the airline scheduling committees, the FAA experimented with other allocation methods. For a short while, the FAA permitted slot exchanges on a one-for-one basis. In 1982, the FAA experimented with a six-week experimental program permitting slot sales.(see footnote 14) The High Density Rule has been amended several times since initially promulgated, to address issues such as the number of authorized operations,(see footnote 15) the specified controlled hours at airports,(see footnote 16) the minimum percentage of slot use required to avoid forfeiture, and the size of aircraft allowed at the airports.(see footnote 17) Slot restrictions have the following characteristics:
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The number of slots varies from airport to airport.
Slots are allocated among specified classes of users—air carriers, commuter carriers, and other operators (general aviation and charters).
Slots must be used 80% of the time over a two month period or they will be considered dormant and withdrawn by the FAA (though special rules attempt to accommodate bankruptcy).(see footnote 18)
The DOT has less flexibility in changing slot restrictions at Washington National Airport, since they are now statutorily imposed.(see footnote 19)
THE BUY-SELL SLOT RULE
In 1986, the rules were amended yet again to allow the purchase and sale of slots. The Buy-Sell Slot Rule was the brainchild of President Reagan's OMB Director David Stockman. Promulgated in 1985, it permits airlines which hold slots to sell them at whatever the market will bear.(see footnote 20)
The FAA ''Buy-Sell'' Rule became effective on April Fools' Day, 1986. It permits airlines to sell slots at the four High-Density airports (i.e., Chicago O'Hare, Washington National, and New York LaGuardia and Kennedy), though the FAA insists they are not to be considered ''proprietary rights''.(see footnote 21) Carriers holding slots on December 16, 1985, were ''grandfathered'' in—that is, they were effectively given the slots they held on that date. Slots not used regularly are deemed dormant and subject to recapture by the FAA(see footnote 22), and along with other newly available slots, can be distributed by lottery.(see footnote 23) The FAA may also recapture slots for ''operational reasons''. International and general aviation slots are treated separately.(see footnote 24) The Buy-Sell Rule also allows non-carriers to hold slots—something of significance for airlines wishing to use their slots as collateral for loans.(see footnote 25) Moreover, in order to dodge the recapture of dormant slots, owners of slots were allowed to lease them to other carriers. Also, air carriers can allow commuter operations to utilize jet slots.
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Four measures are used to determine the value of a slot in the marketplace:
1. The Economic Value of a Slot. To the incumbent airline, the value of a slot is equivalent to the discounted present value of the net profit stream from the fare premium it is able to charge;
2. The Sales Value of a Slot. To the prospective buyer, the value of a slot is the incremental earning power afforded by slot access; it will vary with the number of slots, the time period they represent, and the high density airport to which they provide access;
3. The Collateral Value of a Slot. To the lender, their value will be discounted because of the risk associated with such collateral in terms of the possibility of recapture, or a change in governmental policy;
4. The Accounting Value of a Slot. To the airline holding or seeking them, their value will vary depending upon the accounting treatment they are given, with some carriers bundling their value with gates, while others carrying them on their balance sheets at book value.(see footnote 26)
PROBLEMS WITH THE BUY-SELL SLOT RULE
Parties opposed to the Buy-Sell rule objected on four grounds:
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(1) it would give an undeserved ''windfall'' to incumbents;
(2) (2) it would increase air fares;
(3) (3) it could cause slots used for service to small communities to be outbid by carriers seeking to serve more lucrative routes; and
(4) (4) it would create anticompetitive incentives for large carriers to outbid smaller carriers for slots.
Though history has since proven most of these objections correct, they fell upon deaf ears by a DOT determined to march forward.(see footnote 27) As one source noted, ''The DOT did not believe that larger carriers would use their resources and the flexibility provided by the rule to dominate the markets and thereby create concentration at high density airports. . . . Reality has shown that the DOT's beliefs were quite naiAE4ve.''(see footnote 28)
Since promulgation of the Buy-Sell Slot Rule, by and large the major carriers have been the purchasers, and the early new entrant carriers the sellers, of slots. By 1999, the major U.S. airline controlled 91% of all take-off and landing slots at National Airport, while their commuter affiliates controlled most of the rest (USAirways and its Shuttle affiliate alone controlled 39% of National's slots). In essence, the Buy/Sell Rule has enabled the major carriers to generate significant monopoly power by virtue of the ability to hoard market share and effectively prohibit new entry made possible by slot ownership. As one source noted, ''no meaningful access has been provided to new entrants since the buy-sell rule was enacted.''(see footnote 29) The following table reveals major carrier ownership of slots at Washington National and other slot-constrained airports:
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The recently announced proposal between United and USAirways to merge highlights one of the problems with the Buy-Sell Rule. Those airlines can decide who their competitors will be. In addition, it constitutes a sale of public resources for hundreds of millions, and the taxpayer receives narry a dime of it.
The cost of purchasing slots at slot-constrained airports such as New York's LaGuardia or Ronald Reagan Washington National, or Chicago O'Hare Airports, for example, can be prohibitive for new entrants (though major carriers appear loathe to sell them to new entrants at any price):(see footnote 30)
In 1996, it was reported that ''new airlines have to pay as much as $2 million to buy a slot from one of the majors to fly into airports such as LaGuardia. . . .''(see footnote 31)
In 1993, slots at O'Hare traded at $2 million or more; United reported that each of its slots at O'Hare generates nearly $5 million on average in transportation revenue annually.(see footnote 32)
In 1992, USAir purchased 62 LaGuardia jet slots and 46 commuter slots, 6 national slots, a terminal under construction and flight kitchen for $61 million.(see footnote 33)
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In 1991, USAir purchased 10 Washington National slots and 12 LaGuardia slots for $16.8 million (approximately $760,000 per slot).(see footnote 34) USAir purchased 8 LaGuardia slots for $6 million (approximately $750,000 per slot).(see footnote 35) American Airlines purchased 12 LaGuardia slots and 10 National slots for $21.4 million (approximately $970,000 per slot).(see footnote 36) Continental purchased 35 LaGuardia slots by assuming $54 million in Eastern Airlines debt (approximately $1.5 million per slot).(see footnote 37) Delta purchased 5 LaGuardia slots for $3.5 million (approximately $700,000 per slot).(see footnote 38)
In 1990, American Airlines purchased 14 National and LaGuardia slots, and it was reported that ''slots at National and LaGuardia typically sell for between $500,000 and $1 million each, depending on the time of day in which those landing and takeoff rights can be used.''(see footnote 39) American Airlines purchased 10 LaGuardia slots and two Canadian routes for $10 million.(see footnote 40)
A 1990 DOT study found that the value of all slots at the four high density airports was approximately $3 billion, or $850,000 per slot. When accompanied by gates, the value of slots doubled.(see footnote 41)
One source noted the reluctance of incumbent airlines to sell slots to new entrants, because, ''carriers do not want slots to wind up in the hands of their competitors. In fact, the competitive considerations and reluctance to transfer slots may be greater when the potential buyer is a new entrant. . . .''(see footnote 42) ''Large carriers may also 'park' excess air carrier slots with their affiliated commuter airlines or code-sharing partners to keep them out of the hands of their competitors.''(see footnote 43)
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As a consequence of these restrictions on new entry, average fares at LaGuardia were 35% higher than the average for 33 other airports.(see footnote 44) As we shall see below, yields at National Airport are among the highest in the nation as well. The FAA Buy-Sell Slot Rule has been widely criticized on grounds that it gave the incumbent airlines a windfall, and drove up the price of air transportation for consumers.(see footnote 45) The GAO found that airports where entry is limited by slot controls have about 7% higher air fares.(see footnote 46) Airport access restrictions have been criticized on grounds that they frustrate the open entry objectives and market force reliance fostered by the Airline Deregulation Act of 1978.(see footnote 47) By 1997, the DOT had concluded, ''It would be fare better for open competition if we did not have slot controlled airports.''(see footnote 48)
Pointing out that the oligopoly premium of a slot will vary with the extent of the incumbent firms market share, Professor Hardaway observed, ''each slot held by an incumbent firm represents exactly one slot not held by a competitor. Each competitor eliminated from the market causes the demand curve facing the incumbent to become slightly steeper, thereby permitting the incumbent to reap, by degrees, a slightly higher oligopoly profit.''(see footnote 49) Shortly after the Buy-Sell Rule was promulgated, Hardaway accurately predicted, ''because of the greater value of a slot to large firms, these firms may end up outbidding smaller firms. If this occurs, the following will result: (1) entry will be inhibited, thus permitting incumbent firms to face a steeply declining demand curve and enabling them to set prices at a profitable, but misallocative, level above marginal cost; (2) combined with a 'lose it or use it' provision, large outbidding firms may use slots for flights that do not cover variable costs in order to keep the slots and thus preserve an oligopoly profit on other flights.''(see footnote 50) Hardaway concluded that the Buy-Sell Rule ''creates an economic incentive for large carriers to outbid small carriers for anti-competitive purposes.''(see footnote 51) He urged that a certain percentage of slots be recalled for redistribution, so as to flatten the slope of the demand curve for larger firms, reducing the anticompetitive incentive to hoard slots.
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Proposals for ''peak period pricing''—variable landing fees higher during periods of peak demand, and lower during periods of slack demand—have not been widely embraced. Flat rate fees based on landing, aircraft weight, passenger embarkation, or fuel flowage, though revenue-generating for airports, fail to serve the broader goals of reducing congestion and promoting economic efficiency, thereby forcing greater capital expenditures for airport infrastructure.(see footnote 52) In contrast, variable fees may ration slots to airlines who value the slots most highly.(see footnote 53)
THE FAA AUTHORIZATION ACT OF 1994
In 1993, the Baliles Commission urged the FAA to ''review the rule that limits operations at 'high density' airports with the aim of either removing these artificial limits or raising them to the highest practicable level consistent with safety requirements.''(see footnote 54)
The Federal Aviation Administration Authorization Act of 1994 authorized the Secretary of Transportation to grant exemptions from these requirements to enable new entrant air carriers(see footnote 55) to provide air transportation at high density airports (other than Ronald Reagan Washington National Airport) if he finds both that the public interest so requires and that exceptional circumstances exist.(see footnote 56)
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Prior to the late 1990s, several decisions of the U.S. Department of Transportation appeared to embrace a policy of not finding ''exceptional circumstances'' to exist where an incumbent already provides nonstop service in the market. In fact, DOT had approved only two applications from new entrant airlines, and only in instances where the applicant's proposal would address a service void—markets which were large enough to support nonstop service but had none.(see footnote 57) Moreover, among the principal reasons for denying the Application of Spirit Airlines, Inc.,(see footnote 58) DOT found that ''Spirit's application also does not meet the exceptional circumstances criterion because the benefits of its proposal are too speculative and the basics of its operations are too risky.'' But in granting the Application of Air South Airlines,(see footnote 59) DOT found that ''this service plan should produce substantial benefits for consumers and has a fully reasonable prospect for success. Consumer benefits will include . . . new low-fare service in local . . . markets. . . .'' In granting the Application of Reno Air, Inc.,(see footnote 60) DOT found that Reno would restore service that had been provided in the Reno-Chicago O'Hare market by United and American until 1989 and 1993 respectively. The slots were awarded to Reno and now belong to American Airlines since American purchased Reno.
This narrow interpretation(see footnote 61) of the ''exceptional circumstances'' doctrine came under serious criticism by the U.S. General Accounting Office [GAO]. In its October 1996 report to Congress, Airline Deregulation: Barriers to Entry Continue in Several Key Domestic Markets, the GAO found that ''control of slots by a few airlines greatly deters entry at key airports in Chicago, New York and Washington.'' The GAO also found:
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Few new entries have occurred [at slot-constrained airports] because DOT has interpreted the ''exceptional circumstances'' criterion narrowly and has rejected applications to provide service in those markets already receiving nonstop service. . . .(see footnote 62)
In our review of the legislative history, however, we found no congressional guidance on the interpretation of the exceptional circumstances criterion. Moreover, by selecting a very narrow interpretation, DOT has discouraged entry, according to senior management at many airlines that started after deregulation. They told us that DOT's narrow interpretation of the exceptional circumstances criterion discouraged them from applying for slots. Many noted, for example, that they would not ''waste the time'' applying to DOT for slots in markets where an incumbent carrier already provided nonstop service. They suggested that competition could be substantially increased in some markets if the Congress revised the exemption criteria so that applications resulting in substantial competitive benefits are allowed. Officials from both the Chicago Department of Aviation and the Port Authority of New York & New Jersey stated that they strongly supported such a move. . . .(see footnote 63)
[A]rtificial constraints on entry, in the form of slots, have combined with restrictive gate-leasing arrangements to limit competition at key airports in the East and upper Midwest, contributing to significantly higher fares at these airports. Meanwhile, efforts by the Congress and several airport authorities to spur entry at these airports have achieved little success . . .
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In this regard, we identified a number of policy options 6 years ago that DOT could consider to lower these barriers and increase competition. Since then, there has been little progress toward reducing these barriers, and some, such as slots have grown worse. Therefore, we believe that DOT must now take positive steps to address several of the most serious barriers. . . .(see footnote 64)
The GAO recommended that the Secretary of Transportation create a pool of available slots by withdrawing a reasonable number of slots from incumbent airlines which received them through the grandfather process, and distribute them in a fashion that increases competition. Alternatively, GAO recommended that Congress revise the legislative standard to ''make the consideration of competitive benefits a key criterion. . . .''(see footnote 65)
In calling for the Department to lower the barriers to entry in slot controlled airports, GAO's John H. Anderson, Jr., on two occasions testified:
Our October 1996 report recommended that DOT address the operating barriers to entry by (1) creating a pool of available slots by periodically withdrawing a small percentage from the major incumbents at each of the four slot-controlled airports and redistributing those slots in a fashion that increases competition . . . DOT stated that it shared our concerns about operating barriers and the dominant position of some established carriers in some markets. DOT indicated that it planned to be more accommodating to new entrant requests for slots and would give serious consideration to our recommendation that the agency periodically hold slot lotteries.(see footnote 66)
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We have found little progress has been achieved in lowering the barriers to entry since we first reported them in 1990. Slot controls continue to block entry at key airports in the East and upper Midwest. We recommended that DOT take actions to promote competition in regions that have not experienced lower fares as a result of airline deregulation by creating a pool of available slots by periodically withdrawing some grandfathered slots from the major incumbents and redistributing them in a fashion that increases competition.(see footnote 67)
In the DOT's response to the GAO's study, the DOT announced a new policy of viewing more favorably the applications of new entrant airlines for waiver of the slot restrictions under the exceptional circumstances doctrine so as to improve competition in the market.(see footnote 68) Such a new policy made legislative amendment of the statutory criteria unnecessary.
The DOT embraced a more generous policy of awarding exemption authority in Application of Frontier Airlines.(see footnote 69) Recognizing the need for competitive service—particularly low-fare competitive service—DOT found that ''substantial benefits can be achieved through increasing competition at slot-constrained airports in situations where consumers would be able to obtain significantly lower fares in noncompetitive or underserved markets.''(see footnote 70) It announced that henceforth, the DOT would find ''exceptional circumstances'' to exist warranting an exemption from the High Density Rule where: (1) applicants would fly jet aircraft that meet Stage 3 noise requirements in the market; (2) there is a reasonable expectation that the proposed service would be operationally and financially viable; and (3) the applicant either (a) will offer new nonstop service where none now exists, or (b) has a demonstrated potential to offer low-fare competition, there is single carrier service and the market could support competition, or the existing carriers do not provide meaningful competition.(see footnote 71) Under these criteria, new entrant airlines have been able to inaugurate new competitive service to a number of slot-constrained airports.(see footnote 72) Recognizing the High Density Rule as ''a serious barrier to entry, which has had a dampening effect on domestic airline competition'', DOT authorized 75 slot exemptions to a start-up airline, JetBlue, at New York Kennedy International Airport.(see footnote 73) In awarding slots to JetBlue at JFK, the Department stated:
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As we noted earlier, many authorities, including members of Congress, have concluded that the High Density Rule is a serious barrier to entry, which has had a dampening effect on domestic airline competition.
It is indisputable that Southwest has had a singularly positive effect on fare competition in literally every market it has chosen to serve. In many other markets, other low-fare new entrants have also had a salutary impact on domestic fares. Wherever those carriers have gone, fare competition has followed and traffic has increased, in many cases dramatically. The Department has previously granted New York-area (primarily LaGuardia) slot exemptions on the basis of low-fare proposals to [new entrant airlines] and traffic has been highly responsive.
The principle basis for our granting JetBlue's application is our commitment, as stated in our guidelines, to place a premium on the introduction of new services by applicants that have the demonstrated potential to offer low-fare competition where the market could support new entry or where existing services do not produce meaningful competition.(see footnote 74)
DOT also launched an experimental program of allocating slot exemptions to selected communities for the purpose of assisting them in securing service to slot-constrained airports.(see footnote 75)
Major carriers alleged that the real reason for the new entrant's application for an exemption is that they want to avoid the expense of purchasing or leasing slots at a slot-constrained airport and thereby seek gain a competitive advantage by avoiding a normal cost of doing business. One must recall that the major airlines received National, LaGuardia, Kennedy and O'Hare slots in the mid-1980s without paying for or leasing them. Major airlines also lease the slots they received for free to other airlines. Landing and takeoff slots are public resources. Rather than surrendering dormant slots to new entrant airlines, major airlines have turned these public resources into private gain. For example, Midway Airlines owns 13 Washington National commuter slots that they have leased to Air Canada for 10 years. Moreover, the hypocrisy with which the major airlines make this argument is rather astounding. Paradoxically, the major carriers who protesteth so vehemently to domestic slot exemptions have been the most vociferous advocates in favor of slot exemptions for themselves at foreign airports such as London Heathrow and Tokyo Narita.(see footnote 76)
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All of the available evidence in this docket confirms beyond any dispute that so long as new entry at Heathrow and Gatwick continues to be subject to an absolute government barrier to entry, granting American and BA authority to codeshare on U.S.-Heathrow/Gatwick services would reduce, rather than promote, competition, and would not be consistent with the public interest. (United Air Lines/OST–99–6507–32/Joint Application of American Airlines and British Airways (codesharing)—February 22, 2000)
At present, under Bermuda 2, Heathrow and Gatwick are closed to new entrants, and incumbents serving those airports are constrained from adding new service by the restrictions in the Agreement, including those in Annex 2. While those restrictions remain in place, any decision by the Department authorizing reciprocal code sharing by American and BA on routes involving Heathrow or Gatwick would serve only to strengthen those carriers' competitive position on London-U.S. routes where they are already entrenched, dominant incumbents. (United Air Lines/OST–99–6507–7/Joint Application of American Airlines and British Airways (codesharing)—December 1, 1999)
Delta is barred from serving London Heathrow—the primary airport for business travelers—the largest and most important U.S.—Europe business market. Furthermore, Delta is barred from serving London from New York, the largest U.S.-London routes, and Delta's major international gateway. Delta's lack of London access, particularly to London Heathrow, impairs Delta's competitiveness not only of U.S.-London travelers, but also in the overall U.S.-Europe marketplace. (Delta Airlines/OST–99–6507–6/Joint Application of American Airlines and British Airways (codesharing)—December 1, 1999)
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Because of the unique role Heathrow Airport serves in the competition between carriers for US–UK traffic, unless new entry occurs on a significant scale on US-Heathrow routes, the American/British Airways alliance will be substantially anti-competitive. (United Air Lines/OST–97–2058–253/Joint Application of American and British Airways for approval of antitrust immunity for alliance agreement—May 22, 1998)
DOJ recommends that if the Department finds the public interest requires approval (a conclusion about which DOJ is skeptical) it would be appropriate to condition approval on a requirement that sufficient Heathrow slots and facilities be made available for competitors to operate approximately 24 new daily roundtrip US-Heathrow flights. As Delta exhibits demonstrate, twenty-four daily flights suggested by DOJ would not come close to approaching the level of airline services that would be expected in a freely open market.
The inevitable conclusion from DOJ's analysis of Heathrow's slot constraints is that nothing short of divestiture will provide sufficient slots to satisfy the service requirements of US carriers necessary to offset the anticompetitive effects of the alliance. (Delta Airlines/OST–97–2058–304/Joint Application of American Airlines and British Airways for approval of antitrust immunity for alliance agreement—June 23, 1998)
Ironically, the major airlines have been vigorous proponents of competitive access in foreign markets. Testifying before a Senate Judiciary Subcommittee, United Airlines Vice President Cyril Murphy said, ''It would be irresponsible for governments not to protect their citizens against the possibility of [cartelization and monopoly pricing].''(see footnote 77) In opposing the proposed American Airlines/British Airways alliance (which, incidentally, would compete with the United/Lufthansa alliance, which had been conferred immunity from the application of the antitrust laws) Murphy said, ''Governmental bodies have as their dual goals freeing the industry in terms of the elements of competition and protecting their citizens from the potential for anti-competitive abuse of that new, open environment. This means . . . developing anti-monopoly policies that provide strict scrutiny of the 'superhubs' so as to maintain the opportunity for meaningful intrahub competition.''(see footnote 78) Among the remedies proposed by United was the surrender, by American Airlines and British Airways, without compensation, of slots at Heathrow, JFK and Chicago O'Hare Airports, a restriction on the acquisition of new slots, and the termination of code-sharing agreements with British Midland.
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Yet United takes a different view when addressing competition issues in the superhubs it dominates. Though United Airlines advocates vigorous governmental intervention to prevent monopoly abuse at London's Heathrow Airport, United Airlines CEO Gerald Greenwald said, ''Try to get the government to come in and solve [Denver's] competitive issues, and we will all regret it.''(see footnote 79)
Though United had urged the U.S. government to strip its competitors of slots at Heathrow, JFK and O'Hare Airports, United Executive Vice President Stuart Oran complained that new entrant carriers had asked the U.S. Department of Transportation to provide them with ''free slots'' at LaGuardia Airport.(see footnote 80) The affordable fare carriers possess less than 1% of the takeoff and landing slots at the four slot constrained airports—Chicago O'Hare, Washington National, and New York Kennedy and LaGuardia Airports. United was given ''free'' slots at each of these airports (and it is asking for more ''free'' slots at London Heathrow Airport). Because of slot regulation, incumbent airlines have been able to capture a monopoly premium associated with monopolization of a finite public resource. Deregulation of slots would open these clogged monopoly bottlenecks. Similarly, perimeter rules are inconsistent with a free market system.
The 1994 Act also required DOT to conduct a study of the High Density Rule and report to back to Congress, considering the following:
Whether improvements in technology and in the air traffic control system and the use of quieter aircraft would make it possible to eliminate the limitations on or increase the number of hourly aircraft operations.
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The effects of eliminating the High Density Rule, or increasing operations, on congestion, noise, competition, profitability, and safety.
The impact on the Essential Air Services program, on the ability of new entrants to obtain reasonably timed slots, and the ability of foreign carriers to obtain slots.
The impact of the withdrawal of slots to support foreign air transportation.(see footnote 81)
The DOT issued its report to Congress the following year. It noted that changing High Density Rule would not adversely affect air safety since the rule plays only a secondary role to the FAA's air traffic management system. The study also found that O'Hare and National could support more growth. At Kennedy, the DOT found that the air field capacity was well matched with the number of slots, while other infrastructure could accommodate additional traffic. At LaGuardia, the number of slots appeared slightly to exceed air field capacity, though gate and landside capacity appeared sufficient to handle new growth. Using a cost/benefit analysis, discounting the additional revenue and passengers realized by slot rule elimination with the additional costs of delay, DOT found that O'Hare would enjoy a net benefit of $205 million per year, while at Kennedy the benefit would be only $7 million per year. At LaGuardia and National, however, DOT found that elimination of the High Density Rule would result in net losses.(see footnote 82)
THE PERIMETER RULES & THE SHELBY AMENDMENT
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Congress has taken additional action to reduce barriers to entry at airports. For example, the Wright Amendment of 1979 established a perimeter rule restricting air service at Dallas Love Field restricted service to Texas and its adjacent states (i.e., New Mexico, Oklahoma, Arkansas and Louisiana) unless provided in aircraft with fewer than 56 seats.(see footnote 83) But in 1997, Congress passed the Shelby Amendment(see footnote 84) which allowed service from Love Field to the additional states of Kansas, Mississippi and Alabama, and made it clear that service beyond this area could be provided in aircraft having 56 seats even if such aircraft have been reconfigured to that size.(see footnote 85) Despite the Congressional mandate, major airlines have devoted significant resources fighting new entry at Love Field.
Perimeter rules restrict competition not only at Dallas Love Field, but also at Ronald Reagan Washington National Airport, and at New York LaGuardia Airport. Originally imposed by the Civil Aeronautics Board in the mid-1960s at 600 miles around National, and expanded by the DOT to 1,000 miles in 1981, in the Washington Metropolitan Airport Act of 1986 Congress statutorily prescribed a perimeter of 1,250 miles. Under this statute, all aircraft taking off or landing from National must do so to or from an airport within a 1,250-mile radius from National.
This restriction was criticized by the Transportation Research Board's 1999 Study of Competition in the U.S. Airline Industry: ''These rules no longer serve their original purpose and have produced too many adverse side effects, including barriers to competition. These rules arbitrarily prevent some airlines from extending their networks to these airports; they discourage competition among the airports in the region and among the airlines that use these airports; and they are subject to chronic attempts by special interest groups to obtain exemptions.''(see footnote 86) Moreover, as the Chart 1 reveals, flights have declined at National since their high water mark in the early 1980s.
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CHART 1: WASHINGTON NATIONAL AIRPORT—ANNUAL FLIGHT OPERATIONS
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CRITICISM OF GOVERNMENT RESTRICTIONS ON ENTRY
The Airline Deregulation Act of 1978 was supposed to eliminate restrictions on entry into the airline industry. Yet slot constraints and perimeter rules (as well as long-term gate leases and majority-in-interest clauses) continued to serve as serious impediments to entry some two decades after deregulation of entry was adopted as national policy.
The National Research Council's Transportation Research Board [TRB] addressed the competitive ramifications of slot controls in its Special Report of August 2, 1999. The TRB Report stated that ''increased opportunities for entry and competition in the domestic airline industry'' are an important public interest goal. But the TRBfound that there were obstacles to achieving this goal, ''including longstanding rules that curb access to some of the country's largest airports.'' The TRB Report also confirmed what many other studies have found—that ''high average fares in many of the city-pair markets involving the hub airports of major airlines have been a recurrent subject of public concern and policy debate during the past two decade'' and that ''slot-controlled airports consistently are among the highest-priced markets in the country.''
In testifying before Congress, DOT General Counsel Nancy McFadden stated that:
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A number of factors still prevent airline passengers and the airline industry itself from enjoying the full benefits of deregulation. These have been documented in a number of studies, including the TRB's.
In addition to certain airport business practices, there are external constraints that directly impact competition. In particular, we view the High Density ''slots'' Rule as an impediment to competition, especially for new entrants.
An air carrier's financial viability often depends on serving key business and leisure markets, which requires securing reasonable access to airport gates and other facilities.(see footnote 87)
The State Attorneys General have also become concerned about barriers to entry, including slot constraints. A letter to Congress on behalf of 35 State Attorneys General stated:
As we have reviewed competition among airlines and its impact on business and leisure travelers, we have determined that there are significant barriers to entry and expansion for low-cost and new entrant airlines, a group that has demonstrated a capacity to generate real competition in markets. Of primary significance to this committee, a number of key airports are essentially closed to low-cost and new entrant airlines. The four high density airports—Chicago O'Hare, New York LaGuardia and Kennedy, and Washington National—are currently slot-controlled, while at a number of major carrier hub airports, competing airlines cannot obtain permanent facilities. This is not what was intended twenty years ago when the airline industry was deregulated.(see footnote 88)
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It is next to impossible for a new entrant carrier to attempt to compete with Delta from its Atlanta hub and connecting markets when the new entrant cannot get into National and grow at LaGuardia. Delta is the second largest slot holder at both airports with approximately 150 slots at LaGuardia and 95 at National.(see footnote 89) It controls 19% of the slots at LaGuardia. New entrants have 1% of the slots at LaGuardia and 0% at National. An examination of fares in those markets demonstrates the impact of this dominance. From Atlanta to Dulles Airport, fares are often available at $188.50 roundtrip because AirTran is in the market. Between Atlanta and National—a market in which AirTran is blocked from entering—the same ticket is $1,008.50.
These criticisms of government constraints on entry at airports laid the foundation for legislation introduced by Senator John McCain in 1999 to phase-out slot controls.
WENDELL H. FORD AVIATION INVESTMENT AND REFORM ACT FOR THE 21ST CENTURY
In February 1999, the DOT proposed elimination of many slot rules in order to increase new entry and promote competition.(see footnote 90) On April 5, 2000, President Clinton signed into law, the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century [FAIR–21]. Senator Wendell Ford observed, ''this bill would loosen certain of the remaining federal regulatory restrictions to competition. These restriction, like slot controls or the perimeter rule at National Airport, have limited the benefits of airline deregulation.''(see footnote 91) DOT Transportation Secretary Slater proclaimed:
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Removing slot restrictions is a fundamental part of President Clinton's and Vice President Gore's proposal to bring our aviation system into the new century and the new millenium. The new services allowed under FAIR–21 will increase airline competition, improve access to our major airports, and provide better service to communities across the nation. . . .''(see footnote 92)
FAIR–21 begins a phase-out of slot controls at LaGuardia, Kennedy and O'Hare. Slot restrictions are to be eliminated at Chicago O'Hare by July 1, 2002, and at the two New York airports by January 1, 2007. Airlines with limited operations may expand service at New York airports to 20 slots each, and at O'Hare to 30 slots each. There are no restrictions on adding regional jet flights which are particularly beneficial for large airlines with regional aircraft. Under FAIR–21, the large carriers will end up receiving more slots than new entrants because of its open entry provisions for regional jets. Already, we have already seen approximately 500 slot requests for regional jet operators. The real problem will be gate and facility space for new entrants able to enter the market. As of May 1, 2000, slot exemptions for international service will no longer be required at O'Hare.(see footnote 93)
FAIR 21 also authorizes the Department of Transportation to grant up to 24 exemptions at National Airport, 12 within the 1,250-mile perimeter and 12 outside the perimeter. DOT may grant beyond-perimeter exemptions where the Secretary finds the exemptions will:
(1) provide domestic network benefits beyond the perimeter;
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(2) increase competition by new entrant airlines or in multiple markets;
(3) not reduce travel options from small and medium hub airports within the perimeter; and
(4) not result in meaningfully increased travel delays.(see footnote 94)
Additionally, in awarding slot exemptions, the Secretary may consider whether the carrier seeking a slot exemption provides maximum benefit to the U.S. economy, including U.S. jobs, while giving equal consideration to the consumer benefits associated with the award of such exemptions.(see footnote 95)
These specific directives to issue slot exemptions where competition is increased by new entrants, and to consider the consumer benefits derived from slot exemptions, augment the existing statutory public interest considerations added to the Federal Aviation Act by the Airline Deregulation Act of 1978:
[T]he Secretary of Transportation shall consider the following matters, among others, as being in the public interest . . .:
(4) the availability of a variety of adequate, economic, efficient, and low-priced services. . . .
(10) avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier . . . unreasonably to increase prices, reduce service, or exclude competition in air transportation. . . .
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(13) encouraging entry into air transportation markets by new and existing air carriers and the continued strengthening of small air carriers to ensure a more effective and competitive airline industry.(see footnote 96)
Thus, the enhancement of competition, the reduction of barriers to entry, the fostering of low-priced services, and the continued strengthening of small carriers are primary policy imperatives of the Federal Aviation Act which govern its evaluation of applications for slot exemptions. As of the May 5th deadline for filing for slot exemptions at Washington National Airport, 19 applicants had requested permission to provide 104 new flights, 44 beyond the perimeter. A decision was due within 90 days following the enactment of AIR–21.(see footnote 97)
Other new entrant airlines were able to gain entry at LaGuardia, Kennedy and O'Hare. For example, Midway Airlines was able to secure nine slots at LaGuardia to replace slots that it had previously leased from an incumbent airline for $1.88 million per year.(see footnote 98)
COMPETITION AT THE WASHINGTON, D.C., METROPOLITAN AIRPORTS
As Chart 2 (Washington Metro Airports Average Yields) reveals, of the three airports in the Washington, D.C., metropolitan area, Ronald Reagan Washington National Airport has consistently had the highest airline yields. From the first quarter of 1997 through the second quarter of 1999, yields at National were 20.7 cents—among the highest of any airport in the nation—some 32% higher than yields at Dulles International Airport [Dulles] (15.8 cents), and 67% higher than yields at Baltimore/Washington International Airport [BWI] (12.4 cents) during the same period. This is true despite the fact that Dulles has a higher level of concentration, where United Airlines maintains a dominant hub. The fact that National's yields are so high is, in part, reflective of the fact that it is the only airport in the Washington, D.C., metropolitan area which is slot constrained, curfew constrained, and perimeter constrained, and is served by no new entrant airline.(see footnote 99)
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CHART 2: WASHINGTON METRO AIRPORTS AVERAGE YIELDS
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Chart 2 also reveals the consumer benefits of competition realized when a low-fare entrant appears in a market. Southwest Airlines inaugurated service at BWI in 1993. As Chart 2 reveals, the growing number of consumers using BWI have enjoyed a significant decline in yields there as Southwest has expanded operations. Comparing yields at BWI for the three year period 1990–92, prior to Southwest's entry, to the three year period 1996–98, we see that yields fell from 16.7 cents per mile without Southwest, to 12.9 cents per mile with Southwest—a 22% decrease. These lower yields have driven enormous traffic expansion. Comparing the number of fare paying passengers in 1992, prior to Southwest's entry, with the number in 1998 (the last full year for which we have data) shows a 124% increase—much of it stimulated by Southwest's low-fare presence.
CHART 3: DENVER-WASHINGTON, DC AVERAGE AIR FARES
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Frontier inaugurated service between Denver International Airport [DIA] and BWI on November 16, 1997, with one Boeing 737–300 round trip per day. Chart 3 (Denver-Washington, DC, Average Air Fares) reveals the significant impact of low-fare competition in the DEN–BWI market. Fares in the DEN–BWI market averaged $230 in 1996, before Frontier's entry, and fell 21%, to $182 in 1998, after Frontier's entry. This 21% drop in average air fares occurred with the competitive stimulus of only a single round-trip per day. The presence of a low-cost/low fare competitor (such as Southwest, Frontier, Vanguard, AirTran, Spirit, Pro Air, or Sun Country, for example) can result in significant competitive discipline and consumer savings. According to the DOT, fares tend to be $80 higher on average when no low-fare competitor is present on the route.(see footnote 100) This principle is reflected in Chart 4 (Average Fares—Selected Cities (1990–1999)), which shows historical average one-way fares at seven airports—Minneapolis/St. Paul, Washington/Dulles, Dallas/Ft. Worth, Denver, Atlanta, Salt Lake City, and Kansas City.
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CHART 4: AVERAGE FARES—SELECTED CITIES (1990–1990)
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At various times, Braniff, Eastern and TWA attempted to establish a hub at Kansas City. Each failed. The result is that Kansas City remains unconcentrated (Southwest is the largest carrier, with 23% of enplanements), and its consumers enjoy average fares among the lowest of any city its size. Note that average fares at Salt Lake City, Atlanta and Denver marched in ''lock-step'' with fares at Minneapolis/St. Paul, Dallas/Ft. Worth and Washington/Dulles until 1994. In that year, Southwest acquired Salt Lake City-based Morris Air. Average fares dropped by 50% in Southwest's markets, while traffic tripled. By late 1995, average fares in markets served by Southwest were only one-third the level of fares in other Salt Lake City markets.(see footnote 101) By 1996, Southwest accounted for 12% of enplanements, and Salt Lake City's average fares were as low as Kansas City's. At Atlanta, ValuJet's entry has brought fares down, though it only accounted for 8% of enplanements. At Denver, first MarkAir's, then Frontier's entry brought fares down, though by the end of the 1990's MarkAir had been liquidated and Frontier accounted for less than 6% of enplanements.(see footnote 102)
Contrast these price declines with the relatively higher prices at Dallas/Ft. Worth. Dallas/Ft. Worth International Airport is dominated by two megacarriers—American (65%) and Delta (19%). Neither is a vigorous price competitor, though prices are somewhat disciplined in short-haul markets by the presence of Southwest at Dallas Love Field.(see footnote 103) Minneapolis/St. Paul is by far the worst of the group in terms of exorbitant air fares, because during the period reflected in Chart 4, Northwest dominated the hub with an 84% market share, no low-cost/low-fare carrier accounted for even a 1% market share, and there was no secondary airport at Minneapolis.(see footnote 104) One study revealed that concentration at the Minneapolis/St. Paul hub caused a 72% increase in prices from 1988 to 1995, and that by 1995, its residents were paying ticket prices $693 million above the national average.(see footnote 105) In fact, average round-trip fares at Minneapolis from the first quarter of 1994 through the second quarter of 1999 of $416 are 68% higher than at Salt Lake City, where the average fare during this period was $248, and 70% higher than at Kansas City, where the average round-trip fare is $244.
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Comparing average fares during this period at Minneapolis (which until recently had no low-fare scheduled competitor), and Denver (which has had low fare competition since 1994), reveals a $70 average round trip ($35 each way) fare difference. Denver has approximately 20 million annual origin-and-destination passengers. Were Denver's fares set at the level of those at Minneapolis (as they were in the early 1990s), Denver's O&D passengers would pay $700 million in higher fares per year annually. Between 1994 and mid-1999, since Frontier began operating at Denver, consumer savings at Denver have totaled $3.85 billion. Frontier accounts for less than a 6% market share at DIA. If a low-fare competitor at Denver were to grow to a size comparable to the market share of Southwest at Salt Lake City (more than 12%), consumer savings could total as much as an additional $1 billion per year.
Evidence shows how new entry can reduce fares at slot-constrained airports after receiving. On December 3, 1997, Frontier inaugurated service in the DEN–LGA market with two Boeing 737–300 aircraft. As Chart 5 (Denver-New York/LaGuardia Average Fares) reveals, average fares in the city-pair fell 26%, from $335 in 1997 to $248 in 1998. Frontier's 1998 fares averaged only $167, some 41% lower than the average fares of $283 offered by the only nonstop carrier in the market (United Airlines) in 1997.(see footnote 106)
CHART 5: DENVER-NEW YORK/LAGUARDIA AVERAGE FARES
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CONCLUSION
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Slots are but one of several barriers to entry which impede competition in commercial aviation. Kenneth Mead, former director of the GAO's transportation division, found that ''no single factor is responsible for higher fares at concentrated airports, but that it is the interaction of a number of barriers that allows carriers at these airports to charge higher fares.''(see footnote 107) The GAO found several factors correlating with higher fares:
1. The larger the share of gates a carrier leased at an airport, especially on a long-term, exclusive use basis, the higher the fares;
2. Flights at airports where a majority-in-interest clause might reduce expansion opportunities have about 3% higher fares;
3. Flights at airports where entry was limited by slot controls have about 7% higher air fares;
4. Airports with congested runway capacity and limited expansion due to majority-in-interest clauses have about 3% higher fares; and
5. Carriers with a code-sharing agreement at one of the airports on a route charge fares almost 8% higher than carriers do on routes on which they do not code share.(see footnote 108)
The Buy-Sell Slot Rule ensured that major carriers could buy-up and hoard market share, foreclose new competitive entry, so as to charge supra-competitive prices at High Density airports. Because of the significant economic investment made by major airlines in slots, the Buy-Sell Slot rule created a vested economic interest in their retention by major airlines and lending institutions. By allowing major airlines to avoid recapture by leasing slots to other carriers and commuter affiliates, the rules have led to a less than optimum use of scarce resources.
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If slots are to be retained at some airports, then three significant changes would be in order. First, the leasing of slots to other carriers should be prohibited. If an airline cannot fully utilize a slot it possesses, it should be deemed dormant, be recaptured by the FAA, and distributed to another carrier. No carrier should be able to avoid slot revocation by leasing or lending a slot to another carrier Slots recaptured in this way should be redistributed to enhance competition, particularly by new entrant airlines.
Second, the Buy-Sell Rule should be repealed. Carriers should not be permitted to sell slots. If they cannot use them, they should be returned to the slot pool.
The third change would be more profound, and result in a more efficient use of airport air-side resources. Slots should be priced in a way that imposes the highest landing fees on aircraft using runways during high-demand periods, and the lowest fees when demand is lowest. If the penalty for taking off and landing were sufficient, demand would begin to move toward times of the day when there is less congestion. That would enable airports to use their runways more efficiently throughout the day, and ameliorate the growing demand for new runway construction. However, in order to thwart the potential of larger carriers to buy-up and hoard slots, peak hour pricing must be accompanied by guaranteed access for new entrants without fees. In contrast, if slots go to the highest bidders, the large carriers will dominate the markets, for they have proven their willingness and ability to pay whatever the market will bear for slot control.
The existing slot regulations have proven to have created more problems than they have solved, particularly in terms of allowing large airlines to suppress competition. If the principal purpose of deregulation was to enhance competition, then barriers to entry such as slot and gate restrictions are an anachronism which must be eradicated.
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Mr. HYDE. President Geils?
STATEMENT OF JOHN GEILS, VILLAGE PRESIDENT, BENSENVILLE, IL
Mr. GEILS. Thank you, Mr. Chairman, Ranking Member Conyers and members of the Judiciary Committee. Thank you very much for this opportunity to present my views on the fortress hub monopoly in the airline industry.
As a brief aside, I would like to say that my daughter, Jamie, and I had two choices in air travel to DC yesterday. One was to fly out of an over-crowded fortress hub called O'Hare Field, dominated by United and American Airlines, at a cost of $1200 per ticket, or to travel 25 minutes from our home to an over-crowded Midway Airport that represents low-cost carriers at a cost of $185 a ticket. We chose the latter and proceeded to stand in line for two hours to make our points this afternoon.
So, we thank you for the opportunity and we appreciate your efforts in this issue. The Suburban O'Hare Commission is an inter-governmental consortium of 14 municipal and local governments surrounding O'Hare Airport. Our focus has been the benefits and the problems created by the growth at O'Hare Airport and our desire to balance that growth with the creation of a new south suburban regional airport.
It is important to state that we are not anti-O'Hare or anti-business. In fact, many of us are pro-business and pro-airport. Virtually all the mayors and other officials in the SOC operate small to large businesses. We welcome the economic benefits associated with air travel.
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Having stated our bias, let me also emphasize that we also recognize that when a business does wrong or violates the law, business, just like any other segment of our society, must be subject to the same vigorous law enforcement efforts applied to other wrong-doers in our society.
In that spirit, the Suburban O'Hare Commission decided to study what we call, as Joe Karaganis represented, the ''elephant in the corner.'' All of us have observed the ever-growing concentration of marked control by the major airlines in fortress hubs around the country.
For anyone who has had to undertake short term business travel out of these fortress hubs has experienced the pain and sticker shock of exorbitant fares charged by the dominant airlines at these fortress hubs as my illustration earlier indicated.
As a layman, we had a gut feeling that the fortress hub system likely violated our Federal laws designed to prevent monopolization at the industry. But few were asking this specific question. Does the fortress hub system and the obvious decision by major airlines not to compete in each others fortress hub markets violate Federal antitrust laws.
Everyone had a feeling that the fortress hub system was wrong and probably illegal, but no one had conducted a detailed analysis of the problem. In our case in Illinois, we have had specific experience with the major airlines enforcing their fortress hub cartel by specifically refusing to use a major new airport to bring new competition into our region.
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So, we commissioned our counsel to conduct a study of the fortress hub system nationally and its application to our airport situation in metropolitan Chicago. The results of that study are set forth in a detailed report submitted by the Suburban O'Hare Commission entitled, ''If You Build It, We Won't Come.''
It reflects the refusal of major airlines to compete in the Chicago air travel market. The report provides factual and legal context to what we already know, the fortress hub system is an illegal monopoly in violation of Federal antitrust laws.
I won't get into the details of the report that have been alluded to many times here this morning. But I would say, including the report of this hearing, but I would like to summarize that my perspective on the problems are identified in the report.
The report clearly shows that the major airlines have organized a system in which one or two of their members are allowed by their fellow major airlines to dominate a specific geographic market.
The quid pro quo for one or two majors to dominate one fortress hub market so that the others majors are allowed to carve out their own dominance in another geographic fortress hub market.
The resulting lack of competition results in an exorbitant monopoly-induced fares that cost air travelers nationally billions of dollars per year, hundreds of millions of dollars in overcharges to Chicago area travelers at O'Hare alone.
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In Chicago the dominant airlines, United and American, have attempted to solidify their fortress hub monopoly at O'Hare with a two-pronged campaign. They have announced plans to expand the physical facilities at O'Hare with a special terminal designed to enhance the hub and spoke dominance of both United and American.
Secondly, they have waged a bitter campaign to defeat any attempts to build a south suburban regional airport which would bring new competition into the region.
In our case which reflects the national fortress hub situation, we have expressed in concrete evidence the major airline collusion in deciding not to compete with United and American in the metro Chicago market.
United and the Air Transportation Association worked with the CEOs and all members of the ATA, which includes the so-called big seven airlines, to collectively refuse to use new capacity in our region via the development of the new South Suburban Airport.
The consequences of this illegal collusion conduct extends far beyond the huge economic penalty inflicted on the business traveler. Because of the unwillingness to allow a new airport and significant new competition to enter the region and their parallel desire to expand their O'Hare monopoly, United and American are causing significant injuries to our communities around O'Hare, with increased noise, increased air pollution and increased safety concerns.
As Congressman Jackson has pointed out, the major airlines effort to defeat a new airport and new competition in the south part of Chicago has led to serious economic and social discrimination between the northern part of the metropolitan area and the southern part of our region.
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The airlines have been able to get away with these abuses only because the governmental and political establishment has either looked the other way or has affirmatively helped the airlines create, maintain and expand their fortress hub monopoly.
While there are likely parallels in other urban centers, the dominant airlines in Chicago have entered into a symbiotic relationship with the mayor of the City of Chicago to block new airport development and expand the fortress hub monopoly of O'Hare.
The mayor of the City of Chicago has worked to expand United and American's monopoly at O'Hare while simultaneously blocking new airport development.
On the other hand, Congressman Hyde, yourself, and Congressman Jackson have been leaders in the fight to break the Fortress O'Hare monopoly and bring a new airport and new competition to our region.
In conclusion, this massive problem of blatant widespread violation of the Nation's antitrust laws is costing the public billions of dollars yearly and will not be solved unless the Congress takes aggressive action on its own and demands aggressive action by the administration.
Thank you very much, Congressman Hyde, for this opportunity.
[The prepared statement of Mr. Geils follows:]
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PREPARED STATEMENT OF JOHN GEILS, VILLAGE PRESIDENT, BENSENVILLE, IL
Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. Thank you for the opportunity to present the views of the Suburban O'Hare Commission to the Judiciary Committee on the problem of Fortress Hub monopoly in the airline industry.
The Suburban O'Hare Commission (SOC) is an intergovernmental consortium of 14 municipal and local governments surrounding O'Hare Airport. Our focus is the benefits and the problems created by growth at O'Hare Airport and our desire to balance that growth with the creation of a new South Suburban Regional Airport.
Let's get something on the table from the start. We are pro-business and pro-airports. Virtually all of the mayors and other officials in SOC operate small to large businesses and we welcome the economic benefits associated with air travel. Having stated our bias, let me also emphasize that we also recognize that when a business does wrong or violates the law, business—just like any other segment of our society—must be subject to the same vigorous law enforcement efforts applied to other wrongdoers in our society.
In that spirit, the Suburban O'Hare Commission decided to study what we call the ''elephant in the corner.'' All of us have observed the ever growing concentration of market control by the major airlines in Fortress Hubs around the country. Further, anyone who has had to undertake short-term business travel out of these Fortress Hubs has experienced the pain and sticker shock of the exorbitant fares charged by the dominant airlines at these Fortress Hubs. And as laymen, we had a gut feeling that this Fortress Hub system likely violated our federal laws designed to prevent monopolization of an industry..3
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But few were asking the specific question: Does the Fortress Hub system—and the obvious decision by major airlines not to compete in each other's Fortress Hub markets—violate federal antitrust laws? Everybody had a gut feeling that the Fortress Hub system was wrong and probably illegal, but no one had conducted a detailed analysis of the problem. And in our case in Illinois we have had specific experience with the major airlines enforcing their Fortress Hub cartel by explicitly refusing to use a major new airport to bring new competition into our region.
So we commissioned our counsel to conduct a study of the Fortress Hub system nationally and its application to our airport situation in metropolitan Chicago. The results of that study are set forth in detail in a report the Suburban O'Hare Commission released last month: If You Build It, We Won't Come: The Collective Refusal Of The Major Airlines To Compete In The Chicago Air Travel Market. The report provides factual and legal context to what we already know: the Fortress Hub system is an illegal monopoly in violation of the federal antitrust laws.
I won't get into the details of the report. I ask that it be included in the record of this hearing. But I would like to summarize my perspective on the problems identified in the report:
1. The report clearly shows that the major airlines have organized a system in which one or two of their members are allowed by their fellow major airlines to dominate a specific geographic market.
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2. The quid pro quo for one or two majors to dominate one Fortress Hub market is that the other majors are allowed to carve out their own dominance in another geographic Fortress Hub market..4
3. The resultant lack of competition results in exorbitant monopoly-induced fares that cost air travelers nationally billions of dollars per year—hundreds of millions of dollars in overcharges to Chicago area travelers at O'Hare alone.
4. In Chicago, the dominant airlines, United and American, have attempted to solidify their Fortress Hub monopoly at O'Hare with a two-pronged campaign: a) they have announced plans to expand the physical facilities at O'Hare with a special terminal design to enhance the hub-and-spoke dominance of United and American, and b) they have waged a bitter campaign to defeat any attempts to build a South Suburban Regional Airport which would bring new competition into the region.
5. In our case (which reflects the national Fortress Hub situation) we have express and concrete evidence of major airline collusion in deciding not to compete with United and American in the metro Chicago market. United and the Air Transport Association worked with the CEOs of all the members of the ATA (which includes all the so-called ''Big Seven'' airlines) to collectively refuse to use new capacity in our region—i.e., the new South Suburban Airport.
6. The consequences of this illegal collusive conduct extend far beyond the huge economic penalty inflicted on the business traveler. Because of the unwillingness to allow a new airport—and significant new competition—to enter the region and their parallel desire to expand their O'Hare monopoly, United and American are causing significant injuries to our communities around O'Hare with increased noise, increased air pollution, and increased safety concerns. And as Congressman Jackson has pointed out, the major airlines' effort to defeat a new airport (and new competition) in south suburban Chicago has led to serious.5 economic and social discrimination between the northern part of the metropolitan area and the southern part of our region.
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7. The airlines have been able to get away with these abuses only because the governmental and political establishment has either looked the other way or has affirmatively helped the airlines create, maintain, and expand their Fortress Hub monopoly. While there are likely parallels in other urban centers, the dominant airlines in Chicago have entered into a symbiotic relationship with the mayor of the City of Chicago to block new airport development and expand the Fortress Hub monopoly in Chicago. The mayor of the City of Chicago—and through him the Clinton-Gore Administration—has worked to expand the United/American monopoly at O'Hare while simultaneously blocking new airport development. By this comment, I do not seek to disparage Democrats. Congressman Jackson has been a leader in the fight to break the Fortress O'Hare monopoly and bring a new airport (and new competition) to our region. And there are Republicans in Illinois who must bear a good deal of responsibility for the problem and the failure to correct it.
8. This massive problem—a blatant, widespread violation of the nation's antitrust laws costing the public billions of dollars yearly—will not be solved unless the Congress takes aggressive action on its own and demands aggressive action from the Administration.
Mr. HYDE. Thank you, President Geils.
Mr. Gordon?
STATEMENT OF MIKE GORDON, MAYOR, EL SEGUNDO, CA
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Mr. GORDON. Mr. Chairman, Ranking Member Conyers and members of the Judiciary Committee, my name is Mike Gordon. I am the mayor of the City of El Segundo.
I come before you today on behalf of the people of El Segundo to oppose the United-US Air merger. We firmly believe the prospect of further concentrating market share in the hands of a few mega-airlines represents the worst possible scenario for commercial aviation as it will eliminate needed competition and create even greater dependence on the hub-spoke system.
No one knows the negative impacts better than the people of El Segundo. The City of El Segundo is located literally across the street from the third busiest airport in the world, Los Angeles International Airport, which is United Airlines' hub.
For the past 4 1/2 years, our community along with the southern California region as a whole has been engaged in a bitter public debate about what aviation demand is in the 21st Century and how it should be met.
One approach supported by United Airlines calls for LAX to expand air capacity by over 50 percent. A second approach supported by our community and over 80 cities, counties and transportation agencies throughout southern California calls for constraining growth at the LAX hub in favor of a more equitable distribution of air commerce to the 12 airports available for commercial use in our region.
Each member of our growing coalition understands how the hub and spoke airport structure at LAX compromises our local economies, our infrastructure, our environment, our planning processes and our quality of life.
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For example, the refusal of dominant airlines such as United Airlines to provide adequate service at non-hub regional airports has resulted in artificial airport capacity shortages in a region where the LAX hub undergoes constant expansion at the command of the airlines even though available capacity at non-hub airports remains unused.
Furthermore, to reinforce dependence on hub airports, the airlines engage in ticket pricing strategies that render non-hub airports non-competitive. The airlines implement cost recovery measures at smaller airports in the form of higher ticket prices in order to finance investments at their hubs.
Such pricing strategies create a vicious cycle wherein passengers are forced away from alternative airports and back into the hub airports. Sadly that forced reliance on LAX deprives much of the region outside the catch basin of LAX of the economic opportunity that the development of passenger and air cargo service at non-hub airports would bring.
This desire of major airlines, such as United Airlines, to maintain dominance in the hub market and their unwillingness to invest in competitive service at non-hub airports results in an economic imbalance in our region.
Communities ready, willing and able to provide air service, such as the Inland Empire, are locked out of the marketplace by the hub and spoke LAX structure and are deprived of the economic catalyst that airports would bring to their region.
Remarkably, by denying competitive service to non-hub airports, areas of the region facing the greatest increases in population and employment, such as the Inland Empire, Orange County, northern Los Angeles County, suffer a loss of critical air service for their residents and businesses.
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Compounding our problems even further, while LAX strains to shoe-horn more and more passengers into its airport, it already leads the Nation in runway incidents or near-misses at today's levels.
We see the refusal of the airlines, led by United, to meet demand where the demand is generated only serves to exacerbate safety problems at the LAX hub. As serious a threat as we face in safety, safety is not our only problem.
By concentrating aviation, LAX passengers and their vehicles must pass through numerous cities and often multiple counties in order to get preferred flight schedules and reduced fares. This unnecessary traffic seriously impedes ground traffic movement and places undue burdens on the region's infrastructure.
Finally, we cannot ignore the human cost of the LAX Airport phenomenon. Noise and pollution emanating from large hub airports impose acute impacts on communities under or in the flight path and a disproportionate share of the burden is borne by low-income communities and communities of color.
According to preliminary environmental assessments, disbanding the hub and spoke airline structure in favor of a more rational distribution of air traffic throughout the region significantly reduces the impacts of aviation-related noise and pollution, particularly in low-income and ethnic communities.
In conclusion, while we fully recognize the importance of a robust air commerce economy, the LAX hub phenomenon supported by United Airlines unfairly compromises our regional economy, infrastructure, environment, planning process and quality of life.
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Mr. HUTCHINSON [assuming Chair]. Thank you, Mr. Gordon.
[The prepared statement of Mr. Gordon follows:]
PREPARED STATEMENT OF MIKE GORDON, MAYOR, EL SEGUNDO, CA
Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. Thank you for this opportunity to present the views of the City of El Segundo. Today's hearing brings into focus the anti-competitive nature of the nation's largest airline carriers and the negative consequences of the hub-and-spoke structure fostered by airline deregulation. I am pleased to share with this committee our experiences in dealing with the fortress hub phenomenon.
The recent announcement of a proposed merger between United Airlines and US Airways certainly makes this issue all the more urgent.
My colleagues and I oppose the merger between United Airlines and US Airways. The prospect of further concentrating market share in the hands of a small but elite group of corporate giants represents the worst possible scenario for commercial aviation and for the American consumer in the air travel marketplace.
That threat looms larger as industry analysts predict this deal will touch off more mergers, more concentration of power, and further reduction in airline competition as other airlines scramble to meet or beat the United/US Airways stronghold.
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El Segundo is a community located literally across the street from the third busiest airport in the world—Los Angeles International Airport. We have witnessed first hand the crippling effect of large airlines growing even larger and exercising their power over aviation in our region with impunity.
We are not alone in our concern over the fortress hub empire the airlines have crafted in the wake of deregulation. More than 80 cities, counties and transportation agencies in Southern California have adopted resolutions calling for the constraint of growth at the LAX hub airport in favor of a more equitable distribution of air commerce to the many airports available for commercial use in our region.
The anti-competitive practices of giant carriers such as United and the hub-and-spoke airport structure the airlines have created have brought about a portfolio of negative impacts to Southern California. Judging from the Suburban O'Hare Commission's report, Southern California is not the only region of the country being held hostage by little more than a handful of mega carriers.
Among the most serious of negative impacts caused by carrier domination and the hub-and-spoke structure in Southern California are:
1. The creation of artificial airport capacity shortages
2. Ticket price strategies that constrain the ability of existing and emerging non-hub airports to accommodate growing demand
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3. Loss of critical air service to areas of the region facing the greatest increases in population and employment
4. Serious threats to the safety of air travelers as overburdened hub airports strain to shoehorn in more and more planes
5. Traffic impacts caused by importing passengers to hub airports
6. Health risks associated with high concentrations of air pollution around over-developed hub airports
7. Loss of quality of life in communities pounded by noise from concentrated aircraft operations
8. Economic loss to communities ready, willing and able to provide air service but who are locked out of the marketplace by the hub-and-spoke airport structure
9. Over-consumption of regional transportation dollars by hub airports in order to facilitate the hub-and-spoke structure and the consequent lack of resources to meet other regional transportation needs
10. The formidable impediment that dominant airlines present to effective regional transportation planning
CURRENT AND FUTURE AVIATION DEMAND IN SOUTHERN CALIFORNIA
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To put into perspective the backlash over hub-and-spoke aviation in Southern California consider the current and future outlook for aviation in the region.
Currently, the five-county region of Southern California serves approximately 87 million annual passengers and handles nearly two million annual tons of cargo. LAX, with United Airlines at the forefront of both passenger and cargo service, will handle approximately 64 million passengers and 2.1 million tons of cargo this year. That means that one airport—LAX—handles more than 73 percent of the total demand for the region, one of the busiest regions in the world.
By the year 2015, Southern California is projected to serve over 150 million annual passengers. Under its proposed expansion plan, LAX will take in up to 98 million of those passengers.
1. The Creation of Artificial Airport Capacity Shortages
The role of major airlines in creating artificial airport capacity shortages via the spoke-and-hub structure that now reigns in commercial aviation is evident at LAX.
United Airlines is the top passenger carrier at LAX, capturing more than 22% of the passenger market share in 1998—more than twice the market share enjoyed by United's closest competitors, Southwest and American Airlines. And, United Airlines is the second largest cargo carrier at LAX—second only to Federal Express.
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In 1999, United Airlines completed a $260-million terminal expansion and promptly introduced 69 new daily flights out of LAX. United's capacity enhancements roughly coincided with the announcement by LAX officials of the development of a Master Plan for a $12-$15-billion airport expansion project.
LAX, they said, was reaching its maximum capacity and would have to be expanded to meet the region's current and future aviation needs. Airport officials contend that failure to expand LAX will result in a severe shortage of airport capacity and a commensurate economic loss to the region.
What LAX officials fail to acknowledge, however, is the fact that there are 12 existing or potential airports in Southern California available for commercial use, including a second ''international'' airport. More than half of these airport opportunities lie in the heart of the counties expected to experience a large majority of the growth of the region.
Nevertheless, LAX remains the only airport in the region with a full complement of flight options, LAX remains the only airport offering truly international air service and LAX remains the only airport in Southern California where United and other dominant carriers are willing to invest.
The fact is there is NO SHORTAGE OF AIRPORT CAPACITY in Southern California.
The fact is the only shortage of capacity is at the LAX hub, and that shortage is artificial.
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The fact is this artificial capacity shortage is a direct result of the collective refusal of dominant airlines to provide adequate service at non-hub regional airports.
2. Ticket Price Strategies That Constrain the Ability of Existing and Emerging Airports to Accommodate Growing Demand
To further reinforce dependence on hub airports, the airlines engage in ticket pricing strategies that render non-hub airports non-competitive.
Airlines implement cost-recovery measures at smaller airports in the form of higher ticket prices in order to finance investments at their hubs. And by implementing such cost recovery measures, airlines create a vicious cycle wherein passengers are forced away from alternative airports and back into the hub airport.
Despite reduced landing fees and lower operating costs, the airlines overprice fares at non-hub airports. At Ontario International Airport, for example, the cost to fly to Florida is $431. The fare to Florida from LAX, on the other hand, costs only $230.
This same pattern and practice of overpricing tickets is duplicated at other non-hub airports throughout the region, as shown in this cost comparison:
The practice of overcharging passengers for same-destination flights results in reduced usage at non-hub airports and creates an artificial need for additional capacity where the airlines want it most—at the stronghold hub airports.
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3. Loss of Critical Air Service to Areas of the Region Facing the Greatest Increases in Population and Employment
The refusal of dominant airlines to invest in non-hub airports, inequitable pricing strategies and unjustified capacity enhancements at large hubs conspire to deprive safe, convenient and affordable air travel in areas of Southern California expected to receive the greatest increases in population and job growth.
Southern California is expected to grow in population equivalent to two cities the size of Chicago. One of those Chicago-size growth areas is in the Inland Empire-San Bernardino and Riverside Counties.
There are five existing airports available for commercial use in the Inland Empire. Three were made available by military base closures. Despite the abundance of airports, the Inland Empire's growing resident and business population must travel up to 80 miles to Los Angeles in order to receive passenger service at a reasonable price.
Why? Because no passenger carrier has been willing to invest in any of the five non-hub airports in the Inland Empire that are currently operational.
4. Serious Threats to the Safety of Air Travelers at Overburdened Hub Airports Strain to Shoehorn in More And More Planes
The artificially inflated demand for added capacity at hub airports has created a serious threat to the safety of air travelers as more and more flights are shoehorned into already overburdened facilities. The major airlines' refusal to meet demand where the demand is generated only exacerbates safety problems at hub airports.
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At LAX, where United, Southwest and American Airlines maintain dominance over the region's air travel, safety issues remain a grave concern to the FAA and local communities.
For the past two years LAX has held the dubious distinction of being the airport with the highest number of runway incursions, or near misses, in the nation. LAX simply is unable to efficiently handle the volume of arriving and departing aircraft during peak traffic periods.
In fact, air traffic controllers at LAX tower estimate that the volume of operations at that airport is so great that they are unable to handle the load up to four hours each day resulting in serious arrival delays.
More ominous than delay is the increased risk to passengers as well as to communities under the LAX flight path as aircraft that are unable to land are stacked in the arrival stream for prolonged periods of time.
And in El Segundo, we are all too frequently alarmed at the sight and sound of low-flying craft sent over our city when runway congestion forces aborted landings.
5. Traffic Impacts Caused By Importing Passengers to Hub Airports
Hub airports have an adverse effect on ground traffic movement throughout the five-county region of Southern California and place undue burden on the region's infrastructure. By forcing a concentration of passengers into hub airports, air travelers and their vehicles must pass through numerous cities and, often, multiple counties in order to avail themselves of preferred flight schedules and reduced fares.
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More than half of the passengers currently using LAX for foreign and domestic travel live and work outside LAX's 20-mile catchment area. And transportation professionals conclude that the irrational concentration of air travelers flowing into the dense metropolitan area around the hub airport will continue to compromise ground traffic movement.
The Southern California Association of Governments, our only regional transportation planning authority, states that congested speeds on the main freeway into LAX will continue to deteriorate in years to come.
SCAG estimates that congested speeds on the 405 Freeway currently average 18–23 miles per hour. SCAG projects that those speeds will be reduced to 10–16 miles per hour in the next 20 years.
A significant amount of traffic adding to the congestion on the region's highways could be eliminated, and the repair and maintenance of highways reduced, if aviation demand were met in the county that generates the demand.
At present, and into the foreseeable future, counties will be unable to meet their aviation demand until dominant carriers relinquish their hold on hub airports and invest service in other airports.
6. Health Risks Associated With High Concentrations Of Air Pollution Around Overdeveloped Airports
The undue concentration of aviation at the LAX hub has resulted in significant increases in toxic pollution in and around Los Angeles where LAX tops the list of pollution offenders.
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LAX is the single largest source of NOx emissions in the Los Angeles Basin, ranking far above the next three biggest sources, including oil refineries. Studies show the LAX hub's aircraft operations and vehicle traffic generates more NOx , a critical element in the formation of ozone, than all the MTA's public transportation buses combined.
Local communities are blanketed by toxic emissions including Benzene, Formaldehyde and particulate matter from the more than 2000 flights per day taking off and landing at LAX.
The California Air Resources Board recently classified LAX and its proposed expansion, aimed at curing an artificial capacity shortage, as its number one concern relative to air quality.
On-going testing and air quality studies by the Southern California Air Quality Management District and other professionals show that communities near LAX and under its flight path are seriously impacted by health threatening pollution.
Moreover, the greatest impacts from pollution are disproportionately leveled upon low income communities and communities of color resulting in significant environmental justice issues in the region.
According to preliminary environmental assessments, disbanding the hub-and-spoke airline structure in favor of a more rational distribution of air traffic throughout the region significantly reduces the impacts of aviation-related pollution particularly in low income and ethnic communities.
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7. Loss Of Quality Of Life In Communities Pounded By Noise From Concentrated Aircraft Operations
Aircraft noise emanating from large hub airports imposes acute impacts on communities under or near the flight path. Here again, a disproportionate share of the burden is borne by low income communities and communities of color.
Noise impacts are particularly problematic near LAX where communities like El Segundo, Inglewood, Playa del Rey and others abut the airport.
Some areas are so profoundly impacted that LAX has agreed to purchase entire neighborhoods. Property owners in Belford and Manchester Square have petitioned airport authorities to buy them out because noise and other airport-related impacts have rendered those communities unlivable and have permanently and unrecoverably depressed property values.
Noise impacts are so severe that hundreds of millions of dollars have been spent to soundproof homes and schools in the broad swath that falls within the airport's 65-decibel noise level. While soundproofing homes provides a partial remedy to indoor noise impacts, residents gain no relief from relentless aircraft noise in their own back yards.
More significantly, soundproofing is a stealth tool used by large hub airports to expand facilities and increase capacity. Where airports are able to demonstrate that they have mitigated noise impacts in a majority of a given impact area, that area is no longer considered to be impacted by airport-related activity even though there has been no reduction in flights and no reduction in aircraft noise.
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The artificial reduction in the airport's impact zone allows airport growth to continue and disregards the overall quality of life in local communities.
8. Economic Loss To Communities Ready, Willing And Able To Provide Air Service But Who Are Locked Out Of The Hub-And-Spoke Marketplace
Consistent with the findings of the Suburban O'Hare Commission's report, the desire of major airlines to maintain dominance in the hub market by refusing to invest service at other airports results in an imbalance in economic gain throughout Southern California.
LAX officials state that airport-related activity generates $61-billion annually in economic activity and creates 393,000 jobs in the region.
While we do not dispute the economic stimulus provided by airports, it is clear that reliance on the hub airport structure deprives other parts of the region economic opportunity that development of passenger and cargo service at other airports would bring.
The Inland Empire, with five airports available for commercial use, lacks an economic engine to fuel a rapidly increasing population and remedy the economic loss resulting from the local military base closures. These airports are ready, willing and able to support substantial air commerce activity and have the support of the local communities and leadership. Yet, the airlines' intractable adherence to the LAX hub prevents any significant airport activity in the Inland Empire.
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Without the stimulus of investment in these airports by major carriers and the establishment of reliable flight options, Inland Empire airports will be unable to meet the aviation demand generated there and will suffer unfair economic loss.
9. Over-consumption Of Regional Transportation Dollars By Hub Airports In Order To Facilitate The Hub-And-Spoke Structure
The domination of airlines in hub airports has a significant but often overlooked impact on regional transportation funding. As hub airports continually expand to handle more and more passengers, ground access improvements requiring federal transportation funding are needed. Hub airport expansion projects consume large portions of the transportation funds available to the entire region.
The proposed expansion at LAX is estimated to cost $12-15-billion including a high-cost traffic mitigation component. In order for LAX to handle anywhere near the 98 million annual passengers it desires, LAX proposes a number of ground access improvements, including:
Construction of a new freeway dedicated to airport traffic only
A dedicated ring-road around the airport
Extension of the light rail system into the airport at and below grade
Creation of HOV lanes on the 405-Freeway
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Obviously, these ground access improvements will be costly and much of the cost for these projects will come out of the transportation funds needed for infrastructure improvements elsewhere in the region.
The over-consumption of transportation funds for hub airport expansion projects further impedes development of existing or emerging airports especially in Southern California where a number of airports lie in underdeveloped areas where transportation improvements are badly needed.
Surveys by the Southern California Association of Governments indicate that poor highway conditions or limited highway access to outlying airports is an impediment to passenger usage and further forces usage of hub airports.
10. The Formidable Impediment That Dominant Airlines Present to Effective Transportation Planning
Transportation planning is an essential undertaking especially where significant increases in population, ground traffic and air commerce are expected to occur. Southern California, as stated previously, anticipates significant increases in all of these areas in the next 20 years.
But the refusal of major airlines to make service investments outside the hub airport—at the other 11 existing or potential airports available in the region—yields distortions in transportation planning.
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Computer modeling and demand forecasting at the Southern California Association of Governments demonstrates that when the hub airport is constrained, air traffic demand easily distributes to other airports in a rational way—demand is met where the demand is generated.
But the entrenchment of air carriers at hub airports casts a pall over efforts to equitably distribute air traffic and forces transportation planners to accommodate the concentration of ground access and aviation demand at the hub.
CONCLUSION
The community of El Segundo has watched Los Angeles International Airport evolve from a small barnstorming field where it is said farmers planted seeds in the wheel ruts left behind by Charles Lindbergh's plane to become what it is today—a Fortress Hub for major air carriers.
As that transition took place, my community and many others in the region have suffered the negative impacts of the hub-and-spoke structure fostered by the airlines. While we fully recognize the importance of a robust air commerce economy, we cannot condone the willful disregard for the welfare of our communities, our health and our quality of life as corporate giants tighten their grip on profits.
The hub-and-spoke structure of the deregulated airline industry stifles competition among airlines, frustrates the goals of deregulation, and deprives consumers of the benefits of competition. Moreover, the negative effects of the fortress hub phenomenon, as I have demonstrated here today, ripple through local economies, infrastructure, environments and planning processes.
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The inevitable spiral of airline consolidations and the consequent reinforcement of the hub-and-spoke structure must be stopped now by blocking the United Airlines/US Airways merger.
I respectfully urge this committee to fully examine the anti-competitive practices in the airline industry, to consider the grave consequences of the fortress hub phenomenon on both the national and local level, and to recognize that the unmitigated consolidation of power through mergers and acquisitions in the airline industry is contrary to the principles of free trade and threatens to stunt safe, convenient and affordable air commerce in the United States.
Thank you for this opportunity to share our views and experiences in this matter.
Mr. HUTCHINSON. Professor Kahn?
STATEMENT OF ALFRED KAHN, ROBERT JULIUS THORNE PROFESSOR OF POLITICAL ECONOMY, EMERITUS, CORNELL UNIVERSITY
Mr. KAHN. Thank you. I think it is probably sensible that I am in the middle of this table because the first proposition I want to assert very briefly is that airline deregulation has been a great success.
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I have no reason to doubt the estimates that it saves travelers billions of dollars a year, that the fact that 94 percent of all mileage last year was at discount fares, average discount 69 percent from the admittedly outrageous full fare prices is a tribute to the increased competition that has occurred in the industry.
At the same time there are obviously very severe problems and I belong on the other side of that picture as well. One of the problems has been the enormous increase in congestion and discomfort. That is not necessarily a bad thing.
The problem under regulation was that you had empty seats next to you, but you paid for the empty seats. Our main purpose of deregulation was to increase competition and to bring air travel within the reach of families of modest means. And it has certainly done that.
On the other hand, it is clear that you are not going to have adequate competition unless the government fulfills its role and we have a system for providing infrastructure, air traffic capacity, airport capacity that is insane and partly because it is all concentrated in the government. It ought to be done in some independent fashion.
I urge you at some point if you want to pursue that to talk to Robert Poole of the Reason Foundation or I will give you an article which shows the enormous increase in competition between airports in Europe that have enormously increased the opportunities for low-fare travel.
The other major portion of my paper, which I can only briefly summarize, goes to the policies on the part of the Government needed to expand competition directly, and I refer to two in particular.
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The antitrust laws operate to concentrate on two aspects of behavior. One is changes in the structure of an industry that make it less competitive and second, behavior on the part of incumbents that makes fair competition impossible.
The second of these, of course, has been a major issue because of the entrance of new airlines in the mid-1990's and the kinds of reactions that Professor Dempsey has described. There are incident after incident of this. The Department of Transportation, I have supported what they have done.
I have a discussion in my paper of some of the problems with the criteria that they propose. But they are fundamentally right that it is necessary to identify situations in which the incumbent carriers in effect take losses in the expectation of driving out new entrants in order to protect their fare structures, which are highly discriminatory. I will just give you one figure. Average fares have declined about 40 percent, CPI adjusted, since 1976. Full fares have increased 70 percent in real terms, CPI adjusted.
A lot of that differentiation is necessary and desirable and I would be glad to describe why. But there is no question, it also reflects monopoly power and the principal protection against that has to be freedom of entry.
When then you find case after case of a low fare entry coming in and offering people bargains and being met with in one case an expansion in the number of discount seats from 13,000 to 50,000 in one quarter, then the entrant is driven out and the low-fare seats then go down to 1,000. You have something there and I agree that we should be supporting DOT.
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The other is the specific proposed United-US Air merger. I do not have a settled, definite opinion on the merger. But there are three things that I think the antitrust authority should be looking at.
Number one is, of course, are there routes on which they are already direct competitors and in which their merging will directly threaten competition?
The second, which is not often mentioned, but is very important, one of the major premises behind deregulation was that airport markets were contestable, that potential competition would protect customers.
There have been studies that demonstrate that the presence of a potential competitor of a route, by already being at one end or another of the route, does help discipline fares.
What we have to be concerned about in the case of United and US Air is not really the small number of routes on which they may be direct competitors, but the enormous number of routes on which they are potential competitors.
If a major defense of United is that it needs a major hub in the northeast as does American, then that suggests to me that it is a potential competitor of US Air and if it were denied the ability to acquire the hub the easy way by purchase, let it put itself into the northeast and let us get some real competition.
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The final thing, of course, is the cumulative effect. That is that if United does indeed by acquisition of US Air obtain preferential access to the feed from US Air's very intricate route structure in the northeast, I can well understand American saying, well, in those circumstances because we don't have a major hub in the northeast either, we will have to go about joining somebody else.
That prospect of the industry being reduced from six majors to three always leaves out Southwest Air without which I probably wouldn't dare to show my face today.
But that prospect is frightening to me. I think we want to give the Antitrust Division not only the urging but the resources that it needs to look into this merger.
Thank you.
Mr. HUTCHINSON. Thank you, Professor.
[The prepared statement of Mr. Kahn follows:]
PREPARED STATEMENT OF ALFRED KAHN, ROBERT JULIUS THORNE PROFESSOR OF POLITICAL ECONOMY, EMERITUS, CORNELL UNIVERSITY
My name is Alfred E. Kahn. I am the Robert Julius Thorne Professor of Political Economy, Emeritus, Cornell University, and also Special Consultant with National Economic Research Associates, Inc. Most directly pertinent to my appearance here, I was Chairman of the Civil Aeronautics Board during the 16 month period ending with deregulation of the airlines, in October of 1978. In compliance with your rules, I attach a brief curriculum vitae and attest that I have not received any federal grant, contract or subcontract associated with my studies of the airline industry.
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I am honored by your invitation to appear before you today, to offer you my opinions about the state of competition in the industry.
I can state my first and most general opinion very briefly: deregulation has been a great success, precisely because it unleashed the forces of competition in the industry. This means that on the whole I regard the industry as highly effectively competitive. I will leave to others—most notably Dr. Clifford Winston, of the Brookings Institution, and Professor Steven Morrison, of Northeastern University, who have studied the subject in much greater detail than I'the documentation of the proposition that competition has produced annual savings for travelers in excess of $15 billion dollars a year. Last year, in large measure because of the pressures of competition, more than 93 percent of all air travel was at discount fares, with the discounts averaging some 69 percent below full fares.
There are, I think, two things to be said about the fact that all this discounting has been accompanied by a marked increase in discomfort and congestion. First, it was precisely the failure of regulation to offer travelers a low-cost/lower-quality product that was its greatest failure: more crowded planes are the means by which deregulation has brought air travel within the means of families with modest incomes. Second, this deterioration in the quality of the air travel experience is a consequence, in important measure, of the failure of government to provide the optimal infrastructure'specifically, air traffic control and airport capacity—and to price it in recognition of the fact that the true costs of these services are far higher when and where congestion is severe than when and where capacity is ample.
I take it as a truism, which requires no explanation to this Committee, that the withdrawal of direct regulation shifts the responsibility for protecting consumers to competition, and responsibility for preserving that competition to increased vigilance in enforcing the antitrust laws, including the statutory prohibition of unfair methods of competition.
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In these remarks, I propose to concentrate on the two aspects of antitrust policy, as applied to this industry, that have inspired the greatest amount of controversy and concern in the last several years. The first is the question of what constitutes or should constitute unfairly exclusionary practices, such as the Department of Transportation is charged with preventing. The second, and more immediate, is raised by the proposed merger of United Airlines and US Airways, and the possibility that it might set off imitative or defensive mergers among the other four major domestic carriers, which would threaten to produce a very substantial increase in industry concentration at the national level. Along with the reform of the arrangements for providing and pricing access to infrastructure and our long-continuing efforts to lift the governmentally imposed barriers to competition at the international level, I can think of no other aspect of government policy with greater significance for the preservation and expansion of the benefits of deregulation.
PREDATORY OR EXCLUSIONARY PRICING
The basis for the heightened concern in recent years about such assertedly exclusionary tactics—which the Department of Transportation is charged with preventing—as predatory pricing, interference with new entrants obtaining fair access to airport facilities, refusals to interline or exchange luggage, and the offer of special override commissions to travel agents targeted at markets subjected to new competitive entry is by now entirely familiar. While I have not been in a position to make any direct assessment, on the basis of historical experience, of the importance of such practices—and am not at all clear how it might be conducted—I have at least the strong impression that the intense controversies engendered by DOT's promulgation of proposed rules in fulfillment of that responsibility, in April of 1998, does properly reflect their importance. Consistently with that opinion, I strongly endorse the proposition that DOT both has and should have that responsibility: it is the precise counterpart of the statutory responsibility of the Federal Trade Commission to prevent unfair methods of competition—from which airlines were exempted because of their historical subjection instead to direct regulation.
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1. While average yields, per mile, have declined on the order of 40 percent in real terms—i.e., adjusted for changes in the Consumer Price Index'since deregulation, full fares, paid on only some 6 percent of total mileage, have apparently increased on the order of 70 percent. That sharply increased spread has surely been in large—indeed, I offer the impression, major—measure beneficial to all travelers, for two reasons. In part, it reflects wide differences in real costs as between long and short, dense and thin routes and by hour of the day and day of the week, as well as of holding seats open for last-minute availability. Moreover, to the extent that the fare differentials are discriminatory, they make it possible to use larger, more efficient planes and offer more convenient scheduling on a greater number of routes than would have been possible if all fares had to be uniform. Within limits—of incremental costs at the bottom and stand-alone costs at the top'the offer of heavily discounted tickets to discretionary and/or leisure travelers, in order to fill seats that would otherwise go empty, while charging higher fares to demand-inelastic travelers, is beneficial to both of them.
2. At the same time, this increased discrimination has raised legitimate concerns about the likelihood that those full fares reflect also monopoly exploitation of travelers who cannot make their reservations weeks in advance or stay over a weekend'the most familiar devices by which the airlines discriminate between demand-elastic or discretionary travelers, on the one side, and demand-inelastic, exploitable ones, on the other.
3. There are, effectively, only two ways of preventing exploitation of the demand-inelastic travelers. One would be a resumption of regulation; since no economist I know advocates this, it would be superfluous to expatiate on my reasons for not recommending it.
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4. The only alternative protection, and the one completely consistent with deregulation, is competition. One important function of free competitive entry is to ensure that no group of travelers is ever charged more than the costs of serving it alone. This process was apparently exemplified by the increasing challenge by new, low-cost, low-fare entrants in the middle '90s to the sharp increases in full fares—documented by the Department of Transportation, along with an estimate that they saved travelers some $6 billion in 1996. This is precisely the way in which a deregulated, competitive industry is supposed to protect not merely consumers generally but any smaller subgroup of them.
As I put it in my testimony on April 22, 1998,
The theoretically correct basis for—charges to subgroups of customers—is stand-alone costs—the hypothetical cost of serving any partial grouping of customers alone. That is the ceiling that would prevail if there were perfectly free entry: . . .
Clearly, the best way of ensuring that such a ceiling will prevail is free entry itself; and it was indeed on freedom of competitive entry that we relied for the protection of travelers when we deregulated the airlines. But what seems to have occurred time and again in recent years has been: unrestricted fares are jacked up and up; that induces entry of low-cost, more or less uniformly low-fare rivals, emulating Southwest, who can profitably serve those customers at much lower fares; the incumbents then cut their fares deeply and sharply increase the number of low-fare seats they offer on the routes—and only on the routes—on which they have been challenged; the new entrant departs; and fares immediately go right back up, with no further challenge. That is the kind of scenario that the Department of Transportation says it has seen played out many times in the last few years and that it sees as crying out for remedy.
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I should point out, at the same time, that the pattern I have just described is by no means uniform and invariable. While the TRB Committee, of which I was a member, that reported on Entry and Competition in the U.S. Airline Industry last summer, found some of the responses of incumbents to competitive entry ''difficult to reconcile with fair and efficient competition'' (p. 6), it could find no uniform pattern in the instances of possibly exclusionary conduct presented to it by the Department of Transportation: while incumbent airlines typically reduced their fares sharply in response to such entry, sometimes increasing capacity, sometimes not, there is no clear and consistent relationship between those responses and either the disappearance of the challengers or the restoration of fares to their previous level. On the other hand, there has just come across my desk a monograph by Professors Fred Allvine, of the Georgia Institute of Technology, and Ashutosh Dixit, of the University of Georgia, which appears to document at length and in great detail exactly the kind of scenario that I have just described, showing a pattern of great consistency; it clearly deserves your careful attention and that of the Department of Transportation.
5. Market entry by low-cost, more or less uniformly low-fare-charging carriers has made a grossly disproportionally great contribution to the benefits of price competition in the industry, according to the definitive studies of Drs. Winston and Morrison.
6. The airline industry is especially susceptible to predation, because of the mobility of aircraft and the consequent relatively small proportion of sunk costs in undertaking to serve and responding to competitive entry into individual markets: the incumbents need incur virtually no additional sunk costs when they increase capacity on challenged routes and entrants can be readily induced to depart, because of their ability correspondingly to move their equipment out.
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7. The sophistication of the major airlines in practicing yield management, rationing the availability of deeply discounted tickets, makes it easy for them sharply to increase the availability of such fares on individual routes in response to competitive challenge and to withdraw them when the challenge disappears.
8. This character of the industry and of its costs makes it extremely difficult to apply the test of predation that has been most widely adopted by the courts—namely, pricing by the incumbent below its short-term marginal or average variable production costs. In the circumstances that I have just described, the principal component of those average variable costs are not production costs but opportunity costs'the revenue foregone elsewhere by transferring capacity to the contested route and/or the revenue from undiscounted or only modestly discounted ticket sales sacrificed by the suddenly increased availability of deeply discounted ones. This is the essence of the condition incorporated in all three indicators of ''unfair exclusionary practices'' proposed by the Department of Transportation: that ''the ensuing self-diversion of revenue results in lower local revenue than would a reasonable alternative response.'' (in Transportation Research Board, p. 166)
There is nothing wrong in principle with this proposed criterion of predation or unfairly exclusionary practices proposed by DOT. A carrier that adopts a less profitable response to the entry of a competitor than others available to it may reasonably be presumed to have made that sacrifice only in the expectation that it would succeed in driving the competitor out of the market and permit restoration of the previous more profitable fares. The problem, recognized by both supporters and opponents of the DOT initiative, lies in the feasibility of administering such a standard: one can readily envision the judicial morass that would be involved in a government agency attempting to determine whether there were indeed other more profitable alternative responses available to the carrier. Moreover, there is the difficulty, in proceeding against these vigorous competitive responses, in predicting which of them will ultimately succeed in destroying competition and which will not, and in which markets, therefore, competition is likely to be destroyed, in which instead it is likely to persist, to the lasting benefit of consumers.
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My own proposed resolution of this dilemma would be to leave the determination of what would be the least unprofitable response to competitive entry, absent a predatory intent, to the incumbent carriers themselves, by a simple requirement that if their response does indeed succeed in driving out the challenger, they be required to maintain the levels of capacity and of fares that they adopted after entry for some substantial period of time'say, two years. This would tend to ensure that an incumbent carrier would not lightly undertake a predatory, profit-sacrificing response in the expectation of being able to withdraw it if it succeeds in driving out the challenger; and, at the same time, give travelers the continuing benefit of the newly introduced competition for some substantial period of time, rather than permitting its quick withdrawal.
I must emphasize, in fairness, that the overall profitability of the airline industry seems hardly reflective of what one would expect from a monopolist: overall, it apparently has, on average over the years, fallen well below the average of American industries generally. This consideration does not, however, exclude the possibility of purchasers of unrestricted tickets having a legitimate complaint; and it by no means follows that if unrestricted fares were to come down, discount fares would inevitably go up. The industry is far from perfectly competitive; there is therefore a wide range within which its rates of return can vary, not only from year to year, but also in the long run, if only because its costs are not exogenously fixed by perfectly competitive input markets but are themselves instead responsive in important measure to the intensity of competition in airline markets. If competitive entry were freer than it is today of predatory responses, the intensified competition that it could bring could clearly be associated with lower costs, the latter because of both intensified downward pressures of competition on the costs of incumbents and the increase in the proportion of the traffic carried by the low-cost carriers.
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There is always a danger, in proceeding more vigorously against what appear to be predatory pricing responses, of weakening competition itself. The concern is a legitimate one'that a more vigorous attack on responses by incumbent airlines to competitive entry may outweigh the benefits, by labeling as predatory what is really healthy and consumer-benefiting competition. On the other hand, some of the criticisms of the Department of Transportation's initiative, to the effect that it would suppress more competition than it would protect, generally ignore the fact that the only possible circumstances under which the DOT policy would discourage such price reductions would be when the incumbents were not offering such low fares in such profusion until they were challenged, then offered them only in direct response to competitive entry and only on the particular routes affected, and—in those instances in which the competitor had been driven out—promptly withdrew them.
THE PROPOSED UNITED AIRLINES/US AIRWAYS MERGER
I must begin by pointing out that I do not as yet have a settled opinion about whether the proposed merger of United Airlines and US Airways should be approved. I do urge your Committee—and, of course, even more, the antitrust agencies—however, to give careful consideration to its possible anticompetitive effects. It seems to me they are of three kinds.
The first is the possibility that it will suppress preexisting direct competition between the two carriers. I do not know whether there are indeed any substantial number of particular routes on which United and US Airways are already direct competitors. In the case of the proposed merger of Continental and Northwest, the Antitrust Division identified several very important routes between their respective hubs (for example, Houston/Minneapolis-St. Paul, Houston/Detroit, Cleveland/Minneapolis-St. Paul, Cleveland/Memphis, Newark/Twin Cities) on which it appeared those airlines were the two main if not only competitors, and their merger would simply eliminate that competition. I do not know to what extent there are similar overlaps between US Airways and United.
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Second, however, in deregulating the airlines we relied very heavily on the threat of potential as well as actual competition to prevent exploitation of consumers: an important part of the rationale of deregulation was the contestability of airline markets. It seems to me highly likely that there are many routes in which either United or US Airways is a potential competitor of the other. And it is my recollection that while studies of the behavior of airline fares after deregulation (notably one by Winston and Morrison and another by Gloria Hurdle, Andrew Joskow and others) demonstrated that one actual competitor in a market is worth two or three potential contesters in the bush, they nevertheless also found that the presence of a potential contester—identified as a carrier already present at one or the other end of a route—did constrain the fares of incumbents.
The likelihood that a United/US Airways merger would indeed result in suppression of such potential competition would seem to be enhanced by what I take it would be United's explanation and justification—namely, its need for a strong hub in the Northeast (commented on widely in the literature, along with attributions of a similar need to American Airlines). But if United really does feel the need for a big hub in the Northeast, this suggests that it is indeed an important potential competitor of US Airways, and that, denied the ability to acquire the hub in the easiest, noncompetitive fashion, by acquisition of that company's Pittsburgh and Charlotte hubs, might instead feel impelled to construct a hub of its own in direct competition with it. And while I have the impression that the suppression of potential competition has not played a major role in most merger litigation, it might properly be definitive in this case, if only because, either explicitly or implicitly, United is in effect conceding the potentiality of that competition in its rationalizations of the merger itself. The stronger its argument that it does indeed require a big hub in the Northeast, the more that signifies that the alternative, if it were denied the opportunity to acquire US Airways, would be to construct a major competitive hub of its own.
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Finally, if indeed United's acquisition of a competitive advantage by this acquisition—giving it the first claim on traffic feed from US Airways—extensive network—does increase the pressure on other carriers, particularly American, to merge similarly, then it seems to me that is a possible competitive consequence of this particular merger that should additionally be taken into account in deciding whether it should be permitted. A consolidation of the big six into an even bigger three would certainly raise most serious questions about its compatibility with the continuing competition that has brought such benefits to the travelling public—all the more so because of the legal prohibitions of foreign-owned carriers operating in the U.S. market.
I do hope your Committee will press the antitrust agencies (and if their resources are strained, help them obtain resources sufficient) to undertake this important inquiry: we may be confronting a very radical consolidation of the industry that would threaten to reverse the great benefits of deregulation.
Mr. HUTCHINSON. Now, Mr. Leonard, we will be delighted to hear from you.
STATEMENT OF JOE LEONARD, CHAIRMAN AND CEO, AIRTRAN AIRWAYS, INC.
Mr. LEONARD. Thank you. The United-US Air acquisition presents a unique opportunity to create and improve competition in the airline industry, I believe, and I will describe that later.
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Given the opportunity to compete at Reagan National Airport the consumer benefit of a low-cost, low-fare network would save consumers $600 million in the first year.
Mr. Chairman, Mr. Conyers, members of the committee, as you go through your work here considering these issues, I would like for you to focus on four items.
The first is the merger between United and US Air will not change an already disparate condition of competition in the industry and it would strengthen both of those airlines. To me, the key element in the merger proposal is the structure of the divestiture of the slots at Reagan National Airport.
Three, the disposition of DC Air as proposed will not provide any meaningful competition. It will certainly result in a curtailment of service and it will result in increased fares. The best chance and last chance to bring meaningful competition to the east coast and Reagan National Airport is at hand.
Mr. Chairman, the state of competition in the airline industry is at best poor today. In terms of the type of competition that consumers really benefit from, i.e., price competition, it is limited to those relatively few markets where carriers like AirTran and Southwest participate.
The fact is, the big six don't compete on price today. In fact, the big six function already like the big three through alliances and code sharing agreements.
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I say this from the perspective of somebody who has been struggling against the anti-competition practices of some of the major airlines for some time, and with some success.
United and US Air have already acknowledged the requirement to divest the slots at Reagan National Airport in order to get this deal done. The question is, does DC Air divestiture provide meaningful competition or public benefit?
I would submit the answer is a thunderous no. First of all, DC Air is not an independent airline. It gets its crews, airplanes, maintenance facilities, and airport facilities from United Airlines. It is in the United Airlines Frequent Flyer Program.
Furthermore, there are very, very strict limitations on DC Air's ability to sell or use the slots so they have maintained control, absolute control, over this new airline. Therefore, solidifying their position that there will be no meaningful competition anywhere in the Washington metropolitan area.
Given the structure, DC Air will have some of the highest costs in the industry. They are going to use smaller airplanes. This is not a formula for low cost. If your costs are high, you have to charge higher fares.
In addition, they have already put a schedule out that would indicate that upstate New York is going to lose 48 to 56 percent of its seats. Louisville will lose 62 percent of its seats. Greensboro and Raleigh-Durham, more than 50 percent. Where is the public benefit?
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The new carrier will reduce capacity on the east coast and add no capacity in Charlotte, Pittsburgh or Chicago. Real competition comes from low-cost, low-fare carriers. AirTran Airways competition in Atlanta brings $700 million of benefit to the customers each year.
In 1997, the DOT gave us exemption slots to operate in New York LaGuardia Airport. Last year New Yorkers saved $175 million based on that competition.
Most airports are growing in the country today, but Reagan National is actually shrinking. Because there is lack of demand? No. It is because the fares are so high. We estimate the consumer benefit from a low-fare network carrier could bring $600 million of consumer savings in the first year alone.
The conditions of approval of this acquisition must include provisions for real competition by independent new entrant carriers at a number of airports, most notably Reagan National.
Reagan National is one of the few markets on the East Coast that has not experienced any low-cost competition. A network provider in this market will save the consumers $600 million a year as we have demonstrated in Atlanta and other markets.
The point, of course, is not whether AirTran receives these slots. The point is what real low-fare competition can do in this marketplace, and this is a unique opportunity for you to assure that that competition takes place by the appropriate disposition of the Reagan National slots.
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Thank you very much, Mr. Chairman. By the way, sir, if you build an AirTran, we will come.
Mr. HYDE. We will certainly make a note of that.
[The prepared statement of Mr. Leonard follows:]
PREPARED STATEMENT OF JOE LEONARD, CHAIRMAN AND CEO, AIRTRAN AIRWAYS, INC.
''The United-US Airways acquisition presents a unique opportunity to create and improve airline competition''
''Given the opportunity to compete at Reagan National . . . the consumer benefit of a low fare network would easily exceed $600 million in the first year''
Mr. Chairman and Members of the Committee:
As you go about the difficult work of considering the implications of the proposed United and US Airways merger, here are the key points that I think you should consider:
1) The merger of United and US Airways would NOT alter the already desperate condition of competition in the airline industry, and it WOULD strengthen both airlines.
2) The key element in the merger proposal is the structure of the divestiture of US Airways slots at Washington's Reagan National Airport.
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3) The disposition of those slots through the proposed creation DC Air would NOT provide meaningful competition, and it WOULD sharply curtail service in many communities currently served by US Airways. It also will almost certainly lead to fare increases in those markets.
4) Finally, and most important, this merger has opened the door to what I believe is a historic opportunity to expand service and lower fares in the most heavily protected bastion of the major airlines—Reagan National. The Executive Branch and the Congress are now facing the best and perhaps the last meaningful chance to stimulate service and lower fares at Reagan National for years to come.
Mr. Chairman, the state of competition in the airline industry is at best poor. In terms of the type of competition that is most beneficial to consumers—price competition—it is limited to those relatively few markets where a low fare carrier, like AirTran Airways and Southwest, provide competition. The fact of the matter is the big six carriers do not compete on price. And the combination of United and US Airways will not change that fact or significantly worsen an already struggling situation. The big six carriers are already combined as a result of marketing and code share alliances into three distinct camps; this proposed merger will only formalize the relationships and change some of the dance partners—but the dance will go on. I say this from the perspective of someone who has been struggling against the anti-competitive practices of the major airlines for some time, and with some success.
As you know, both United and US Airways acknowledge the need to divest of assets at Reagan National Airport as a condition of approval. Without this divestiture, the combined United would control two thirds of all flights from the Washington Metropolitan area.
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The question then, is whether the proposed creation of DC Air is a divestiture that will result in meaningful competition or in any way be in the public interest? I would submit the answer is a thunderous ''no.''
Even a cursory review of the facts clearly indicates DC Air will not be an independent carrier. DC Air will lease United aircraft and flight crews, adopt the United pilot contract terms, use United maintenance and ground facilities, participate in the United frequent traveler program—all under the direction of a current US Airways Vice President. To affirm this control, United placed strict limitations on the sale and control of the DCA slots—the primary asset of the new carrier—which is a clever means to keep any real competition from entering the Washington metropolitan marketplace.
Given the structure of the proposed new airline, DC Air would have some of the highest costs in the industry. High costs and the extensive use of smaller aircraft are not a realistic formula for low cost service. Clearly no real competition and no consumer benefits will result from the new carrier. In fact, several markets would lose service as a result. For example, upstate New York communities will have 48% to 56% fewer seats post-merger; Louisville will have 62% fewer seats while Greensboro and Raleigh-Durham will each lose more than 50% of current capacity. Where is the public benefit? The new carrier will reduce capacity in key East Coast cities, but not add significant capacity in any of United's mega-hubs—such as Charlotte or Pittsburgh, and no service to Chicago O'Hare.
Real competition comes from carriers with quality low fare service. AirTran Airways competition in Atlanta resulted in consumer savings of $700 million last year. In 1997 the DOT wisely granted AirTran Airways exemption slots to serve New York LaGuardia; the resulting competition saved New York consumers more than $175 million last year. One of the most significant markets not benefiting from low fare competition is Reagan National Airport—and while nearly every major airport in the United States is reporting record boardings, Reagan National is actually shrinking. This is a direct result of a lack of competition—clearly there is not a lack of demand for travel to Washington, but rather outrageously high fares suppressing demand. Given the opportunity to compete at Reagan National with a network similar to that proposed for DC Air, we estimate the consumer benefit of a low fare network would easily exceed $600 million in the first year.
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The conditions for approval of this acquisition—and we believe it should be approved—must include provisions for real competition by independent, new entrant carriers at a number of airports—most notably Reagan National.
This is the key part of the merger equation—if the DC Air proposition is brushed aside, how will slots be reallocated? How that question is answered will have far more impact on passengers and fares than the merger itself.
If those slots become available, the Congress and the Executive branch can follow the traditional path of distributing them one-by-one to selected communities. I would call that the ''let's feed all our children'' scenario. Or you can do what the merger partners declined to do for obvious and self-serving reasons—reallocate the slots to one or two low fare carriers who would be required to network them to many cities, and in doing so break open the Reagan National monopoly. Reallocation of slots to AirTran Airways, either by voluntary divestiture or withdrawal, will clearly result in a level of competition never experienced at Washington's primary airport. Similar measures must be taken at other airports to ensure facilities are available for new entrant competition and to prevent the public harm that will result from increased monopolies.
If I was planning the legislative and regulatory tactics of the merger airlines, this would be my strategy: put DC Air on the table, knowing that it would be the best possible outcome for the merger airlines. If it runs into heavy flak, I'd fight the fight as long as I could, and then unveil a plan to disburse those Reagan National slots piecemeal, and to as many airlines as possible. That would be the way to guarantee that the slots could not hurt me—if they were fragmented, there would be no consolidated market power leveraged against me.
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It will not surprise you that AirTran Airways has ideas about how to carry out what I describe, and in the back of the handout that accompanies my statement you will see exactly what I describe along with the fare impact. These are not back-of-the-envelope computations—they are reflective of the well-documented impact AirTran Airways competition has had on prices and passenger demand in similar routes.
AirTran Airways has successfully demonstrated its ability to operate the type of low fare hub network envisioned by the DC Air proposal. We have competed profitably with Delta and other major carriers in Atlanta and other large and small markets throughout the Eastern United States. We are prepared to expand our low fare, quality brand of service from Washington National to markets such as Akron-Canton, Bloomington, Buffalo and other upstate New York markets, Greensboro, Charleston and Savannah as well the major markets we serve today, including Chicago and Minneapolis. AirTran Airways has repeatedly demonstrated in small and large markets that low fares and quality service significantly increase demand and consumer benefits. Ronald Reagan Washington National is one of the few markets on the East Coast not to experience this benefit. We are seeking the opportunity to provide significant low fare service in this market—this is a unique opportunity to act to create real competition.
But the point, of course, is not whether AirTran Airways receives these slots—the point is what real, low-are competition could do in this market place—be it AirTran Airways or another new entrant, low fare carrier.
Mr. Chairman, this concludes my prepared statement. I would be glad to respond to any question that you or any Members of the Committee may have.
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Mr. HYDE. Ms. McInerney?
STATEMENT OF MARIANNE MCINERNEY, EXECUTIVE DIRECTOR, NATIONAL BUSINESS TRAVEL ASSOCIATION
Ms. MCINERNEY. Good afternoon. As the executive director of the National Business Travel Association, I have the privilege of representing over 1900 corporate travel managers who work for our Nation's Fortune 1000 companies and who are in charge of over $70 billion in business travel expenditures domestically.
Before I begin my remarks, I want to thank you for this important forum and for your leadership in helping us move the aviation industry closer to a more competitive and consumer friendly environment.
It is refreshing today that we have been invited to share with you the perspective of the customer. Our position in this dialogue is unique. We represent corporate travel managers and their companies who operate throughout the world and who account for about 50 percent of the $396 billion that is spent annually on business travel.
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Those are the people who send 44 million travelers through our air travel system annually.
NBTA is dedicated to one collective goal, ensuring that travel is safe, efficient and cost effective. In today's environment it certainly magnifies the important role of business travel managers and corporations' ability to maximize the return on their investment and enhance corporate productivity.
Business travel today is the core function which contributes to all elements of corporate productivity as well as its bottom line.
In today's environment, corporations pay a disproportionate share for air fares when contrasted to the amount that leisure travelers pay.
Often business travel fares are four times as much as leisure fares because of the price of the airline ticket and the accompanying Federal passenger taxes.
In recent years we have witnessed carriers who have faced many challenges including rising fuel costs and over-capacity in some regions and poor economic conditions in others.
Unfortunately, business travelers and their corporations have shared the burden of the carriers' misery. It is clear that there is a desire on the part of the aviation community to resolve their financial burdens by seeking to consolidate and align themselves with rival carriers.
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The question is, at what premium will the consumer, particularly the business traveler, have to pay for the consolidation and the alignment of these carriers.
In the wake of the recently announced alliances and the merges by major carriers, NBTA developed a survey and conducted it within the last 48 hours to measure the full impact of this situation and what impact it will have on corporate travel.
I would like to share these top of line results with you this morning. To provide you with some context, our Nation's corporations and their travelers already experience record high airfares. Sixty-one percent of those corporations report that their airfares have increased between six and nine percent in the last year.
Indeed the average domestic airfare ticket of our members is over $1600. Since the beginning of the year we have witnessed walk-up fares, those fares most often used by business travelers, that have moved past the $2,000 mark.
Low-fare and new entrant carriers have become the core component for corporations to respond to today's environment. They have become the true counter weight to traditional airfare pricing.
If I may illustrate, just today, if we were to walk up and fly from Boston to Los Angeles on Frontier Air, we would be able to pay $1,000. But the same trip on American would cost the business traveler over $2400.
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To further illustrate, to fly from New York today on a walk-up fare to Chicago on ProAir would cost $434. On Northwest it would cost $720 and on United it would cost $1200. This illustrates that there is clearly a need for low-cost alternatives in major markets.
Seventy-nine percent of our corporations have increased their use of low-fare carriers in order to deal with higher airfares and to respond to the heavily inflated market prices that have risen over the past year.
This statistic alone speaks to the importance and need for alternatives of price point and service within the corporate travel dynamic.
Airline deregulation has created a marketplace dependent on competitive market forces. These forces are led by two factors: cost and choice. In an effort to reduce the impact of rising costs, corporations have sought alternatives to traditional travel, but the impact on the bottom line must be carefully balanced within the corporation's desire themselves to remain competitive economically.
Within today's market dynamic, we have also witnessed a reduction in consumer choice, a key component in a truly competitive environment. Our survey indicates that 82 percent of corporations anticipate that the consolidation in mergers will lead to higher airfares and less choice.
NBTA believes that it is essential to maintain an environment that assures a level playing field in terms of competition within the airline industry. There must be fair, f-a-i-r, competition and fare, f-a-r-e competition. The emergence of new entrant carriers in several regions has expanded services for healthier competitors and these are the only solutions that will pressure fares downward and force the world's dominant air carriers to redefine their pricing strategy.
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In conclusion NBTA strongly believes in the interplay of free market forces. We do not advocate re-regulation or price controls on the airlines. But we do believe the Government has a role in ensuring that there is a level playing field and that true competition in the airline industry will remain.
We believe that there is clear authority for the Government to do this. To that end, our ability to collectively drive solutions that will allow our system to operate efficiently and safely will be the foundation of our future economic and market growth or failure for our Nation in total.
Thank you for your leadership.
Mr. HYDE. Well, thank you very much.
[The prepared statement of Ms. McInerney follows:]
PREPARED STATEMENT OF MARIANNE MCINERNEY, EXECUTIVE DIRECTOR, NATIONAL BUSINESS TRAVEL ASSOCIATION
GOOD MORNING. IT IS A PLEASURE TO BE WITH YOU TODAY. MY NAME IS MARIANNE MCINERNEY, AND I AM EXECUTIVE DIRECTOR OF THE NATIONAL BUSINESS TRAVEL ASSOCIATION (NBTA). NBTA REPRESENTS OVER 1,500 CORPORATE TRAVEL MANAGERS FOR THE FORTUNE 1000 COMPANIES, WHO ARE IN CHARGE OF $70 BILLION DOLLARS IN BUSINESS TRAVEL EXPENDITURES.
BEFORE I BEGIN MY REMARKS, I WANT TO TAKE A MOMENT TO THANK YOU FOR THIS IMPORTANT FORUM. IT IS GOOD TO HEAR FROM LEADERS FROM THE AVIATION AND TRAVEL INDUSTRY COMMUNITY, BECAUSE EACH OF US ARE A PART OF THE SOLUTION THAT CAN MOVE THE AVIATION INDUSTRY TOWARDS A COMPETITIVE AND CONSUMER FRIENDLY ENVIRONMENT.
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IT IS REFRESHING TODAY THAT WE HAVE BEEN INVITED TO SHARE WITH YOU THE PERSPECTIVE OF THE CUSTOMER. IT IS GOOD THAT SUCH A FORUM HAS CHOSEN TO LISTEN TO PASSENGERS IN LOOKING AT PUBLIC POLICY ISSUES. TOO OFTEN, THAT IS NOT THE CASE, BUT I MUST TELL YOU THAT WE ARE A GROWING RESTLESS FORCE THAT WILL BE FELT IN MORE POLITICAL OFFICES THAN EVER BEFORE.
OUR POSITION IS UNIQUE IN THIS DIALOGUE TODAY. NBTA REPRESENTS CORPORATE TRAVEL MANAGERS AND THEIR COMPANIES THAT OPERATE THROUGHOUT THE WORLD. THEY AND OUR COLLEAGUES THROUGHOUT THE WORLD ACCOUNT FOR ABOUT 50% OF THE $396 BILLION THAT IS SPENT ANNUALLY ON BUSINESS TRAVEL WORLDWIDE. YOU WOULD RECOGNIZE THE COMPANY NAMES SINCE MANY ARE IN THE FORTUNE 100. WITHIN OUR RANKS ARE ALL THE MAJOR TRAVEL SUPPLIERS AS WELL. OUR ORGANIZATION SERVES AS A FORUM FOR BRINGING TOGETHER ALL COMPONENTS OF THE TRAVEL MARKETPLACE—NOT ONLY TO WORK ON TRAVEL ARRANGEMENTS—BUT TO ADDRESS MAJOR ISSUES AS WELL. EVEN THOUGH WE MAY NOT AGREE COMPLETELY ON SOME ISSUES, WE ARE DEDICATED TO ONE COLLECTIVE GOAL: ENSURING THAT TRAVEL IS SAFE, EFFICIENT, AND COST EFFECTIVE.
TODAY'S ENVIRONMENT MAGNIFIES THE IMPORTANT ROLE OF CORPORATE TRAVEL MANAGERS AND THEIR ABILITY TO MAXIMIZE RETURN ON INVESTMENT AND ENHANCE CORPORATE PRODUCTIVITY. CEO'S OF PROMINENT CORPORATIONS REALIZE THAT BUSINESS TRAVEL IS RESPONSIBLE FOR KEY MISSIONS ACROSS THE ENTIRE CORPORATION. IT IS A CORE FUNCTION MEANT TO CONTRIBUTE VALUE TO ALL OTHER ELEMENTS OF A COMPANY'S PRODUCTIVITY AS WELL AS ITS BOTTOM LINE.
CORPORATIONS PAY A DISPROPORTIONATE SHARE FOR AIRFARES WHEN CONTRASTED TO THE AMOUNT THAT LEISURE TRAVELERS PAY FOR THEIR AIRLINE TICKETS. OFTEN BUSINESS TRAVEL FARES ARE FOUR TIMES AS MUCH AS LEISURE FARES BECAUSE OF THE PRICE OF THE AIRLINE TICKET AND THE ACCOMPANYING FEDERAL PASSENGER TAXES.
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IN RECENT YEARS, CARRIERS AROUND THE GLOBE HAVE FACED MANY CHALLENGES, INCLUDING RISING FUEL COSTS, OVERCAPACITY IN SOME REGIONS AND POOR ECONOMIC CONDITIONS IN OTHERS. UNFORTUNATELY, BUSINESS TRAVELERS AND CORPORATIONS HAVE SHARED THE BURDEN OF THE CARRIERS' MISERIES.
IT IS CLEAR THAT THERE IS A DESIRE ON THE PART OF THE AVIATION COMMUNITY TO RESOLVE THEIR FININACIAL BURDENS BY SEEKING TO CONSOLIDATE AND ALIGN THEMSELVES WITH RIVAL CARRIERS.
THE QUESTION BECOMES AT WHAT PREMIUM WILL THE CONSUMER, PARTICULARLY THE BUSINESS TRAVELER, PAY FOR THE CONSOLIDATION AND ALIGNMENT OF COMPETING CARRIERS.
IN THE WAKE OF THE ANNOUNCED ALLIANCES AND MERGES BY THE MAJOR CARRIERS, NBTA DEVELOPED A SURVEY, CONDUCTED LAST WEEK, TO MEASURE THE FULL IMPACT THAT THIS SITUATION WILL HAVE ON OUR MEMBERSHIP AND CORPORATE TRAVEL. I WOULD LIKE TO SHARE WITH YOU THESE TOPLINE RESULTS THAT YOU CAN UNDERSTAND THE MAGNITUDE OF A MARKETPLACE WITH DIMINISHED COMPETITION.
CORPORATIONS SEEING ALTERNATIVES
61% OF THE NATION'S CORPORATE TRAVEL MANAGERS REPORT THAT THEY HAVE EXPERIENCED BETWEEN A 6–9% INCREASE IN BUSINESS FARES SINCE LAST YEAR. THE AVERAGE DOMESTIC BUSINESS AIR TICKET IS $1,691 AND THE AVERAE INTERNATIONAL TRIP COSTS $3,542. 54% OF OUR CORPORATIONS HAVE INCREASED USE OF LOW FARE CARRIERS IN ORDER TO DEAL WITH HIGHER FARES AND RESPOND TO THIS HEAVILY INFLATED MARKETPLACE.
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CONSOLIDATION COULD SPELL TROUBLE FOR CORPORATIONS
82% REPORT CONSOLIDATION WILL LEAD TO HIGHER FARES AND LESS CHOICE. CHOICE IS VERY IMPORTANT TO CORPORATIONS. A CORPORATION IN ROCHESTER NEW YORK, SENDS A WEEKLY VAN POOL OF TRAVELERS TO THE BALTIMORE-WASHINGTON INTERNAITIONAL AIRPORT, TO AVOID THE LIMITED AIR SERVICE AT ROCHESTER AIRPORT. 96% REPORT CONSOLIDATION COULD MAKE NEGOTIATIONS MORE DIFFICULT DUE TO INCREASES IN CARRIER MARKET SHARES IN VARIOUS REGIONS.
CONSOLIDATION COULD HURT ALREADY INADEQUATE SERVICE
54% REPORT THEY HAVE A NEGATIVE IMPRESSION OF THE AIRLINE INDUSTRY. 70% REPORT THAT THEIR TRAVELERS HAVE NOT NOTICED AN OVERALL IMPROVEMENT IN THE SERVICE THAT THE AIRLINES PROVIDE SINCE THEY INTRODUCED THEIR PASSENGER RIGHTS PLAN. 82% REPORT THAT CONSOLIDATION WILL NOT LEAD TO IMPROVED SERVICE.
ACTIONS TO IMPROVE COMPETITION
65% OF CORPORATIONS FEEL AIRLINE COMPETION WILL IMPROVE BY PROVIDING TAX BREAKS AND LOAN GUARANTEES TO SMALL CARRIERS AND NEW ENTRANTS.
OVERALL, THE SURVEY RESULTS POINTS TO A NEED FOR LOW FARES, LOW COST CARRIERS AND IMPROVED SERVICE.
CURRENT DILEMMA
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WE HAVE HEARD MUCH IN THE LAST MONTH ABOUT THE POTENTIAL PROBLEMS OF A MERGER BETWEEN UNITED AND U.S. AIRWAYS, AND SUBSEQUENT MERGERS. WHILE THE UNITED AND US AIR MERGER SEEMS PRATICAL DUE TO THE INTEGRATION OF EAST TO WEST AND NORTH TO SOUTH ROUTES, IT COULD REDUCE COMPETITION BY TRIGGERING A WAVE OF OTHER MERGERS THAT WOULD PROVIDE IMPRACTICAL CONVERGENCE OF ROUTES AND REDUCTIONS IN CONSUMER CHOICE.
AMERICAN AIRLINES AND DELTA HAVE ALREADY STARTED DISCUSSIONS OF A POSSIBLE MERGER.THESE TWO COMPANIES HAVE SIGNIFICANT OVERLAP ON THEIR ROUTES, WHICH COULD STRENGTHEN THEIR MARKET SHARE IN SPECIFIC REGIONS. ANY STRENGTHENING OF MARKET SHARE IN A SPECIFIC REGION SPELLS HIGHER FARES AND LESS CHOICE FOR BUSINESS AND LEISURE TRAVELERS.
HUB CONCENTRATION IS INCREASING. IN SOME MARKETS, THE LARGEST HUB CARRIER HAS 85 TO 90 % MARKET SHARE. MANY CORPORATIONS ARE LOCKED INTO NEGOTIATING WITH ONE CARRIER, EQUALING TO HIGHER FARES, LESS CHOICE AND HIGHER TRAVEL COSTS, WHICH WILL UNDOUGHTEDLY BE PASSED ON TO THE CORPORATION'S CONSUMER.
SOLUTIONS
NBTA BELIEVES THAT IT IS ESSENTIAL TO MAINTAIN AN ENVIRONMENT THAT ASSURES A LEVEL PLAYING FIELD IN TERMS OF COMPETITION WITHIN THE AIRLINE INDUSTRY. THERE MUST BE BOTH FAIR COMPETITION AND FARE COMPETITION.
THE EMERGENCE OF NEW ENTRANT CARRIERS IN SEVERAL REGIONS AND EXPANDED SERVICES FROM HEALTHIER COMPETITORS ARE THE ONLY SOLUTIONS THAT WILL PRESSURE FARES DOWNWARD AND FORCE THE WORLD'S DOMINANT AIRLINE CARRIERS TO REFINE THEIR PRICING STRATEGIES.
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NBTA STRONGLY BELIEVES IN THE INTERPLAY OF FREE MARKET FORCES. WE DO NOT ADVOCATE RE-REGULATION OR PRICE CONTROLS ON THE AIRLINES, BUT WE DO BELIEVE THAT THE GOVERNMENT HAS A ROLE IN ENSURING THAT THERE IS A LEVEL PLAYING FIELD AND TRUE COMPETITION IN THE AIRLINE INDUSTRY. WE BELIEVE THAT CLEAR STATUTORY AUTHORITY EXISTS FOR THE GOVERNMENT TO DO THIS.
IN THE END, OUR ABILITY TO COLLECTIVELY DRIVE A SOLUTION THAT WILL ALLOW OUR SYSTEM TO OPERATE EFFICIENTLY AND SAFELY WILL BE THE FOUNDATION OF FUTURE ECONOMIC AND MARKET GROWTH OR FAILURE.
I WANT TO THANK THE COMMITTEE LEADERSHIP FOR THE TIME AND ENERGY THEY HAVE DEVOTED TO THIS IMPORTANT ISSUE—AND I THANK ALL OF YOU FOR YOUR ATTENTION, AND THE CHANCE TO BE HERE TODAY.
Mr. HYDE. We are down to our last witness, and again, he is certainly not our least witness.
Before we finish with Mr. Roddey and we will ask you to entertain questions, but I don't want to forget to say what a great contribution you have made to this festering, difficult, frustrating problem.
The validity of the old saw that ''You can't fight city hall'' is sure true. That is what we are literally doing. It is frustrating for all of us, and you, especially, I am sure. You have really made a contribution by giving us this testimony, which we will cite and cite, and cite.
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I just want to thank you.
Mr. FRANK. Mr. Chairman, we should note that the adage that ''You can't fight city hall'' has historically been truer in Chicago than in a lot of other places.
Mr. HYDE. Well, I am not sure Boston is so—even with the Red Sox.
STATEMENT OF JIM RODDEY, CHIEF EXECUTIVE, ALLEGHENY COUNTY, PENNSYLVANIA
Mr. HYDE. In any event, Mr. Roddey, thank you for your patience. We welcome you.
Mr. RODDEY. Thank you Mr. Chairman and Ranking Member Conyers and members of the committee. My name is Jim Roddey. I am the chief executive of Allegheny County, Pennsylvania.
I would like to thank the committee for this opportunity to present our region's views on United Airlines' acquisition of US Airways.
In the early 1980's, unemployment in Pittsburgh was at its height, following the closure of virtually all of the major steel mills. The region suffered the largest job loss per capita in our Nation's history.
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We have been working diligently to recover and in recent years our region has begun to grow. Over 120,000 people are now employed in the technology field. Among our 33 colleges and universities, several are world renowned and we stand among the Nation's top eight centers in medical research.
Today, Pittsburgh is the corporate headquarters of numerous Fortune 500 companies, many multinational companies such as Sony and Bayer, have located in the region and many Pittsburgh corporations like Heinz, Alcoa, PPG, continue to succeed in the global marketplace.
Pittsburgh International Airport is the world's gateway for Pittsburgh, southwestern Pennsylvania, northern West Virginia and eastern Ohio. It is an integral part of the economic fabric of the region, creating over 18,000 airport related jobs and over $3.5 billion of economic impact.
Our airport has received worldwide recognition for its airmall and just last year the readers of Conde Nast Traveler magazine voted it the best airport in North America and the third best in the world. Pittsburgh International is an expanding airport with an impressive list of development projects.
In a few days we will open a new Hyatt Hotel and conference center complex. We are doubling our air cargo capacity, creating a business aviation center and another Airside Business Park.
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The airport covers more than 12,000 acres. It is larger than O'Hare and Atlanta combined. This huge amount of space gives us many advantages including the airspace and the airfield capacity necessary to accommodate future growth.
Located midway between New York and Chicago, Pittsburgh lies within one hour's flight time of 50 percent of the populations of the United States and Canada. Clearly, Pittsburgh International is one of our region's significant assets.
With United Airlines' announced purchase of US Airways, I am deeply concerned, not only about the continued presence of a major hub at Pittsburgh International, but also for the continued employment of approximately 11,700 employees of US Airways in southwestern Pennsylvania.
It is imperative that a number of matters that affect our region are contained in any conditions of approval which the Department of Justice and Department of Transportation would make if they grant approval for this acquisition.
While the discussions I have had with James Goodwin of United Airlines and Steven Wolf of US Airways have been generally positive, contracts between parties often do not turn out as contemplated.
Therefore, I request this committee urge the Department of Justice to ensure the following four items are addressed:
One, with the hardship endured by our region in the 1970's and 1980's, one of our foremost concerns is the 11,700 individuals currently employed by US Airways at Pittsburgh International. We need a commitment contained in the conditions of approval that these jobs will be maintained in our region beyond United's current two-year pledge.
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Two, the taxpayers of Allegheny County provided bonds to cover construction of the $800 million Midfield Terminal complex at Pittsburgh International. US Airways is the principal guarantor of those bonds. They use 90 percent of the Midfield Terminal and they pay a majority of our outstanding debt.
We need written assurances that United Airlines will assume US Airways' existing lease and guarantee payment of all future obligations.
Three, with significant Federal support and expectation that it would be a major hub, Pittsburgh International opened in 1992. US Airways currently operates approximately 515 flights a day to 110 nonstop destinations throughout the United States and Europe.
United Airlines must commit to maintain at least the existing levels of service.
Finally, number four, by year's end US Airways and United Airlines will have an extensive fleet of Airbus Aircraft with numerous new aircraft on order. Both airlines have indicated the need for a new maintenance facility for these aircraft.
A skilled work force is available now is southwestern Pennsylvania to perform these tasks and the needed facilities have already been designed for construction at Pittsburgh International.
We ask your help in urging United Airlines to follow through with US Airways plans to construct this facility and to commit to do so within two years.
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Mr. Chairman and members of the committee, I ask your assistance to strongly convey to the Departments of Justice and Transportation our need for these guarantees to preserve the economic future of a region that is rich in resources.
Thank you for the opportunity to present this information.
[The statement by Mr. Roddey follows:]
PREPARED STATEMENT OF JIM RODDEY, CHIEF EXECUTIVE, ALLEGHENY COUNTY, PENNSYLVANIA
Good morning, Mr. Chairman and Committee Members. My name is Jim Roddey and I am the Chief Executive of Allegheny County, Pennsylvania. I would like to thank the Committee for this opportunity to present our region's views on United Airlines' $11.6 billion acquisition of US Airways.
In the early 1980s unemployment in Pittsburgh was at its height following the closure of virtually all the major steel mills. The region suffered the largest job loss per capita in our country's history. By the early 1990's, the city was only reporting half the job growth of the national average.
We have been working diligently to recover, and finally our region is beginning to grow. 120,000 people are employed in the technology field. That represents 12 % of the workforce and 18% of the payroll. Our colleges and universities are world-renowned and we stand among the top ten centers in medical research.
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Today, Pittsburgh is the corporate headquarters of many Fortune 500 companies. We have numerous business parks nurturing both U.S. and foreign investment. Multinational companies like Sony and Bayer have located in the region and many local corporations like H.J. Heinz, Alcoa and PPG continue to succeed in the global marketplace.
Pittsburgh International Airport (PIT) is the world's gateway for Pittsburgh, southwestern Pennsylvania, northern West Virginia, and eastern Ohio. It is an integral part of the economic fabric of its serving area, creating over 18,000 direct airport-related jobs and over $3.5 billion a year in economic impact.
PIT has received worldwide recognition for its now famous Airmall'', featuring over 100 retail, specialty services and food and beverage stores all at guaranteed street prices. Its distinctive 900-acre X-shaped terminal is designed to give connecting passengers easy access to all 75 gates without ever changing levels or terminals.
And just last year, because of it's traveler-friendly design, the readers of Condé Nast Traveler magazine voted Pittsburgh International Airport the best airport in North America and the third best airport in the world.
Pittsburgh International is an expanding airport with a significant list of development projects. Next month, we will open a Hyatt airport hotel and conference center. We also plan to more than double the cargo ramp and building capacity, and we are creating a Business Aviation Center and a 300,000 square foot Airside Business Park.
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PIT covers more than 12,000 acres, making it the third-largest airport complex in the U.S., so large that you could fit Atlanta and Chicago O'Hare airports within its boundaries. The huge amount of space we have available gives us many advantages. The apron is large enough for one aircraft to pull back from the gate while another is pulling into the same space. The system of taxiways surrounding the entire airside building allows aircraft to exit the runways at a greater speed, taxi in either direction and avoid delays. And we have excess airspace and airfield capacity to accommodate future growth.
Located roughly midway between New York and Chicago, Pittsburgh lies within one hour's flying time of nearly 50 percent of the U.S. and Canadian populations or 71.3 million people, and 63 percent of U.S. manufacturing output.
And don't worry about the weather. Smooth operations regardless of the weather make PIT North America's airport of choice for reliability.
Clearly, Pittsburgh International Airport is one of the Southwestern Pennsylvania region's most significant assets. Presently, US Airways has a major hub agreement at Pittsburgh International Airport generating 515 flights per day both domestically and internationally. With United Airlines and US Airways announcement on May 23, 2000, I am deeply concerned not only about the continued presence of a major hub at Pittsburgh International Airport, but also for the continued employment of the approximately 11,700 employees of US Airways in southwestern Pennsylvania.
With the announced acquisition by United of US Airways, it is imperative that a number of matters that affect our region are contained in any Conditions of Approval, which the Department of Justice and Department of Transportation would make, if they should decide to grant approval for this merger. While the discussions I have had with James Goodwin of United Airlines and Stephen Wolf of US Airways have been very positive, contracts between parties often do not turn out as contemplated. Therefore, I request that this Committee urge the Department of Justice to ensure the following items are addressed in their Order:
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1. With the hardship endured by our region in the 70's and 80's, one of our foremost concerns is for the approximately 11,700 individuals currently employed by US Airways in Southwestern Pennsylvania, eastern Ohio and northern West Virginia. We need an absolute commitment contained in the Conditions of Approval of this merger that these jobs will be maintained in our region beyond United's two-year pledge.
2. The taxpayers of Allegheny County provided the financial vehicle through bonds to fund the construction of the $800-million Midfield Terminal Complex at Pittsburgh International Airport. US Airways is the principal guarantor on those bonds. US Airways presently uses nearly 90 percent of the midfield terminal and pays the majority of the outstanding debt, which totals over $700 million. We need written assurances that United Airlines will assume US Airways existing lease and guarantee payment of all future obligations of US Airways.
3. With significant federal support and the expectation that it would be a major hub, Pittsburgh International Airport opened in 1992. US Airways currently operates approximately 515 flights a day to 110 non-stop destinations throughout the US and Europe from Pittsburgh International Airport. The Airport is the economic engine of the region and provides us access to the world and the world access to our region. While United flies mostly east-west domestic flights and international routes, and US Airways strength is in its north-south routes on the East Coast, we must be certain that the existing level of service is maintained and included in the Conditions of Approval of the merger. On a long-term basis, Pittsburgh must remain a significant US domestic hub.
4. By year's end, US Airways and United Airlines will have an extensive fleet of Airbus aircraft with numerous new aircraft on order. Both airlines have indicated a need for a new maintenance facility to perform maintenance and safety checks on these aircraft. An excellent, trained workforce is available right now in southwestern Pennsylvania to perform these tasks and the needed facilities have already been designed for construction at Pittsburgh International Airport. We ask your help in urging United Airlines to follow through with US Airways plans to construct this facility, and commit to do so within the next two years.
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Pittsburgh International Airport is strategically located in North America to reach much of the population of the United States and Canada within in 1-hour flying time. National and international travelers give Pittsburgh International Airport an A+ rating. Our workforce and work ethic are second to none. We are capable of handling any aircraft used today and our facilities are easily expandable.
Not only is Pittsburgh International Airport an economic generator in terms of jobs, but it serves as a major connection hub, linking Pittsburgh businesses, passengers and cargo with cities around the world. It is extremely well located in every sense and its physical structure is flexible, functional, attractive and expandable.
Mr. Chairman and Committee members, I ask your assistance to strongly convey to the Departments of Justice and Transportation our need for guarantees to preserve the economic future of a region rich in resources. Pittsburgh is poised for takeoff. Thank you for the opportunity to present this information to you today.
Mr. HYDE. Thank you very much, Mr. Roddey.
Now we will submit questions.
Mr. Conyers, the gentleman from Michigan.
Mr. CONYERS. Thank you. I join in congratulating this panel. I think this is an important part of our hearings. We are going to have another one. We don't know how far this is going to go, but this is certainly an important panel.
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I want to just express my reservations with Mr. Leonard, not because he may be inaccurate, but here we have Bob Johnson of BET and a minority airline just on the verge of discussions and you are suggesting, I presume, that they cannot be a low-airfare carrier by definition.
Is there any way that this new and important minority entrepreneurial event could meet the demands and criteria that you have expressed here today?
Mr. LEONARD. Mr. Conyers, my comments were directed at the business plan that was submitted as part of their merger proposal. In its business plan it proposes to use services from United pretty much across the board, which means it would have the United cost structure.
Then it proposes to downgrade from mainline jets to regional jets and regional jets on a cost-per-seat basis are always more expensive than a mainline jet. So, if you have the same cost as United today and you down gauge the equipment, which is in their plan, you are going to have higher costs.
I don't know any way around that. We are just quoting from the plan that has been submitted by the parties as part of the merger agreement.
Mr. CONYERS. I don't either. I am probably going to consult with the chairman and Mr. Johnson about him making an appearance here if that would help, and if he desires to do so.
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Now, Professor Dempsey, Mr. Karaganis, I am very moved by what you said. Did you feel that some of your presentation was offset by our distinguished long-time academic Professor Kahn in his evaluations? Because I would like to try to get some kind of interchange between you because I felt that what you were all saying was quite important.
We may have a Department of Justice Antitrust Division and a FTC, by the way, that find it hard to step up to the plate in a booming economy where there might be as much as $1 trillion worth of mergers going on each year, and increasing, and continue to look at the application by application, but not at the aggregate impact that is ultimately going to occur.
Mathematically, we are going to run out of mergers. It seems to me that opportunity and the nature of the American economy, both national and global, is changing dramatically.
I would appreciate your comments in that direction.
Mr. DEMPSEY. My impression is, and Fred's may be different but our two positions have come closer over the years, I would say this: The airline industry is a part of America's infrastructure.
The transportation infrastructure is one in which the vitality of competition is peculiarly and particularly important because all other industries in any geographic region depend upon adequate service
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Without sufficient competition, then, geographic regions are economically injured. We have some of them. The Department of Transportation has talked about pockets of pain. They stretch all the way through the Appalachian region. They are clustered around Minnesota.
There are many regions in the United States where there is no Southwest and there is no low-fare alternative. That creates significant economic problems for businesses, for people who live in those communities and therefore, given that and given the fact also that airports are public resources built by taxpayers, funded by taxpayers, and the airways are owned by the public, those reasons suggest, perhaps, a rationale for more intensive governmental scrutiny of those industries.
It doesn't necessarily mean a return to economic regulation as we had in 1938. But it does mean that the significant problems which exist and which have manifested themselves over the last 20 years need some rectification. I have given you a half a dozen suggestions that I think would improve the operation of that industry for the betterment of the public.
But clearly, if the industry becomes a monopoly it will be difficult for anyone to argue that the time is not right for re-regulation.
Mr. CONYERS. Yes.
Mr. KARAGANIS. If I could, Mr. Chairman, I think the contributions of Professor Kahn are well-known and well-respected by people who study his writings and those of Professor Dempsey.
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I think one of the things that stood out in the testimony to me today most vividly was Ms. McInerney's testimony. She gave you hard numbers of what it costs for business people to travel in this country today, primarily to major business centers. It is outrageous.
I mention anecdotally that not too long ago, my son-in-law works for a large corporation and they had to send a team of five people from Chicago to Los Angeles at a cost of $2200 per person. That is $12,000. That is basically looking at a small car to get to Los Angeles.
That is the kind of thing that does two things: One, it penalizes the customers of those businesses, but two, it stifles business development. It stifles economic opportunity because there is a whole group of people who just won't travel, who will just say, ''I can't do it, therefore, I am not going to try to get the client out in California or in New York City.''
So, sure, we are in good times now. But those good times don't always last and we could be in better times or we could have a cushion for the future if we have the opportunity for business development.
That is why I would like to see the Department, again, consistent with what Professor Kahn has said and what the Department of Justice has said, why can't we have-they have all outlined it-a spoke carrier coming into a hub and spoke market faces significant disadvantages, but why can't we have more hub and spoke competition?
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United and American claim they compete in Chicago, but we have two hub and spoke carriers. Why can't we have more hub and spoke competition and if need be, why can't we focus the billions of dollars in Federal resources away from enhancing the existing monopoly into enhancing the opportunity for new competitors to come in?
I have never met the mayor of El Segundo, California, before today, but I thought I was listening to one of my clients because the problems that he articulated are vividly illustrated in Los Angeles, in Chicago, in New York.
One of the things you will hear next week is that you can't have multiple hub competitors in the same town. That is the current airline spin in Chicago. What they forget is that New York has discreet limitations. You can only put so much into LaGuardia.
So, what is happening is American is going into JFK with a major hub. Continental has got Newark as a major hub. You can have multiple hub and spoke operations in the same city. They don't all have to be at the same airport, but they have to be in the same city to provide the consumer choice that Ms. McInerney talked about so that there is competition and there are lower prices.
Right now we are headed toward an intolerable situation.
Mr. CONYERS. Professor Kahn, are you inclined to give any comment at this point?
Mr. KAHN. I agree very strongly with what Mr. Karaganis has been saying. In fact, just yesterday I came across an article based on a study of European deregulation and the title is ''Airport Competition in the Deregulated European Aviation Market, Competition Between Airports.''
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It is very thoroughly documented. I know the man. He is really a very leading authority on the state of the European industry.
Now, the way in which we now organize our airports, the way in which we organize to provide airport capacity is really insane. The fact that these appropriations have to go through a congressional budget process, what other business would operate in that way?
So, you need much more autonomy of the airports. Then we need this kind of competition and he gives example after example of airports that are underused, offering all sorts of inducements to low-fare carriers so that Lutin competes with Heathrow, for example.
There was a commission appointed earlier in President Clinton's administration. I think it was Governor Bliley who was the chairman, which argued for a different way of providing airport infrastructure and air traffic control and pricing it intelligently.
So, I quite agree that we have a real opportunity for competition among the airports.
Mr. HYDE. Mr. Barr, the gentleman from Georgia.
Mr. BARR. I don't have any questions. I have appreciated the panels today, Mr. Chairman. I look forward to the follow-up later on this month.
Mr. HYDE. Thank you.
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The gentleman from Massachusetts, Mr. Frank.
Mr. FRANK. Thank you, Mr. Chairman. Just a brief correction for the record, I think that was Governor Baliles, not Governor Bliley who is our colleague. It was Governor Gerald Baliles who was chairman of that commission.
Mr. Chairman, I appreciate your putting this hearing together. Most of the time we come to hearings to talk. But this is one of those where I have come to listen and have found it useful. We maybe should do that more often, although it may be against the rules to do it too often.
Mr. HYDE. Was that for Mr. Delahunt's benefit?
Mr. FRANK. Everything I say is for Mr. Delahunt's benefit. Mr. Chairman, I try hard.
But I had some questions to focus on with Professor Kahn and I would ask others to get in. First, I am struck, Professor Kahn, by the importance you give to the Government's role precisely because we have deregulated.
I think too often we are inclined to treat those two as sort of zero sum and if one goes up, the other goes down and your point appears to be that to make deregulation work, to give the market free reins in this particular context, given the nature of air travel, et cetera, that that requires a very vigorous Government, although doing different things than it did during the regulatory period. Am I stating that fairly?
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Mr. KAHN. One of my proudest achievements is the bumping rule that I wrote. That was Government intervening. We said that it is an unfair method of competition to tell people they have reservations and then to tell them they don't have reservations.
So, I wrote the rule, ''It shall be an unfair method of competition to bump people involuntarily.''
How do you avoid that? You get volunteers. How do you get volunteers? You bribe them. So, there are all sorts of need for Government.
Of course, antitrust becomes so important because we no longer have regulatory protection.
Mr. FRANK. Thank you. This may be one of the few times that people have spoken in favor of bribery in this hall. But I think you are right and I think that that is important.
I want to follow up on some of that. One of the problems I think we have is, and I think your work was very helpful and I agree with your statistics that congestion is a sign of things being better.
I remember reading an anecdote of your conversation with Senator Goldwater who complained about overcrowding and you said, ''Well, it is a sign of consumer satisfaction that we have congestion.''
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But then the question is how do we respond to it?
I think part of the problem we have politically is, and it is not just here, but deregulation, it strikes me, in many cases creates macro efficiencies and micro inconveniences. That is, the economy as a whole improves, but it improves in ways that are invisible to the individual.
Overall costs go down and the individual often will experience this in the form of inconveniences personally and we need to do a better job then.
That is probably what I am going to talk about here. For example, if I read your testimony correctly, and I did get a chance to read it, you appear to be at the end somewhat less skeptical about the prevalence of predatory pricing than you were at the beginning.
You seem at first to say you thought it was somewhat overstated as a practice but have recently come across some evidence that there may be more of it than you had previously thought?
Mr. KAHN. No. I happen to be consistent on that. I think the judiciary has been overly influenced by the University of—you will pardon my reference to it—Chicago.
The free market people in the University of Chicago were preaching the gospel that there is no such thing as predation. Well, to quote Justice Stewart, ''I may not be able to define it, but I know it when I see it.''
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Mr. FRANK. Some of us probably looked at it, too.
Mr. KAHN. So, point in fact, when we were opening the transcontinental market to competition in the summer of 1978, I sent a memorandum to my fellow board members saying, ''What are we going to do when Capitol and World come in and offer $99 fares?'' At that time the uniform fare was $240, I think, of course those were real dollars. ''What are we going to do about the competitive response?''
I suggested something like, and we were still regulating, that if you come down hard and meet this low fare, that if that succeeds in driving the intruder out, you have to keep it there for several years.
Mr. FRANK. It did strike me that if you were just doing an economic model, you would expect that after deregulation, I would assume, to have more low-fare carriers than we have. Would I be correct?
You said jokingly, but with some point, ''Thank God for Southwest or I wouldn't be able to show my face.''
I would assume that we would have thought there would be more than just Southwest and I would infer predatory pricing just from the paucity of low-fare carriers.
Mr. KAHN. I admit to being surprised that we have had so few successes. But one factor that you haven't introduced is the imaginativeness with which the incumbent carriers, and this is not necessarily predatory, that they recognize that the way to fill seats is to have convenient schedules and big planes, you have to fill those empty seats and you fill them by offering much lower fares to people who are discretionary travelers.
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Mr. FRANK. I guess it is creative in the airline industry to seize on the principle that one way to increase demand is to lower prices. But the question still is institutionally because I am convinced that deregulation is a good idea, but predatory pricing is a problem in that as part of the result of that we have fewer low-fare carriers than we should have.
Then the question is, how do we, and I agree with you, we need a good Government role here, for example, you mentioned one remedy would be to impose on the large carrier a requirement that whatever you do to knock out the competition, you have to keep doing for a couple of years.
Is there any legal framework within which we could now do that? Should we create one? I mean I assume in the deregulatory situation we have no mechanism for doing that. Is there a way to change the antitrust laws so they could be enjoined to do that?
Mr. KAHN. There has been an assault on the authority of the Department of Transportation. It has authority very similar to that of the Federal Trade Commission for industry generally. Aviation was exempted from FTC authority.
You may remember that in 1914 we introduced a new law to prohibit unfair methods of competition. The FTC administers that. The idea was that you should stop unfair exclusionary practices before they achieve full-blown monopoly.
So, I am a very strong supporter of the DOT. I know that they have been stymied in part by political reasons.
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Mr. FRANK. One thing we ought to do then is to look into what—would the DOT have existing statutory power to order such a remedy, for example, in your judgment?
Mr. DEMPSEY. The case law interpreting what is the equivalent of section 5 of the Federal Trade Commission Act, which doesn't exist for airlines because there is an equivalent position in the Federal Aviation Act, has been interpreted quite broadly to allow the FTC, or in this sense, the DOT, to exert its authority in situations that would not constitute a violation of the Sherman Act under traditional antitrust analysis.
The types of remedies that may be imposed is an open-ended question which would have to be looked at.
Mr. FRANK. Perhaps think that has a great beauty to which is, hey, you are the ones who set up this fare structure, all we are telling you is that the fare structure that you defended as non-predatory you have to stick with for a couple of years in the absence of this other carrier.
Would they have the legal authority to do that, in your judgment?
Mr. DEMPSEY. Perhaps they would. I don't know they are politically inclined to go down that path at this juncture.
Mr. FRANK. I understand that, but it would lean more on the law than the politics.
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Mr. HYDE. The gentleman's time has expired.
Mr. FRANK. Thank you, Mr. Chairman.
Mr. LEONARD. Mr. Chairman, would you mind if I were to make one comment on that since I am the recipient of this type of behavior on a pretty regular basis.
Mr. HYDE. Absolutely.
Mr. LEONARD. A case in point, we started in Minneapolis, from Midway to Minneapolis on last Saturday, four new flights. Our intent was to begin that service, Atlanta-Minneapolis. We actually went to the Department of Justice ahead of time to tell them that we were going to start that service and we would anticipate that Northwest, if they followed their normal behavior, would add capacity of 30 to 50 percent.
Northwest got wind of this a couple of days before we announced and in fact increased capacity in the marketplace 40 percent. That route then went for us from about a half million dollar profit to about a $3.5 million loss, obviously one that we couldn't sustain. So we did not start the service.
We have filed complaints with DOT and Department of Justice. In Congressman Scott's area of Richmond, Virginia, the same thing happened. We went in the market. Delta put in 40 percent additional capacity——
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Mr. FRANK. If I could interrupt, was there then, after you had to withdraw a diminution in that capacity? Has that happened yet?
Mr. LEONARD. In every case, capacity went back to almost exactly what it was before we went into the market and fares ended up on average ten percent higher than they were.
Mr. HYDE. Would the gentleman yield?
Mr. FRANK. Yes, certainly, Mr. Chairman.
Mr. HYDE. Are our laws adequate to deal with a situation like this, Mr. Karaganis?
Mr. KARAGANIS. One of the things that we keep losing sight of, there is the regulatory structure that Professor Dempsey and Professor Kahn are much more knowledgeable about than I am.
The other question is, if you are handing people billions of dollars, you have a substantial amount of influence as to the conditions you put on those gifts. The majors at all the hubs are seeking huge subsidies from the Department of Transportation in the form of PFC authorizations and AIP funds. That is to subsidize their growth and their activities.
There is no question in my mind that as part of the Department of Transportation it can condition the exercise of their decision-making for funding on various antitrust and anti-competitive conditions.
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Mr. FRANK. Mr. Chairman, could I have one last question? Mr. Leonard, would the remedy that Professor Kahn suggested and Professor Dempsey said we had the legal authority and Mr. Karaganis said we could leverage it, if they were told that if in anticipation of competition they increased capacity, they would have to maintain that increased capacity for, say, two years, do you think that would be helpful?
Mr. LEONARD. It would be helpful. It would be a deterrent. I don't know that it would be the solution, but it certainly would be a deterrent and one that we have advocated.
Mr. KAHN. You could define unfair exclusionary practices as consisting in reducing your fares sharply and then raising them. That would be in addition to the capacity. You could define the events that way, it seems to me, because that is what it is.
Mr. LEONARD. The capacity issue is much more painful than the fare issue, actually.
Mr. HYDE. Well, I think the committee ought to study that. If our laws are inadequate, let us come up with some that are adequate. That is an abusive situation.
The gentlelady from Texas.
Ms. JACKSON LEE. I thank the chairman very much. The discussion has been enlightening, insightful and disturbing at the same time. I remember and recall as a consumer years ago when the airlines made the argument to consumers as well of the potential benefit to consumers of deregulation.
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It seems that we have come a full 180 degrees. I have been told by one of the individuals who is in this room that you could travel almost halfway around the world including the nation of China for a lesser amount than you might be able to get a coach ticket from the west coast to Washington, DC, or maybe even my State of Texas.
So, I would expand, Ms. McInerney, the depth of reach of this problem. How many of you have heard of stories of college students stranded during the Thanksgiving and Christmas break because their parents cannot afford for them to come home?
How many are aware of trampled on vacation plans by families of four and five, meaning three or four children, who miss the deadline of either getting with a travel agency or calling a year in advance to get that special price and cannot get where they have to go along with not only the small businesses or businesses, but the cottage industry, people who have businesses in their homes who are in business and may require a visit in another State or another location and happen not to be able to use the Internet or tele-conferencing because it requires a personal visit?
So, I think that there is a broad spread here as we look at this question. I guess I would like to pose two questions on the issue dealing with profit. Before I do that, let me also comment and join my colleague, Congressman Conyers, I don't know if I was out of the room when others might have mentioned it, I certainly do have an enormous concern that over the history of the airline industry, it has seemed to be impenetrable for minorities and women in terms of ownership.
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I will certainly be leveraging or looking for opportunities to make that a viable part of whatever we might do or the study might bring about on the question of competition and the balance that you all are speaking of.
I want to go to this question of profit. The argument, I think when I have mentioned this cost, when I have mentioned it at least, the response has come, ''Do you really know how costly it is to run airlines?''
Fuel costs, of course, have gone up. The difficulties we have had over the last year, personnel costs, and governmental regulations. So, I ask you, Mr. Leonard, do I need to take into consideration that it costs so much more to finance airline travel and the owners or airlines are bearing the burden and this is why we have this cost and added competition which would not substantially help because we have these costs. That is my first question.
The second question is, what was the single factor, and I know there are many, I just want to hear the single factor of what brought us to this point when we thought we were on the right track as Professor Kahn and his able involvement-and let me personally thank him for his bumping rule, as I hear the personnel on each of my flights announcing trips to places like Bali in order to get people to get off the planes. Unfortunately, I am not able to take advantage of it.
But in any event, what is the single factor that that is based on? Mr. Leonard, would you just answer the question about this whole issue of profit.
Mr. LEONARD. Well, obviously, the airline industry is a difficult industry. It is highly capital intensive. It is highly labor intensive. It has long lead times. There are a lot of things that make it a tough industry.
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But we have demonstrated that we can be successful. We operate 290 trips a day in and out of Atlanta and we are profitable and we bring tremendous value to the Atlanta community.
In estimates by the Department of Justice, we are saving the people in Atlanta $700 million a year. A typical fare for us, say Atlanta to Memphis, is $150. There is a DCA to Rochester that is $331. So, we can operate at a low cost and offer low fares and still be profitable. But the barriers to entry are significant. Getting gate space, we could only get one gate in all of Minneapolis. We can't get into Detroit at all.
It took us a year and a half to get a half a gate in Newark. So, lack of access to these critical infrastructure facilities and the anti-competitive behavior from some of the competitors makes it very, very difficult to penetrate these new markets.
Ms. JACKSON LEE. So the answer to the airlines is that there are entities out there that, with the necessity of either profit or being able to finance a highly capitalized industry, can in fact have lower rates and fares that would benefit the consumer. Is that your bottom line answer?
Mr. LEONARD. Yes. I think we are an example of that and so is Southwest.
Ms. JACKSON LEE. Thank you. Let me ask Professor Kahn, what do you think is the single factor that got us to this point?
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Mr. KAHN. Certainly one of the major dilemmas is created by the fact that if you are going to have a creative available service with opportunities to go to a great number of destinations, which certainly have increased since deregulation because of the hub and spoke system, and you are going to have larger planes, because they have lower costs per unit, then there has to be a pricing structure which fills the empty seats by offering fares that cover your costs and make some contribution, in a sense are beneficial to everybody.
So, the profusion of fares is in part a consequence of competition. There have been studies that demonstrate the more competitive markets have more varied fares than the non-competitive markets because the competition has taken the form of different forms of discounts.
But the result is, however, that these hubs are something like natural monopolies, particularly to business travelers at those hubs who value convenience above all else. They also value Frequent Flier benefits.
Of course, in the past the domination of the computerized reservation systems or the special incentives offered to travel agents to throw all their business to the majors, some of those are unfair methods of competition.
The really difficult problem in those circumstances is how do we decide how much discrimination is okay, because the business traveler should pay a disproportionate share because of the value of the service.
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Really, if you want good service, the best place to live is Charlotte or Pittsburgh in terms of a great variety of destinations. The only way I know of doing that, since I am not for regulation, is to make sure that competitive channels are open.
The best way of testing whether those rates are outrageous or not is to let guys like this in and see to it that he has equal competitive opportunities and doesn't have somebody come down and sit on him in the ways that we have already described.
Ms. JACKSON LEE. Well, I thank the chairman. I see him leaning forward so I know my time has been far spent. I thank him for his indulgence.
My senses of conclusion to your comments is that I think the market will find its normal resting location, meaning people will vote for self-interest and if I have a link with a particular airline, I will keep going to it. But it still gives me in points of crisis or other times of necessity, the competition is there for me to chose.
I think, Mr. Chairman, that is where we should be moving ourselves toward in this process, the opportunity to choose and the greater opportunity of choice.
So, I thank you for this hearing.
Mr. HYDE. I thank the gentlelady for her comments.
The gentlelady from California, Ms. Waters.
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Ms. WATERS. Thank you very much, Mr. Chairman. I, too, would like to thank all of our panelists who are here today.
I think this is one of the most significant hearings that we will have in this committee all year. Mr. Chairman, I would like to thank you for moving so quickly to hold this hearing.
I am particularly concerned about the way in which the proposed merger was announced and the arrangements that were made to keep people from opposing and saying negative comments about it at the time that they first announced the merger.
So, this hearing certainly is coming right on the heels of that and following up in ways that perhaps the industry had not anticipated or wanted.
I would like to particularly thank Mr. Gordon. Mr. Gordon comes from the City of El Segundo that is right immediately adjacent to my district. He has been a leader down there in dealing with the problems of the expansion of LAX. He has about 80 cities in the coalition and all of the cities in my district are a part of that coalition.
As we move to consider this merger, I would like to get some sense of what has been happening with United Airlines. The bigger they get, usually the harder they are to reach and to talk to and to try and get involved with community concerns.
Mr. Gordon, have you been able to sit down with United about both the proposed overall expansion and their cargo expansion which some of us believe it is anticipation of expansion where we haven't even gotten the environmental impact study down there.
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Have they sat down with the coalition? Have they talked to you? Have you been able to take the grievances of our communities to them?
Mr. GORDON. Thank you, Congresswoman Waters and thank you for your support in our efforts to bring about a regional airport plan for southern California.
Let me begin by saying with respect to the United Airlines merger, we have had no dialogue and no discussion. There has been no effort on behalf of United Airlines or US Air to contact my community or any members of our 80-city coalition with regards to southern California.
I think you know from our involvement with United Airlines throughout the Aviation Task Force of the Southern California Association of Governments, United Airlines made it clear they only want to fly to LAX.
They do not want to take themselves out to the other 11 regional airports, despite the fact that some of those regional airports will be some of the largest regional airports in our country.
They opposed our efforts to study the environmental impact report, negative impacts that exist for our region as a result of their expansion of their cargo terminal.
They announced that there would be no expansion plans for that terminal, however, in their statements to the State of California, they said there would be. So they misrepresented directly and deliberately their position there.
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The relationship with this airline, I think, is very precarious for those of us in southern California who truly believe the quality of life of the people that we represent and the people throughout southern California is at great risk and that they have taken a position that as far as they are concerned the only responsibility they have is to fly planes as cheaply as they possibly can without regard to the people of southern California.
We believe that to be wrong.
Ms. WATERS. Mr. Gordon, you just mentioned, and this may be a remarkable fact for many of the people in this room, that we have 11 other airports that are under-utilized and the insistence on LAX and the major hub owners like United that everybody who comes into LAX is wrecking havoc on all of our cities.
Could you describe where people are coming from, how far they are coming all to be serviced by LAX or what this habit is doing to the cities in that area?
Mr. GORDON. Absolutely. We anticipate over the next 20 years in southern California that we will see aviation growth to the tune of 70 million new passengers. To stay on Chairman Hyde's position, the City of Chicago is going to grow up in the Inland Empire of Southern California. We are going to see rapid growth in Orange County. We are going to see rapid growth in north Los Angeles County.
Three-fourths of all of the growth that is anticipated in southern California will be outside 20 miles from L.A. International Airport. We firmly believe that each major county in southern California must assume its fair share of the opportunity and the fair share of the burden of aviation travel.
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If not, what is already an over-burdened traffic system, and if you have been to southern California, you know that system is already at the breaking point. The I–405 Freeway, the major north-south artery is already at speeds of 16 to 22 miles per hour today over a 24-hour period.
We cannot continue to bring passengers from Orange County and the Inland Empire to LAX to find their opportunities for aviation travel. We have to develop those opportunities where those people live and where those people work.
Ms. WATERS. Thank you very much. Mr. Roddey, you mentioned some concerns that you had. You talked about the potential lay-offs if this merger takes place. I serve on the Banking Committee and we have seen mergers of the big banks. With those mergers come big lay-offs, the close-down of branch banks, et cetera, et cetera.
Would you describe for us a little bit more than you already did, your concern about the layoffs and the displacement of workers in your area?
Mr. RODDEY. Yes. Congresswoman, first I am concerned about the statements made by US Airways and by United that there would be no furloughs for two years. It is clearly a warning sign that after two years there could be layoffs. United Airlines currently has about 100,000 employees and US Airways about 40,000.
It is logical to assume in a merger of this type that some jobs will be consolidated. I think we all understand the business ramifications of that. But we are very concerned about saving jobs in southwestern Pennsylvania. We have been through some very difficult times and now we are beginning to grow.
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We work everyday and celebrate 1,000 jobs coming in or 500 jobs coming in. The thought of losing a couple of thousand jobs, perhaps in administrative roles, reservations and accounting departments and personnel departments, which you would think would logically be the most at risk, we are very concerned about that.
We are hoping that if this merger goes through that we would be the site of a maintenance center so that we could at least have an opportunity to grow some jobs.
But I have heard from all of the labor unions. I have heard from thousands of employees of US Airways and of United Airlines also of their concern. I have met with both of the chairmen of each of the airlines. They have been gracious enough to meet with me and address the concerns.
They are saying that over the two-year period they believe that they will have significant attrition. United Airlines points out that about 500 pilots retire every year, that about 30 percent of their maintenance force turns over every year.
So, they feel that there will be some attrition and that the people that are working now will have jobs. But I don't think there is any question that we will have fewer jobs between the two airlines than we have now.
Ms. WATERS. Thank you very much. Mr. Chairman, if you will just indulge me for a second here.
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Mr. Gordon, I know that you took a plane last evening to get here. Those of us who are coming from California, we must really be concerned about our ability to get to Washington, DC.
I fly to Los Angeles every Thursday night or Friday morning every week. I return every Monday morning or Sunday night back to Washington, DC.
I know a lot about some of our big carriers who hub there in Los Angeles. I know that you were here early this morning, despite the fact that you were the victim of one of the many delays that we are experiencing more and more in these hub cities.
Could you tell us what happened to you on your way here, Mr. Gordon?
Mr. GORDON. I would be happy to, Congresswoman. I was scheduled to leave Los Angeles yesterday at 4:20 on United Airlines' flight direct to Dulles. We boarded the plane and sat on the runway for two hours while they waited for the opportunity to depart the airport because of congestion and problems.
In addition to that, because of the lateness of understanding the need to come back and testify, the cost of a ticket for me and for the taxpayers of the City of El Segundo was $2100, to fly coach.
Ms. WATERS. Coach for $2100?
Mr. GORDON. That is right.
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Ms. WATERS. That is outrageous. Thank you so very much, Mr. Gordon and the entire panel.
Thank you again, Mr. Chairman.
Mr. HYDE. We thank you, Ms. Waters.
Mr. Delahunt.
Mr. DELAHUNT. I will be brief, Mr. Chairman.
I just would echo the sentiments that everybody has expressed for a very informative and very instructive session with this particular panel. I don't want to draw any inferences, but I think it is unfortunate that this panel and representatives of the various major airlines weren't able to testify together.
I have my own suspicions as to why that didn't happen. I guess it is best left unsaid. But let me just direct some questions, and they will be brief, to Mr. Karaganis and Professor Dempsey. I just want to make sure I really understand this concept.
It would appear that there are regional monopolies or hub monopolies. Clearly, many here have described what I would consider anti-competitive practices that despite what we heard from the Department of Transportation and from Department of Justice have not really been addressed. Is that a fair statement?
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Then we hear that the airlines or let me speak specifically to this particular merger, the UAL–US Air merger, because you are not inhibited from commenting on that merger. Their argument is that there is no overlap. Well, presumably what would occur is that the same anti-competitive behavior that we see in regions based on this hub concept would just simply be expanded and exacerbated.
In other words, rather than having the country, I think it was your term, Mr. Karaganis, ''carved up in six or seven regions,'' the consolidation that presumably would be spawned by this particular merger, again, as I understand, Delta is talking to Continental and American is talking to Northwest, we would have a Nation that, presuming the argument of no overlap has any merit whatsoever, would be reduced from seven monopolies down to three monopolies. Is that a fair analysis?
Mr. DEMPSEY. Yes, I think it is. I think the fundamental question you have to ask is, ''is the state of competition in the airline industry adequate today?'' If the answer to that question is at all ambivalent, then, the question is ''would this merger improve the state of competition'' and the answer to that has to be ''absolutely not.''
Mr. DELAHUNT. But would it exacerbate it?
Mr. DEMPSEY. It would exacerbate it. The major airlines have a ''live and let live'' philosophy with respect to themselves. That is, a major airline will allow another major airline to enter its hub and will not respond in an aggressive predatory way with respect to that entry. They do respond that way with respect to smaller carriers that are less well financed.
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Mr. DELAHUNT. They will exercise their monopolistic power with the Frontiers and with the regional airlines?
Mr. DEMPSEY. Because they understand that their cost structure is so high that unless they respond in an aggressive way they may well be dinosaurs, they may well be on the path to extinction. That is what, I think, fundamentally, is what terrifies them about competition.
Mr. DELAHUNT. So you would agree with me, then, that the UAL–US Air merger would really be a harbinger for compounding the existing problem?
Mr. DEMPSEY. There is no way that American Airlines and Delta and Northwest will stay——
Mr. DELAHUNT. What I can't understand is, given what we heard from the Government representatives acknowledging particularly predatory practices, how this merger would ever pass muster.
Let me just jump to another, but I think related issue. It almost seems that this is really a competition between airports as opposed to airlines and who really controls the airports.
You made an obvious, but excellent, point. How are the taxpayers, the people who paid for these airports, who own the slots and who own the rights, I would think, and it goes, I guess, to Professor Kahn, I mean there is a lack of competition there.
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Maybe in the 1978 deregulation act that particular issue should be revisited. Whether the Government intervenes and steps in and owns the slots and apportions them out based upon a bidding process or some sort of mechanism that is fair and equitable so the competition can thrive, or the regional airport authorities do something similar, I don't see how you will ever solve the problem.
Mr. KARAGANIS. That was the whole fallacy and idiocy of the whole debate about slots. First of all, they shouldn't be an airline asset. It has become a joke there. The capacity at the Nation's airports are Government assets. The Government paid for them. The Government finances them.
But you realize we can pull all the slots out of O'Hare, we can pull all the slots out of LaGuardia, because the airports themselves govern capacity. It is the concrete that is on the ground. You can only jam so much into those airports.
Because of that, I come back to the gentleman from Atlanta and the airlines, is that everyone talks predatory pricing when you can get into the airport, but the real problem is that in most of these airports you can't get in. You can't get in because the big guys are sitting there and they are saying we don't want anybody coming in. We would rather, sometimes have even a smaller market at higher prices than a larger market with lower prices.
So this is what has so frustrated me this morning. I invite anybody to travel to O'Hare this summer. You are going to see a nightmare on your hands. It is a nightmare that is self-inflicted because our Federal Government has not stood up and said, ''My God, we can't talk about a new airport in 2020. We need a new airport tomorrow.''
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The capacity, predatory pricing and Government policy of where the money is spent——
Mr. DELAHUNT. But that is the leverage.
Mr. KARAGANIS. It is incredibly important. How do these airlines end up with assets that were funded by the taxpayers of America?
Professor Dempsey alluded to several of those things including the majority in interest clauses. One of the things that the Department of Justice could do and DOT could do, some of these things are per se violations of the antitrust laws and they violate the commerce clause.
They could be stricken down and we could open up competition with a combination of strong law enforcement and funding.
Mr. HYDE. Would the gentleman yield?
Mr. DELAHUNT. Certainly, Mr. Chairman.
Mr. HYDE. Well, I think what is needed is a Justice Department that is willing to prosecute and enforce the laws that are on the books now. If the laws are not adequate, I would like some suggestions as to how we could make them adequate.
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But you can't give a prosecutorial impulse to people if it isn't there. I have learned how powerful the airlines are, with Congress. Believe me, you are running into a stone wall.
I wonder if you would indulge me. I cannot stay, but I want to ask Mr. Karaganis a question and then you can finish.
Mr. Karaganis, there is going to be a third airport some day to service northern Illinois, either that or we lose all the transfer traffic. It is going to go to St. Louis or Denver or Dallas or somewhere.
Why was it a great idea to have a third airport if it was in Chicago? The mayor wanted it. We passed the passenger facility charge to help pay for it. I eagerly voted for it at that time.
All of a sudden it became environmentally infeasible to put it in Chicago. Only then did the idea of a third airport take on such derision from everybody? I am a little bewildered. Why the resistance to a third airport? Have you any idea?
Mr. KARAGANIS. Mr. Chairman, again, I suggest the committee ask for access to the documents which show Chicago's reasoning.
Again, somebody mentioned this before, the cities that have relationships with the majors engage very often in an anti-competitive relationship with them. They are sitting there.
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I am not suggesting actual collusion, but Minneapolis sits there and favors Northwest. Chicago sits there and favors United and American and we have specific evidence that they have done more than just favor them
The problem in Chicago is that we are out of capacity. We have known we have been out of capacity for a long time.
I would respectfully disagree with the Chair that if Chicago has its way and United and American have its way there will never be a third airport in Chicago. The third airport in Chicago will be built on the ground at O'Hare. It will be built with a super-hub, built by United and American, fed by United and American, and the new US Airways merger, and we are going to have a million and a half to two million flights being jammed into that airport and no new competition coming in by way of a new airport. That is their plan. We know it from the document. So, unless Government wakes up, and when I say Government, I mean the administration, and starts using the tools they have available to them, we are in trouble.
Ms. WATERS. Will the gentleman yield?
Mr. HYDE. Mr. Barr, did you have a question?
Mr. BARR. Yes. I just had one question. I am sorry to keep you all, but the last discussion with regard to strong law enforcement of existing laws, I was intrigued, Mr. Leonard, with your scenario that you laid out earlier with regard to the practice that once one of the majors finds out that you all are proposing to begin flights from Point A to Point B they will come in and all of a sudden, magically increase capacity and then it drops back down after you all have been cut out and it has been made economically infeasible.
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Are existing laws inadequate if enforced to address that particular problem?
Mr. LEONARD. I believe so. I believe that the Department of Transportation and the Department of Justice have adequate controls today. The Department of Transportation awards international routes.
If they found that somebody was consistently misbehaving, I think they ought to make a condition of a change in behavior before they consider international routes for that carrier.
I think there are a lot of administrative and procedural things that can be done. We have proposed this before. I think any time there is a merger of carriers that own slots at airports, a certain percentage of those slots, a condition of the merger should be to release those slots back for new entrant carriers.
The slots that were given to United and US Airways were under an entirely different context, and entirely different time and not considering the fact that those two airlines were going to merge.
So, I think an enhancement to competition would be to always, as a matter of policy, require carriers who control slots to release those back. They certainly have the ability to do that. They have withdrawn slots in the past. They have reallocated slots in the past. Recent law says that those are public assets and they can be withdrawn by the DOT.
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Mr. BARR. Could I ask you to do me a favor, please? In advance of the next hearing that the chairman announced earlier today that will focus on this with some additional witnesses, would you give a little more detail on this interchange and that particular question and if there are any additional details you can get to me in advance of that hearing, would you do so?
Mr. LEONARD. Yes, sir, I certainly will.
Mr. BARR. That would be very helpful. Thank you.
Mr. CANADY [assuming Chair]. The gentlelady from California is recognized.
Ms. WATERS. Thank you very much. I would like to ask Mr. Karaganis and Mr. Gordon, given the description of Chicago and Los Angeles on the one hand, both airports are impacted and for whatever reason decisions are being made to just jam more flights into them, what alternatives do the cities have that are impacted by a decision like this where they have to have access, for example, to a number of those cities in and around the airport to get into those airports?
Do they have the ability to sue? Do they have the ability to refuse to be cooperative in allowing the traffic to come through those cities? Have you been involved in any discussions like that at all?
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Mr. GORDON. Well, Congresswoman, as you know, we are engaging in most of those activities, so I can tell you what we are doing. We have filed a lawsuit against the airport for pattern and practice of expansion at the airport outside the master plan and environmental impact review process.
When and if the master plan is ever released for LAX we will certainly review that process very closely. The regional transportation plan which governs the Federal transportation dollars in southern California is under review by the Southern California Association of Governments.
As you know we have been actively involved in presenting an alternative to the expansion plans of LAX to that committee to redirect the transportation dollars that need to be spent to allow for the freeway and major artery improvements around LAX to permit the expansion to occur.
We are working closely with the LA City Council members to see that they draft a master plan that says we are going to limit the expansion of LAX to the physical capacity of that airport, which still would permit over the next 20 years about 18 percent growth to go about.
So, we are looking to limit the continuous growth that is there. We do not believe there is any mitigation plan available that will allow the expansion as LAX is proposed to do to 94 million passengers to occur without dramatic negative impact upon my community and your constituents and all the communities around the flight path and under it.
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So, from that perspective we will continue to pursue all of those avenues. I want to make one comment, and I think that my constituents ask me, ''Why wouldn't United Air Lines want to consider flying to the other airports in southern California?''
I think very simply it is just a matter of cost. They don't want to have to decentralize their operations. I don't own an airline, but I would say it costs less to fly to one than it costs to fly to maybe ten or eleven.
But our statement to United Airlines and frankly it was to Southwest Airlines because Southwest Airlines was defending the position as well about ''continue to grow, LAX, don't make us go someplace else,'' is let in other airlines.
Let us get AirTran involved in southern California. Let AirTran fly to Ontario. Let AirTran fly to El Toro. Let AirTran fly to March Air Force Base. There are other airlines that can do this. This doesn't simply have to be the top three or four airlines to make it conducive for their business operations.
Ms. WATERS. Thank you.
Mr. KAHN. May I just interrupt to say that is exactly what has been happening in Europe. That is, under-utilized airports that have turned to low-fare carriers and offered special deals. So you have competition among the airports.
You have it here as well. I remember when it was just awful that the shuttle fare, LA to San Francisco was something like $300 and Southwest came in and offered fares of $61 and $79, but flying out of John Wayne, I guess, flying out of Oakland.
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So, competition will tend to do that if you open the doors to competition.
Mr. KARAGANIS. Again, sometimes it needs a little persuasion. Your situation in California can be parallel. There is an airport outside of St. Louis right now. It is called Mid-America Airport. It is sitting empty. It is built with Federal funds. It is sitting empty because the airlines don't want to use that one.
There is an indication in the documents I have seen that again the ATA was involved in it. It becomes a story on Brokaw and wasteful dollars in America because they all want to use Lambert. They don't want to use this new airport. They are staying away from it, just like they are staying away from available airports in southern California.
Our situation is somewhat different in the Chicago area because we are full up to capacity and then they are fighting the new capacity where we want to build it. They want to build it to expand their monopoly.
Are there laws on the books that can help? Yes. One of the things that we push very strongly is the Federal-State partnership. California has been in the lead in emphasizing that the State government have a major role in the whole issue of siting and allocation of airport resources. They should have that role and where appropriate the State laws can and should be enforced.
I am sure your communities in California are doing this.
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I want to come back. The biggest problem we have is that the Federal agency that has most responsibility in this area, the DOT, has not examined the kinds of problems we are talking about.
That has been true of both Republican and Democratic administrations. This is not something unique to the current administration, although it has become more severe under the current administration.
But we need to look at the question of are we going to continue to funnel public monies toward what the big seven want, as opposed to what is good for the communities that need the airport service.
Ms. WATERS. Thank you very much. Let me just say, Mr. Karaganis, that you mentioned St. Louis. I didn't know about that other airport because Lambert proceeded to destroy the adjacent communities of Kinloch where I grew up as a child. That city sits half empty today, even though they destroyed the city, I guess they own that, but they haven't done anything with it.
That is what I am so afraid is going to happen down in the Los Angeles area, the little cities right adjacent to LAX where the noise and the pollution and the traffic congestion is getting so intense that the value of the properties eventually, I think, has got to be destroyed.
I think that my city of Inglewood that goes right into LAX reminds me so much of what happened to the city of Kinloch right there at that St. Louis airport.
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Thank you.
Mr. CANADY. I want to thank the members of this panel for your participation today. The committee is adjourned.
[Whereupon, at 1:20 p.m. the committee was adjourned.]
THE STATE OF COMPETITION IN THE AIRLINE INDUSTRY
FRIDAY, JUNE 23, 2000
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to call, at 9:40 a.m., in Room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, F. James Sensenbrenner, Jr., George W. Gekas, Steve Chabot, Bob Barr, William L. Jenkins, Asa Hutchinson, Edward A. Pease, John Conyers, Jr., Robert C. Scott, Melvin L. Watt, Zoe Lofgren, Sheila Jackson Lee, Maxine Waters and William D. Delahunt.
Staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Jon Dudas, deputy general counsel-staff director; Joseph Gibson, chief antitrust counsel; Sharee Freeman, counsel; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; James B. Farr, financial clerk; Ann Jemison, receptionist; Judy Wolverton, professional staff member; Mathew Nosanchuk, minority special counsel; Cori Flam, minority counsel.
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OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order. Today the committee holds the second of two oversight hearings on the state of competition in the airline industry. At this first hearing, which we held June 14th, I set forth how we got to this hearing at some length, and I won't repeat that history today, but let me summarize very briefly.
I have long been concerned about airline competition issues, and to put it briefly, I don't think there is enough competition in this industry. That is largely due to the lack of airport capacity, particularly in key cities like Chicago. That debate, however, has been going on for some time. The immediate cause for this hearing was the report of the Suburban O'Hare Commission, a group of local governments in my district, released in May. That report, which is available on the committee's Web site, alleges that there is silent collusion among the major airlines not to compete in one another's hubs. So I scheduled this pair of hearings to look into that allegation.
A number of witnesses at last week's hearing discussed that allegation and made very convincing presentations. I was particularly impressed by the testimony of AirTran, a low-cost carrier. AirTran is anxious to compete in a number of markets, but can't get sufficient access to airports. We have heard similar complaints from other low-cost carriers in the past.
Several days after the announcement of the report, United and US Airways announced their intention to merge. As I have expressed before, I have serious concerns about the competitive impact of this proposed merger. I don't see where it adds much to the competitiveness of the industry.
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Despite my skepticism, fairness dictates we certainly listen to the other side of the story, and that is why we have scheduled this second day of hearings so we can hear from those involved in the merger and others who dispute the allegations of market division among the airlines.
Although we do disagree on this issue, Mayor Daley is a good friend of mine, and I am particularly pleased to have two representatives of the city of Chicago with us.
I welcome all of the witnesses and look forward to their testimony, and with that I am pleased to turn to Mr. Conyers, the gentleman from Michigan and the ranking Democrat on the committee for his statement.
[The prepared statement of Mr. Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today, the Committee holds the second of two oversight hearings on ''The State of Competition in the Airline Industry.'' At the first hearing, which we held on June 14, I set forth how we got to this hearing at some length, and I will not repeat that history today. Let me summarize briefly.
I have long been concerned about airline competition issues. To put it briefly, I do not think there is enough competition in this industry and that is largely due to the lack of airport capacity particularly in key cities like Chicago. That broad debate has been going on for some time. The immediate cause for this hearing was the report of the Suburban O'Hare Commission, a group of local governments in my district, released in May. That report, which is available on the Committee's website, alleges that there is silent collusion among the major airlines not to compete in one another's hubs. So, I scheduled this pair of hearings to look at that allegation.
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A number of the witnesses at last week's hearing discussed that allegation, and they made very convincing presentations. I was particularly impressed by the testimony of AirTran, a low cost carrier. AirTran is anxious to compete in a number of markets, but cannot get sufficient access to airports. We have heard similar complaints from other low cost carriers in the past.
Several days after the announcement of the report, United and US Airways announced their intention to merge. As I have expressed before, I have serious concerns about the competitive impact of this proposed merger. I do not see where it adds much to the competitiveness of this industry.
Despite my skepticism, fairness dictates that we listen to the other side of the story. That is why we have scheduled this second day of hearings so that we can hear from those involved in the merger and others who dispute the allegations of market division among the airlines.
Although we disagree on this issue, Mayor Daley is a great friend of mine, and I am particularly pleased to have two representatives of the City of Chicago with us. I welcome all of the witnesses and look forward to their testimony.
With that, I will turn to Mr. Conyers for his opening statement.
Mr. CONYERS. Good morning, Mr. Chairman and members of the committee. We are glad to have the witnesses, particularly Bob Johnson and his new development that we will be hearing more about.
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There seem to be three key issues we need to look at regarding competition in the airline industry. The first is increased consolidation. You know, with the announcement of the proposed merger of United and US Air and other potential airline mergers on the horizon, we are likely to have fewer bigger airlines from which to choose.
We need to make sure that these megamergers do not weaken competition. We know that less competition can lead to higher ticket prices and reduced choice among airlines. The top three airlines, United, American and Delta, control over half the U.S. traffic and through mergers could end up controlling 85 percent or more of the U.S. traffic.
Now, one way to preserve competition through merger is to create new airlines, and I am interested in hearing more about the United and US Air's proposal to create DC Air, a new airline that will be under new leadership. DC Air would take over a number of slots at Reagan National that are divested by United and US Air.
The second area of concern in preserving airline competition is the emergence of regional fortress hubs. Anyone who flies frequently knows the hubs provide travelers with a jumping-off point to just about anywhere they need to go in the country. But there is a down side. Since the airlines that created the hubs also control the hubs, air travelers often have to put up with higher ticket prices and unacceptable service.
So, the ultimate question for regulators is whether these fortress hubs are the product of competition or collusion. I hope the testimony today will help us answer the question.
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And finally, we are concerned about allegations of predatory pricing. We have all seen the benefit to consumers when low-cost airlines like Southwest are permitted to compete with the larger airlines. Now, we have also seen how David is defeated by Goliath through predatory pricing or other anticompetitive practices that undercut any total the low-cost carrier is able to obtain. In the Detroit area, Pro Air, which offers services between Detroit and Baltimore and has been blocked from offering service from Reagan National or Dulles.
Before we hear from our panelists, I would like to make this final point. Anyone in Congress who is complaining about competition in the airline industry needs to put their money where their mouth is, because right under our noses, the Republicans in charge of Commerce-Justice-State appropriations have taken a bill to the floor that increases premerger filing fees under Hart-Scott-Rodino, but doesn't let the Antitrust Division or the Federal Trade Commission use these fees for their enforcement activities. Instead they have funded the agencies at last year's levels, notwithstanding the support from both Chairman Hyde and myself for a funding increase. This is unbelievable when you think about the fact that Members on both sides of the aisle are calling for antitrust investigations in connection with airlines, gas prices, and the increasing spate of mergers occurring in the high-tech pharmaceutical, health care, airline, and telecommunications industries, to name a few.
The American people are calling on their national leaders to make sure our robust economy doesn't give rise to anticompetitive conduct in the airline industry or anywhere else. And I want everybody to know we will be listening carefully for some of these answers.
Thank you, Mr. Chairman.
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Mr. HYDE. Well, I thank you, Mr. Conyers, and I would like to state in response to your justifiable criticism about the diversion of fees, that you and I both have sent a letter to Mr. Rogers requesting full funding of the Antitrust Division and the Federal Trade Commission, and we also are working on legislation under Hart-Scott-Rodino to make that more adequate.
Mr. CONYERS. Absolutely correct, and I thank you for that.
Mr. HYDE. So we are on the same page.
If anyone else does not have an opening statement, and I don't see anybody—yes, ma'am.
Ms. JACKSON LEE. I didn't want to disappoint you this morning. I would like to strike the last word.
Mr. HYDE. Why certainly. The gentlelady is recognized for 5 minutes.
Ms. JACKSON LEE. Thank you, Mr. Chairman. I will not use the entire 5 minutes, and I would ask that I would be able to submit my entire statement into the record with unanimous consent.
Mr. HYDE. Without objection.
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Ms. JACKSON LEE. Mr. Chairman, I want to emphasize the importance of this hearing on two very narrow and simple points. I believe that though the Constitution was written with certain provisions, I think that its intent was to ensure that the American people had a good quality of life, measured by the technology and the capacity as we move into the 21st century. Air travel is part of that quality of life. People have become dependent upon being able to get to their destinations safely, securely, and with the necessary attention to the detail of how they are treated.
I think these hearings should focus on the quality of life that our travelling public has to accept as they move about this country. And so I hope as we listen to the testimony, we will focus on the need for high-quality travel.
In addition, I think that the airline industry has been an economic engine, and we need to realize that as it is an economic engine, as we look at its anticompetitive features and how it is regulated, that we work to balance keeping the airline industry healthy and as well making sure that it provides active competition.
And finally, I might say, narrowly speaking, I am excited when there are new opportunities for new businesses to participate in what is a very old industry in our terms, and so if there's any way that we can help new industries or new partners in the airline industry diversify its ownership, then I think that is an important message and challenge for all of us.
With that I yield back my time.
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[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Thank you Chairman Hyde and Ranking Member Conyers for convening hearings on the ''State of Competition in the Airline Industry: Part II.''
Today, the Committee will reconsider issues and testimony regarding major antitrust concerns that face America. In fact, the Committee has already spent a great deal of time in trying to investigate these matters during a hearing on June 14 of this month. Although we will specifically focus on the recent United-US Airways merger, we will also discuss the impact of ''fortress hubs'' and airport capacity. The topics are inextricably intertwined. Unavoidably, questions will be raised about whether litigation involving Airline mergers hinders or helps consumers in accessing reasonable, affordable prices.
Congress substantially deregulated the airline industry in 1978. Since that time, the industry has experienced numerous mergers and bankruptcies. Today, the industry is significantly more concentrated than it was before deregulation, and airline prices for some businesses travelers who cannot buy in advance are quite high. On the hand, some travelers prefer what is currently available in the marketplace.
It is true that competition actually occurs along individual routes between pairs of cities. Along specific routes, the markets are much more concentrated. In most city pairs, one of the major carriers has the dominant market share.
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Some believe we need more regulation. Others adamantly suggest that the problems in the airline industry arise from inadequate enforcement of antitrust laws against industry practices like predatory pricing.
We must also address the issue of fortress hubs and airport capacity. The antitrust concern focuses on the so-called development of ''fortress hubs.'' Most airlines have some form of a hub and spoke system. For example, Delta has a hub in Atlanta, United and American have hubs in Chicago, and US Airways has a hub in Pittsburgh. Clearly, if a traveler wants to fly on one of these airlines, he or she usually has to take a connecting flight through the hub.
The term ''fortress hubs'' typically refers to allegation that major airlines are controlling a dominant share of the flights at a hub airport. By gaining a dominant share of flights, the airline may gain the ability to control the prices of flights from that Hub, particularly for business travelers. Although the evidence of such practices may or may not lead to higher prices for consumers, we must carefully evaluate the entire effect of so-called hub dominance on competition.
We must review the global antitrust issues that concern the airline industry such as mergers. On May 24, United Airways and US Airways announced that they intended to merge. Because such a merger necessarily affects the hub dominance issue, we shall examine this issue today with the distinguished group of panelists from the industry and government.
The two are among the six largest airlines in the country. United is primarily an east-west coast carrier. U.S. Airways is primary a north-south carrier along the east coast. In recent years, U.S. Airways has had financial troubles because of heavy debt and high labor costs. The largest overlap between the carrier occurs in Washington. Because of that, companies have proposed to spin off part of their Washington operations to a newly created airline, DC Air.
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Although I recognize we all must exercise some restraint in commenting on an ongoing merger, the United-US Airways merger raises interesting policy issues regarding pricing that Americans need to know. If the government decides to investigate the effect of the merger, consumers have a right to hear the policy issues behind the likelihood that such a transaction would exacerbate the hub dominance problem.
We must keep on open mind as we examine these issues. Other acquisitions in the industry have raised similar concerns, but the effect on consumers has not necessarily been clearly understood.
For these reasons, I look forward to the testimony on this matter before any possible action is taken.
Thank you.
Mr. HYDE. I thank the gentlelady.
And our first panel consists of three witnesses who are involved in the proposed United Airlines/US Airways merger. They have been asked to address that topic and the broader topic of hub dominance.
First, we have Mr. James Goodwin, the chairman and chief executive officer of UAL Corporation, the parent company of United Airlines. He is a graduate of Salem College. He joined United in 1967 and worked his way up through the ranks, becoming chairman and CEO in 1999. United's headquarters are located in my district, and for that reason, I want to give a special welcome to you, Mr. Goodwin.
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Next we have Mr. Stephen Wolf, the chairman of US Airways. He is a graduate of San Francisco State University and has had a long and distinguished career in the airline industry, serving with American Airlines, Pan American World Airways, and Continental Airlines before becoming CEO of Republic Airlines in 1984. In 1987, he became CEO of United Airlines, where he served until 1994. In 1996, he took his current position at US Airways.
Finally, we have Mr. Robert Johnson, the chairman and chief executive officer of DC Air. He is a graduate of the University of Illinois and Princeton University. Before starting his own business, he worked with the Washington Urban League, the Corporation for Public Broadcasting and the National Capable Television Association. He also served a tour in the House with former DC Delegate Walter Fauntroy. In 1980, he founded BET Holdings, which owns Black Entertainment Television and a number of related media and entertainment businesses. Although he is best known for his work at BET, Mr. Johnson appears here today in his capacity as the leader of the newly formed DC Air.
And so we will start with Mr. Goodwin, and I would respectfully suggest that we try to confine the statement, the oral statement, to 5 minutes or thereabouts, and all of your statements will, of course, be made a part of the record. Thank you.
Mr. Goodwin.
STATEMENT OF JAMES GOODWIN, CHAIRMAN AND CEO, UAL CORPORATION
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Mr. GOODWIN. Thank you, Chairman Hyde, Ranking Member Conyers and other members of this distinguished committee. On behalf of United Airlines' more than 100,000 employees worldwide, I am delighted to be here today and testify before your committee. My name is Jim Goodwin. I am chairman and CEO of United Airlines, and in my 33 years I have held numerous jobs. I was president and chief operating officer. I have managed our North American operations. I have run our international division, maintenance and marketing to name a few.
I am an airline guy. I have spent my entire career learning how airlines work. I have also learned how important it is to listen, to listen to what others have to say. Well, I have been listening over the last few weeks to what Members of Congress are saying about United's merger with US Airways, and today I want to address clearly what I have heard.
The concern I hear most frequently is whether this merger will spark a future round of consolidation. And related to that is a concern about competition in the airline industry. A second concern deals with customer service and whether it will improve as a result of this transaction, and third has to do with airline hubs and their role in serving the Nation's air travelers' needs.
Let me first talk about possible consolidation. It is impossible to predict what may happen in this industry, given the nature of the transaction, but one thing I can predict, that this merger will create immediate and sure competition. Why? Because if fear of consolidation stops this transaction, it will prevent Charlotte from growing as a hub and becoming a more vigorous competitor to Atlanta in the Southeast. The fear of consolidation stops this merger, it would prevent consumers from realizing the competitive benefits of the country's first truly national airline, an airline that will increase single-carrier service to communities large and small across America and deliver more convenience and more travel options to millions of consumers.
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In short, this merger will expand consumer access and choice. It will do so by introducing 93 new nonstop flights that United plans to immediately offer, half of those routes where no airline offers nonstop service today. It will do so by offering single-carrier service on 560 new city-to-city routes, routes not available today to customers of either United or US Airways. That adds up to more competition.
This is an industry open to new competition. Today there is a long list of airlines that did not exist 20 years ago, Frontier, National, Legend, JetBlue, Midway, AirTran, Vanguard, Spirit and America West among them. They are just not competing. They are competing against a major carrier in various regions of the country.
Today, for a variety of reasons, the average domestic airline ticket costs 40 percent less in real dollars than it did 20 years ago.
Permit me to briefly address another area that I have heard concern about: hubs. What tends to get lost in the discussion is the enormous benefits that hubs provide consumers. The fact is that without hubs, small and medium-size cities would not have the convenient access to the world they now enjoy. Hubs allow carriers to serve many more destinations with many more flights than would otherwise be possible, and the existence of hubs promotes competition among major carriers because consumers have a choice in getting from point A to point B via a number of connecting points.
The hub system makes short-haul flights from smaller cities economically feasible. For instance, United today offers three jet flights a day from Boise, Idaho, to Denver. We can offer that service because of the 100 passengers on each of those flights that are travelling beyond our hub in Denver to one of the 50 places United serves from Denver. Only 23 of those 100 passengers on each flight are going to Denver.
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Now, I understand that not everyone sees it as I do. That is why this committee will conduct its own review alongside the regulatory process that Congress has established to study mergers like this one. We welcome the scrutiny. We welcome it because we are confident that those who will be reviewing this transaction will conclude just as we have that this merger will benefit consumers.
In my years in the airline industry, I have looked at every single possible combination for United, and I am here today because this merger is the only one that will deliver what consumers tell us they want, more choices for more convenient single-carrier service to more destinations around the world.
They also want better service, and I can tell you that United takes customer service seriously. Today we are already demonstrating our resolve to improve customer service through our United Commitment Program. United was the first airline to put leg room back on the plane, 5 extra inches in the economy sections on our domestic fleet of 450 aircraft. But as good as our record is, we know we can do better.
Last year 99.3 percent of our customers arrived at their destination without a baggage problem. I will not be happy until it is 100 percent.
Should we do more? Of course we should. United must deliver the superior service that our customers deserve, and I pledge that we will do everything we can to fulfill that promise now and after the merger is complete. It is good business, and it is the right thing to do.
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I look forward to talking with each of you during the course of this hearing.
Mr. HYDE. Thank you Mr. Goodwin.
[The prepared statement of Mr. Goodwin follows:]
PREPARED STATEMENT OF JAMES GOODWIN, CHAIRMAN AND CEO, UAL CORPORATION
Chairman Hyde, Ranking Member Conyers, and other Members of this distinguished Committee, on behalf of United Airlines' more than 100,000 employees worldwide, thank you for the opportunity to testify today. United appreciates the chance to explain why our customer-driven merger with US Airways will promote competition in the airline industry and how this transaction will significantly benefit consumers and communities served by both carriers.
I will explain in more detail in a moment, the merger is a ''win win'' for valued customers of both carriers as well as all air travelers. The transaction will create a 21st Century airline that offers consumers significantly improved choices for more convenient, single-carrier service on thousands of routes around the world. At the same time, it will usher in new, competitive air service at capacity-controlled Ronald Reagan Washington National Airport.
Moreover, communities, especially US Airways hub cities, will receive considerable travel and economic benefits as a result of the transaction. The combined reach and efficiency of the new network will also enable United to offer improved service to smaller cities throughout the system.
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The merger's network synergies will also lead to increased competition. United plans to provide nonstop service in many markets in which no nonstop service exists today and will add new competition to routes in which neither United nor US Airways competes today. Among other things, United will add new competition in the Southeast and along southern cross-country routes, taking on Delta's and American's strong presence in those areas. In addition, the merger's synergies will allow United to offer more extensive connecting service to customers in our hub cities and the smaller airports connected to our hubs. Finally, passengers that prefer flying on United or US Airways will now enjoy access to a more extensive, global on-line network, allowing them to earn and use frequent flyer miles on one network, which will result in significant consumer benefits.
The acquisition not only will generate these significant consumer and competitive benefits, but also has been structured to address any potential antitrust issues raised by the combination. United and US Airways propose to divest sufficient assets to create a new airline, DC Air, that would address antitrust concerns arising from combining the two airline networks in Washington, D.C. Consumers will benefit both from the synergies resulting directly from the transaction and from the additional competition that DC Air will provide.
Mr. Chairman, we are a customer service business that operates in a highly competitive global industry. Customers are the lifeblood of our business. We must listen to them and respond to their needs. At United, we have been listening. We implemented a comprehensive customer service enhancement program—''our United Commitment''—to improve the traveling experience of our valued customers. While we at United are proud of the improvements the program continues to produce, we are not resting on our laurels. Each day, the entire United family is striving to provide the best customer service possible.
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We have also intensified our efforts to identify what type of service our customers valued most and expected us to provide. This is what we learned. Our customers told us they want hassle free, single-carrier service in as many city-pair markets throughout the U.S. as possible. Similarly, international passengers told us that they want seamless, global network service such as that offered by the Star Alliance, the premier alliance with which United is proud to be affiliated. Listening to the marketplace, the message was unmistakable—our customers expect us to offer them the benefits of the most comprehensive air service network possible and they want such service benefits as soon as possible.
Put in that context, let me explain our decision to acquire US Airways. Like a chain, an airline's network is only as strong as its weakest link. As United examined its ability to respond fully to our valued customers, we considered whether we could improve our efficiency and the sustained level of service we provide. What we discovered was that United's weakest link was US Airways' strongest link and vice-a-versa. United has an extensive east-west system in the U.S. with hubs in the Midwest and the West. In contrast, US Airways has a comprehensive north-south route system along the East Coast anchored by hubs in Pittsburgh, Philadelphia and Charlotte. Together, the two networks are highly complementary.
Accordingly, United concluded that by combining the two carriers, we would draw upon the strengths of both airlines and simultaneously fill service voids in each other's existing networks. The result, we believe, will be the first truly efficient nationwide network that will provide consumers with unparalleled travel convenience and service.
Let me explain in more detail why the transaction will produce substantial pro-competitive benefits. The merger's pro-competitive synergies reflect the nature of the airline business. Most airline networks are structured as hub-and-spoke networks to route passenger traffic efficiently. These networks exhibit certain network economies, such that the more extensive the hub-and-spoke network, the lower the cost of providing service on each city-pair segment and the greater the ability to provide improved quality of service throughout the airline's route structure. By combining the complementary US Airways and United networks, the proposed transaction would allow the combined entity to enjoy greater network economies. The merger would therefore facilitate adding frequencies and new routes, and improve overall quality of service.
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Because of such network synergies, United will be able to add nonstop service on many cross-country and international routes on which neither United nor US Airways would have found it economical to do so without the merger. As a beginning, United plans to add 93 non-stop flights on 47 routes shortly after the merger is consummated. Of these, 64 will be domestic flights and 29 will be international flights. On domestic routes, for example, consumers will benefit from planned new non-stop flights between Pittsburgh and San Jose; Philadelphia and Portland, Oregon; Washington Dulles and Orange County; Raleigh-Durham and San Francisco; Austin and Charlotte; Denver and Ft. Lauderdale; and San Francisco and Tampa Bay. On international routes, United plans to introduce the only daily non-stop flight from Dulles to Copenhagen and, subject to government approval, the only daylight service from Dulles to London Heathrow. In Boston, United plans an additional daily flight to Frankfurt and the only daily non-stop service to Tokyo.
These new nonstop flights will add competition along these routes. It is important to note that slightly more than half of these 93 flights will be on routes where no airline provides non-stop service today. Beyond a doubt, the merger will enhance consumer choice and add competition on these routes.
This increase in service and the overall greater connectivity created by the merger also will enhance competition along hundreds of other city pair routes. After the merger, United will have a significant competitive presence on 560 city-to-city routes where neither United nor US Airways competes today. Examples of one-stop routes where United will provide new competition include Sacramento to Erie, Pa.; Reno, Nev., to Tallahassee, Fla.; Ft. Lauderdale to San Antonio; and Fargo, N.D., to Panama City, Fla. The 560 new routes also include a number of international flights as well, including new one-stop flights from Phoenix to Copenhagen; San Jose, Calif., to Madrid; Birmingham, Ala. to Brussels; and Tulsa, Okla., to London.
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The merger will not only increase competition on a route-by-route level, but also from a broader perspective. Today, United has minimal presence on north-south routes along the East Coast, in the southeastern part of the country, and on transcontinental routes across the southern tier of the United States. US Airways, while it has a strong presence along north-south East Coast routes, does not have the network to adequately serve the southeastern part of the country nor compete strongly along southern transcontinental routes. By contrast, these areas are the strengths of Delta and American Airlines, the second and third largest airline carriers. Delta, with its hub in Atlanta, is the largest airline in the Southeast, and it has a strong presence from this southeastern base along north-south East Coast routes and southern transcontinental routes. Similarly, American Airlines, with its hubs in Dallas-Fort Worth and Miami, has a strong presence in the southeastern part of the country along with southern transcontinental routes. American, with its southern focus, also has a strong presence in routes from the United States to South America.
The merger will allow United to challenge Delta's and American's strong presence in these markets. With the newly acquired hub in Charlotte, United will have sufficient presence on both sides of the country to begin flying transcontinental routes across the southern tier of the country, directly challenging American and Delta along these routes. Moreover, this transcontinental presence will allow United to focus the Charlotte operations on challenging Delta in the southeastern part of the country, as the availability of cross-country routes will make it more economical for United to expand service from Charlotte in the Southeast. And that is what we plan to do with new non-stop service from Charlotte to Portland, Oregon, Austin and San Antonio as well as additional non-stop flights to Denver, Seattle and San Francisco.
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In addition, the expanded presence in the southeastern part of the country and southern cross-country routes, United can better use Miami as a gateway into South America, where it competes with American's service in these markets.
The numbers tell the story. For United passengers, the merger will create new, single-carrier service to 93 destinations and add about 5,000 routes to the network. For US Airways passengers, the benefit is even greater: new, single-carrier service to 145 destinations and an additional 7,000 routes. Overall, United will offer over 80,000 non-stop, one-stop, and two-stop flights daily, more than double what United or US Airways offers today separately.
In short, this transaction brings together two complementary route systems that will result in a new network connecting US Airways' eastern U.S. routes with United's western U.S. routes and our international network. The result for consumers will be a more extensive network in which consumers can enjoy the considerable benefits that travel on United offers, benefits that will help simplify travel and make it as hassle-free as possible. Those benefits range from the convenience of single-carrier service and one baggage check-in to United's #1-rated Internet site, the best airport lounges in the industry, and a frequent flyer program, Mileage Plus, that delivers more opportunities to earn miles and many more destinations for award travel throughout the world. Added to that is the reach of our Star Alliance partners, which will link passengers to a comprehensive network that will directly carry them to destinations around the globe in a way not currently possible.
Let me share a case in point. We have an extensive network in Asia while US Airways does not serve that region of the world. The merger will fill that service gap for US Airways passengers. As a result of the merger, a current US Airways passenger in Pittsburgh will enjoy new single-carrier, one-stop service to Asia/Pacific destinations such as Shanghai, Beijing, Osaka, Taipei, Seoul and Sydney. The same is true for new single-carrier, one-stop service from Pittsburgh to Latin American destinations such as Caracas, Rio de Janeiro, Sao Paulo, Santiago and Buenos Aires.
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Mr. Chairman, that is a summary of the pro-competitive benefits of the transaction and we think they are substantial. Now, let me turn to the issue of the extent of overlap between the networks and what we are doing to address the potential antitrust concerns. At the outset, it is worth noting that unlike previous airline mergers dating back to the 1980s, United and US Airways do not share a common hub. So, our merger does not present that concern. We believe also that overall there are few overlaps that raise significant antitrust concerns. To cite one statistic, within the East Coast, while US Airways carries about 38 percent of passengers, United only has about 1.7 percent of passengers. What that tells you is that in US Airways' strength, the north-south network along the East Coast, United is not a significant player today and therefore the merger does not present significant overlaps.
Nonetheless, we have taken great care to proactively identify and remedy what we thought might be potential issues for regulators. We recognized from the outset that antitrust concerns might be raised with respect to Washington, D.C. United has a hub at Washington Dulles and US Airways is the #1 carrier in terms of enplanements at Ronald Reagan Washington National Airport. To address any possible issue about the overlap on Washington routes, we are voluntarily divesting the bulk of US Airways' significant and valuable resources at Reagan National to DC Air, an independent new-entrant carrier that will bring significant new competitive service to the nation's capital.
Let me take a moment to respond to questions some have raised about DC Air's independence. Simply put, DC Air will be a wholly independent carrier owned by Robert Johnson and United intends to compete vigorously against it just like any other carrier. Mr. Chairman, I cannot speak for Mr. Johnson but I firmly believe that DC Air intends to compete vigorously against us as well. To dispel any misperception, let me share some facts with the Committee. Like any other independently operated carrier, DC Air will (1) determine its own scheduling, (2) determine its own pricing, (3) collect its own revenue and (4) hire its own employees.
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Mr. Chairman, it is true that we have an arms-length agreement to assist DC Air in the initial phase of its start-up operations. That commercial arrangement is intended to help DC Air successfully get off the ground, not to somehow keep it under United's thumb. Let me be clear, United is merely offering DC Air the opportunity to acquire services. However, we are not obligating it in any way to do so on a continuing basis. In addition, the services are being offered to DC Air at market price, just as our subsidiary UAL Services offers services to a multitude of competitor carriers around the world. For instance, United is offering to wet-lease 10 Boeing 737–200 aircraft to DC Air during its initial two-year transition period but DC Air can discontinue this arrangement with four-months notice.
As is commercially customary, the agreement also gives DC Air the option of extending the wet-lease arrangement under certain circumstances. By no means will this wet-lease arrangement account for DC Air's entire fleet. In fact, DC Air intends to lease 19 regional jet aircraft that currently are operated by US Airways commuter affiliates.
In addition to aircraft, United also is offering DC Air the chance to purchase an array of other services at market price including station handling, maintenance, training, and access to club facilities. Consistent with industry practice, such agreements can be terminated by DC Air if it finds a better deal elsewhere.
Now, let me turn to the significant benefits this transaction will create for passengers using Reagan National. The transaction will not simply maintain status quo competitive levels and consumer choice at Reagan National, it will expand both in a meaningful way. For instance, DC Air has said it plans to offer service from Reagan National to 43 cities, including many small and medium-sized communities throughout the eastern U.S. That total includes all 31 cities in which US Airways' service from Reagan National competes today with United service from Dulles.
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In the case of routes between Reagan National and three cities—Pittsburgh, Philadelphia and Charlotte—that currently are served by US Airways alone, United will enter those routes and offer consumers at Reagan National a new competitive choice. United will also operate the shuttle between Washington, New York and Boston and will compete vigorously with Delta on those popular routes.
Like consumers, communities served by United and US Airways similarly will benefit from this merger. As the Committee knows, air service is an engine for commercial activity. This is especially true in the increasingly global economy that is creating commercial opportunities literally worldwide. Planned new service and improved access through United's global network will benefit communities by stimulating economic activity, spurring tourism and facilitating new commercial opportunities.
Examples of direct and indirect economic benefits for communities resulting from improved and expanded air service access range from new export opportunities to increased foreign investment to tourism. Sometimes such beneficiaries can be far removed from the airline industry. For instance, I understand the Maine and Massachusetts seafood industries may benefit as a result of gaining quicker and more efficient access to the Japanese market through our planned new, non-stop access to Tokyo via Boston. Such community and regional economic benefits are inextricably linked with improvements in air service.
This discussion of the benefits of the transaction for communities must address an issue of great importance to this Committee—its impact on small community air service. At the root of the merger is our goal to build a truly national airline network that will carry passengers as conveniently and efficiently as possible. Small communities are an important part of both United's and US Airways' networks. The same will be true for our combined network.
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As the largest provider of Essential Air Service in the U.S., United has firsthand experience knowing how vital a link to the national air transportation system is for smaller cities. However, we are not limiting ourselves to that distinction. United is already delivering on its promise to expand our service to communities. Thanks to this Committee and this Congress, the easing of High Density Rule at Chicago O'Hare has allowed us to add flights from O'Hare to a number of small and medium-sized communities. United Express recently introduced service to Springfield, Ill. And by October, we will be offering 22 new daily United Express flights—mostly on regional jets—to destinations that will also include Tulsa, Okla., Columbia, S.C., and Little Rock, Ark.
Finally, the merger is in the best interest of the U.S. economy. There is no doubt that the airline industry is a major contributor to our nation's economy and its prosperity. Besides its own direct spending and employment, our industry also contributes significantly to the creation of earnings and jobs in every major sector of the economy. A study by the Air Transport Association found that the U.S. airline industry generated $273 billion in economic activity in 1998 through direct, indirect and induced expenditures. Each dollar spent directly by the airlines produced another 2 dollars in economic activity.
Recently, there have been a number of press reports indicating possible consolidation in the airline industry in Europe and elsewhere. Airlines are not seeking to get bigger solely for the sake of size alone. That is not the case at all. As with this transaction, airlines are being forced by the marketplace to build the strongest and most comprehensive route structure possible to compete effectively in the global economy. As Clyde Prestowitz, the President of the Economic Strategy Institute, explained in Congressional testimony just last week, our transaction ''reflects the reality that the airline industry is not immune to the impact of globalization.'' To respond to consumers, airlines are seeking to build the strongest and most efficient networks possible.
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Since the airline industry is global in scope, it is in the national interest to ensure that our carriers are not placed at a competitive disadvantage vis-a-vis foreign carriers that are permitted to optimize network-operating efficiencies. Mergers such as ours should be considered with an open mind on a case-by-case, fact specific basis.
Mr. Chairman, let me conclude by again thanking you for the opportunity to testify today. As I have said, we strongly believe this transaction should be approved. It is in the best interest of consumers, communities served by both carriers and the U.S. economy. I would be pleased to respond to any questions.
Mr. HYDE. One of the occupational hazards that we labor under is we have to occasionally scurry over and vote, and one of those occasions is now. I understand this is a vote on the Waxman amendment, and then there will not be another vote until noonish. At least that is the projection. So we will excuse ourselves, if you will be patient, and we will be right back. The committee will stand in recess.
[Recess.]
Mr. HYDE. The committee will come to order, and next we will hear from Mr. Wolf.
STATEMENT OF STEPHEN WOLF, CHAIRMAN, US AIRWAYS
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Mr. WOLF. Chairman Hyde, Congressman Conyers and members of the committee, on behalf of the entire US Airways family, I appreciate the opportunity to be here this morning.
During our previous hearings we have heard a number of comments from Members of Congress which fell into broad specific categories, and they were tinged with angst, sincere angst, real angst. Why is this merger happening? How does it work? And importantly, what does it mean for my constituents? In 4 minutes I am going to try to answer.
From US Airways' perspective, there are two key reasons for this merger. There is a push reason and a pull reason. The push reason, 4 years ago when I joined then US Air, it was in a particularly troubled situation following multiple years of multibillion-dollar losses, but my concern was not the company's financial performance and other weaknesses. My concern was the question of whether there is a place long term for a midsize, mature cost carrier.
At the start of deregulation, there were six such carriers. Of the six, three—Braniff, Eastern and Pan American—are gone, and the other two—Continental and TWA—have each gone through bankruptcy twice and in the process dramatically reduced their operating costs. US Airways remains the only midsized mature cost carrier in the country, and the question remains.
And there was a pull reason, which was that the communities we serve and the consumers who live there want it. They want a large on-line network with all of its associated benefits. Allow me to share two anecdotes.
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Shortly after I joined the company, I had the opportunity to meet Governor Ridge of Pennsylvania, who stated he would be very interested in seeing us provide service to Asia from either Pittsburgh or Philadelphia. And, just a few weeks ago at a reception in Paris to celebrate the inauguration of our Charlotte-Paris service, Governor Hunt of North Carolina was on the inaugural flight and told me how much he wanted service to Latin America. With this transaction, Philadelphia and Pittsburgh will now have one-stop service to Hong Kong, Tokyo, Seoul and elsewhere, and Charlotte will have one-stop service to Buenos Aires, Rio de Janeiro and Sao Paolo. Importantly, our unit costs come down dramatically, and we would become a much more viable competitor going forward, albeit under the United name.
How does it work? The consumer understands airlines compete, but less clear is that hubs compete with hubs and in the process bring enormous consumer benefits. Clearly, this is not well understood. One example: Buffalo to Pittsburgh. Pittsburgh is a US Airways hub city with some 508 flights per day, far more than that city could otherwise economically justify. We fly Buffalo-Pittsburgh four times per day. On average, there are 24 passengers who fly between Buffalo and Pittsburgh, or six per trip. We fly these routes because there are many passengers who want to connect to other cities at the hub, and as a result of this merger, for the first time, passengers travelling between 515 city pairs will have a choice of on-line carriers.
Four thousand nine hundred forty-three new city pairs will have on-line service for the first time. Ninety-three new flights will be added immediately, almost all of them transcontinental and international, providing our Charlotte hub, as an example, with new direct service to Austin, San Antonio, Portland, Oregon, as well as new service to Aruba and Barbados, and giving it a stronger platform to compete with Atlanta.
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Fares. When this industry was regulated, there were effectively four fares: first, economy, night coach and family fares. Today's fares are far more complex and far more prolific, all designed to attract one more passenger. The industry had 297,726 fare changes yesterday. US Airways had 15,263 fare changes yesterday, each of them designed to attract every passenger possible.
Service. Ours is the best commercial aviation system in the world, and, yes, it has some warts. We lost a bag, the check-in line was too long, and a passenger did not get his or her special meal. But U.S. carriers handled over 600 million passengers last year, and the vast majority got to their destination safely with no significant problem.
Last, what does it mean? None of us could have predicted 20 years ago that Southwest would be carrying more passengers than all but four airlines in the world today. The aviation marketplace today is global in scope. It demands ease of access to Beijing and Budapest with the same urgency as to Sacramento and Knoxville. The enhanced United Airlines will lead the way into the future, bringing with it opportunity for communities all across our Nation.
Mr. Chairman, we have a unique opportunity, and we look forward to putting in place the first true network of the 21st century. Thank you for allowing me to share my remarks.
Mr. HYDE. Thank you, Mr. Wolf.
[The prepared statement of Mr. Wolf follows:]
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PREPARED STATEMENT OF STEPHEN WOLF, CHAIRMAN, US AIRWAYS
Chairman Hyde, Congressman Conyers, and Members of the Committee, on behalf of the entire US Airways family, I appreciate the opportunity to be here this morning to discuss the proposed merger between United Airlines and US Airways.
I have been reflecting on the many comments that have been made about this transaction by Members of Congress and others over the past week. I have heard how this endeavor somehow will reduce competition and therefore lead to less service and higher fares. I have heard how it will trigger a wave of other mergers and how it will cost employees their jobs. I have heard how DC Air is not a real carrier and that slots at Reagan National Airport should go not to a new entrant but should be redistributed to existing carriers.
Mr. Chairman, you have a reputation for plain speaking and for going to the heart of a matter regardless of the consequences. If you will allow me, I would like to be similarly direct on the issue before us today.
The hue and cry we have heard—which I am sure has been well- meaning—has been largely anecdotal and when held to the light of day, will be shown to reflect sincere if misplaced frustration over fares that people perceive to be too high and service that people perceive to be too low. These issues clearly are important, but the central issue before us today is: Will the merger of US Airways and United Airlines benefit consumers?
Mr. Chairman, the fact of the matter is that this merger will bring overwhelming new opportunity and competition to scores of communities across this country by creating significantly expanded service options and greater consumer choice. It will bring new job opportunities and economic growth to these communities and a new competitive vigor to U.S. air carriers as they enter an era of heightened competition in domestic and international air travel.
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Mr. Chairman, as a result of this merger:
37 communities will gain direct access to the vast United national and international system that they do not have today. Communities like Bangor, Maine; Erie, Pennsylvania; and Asheville, N.C. will instantly experience a major increase in their service options.
For the first time, passengers traveling between 515 city pairs will have a choice of on-line carriers. For example, today, a passenger traveling between Albuquerque and Augusta, Georgia, has a choice only of Delta; between Flint, Michigan and Sacramento, only Northwest; and between Myrtle Beach, South Carolina, and Portland, Oregon, only Delta. After this transaction, there will be two choices.
4,943 new city pairs will have on-line service for the first time. While many of these involve small communities with limited traffic today, the added opportunity of new service can only mean an increase in the number of passengers choosing to fly. Examples include Bangor, Maine to Anchorage, Alaska; Myrtle Beach, South Carolina to Palm Springs, California; and Fargo, North Dakota to Sarasota, Florida.
103 new flights will be added, almost all of them transcontinental and international, providing our Charlotte hub, for example, with new direct service to Austin, San Antonio and Portland, Oregon as well as new service to Aruba and Barbados, giving it a stronger platform to grow and compete with Atlanta. Philadelphia's already extensive international service will grow with flights to Brussels and Amsterdam.
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In the face of the overwhelming presence of foreign carriers serving our markets, this transaction enhances United's competitive position. For example, our hub cities of Charlotte, Philadelphia and Pittsburgh will now be only one stop away from Tokyo, Hong-Kong and Seoul to the west as well as Buenos Aires, Santiago and Sao Paulo to the south. This is an enormous advancement in their patterns of service.
And, Mr. Chairman, all of this will be done with a job guarantee and all will be done with a two-year fare freeze.
If one steps back and looks at the fare issue, in 1977, just prior to deregulation, more than 240 million people flew on U.S. air carriers. Last year, U.S. carriers carried more than 635 million people. Those numbers alone attest to the widespread availability of affordable air travel.
I well understand that there is no issue as sensitive as air fares and I have seen the charts and graphs Members have displayed over the past week of hearings. Yes, airfares ARE complex today, but this reflects the competitive nature of this industry. Under regulation, we had a simplified fare structure characterized by uniformly high fares. Congress' decision to deregulate led to intense price competition, resulting in an array of fares and greater consumer choice. The reality is that there has been a 44 percent decrease in average fares since 1977, the last year prior to deregulation.
Lower fares are the direct result of the efficiencies and the intense competition built into the far-reaching networks that have been created over the past two decades—efficiencies and competition that would be enhanced by this transaction. And this doesn't even begin to take into account the enormous impact of the Internet in giving consumers instant access to appealingly low fares for an extraordinarily wide array of travel.
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There have been suggestions that this industry will move to three or four or five network carriers—a future I for one do not have the wisdom to predict. But under any of these scenarios, this industry will continue to be characterized by intense competition. In fact, it would be enhanced in other ways beyond network competition. Just as DC Air is a new entrant by-product of the US Airways-United merger, it is inevitable that there would be other opportunities for new entrants and low-fare carriers as gates and other facilities are divested.
These would add to the pool of aggressive carriers that have learned from past failures and today provide an added level of competition—carriers such as America West and Frontier, JetBlue and AirTran, Spirit and Legend and, of course, Southwest, which now is the fifth largest airline in the world in terms of passengers carried and growing rapidly into a national carrier of immense scope with the highest market capitalization of any U.S. carrier.
For US Airways and the customers and communities it serves, this transaction offers an instant solution to the question of long-term competitiveness. US Airways is the smallest of the six major network carriers. Yet we have the highest costs in the industry.
We already have seen what has happened to other mid-sized, mature-cost carriers operating at the beginning of deregulation. Braniff, Eastern, and Pan Am no longer exist and two others, Continental and TWA, exist only after having gone through bankruptcy twice.
In this environment, to provide our consumers with the truly national and global service they demand, we have to join with a partner that has a more extensive scope, breadth and reach. With a route network that primarily complements ours, a merger with United Airlines is the right thing to do. The result will be more jobs, more growth, and greater economic development for the communities we serve.
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And we have taken steps to ensure that US Airways' service to numerous medium and smaller sized cities from our nation's capital would continue through a new entrant carrier, DC Air.
Some have argued that the slots at Reagan National should be put up for auction. This was considered but I firmly believe it would be the wrong solution. Make no mistake about it, history clearly shows that as airlines acquire slots at Reagan National, they use those slots in a way that is most profitable to them. That means serving National from their hub or hometown airports with additional frequencies. If US Airways' slots at Reagan National are redistributed piecemeal to incumbent carriers who will use that access to add more frequencies to Washington from their principal network cities, there will be an abrupt and painful loss of service to smaller communities such as Portland, Maine; Charleston, West Virginia; Columbia, South Carolina, and Burlington, Vermont.
Instead, Bob Johnson, a person of impeccable business credentials, has pledged to continue service to all 43 cities now served from National and to improve it through the addition of more jet aircraft.
In closing, allow me to step back for a moment and reflect upon this business of which I have been privileged to have been a part for more than three decades.
Other than the world of the computer, I can't think of another industry that has been more dynamic and more vibrant than the world of aviation. It is a dynamic business driven by competition and change.
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Just as none of us could have predicted 20 years ago that Southwest would be carrying more passengers than all but four other airlines in the world, neither can we judge this latest evolution of the system within the framework of 1980. The aviation marketplace today is global in scope. It demands ease of access to Beijing and Budapest with the same urgency as to Sacramento and Knoxville. The world has never been more interconnected than it is today. Goods and services flow across borders and oceans with speeds and ease unimagined only 20 years ago. If our aviation system is to remain the envy of the world, we must look ahead, further into the 21st Century, not backward.
The enhanced United Airlines will lead the way into that future, bringing with it opportunity for communities all across this nation. At the same time, the nature of its evolution will enhance not only competition among the major networks but also the entry of new carriers that has been one of the key transforming features of the era of deregulation.
Mr. Chairman, we have a unique opportunity, if only we have the courage and wisdom to seize it.
Thank you for allowing me to share my thoughts with you today.
Mr. HYDE. And now Mr. Johnson.
STATEMENT OF ROBERT JOHNSON, CHAIRMAN AND CEO, DC AIR
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Mr. JOHNSON. Chairman Hyde, Ranking Member Mr. Conyers and members of the committee, thank you for this opportunity to be here this morning.
Mr. Chairman, over the last 2 weeks I have testified in three hearings before the House and Senate on the issues raised in both hearings concerning my plans for building a competitive new airline in Washington, DC, called DC Air. The questions focused on a few key points, and let me take this opportunity now to address them for this committee.
First point was I was asked if DC Air, a regional carrier which will serve 42 cities from Washington Reagan National Airport, can be competitive. It will absolutely be competitive. I am purchasing from United the slots to allow me to serve routes that US Airways has served profitably for years, in some cases as many as 50 years. And my cost will be lower than US Airways' or United's because I am starting up a focused all-jet carrier that will not have the burdens or the complexity or mature cost structure that US Airways have. I will have a fleet of jet aircraft that is perfectly suited to fly the routes DC Air will fly. All this means that DC Air will be competitive on both price and service with anyone and everyone who flies to Washington, DC.
I was asked if DC Air would truly be an independent carrier that would provide true competition, with concerns being raised about the memorandum of understanding with United because it provides for some transition assistance. My answer is that absolutely will be an independent carrier from day one. I am paying full market rate for the assets I am buying and the services I am receiving from United. I negotiated for these transition services because I plan to run a full-fledged operation with 37 aircraft serving 43 cities from day one after this deal is consummated. And furthermore, I have a strong incentive to terminate these relationships as soon as I can because DC Air will be able to do the same thing for less with our own people and our own aircraft. We are already to begin discussions with other major airlines, such as American, Delta, Continental and Northwest, to seek out partnering opportunities such as code-sharing and frequent flier arrangements.
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I was asked if this is a sweetheart deal and if I were receiving assets for less than their true value. On the contrary, I am paying full market value for the assets I am purchasing. Not only that, I plan to invest hundreds of millions of dollars in jet aircraft and paying market rates for every service I am buying. I am putting up $200 million of my own money into this venture, and I am not doing this just to help Steve Wolf and Jim Goodwin out of the goodness of my heart. I am doing this to build a business that I am certain will be competitive and, most of all, profitable for me. And let me add to that, if this is a sweetheart deal, it is sure one very expensive sweetheart.
I was asked why I felt that I should be the recipient of all 22 valuable slots at Washington Reagan National Airport and why these slots should not instead be divided up and sold to various other carriers. Mr. Chairman and members of the committee, one thing is certain. If those slots were split up and sold to the highest bidder, they would certainly not be used to fly to the many small and midsize communities that DC Air will serve as US Airways has served for the past 50 some years, communities such as Birmingham and Huntsville; Knoxville and Nashville, Tennessee; Little Rock, Arkansas; Indianapolis, Indiana; Norfolk, Richmond and Roanoke, Virginia; Allentown and Philadelphia, Pittsburgh, Pennsylvania; Fort Lauderdale, Jacksonville, Tampa and West Palm Beach, just to name a few, and, of course, Congressman Conyers, Detroit. Instead, they would be used to increase an existing service to other airline hubs, and this is all it would be used for.
On the contrary, I am a resident of Washington, DC, I have lived here for almost 30 years. I pay taxes here in Washington, DC, BET is located in Washington, and DC Air will be Washington's hometown carrier, and I am committed to continuing to serve these 43 communities.
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I was asked what impact the transition from US Airways to DC Air would have on the service in the communities we serve. The answer is it will undoubtedly improve. Today one-third of the service provided by these communities are turboprops, while two-thirds are jets. On day one of DC's operations we will increase the 75 percent jet service, and we will move as rapidly as possible, subject to aircraft deliveries only, to a 100 percent jet service for all of our communities.
Finally, I was asked what sort of employer would I be. I fully expect DC Air to be a union carrier. I intend to foster strong employee relationships with all employees because that translates into great service for our customers, and great service is what DC Air will provide. Thank you.
Mr. HYDE. Thank you Mr. Johnson.
[The prepared statement of Mr. Johnson follows:]
PREPARED STATEMENT OF ROBERT JOHNSON, CHAIRMAN AND CEO, DC AIR
Mr. Chairman, Congressman Conyers, and Members of the Committee, my name is Robert Johnson. I am founder and Chief Executive Officer of BET Holdings, Inc., a multi-media company whose principal business is the operations of the BET Cable Network, a 24-hour basic cable programming service that reaches 60 million cable households.
From an initial investment of $500,000 by Tele-Communications, Inc. in 1980, BET Holdings celebrates its 20th Anniversary with a market capitalization of approximately $2.5 billion dollars and is the preeminent business serving the entertainment and information needs of African Americans.
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The recently announced acquisition of US Airways by United Airlines has created for me another historic and exciting opportunity. I have agreed to purchase certain assets currently operated by US Airways out of Reagan National Airport and will be launching DC Air. I do so not to create an African American owned airline, though it will be that. I do so not just to make sure that air transportation remains competitive, though I will do that. Rather, I do so to build a great and successful company that I believe with all my heart will benefit the Washington area, offer high quality service and value to passengers traveling to and from DC, and make us all proud that ''our airline'' is the best to fly.
My vision for DC Air is straightforward:
to build on the well-established East Coast service from Washington's National Airport that Washington-area passengers have come to rely on;
to provide safe, reliable, high-quality service, at competitive prices to customers and communities in this area;
to compete vigorously on price and service in the markets we serve;
to facilitate the growth and economic development that accompanies air service; and
to develop and maintain an airline that the Washington community will be proud to call its hometown carrier.
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In terms of its development and its creation, DC Air is a product of the United/US Airways merger, and that is great news for consumers. Why?
The creation of a new airline is no small task in this intensely competitive industry. New entrant carriers face numerous obstacles such as high, fixed start-up costs, the lack of a strong identity, and an unproven route structure and business plan. DC Air, however, is not a typical airline startup company. Benefiting from the experience and expertise of United and US Airways personnel, we intend to build upon a proven network anchored at Washington's National Airport. DC Air will be a viable and totally independent competitor from Day One. At the same time, it will avoid the mistakes and pitfalls that often confront and, in many cases, overwhelm new entrant carriers in this industry. DC Air will be the largest carrier (measured by number of departures) at Washington's premier, close-in airport, offering 111 daily departures, flown by 37 aircraft, serving 43 airports, extending as far as Maine, Florida, and Kansas City. And as DC Air develops, we will assess opportunities to expand service to additional communities.
For over several decades in some cases, great American cities like Albany, Allentown, Birmingham, Buffalo, Burlington, Charleston, Columbia, Greensboro, Greenville, Huntsville, Knoxville, Lewisburg, Manchester, Morgantown, Norfolk, Roanoke, Rochester and Syracuse, among others, have enjoyed nonstop air service to the heart of the nation's capital. These communities have relied upon this extensive service network, which has provided significant commercial, trade, economic development, and governmental relations benefits for these important cities.
The network has been maintained during periods of economic growth and recession, during harsh winters and humid Washington summers. Sustained service to many of these cities is made possible by the efficiency of a network that is centered at the beautifully renovated, convenient Ronald Reagan Washington National Airport.
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DC Air is fully committed to sustaining and enhancing this network of service that links these critical American cities to our nation's capital. As a new entrant, DC Air will provide frequent, competitively priced air service, ultimately with an all-jet fleet. Retaining the synergies of the current route system is absolutely vital to ensure the important access for these communities to Washington, D.C.
History clearly shows that as air carriers acquire the coveted, valued slots at Washington National, they use those slots in the most profitable way—in service to their hometown hub cities. In fact, excluding US Airways, the principal U.S. carriers serving National Airport only do so from their hubs or focus cities: America West from its hub in Columbus, Ohio; American from its hubs and international gateways in Chicago-O'Hare, Dallas, New York-JFK, and Miami; Continental from its hubs in Cleveland, Newark, and Houston; Delta from its hubs in Atlanta, Cincinnati, and Dallas, its New York-JFK international gateway, and its Delta Shuttle cities, New York-LaGuardia and Boston; Northwest from its hubs in Detroit, Memphis and Minneapolis; TWA from its hub in St. Louis and its New York-JFK international gateway; and United from its hub in Chicago O'Hare and its Miami international gateway.
Only US Airways, the current hometown, Washington-based carrier, offers breadth of service to the Washington passenger, serving not just its hubs in Charlotte, Philadelphia and Pittsburgh, but also 46 additional communities each day. That is why the creation of the hometown D.C. carrier is so critical to the preservation of a route system that has served medium and small cities throughout the eastern United States for so many decades. That is why the merger proposal reflects the strong conviction of each of the three principal players that not only must competition be preserved in the D.C. metropolitan area, but that new competition must come in the form of a carrier able, willing, and completely dedicated to preserving and enhancing the existing network of service upon which the citizens of so many of these cities have come to rely.
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The prospects for vigorous new competition and improved quality of service to these communities are boundless. DC Air is up to the challenge and is eager to assume the historic commitment to these great American communities by providing safe, reliable, high-quality service with outstanding employees.
I appreciate that the airline industry is unique in many ways, and I further appreciate that the industry is highly unionized. I welcome all employees—whether union or non-union—to the DC Air family. My plan is to provide fully competitive compensation and benefits packages, while fostering an environment of participation and common goals for all our employees. This plan, I believe, will result in high job satisfaction among DC Air employees, which, in turn, will translate into the top-quality service our passengers should expect and demand.
STARTUP OF OPERATIONS
To assist in shaping and realizing the vision of DC Air, Bruce Ashby has been named acting President of DC Air. Bruce has 14 years of airline experience, most recently with US Airways, where he held the position of senior vice president—corporate development. Prior to that, he held the positions of senior vice president—planning and vice president—financial planning and analysis. Before joining US Airways in April 1996, he held corporate officer positions at Delta Air Lines, where he was vice president of marketing development, and at United Airlines, where he was vice president of financial planning and analysis and vice president & treasurer. Bruce played a key role in the formation of three ''airline-within-an-airline'' units: MetroJet by US Airways, Delta Express, and Shuttle by United, all of which were successfully launched and grown by these respective carriers, and continue to operate today. Bruce's broad background at a senior management level in the areas of airline finance, planning, marketing, operations, and labor negotiations will prove invaluable to DC Air.
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As I mentioned earlier, unlike a typical airline startup, which might begin with one or two airplanes flying one or two routes, DC Air will be a fully operational airline serving 43 communities from National Airport with 111 daily departures. This plan brings important consumer benefits, by providing nonstop service and a new, competitive force to the 43 communities that we plan to serve, 36 of which are served from Washington's Dulles airport as well.
To enable this level of startup, DC Air has entered into a memorandum of understanding with United Airlines, as part of the proposed United-US Airways merger, that will provide DC Air, from Day One, with the hard assets it requires to mount its operations. These include 222 departure and arrival slots at Washington National Airport; necessary gates and related airport facilities, for which DC Air will assume the leases; and the operations of one of its commuter airline subsidiaries, including the management staff, turboprop aircraft, and related assets. In addition, during a brief transition period in which DC Air will build its own fleet, United will ensure near-term aircraft availability through customary contractual ''wet-lease'' relationships for up to ten B–737–200 aircraft and up to 19 regional jet aircraft. In short, DC Air will have the necessary people, aircraft, and airport rights and facilities from Day One.
In addition to the Day One hard assets, United has agreed in the memorandum of understanding to provide DC Air, if DC Air so requests, with certain supporting services at market rates. These services are typically purchased by airlines, and include items such as fuel, occasional use gate agreements, station-handling contracts, and standard industry interline ticketing and baggage agreements. DC Air is free to purchase any and all of these services on the open market from the numerous other providers of such services.
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It is critical to appreciate that none of these understandings compromises DC Air's independence.
We are rapidly moving through the process of turning the vision of DC Air into an operating reality. We have begun discussions with aircraft manufacturers in order to build our long-term all-jet fleet of aircraft. We are drafting the definitive documentation with United Airlines to implement our memorandum of understanding. We will soon be entering into detailed discussions with the DOT and FAA to obtain the required permits and certificates. And, we are engaged in working with the federal, state and local governments and community leaders to ensure that their needs are met.
In addition, we are ready to begin discussions with other major airlines, such as American, Delta, Continental and Northwest, to seek out partnering opportunities such as code-sharing and frequent flyer arrangements. We see these as beneficial to our passengers, who would thus be able to earn frequent flyer miles in these other major airline programs while flying DC Air. We believe our service at National Airport will be perceived by these carriers as a desirable feature of their extended networks.
SERVICE
DC Air's initial aircraft fleet will be composed of turboprop aircraft operated by DC Air employees, plus 19 regional jets obtained through an industry contractual relationship with current US Airways affiliates and 10 Boeing 737–200s obtained through a wet-lease arrangement with United Airlines.
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Currently, the markets that DC Air will serve are flown by US Airways with 34% turboprop departures and 66% jet departures. Of the 111 daily departures to be flown by DC Air, 25% will be turboprops and 75% jet departures. We will move to an all-jet fleet of aircraft over the first few years of operation; ultimately 100% of DC Air's service will be flown by jets.
DC Air intends to retain service to the communities it serves. One of the key benefits that comes to the communities we serve is that we are purchasing from United all of the slots required to serve these communities. Were the slots to be divided up among several larger carriers, none of these carriers would have sufficient slots to serve all the communities and each would naturally tend to add service to high-volume markets, such as hubs and focus cities where they already have a significant presence. Conversely, DC Air is committed to continuing service to all of our mid-size and smaller communities, and its sole focus is on serving these communities with the highest quality operation. Access by these 43 cities to the heart of the nation's capital will be assured.
COMPETITION
DC Air will provide Day One competition to the Washington, DC area, with competitive pricing and high-quality service.
DC Air will offer nonstop competition to larger incumbent carriers from National Airport in eight of its 43 markets: Atlanta, Georgia; Charlotte and Raleigh-Durham, North Carolina; Columbus, Ohio; Detroit, Michigan; Ft. Lauderdale, Florida; and Philadelphia and Pittsburgh, Pennsylvania. These constitute 22 of its 111 daily departures, or 19%. All eight of these markets are also served from Washington's Dulles airport.
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In addition, DC Air will compete in 28 markets with service currently offered from Dulles Airport: Albany, Buffalo, Rochester, Syracuse and White Plains, New York; Allentown, Pennsylvania; Hartford, Connecticut; Burlington, Vermont; Charleston, Columbia and Greenville, South Carolina; Greensboro, North Carolina; Charleston, West Virginia; Dayton, Ohio; Indianapolis, Indiana; Kansas City, Missouri; Nashville and Knoxville, Tennessee; Louisville, Kentucky; New Orleans, Louisiana; Norfolk, Richmond and Roanoke, Virginia; Portland, Maine; Providence, Rhode Island; and Jacksonville, Orlando, and Tampa, Florida. These constitute 70 of its 111 daily departures, or 63%.
In seven of its markets, DC Air will face no direct competition at National or Dulles airports. These include two designated Essential Air Service markets (Lewisburg and Morgantown, West Virginia), as well as Birmingham and Huntsville, Alabama; Little Rock, Arkansas; Manchester, New Hampshire; and West Palm Beach, Florida. Washington's National Airport represents the only nonstop link for these communities to the nation's capital.
SUMMARY
DC Air is an airline that works. It works for our customers, who will receive top-quality service at competitive prices between Washington's premier airport and the forty-three other cities we plan to serve. It works for our many mid-size and small communities, because it will retain nonstop service to National from those communities that otherwise would likely be converted to connecting service over another carrier's hub. It works for our employees, who will enjoy the benefits of working for a competition-focused, all-jet carrier with a clearly defined mission. And it ensures that airline competition will grow and thrive here in Washington.
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Mr. HYDE. Mr. Conyers.
Mr. CONYERS. Thank you very much.
Gentlemen, your testimony has taken into consideration some of the questions I was going to ask, and I thank you for your contribution.
Let me throw this out because I have seen low-cost carriers who get underbid, the prices are lower until they are driven out of the market, Mr. Johnson, and then the bigger carrier merely raises its fare. This has almost been a standard tactic, and I would like all of you to respond to that. Is there any way you can see that as something that might be in your future?
Mr. JOHNSON. Congressman Conyers, I don't see that in the future for DC Air, and part of that is, one, we are going to always have a lower-cost operating structure than any of the major airlines from day one as we focus on serving only these 43 communities.
The other factor that we have in our favor is we have a very desirable airport destination. The close-in destination of Reagan National Airport gives us an advantage.
Third advantage we have is the fact that Reagan National is a slot-constrained airport for both environmental reasons and other reasons, and as a result of that, the number of flights you can get into Reagan National Airport are always going to be limited. That gives us some protection and advantage, but at the end of the day I think the advantage that we will have is the quality of our service and the low-cost structure of our operations, which will be passed on to our customer in very competitive prices. We will not be beat on price structure.
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Mr. CONYERS. Thank you.
Any other comments?
Mr. WOLF. I think Bob did a very good job of answering that, Congressman Conyers. In the end of the end, Bob has told me in far greater detail, this is the service—this is a service business, and you win customers by providing superior levels of service, and from his perspective this is going to be a Washington, DC-based airline that only flies from Washington, DC, to these 43 communities. He is going to have a focus on that unlike we have seen in the industry for some period of time. I think he is going to do exceedingly well.
Mr. GOODWIN. Congressman, just another point of view on your question. I think it is also important to note that carriers like AirTran have been very successful competing in Atlanta against Delta Airlines. Frontier has been very successful in starting a hub operation in Denver, and is growing and has done so profitably. And I think American Trans Air is now the newer emerging low-cost carrier that is starting to reach out. They are expanding into Midway, into the east coast marketplaces. And, of course, we all know how successful Southwest has been at being able to continue to grow their franchise at 13 to 15 percent a year. They have now developed a route network that covers almost 90 percent of the population of the United States, and I think they are going to continue to spread their wings and fill out their route structure as they, too, look to become a nationwide low-cost carrier.
Mr. CONYERS. Thank you very much.
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Mr. Johnson, how can you cross over from the entertainment business, jazz enthusiast, a media mogul, but how does all that relate to a new, highly-technical field that you are entering into with a lot of regulation? This is a highly regulated industry. What do you bring to that, Bob?
Mr. JOHNSON. Well, Congressman Conyers, I think the thing that I bring to DC Air is the same thing I brought to starting up Black Entertainment Television. As Chairman Hyde pointed out, you know, I started out as a press secretary to Walter Fauntroy and from there went to the cable business and got acquainted with an industry that I had never been in before, and as a result of being involved in that industry at its beginning, going from retransmitting broadcast signals to satellite services that we now have in cable today, I was able to master that technology.
Now, I can admit that the airline business may be a more complex business than putting on a great jazz concert. I am not sure it is much more enjoyable, but it probably is more complex. But the point is I think what you do is you find talent that can help you grow a business that you are not totally versed. I have already done that in hiring a young man by the name of Bruce Ashby, who has 14 years in the industry, to be my acting president, who is helping me put together this operation.
I might also point out that there are a number of other people in the airline business who didn't start out. The current CEO of Delta Airlines, Leo Mullen, was not from the airline industry, and, of course, we all know the famous Richard Branson, who founded Virgin Records and now running Virgin Atlantic, which is a very competitive airline across the Atlantic against British Airways and other carriers that come across the Atlantic. And there are others who have come into this business from outside.
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My approach to it is what you know, you bring to the table; what you don't, you find competent, dedicated, quality people who can provide the service the public is expecting, and that is exactly what I plan to do.
Mr. CONYERS. Thank you very much.
Mr. HYDE. Thank you.
Mr. Gekas, the gentleman from Pennsylvania.
Mr. GEKAS. Yes. Thank you, Mr. Chairman.
Mr. Wolf, you made several allusions to Pennsylvania and the contact you have had with Governor Ridge on one hand, and in your written statement about the new opportunities for people from Erie, shall we say. Then you anecdotally said that in Paris after your contacts with Governor Hunt, you were able to establish a run from his State to Brazil or someplace; is that correct?
Mr. WOLF. No. The two anecdotal comments, Congressman, pertain to two Governors, one of Pennsylvania and one of North Carolina. In both cases they asked questions, frankly, a couple of years apart. Governor Ridge asked is there any way in the world US Airways could ever get flights into the Asia Pacific theater; and Governor Hunt, more loosely, just a few weeks ago, asked about flights into Latin America.
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Frankly, I don't see US Airways flying into the Pacific or Latin America during the balance of my natural life if we are a stand-alone company, but if it happens overnight, as a result of the merger with United, Charlotte will have one-stop service throughout Latin America, and Philadelphia, Pittsburgh will have one-stop throughout the Asia theater.
Mr. GEKAS. I mistakenly thought if I had been with you in Paris, you would have a new line from Harrisburg to Athens.
Mr. WOLF. I wish you as well had been there. It was most enjoyable. But, no, you wouldn't have been able to do it.
Mr. GEKAS. But what I am concerned about is the assertion, and, I suppose, fiat, that there would be a 2-year fare freeze. I don't see how you can do that with the rising costs that impact on fares, but we want to take you at your word on that. That is number one.
Number two, what does it mean to offer a job guarantee? Does that mean the same number of employees who are now employed by the airlines involved will remain on the books following the merger, and if that is so, how long?
Mr. WOLF. Sure. Let me explain both if I could. One of the things United Airlines is offering to the American consumer and the travelling public as a result of this merger going forward is, on the day the transaction closes, they will have a fare freeze for 2 years. And by the way, if United has a fare freeze for 2 years, you can effectively say the industry will have a fare freeze for 2 years because no one gives anybody a fare advantage. So if United freezes, they will freeze.
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In saying that, though, there are exclusions; one, the exclusion for CPI. If the general cost of living goes up, and fuel prices go up—although I am not sure they can go up terribly much higher than they are currently—those increases would be allowed to pass through in the fare freeze, but otherwise it would be a 2-year fare freeze.
And two, on the job guarantee, I think the aspect of the job guarantee that probably catches your attention is that it is so unusual. Frequently one of the ways you justify mergers is the efficiency of the merger, and efficiency is the number of people you are going to lay off to become less costly and operate a combined company. One of the conditions that we felt very strongly about, and United felt strongly about also, was the fact that we were going to offer—United is going to offer 100 percent of the employees of both companies, except for the officers of US Airways, about 30 people, a job guarantee for 2 years, they won't get furloughed, and quite frankly, Mr. Goodwin has extended that. Jim, maybe you can comment on that.
Mr. GOODWIN. Congressman, as Mr. Wolf said, we do have a contractual obligation with all the US Airways employees for a 2-year guarantee, but we are an employee-owned company. We view our relationship with our employees very seriously. We have committed that no employee will be furloughed as a result of this transaction even beyond the 2-year period. We say that because we have extreme confidence that we are going to be able to continue to provide increased consumer benefits of this transaction that will be more growth opportunities for States like Pennsylvania and North Carolina, et cetera.
Mr. GEKAS. But you still feel constrained to limit your guarantee to only 2 years?
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Mr. GOODWIN. No, sir, we have a legal, binding commitment that is part of our merger agreement for 2 years, but we have publicly stated and I have publicly committed to all of our union leaders that we will continue employment for all these people beyond the 2-year period.
Mr. GEKAS. Does the current union contract carry us beyond 2 years from, say, today?
Mr. GOODWIN. The current union agreements that the airline industry operate really never expire, they just get amended on a periodic basis. So, yes, those contracts would carry on beyond the 2-year period.
Mr. GEKAS. If there are some layoffs absolutely made necessary by the economies of the merger beyond 2 years, would you employ the practices of attrition and other transfer possibilities before an absolute layoff?
Mr. GOODWIN. That is the statement we have made, Congressman, that with our retirements, with normal attrition, and with growth, we see no problem in being able to absorb this work force and do not anticipate we will have to have any reduction at all.
Mr. GEKAS. And then speaking parochially, I would have to encompass all of what you have said and what you stated to the benefit of those in my State in Pennsylvania who do occupy positions with your respective companies. Is that fair, too?
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Mr. GOODWIN. That is correct. Pennsylvania has about 17,000, I think, US Airways employees, I think considerably less from United's perspective. We have been meeting with those employees routinely since we announced this transaction to allay their fears and to assure them that there will be jobs for them as a result of this transaction.
Mr. HYDE. The gentleman's time has expired.
Mr. GEKAS. I thank the Chair.
Mr. HYDE. The gentleman from Virginia, Mr. Scott.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Johnson, in the areas that you will be flying in, will you be competing against United or US Airways?
Mr. JOHNSON. Congressman Scott, US Airways will—if the deal is consummated, will no longer exist, so I will be flying against United in a number of communities, both into DC National and as well as the flights that United has into Dulles International Airport, and perhaps even BWI.
Mr. SCOTT. So the service that is there now with one of the airlines will continue? I live in the Hampton Roads, Virginia, area. We have United and US Air coming into there. Coming to Washington, DC, for example, you will compete against the combined United?
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Mr. JOHNSON. That is correct.
Mr. SCOTT. You gave a couple of—you gave a couple of examples of new services that will be available, direct services; I think either Mr. Wolf or Mr. Goodwin gave examples of new services that will be provided, direct flights that will compete against other airlines.
Can you explain to us how this will reduce costs for consumers?
Mr. GOODWIN. Congressman Scott, obviously the more competition in markets, the more opportunity for consumers to have choice; more choice typically has a great effect on disciplining price in the marketplace.
Mr. SCOTT. Can you give us some examples of cities where there was new competition that resulted in lower airfare for the consumer rather than two people charging the same amount?
Mr. GOODWIN. Well, as Mr. Wolf testified a moment ago, yesterday there were over 200-and-some thousand fare changes in our industry. Fares in our business last—have a very short shelf life. However, in the case of this transaction, we have already announced the addition of a lot of new service, Raleigh/Durham-San Francisco; Charlotte to Austin, Texas, today, which has no nonstop service and receives all service on a connecting basis; San Antonio to Charlotte; Seattle to Philadelphia; Seattle to Boston.
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There are 94 new flights, 69 of those domestically and 24 of them in the international markets, which will bring more competition, which will give customers a choice in those markets.
Mr. SCOTT. I assume that you have examples of where new service resulted in lower fares; where as a result of the new service, the consumers can expect to pay a lower fare, people going from Seattle to Boston by virtue of your new service should be able to get from Seattle to Boston cheaper, and that you should have some examples of where new services actually resulted in lower fares so the people can have confidence that that is what is going to happen?
Mr. WOLF. Congressman Scott, we are making a number of claims relative to this merger. The on-line service and the economic benefits will be explosive in terms of their impact.
We have a 2-year fare freeze. We have a job guarantee, and we are not going to reduce travel agency commissions, et cetera. During this 2-year period of time, the combined US Airways/United Airline entity is going to become a more efficient operation than either of the two of them are today.
As an example, US Airways' unit costs, which are the highest in the industry, as a result of the merger will average down dramatically. During that 2-year period of time, when the cost structure becomes understood, and recognizing there is a burden we are imposing from the beginning of no fare increases as we articulated, United will be able to understand what it can do on the fare side going forward thereafter.
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Our claim is as a result of the merger, we are not raising the fares in the United States of America across the board, or on specific given routes. We will become a much more efficient airline and have the ability to do so in the future.
Mr. SCOTT. Do you expect the new service to create new demand for service, or will you be dividing up the number of passengers by the people you are competing against?
Mr. WOLF. I believe it will——
Mr. SCOTT. For example, do you expect more people to be flying from Seattle to Boston? You gave that example.
Mr. WOLF. I believe it will do both. Service begets more passengers, quite frankly, and more efficient service begets more passengers. Some of those will be passengers who are flying between Portland, Oregon, and Charlotte today on a circuitous routing, and they exist. People fly today between Portland, Oregon, and Charlotte, North Carolina. When we put a non-stop flight in there, I think we will attract some number of those passengers who are connecting today, and I also think we will stimulate some additional demand.
Mr. HYDE. The gentleman's time has expired.
Mr. Barr, the gentleman from Georgia.
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Mr. BARR. Thank you, Mr. Chairman.
Mr. Johnson, as I am sure you are aware, we had an initial hearing on this matter 8 or 9 days ago, and Mr. Leonard from AirTran made the following statement: DC Air will lease United aircraft and flight crews, adopt the United pilot contract terms, use United maintenance and ground facilities, and participate in the United frequent traveler program.
Is any of that inaccurate?
Mr. JOHNSON. Yes, Congressman, it is. We will simply lease United aircraft, pilots and crew under a lease agreement. We will not adopt any of their contractual obligations. It will be a straight fair market lease that we will pay United for those transition services.
We will not be part of their code-sharing or frequent flier program. In fact, as I testified earlier, I plan to seek code-sharing arrangements with American, Delta, Northwest and other carriers that I think will be attractive to the DC Air flying public.
Mr. BARR. I am not finished.
Let me go back here. I have learned over the last 7 1/2 years to be very careful about terms that people use. Okay?
I asked you if it was accurate that DC Air will adopt the United pilot contract terms. You talked about contract obligations. Is that completely inaccurate? You do not intend to adopt any of the United pilot contract terms?
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Mr. JOHNSON. That is inaccurate. We will not adopt any of the United pilot contract terms. We will simply have a lease arrangement with United. Their relationship with their pilots are their relations, not ours.
Mr. BARR. Okay. With regard to using United maintenance and ground facilities, is that inaccurate that you will use those?
Mr. JOHNSON. We will lease certain facilities, ground facilities, from United during the transition period. And let me point out the reason for this is that the 43 cities—for example, Little Rock, Arkansas, for example, has been served by US Airways for a very long time. If this deal is consummated on Tuesday, on Wednesday those citizens from Little Rock who want to get to DC are going to expect to be able to get there, and by leasing these transition services, it allows us to continue to serve that public while we transition to our own operations, our own fleet and our own employees.
Mr. BARR. Okay. And it also is accurate, though, that DC Air will participate in the United frequent traveler program?
Mr. JOHNSON. That decision has not been made, Congressman Barr. We do not know which frequent flier program we will participate in. We hope to participate in as many as we think are attractive to our passengers.
Mr. BARR. So there is nothing in writing anywhere that would indicate otherwise on that?
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Mr. JOHNSON. I assure you, Congressman, there is nothing in writing that obligates us to enter into any kind of frequent flyer code-sharing arrangement with United.
Mr. BARR. Okay. With regard to the announced plans to initiate service to various cities from Reagan National, it is my understanding that you plan to initiate service to Detroit and Little Rock?
Mr. JOHNSON. We are picking up services that have already been in place, and those two cities are currently served by US Air. Those are new cities, new from DC, right.
Mr. BARR. Okay. Those cities are currently served by US Air?
Mr. JOHNSON. No, will be served by DC Air.
Mr. BARR. By DC Air?
Mr. JOHNSON. That is correct.
Mr. BARR. But they are not currently served by US Airways?
Mr. JOHNSON. That is right.
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Mr. BARR. Are you initiating any service or plan to initiate any service initially to Chicago, to or from Chicago?
Mr. JOHNSON. No.
Mr. BARR. Okay. How was your initial list of markets developed, and was there any communication at all in those discussions to come up with an initial list of markets out of Reagan National with either US Airways or United?
Mr. JOHNSON. The route structure that we have was principally based on where US Airways has served these communities for a number of years, so we started with that.
I think the other—the structuring of it was to look at what we believed would be the best allocation of our slots to serve communities that we felt would be both in need of service and profitable services.
Mr. BARR. I understand that. That is obviously the general philosophy. That doesn't answer any of the questions, so I was just asking a very specific question.
In all of your discussions and deliberations regarding coming up with a list of initial markets, was there any communication whatsoever between you or your company and United or US Airways?
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Mr. WOLF. There was with US Airways.
Mr. BARR. I am asking Mr. Johnson.
Mr. JOHNSON. Yes, there was definitely communications with US Airways simply because they had the routes; they understood the route structure, the cost, the profitability structure; and as an acquirer it made all the sense in the world for me to talk to the company I am acquiring the product from to determine what was the most efficient way to maximize revenue off the slots.
Mr. HYDE. The gentleman's time has expired.
Mr. BARR. I would ask unanimous consent to ask just one brief follow-up question, Mr. Chairman?
Mr. HYDE. Without objection.
Mr. BARR. Thank you, Mr. Chairman.
Are any of the list of initial markets to be served by DC Air in current competition with United or US Airways to or from Reagan National?
Mr. JOHNSON. Yes, Congressman Barr. A number of the routes are in competition with United, particularly in DC, as well as United flying into Dulles International Airport.
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Mr. BARR. But not with US Air?
Mr. JOHNSON. Well, the US Air routes—I am assuming you are talking post-merger. Then US Air would go away. It would all be United.
Mr. BARR. Okay. Thank you.
Mr. HYDE. The gentleman from North Carolina, Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
Last week when we had the first part of this hearing and some of the governmental officials were here, I asked them whether antitrust violations or potential antitrust problems can exist because—not because of what is happening now, but because of what might happen in terms of competition in the future, and they said, yes, we can evaluate the impact of this transaction on competition that might be engendered in the future.
Mr. Wolf, I take it that if there is ever going to be—there was ever going to be any real competition—well, let me put it another way—if US Air was ever going to grow, and you were out seeking these linkages when the discussion of a merger came up, you were seeking those linkages because you thought you needed to have service to the west coast and other places to make US Air more viable.
Without this merger I assume that would have continued to be the case, and you would have either made US Air more viable by going to some of the places that United now serves, or US Air would have continued to have problems? Do I misapprehend that?
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So my question to you, I guess, is the same as I asked last week: What impact is this merger going to have on future prospects for competition that might have occurred between US Airways and United as opposed to the existing routes where there was competition?
Mr. WOLF. I think I understand the question, Congressman Watt.
I was in a discussion with Jim Goodwin about US Airways participating in the Star Alliance. We are not in any of the global alliances that exist today. And out of that discussion with Mr. Goodwin about Star Alliance, he brought up this possibility of acquiring our company. I didn't think that would happen, quite frankly, because of the number of conditions we would put on it, and those conditions are threefold: price for our shareholders, job guarantee for our employees, and continuing to serve all the communities we serve. But we were able to resolve all of those things, and we went forward.
I really don't know how to speculate as to what other routes carriers might fly in the future.
Mr. WATT. But wouldn't part of your strategy as US Airways and growing US Airways inevitably have led you into further competition with United in a number of markets——
Mr. WOLF. Well, I——
Mr. WATT [continuing]. Without the merger?
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Mr. WOLF. I cannot say that it would not, but I would say this: US Airways' overriding problem is that it is too small to support its cost structure. It has to become much larger.
Mr. WATT. Doesn't that prove the implication of my point?
Mr. WOLF. Well, I am not quite sure that it does because I don't think we—I do not believe we can get to the size we need to get to singularly through internally generated growth. We ourselves have looked at acquiring every single airline imaginable, and for one reason or another either couldn't finance it or the fit wasn't right. We don't have the financial strength to buy United Airlines, and it is a 55 percent employee-owned company anyway, so it probably wouldn't happen.
But we have to get substantially larger in order to spread our costs over a bigger base to get our unit costs down. We can't continue through life with the highest costs in the industry indefinitely.
We are addressing that by trying to grow ourselves as reasonably as fast as we can internally, but those are very significant capital expenditures for aircraft.
Mr. WATT. Let me talk to you about that concern. I am still concerned about that aspect of it. I know it involves some level of speculation, but I think that is where—if the Antitrust Division of the Department of Justice is going to really have some problems, I think that is more likely to be here than anyplace else.
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Mr. Chairman, could I ask one additional question?
Mr. HYDE. Without objection.
Mr. WATT. This question goes to Mr. Johnson, because one of the problems we are having in Charlotte is not so much with service. We get plenty of service. It is with pricing, because Charlotte is the hub, and the only way that prices are going to come down in the Charlotte market is to have competition in the Charlotte market.
So I am particularly interested, and maybe we do not have time for you to really address this at this point, in knowing how much competition DC Air will provide between Washington Reagan in particular and Charlotte with this new merged airline. If you can just address that at some future point, I think the chairman wants to move us on. But hopefully we are going to have an opportunity to sit down and talk about this in more detail anyway.
Mr. JOHNSON. I will make a point to do so, Congressman. Thank you very much.
Mr. HYDE. The Chair will recognize himself for 5 minutes.
Mr. Goodwin, I know you dispute the conclusions of the Suburban O'Hare Commission report that major airlines have agreed to divide up the hub markets geographically. Setting aside the question of whether there is agreement, do you concede that except for Chicago, every major hub is dominated by one carrier? If that is true, why?
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For example, why don't you challenge Delta in Atlanta or American in Dallas? Aren't Delta and American making money in these hubs?
Mr. GOODWIN. Mr. Chairman, hubs get formed over a period of time, and I think it has often been said every city would like to be a hub if they had the opportunity, because of the tremendous economic benefits they bring, the schedule frequency and some of the service options that cities derive. But the fact is that a hub like Chicago—and Chicago is blessed with having a hub that not only has United and American, Southwest is a major connecting player at Midway and, as I mentioned earlier. ATA is as well. The reason why a city like Chicago can sustain multiple carriers operating in a hub is indeed driven by the size of its local traffic. Chicago is a major business center. People come to Chicago to do business. People leave Chicago to do business. It has historically been at the crossroads of the transportation network in our country, from the railroad days to the air days, even the trucking industry. So business tends to collect in Chicago. As a result, it can support a higher level of travel.
Other cities which do not have that strong presence of local traffic would have difficulty in supporting multiple air carriers, because the number of passengers to make it work simply is not there. We have mentioned a couple of examples. Boise to Denver, as I indicated earlier, has 23 passengers a day that want to travel on one of three airplanes. Des Moines, which is a city in our backyard, has nine flights a day to O'Hare. Nine flights to transport 176 passengers a day that want to get between Des Moines and O'Hare. So that is an average of 19 passengers a flight.
For another carrier to come into Des Moines-O'Hare, with two already serving that market, is difficult. However, let's say a third carrier decides to enter Des Moines-O'Hare, their natural share would tend to be 19 passengers, or if—that is if the market grew by 19. If the market stayed the same, their natural share is going to be less than 19. So you can't sustain an economic service when you have those levels of passenger traffic without the hub. You need a large city, a large business base, and Chicago is blessed with it.
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Mr. HYDE. Well, I understand that, Mr. Goodwin. What I don't understand, or partially understand, is why these geographic locations seem divided up between the Big Seven; for example, Atlanta, Delta; not American, not United, but Delta in Atlanta. US Air is Charlotte, Pittsburgh; American, Dallas, Miami; Northwest, Minneapolis; Northwest, Detroit. It looks to me like people have decided to geographically divide up the country, and you stay out of my backyard, and I will stay out of yours. That is perhaps a too superficial analysis, but Minneapolis is, what, Northwest? Everybody has got their backyard, and they dominate, and the others stay out, and that—I just don't know how that serves the consumer very well.
Mr. GOODWIN. Well, I would like to comment on your statement that others stay out. Hubs attract competition from other carriers' hubs. The reason for that is simple because, again, it gets back to the ability to attract traffic and then leverage the traffic over your own personal network. I compete very vigorously in Dallas for traffic, and I am pretty successful at it, but I can compete in Dallas against an American Airlines into cities where I also have the ability to offer the consumer some value for that competition.
I can't compete against American in Austin to Dallas as effectively as they can because they have the mass connecting advantage, but I can compete in Dallas for passengers going to San Francisco. I can compete for them going to Chicago, to Washington, and all the connecting opportunities I can provide.
We have been growing or flying into Dallas, into Atlanta, into Houston, into Minneapolis. We are very, very willing to aggressively compete in other carriers' hubs where we can provide a service that our customers will buy.
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Mr. HYDE. Just one more question, Mr. Goodwin. As you probably know, I am sure you do, there is litigation out in my part of the country in Illinois regarding whether the city of Chicago has been planning to expand O'Hare Airport, and the judge has sealed some of the evidence. I am wondering if United could cooperate in helping to get the judge to lift the seal on these documents and make them public?
Mr. GOODWIN. Congressman, you are asking a nonlawyer a very technical question.
Mr. HYDE. You don't have to answer it. You can get back to me on it.
Mr. GOODWIN. I would be happy to get back to you on that one.
Mr. HYDE. I would never want to deny a lawyer a fee.
The gentleman from Arkansas, Mr. Hutchinson.
Mr. HUTCHINSON. Thank you, Mr. Chairman.
I was delighted to hear the comments of Mr. Johnson concerning the proposed direct service to Little Rock from D.C., but I wanted to follow up a little bit. It is my understanding, Mr. Goodwin, that United formerly had a direct flight from Washington to Little Rock; is that correct? Or do you know?
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Mr. GOODWIN. Congressman, I don't know the answer to that. I know we have provided service to Little Rock out of our Chicago hub over the years, but I do not know about Washington. I will be happy to get you to the answer.
Mr. HUTCHINSON. Mr. Wolf, US Air serves Little Rock, but there were not any direct flights from Washington to Little Rock?
Mr. WOLF. Correct.
Mr. HUTCHINSON. But your recommendation to Mr. Johnson was that Little Rock is a good market to look at, that you could expand service in; is that correct?
Mr. WOLF. It was our internal analysis that might be an interesting market for him to try, yes.
Mr. HUTCHINSON. I am curious as to what the dynamics are that a spin-off carrier, DC Air, could have a direct flight to Little Rock when US Air did not?
Mr. WOLF. Yes. One of the things that we felt very strongly about in spinning off these 222 slots to whomever, that that party continue to serve these communities to the greatest degree possible. We have, in some cases, served those for over 50 years, and clearly there are larger population centers to which we could be flying our airplanes.
In doing that at this point in time, we felt there was an ability to rationalize a little bit, and where we have had some number of flights today, and maybe we have had them for a number of years, maybe we can go down by one or two, and maybe we can add a new service to a new city to also give them on-line direct access to Washington National Airport. That is what we are doing in this transaction.
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Mr. HUTCHINSON. Well, I am not sure I followed all of that. I mean, you did not determine that US Air should open up that direct flight between Washington and Little Rock. But with a new carrier, you know, why would it be profitable for them to do it, but not for you to do it?
Mr. WOLF. It could be profitable for us to do it, but for us to do it could be sensitive, quite frankly. We have a finite number of slots, and we are using all the slots to serve X number of communities. In order to serve Little Rock, I have to cease service to somebody else to start service to Little Rock.
Mr. HUTCHINSON. If DC Air is taking it over, they are not going to have to do the same thing?
Mr. WOLF. That is precisely what they are going to do, but they are going to continue service to all of the communities, and a limited number of theses communities are going to lose a flight or two a day, but still have a very broad pattern of service.
Mr. HUTCHINSON. Mr. Johnson, let me just encourage you that it is a great market. Little Rock is not in my district. XNA, Northwest Arkansas Regional Airport, is in my district as is the Fort Smith Regional Airport, and there is some strong industry there, direct flights. Take a look at that market up there as well as you enter into that.
Let me switch to Mr. Goodwin. I am interested in the new joint venture among a number of airlines known as T2. Can you tell me, is there any agreement requiring airlines owning or participating in T2 to put fares on T2 that they would not make available through other retail channels such as their own Web sites or traditional travel agencies?
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Mr. GOODWIN. Congressman, I can't tell you whether there is a condition in there or not, but I will be happy to find the answer out and let you know.
Mr. HUTCHINSON. I would appreciate that.
[The information referred to follows:]
United's agreement with Orbitz permits United to make fares available in any retail channel, and it is United's understanding that the same provisions are in Orbitz's agreement with any other airline. In the relevant provision of the agreement Orbitz guarantees non-exclusivity to all airlines associated with Orbitz. That provision expressly provides that no airline is restricted from offering any fare it wants at other Internet sites or through traditional travel agencies. If other entities were to offer United the same range of economic benefits that we expect to receive from participating in Orbitz, then United would be prepared to consider making those fares available on comparable terms.
Where carriers choose to sell their fares has been an individual airline decision throughout the years of deregulation. Nothing about our agreement with Orbitz suggests that would change once Orbitz is operating.
Mr. HUTCHINSON. And then let me also ask, does United make all of its published fares available to other CRS systems?
Mr. GOODWIN. Published fares—all the fares that we file through ATPCO are delivered to all CRSs, yes.
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Mr. HUTCHINSON. Are there any other fares that are held back that are not published that you use in your own marketing scheme?
Mr. GOODWIN. The only fares, and I am treading on a lack of knowledge here, but the only fares that we do some displays on are on our own Web site, so they are available to our Web site users, our Web sale fares. Whether those are totally made available to other sites, I don't know, but I will get you an answer to that one.
[The information referred to follows:]
United, like virtually all airlines, chooses to make most of Its fares available through all channels. This is done for a very good and simple reason—making our fares available through all channels maximizes our ability to sell seats.
A very small percentage of our fares, however, are so low that we would not be able to afford to offer them if we had to pay a CRS booking fee and a travel agent commission, or offer the personal advice of one of our employees in order to sell that ticket. These very small groups of fares, sometimes called webfares, are typically available only on our website, where we incur none of these costs. These are often seats on flights at very low demand times which are typically made available only a few days before flight time when it is clear that we will have an excessive number of empty seats on that flight. Fewer than one in 200 United passengers uses any type of Internet-only fare, largely because the generally last-minute availability, change and refund restriction, and limited routes and times available appeal to a limited number of travelers. If United were required to make Internet-only fares available through all or most other high-cost channels, our ability to offer such fares at all would be substantially eroded.
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In addition, there are many unpublished fares that have existed for years, including government fares, corporate discount fares, convention fares, consolidator fares, and so on. These have long been available only to selected customers and/or through selected retailers (such as the travel agent who works with a particular corporation). These fares typically have not been available on public websites, and nothing about Orbitz is expected to change that situation in the future.
Mr. HUTCHINSON. Thank you, Mr. Goodwin, Mr. Wolf, and Mr. Johnson.
Mr. Chairman, I yield back.
Mr. PEASE [Presiding.] The gentlewoman from California Ms. Lofgren.
Ms. LOFGREN. Thank you, Mr. Chairman.
I am mindful that none of us on this committee has ever run an airline, so we are not an expert of running an airline, but we do have some expertise and that is in being passengers. In fact, every Monday or Tuesday I fly United from San Jose to Dulles, and every Thursday or Friday I fly from Dulles to San Jose. I log in close to 5,000 miles a week.
On this Monday, I showed up at San Jose Airport for my 8:10 flight a little bit before 8:00, about quarter to 7. The line extended to the sidewalk. So I skipped the front desk, and I went down to the gate, where the line extended to the metal detector. I waited in line for over an hour to get a boarding pass, whereupon we entered the plane that had then been sitting there for about 2 hours and were advised that they had just discovered that there was a defective part, which they drove down from San Francisco in rush hour traffic.
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Now, in the 3 hours that I sat there in the airport, the other passengers came up to me and said, ''Don't let them merge until they can improve this kind of service.'' I promised them, the other passengers in San Jose, that I would raise this issue with you.
Now I will say that the staff, the United staff, both in Dulles and San Jose, are unfailingly very polite, and really they do credit to your institution, but they are pulling their hair out as well. I mean, it is aggravating for them. It is embarrassing for them. I am just wondering how this proposed merger is going to make this level of service better. This is not an everyday occurrence, but let me assure you it is not an isolated event.
In San Jose, for example, it is an American Airlines hub, a couple of years ago both American and United indicated they would do direct nonstop to Boston and to Dulles. Shortly thereafter, and I am not suggesting collusion, but magically United dropped its flight to Boston, and American dropped its flight to Dulles, so there is really no competition at that airport.
I am not seeing how this merger is going to make that competitive situation better, and if we assume in a capitalist society that competition leads to appealing to passengers, and I do both in terms of fares and also service level, I am not seeing how my constituents are going to receive their dream of on-time service and better service from United with this merger.
Actually, that is more important to them even than the cost of the fare. Can you address that?
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Mr. GOODWIN. Congresswoman, first of all, I apologize for you having to stand in line.
Clearly, service is the backbone of this industry, and we recognize at United that in order for us to put our best foot forward every day, we have to treat our customers appropriately. If we don't, they have choices. I hope you will understand that in the complexity of this industry, we do occasionally have an airplane that because of its mechanical nature will have a problem, that will require a lengthy time to fix. But, again, safety is very important to us, and we want to ensure that we do that.
But when you look forward in this transaction, we go into this transaction knowing full well that if we do not produce a product at the end of the day that our customers believe is of value to them, then all the work and all the energy that we have put into this transaction will not be worth anything, if they don't believe the service is there.
Ms. LOFGREN. Can I interrupt just a little bit, because we do have time limits. I am eager, actually, to get an answer to my question, because right now there isn't much competition from the west coast. I mean, if you want to get from, you know, the San Francisco Bay area to Washington direct nonstop, you are on United. The statistics I have seen, you know, I can't swear they are correct, is that the on-time service is below 70 percent.
Now, nobody wants, you know, to fly in an unsafe plane. No one would ever say if there is a mechanical problem, fly anyhow. I am not saying that. But the on-time service level for United is worse than practically every other airline is what I am being told. So how is this merger going to make you pay more attention to that so that the service that is already not very competitive is better?
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Mr. GOODWIN. Congresswoman, unfortunately flights out of the west coast, particularly San Francisco, are originating or terminating in the worst airport in the Nation with respect to its ability to accept aircraft during inclement weather.
Ms. LOFGREN. Let's eliminate San Francisco and go to San Jose, because that never occurs in San Jose.
Mr. GOODWIN. Unfortunately the skies that feed airlines to and from the San Francisco Bay area use the same air space. So when the system begins to back up because of San Francisco's inability to accept aircraft, then the San Joses and the Oaklands and other places also get impacted because that airplane has to stay in the sky.
Ms. LOFGREN. I know that there is a proposal to change the approach to the San Francisco Airport, but that has not yet been implemented, and, in fact, the approach is from the south into San Jose; whereas the approach coming westbound is not in the same pattern right now out of Oakland air control, at least that is what I have been told.
Mr. GOODWIN. If you look at the airways going east-west across the country, the departure fixes that the FAA uses to route aircraft all bring airplanes into a common area and then meter them into airports. If that pipeline gets backed up because one of the outlets, San Francisco, can't accept airplanes at the same rate, it will have an effect not only on San Jose, it will have an effect on Oakland, it will have an effect on Sacramento and other airports that depend on those arrival fixes for aircraft to operate.
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Ms. LOFGREN. So you are saying this merger, or no merger, that the service is going to continue to be bad in the West, no matter what?
Mr. GOODWIN. The airport operation in the Bay area is a major concern for this—for us as a major player out there. It also is a major concern for the Federal Aviation Administration. It has to be fixed. But it is not the only airport that suffers from lack of available space. We have the same problems here on the east coast. We have problems in Chicago. We have problems in Denver.
Ms. LOFGREN. Well, I don't want to abuse my time. If you have any further information on the actual merger question that I asked you, I would appreciate getting it in writing.
Mr. GOODWIN. We will follow up. Thank you, Congresswoman.
[The information referred to follows:]
As you know, the airline industry is facing a crisis in our nation's skies. An outdated and overburdened air traffic control system across the country is putting a strain on our operations and on the patience of the flying public. I appreciate that you shared with me your personal frustration when flying from San Jose to Washington, D.C. each week. In short, we know there is a problem and we are constantly searching for ways to solve it. I hope you will recognize, however, that the solution does not lie solely with the airlines. We must work collaboratively with the federal government, the airports, air traffic controllers, pilots, flight attendants and the traveling public to find long-term customer satisfaction.
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The acquisition of US Airways will enhance consumer choice by enabling United to provide service in many markets where non-stop access currently does not exist. Additionally, in June 1999 United Airlines developed ''Our United Commitment,'' an initiative that is steadily improving customer service in several areas. Since that time, a number of new policies, procedures and technology have been implemented to improve the level of customer service. With the proposed merger, United and US Airways will be able to share each other's voluntary customer service initiatives and best practices.
I have included a one-page summary of our new customer service initiatives that will expand as we move forward. I can assure you that United understands the importance of customer service and we will continue address out passenger's needs should our merger with US Airways be approved.
UNITED'S NEW CUSTOMER SERVICE INITIATIVES
Newly Developed Training
All 100,000 employees provided ''awareness training'' on Our United Commitment
Incorporated in New Hire Training
Customer Information and Technology Enhancements
Mobile CHARIOTS—Flexible work stations particularly used during Irregular Operations
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850 BULLSEYE Baggage scanners deployed for baggage tracing
GATE READERS—Promotes faster boarding and check-in process
THE WORD—New airport information display system
CSINFO—New Technology for up to the minute flight information from airport agents
Automated policy and procedure cards upon request at airport and ticket locations
Customer paging for flight irregularities
Visual computer enhancements for Reservations to quickly find lowest fare available
United updates on flight status, flight availability and Mileage Plus can be accessed by WAP-enabled devices. Also provides ability to talk directly to a UA rep.
Flight Information on Website, United.com
Annual Mileage Plus report on Frequent Flyer award redemption
800 # for Bag Desk—New VRU/Voice Response System for Bag Desk
800 # for Refund Department
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800 # for Customer Relations (later 2000)
Enhanced Services
Economy Plus—More legroom on all aircraft
Free Headsets
Automated compensation available at any airport check-in/ticketing location
Elimination of Mileage Plus Award expiration
Paid telephone reservation can be cancelled within 24 hours without penalty
Re-designed Website—Easier for our customers to access services
Irregular Operations
Airport Contingency Plans—Access to gates, food, water, lavatory facilities and medical assistance during extended onboard delays
Extended Delay Kit—Nutrition bars and liquid nutrition supplement provided on delayed flights
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Cockpit prompts every 90 minutes during delays to assess customer needs
Increased Baggage Liability
Increase from $1,250 to $2,500
Mr. PEASE. The gentleman from Ohio Mr. Chabot.
Mr. CHABOT. Thank you, Mr. Chairman.
Mr. Goodwin, or Mr. Wolf, either one of you, if you wouldn't mind answering, I represent the First District of Ohio, which basically is Cincinnati. We are served by the Greater Cincinnati-Northern Kentucky Airport, and it is one of Delta's main hubs along with, of course, Atlanta. I would like you to comment on what effect there might be in this merger, or Delta's also—there are other mergers that are rumored and reported of late—could you comment on what type of effect on either service or airfares there might be relative to our service in Cincinnati, either your merger or some of the others that we have talked about?
Mr. GOODWIN. Congressman, I don't have the specific schedules for the Cincinnati area with me, but we would be more than happy to have them delivered by your office later this afternoon or Monday morning——
Mr. CHABOT. I would appreciate that.
Mr. GOODWIN. [continuing]. So that we could do that for you.
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As far as your—as far as your question, your more general question on what other mergers may be out there, I don't know whether there will be another merger out there, and I say that not because I am trying to be evasive on the answer. I don't know whether there is another merger out there.
As we have said consistently, this combination is a very unique combination with US Airways' presence on the north-south on the east coast, ours in an east-west network.
We have common labor unions. We have a highly common fleet between our two companies. That presents some very unique opportunities for us to do some of the things that we have been able to do in this transaction.
We have been able to minimize the route overlap. We have been able to divest the concentration in DCA. We have been able to guarantee jobs to the people because of the union conditions, and we believe the transition is going to be a lot smoother because of the common fleet types.
Whether those conditions exist in another combination, I don't know.
Mr. CHABOT. Mr. Wolf, would you want to comment?
Mr. WOLF. I think I would sort of paraphrase the same. US Airways, albeit a smaller carrier, we have substantially the largest market share north-south in the east coast of the United States, at about 37, 38 percent. United has a little less than 1 percent. We have exceedingly little overlap, so when you put our two systems together, they fit very well, and the passengers will flow in a much more expeditious and economical fashion than they do today in our two independent systems.
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Mr. CHABOT. Also one other thing I wondered if you might want to comment on, a little bit different subject, but it seems that the airlines, and I guess the industry building the planes, there is a trend toward squeezing more and more people on planes, I assume trying to save some money in doing that.
I just had an experience this week flying from Cincinnati. It was a new plane. I was kind of impressed with the looks of the plane as I got on. I don't recall which one it was. I assume it was built by Boeing, but I am not sure.
I happened to be sitting in the—not in the emergency row, but the row in front of the emergency row, so the seat—you can't put it back for one thing, but then the row in front of you can, so you have that seat in front of you in your lap, but your seat can't go back, and unless the femur, my femur, has grown between my knee and my hip, which I don't think it has, they have reduced the leg room there. And I mean literally, I could hardly keep my leg straight without being just jammed in there.
I was just wondering if you might comment on the trend of trying to pack more people on planes and making them much less comfortable, quite frankly, for the passengers, the public?
Mr. GOODWIN. Congressman, I would be happy to. United Airlines last fall started taking seats out of the economy cabin. We have added a front end of the cabin called Economy Plus, where we have added 5 inches of leg room to 450 of our airplanes that are flying domestically. American Airlines has also expanded leg room in their fleet, their domestic fleet, and they are in the process of making that conversion.
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Again, I believe it is a response from our consumers that are telling us that service has deteriorated, and they are looking for us to provide them more value for their investment, and here are two airlines that have clearly stepped up to the plate to do so.
Whether other carriers decide to or not, I do not know, but if they don't, we will be happy to provide you service out of Cincinnati so you can take advantage of our leg room.
Mr. CHABOT. Thank you very much. I yield back the balance of my time.
Mr. PEASE. The gentlewoman from Texas, Ms. Jackson Lee.
Ms. JACKSON LEE. Thank you very much, Mr. Chairman.
Let me thank the members of the panel for their testimony. As I look at the high number of billable hours in this room, I know they are taking great humor in our personalized stories. Although we are not the Transportation Committee, realizing that competitive issues impact our constituents, you might have also noted a twinkle in your eye as I cited the Constitution in my earlier remarks only to say that the Constitution gives us the governance of this Nation, and it raises, along with the Declaration of Independence, our right to a good quality of life. So there lies the nexus to those comments.
But I want to focus in the brief time that I have on two points, pricing and access. I do want to note that the bright light in this merger is DC Airlines, because I guess I could make the argument that you are creating another airline, a competitor. I can't speak for my colleague from North Carolina, but it looks as if you are creating opportunities for easier travel for that population of individuals wanting to go from destinations south to DC
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But let me ask both gentlemen from US Air, Steve and Mr. Johnson—forgive me by calling you by your first name—about the factor—I think I will ask one question to Mr. Johnson: Do you believe that the creation of a DC Air out of the merger puts you in a privileged position where ultimately you will not have to worry about fares and begin to start charging fares that, I believe, would be anticompetitive inasmuch as you have carved out a market and those consumers will take it or leave it? How will you manage an airline that stays true to its—I hope its definition or destiny, which is to be hopefully efficient and priced for the consumer in a reasonable manner?
I will go first to Mr. Johnson.
Mr. JOHNSON. Congresswoman Jackson Lee, I have been in business with a company for 20 years, and the business that we are in, the viewers vote every day with their eyeballs, and now that they have this remote control, they can vote very quickly with their eyeballs if they want to go to someone else. And the same thing exists in the airline business today, that viewers—I mean, the flying public will look at the airline business as a means of efficient transportation. Very few people are in love with just getting up in an airplane and going up 30,000 feet. They really want to get from point A to point B at the most cost-effective, safest way possible.
If DC Air does not provide a quality service at a competitive price, our customers in all the cities we serve, they will fly Southwest, they will fly other carriers, they will fly United, they will go to BWI, they will go to Dulles. They will not suffer high-priced costs simply because they land at Reagan National Airport where we have significant penetration and significant slot control. So we have to be competitive.
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Furthermore, you mentioned that I am a new entrant in this business, and as a new entrant in this business, I have got a lot of eyes of the world, or at least the United States, on me as an operator. I can assure you that my objective is to operate this airline in a way that it demonstrates that a new entrant, someone like myself, can make this business work in the best interests of the flying public, because I honestly believe what Steve and Jim Goodwin have done is to send a signal to other industries saying that there should be diversity of ownership and opportunity.
My obligation is obviously to run a good business that gives a good return on the investment. That return is directly related to the quality of product and the cost of the product to the customer.
Ms. JACKSON LEE. Thank you very much.
Let me get two questions in so that you gentlemen can answer them, as the light might be changing, and it is on the predatory aspect. How do I know—Mr. Johnson has already noted for the record his business qualities, and he is right. Certainly he has an enormously respected business, but where do I find the relief that he will not be protected by this merger, which really diminishes competition?
And my second question is that I would like, in writing, for you to give me the list of new airlines that have really been created and what is out there, the large ones and the small ones. I will take that in writing.
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[The information referred to follows:]
Ms. JACKSON LEE. But my last question for you to answer would be AIR 21 has been passed; it has been a gift to you. How bad is the air traffic control problem in America?
Those are my two questions.
Mr. WOLF. On the former, it is misunderstood, and the thing that is misunderstood about it is that no airline has ever come into being on day one with 37 aircraft serving 44 cities, 43 others plus this one. JetBlue just started up, a well run, low-cost airline that is off to a very successful start. They started with two airplanes. Then they added their third and their fourth. It was a very manageable process.
This transaction is going to cause DC Air to come into being the day after the merger closes with 37 aircraft serving 43 cities from Washington. It is unheard of. So it is pieced together initially because Mr. Johnson cannot go out today and commit to spend hundreds and hundreds of millions of dollars to buy airplanes when he doesn't know whether he is going to have an airline yet. So we have had to do these things on an interim basis, which causes everyone's eyebrows to raise.
It is interim. It is arm's length. It is no puppet of United Airlines, and he may not even be in their frequent flier program because he hopes to be in everybody else's, and I am not sure how it is going to work. But it is going to be an independent, competitive company.
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In terms of AIR 21, during our natural life, there has been one new airport built in this country, Denver International, but we didn't go up by one because as it came into one, we shut down Stapleton. So there has been no new airport. There have been a few runways, a little taxiway improvement and some money spent on ATC.
Is it adequate? We all know it is not adequate. We have got to spend a significant amount of money in infrastructure to better manage the airways. US Airways has cancelled 6.2 percent of its flights so far this month. That is outrageously bad. I think it is probably comparable with most of our competitors. It is primarily weather, weather that then spills into air traffic control, and then the airplanes are out of sync because you can't get the maintenance done the night before because it has been sitting at a gate for X number of hours.
We have to spend some real money, and AIR 21 is a real breath of fresh air enabling us to do that.
Mr. GOODWIN. Congressman, I think Mr. Wolf covered it pretty well, but I think the air traffic control system and the infrastructure——
Ms. JACKSON LEE. That is what I want to hear, what condition are we in right now?
Mr. GOODWIN. The infrastructure of this industry is creaky. We have scratched the surface by providing funding through AIR 21, but it is going to take years for those dollars to start to produce beneficial, tangible results for the consumer, through improved air traffic control processes, et cetera.
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We have to step up to airports. We have to step up to runways. We have to step up to airport access, not just for planes, but for consumers who must get there; whether it is mass transit or automobile, et cetera.
Ms. JACKSON LEE. I thank the gentleman. Thank you very much for your indulgence.
Mr. PEASE. The gentlewoman from California Ms. Waters.
Ms. WATERS. Thank you very much, Mr. Chairman. I have a few questions.
After the merger, how many slots will you have in the Los Angeles Airport, LAX? Do you combine what you have? How does that work?
Mr. WOLF. Congressman Waters, there are only four slot-controlled airports: Chicago O'Hare, LaGuardia, Kennedy and Washington National. Los Angeles is an open airport. Anybody can fly there as often as they want to, whatever destination. There are no slots. We only have four slot-controlled airports, so——
Ms. WATERS. I see.
Mr. WOLF. So don't compare our activity to their activity. Their gross flights will go up, but they won't have more slots.
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Ms. WATERS. So what happens after the merger? Do you expand? Do you contract? Are there going to be layoffs? Are there going to be transfers? What is going to happen?
Mr. GOODWIN. As far as the merger is concerned, there is going to be expansion. I mean, we have announced as part of this transaction 93 new flights from day one. Sixty-nine of those are domestic. Twenty-four of those are international. Principally——
Ms. WATERS. How many of those will originate in Los Angeles? What does this expansion mean for Los Angeles?
Mr. GOODWIN. I will have to get you the specifics on Los Angeles International, because I can't tell you what they all are off the top of my head. I don't believe there is any going right into Los Angeles International. I believe there is additional service into San Diego from cities in the East, but I don't recall, Congresswoman, right now off the top of my head if there are any directly into Los Angeles.
Ms. WATERS. You expanded your cargo facilities in Los Angeles, didn't you?
Mr. GOODWIN. I did not hear the first part.
Ms. WATERS. You expanded your cargo facilities in Los Angeles?
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Mr. GOODWIN. We are in the process of expanding our cargo facilities in Los Angeles.
Ms. WATERS. That is to accommodate simply what you are doing now, or is that in anticipation of the merger?
Mr. GOODWIN. No. Congresswoman, our cargo facilities in Los Angeles have been woefully inadequate for years, and to satisfy the growth and the demand from the Pacific, which is continuing to add additional cargo traffic, we needed the cargo facilities on the west coast.
Ms. WATERS. You are a big supporter of expanding LAX; is that right?
Mr. GOODWIN. Yes, ma'am, I am. Los Angeles is a growing marketplace. It is a growing airport. It is a critical connecting point for the Pacific and the South Pacific and Latin America, and we believe the community is asking for more service, and we are trying to provide it.
Ms. WATERS. Are you aware of the coalition that has formed that oppose this merger; all of the cities around LAX, the beach cities, the city of Inglewood, the cities of Hawthorne, Gardena, El Segundo? Are you aware of the opposition of that expansion there?
Mr. GOODWIN. Congresswoman, I am aware of the concerns of the community, the communities around Los Angeles International Airport, with respect to the proposed expansion of runways and terminals there. We appreciate those concerns, and I think it is our intent to work as closely as we can with the airports, the Department of Airports in Los Angeles, with the city of Los Angeles and the surrounding communities to see if we can find a solution that satisfies the consumer as well as the constituency that lives around the airport.
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Ms. WATERS. Our solution is that there should be a regional response and that you should not continue to try and jam all of that traffic into LAX. We think it is going to be destructive, particularly to the city of Inglewood.
Are you familiar with the city of Inglewood?
Mr. GOODWIN. Yes, Congresswoman, I am.
Ms. WATERS. Are you aware of the tremendous complaints about the number of flights and the noise and the traffic that has been caused by LAX?
Mr. GOODWIN. Congresswoman, I think that was one of the issues that I was trying to address earlier, that traffic congestion, getting to and from airports, noise are all issues that we, working with the communities, have to address collectively.
Ms. WATERS. How has United been working with the community to address that?
Mr. GOODWIN. With reequipping our fleet with quieter airplanes, with using energy-efficient ground vehicles and natural-gas-propelled ground equipment, electrical-propelled ground equipment. We have transferred flights from Los Angeles into Burbank, Ontario, Orange County, all to try to provide the constituents of the greater Los Angeles area access to air travel.
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Ms. WATERS. Could you get me some information about the flights that you have transferred into Ontario or any of the airports? We don't see any change in the noise. We don't see any change, but only increased traffic problems. I live in the path right adjacent to Inglewood. That is my district. I find that LAX is a very poor neighbor. I don't sense any involvement from United Airlines in trying to deal with the solution of a regional response. I sincerely believe that Inglewood is going to become the next Kenlock. Are you familiar with a little city called Kenlock right outside of St. Louis, Missouri?
Mr. GOODWIN. No, Congresswoman, I am not.
Ms. WATERS. It is similar to Inglewood, and because of expansion it was devastated. Now I suppose it has been taken over by the airport, and the city, for all intents and purposes, does not exist anymore except for a few homes that are left.
We believe that this increased traffic and the noise and the pollution, all of the complaints, will drive down the property values in Inglewood and some of the surrounding cities.
We had the mayor of El Segundo here last week who came to testify on behalf of the coalition.
In short, Mr. Goodwin, we don't want LAX to expand. We don't want United Airlines to grow bigger, using that airport. We believe that there can be a regional response to the need for expansion. We think that in addition to the noise and the pollution and the traffic, that there are increased delays in the service that you are providing and the other airlines are providing.
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Do you agree that you have increased delays in service?
Mr. GOODWIN. I agree that the air traffic system in and out of Los Angeles is congested and will continue——
Ms. WATERS. Horrendous.
Mr. GOODWIN. [continuing]. And will continue to be so.
Ms. WATERS. Horrendous.
Let me just say this, I am not going to go into any more personal stories, as was said earlier. Because we all fly so much, we know a lot about customer service, and we know a lot about each of the airlines. I used to be a customer of United. No longer, if I can avoid it.
You have a policy of no matter what an employee does to a customer, they don't have to apologize for it, even when they are discovered to be wrong, have made an error, and because of that I try never to fly United. Sometimes I am caught, and I have to.
One last question, what are you going to do about the air quality on your airplanes?
Mr. GOODWIN. Air quality on board our airplanes we monitor continuously. We are the only airline that I know of that uses hepa filters on all of our airplanes to ensure that we have got the best filtered air that consumers breathe on board the airplanes.
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Ms. WATERS. Was there a recent study that indicated that air quality needed to be improved on all of the airlines?
Mr. GOODWIN. Cabin air quality is very important to us. We continue to monitor it, and we will continue to do so.
Mr. PEASE. The gentlelady's time has expired.
Ms. WATERS. Unanimous consent for 1 more minute.
Mr. PEASE. Without objection.
Ms. WATERS. You have heard from not only this committee, but other committees that we are concerned about the merger because we are concerned about competition. Since you have announced your merger, there have been, I think, two other airlines that have announced that they are going to consider mergers, which means that we will be confronted with only three or four major airlines in this country. Can you explain to me why that is going to be good for consumers?
Mr. GOODWIN. Congresswoman, there have been a tremendous amount of speculation in the press since we announced our merger, but there has been no announcement of any other merger since we announced ours.
Ms. WATERS. No, there has not been an announcement of a merger. There has been discussion of the possibility of other mergers, basically saying if you can do it, they can do it, too. And do you think that if there are other mergers, if you are allowed to merge and the other two airlines that are discussing merging are allowed to merge, would that be good for this country?
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Mr. GOODWIN. As I commented earlier, Congresswoman, I am not sure that there are two other airlines out there that can put together a transaction like this one where US Airways' route structure in the East, our east-west route structure are very complementary to each other. This transaction is being done in the spirit of improving customer service, creating a nationwide airline, creating more access for our consumers. There is no labor implications in the transaction. No employees are going to be laid off as a result of it. We have guaranteed fare freeze for 2 years. We think it has got tremendous value, and until someone else can find a way to put a transaction together to meet all those criteria, I can't speculate there will be or won't be.
Ms. WATERS. Thank you very much.
Mr. PEASE. The gentleman from Massachusetts Mr. Delahunt.
Mr. DELAHUNT. My colleague from California was on a roll. I don't know if she wants any more time.
I respect what you said, Mr. Goodwin, about the purpose of the merger, but the real purpose of the merger is to increase the value of the shares that your stockholders own. That is what the merger is about, nothing more, nothing less. It is not—you know, the increased efficiencies and quality improvements that may happen, but your responsibility is to make money, it is about money, and I would just make this observation.
But let me just pursue a point that Ms. Waters was making, and I think we have got to be realistic, and I will address this to Mr. Wolf and Mr. Johnson if they have a comment. I mean, it was less than a week after the announcement by US Air and by UAL that American Airlines and Northwest were in discussions, and then I think about a week after that there was an announcement that Delta and Continental were in discussions.
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Clearly if your merger is approved, it will be an impetus for further consolidation. Let us not kid each other. I mean, there will—at some point in time, if your merger is approved, be another set of CEOs from other airlines that will be speaking to analysts on Wall Street and to the various agencies involved and before committees like this saying, hey, we have to do it, we have got to do it to survive.
So I think the concerns that Ms. Waters speaks to are very real. I mean, you know what happens. At some point in time I guess we end up with one big airline or maybe two big airlines.
But anyhow you talked earlier, I think it was Mr. Wolf, about how the union contracts would be respected for 2 years, which I presume are legally binding. But then you mentioned something about 30 other employees. Are those management employees?
Mr. WOLF. I merely stated that of our 45,000, approximately, number of employees, it does not apply to our officer corps, vice presidents of the company.
Mr. DELAHUNT. Now, what happens to those individuals? How do they make out?
Mr. WOLF. They may very well go to work for United Airlines. They may want to do that. United may want to have them. They do not have a job guarantee.
Mr. DELAHUNT. I see. Do they have any kind of compensation package? Do they get golden parachutes?
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Mr. WOLF. They have termination arrangements in all cases.
Mr. DELAHUNT. They do get golden parachutes?
Mr. WOLF. In order to cause them to leave where they were working and come join us, we offered them all contracts, and they have contracts. And indeed, if something like this happens, and they are not offered a job with the new company, they will be able to leave with a severance package.
Mr. DELAHUNT. Could you submit what their compensation package will be?
Mr. WOLF. Absolutely, for all of them.
[The information referred to follows:]
| U.S. Airways, |
| Washington, DC. |
Hon. WILLIAM D. DELAHUNT,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CONGRESSMAN DELAHUNT: In response to your request for information about the severance packages of senior US Airways management personnel, please find attached an excerpt from US Airways Group, Inc.'s October 12, 2000 proxy statement. I trust that this responds to your inquiry.
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I continue to believe firmly that the proposed US Airways-United Airlines merger will provide extensive benefits for the consumers and communities that we serve, as well as for our employees. The merger will result in one-airline, seamless service in more than 500 city-pairs not served by US Airways or United today. It will provide on-line service for the first time to over 4,000 city-pairs. Additionally, United plans to offer 89 new nonstop flights to international and domestic destinations, including new services from Boston to Tokyo and Frankfurt.
United has also provided a no-furlough guarantee to the employees of United and US Airways. And, United has publicly committed to an unprecedented, and easily monitored, two-year freeze on structure fares (excluding CPI and fuel cost adjustments).
For these reasons, among others, I strongly believe that the proposed US Airways-United Airlines merger is in the best interests of businesses and travelers throughout the country, including southeastern Massachusetts. If you need further information, please do not hesitate to contact my office.
Sincerely,
| Stephen M. Wolf, Chairman. |
Enclosures
INTERESTS OF CERTAIN PERSONS IN THE MERGER
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In considering the recommendation of our Board with respect to the merger, stockholders should be aware that the executive officers and directors have some interests in the merger that may be different from, or in addition to, the interests of stockholders generally. The Board was aware of these interests and considered them, among other matters, in making its recommendation.
Severance and Employment Agreements
Each of our executive officers is party to an employment or severance agreement with us which provides for certain benefits upon a termination of employment by us without ''cause'' or by the executive officer for ''good reason'' (each as defined in the executive officer's employment or severance agreement) during the period beginning on the date of stockholder approval of the merger and ending on the third anniversary of the date of consummation of the merger (the fourth anniversary in the case of Mr. Stephen Wolf). In addition, pursuant to the terms of the merger agreement, UAL Corporation has agreed that (a) with respect to Messrs. Stephen Wolf, Rakesh Gangwal and Lawrence Nagin, any termination of employment following the consummation of the merger and (b) with respect to the other executive officers, any termination of employment during the period commencing on the six-month anniversary of the date of consummation of the merger and ending on the nine-month anniversary of such date will, in each case, automatically be deemed to be a termination for ''good reason'' giving rise to the payment of severance benefits.
Each agreement provides for (a) a severance payment equal to three times the sum of (i) the executive officer's base salary and (ii) (A) in the case of Messrs. Wolf and Gangwal, the highest of (1) the annual bonus paid in respect of the immediately preceding year, (2) the annual bonus paid during the immediately preceding year or (3) the current year's maximum bonus, or (B) in the case of the other executive officers, the highest of (1) the annual bonus paid in respect of the immediately preceding year, (2) the annual bonus paid during the immediately preceding year or (3) the annual bonus that would have been paid to the executive with respect to the last fiscal year if the applicable targets had been achieved and the current year's bonus percentage had been applied; (b) a pro rata bonus through the date of termination; and (c) continued retirement, welfare and fringe benefits, including transportation benefits, for three years (four years in the case of Mr. Wolf) and that such executive officer is deemed to have retired from our company for purposes of such plans at the end of such period; provided, however, the executive officers receive transportation and certain welfare benefits for life following such period. In addition, a ''gross-up'' payment to compensate the executive officer for any ''golden parachute'' excise tax is also provided.
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Assuming current salary and bonus information remain in effect, if the merger is consummated on December 31, 2000 and the employment of each of the executive officers is immediately terminated, the approximate value of the severance payments due under the employment and severance agreements. to each of the executive officers, including amounts attributable to continued retirement plan benefits but not including any payments that may be made with respect to any excise tax, would be: Mr. Stephen M. Wolf (Chairman), $7.6 million, Mr. Rakesh Gangwal (President and Chief Executive Officer), $8.3 million, Mr. Lawrence M. Nagin (Executive Vice President, Corporate Affairs and General Counsel), $3.4 million, Mr. N. Bruce Ashby (Senior Vice President, Corporate Development), $1.9 million, Mr. B. Ben Baldanza (Senior Vice President, Marketing), $2.4 million, Ms. Michelle V. Bryan (Senior Vice President, Human Resources), $2.0 million, Mr. Alan W. Crellin (Senior Vice President, Customer Service), $1.6 million, Mr. Christopher Doan (Senior Vice President, Maintenance), $1.7 million, Mr. Thomas A. Mutryn (Senior Vice President, Finance and Chief Financial Officer), $2.9 million and Mr. Gregory T. Taylor (Senior Vice President, Planning) $2.0 million. The foregoing benefits are not dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement, we could become obligated to pay as much as $33.8 million under the employment and severance agreements, even if the merger is not consummated.
Long Term Incentive Awards
Pursuant to the terms of our Long Term Incentive Plan and awards thereunder, upon consummation of the merger, each executive officer will receive a cash payment with respect to each then-outstanding three-year performance cycle equal to the executive officer's target percentage multiplied by the average rate of base salary in effect on the last day of each of the three years in the performance cycle. In calculating the average, the executive officer's rate of base salary upon consummation of the merger will be utilized for any years in the performance cycle which have not yet been completed. Based upon performance cycles currently outstanding under the Long Term Incentive Plan and assuming current salary and bonus information remain constant, the approximate value of the cash payments due under the Long Term Incentive Plan to each of the executive officers upon consummation of the merger would be: Mr. Wolf, $4.0 million, Mr. Gangwal, $4.5 million, Mr. Nagin, $1.0 million, Mr. Ashby, $0.5 million, Mr. Baldanza, $0.8 million, Ms. Bryan, $0.6 million, Mr. Crellin, $0.5 million, Mr. Doan, $0.6 million, Mr. Mutryn, $0.9 million and Mr. Taylor, $0.6 million. The foregoing benefits are dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement but the merger is not consummated, we will not be obligated to pay the foregoing amounts under the Long Term Incentive Plan.
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Supplemental Pension Agreements
Each of Messrs. Wolf, Gangwal, Nagin, Ashby, Baldanza, Mutryn and Taylor is party to a supplemental pension agreement with us. Assuming the merger is consummated on December 31, 2000 and that each such individual's employment is immediately terminated, the annual retirement benefit commencing immediately for each of Messrs. Wolf, Gangwal and Nagin would increase by approximately $87,000, $649,000 and $126,000, respectively, and the annual retirement benefit commencing upon attainment of age 55 for each of Messrs. Ashby, Baldanza, Mutryn and Taylor would increase by approximately $40,000, $40,000, $30,000 and $20,000, respectively. The foregoing benefits are dependent upon stockholder adoption of the merger agreement. Accordingly, if the stockholders adopt the merger agreement, we could become obligated to pay as much as an additional $992,000 per year under the supplemental pension agreements, even if the merger is not consummated.
Equity-Based Awards
Stock Options
Pursuant to the terms of our equity-based compensation plans and awards thereunder, unvested stock options held by our executive officers will become vested and exercisable upon stockholder adoption of the merger agreement. Pursuant to the merger agreement, upon consummation of the merger, each executive officer will receive, with respect to each stock option then held by such executive officer, a cash payment equal to the amount by which $60.00 exceeds the exercise price of such stock option, multiplied by the number of shares subject to the option. The number of unvested stock options with an exercise price of less than $60.00 per share held by each of the executive officers as of September 15, 2000 (and the approximate amount such person will be entitled to receive in respect of those stock options upon consummation of the merger) is as follows: Mr. Wolf, 240,000 ($3.1 million), Mr. Gangwal, 500,000 ($6.4 million), Mr. Nagin, 18,000 ($0.6 million), Mr. Ashby, 6,000 ($0.2 million), Mr. Baldanza, 67,500 ($2.2 million), Ms. Bryan, 20,800 ($0.3 million), Mr. Crellin, 4,800 ($0.2 million), Mr. Doan, 20,000 ($0.7 million), Mr. Mutryn, 66,666 ($0.9 million) and Mr. Taylor, 35,250 ($0.6 million). The vesting of the stock options is not dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement, options to acquire an aggregate of 979,016 shares will become exercisable, even if the merger is not consummated. The value of such options will be dependent upon the price of our stock.
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Restricted Stock
Pursuant to the terms of our equity-based compensation plans and awards thereunder, (a) certain shares of restricted stock held by executive officers (the ''Type A Restricted Stock'') will vest upon the consummation of the merger, (b) other shares of restricted stock held by executive officers (the ''Type B Restricted Stock'') will vest upon consummation of the merger or, if earlier, upon termination of the executive officer's employment resulting from a ''change in control,'' which is defined to include stockholder approval of a transaction such as the merger and (c) other shares of restricted stock held by executive officers (the ''Type C Restricted Stock'') will vest upon stockholder adoption of the merger agreement. The executive officer will receive a payment to compensate him or her for any income taxes payable with respect to the vesting of Type C Restricted Stock. The number of shares of Types A, B and C Restricted Stock and the aggregate value of that restricted stock based upon a per share price of $60.00 held by each of the executive officers as of September 15, 2000 is as follows: Messrs. Wolf (0, 100,000, 221,121 and $19.3 million), Mr. Gangwal (0, 125,000, 237,450 and $21.7 million), Mr. Nagin (10,000, 17,500, 15,331 and $2.6 million), Mr. Ashby (10,000, 19,125, 0 and $1.7 million), Mr. Baldanza (0, 30,000, 0, $1.8 million), Ms. Bryan (10,000, 18,750, 0 and $1.7 million), Mr. Crellin (10,000, 12,625, 0, and $1.4 million), Mr. Doan (3,000, 10,000, 0 and $0.8 million), Mr. Mutryn (10,000, 42,291, 0 and $3.1 million) and Mr. Taylor (10,000, 32,125, 0 and $2.5 million). Vesting with respect to Type A Restricted Stock is dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement but the merger is not consummated, vesting will not occur with respect to the 63,000 shares of Type A Restricted Stock. Vesting with respect to the Type B and Type C Restricted Stock is not dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement, an aggregate of 881,318 shares of Type B and Type C Restricted Stock could become vested, even if the merger is not consummated. The value of such shares will be dependent upon the price of our stock.
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Director Equity-Based Awards
Pursuant to the terms of our equity-based compensation plans and awards thereunder, the unvested stock options held by our non-employee directors will become vested and exercisable upon consummation of the merger. In addition, the unvested deferred stock units held by our non-employee directors will vest upon consummation of the merger. As of September 15, 2000, each of the 10 current non-employee directors who is still in service as a director will hold 1,500 unvested stock options (with a value (based upon a share price of $60.00 less the applicable exercise price per share) of approximately $50,000) and 500 unvested deferred stock units (with a value (based upon a share price of $60.00) of $30,000). The foregoing benefits are dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement but the merger is not consummated, the vesting of the options and deferred stock units will not be accelerated.
Director Travel Benefits
Pursuant to the terms of our travel policy for non-employee directors, each director who terminates service after having completed at least 10 years of service as a director is entitled to free, positive space, lifetime travel privileges on US Airways or our successor, including United Airlines following consummation of the merger, and an income tax gross up payment with respect thereto. Following consummation of the merger, each nonemployee director who terminates service having completed less than 10 years of service as a director will be entitled to free, positive space travel privileges on US Airways or our successor, including United Airlines, for 7 years following termination of service, with an income tax gross up payment with respect thereto. The foregoing benefits are dependent upon consummation of the merger. Accordingly, if the stockholders adopt the merger agreement but the merger is not consummated, we will not be obligated to provide travel benefits to directors with less than 10 years of service.
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Mr. DELAHUNT. And, Mr. Goodwin, it is my understanding that United is an employee-owned airline. What was the process during your discussions in terms of consultation with the various employee groups regarding the merger?
Mr. GOODWIN. During the course of our discussions with US Airways, I was obligated, as any CEO would be, to keep their board fully apprised of our discussions, to seek their guidance, to seek their permission to continue the pursuit, and our unions' leadership is represented on our board. The two major shareholders on our board are the pilots' union as well as the machinist union. They both have representatives on the board, heard all of those discussions. In addition to that, our management and our administrative employees also have a representative on the board.
Mr. DELAHUNT. During the earlier hearing there was a petition that was presented to me, I think it came from Representative Slaughter, a petition of some 1,400 machinists—that indicated that they felt that they had not been involved in the process despite the fact that their representative to the board had voted, I guess, affirmatively in support of the merger. In terms of the airline pilots, what is their position as far as the merger is concerned? What did their representative to the board do?
Mr. GOODWIN. Their representative at the board? Their representative at the board during the entire discussion process was very supportive of the strategic value of this transaction to our company. The issue with the pilots as well as the IM, as part of the labor integration process, is what will happen to me, whether it is my seat, or whether it is my shift. We have very strict guidelines that have to be followed as part of their labor contracts on how we integrate the work force. We have committed——
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Mr. DELAHUNT. How did the pilot representative vote in terms of the merger?
Mr. GOODWIN. The pilot representative voted against the merger.
Mr. DELAHUNT. Okay. Thank you very much.
Mr. PEASE. The gentlelady from Texas.
Ms. JACKSON LEE. Mr. Chairman, if you would like to be yielded time to raise questions on the record, then I ask the gentlemen to respond to me in writing.
Mr. PEASE. Without objection.
Ms. JACKSON LEE. Thank you very much.
All of us would wish that this would work best for the consumer. I have a concern that with this merger how many more will come. So I would appreciate if you could—some of my colleagues asked the questions, but if you would be able to present to me in writing your packages of how you are treating the employees under the merger, both the executive and others, particularly whether—even though I know union agreements are contracts, but what would be projected into the future for union relationships?
[The information referred to follows:]
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1. For a period of two years following the consummation of the merger, UAL must offer continued employment to non-officer employees of US Airways (other than those discharged for Cause or those employed by a US Airways subsidiary that is sold).
2. Employees not covered by a collective bargaining agreement (''Affected Employees'') will be given credit for eligibility, vesting and benefit accrual under UAL plans for the employee's US Airways employment.
3. Employees in 2 above who are current officers of US Airways or its principal subsidiary or are director level employees of its principal subsidiary who were formerly employed by UAL and became employed by US Airways within three months after leaving UAL will be given full credit for eligibility, vesting and benefit accrual for such employee's service with UAL prior to the merger as if there had been no break in service.
4. UAL will waive preexisting limitations, exclusions or waiting period for the Affected Employees for purposes of participation and coverage requirements under UAL welfare plans to the extent these were waived by US Airways before the merger.
5. UAL will give credit to the Affected Employees for co-payments and deductibles made before the merger for the calendar year of the merger to the extent these payments are made to a welfare plan in which such employees may participate following the merger.
6. UAL must honor the benefit plans and benefit agreements of US Airways (subject to the company's right to amend the plans).
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7. For a one year period after the merger, UAL will provide the Affected Employees with benefit plans and benefit arrangements not materially less favorable than those provided by US Airways.
8. For a period of one year UAL must provide eligibility for option grants to the Affected Employees on the same basis as provided to similarly situated UAL employees.
9. Following the two-year period in 8 above, UAL will provide job security protection to former non-officer, non-union employees of US Airways in the same manner as provided to similarly situated UAL employees.
10. UAL agreed to the amendment of the US Airways officer severance agreements to allow the officer to terminate their employment between 6–9 months after the merger and claim the termination was for Good Reason under the agreement.
Ms. JACKSON LEE. Second, with the merger going forward, what does that leave us in the marketplace? You being experts know more than I would. What are the large entities left, and what are the small ones that either are being created or exist now? Appreciate that in writing.
[The information referred to follows:]
Ms. JACKSON LEE. Your overall civic participation in your respective areas. One of the problems with airlines is most of the people view them as leaving town, and they get a bye for those who have physical buildings, and I know you have structures, but then you get a bye; basically you fly in from one community to another, and say you don't live here, and how do you impact your local communities where you are?
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And then my last question is on this pricing. I am reminded of the parent, single parent, whose youngster is in far away school, college, and can't get home for Thanksgiving, Christmas simply because they don't have the airline fee, they don't have the ability to pay. In my day we used to have college student fees. You don't have that anymore. There is a big competition, and you have got to buy your ticket 6 years in advance, and none of that works for the average citizen. So I really want to know whether or not there is going to be predatory—whether I am going to see a decided difference in what your prices are now, and project that. I would like that directed to the record, but I would like it directed to my office, please.
[The information referred to follows:]
No. United strongly rejects any suggestion that it has engaged in or would engage in predatory conduct in the market place. United's philosophy is to compete aggressively, but fairly, in terms of price and service with all other airlines that offer service on city pair routes that United serves. If the US Airways transaction were to be approved there would be no change in United's competitive philosophy.
Ms. JACKSON LEE. I thank the chairman for his indulgence, and I thank the witnesses for their testimony.
Mr. PEASE. I thank the gentlelady.
I deferred my questions until the end. I know you have been here a long time, but I am grateful you are here.
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I have to tell you I have tried to resist my temptation for this to be a Transportation Committee hearing rather than a Judiciary hearing, but it has been difficult.
Let me also say that United and US Airways, which have major presence in Indianapolis, which is the closest—it is the airport that I use, although it is not in my district—have been very good corporate citizens, and I know there have been difficulties and challenges for them as all other airlines, but we appreciate their presence there.
And, Mr. Johnson, I am personally pleased for your—for your participation in this hearing and in this discussion on a merger. As you are—as BET has made a tremendous contribution, though they are not physically present in Indianapolis, to the cultural life of Indianapolis, and you personally are, in my view, an example of all that is best in American entrepreneurship and commitment to communities where you provide service, and so I am grateful that all three of you are here.
Having said that, and having—trying really hard to resist talking transportation rather than antitrust, let me just ask a few quick transportation questions, then get to antitrust. My understanding, which may be incorrect, because I talked to a lot of US Airways employees in Indianapolis because they are the only nonstop to DCA, is that US Airways has been making an effort to rationalize its fleet, which I understand and which I think in the long run is going to be good for consumers. I think it is going to help the costs, the price structure. As an aside, I wish you had picked Boeing instead of Airbus, but nevertheless—but it is also my understanding that United is largely Boeing. If I am incorrect in that understanding, please correct me. But the larger issue is if there are benefits to fleet rationalization, what is going to be the impact of the merger of these two airlines in that effort, and what is—what are the cost consequences?
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Mr. WOLF. Let me maybe comment on US Airways first. One of the things that I found in joining the company was a fleet made up of all manner of aircraft types and engine types, and that is not because somebody was dumb in the past. It is because we are the sum of a number of small airlines that merged together, and they brought their respective fleets, but it is horribly uneconomic to operate multiple types of 150-seat aircraft, if you will.
We did have a vigorous competition between then McDonnell Douglas, Boeing and Airbus, and we selected the Airbus A–320 family aircraft. Frankly, it was the largest order option number in the history of aviation at that time, 400 aircraft, and we take 58 new Airbus aircraft this year.
United Airlines also operates the same Airbus aircraft, so we have marvelous fleet compatibility going forward and all of the associated efficiency that brings.
Mr. PEASE. Thank you.
Mr. Goodwin.
Mr. GOODWIN. Congressman, in addition to that, as you pointed out, we are a large Boeing operator. Principally our Boeing aircraft are the larger fleets. The 747, 777, 767, 757, 767 and 757 are also common fleets to US Airways. In addition, both carriers are very, very large 737 operators.
Mr. PEASE. Thank you very much.
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Mr. Johnson, I don't know how far along the discussions have gone yet, but I am concerned about competition out of Indianapolis. I have tried hard to not be parochial, but all the infrastructure for the Indianapolis airport, most of the income is in Danny Burton's district, most of the noise is in mine. I have a few questions about what the plans are regarding competition we—well, let me start over. Assuming this goes through as planned, I assume that DC Air will fly Indianapolis to Reagan National. My question is whether United will also fly Indianapolis-DC National, or whether there will just be one airline flying Indianapolis to Reagan National.
Mr. JOHNSON. Jim can speak to what United will do. I know DC Air will fly three jets, Indianapolis to Reagan National Airport, and that is what is being flown now. We will continue that level of service. And to your earlier point, we, like all the other airlines, are looking at fleet rationalization, and while we haven't made decisions about aircraft, we are looking at Boeing, and they do make some good aircraft.
Mr. PEASE. You are making more points the longer we go. Thank you.
Mr. GOODWIN. Congressman, we fly from Indianapolis to Dulles today. We will not be offering service to Reagan National. Those slots that are needed for that service will be part of the slots that are being transferred to DC Air.
Mr. PEASE. Thank you.
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Trying to move more to the question on potential anticompetitive consequences of the merger, Mr. Wolf and Mr. Goodwin, you both told us that one of the benefits of your merger is that you are going to serve more cities than you currently serve, and I think the logical question that flows from that is why can't you do that anyway without the merger?
Mr. WOLF. US Airways has a very, very modest presence in the west coast of the United States, and United has a strong presence in the west coast of the United States. When you put us two together, we will be able to flow over a common route structure where we have some passenger strength on both ends. It is a more difficult thing for us to do it today because of our almost complete absence of service on the west coast. It is truly absent intra-west. We do fly to a number of transcontinental points, but when you put the sum of the passenger flows together, we will be able to do more than either one of us can do independently.
Mr. PEASE. Mr. Goodwin.
Mr. GOODWIN. Congressman, if you look at the natural geographic location of a lot of the new cities that are going to come to our route network as a result of this, there are not many natural places to connect them with our route structure. Places such as Erie, Pennsylvania, or Bradford, Pennsylvania, don't flow easily into our network today because of our hub locations. So by tying these two route networks together, we are able to provide access to a host of cities that today our customers cannot get to online, nor can US Airways passengers get to online. That is not to say that there are not some points that will evolve out of this transaction that sooner or later US Airways, United Airlines may have decided to serve on their own, but they are not points that are easily connected to the existing network.
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In addition to that, several of the other new points that are being created out of this transaction are in international markets. And the fact that this transaction creates a domestic nationwide network, we are going to be in a position to provide competing service into the Caribbean, for example. Today, the Caribbean operation is largely served by American. A few other carriers have some limited service in the Caribbean. This now gives us the ability to provide a competitive service offering into the Caribbean. We couldn't do that today on our own because we don't have the strength on the east coast in order to flow traffic and make it work effectively.
Mr. PEASE. I appreciate what both of you said, but I still—this is probably my problem—I still don't understand why it is that together you can serve more cities than you could independently. I mean, I assume there is a certain cost in going to a new city, and that is going to be the same whether you are merged or independent.
Mr. WOLF. We have about 507 flights a day out of Pittsburgh, and we have a relatively strong presence in the east coast of the United States, dramatically less strength as you go west to the Midwest and flying to the west coast of the United States. For us to sell in Portland, Oregon, where all the business travelers are probably in United's frequent flier program or American's or maybe, even more apt, Delta's frequent flier program, we can do a nice job going from Pittsburgh to Portland, Oregon, but a less strong job in the Portland market coming back because we are nonexistent in the Portland market, and there are options in the Portland market with their existing carriers so they can get to the cities we serve in the east coast of the United States.
When you put the two of us together, we have common strength on both ends, and we will do a better job of flowing passengers, and that will give us the ability to add non-stop flights that we couldn't otherwise do because we will be able to serve there with a stronger load factor.
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Mr. PEASE. Thank you.
Mr. WOLF. I thank you for saying thank you. Your face looks like I answered the question.
Mr. PEASE. I am trying to keep to my effort to focus more on antitrust, and I am not quite getting there.
Let me move to a different area. Do business travelers that go the major business markets like O'Hare or Cincinnati or Detroit pay higher fares than would exist if there were other hub-and-spoke competitors in those cities? Most of them have one. I realize Chicago has two, but most have one.
Mr. WOLF. Can I try that one and go back to the development of the hub for a second, because hubs sort of have a little bit of a negative ring to them. The thing that is wonderful about hubs is you are able to offer a pattern of service in the hub city that is far greater than you could economically justify based upon the population mass there or the number of local travelers, because you have these feed flights. So Pittsburgh winds up at 507 flights a day, far more than anyone would ever operate if you weren't feeding it.
But now go to the feed point, and let me go back to my Buffalo example of a minute ago. We fly Buffalo-Pittsburgh four times a day. There are 24 passengers a day on average, or an average of six per trip. If we weren't flying Buffalo-Pittsburgh today, but we were about to add it for the first time, and we also had our hub, we would say to our sales force in Buffalo, we are going to start four flights a day from Buffalo to Pittsburgh. Now you are going to be able to go to the travel agents and the commercial accounts, independent personal travelers, and say, you can fly four times a day now on US Airways from Buffalo to Pittsburgh, but you can also fly from Buffalo to this array of 35 beyond cities as you connect. And as you wind up adding these additional spurs, it starts to become a very, very significant connecting point, and it then becomes difficult for a competitor to come in there to run a hub. They can fly in there—as Delta will fly there from Atlanta, but they can't fly there and put a hub in place because the hub carrier offers so much more service that Delta will fly twice a day, but we will fly eight times a day to Charleston, South Carolina, for example.
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Mr. PEASE. But hasn't that actually happened, for instance, in New York? I mean, if you include Newark and New York, I mean, there is—Continental has a hub in Newark, and who is in LaGuardia? American just spent a billion dollars at LaGuardia.
Mr. WOLF. American is spending a lot of money at Kennedy, but basically Kennedy is a point-to-point airport because it has such a large population mass—Kennedy is a slot-controlled airport, with a large population mass, you fly to big population centers. You fly to Europe, you fly transcontinental, you fly to Chicago, you fly to Dallas, San Francisco and L.A., but you don't fly to small points for the most part.
Mr. PEASE. Mr. Goodwin, do you have thoughts on this?
Mr. GOODWIN. I think maybe the core of your question is do hubs create a pricing premium.
Mr. PEASE. Correct.
Mr. GOODWIN. And I don't believe they do. Now, there have been a whole host of studies done on hub pricing. I mean, the Government has done studies. There have been private institutions. There have been research grants given on whether there are, in fact, hub premiums. And I think if you look at all of those studies, there are no consistent conclusions. I think there is inconclusive evidence to support whether there is or there is not. I don't happen to believe there is, and there are a lot of reasons for that.
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Hubs tend to attract different mixes of traffic. We were talking about Chicago a moment ago versus a hub that is more leisurely focused. There is going to be a different fare construct on a Chicago hub than there will be on a more leisurely focused hub. The length of haul of travelers, the mix of domestic versus international passengers, the types of air carriers that are in a market will have an impact. There are a lot of factors that impact the dynamics in hub pricing.
Slot controls. I mean, O'Hare has been slot-controlled. LaGuardia has been slot-controlled. Kennedy has been slot-controlled. Those all have impacts in the scheme of things, and as we remove the slot controls in O'Hare and LaGuardia and others, the dynamics in those markets are going to change.
Mr. PEASE. Well, thank you for your response, and this has gone much longer already than I think any of us anticipated.
I do want to thank all of you again for your participation here today and for your responsiveness, and a number of members of the committee have asked for follow-up, and I am sure you will do so. If you need any assistance, Joseph will take good care of you. Thank you all very much.
Mr. GOODWIN. Thank you, Congressman.
Mr. PEASE. Our second panel consists of four witnesses, two on behalf of the city of Chicago and two on behalf of American Airlines.
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First we have Mr. Tom Walker, the commissioner of aviation for the city of Chicago. He is a graduate of Dartmouth College and the Illinois Institute of Technology. Before joining the city government, he worked with several private architecture firms, and since joining the city, he has served as executive director of the Public Building Commission and as commissioner of the Department of Transportation. He took his current position in November 1999.
Next, we have Mr. Ken Quinn, a partner in the Washington law firm of Winthrop, Stimson, Putnam & Roberts. He is a graduate of Northern Illinois University and the DePaul University Law School. Before entering private practice, he served as Counselor to the Secretary of Transportation and General Counsel to the Federal Aviation Administration. He now practices aviation law and has chaired the American Bar Association's forum on air and space law. He appears here today on behalf of the city of Chicago.
Next we have Mr. Bob Baker, the vice chairman of American Airlines. Mr. Baker is a graduate of Trinity College and the Wharton School of Business at the University of Pennsylvania. Mr. Baker began with American in 1968 and worked his way up through the ranks. He became vice chairman in January of this year.
Finally, we have Mr. Jim Rill, a partner in the Washington law firm of Howrey, Simon, Arnold & White. He is a graduate of Dartmouth College and Harvard Law School. He has chaired the section on antitrust law of the American Bar Association, and he headed the Antitrust Division during the Bush administration. Most recently he cochaired the Justice Department's International Competition Policy Advisory Committee. He appears here today on behalf of American Airlines.
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Gentleman, we thank you all. I am sorry you had to wait longer than we anticipated to begin your presentation, but we are grateful, and we will begin with you, Mr. Walker.
STATEMENT OF TOM WALKER, COMMISSIONER, DEPARTMENT OF AVIATION, CITY OF CHICAGO
Mr. WALKER. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, I am Thomas Walker, the city of Chicago's commissioner of aviation. I am pleased to appear here today on behalf of Richard M. Daley, mayor of Chicago, to discuss the state of airline competition in the Chicago region. Far from being a fortress, as claimed by some, we have a vibrant airport system that provides passengers with a virtually unlimited number and variety of service and fare options, supports more than 500,000 jobs, and generates a $35-billion-a-year economic impact within our region.
We have the best of all worlds: two large and fiercely competitive hub airlines, American and United, at O'Hare; 74 additional U.S. and foreign airlines providing competitive service at O'Hare; and 17 carriers at Midway, including low-fare service by Southwest and American Trans Air, competing not only among themselves, but also with the 76 airlines providing service at O'Hare.
As will be discussed later by Mr. Quinn, the average fare paid by Chicago passengers is actually lower than the average of the fares paid at the other major airports in the United States.
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This growth in service and competition at O'Hare and Midway did not occur by accident. The city has been a tireless advocate for measures, like repeal of the High Density Rule, that increase service and competition, an equally tireless promoter of the benefits of liberalized international air service, and the driving force behind major capital improvements at O'Hare and Midway for both existing carriers and new entrants.
Far from attempting to shore up the so-called ''fortress'' wall, the city constantly encourages competition between its hub carriers and has opened up O'Hare and Midway to new and additional service and competition by a wide variety of carriers.
Now, Mr. Chairman, we are keenly aware of your longtime interest in reducing aircraft noise around O'Hare and in building a third airport in our region. Allow me to touch on these two areas briefly.
We are absolutely committed to being good neighbors at our airports. The city, with the help of the O'Hare Noise Compatibility Commission, has undertaken the Nation's most aggressive sound insulation program, which, since 1995, has resulted in insulating almost 4,000 homes and 90 schools at a cost of more than $325 million. We have wisely invested over $101 million in PFC revenue alone for school soundproofing, and, as you know, Mr. Chairman, as a result of the 1990 congressionally mandated phase-out of stage two aircraft, the number of people adversely affected by noise has shrunk dramatically.
Near O'Hare we have gone from 103,740 homes in 1979 that were adversely affected by noise to a projected 27,454 for the year 2000. That is real progress.
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Regarding Peotone, Mr. Chairman, the city has several concerns. For example, we fear that some would siphon PFC revenues generated by Midway and O'Hare to support an additional airport. We need PFC money to address some of the efficiency, competitive and environmental concerns that you have.
In addition, we are concerned about the negative impacts of a third airport on our existing airports at Midway, O'Hare and at Gary. For example, as you may recall, when Mayor Daley proposed a new airport for Lake Calumet, it was envisioned that Midway would close due to airspace considerations. Aviation history demonstrates that our concerns are not idle concerns. You only need to look to downstate Illinois at the Mid-America Airport near St. Louis or up north at the Mirabel Airport near Montreal to see the folly of dreams not grounded in reality.
We must therefore respectfully disagree with you on this one, Mr. Chairman. And this concludes my remarks, and I will be happy to answer any questions that you or other members of the committee may have.
Mr. HYDE. Thank you very much, Commissioner Walker.
[The prepared statement of Mr. Walker follows:]
PREPARED STATEMENT OF TOM WALKER, COMMISSIONER, DEPARTMENT OF AVIATION, CITY OF CHICAGO
Mr. Chairman and Members of the Committee, I am Thomas R. Walker, the City of Chicago's Commissioner of Aviation. I am pleased to appear today on behalf of Richard M. Daley, Mayor of Chicago, to discuss the vibrant state of airline competition in the Chicago region.
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I have been Commissioner of Aviation for the past eight months. Each day that I am on the job, I have come to appreciate more fully the remarkable service, fare and competitive benefits provided by the two airports—O'Hare International and Midway—comprising our Chicago Airport System. Between O'Hare and Midway, there are approximately 2,700 commercial passenger flights per day to 216 separate markets (189 nonstop destinations) provided on 60 different passenger airlines, as well as an equally impressive number of cargo flights provided by 26 different cargo airlines.
Far from being the ''fortress'' described by some, Chicago has developed a true airport ''system'' that provides local and connecting passengers with a virtually unlimited number and variety of service and fare options. As I have learned in my travels in this job, our Chicago Airport System, which supports more than 500,000 jobs and generates a $35 billion annual economic impact, is the envy of cities throughout the world.
AIRLINE DEREGULATION HAS DRAMATICALLY TRANSFORMED THE U.S. AIR TRANSPORTATION SYSTEM
Before addressing our unique and extremely competitive Chicago system, however, I thought it might be useful to focus for a moment on the remarkable transformation that has occurred in the competitive landscape of commercial aviation within the United States since Congress passed the Airline Deregulation Act in 1978. Today, U.S. air carriers transport over 270 million more passengers a year than they did during the last year of economic regulation. On average, domestic consumers pay a third less (in constant dollars) than they did twenty years ago. These gains are largely the result of more efficient industry operating practices and the critical role played by low-fare air carriers in creating a more competitive environment.
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In response to deregulation, the major airlines greatly expanded the use of hub-and-spoke networks and created connecting hub airports around the country. With a hub-and-spoke system, an airline, using banks of connecting flights, can serve the maximum number of city-pair markets with a minimum number of aircraft. Among other things, this strategy allows air carriers to better match the size and frequency of aircraft serving spoke routes, while maximizing traffic flow by consolidating connecting passengers with different destinations on each flight.
Operating at a hub creates service advantages for many travelers, since it gives travelers at hub cities many more flights and enables airlines to offer more service in markets without sufficient traffic to sustain nonstop service. In addition, travelers throughout the United States benefit from the fare competition resulting from the myriad of competitive connecting opportunities provided over these hubs.
Immediately following domestic deregulation, a large number of new airlines attempted to break into the airline industry, but virtually all failed or were acquired by established airlines. What followed was a period dominated by large, network air carriers until Southwest Airlines altered the competitive landscape with its nationwide expansion. Today, a number of low-fare carriers provide service, resulting in substantial consumer benefits and new service. Low-fare airlines have proven to be an efficient way to inject competition into concentrated markets.
Chicago has been a very real beneficiary of the evolution of the air transportation system that has occurred in the years since deregulation, and we are, indeed, very fortunate to have a two-airport system that gives us the best of all worlds:
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an extensive hub-and-spoke system at O'Hare that permits far greater amounts of service to be offered than if the O'Hare markets were served only on a point-to-point basis;
two fiercely competitive airlines, rather than a single dominant airline, providing these hub-and-spoke services;
74 additional U.S. and foreign airlines providing extensive, additional, competitive domestic and international service at O'Hare; and
17 carriers providing service at Midway, including low-fare service provided by Southwest and American Trans Air, competing not only among themselves, but also with carriers providing service at O'Hare. Almost 75 percent of passengers choosing to fly to or from O'Hare have the option to fly a nonstop from Midway.
This evolution of the service and fare options provided at our airports has resulted in a unique and extremely competitive airport system to which I will now turn.
THE CHICAGO AIRPORT SYSTEM IS VIBRANT AND VIGOROUSLY COMPETITIVE
To those who attempt to assail the levels of competition in Chicago, the facts show otherwise. Chicago offers more service to more destinations, at more times during the day, with more competition than any other city in the world. This variety of airlines, airports, flights and fares indicates a vigorous and very competitive aviation environment within the Chicago Region.
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O'Hare
During 1999, there were 896,228 operations at O'Hare, and over 72 million enplanements.(see footnote 109) In June 2000, a total of 76 airlines are scheduled to operate at O'Hare, 17 domestic passenger airlines, 5 charter airlines, 28 foreign flag passenger airlines and 26 all-cargo airlines.(see footnote 110) On an overall basis, a traveler can fly directly from O'Hare to a total of 206 destinations, 182 of which are nonstop.
O'Hare has long offered more service to U.S. domestic markets than any other airport in the country. Travelers want to get to O'Hare because with one-stop, they can get to just about anywhere in the world. The overwhelming congressional support to eliminate the High Density Rule at O'Hare is clearly indicative of the traveler's desire to utilize the tremendous asset that is O'Hare.
O'Hare is also fast becoming one of the nation's leading international gateways. International passenger service is provided by 34 airlines between O'Hare and 61 foreign cities, and international cargo service is operated by 38 airlines between O'Hare and 54 foreign destinations. During the last year, the average number of weekly international seats at O'Hare has increased by 7,414 or almost five percent over last year. And, the average number of weekly seats in Chicago's top five international markets, London, Toronto, Tokyo, Frankfurt and Montreal, has jumped by more than 14 percent over last year.
Long the world's busiest airport in terms of enplanements and operations, O'Hare is now on the verge, particularly with the repeal on May 1, 2000 of the High Density Rule for international service, of becoming the preeminent international gateway for service, competition and global alliances. In recognition of this status and opportunity, the City and its airlines are investing heavily in the future with a ''World Gateway Program'' to reconfigure O'Hare's terminals and real estate to maximize operational flexibility. As part of the Program, the airport will be adding gate frontage to serve larger aircraft and making roadway improvements to improve the flow of traffic at the airport. In addition, the airport will build two new terminals, rebuild a concourse, extend another concourse, and add additional space for Federal Inspection Services. The result? With the World Gateway Program, international terminal, people-mover, concessions, and parking, travelers to and from O'Hare and distant lands will enjoy the ultimate convenience, competition, and connections at state-of-the-art facilities that are second to none.
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In terms of competition, O'Hare currently has 175 gates: 149 exclusive-use gates in the domestic terminals and 26 common-use gates in the international terminal. In conjunction with the World Gateway program and as part of the negotiation of a new use agreement with the airlines, the City's goal is to convert these 149 gates from exclusive to preferential use to give the City additional flexibility in accommodating new entry at the airport. The City has already received commitments from American and United to support this practice.
The City also focuses on safety, efficiency and environmental concerns when formulating capital improvements at O'Hare. The City, with the help of the O'Hare Noise Compatibility Commission (ONCC), has undertaken the nation's most aggressive sound insulation program that has insulated 3,655 homes and 90 schools at a total cost of more than $325 million. Additionally, it is launching an industry partnership with the airlines, the Federal Aviation Administration and Honeywell to implement global positioning systems. This new navigational technology not only will enhance operating efficiency but also will improve the ability of pilots to adhere to established noise abatement tracks. The City has also offered to spend $3 million on a new, on-site computer simulator to train local FAA air traffic controllers.
Midway
Midway Airport, said to be the busiest square mile in the country, has been a port for air traffic since 1927, and was the world's busiest airport until 1959. Over these 73 years, Midway has witnessed a remarkable transformation in Chicago air service. The Deregulation Act of 1978 started Midway's first resurgence of activity with numerous new entrant carriers starting service at Midway. Today, seventeen airlines operate at Midway, including six of the nation's largest carriers. Midway had 297,136 operations and handled 13,585,262 passengers in 1999,(see footnote 111) which is a remarkable 18.9 percent increase over 1998 levels.
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At Midway, the City has begun the $761 million Midway Airport Development Program (''MDP'') to replace the existing 50-year old terminal building. Included in this six-year program is the construction of a new terminal building (almost four times larger than the current facility), expanded concourses and aircraft ramps, a new heating and cooling plant and construction of a six-level 3,000 space parking structure. As part of this project, the current terminal and concourses located west of Cicero Avenue will be demolished and rebuilt in phases to allow for uninterrupted airline operations during construction of the replacement facility. The parking garage was completed in 1999, and the new pedestrian bridge across Cicero Avenue will open this fall. The next major milestone will be the opening of the new terminal building and concession triangle in the first quarter of 2001, and the entire program will be completed in 2004.
Midway currently has 29 gates: 27 preferential-use gates and two city-controlled gates. In addition to creating two new commuter aircraft parking positions, the Midway Development Program will increase the number of gates to forty-one. Thirty-five of those gates will be leased on a preferential-use basis, and six of them will be controlled by the City to facilitate entry by carriers not presently serving Midway.
Competition At O'Hare And Midway
As a result of the competition provided by the 17 domestic airlines operating at O'Hare, ninety percent of O'Hare's domestic nonstop passengers travel in markets served by at least two carriers—a far greater percentage than the other Midwestern hubs with which O'Hare competes. For example, fully 70 percent of the passenger trips in Cincinnati are in monopoly markets, 62 percent in Memphis are in monopoly markets, and 72 percent in Pittsburgh are in monopoly markets.
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On a market-by-market basis, eleven of O'Hare's top twenty markets have three-carrier service, and, in O'Hare's top fifty markets, forty-nine have service by two or more carriers. Indeed, the only top fifty market with single-carrier service (O'Hare-Dulles) is disciplined by service provided by United and American in the O'Hare-Reagan National market as well as by Metrojet service in the Midway-Dulles market, Southwest service in the Midway-Baltimore/Washington market, and American Trans Air service in the Midway-Reagan National market. And, a total of forty-six domestic O'Hare markets are currently served with at least hourly service, and fifteen of those markets have twenty or more flights per day.
As important as intra-airport competition is at O'Hare, the price-disciplining effect of service offered at Midway airport, now the home to many low-cost, low-fare carriers, is unparalleled. As noted previously, almost 75 percent of passengers choosing to fly to or from O'Hare have the option to fly a nonstop from Midway.
As a result of this competition, Chicago's airfares have risen far less than at other major hub cities between 1989 and 1999. And, information provided in the DOT's Airline Fare Study for the Third Quarter of 1999 (the most recent version of this study), confirms the competitive nature of the Chicago Airport System and its consequent impact on fares. This DOT study indicates that the average passenger in the Chicago area pays less than the average traveler in seventeen other major markets, including many that are dominated by a single hub airline such as Cincinnati, Charlotte, Pittsburgh and Philadelphia. In addition, the Chicago average fare ($176) is lower than the average fare ($180) for the other major markets included in the study.
Thus, far from standing as an impenetrable fortress, the Chicago Airport System offers travelers a wide range of carriers, service and fares that are lower than numerous other airports in the country.
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THE CITY HAS BEEN AN AGGRESSIVE PARTICIPANT IN THE GROWTH IN SERVICE AND COMPETITION WITHIN THE CHICAGO AIRPORT SYSTEM
This tremendous growth in service and competition at O'Hare and Midway did not occur by accident. The City has been a tireless advocate for measures that would increase the number of carriers providing service at these airports, and an equally tireless promoter of the benefits of the Chicago Airport System to U.S. and foreign airlines. Included among those efforts are the following:
The City has, since 1983, supported repeal of the slot limitations at O'Hare imposed by the FAA's High Density Rule, to enhance access and competition. These efforts were rewarded in the recently-passed Wendell H. Ford Aviation Investment and Reform Act of the 21st Century. Under the special O'Hare slot provisions of that Act—
— On May 22, 2000, the Department of Transportation granted thirty O'Hare slot exemptions for domestic service to the following airlines:
America West/Mesa—9 slots
Sun Country—6 slots
National—5 slots
Spirit—6 slots
Legend—4 slots
— Effective May 1, 2000, slots were not required for carriers providing new service between O'Hare and a small or non-hub airport with aircraft having a seating capacity of fewer than 71 seats.
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— Effective May 1, 2000, slots were not required for foreign air transportation.
— The High Density Rule will not apply at O'Hare after July 1, 2002.
During consideration of the repeal of the High Density Rule, the City was an active participant in numerous DOT proceedings in which it urged the Department to grant slot exemptions to domestic and international airlines to increase service at O'Hare as provided in the Federal Aviation Administration Authorization Act of 1994. As a result of those efforts, the Department granted almost 190 slot exemptions that have permitted a significant increase in domestic and international service at O'Hare.
The City has been an active participant in bilateral negotiations, route proceedings and the development of U.S. international aviation policies to liberalize international air transport and create opportunities for new and expanded service at O'Hare for U.S. and foreign airlines. Three tangible examples of the City's success in this area are more liberalized agreements between the United States and the United Kingdom, Germany and Japan, which have, in turn, resulted in increased service between Chicago and those countries. More recently, the City has been an active participant in the DOT ''U.S.-China Air Services (2001)'' proceeding, urging that American be designated and awarded frequencies to provide the first nonstop service in the Chicago-Shanghai and Chicago-Beijing markets.
Our comprehensive marketing efforts to encourage U.S. and foreign airlines to expand or initiate service at O'Hare and Midway have closely followed our bilateral participation. With almost every domestic carrier already serving O'Hare or Midway, the City has focused its efforts on attracting foreign flag carriers to serve Chicago and compete with existing carriers on very lucrative international routes.
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Finally, as discussed previously, the City has been the leader in the major capital improvements for O'Hare and Midway that will facilitate expansion by the existing carriers and encourage new entry by airlines that are not serving these airports.
In short, rather than attempting to shore up the so-called ''fortress'' walls, the City has been an active and forceful participant in efforts to open up O'Hare and Midway to new and additional service and competition.
CONCLUSION
The Chicago Airport System is one of the most competitive airport systems in the country. Passengers traveling to and from the Chicago region enjoy more flights, more airline choice, more nonstop destinations and more competition than passengers in virtually any other region in the world. Moreover, domestic and international passengers traveling via Chicago enjoy an unmatched number of connecting opportunities to and from U.S. cities and international destinations throughout the world. Furthermore, passengers traveling between points beyond Chicago receive the benefits of lower fares resulting from the myriad of service offerings provided over Chicago. With the world's only dual hub, a plethora of airlines providing competitive service at O'Hare and Midway, an abundance of low-cost, low-fare carriers, and the elimination of the high-density rule on July 1, 2002, the Chicago Airport System is well-positioned to remain highly competitive for the foreseeable future.
Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or other Members of the Committee may have.
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Mr. HYDE. Mr. Quinn.
STATEMENT OF KEN QUINN, PARTNER, WINTHROP, STIMSON, PUTNAM & ROBERTS, WASHINGTON, DC
Mr. QUINN. Thank you, Mr. Chairman, and greetings from Mayor Daley who sends his regards, by the way, and I welcome the opportunity to appear before you, Mr. Chairman, and other members of the committee.
Last week you heard a fair amount of airline bashing and O'Hare and Chicago bashing in your hearing. Unfortunately, there was a very one-sided presentation of some of the issues, and what you heard about airline competition we believe, respectfully, Mr. Chairman, was based on fiction, not fact.
We believe that these latest efforts to shut down the economic engine that is O'Hare has nothing at all to do with consumers or competition. It is about limiting flights at O'Hare and building an airport in downstate Peotone. We believe it is really a concocted conspiracy, largely scripted by a lawyer in continual litigation against the city for the past 15 years, and evidencing a fundamental misunderstanding of the antitrust laws.
For example, even if one could establish coordinated action by the airlines and the city against Peotone, long-established antitrust doctrines of State action and of the Noerr-Pennington doctrine would prohibit and make immune the airline conduct and the city's conduct.
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The report of the Suburban O'Hare Commission is long on rhetoric and very short on facts. Their charges are nothing short of preposterous and we believe, respectfully, Mr. Chairman, it is patently absurd to suggest that the current state of competition in the Chicago airport system is anything other than intense, and we would like to use some charts to let us look at the real facts concerning Chicago's competitive state.
Looking at this chart here, you can see O'Hare itself has more nonstop service than any other domestic airport. O'Hare has 45 carriers for 182 markets. Midway itself has 17 carriers, a hotbed of low-cost, low-fare carriers serving 55 markets. We examined all of their top markets at O'Hare. Fully 49 of O'Hare's 50 top markets have nonstop service by two or more carriers, and 13 of these markets have service by three or more carriers. Only one market is served by one carrier and that is Dulles, which has multiairport competition from Midway, BWI and National.
Looking at this third chart, 72 percent of Chicago passengers now have, as a result of the growth of Midway, once the world's busiest airport, a choice between O'Hare and Midway, where you can see this huge overlap in routes between O'Hare and Midway, and that has a very significant price disciplining effect on the Chicago airport system.
This is the benefit in the competitiveness, the intense competition in the Chicago airport system. It is not limited just to the domestic market. Indeed, 34 airlines serve 61 foreign cities out of O'Hare. It truly is an aviation system that is the envy of the world.
If you look at air fares, which we have done intensively, they have risen far less—and these are absolute terms not CPI-adjusted—fares would actually go down, as they have 40 percent since deregulation. If you compare Chicago here with other hub cities, you can see it is far less in terms of increases in fares than Pittsburgh, Charlotte, Dallas, Boston, Detroit, Philadelphia, Cincinnati, Newark/New York, Minneapolis/Saint Paul, and Memphis. It is an intensely competitive market. Air fares certainly do not support the myth of a fortress hub.
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If you look at the major markets and the air fares just based on the most recent DOT data, what you will find—and this is third quarter 1999—is that air fares in Chicago are $176. That is a one-way, on average, as determined not by us but by the Department of Transportation. That is less, Mr. Chairman, than the average fare in the whole country. So far again from supporting a myth of a fortress hub, what you find are 17 other major markets all throughout the country have higher air fares than the Chicago airport system, in fact, including this market and San Francisco and on and on and on. This evidences, without a doubt we believe, an intensely competitive and vibrant market.
Let us look finally in my limited time, Mr. Chairman, just at this one market. Mr. Giles at Suburban O'Hare Commission illustrated last week by saying he could get, when faced with a higher fare out of O'Hare, he could get $185 round trip out of Midway, proving our point. The Chicago Washington market is served from Midway on Southwest to BWI. You can get it on the Internet this week, $162 round-trip fare. You can fly ATA from Midway to National for $168. Either of our hub carriers from O'Hare to National at $178 round trip, and Midway on US Airways for $208 to Washington Dulles. So I think the real facts, not rhetoric, demonstrably show an intensely competitive market, Mr. Chairman.
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Mr. QUINN. Those conclude my remarks and we would be happy to answer any of the questions you or the committee may have.
[The prepared statement of Mr. Quinn follows:]
PREPARED STATEMENT OF KEN QUINN, PARTNER, WINTHROP, STIMSON, PUTNAM & ROBERTS, WASHINGTON, DC
Mr. Chairman and Members of the Committee:
I am Kenneth Quinn, a partner in the law firm of Winthrop, Stimson, Putnam & Roberts. I thank you for providing this opportunity to build on Commissioner Walker's testimony and respond to some of the allegations that were raised in last week's hearing regarding airline competition, especially in Chicago.
I have had the privilege of representing the great city of Chicago in a wide-variety of air service, competition, and aviation issues since 1993. Before that, I served four years as FAA Chief Counsel and Counselor to the Secretary of Transportation in the Bush Administration. In that capacity, I was a member of the Secretary's Task Force on Airline Competition, and oversaw the Federal government's administration of the High Density Rule governing slots at Chicago's O'Hare International Airport, JFK, LaGuardia, and now Reagan National airports. Prior to my government service, I practiced antitrust and financial litigation at Sidley & Austin in Chicago. As a result of my private sector experience and government service, it is fair to say that I have participated in and viewed the debate over airline competition from many different perspectives.
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Mr. Chairman, Ranking Member Conyers, and other distinguished Members, you heard a fair amount of airline and O'Hare bashing in last week's hearing. Let there be no doubt, however, about one straightforward fact: Chicago's hub air carriers, its many low-fare carriers, and its broad array of domestic and international competition justifiably are the envy of the world. Why? Because business travelers are offered a multitude of non-stop destinations around the world by different carriers, often with multiple daily flights. Leisure travelers can get to and from Chicago to just about anywhere they want; and with advance planning, they are almost certain to get there at affordable prices.
Unfortunately, the one-sided presentation of some of the issues you heard last week regarding airline competition in Chicago was fiction, not fact. To state the obvious, this latest effort to put the brakes on the economic engine that is O'Hare has nothing to do with consumers or competition. Rather, it is a tool to further the frankly stated goals of limiting flights at O'Hare and building an airport in downstate Peotone. Neither limiting O'Hare nor building Peotone would increase competition in the Chicago Aviation System, as we are prepared to discuss further. In the meantime, there should be no doubt: the City is committed to preserving and enhancing the economic benefits of its airport, and to continuing its laudable efforts to reduce the adverse affects of aircraft noise.
After a decade, the proponents of a new airport in Peotone have not been able to make their case on the basis of economic viability, airport capacity, aviation safety, or airways efficiency. This Committee heard just last week from the FAA's senior career official that O'Hare has an ''acceptable'' level of delays. O'Hare and Midway have outstanding safety records. You also heard, Mr. Chairman, the FAA flatly deny the contention of the Suburban O'Hare Commission, that O'Hare is ''at capacity.'' Mr. Galis clearly stated that O'Hare has additional room and capacity to grow.
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So now we are faced with a concocted conspiracy script worthy of an Oliver Stone movie, written by a lawyer in continual litigation against the City for the past 15 years and evidencing a fundamental misunderstanding of our nation's antitrust laws. And what is the evidence of this massive antitrust conspiracy? Did they conduct any analysis whatsoever of competition in any relevant city-pair market? Did they conduct any analyses of air fares or service options from Chicago's airports? Did they even retain any reputable economist or antitrust lawyer to research their far-reaching claims before they made them? The answer to all of the above appears to be ''no''.
Instead, we were treated to a press conference and ''report'' that were long on rhetoric, and short on facts. After all of their efforts to paint a terrible picture, all they can point to is a highly public letter written five years ago by the airlines indicating opposition to further planning and development funds for a Peotone airport. Without question, this letter is not the stuff of illegal antitrust conduct. In fact, the airlines' collective exercise of free speech in opposing a third airport as a waste of taxpayer and potentially their own dollars is exempt from the antitrust laws, as is the City's efforts to analyze and participate in the public debate over this issue. If the airlines believed they were acting in collusion, they took no pains to keep the secret. The letter was the subject of a press release written by the ATA, the airlines' trade organization, and disseminated to members of the Illinois legislature and the press.
At bottom, the charges of the Suburban O'Hare Commission are nothing short of preposterous. Reasonable people might disagree about the consumer or competitive implications of any given airline merger. They might disagree about whether a new airport ought to be built in a farm field 37 miles southwest of any major population base.
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It is patently absurd, however, to suggest that the current state of competition in the Chicago airport system is anything other than intense. Let us look at the real facts about competition in the Chicago airport system.
In fact, you heard a great example last week, from an unlikely source'the head of the Suburban O'Hare Commission, John Geils. He told you that he faced a high fare from O'Hare to come to the hearing, so he promptly examined his options, drove 25 minutes to Midway Airport, and hopped on a plane to D.C. for a fare of $185. Does this sound like monopolistic pricing? Of course not. I dare say most if not all members of this Committee would welcome the ability to drive 25 minutes to catch a flight non-stop to Reagan National for $185.
Unfortunately, for many of you, non-stop flights are not even an option, much less affordable or convenient. You may not even have a choice of airlines. If you had the great fortune to represent Chicago, or live in the Chairman's district, you would have the following options to get here, using fares pulled up just this week off the Internet. You could fly Midway to BWI on Southwest for $162 non-stop on seven days advance notice. You could fly from Midway to Reagan National on American Trans Air for $168 non-stop on three days advance notice. You could fly either United or American non-stop from O'Hare to Reagan National at just about any hour of the day for $178 on 14–21 days advance notice. Or you could fly USAirways MetroJet from Midway to Washington Dulles for $208 on 14 days advance notice. And those are just the non-stop flights. Adding direct or connecting service adds a choice of Northwest, Delta, Continental, America West, and others.
The reality? Chicago travelers should be looked upon with envy, not sympathy. Try going from California to here, or from upstate New York, or even Richmond. The list is endless. By any objective measure of competition, Chicago's travelers have got it great. Their choices, fares, and options are outstanding. Sure there can be delays, which are primarily weather-driven, and there are lots of other things to complain about. But let us not mix politics and a desire to build another airport and dissatisfaction with airline service with serious legal charges of antitrust violations that just don't add up.
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Do not buy these conspiracy theories. Through the outstanding efforts of Mayor Daley and many fine professionals throughout our aviation system, Chicago travelers enjoy perhaps the broadest array of non-stop flights at more times during the day from more locations to more destinations at more reasonable fares than literally anyone in the country. These fares, choices, and service levels simply are not indicative of a Fortress Hub.
COMPETITION IS WORKING AT CHICAGO'S AIRPORTS
The City, for its own part, has consistently supported the widest possible range of competitive air transport options at O'Hare and Midway. For example:
The City has long supported a repeal of slot limitations at O'Hare, imposed by the DOT's High Density Traffic Airports Rule (''HDR''), to allow increased access to new and limited incumbent carriers.
The City has supported DOT slot applications by low-cost carriers. The City backed five carriers for new or additional slots at O'Hare to serve Minneapolis, Dallas, Las Vegas, and six Florida destinations. Last month, those applications were granted to America West, Legend, National, Spirit and Sun Country.
Since passage of the Federal Aviation Administration Authorization Act of 1994, the Department of Transportation has granted sixty slot exemptions to new entrant/limited incumbent carriers and carriers serving non-hub airports to provide new, competitive, domestic service at O'Hare, and slot exemptions to thirteen foreign airlines to provide new, competitive, international service at O'Hare.
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The City recently supported America Trans Air's application to provide new low-cost service between Midway and Reagan National.
In addition to American and United, almost 50 other air carriers serve passengers at O'Hare.
Some 90 percent of O'Hare nonstop passengers travel on routes served by more than one carrier.
Some 17 air carriers operate to and from Midway where low-fare service has grown rapidly in recent years, providing significant additional service and price competition.
Almost 75 percent of passengers choosing to fly to or from O'Hare had the option to fly a nonstop from Midway.
At both O'Hare and Midway, the City has supported the evolution from exclusive-use gates—once necessary to support bonding for terminal development—to preferential-use and common-use gates. The World Gateway Program is designed to continue this evolution by providing additional preferential-use gates, and more efficient terminals and roadways, to serve anticipated, limited growth in passenger volume. In the meantime, the City is working aggressively with new entrants at both Midway and O'Hare to accommodate their demand for additional gates and ticket counters. For example, at O'Hare gates are being made available for new entrants at Terminal 5 (International Terminal), which has common-use gates.
CHICAGO'S AIRPORTS ARE MEETING THE CHALLENGE OF FUTURE GROWTH
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The City is committed to developing its airports to keep pace with the needs of future air travelers. Guiding the City's policy for future growth are the twin principles of economically- and environmentally-sustainable airport development.
Current and projected demand appears modest. The City's 15-year aviation demand forecast calls for annual passenger enplanement growth of just 1.7 percent and annual aircraft operations growth of just 0.7 percent. This, coupled with the decrease in delays over the past ten years, an actual decline in operations from 1997 to 1998, and current and future advances in air traffic management, support the conclusion that O'Hare has solid prospects for additional capacity.
One Federal regulation with significant implications for competition at O'Hare is the DOT's HDR. That rule, in effect since 1968, limits the number of available slots at O'Hare. The effect has been to shut out most new-carrier entry.
In 1995, a DOT study found that removing the HDR at ORD would provide ''an overall positive net benefit of $205 million per year.'' Study of the High Density Rule (May 1995) at 61. Put differently, the study found that the HDR costs consumers more than $200 million each year.
The City has opposed the HDR for many years. The City supported repeal of the HDR in 1983; and since 1994, the City has been at the forefront of supporting liberal use of slot exemptions to stimulate new entry, consumer choice and low-fare traffic between O'Hare and destinations in the U.S. and abroad. Sometimes the City has acted over the express objections of O'Hare's hub carriers.
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PEOTONE
The City of Chicago's concerns with an additional airport in downstate Peotone are these:
There has yet to be a thorough analysis of a potential new airport in the region, but there is reason to believe that such a review may well turn up issues of airspace usage.
If, as the airlines have assessed, an airport in Peotone would not attract sufficient traffic to succeed, there would be an incentive to force air traffic to a downstate airport by artificially limiting and/or capping flights at Midway and O'Hare.
A logical extension of that concern is the fear that PFC revenue generated at Midway and O'Hare would be siphoned off to support an additional airport. Aviation history demonstrates that these are not idle fears. To create a new Denver airport, Stapleton was closed. Love Field at Dallas and National at D.C. were forced to scale back operations in an attempt to generate air traffic at their newer airports.
One need not look any further than downstate Illinois, at Mid-America Airport, to see the folly of government dreams without economic sense. Located almost equidistant to St. Louis as Lambert Field, Mid-America was built with public monies totaling over $315 million. Today, save for a few flights recently scheduled from the formerly defunct Pan Am, it stands vacant, with a gleaming new terminal and long runway in the middle of prime farm land. The airlines did not come.
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The Committee may remember that something similar happened at Montreal Mirabel International Airport, a 24-gate facility located 34 miles from the city center. Partly because Mirabel is so far from Montreal, and partly because international passengers arriving at Mirabel had to transfer to Dorval for their connecting flights, the much-heralded ''Airport of the 21st Century'' now handles only cargo and charter traffic. It is a white elephant, and the economic activity has now largely shifted to Toronto.
Planning a new airport always has implications that extend well beyond the proposed site and its immediate surroundings. The views of all concerned must be taken into account. That is why the City has supported well-established Federal government policy—which has extended, since 1992, through both Democratic and Republican administrations—that decisions on any new airport in the vicinity of Chicago should be subject to regional consensus.
Despite all the substantial reasons that weigh against Peotone, or perhaps because the case against Peotone is so strong, some try now to divert attention from the merits by using a red herring: a letter that 16 air carriers wrote to Governor James Edgar of Illinois on January 17, 1995. Of course, the City did not sign this letter. But anyone who reads it can understand its message. According to some, the letter is a threat that the carriers will not provide service at Peotone. What the letter actually says is that the carriers oppose further planning and construction of Peotone. There is simply nothing in it about whether or not any air carrier (let alone all 16 air carriers) will offer service at Peotone if and when it is built.
The view of most aviation professionals is that Peotone simply would not be economically viable. Given that, the City has every right to be vigilant as to attempts to build a downstate airport at the expense of the current engines of economic development, Midway and O'Hare Airports.
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THE CITY HAS ANTITRUST IMMUNITY
The City has seen nothing, in the Suburban O'Hare Commission Report or elsewhere, that would give it a factual basis for thinking that antitrust violations may have occurred in connection with the City's position on Peotone or its relations with the air carriers who serve O'Hare and Midway. Yet, if an antitrust issue were to arise in that connection, two types of antitrust immunity would protect the City from liability.
The State Action Doctrine
The Supreme Court case of Parker v. Brown, 317 U.S. 341 (1943) explains that, under the federal system of U.S. government, a sovereign State's anti-competitive acts are immune from federal antitrust laws because Congress has not expressly subjected such acts to antitrust liability. State-action immunity protects a city if the state where it is located has ''authorized or directed'' the city ''to displace competition with regulation or monopoly public service.'' City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389 (1978); Ports Authority of Puerto Rico v. Compañia Panameña de Aviacio, S.A., 77 F.Supp.2d 227, 2000–1 Trade Cas. 72,903 (D.P.R. Nov. 24, 1999) (airport operator immune from antitrust liability because ''Puerto Rico has clearly articulated a state policy to displace competition in the operation and management of the air transportation facilities at the Luis Muños Marrín International Airport'').
Where entry barriers and other measures for ''displac[ing] unfettered business freedom are the 'foreseeable result' of the state authorization, immunity will apply even if the city has not precisely fulfilled the requirements of the authorizing statute.'' City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 372–373 (1991); Wellwoods v. City of Aurora, 631 F.Supp. 221, 225 (N.D. Ill. 1986), aff'd 822 F.2d 1091 (7th Cir. 1987) (city immune from antitrust liability for alleged conspiracy with fixed-base operators at municipal airport to shut out new entrants; Illinois statute gave city the power to grant concessions or privileges at municipal airport, and a decision to lease only to a certain number of operators was foreseeable result); Campbell v. City of Chicago, 823 F.2d 1182, 1184–85 (7th Cir. 1987) (state authorized City to regulate taxicabs, foreseeable result of which was the challenged limitation on number of City cab licenses, resulting in barrier to new cab entry); see LaSalle Nat'l Bank v. County of DuPage, 777 F.2d 377, 380 (7th Cir. 1985).
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The Illinois legislature has immunized municipalities such as the City from antitrust liability for conduct ''expressly or by necessary implication authorized by Illinois law'' and conduct ''within traditional areas of local governmental activity.'' 50 ILCS 35/1.(see footnote 112)
More specifically, Illinois law expressly authorizes the City (inter alia) to ''establish and maintain public airports,'' ''operate any public airport,'' ''let to, or enter into any operating agreement with, any person for operation and maintenance of any public airport,'' and ''regulate the use of such airports.'' 65 ILCS 5/11–101–1; 65 ILCS 5/11–102–5.
The Suburban O'Hare Commission report alleges that the City has forfeited its state action immunity by ''participat[ing] in a monopoly which gouges air travelers . . . hundreds of millions of dollars each year.'' SOC Report at 28 n.27. This could be read to accuse the City of (a) corruptly conspiring with United and American to raise fares to and from O'Hare; or (b) deriving commercial benefit from (as opposed to exercising regulatory authority over) United and American's high fares at O'Hare. Neither accusation, even if true, would impair the City's state action immunity.
The report also alleges that United, American and the City have waged a ''collective campaign . . . to keep significant new hub-and-spoke competition from coming into the metro Chicago market.'' As such, it more logically relates to the Noerr-Pennington defense, discussed immediately below.
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The Noerr-Pennington Doctrine
The seminal cases of Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), United Mine Workers v. Pennington, 381 U.S. 657 (1965), and California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972) recognize that agreements to influence the government's official legislative, administrative or judicial acts in order to produce an anticompetitive effect are fundamentally different from private agreements to restrain trade. The former qualify for antitrust immunity because they are, at least to some degree, political activities which the antitrust laws do not purport to regulate. They are also protected by the First Amendment rights of individuals and entities to associate with others and to petition the government.
''Joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition. Such conduct is not illegal, either standing alone or as part of a broader scheme itself violative of the Sherman Act.'' Pennington, 381 U.S. at 670. See LaSalle Nat'l. Bank v. County of DuPage, 777 F.2d 377, 384 n.6 (7th Cir. 1985).
There is no merit to the claim that the City is not entitled to Noerr-Pennington immunity because it has joined with United and American to wage a ''collective campaign . . . to keep significant new hub-and-spoke competition from coming into the metro Chicago market.'' A joint campaign to convince government officials to refrain from taking action is a classic example of the conduct Noerr-Pennington immunizes. Indeed, Noerr itself immunized defendant railroads' joint campaign to convince the Governor to veto a pro-trucker bill.
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CONCLUSION
As can be seen by the above analyses, backed by real facts and real cases, the allegations of antitrust conspiracy involving Chicago are simply a desperate attempt to shield the hollow nature of remaining arguments in favor of building a regional airport at Peotone. Competition is alive and well in Chicago, and should not be part of the Peotone debate.
Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or other Members of the Committee may have.
Mr. HYDE. Are those fares advance fares that you get when you buy your ticket in advance, or are they regular business fares where you walk into the airport and buy a ticket?
Mr. QUINN. You can see on the chart here, Mr. Chairman, as well as the copies we provided to each member, I have indicated the advance fares. For example, ATA, here one only needs to plan in advance 3 days to get a $168 dollar round-trip ticket from Midway to Reagan National.
Mr. HYDE. So those are advance fares?
Mr. QUINN. Certainly they are not walk-up fares. What you will find, walk-up fares have an elasticity of demand. That is, a business traveler—those are folks primarily using O'Hare who value the high frequency of service on the hour, and they are certainly going to be paying more than a leisure traveler or even those who can plan 3 days in advance.
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Mr. HYDE. In other words, it costs more because of the regularity of the schedule.
Mr. QUINN. Traditionally, out of a hub it is going to cost more because of the frequency. They do have economies of scope and density, but what you will also find in looking at markets around the country is that a primary determinant of air fares is going to be the nature of the market; is it a high business market versus a leisure market? Las Vegas, Orlando, Honolulu are generally going to be less than a Chicago. But what we have found is even that is not true given the competitive state of the airline market.
Mr. HYDE. I might mention in response to your sharp criticism—that the last hearing was loaded and stacked and bashing Chicago and O'Hare—that we invited the other airlines and the other side of the question, and they had other things to do that day. So we scheduled today's hearings to have some balance, and we had no intention of holding hearings that weren't designed to produce information to help us on these very difficult questions.
Mr. QUINN. And we appreciate the opportunity, Mr. Chairman, to appear before you today.
Mr. HYDE. Now you have argued that. I am leaping ahead. The wish is father to the thought. Mr. Baker.
STATEMENT OF BOB BAKER, VICE CHAIRMAN, AMR CORPORATION, DFW AIRPORT, TEXAS
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Mr. BAKER. Good afternoon, Chairman Hyde, and other members of the committee. My name is Bob Baker and I am vice chairman of American Airlines. Thank you very much for the opportunity to speak to you about competition in the airline industry and in particular in Chicago.
My primary purpose this afternoon is to respond to the paper published by the Suburban O'Hare Commission which aims some pretty profound accusations at the airline industry and government officials in both the Federal Government and the city of Chicago. Rather than trying to respond to all of the claims contained in the paper, I will limit my remarks to three areas. I will try to explain why, from the perspective of a major airline, serving an additional hub in Chicago would be very uneconomical. Then I will restate the position of American Airlines which has been unfairly characterized on the construction of a third airport for Chicago. And last, I will say a few words about competition in the airline industry.
Dual-hub operations in a single city would result in diminished customer service for American's passengers. Hubs are efficient because they serve many points from the same airport. We time our arrivals and our departures to permit as many connecting opportunities as possible between points east of Chicago and points to the west. Having a lot of cities' passengers that can connect allows us to fly some smaller destinations that might not otherwise support airline service.
On a single plane from Des Moines to Chicago, for example, we can fly passengers ultimately bound for Buffalo, Syracuse, Albany, Boston, New York, Philadelphia, Pittsburgh and so on. Combining many of these passengers on the same flights is essential to providing service to smaller communities.
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Having a lot of connections at a single airport also allows us to fly to most cities with greater frequency, something our business passengers strongly desire. This economic reality explains why the industry does not have small hubs. In fact, American had to discontinue hub operations at Nashville, Raleigh-Durham, and San Jose in the early nineties when poor profitability at the small hubs dictated that step.
If we split our hub operations, these customer services would be lost and some small communities would be cut off from the full range of connections as a consequence. We would either have to split destinations served from each airport or serve all cities from both airports but at half the frequency. Thus, for example, you might not be able to fly from Des Moines to Buffalo at all, because each city might be served from a different airport. Alternatively, the frequency of service between Des Moines and Chicago O'Hare would be cut in half, with the other frequencies going to the new airport. Of course, those flights wouldn't do you much good if you parked your car at O'Hare.
In this business, two is not necessarily better than one. As I said at the outset, I believe these economic truths apply equally to the other airlines as well. The fact that several airlines agree that a new Chicago airport is not financially attractive may say more about the merits of the plan than about some conspiracy among airlines serving Chicago.
For the record, please allow me to restate American Airline's position with regard to building a third airport in the Chicago area. American Airlines does not oppose the construction of a third airport for Chicago or any other city. American does object to taking passenger facility charges from O'Hare or Midway and using that revenue to build an additional airport. That revenue is paid to the government by our customers and is intended for the maintenance and development of O'Hare and Midway Airports, and is absolutely necessary to keep operations at those airports both safe and convenient for the traveling public.
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Assuming that more appropriate sources of funding are found, American has no objection to construction of any new airport in our country. We should be clear, however, that even if a new airport is built, American Airlines is not likely to use it. Let me explain why that is. American is not likely to use a new airport in the Chicago area as a hub because it would not make financial or business sense to do so. While I cannot speak for the other carriers, I expect that the economics are the same for any airline that already operates a Midwest hub. While we might someday be able to justify a small number of flights to serve the south Chicago/ northern Indiana market, such tenuous potential should not serve as the basis for the expense of building a new airport. Investment in a new airport is particularly speculative because Gary, Indiana, an airport with excess capacity, would serve some of the same region at a much lower cost.
Let me now focus finally on operating costs at a new airport. New airports have much higher operating costs than older, established airports. That is because a new airport typically has issued bonds to pay for its construction and those bonds must be covered by income from airport operations. Older airports typically do not have equivalent levels of debt that need to be serviced from airport leases and landing fees. That means that it would cost American Airlines or any other airline more in airport charges per enplaned passenger at a new airport than it would at O'Hare. For example, according to the ATA's statistics, the average cost per passenger that an airline currently pays to O'Hare Airport is $8.63. The comparable average cost per passenger at Denver International Airport, the only new hub airport built in the last decade, is 60 percent higher at $13.83, and that amount is down from $20 per passenger in the first year or so after the airport was built.
Thus, moving operations to a new airport would mean signing up for higher costs, with no ability to recoup those costs through higher fares, and that is simply not good business.
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To take just one example, if you were competing for a passenger who is traveling from Des Moines to Buffalo, our fare must be competitive with United that takes that passenger over O'Hare. It must be competitive with Northwest, serving that passenger via Detroit and Delta, carrying the passenger over Cincinnati; and finally it must be competitive with Continental, serving the same route via Cleveland.
Since our fares must be competitive, so must our costs. Otherwise our competitors can make a profit at a price we cannot. And no airline can sustain 60 percent higher operating costs and still expect to be competitive and even marginally profitable on all of the connecting routes served through a competing Midwest hub.
In addition to operating costs, American has made a tremendous investment in facilities and equipment at O'Hare Airport. If a new airport was built and American split its hub operations between the two airports, we would nearly double our capital costs to serve the same city. We would have to buy additional jet bridges and ground service equipment, enter into additional catering contracts, provide at least minimal maintenance capability, including line replaceable spare parts inventory, and of course staff for ground services including baggage handling, fueling, and aircraft cleaning. At the same time, we would likely underutilize the existing assets and investment at O'Hare, which would have fewer departures and passengers.
This increased overhead expense would occur without any material increase in revenue as we simply split the same customers we are serving at O'Hare over two airports. Increased overhead expense and no new revenue is not an attractive combination.
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In contrast to the allegations made by the Suburban O'Hare Commission, the fact is that Chicago is an intensely competitive market. American and United are fiercely competitive at O'Hare Airport, each vying for greater share of passengers originating in Chicago, destined for Chicago to other cities, or simply connecting at O'Hare Airport.
In addition, Chicago is a significant part of every airline's network, which means we compete for passengers traveling between Chicago and all other carriers' hubs as well.
Last, we compete with the airlines serving the Chicago area through alternative airports such as Midway, but also through Milwaukee and Gary. The airline industry is extremely competitive overall, not just Chicago, contrary to popular opinion. Therefore, air fares are clear evidence of this competition. When adjusted for inflation, average fares have fallen almost 39 percent since deregulation according to the Air Transport Association's statistics. However, while it is true that full unrestricted fares have gone up, even those fares have increased only slightly more than the rate of inflation over the last 10 years. What is happening is that the fare structures, the difference between the lowest fare available on a route and the highest, are being stretched. The highest fares are a little higher, but the lowest fares are much lower. Most importantly, the number of people enjoying deeply discounted fares has soared, while the number of those buying full fares has shrunk to less than 7 percent of all the tickets we sell.
In the end, demand at all fare levels has been strong, and a large majority of our customers are paying less and traveling more. Just what you would expect in a healthy competitive industry.
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I am hopeful that this has provided a bit of balance to the perspective expressed in the Suburban O'Hare Commission's paper. I would be happy to address any questions you may have, and again thank you very much for giving us an opportunity speak with you today.
Mr. HYDE. Thank you Mr. Baker.
[The prepared statement of Mr. Baker follows:]
PREPARED STATEMENT OF BOB BAKER, VICE CHAIRMAN, AMR CORPORATION, DFW AIRPORT, TEXAS
GOOD MORNING CHAIRMAN HYDE AND OTHER MEMBERS OF THE COMMITTEE. MY NAME IS BOB BAKER AND I AM VICE CHAIRMAN OF AMERICAN AIRLINES. THANK YOU FOR THE OPPORTUNITY TO SPEAK TO YOU ABOUT COMPETITION IN THE AIRLINE INDUSTRY AND, IN PARTICULAR, IN CHICAGO.
MY PRIMARY PURPOSE THIS MORNING IS TO RESPOND TO THE PAPER PUBLISHED BY THE SUBURBAN O'HARE COMMISSION WHICH AIMS SOME PRETTY PROFOUND ACCUSATIONS AT THE AIRLINE INDUSTRY AND GOVERNMENT OFFICIALS IN BOTH THE FEDERAL GOVERNMENT AND THE CITY OF CHICAGO. RATHER THAN TRYING TO RESPOND TO ALL OF THE CLAIMS CONTAINED IN THE PAPER, I WILL LIMIT MY REMARKS TO THREE AREAS. I WILL TRY TO EXPLAIN WHY, FROM THE PERSPECTIVE OF A MAJOR AIRLINE, SERVING AN ADDITIONAL HUB IN CHICAGO WOULD BE VERY UNECONOMICAL. THEN I WILL RESTATE THE POSITION OF AMERICAN AIRLINES—WHICH HAS BEEN UNFAIRLY CHARACTERIZED—ON THE CONSTRUCTION OF A THIRD AIRPORT FOR CHICAGO. AND LAST, I'LL SAY A FEW WORDS ABOUT COMPETITION IN THE AIRLINE INDUSTRY.
DUAL HUB OPERATIONS IN A SINGLE CITY WOULD RESULT IN DIMINISHED CUSTOMER SERVICE FOR AMERICAN'S PASSENGERS. HUBS ARE EFFICIENT BECAUSE THEY SERVE MANY POINTS FROM THE SAME AIRPORT. WE TIME OUR ARRIVALS AND DEPARTURES TO PERMIT AS MANY CONNECTING OPPORTUNITIES AS POSSIBLE BETWEEN POINTS TO THE EAST OF CHICAGO AND POINTS TO THE WEST. HAVING A LOT OF CITIES PASSENGERS CAN CONNECT TO ALLOWS US TO FLY TO SOME SMALLER DESTINATIONS THAT MIGHT NOT OTHERWISE SUPPORT SERVICE. ON A SINGLE PLANE FROM DES MOINES TO CHICAGO, FOR EXAMPLE, WE CAN FLY PASSENGERS ULTIMATELY BOUND FOR BUFFALO, SYRACUSE, ALBANY, BOSTON, NEW YORK, PHILADELPHIA, PITTSBURGH AND SO ON. COMBINING MANY OF THESE PASSENGERS ON THE SAME FLIGHTS IS ESSENTIAL TO PROVIDING SERVICE TO SMALLER COMMUNITIES. HAVING A LOT OF CONNECTIONS AT A SINGLE AIRPORT ALSO ALLOWS US TO FLY TO MOST CITIES WITH GREATER FREQUENCY—SOMETHING OUR BUSINESS PASSENGERS STRONGLY DESIRE. THIS ECONOMIC REALITY EXPLAINS WHY THE INDUSTRY DOES NOT HAVE SMALL HUBS. IN FACT, AMERICAN HAD TO DISCONTINUE HUB OPERATIONS AT NASHVILLE, RALEIGH-DURHAM AND SAN JOSE IN THE EARLY 90s WHEN POOR PROFITABILITY AT SMALL HUBS DICTATED THAT STEP.
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IF WE SPLIT OUR HUB OPERATIONS, THESE CUSTOMER SERVICES WOULD BE LOST AND SOME SMALL COMMUNITIES WOULD BE CUT OFF FROM THE FULL RANGE OF CONNECTIONS AS A CONSEQUENCE. WE WOULD EITHER HAVE TO SPLIT DESTINATIONS SERVED FROM EACH AIRPORT OR SERVE ALL CITIES FROM BOTH AIRPORTS BUT WITH HALF THE FREQUENCY. THUS, FOR EXAMPLE, YOU MIGHT NOT BE ABLE TO FLY FROM DES MOINES TO BUFFALO AT ALL, BECAUSE EACH CITY MIGHT BE SERVED FROM A DIFFERENT AIRPORT. ALTERNATIVELY, THE FREQUENCY OF SERVICE BETWEEN DES MOINES AND CHICAGO O'HARE WOULD BE CUT IN HALF WITH THE OTHER FREQUENCIES GOING TO THE NEW AIRPORT. OF COURSE, THOSE OTHER FLIGHTS WOULDN'T DO YOU MUCH GOOD IF YOU PARKED YOUR CAR AT O'HARE. IN THIS BUSINESS, TWO IS NOT NECESSARILY BETTER THAN ONE.
AS I SAID AT THE OUTSET, I BELIEVE THESE ECONOMIC TRUTHS APPLY EQUALLY TO THE OTHER AIRLINES AS WELL. THE FACT THAT SEVERAL AIRLINES AGREED THAT A NEW CHICAGO AIRPORT IS NOT FINANCIALLY ATTRACTIVE MAY SAY MORE ABOUT THE MERITS OF THE PLAN THAN ABOUT SOME CONSPIRACY AMONG AIRLINES SERVING CHICAGO.
FOR THE RECORD, PLEASE ALLOW ME TO RESTATE AMERICAN AIRLINES' POSITION WITH REGARD TO BUILDING A THIRD AIRPORT IN THE CHICAGO AREA. AMERICAN AIRLINES DOES NOT OPPOSE THE CONSTRUCTION OF A THIRD AIRPORT FOR CHICAGO, OR ANY OTHER CITY. AMERICAN DOES OBJECT TO TAKING PASSENGER FACILITY CHARGES FROM O'HARE OR MIDWAY AND USING THAT REVENUE TO BUILD AN ADDITIONAL AIRPORT. THAT REVENUE IS PAID TO THE GOVERNMENT BY OUR CUSTOMERS AND IS INTENDED FOR THE MAINTENANCE AND DEVELOPMENT OF O'HARE AND MIDWAY AIRPORTS AND IS NECESSARY TO KEEP OPERATIONS AT THOSE AIRPORTS SAFE AND CONVENIENT FOR THE TRAVELING PUBLIC. ASSUMING THAT MORE APPROPRIATE SOURCES OF FUNDING ARE FOUND, AMERICAN HAS NO OBJECTION TO CONSTRUCTION OF ANY NEW AIRPORT.
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WE SHOULD BE CLEAR, HOWEVER, THAT EVEN IF A NEW AIRPORT IS BUILT, AMERICAN AIRLINES IS NOT LIKELY TO USE IT. LET ME EXPLAIN WHY THAT IS. AMERICAN AIRLINES IS NOT LIKELY TO USE A NEW AIRPORT IN THE CHICAGO AREA AS A HUB BECAUSE IT WOULD NOT MAKE FINANCIAL OR BUSINESS SENSE TO DO SO. WHILE I CANNOT SPEAK FOR THE OTHER AIRLINES, I EXPECT THAT THE ECONOMICS ARE THE SAME FOR ANY AIRLINE THAT ALREADY OPERATES A MIDWEST HUB. WHILE WE MIGHT SOMEDAY BE ABLE TO JUSTIFY A SMALL NUMBER OF FLIGHTS TO SERVE THE SOUTH CHICAGO-NORTHERN INDIANA MARKET, SUCH TENUOUS POTENTIAL SHOULD NOT SERVE AS THE BASIS FOR THE EXPENSE OF BUILDING A NEW AIRPORT. INVESTMENT IN A NEW AIRPORT IS PARTICULARLY SPECULATIVE BECAUSE GARY, INDIANA, AN AIRPORT WITH EXCESS CAPACITY, WOULD SERVE SOME OF THE SAME REGION AT A LOWER COST.
LET ME NOW FOCUS ON OPERATING COSTS AT NEW AIRPORTS. NEW AIRPORTS HAVE MUCH HIGHER OPERATING COSTS THAN OLDER, ESTABLISHED AIRPORTS. THAT IS BECAUSE A NEW AIRPORT TYPICALLY HAS ISSUED BONDS TO PAY FOR ITS CONSTRUCTION, AND THOSE BONDS MUST BE COVERED BY INCOME FROM AIRPORT OPERATIONS. OLDER AIRPORTS TYPICALLY DO NOT HAVE EQUIVALENT LEVELS OF DEBT THAT NEED TO BE SERVICED FROM AIRPORT LEASES AND LANDING FEES. THAT MEANS THAT IT WOULD COST AMERICAN AIRLINES, OR ANY OTHER AIRLINE, MORE IN AIRPORT CHARGES PER ENPLANED PASSENGER AT A NEW AIRPORT THAN IT WOULD AT O'HARE. FOR EXAMPLE, ACCORDING TO ATA STATISTICS, THE AVERAGE COST PER PASSENGER THAT AN AIRLINE CURRENTLY PAYS TO O'HARE AIRPORT IS $8.63. THE COMPARABLE AVERAGE COST PER PASSENGER AT DENVER INTERNATIONAL AIRPORT, THE ONLY NEW HUB AIRPORT BUILT IN THE LAST DECADE, IS 60% HIGHER AT $13.83, AND THAT AMOUNT IS DOWN FROM OVER $20 PER PASSENGER IN THE FIRST YEAR OR SO AFTER IT WAS BUILT. THUS, MOVING OPERATIONS TO A NEW AIRPORT WOULD MEAN SIGNING UP FOR HIGHER COSTS WITH NO ABILITY TO RECOUP THOSE COSTS THROUGH HIGHER FARES. THAT IS JUST NOT GOOD BUSINESS.
TO TAKE JUST ONE EXAMPLE, IF WE ARE COMPETING FOR A PASSENGER WHO IS TRAVELING FROM DES MOINES TO BUFFALO, OUR FARE MUST BE COMPETITIVE WITH UNITED THAT TAKES THAT PASSENGER OVER O'HARE, NORTHWEST SERVING THE PASSENGER VIA DETROIT, DELTA CARRYING THE PASSENGER OVER CINCINNATI AND CONTINENTAL SERVING THE SAME ROUTE VIA CLEVELAND. SINCE OUR FARES MUST BE COMPETITIVE, SO MUST OUR COSTS. OTHERWISE, OUR COMPETITORS CAN MAKE A PROFIT AT A PRICE WE CANNOT. NO AIRLINE CAN SUSTAIN 60% HIGHER OPERATING COSTS AND STILL EXPECT TO BE COMPETITIVE AND EVEN MARGINALLY PROFITABLE ON ALL OF THE CONNECTING ROUTES SERVED THROUGH COMPETING MIDWEST HUBS.
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IN ADDITION TO OPERATING COSTS, AMERICAN AIRLINES HAS MADE A TREMENDOUS INVESTMENT IN FACILITIES AND EQUIPMENT AT O'HARE. IF A NEW AIRPORT WAS BUILT AND AMERICAN SPLIT ITS HUB OPERATIONS BETWEEN THE TWO AIRPORTS, WE WOULD NEARLY DOUBLE OUR CAPITAL COSTS TO SERVE THE SAME CITY. WE WOULD HAVE TO BUY ADDITIONAL JET BRIDGES AND GROUND SERVICE EQUIPMENT, ENTER INTO ADDITIONAL CATERING CONTRACTS, PROVIDE AT LEAST MINIMAL MAINTENANCE CAPABILITY INCLUDING LINE REPLACEABLE SPARE PARTS INVENTORY AND STAFF FOR GROUND SERVICES INCLUDING BAGGAGE HANDLING, REFUELING AND AIRCRAFT CLEANING. AT THE SAME TIME, WE WOULD LIKELY UNDERUTILIZE THE EXISTING ASSETS AND INVESTMENT AT O'HARE, WHICH WOULD HAVE FEWER DEPARTURES AND PASSENGERS. THIS INCREASED OVERHEAD EXPENSE WOULD OCCUR WITHOUT ANY MATERIAL INCREASE IN REVENUE AS WE SIMPLY SPLIT THE SAME CUSTOMERS WE WERE SERVING AT O'HARE OVER THE TWO AIRPORTS. INCREASED OVERHEAD EXPENSE AND NO NEW REVENUE IS NOT AN ATTRACTIVE COMBINATION.
IN CONTRAST TO THE ALLEGATIONS MADE BY THE SUBURBAN O'HARE COMMISSION, THE FACT IS THAT CHICAGO IS AN INTENSELY COMPETITIVE MARKET. AMERICAN AND UNITED ARE FIERCELY COMPETITIVE AT O'HARE AIRPORT, EACH VYING FOR A GREATER SHARE OF PASSENGERS ORIGINATING IN CHICAGO, DESTINED FOR CHICAGO FROM OTHER CITIES, OR SIMPLY CONNECTING IN O'HARE AIRPORT. IN ADDITION, CHICAGO IS A SIGNIFICANT PART OF EVERY AIRLINE'S ROUTE NETWORK, WHICH MEANS WE COMPETE FOR PASSENGERS TRAVELING BETWEEN CHICAGO AND ALL THE OTHER CARRIERS' HUBS, AS WELL. LAST, WE COMPETE WITH AIRLINES SERVING THE CHICAGO AREA THROUGH ALTERNATIVE AIRPORTS, SUCH AS MIDWAY, BUT ALSO THROUGH MILWAUKEE AND GARY.
THE AIRLINE INDUSTRY IS EXTREMELY COMPETITIVE OVERALL, NOT JUST IN CHICAGO. CONTRARY TO POPULAR OPINION, AIRFARES ARE CLEAR EVIDENCE OF THIS COMPETITION. WHEN ADJUSTED FOR INFLATION, AVERAGE FARES HAVE FALLEN ALMOST 39 PERCENT SINCE DEREGULATION ACCORDING TO AIR TRANSPORT ASSOCIATION STATISTICS. HOWEVER, WHILE IT IS TRUE THAT FULL, UNRESTRICTED FARES HAVE GONE UP, EVEN THOSE FARES HAVE INCREASED ONLY SLIGHTLY MORE THAN THE RATE OF INFLATION OVER THE LAST TEN YEARS. WHAT IS HAPPENING IS THAT THE FARE STRUCTURES—THE DIFFERENCE BETWEEN THE LOWEST FARE AVAILABLE ON A ROUTE, AND THE HIGHEST—ARE BEING STRETCHED. THE HIGHEST FARES ARE A LITTLE HIGHER, BUT THE LOWEST FARES ARE MUCH LOWER. MOST IMPORTANTLY, THE NUMBER OF PEOPLE ENJOYING DEEPLY DISCOUNTED FARES HAS SOARED WHILE THE NUMBER OF THOSE BUYING FULL FARES HAS SHRUNK TO LESS THAN 7 PERCENT OF ALL TICKETS SOLD. IN THE END, DEMAND AT ALL FARE LEVELS HAS BEEN STRONG, AND A LARGE MAJORITY OF OUR CUSTOMERS ARE PAYING LESS AND TRAVELING MORE—JUST WHAT YOU WOULD EXPECT IN A HEALTHY, COMPETITIVE INDUSTRY.
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I AM HOPEFUL THAT THIS HAS PROVIDED A LITTLE BALANCE TO THE PERSPECTIVE EXPRESSED IN THE SUBURBAN O'HARE COMMISSION'S PAPER. I WOULD BE HAPPY TO ADDRESS ANY QUESTIONS YOU MAY HAVE. AGAIN, THANK YOU FOR THE OPPORTUNITY TO APPEAR HERE TODAY.
Mr. HYDE. Mr. Rill.
STATEMENT OF JIM RILL, PARTNER, HOWREY, SIMON, ARNOLD & WHITE, WASHINGTON, DC, ON BEHALF OF AMR CORPORATION
Mr. RILL. Thank you, Mr. Chairman, it is good to be back. The paper submitted on behalf of the Suburban O'Hare Commission alleges that major airlines have engaged in market allocation and conspiracy in violation of the Sherman Act. The paper asserts that the alleged conspiracy is proven by the claimed failure of the airlines to engage in hub competition with one another. In addition, the SOC paper claims that certain airlines' lobbying petitions to two Governors of Illinois regarding the construction of an airport in suburban south Chicago further proves the so-called illegal conspiracy.
I reviewed the SOC paper, the testimony of other witnesses and underlying materials drawn on the experience I have had in, I hate to admit, some 40 years of antitrust work. In my opinion, the claims made in the paper do not provide a shred of support for a conspiracy case. It would simply not be credited under accepted principles of law. The claim of collusion of the paper rests entirely on the statement that airlines do not compete in each others' hubs.
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Parenthetically, in making this claim, SOC disregards airline hub competition, for example, of American and Delta at DFW, and, for that matter, United and American at O'Hare.
More to the point, the SOC paper offers utterly no evidence of collusion beyond alleged parallel conduct and legally protected lobbying activities.
Supreme Court precedent firmly establishes that certainly while agreement may be shown by circumstantial evidence, parallel conduct, even if it exists, does not in any way serve to prove conspiracy. As long ago as 1954, in the Theater Enterprise case, the Supreme Court ruled that parallelism does not read the element of agreement out of the Sherman Act. Subsequent Supreme Court cases require that circumstantial evidence reasonably tend to eliminate the possibilities that parties' conduct was undertaken as the result of their independent decisions.
The court of appeals decisions have followed Supreme Court precedent by requiring more evidence of collusive behavior than, as claimed by SOC, parallel action together with an opportunity to conspire.
Under these decisions, that evidence must consist of conduct inconsistent with firms' economic interest acting independently. Applying these principles to the SOC paper makes clear that they do not support an allegation of conspiracy.
The hub-and-spoke system which has been widely acknowledged to have provided greater travel opportunities, as you have heard today, and convenience than existed prior to deregulation, requires a significant scale and scope of operation to be successful. And in this respect, you can see the testimony of DOT General Counsel Nancy McFadden recently on this subject. Where one rival has emerged as the only hub airline in the market, it has been the result of this intense rivalry, not collusion.
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No one has explained this fact better than Deputy Assistant Attorney General for Antitrust John Nannes in his testimony before this committee on June 14th. In response to a question by Congressman Hutchinson, Deputy Assistant Attorney General Nannes stated that the current structure of the hub market is the evidence of ''pretty bitter battles,'' his words, in which the airlines have, again to use his words, ''duked it out'' in hub competition to effectively operate and compete and provide convenience and quality for passengers traveling in and through hubs.
SOC also claims that the airlines' letters to two separate Governors of Illinois constitute proof of illegal conspiracy. I find this startling as an allegation. It consists of nothing more than the airlines' exercise of their first amendment rights to petition the Government. As such, they have been protected from antitrust challenge by Supreme Court precedent going back to 1961 in the Noerr case, with which I am sure the committee is familiar.
There is nothing in the letters to support the SOC assertion that the letters reflect an airline agreement not to use the South Suburban airport if it is constructed.
Mr. Baker's testimony today clarifies American's position against the use of PFC funds from O'Hare as well as the basis for American's own considerations relative to the use of the South Chicago airport, considerations arrived at by American's independent economic analysis.
Thus, unlike the situation in Supreme Court Trial Lawyers which is cited in the SOC paper, there is no claim on the face of the paper that the airlines have actually engaged in illegal conduct of the type challenged in the Superior Court Trial Lawyers case, a boycott, as a means of securing government action.
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Finally, the SOC would implicate the City of Chicago in the alleged conspiracy. I would only add, in support of Mr. Quinn's statement, that cities are equally protected as citizens in their right to petition the government under the Noerr doctrine and to the extent that the state action doctrine might be invoked, and it is not clear from the claims of the SOC paper. Illinois legislation plainly delegates airport operations to municipalities, and the authority of Chicago in that regard was affirmed in a 1987 Federal district court opinion in the Northern District of Illinois relating directly to Chicago, which is cited in my paper.
Mr. Chairman, there have been statements made that the SOC paper shows collusion. It shows nothing of the kind on its face. It could not begin to survive a motion to dismiss and could possibly even lead to rule 11 sanctions if it were filed in the form of a complaint.
Thank you. I will be glad to answer any questions.
[The prepared statement of Mr. Rill follows:]
PREPARED STATEMENT OF JIM RILL, PARTNER, HOWREY, SIMON, ARNOLD & WHITE, WASHINGTON, DC, ON BEHALF OF AMR CORPORATION
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to appear here today to address basic antitrust principles that should be understood and considered in parsing the analysis and conclusions contained in a recent paper issued by the Suburban O'Hare Commission (the SOC) in May 2000. The paper, titled ''If You Build It, We Won't Come: The Collective Refusal of the Major Airlines to Compete in the Chicago Air Travel Market,'' asserts that major air carriers and the City of Chicago have acted in contravention of the nation's antitrust laws, and consequently have harmed airline passengers in the United States. As the former Assistant Attorney General for Antitrust from 1989 to 1992, and as an antitrust practitioner with more than 40 years of experience, I can state without reservation that the allegations of the SOC are based on nothing more than mistaken assumptions regarding the appropriate scope and application of the antitrust laws. The purpose of the antitrust laws is to prohibit conduct by single firms (Section 2 of the Sherman Act) and collaborative conduct among competitors (Section 1 of the Sherman Act) that impedes the efficient allocation of resources and adversely affects consumer welfare. SOC misperceives and misapplies fundamental antitrust concepts in a manner that would discourage aggressive and efficiency-enhancing competition among airlines, resulting in harm to consumers.
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SOC concludes with little analysis that the major carriers and the City of Chicago have violated our nation's antitrust laws. At the center of its broad attack is the extraordinary notion that, since the deregulation of the airline industry in 1978, the major carriers have engaged in a per se illegal geographic market allocation scheme to ''carve[d] up major areas of the Nation into territories of geographic dominance known as 'Fortress Hubs.' ''(see footnote 113) This is the very same hub and spoke systems that are almost universally attributed with having provided superior, competitive service. That airline passengers have benefited in the form of lower fares and increased service from the hub systems that have evolved since deregulation in 1978 is no longer even a subject of serious debate.
Nonetheless, SOC alleges that Chicago, one of the most competitive hubs, with two major carriers, serves as a case study for a ''de facto arrangement,'' under which major carriers have agreed to refrain from competing with United Airlines and American Airlines in the Chicago metropolitan area. SOC also relies on what it characterizes as an ''abandonment'' of the Chicago area by major carriers other than United and American as proof of some sort of allocation agreement.
SOC's second line of attack, which equally ignores both basic antitrust principles and the network economics that underlie the airline industry, asks us to believe that major carriers have conspired not to use a third airport in the Chicago area if it is built. In this purported conspiracy, the major airlines are allegedly joined by the City of Chicago.
A careful review of well-established antitrust principles, and a most basic understanding of the economics of the airline industry, reveals that the SOC's allegations of misconduct are entirely misguided. SOC asserts that the establishment and maintenance of hub-and-spoke systems serves as evidence of unlawful market allocation. SOC thus argues that the major carriers' efforts to create efficient networks (economies of scope) that allow them to increase load factors (economies of scale) and thereby decrease costs and provide greater service is both inconsistent with the carriers unilateral business interests, and proves an anti-consumer conspiracy.
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Deputy Assistant Attorney General John M. Nannes of the Department of Justice Antitrust Division joined most others in reaching the opposite view when he testified last week testified before this Committee that hub locations today result from competitive battles and not from agreements to allocate markets. The fact is, moreover, that slot sales in Chicago to American and United have been the subject of close scrutiny by the Department of Justice, which has never concluded that the they were other than justified by increases in the efficiency of the operations of the hub carriers purchasing those slots.
In sum, the SOC would have you believe that the major carriers' competitive conduct, which is consistent with their unilateral business interests, proves an anticonsumer conspiracy. Not surprisingly, courts wisely have refused to permit conspiracies to be proven using evidence of such conduct, that is consistent with the alleged conspirators' unilateral business interests. To do otherwise would chill aggressive competition, and ultimately would harm consumers.
The SOC also asserts that the joint lobbying activities of carriers in opposing the construction of a third airport in the Chicago metropolitan area constitute an antitrust violation. Carriers, however, should be encouraged to present their views to governmental authorities concerning action that affects them. To do so is a hallmark of our democratic form of government. Lobbying activity, whether individual or joint, should not, and does not, run afoul of the nation's antitrust laws. This principle is embodied in the Noerr-Pennington doctrine. So fundamental is the right to petition and the need to keep channels of communication open with the government that the protection of Noerr-Pennington applies even in situations, unlike this one, where anticompetitive government action is being advocated.
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In letters written to two successive Illinois Governors, several carriers exercised their First Amendment rights to express their legitimate concerns regarding the construction of a third Chicago-area airport. It is my understanding that several carriers have conducted extensive economic analysis and have concluded that either splitting their operations between Peotone and O'Hare, or moving their operations to Peotone, would affect adversely the economics of their systems and result in financial losses. It appears, therefore, that the decisions of carriers to limit their operations to O'Hare and Midway—even if a third airport were built—would be consistent with each alleged conspirator's unilateral business interests. The SOC not only would condemn the carriers for presenting their views, but its assertion goes a step further, suggesting that these letters serve as evidence of an agreement among the carriers to boycott the third airport if it nonetheless is built. The plain language of the letters does not support such an accusation. It is important to note, moreover, that independent, economically motivated decisions of carriers to refrain from using a third airport in the Chicago metropolitan area, if built, cannot be used to prove an agreement among the major carriers to boycott the third airport. As with the decision of the airlines to construct hub and spoke systems, well-established principles of antitrust jurisprudence would not permit this ''evidence'' to be used as proof of a conspiracy.
Finally, it is important to note that the actions of the City of Chicago that are questioned by the SOC clearly are consistent with permissible conduct under the antitrust laws. The City's lobbying efforts against the construction of a third Chicago-area airport are protected under the Noerr-Pennington doctrine, which extends the antitrust immunity for government petitioning to municipal corporations.
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1. The SOC's allegations offer no basis for finding unlawful agreements to restrain competition in the airline industry. The SOC's ''evidence'' of conspiracy consists entirely of conduct that is consistent with each firm's unilateral business interests, and therefore would be given no weight by the courts.
The SOC alleges that major air carriers and governmental entities unlawfully have conspired to limit competition in the airline industry generally, and in the metropolitan Chicago area specifically. Perhaps most notably, the SOC claims that the seven major air carriers in the United States have engaged in per se illegal geographic market allocation on a national scale. Specifically, the SOC alleges that there exists a ''de facto agreement among the Big Seven to stay out of each other's Fortress Hub markets. . . .''(see footnote 114) Unable to provide any direct evidence of this conspiracy, the SOC simply argues that the establishment and maintenance of efficiently run hub-and-spoke networks by the major carriers and the resulting absence of overlap (for the most part) among the major carriers' hub operations prove that this conspiracy exits.
The SOC next claims that ''the metropolitan Chicago market [serves] as a case study of the Big Seven's de facto arrangement not to compete with their fellow major airlines in each other's Fortress Hub cities.''(see footnote 115) Specifically, the SOC asserts that several major carriers have agreed to refrain from competing with United Airlines and American Airlines in the Chicago metropolitan area. Again, the SOC provides no direct evidence of this conspiracy, but instead asserts that the existence of the conspiracy may be inferred from ''the de facto abandonment by members of the Big Seven (other than United and American) of any significant role at O'Hare Airport,''(see footnote 116) and several carriers' opposition to the construction of a third airport in the Chicago area.
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The SOC claims that these alleged conspiracies violate Section 1 of the Sherman Act, which prohibits any ''contract, combination . . . or conspiracy'' that unreasonably restrains trade.(see footnote 117) It is important to note that, by definition, Sherman Act Section 1 reaches only concerted action and not unilateral conduct.(see footnote 118) Before the claims made by the SOC regarding market allocation conspiracies properly can be given credence, there must be a showing that the major carriers have acted in concert. The evidence offered by the SOC as proof of that concerted action would not be given any credence by the courts, and should not be given credence by this Committee.
It is certainly true, as the SOC has observed, that the existence of concerted action may be established by either direct or circumstantial evidence.(see footnote 119) Recognizing that direct evidence of an express agreement is rarely available,(see footnote 120) courts permit plaintiffs to establish concerted action by inferences drawn from the parties' course of conduct or from other circumstances suggestive of a conspiracy.(see footnote 121)
What the SOC fails to mention, however, is that courts have a long-established tradition of examining circumstantial evidence carefully before permitting it to be used as proof of a conspiracy. In Monsanto Co. v. Spray-Rite Serv. Corp.,(see footnote 122) the Supreme Court enunciated the basic test that lower courts must apply when determining whether an unlawful agreement exists: ''The correct standard is that there must be evidence that tends to exclude the possibility of independent action by the [alleged participants].''(see footnote 123) In other words, not only must the circumstantial evidence presented suggest a conspiracy, but also rule out the likelihood that the alleged participants acted independently. The Supreme Court elaborated on Monsanto in Matsushita Elec. Industrial Co. v. Zenith Radio Corp.,(see footnote 124) holding that ''antitrust law limits the range of possible inferences from ambiguous evidence in a §1 case. . . . [C]onduct as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of conspiracy.''(see footnote 125)
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The lower courts have carefully followed Monsanto and Matsushita. First, when the only plausible inference from the evidence is that the alleged participants engaged in lawful business conduct, an inference of concerted action is improper as a matter of law.(see footnote 126) Second, when the only plausible inference is that the alleged participants engaged in acts that are inconsistent with independent business activity, then an inference of conspiracy may be drawn.(see footnote 127) Third, when the evidence is ambiguous—when it permits equally plausible inferences that the alleged participants acted collectively or independently—Monsanto and Matsushita hold that an inference of conspiracy is improper as a matter of law.(see footnote 128) Thus, it is incumbent upon a plaintiff to provide probative evidence that tends to rule out the possibility that the alleged participants acted independently. Only then does the law permit one to draw an inference of unlawful concerted action.(see footnote 129)
These principles were recently applied by Chief Judge Posner in the Brand Name Prescription Drugs Antitrust Litigation.(see footnote 130) There, retail pharmacies brought suit under Sherman Act Section 1 against manufacturers and wholesalers of brand-name prescription drugs, alleging that the defendants had conspired to deny discounts to pharmacies and had engaged in price-fixing. In affirming the district court's judgment as a matter of law for defendants with respect to certain of the plaintiffs' claims, Chief Judge Posner determined that it was incumbent upon plaintiffs ''to present economic evidence that would show that the hypothesis of collusive action was more plausible than that of individual action.''(see footnote 131) In addition, Chief Judge Posner added that ''plaintiffs have the burden of rebutting . . . the hypothesis of individual maximizing action.''(see footnote 132)
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In many cases, allegations of concerted action among competitors have been based on a pattern of uniform business conduct such as pricing or, as the SOC alleges, geographic market allocation. This type of alleged behavior, often referred to as ''conscious parallelism,'' exists when a plaintiff demonstrates ''(1) that the defendants' behavior was parallel; [and] (2) that the defendants were conscious of each other's conduct and that this awareness was an element in their decision-making process.''(see footnote 133) The SOC appears to assert that the establishment of a Sherman Act Section 1 violation requires nothing more than the production of evidence regarding common business actions by the alleged conspirators. In fact, the Supreme Court has long held that evidence of conscious parallelism alone will not support a finding of concerted action.(see footnote 134)
In Theatre Enterprises, the Supreme Court affirmed a verdict for the defendants, motion picture distributors that had refused to grant the plaintiff the right to show first-run movies in its suburban theater. The Court reasoned that the defendant distributors had explained the business considerations that led each of them, independently, to conclude that the plaintiff's request for access to first-run features should be denied. Declining to infer a conspiracy, the Supreme Court noted that ''[c]ircumstantial evidence of consciously parallel behavior may have made heavy inroads into traditional judicial attitude toward conspiracy; but 'conscious parallelism' has not read conspiracy out of the Sherman Act entirely.''(see footnote 135)
Lower courts consistently have required a plaintiff seeking to establish the existence of an unlawful agreement to present additional facts and circumstances—termed ''plus factors''—that, together with conscious parallelism, tend to exclude the possibility of independent behavior under Monsanto and Matsushita.(see footnote 136) Perhaps the most important plus factors are those that tend to show that the conduct at issue would be in the alleged conspirators' self-interest if all acted in the same way, but would be contrary to their self-interest if they acted independently.(see footnote 137) Thus, courts frequently examine whether each alleged participant had a rational business justification for its conduct. According to the Matsushita Court, for example, ''if [the alleged participants'] conduct is consistent with other, equally plausible explanations, the conduct does not give rise to an inference of conspiracy.''(see footnote 138) In a similar vein, some courts ask whether the conduct at issue would have worked to the disadvantage of each alleged participant had there been no agreement. Where the conduct in question is in each defendant's independent best interests, no finding of conspiracy will be made.(see footnote 139) In contrast, evidence of the mere opportunity to conspire through correspondence, meetings or other communications generally has received very little weight from courts as a plus factor.(see footnote 140) In fact, even a detailed showing of the opportunity to conspire, by itself, has been found insufficient to infer a conspiracy from otherwise legitimate business activity.(see footnote 141)
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As noted above, the SOC has not provided any direct evidence of the alleged conspiracies and instead argues that inferences of these conspiracies should be drawn from the conduct of the major carriers. The conduct identified by the SOC as supporting inferences of concerted action include the major carriers' establishment and maintenance of hub-and-spoke systems, the failure of major carriers (with the exception of United Airlines and American Airlines at O'Hare) to operate hubs in cities where competitors already have hubs, and the purported refusal of the major carriers to use a third airport in the Chicago area if it is built. Each of these categories of conduct is consistent with the business interests of each independent carrier. An application of well-established antitrust principles would require courts to disregard this ''evidence,'' and I submit that this Committee should do the same.
The first category of conduct employed by the SOC as justifying the inference of an unlawful conspiracy to restrain competition in the airline industry concerns the establishment and maintenance of hub-and-spoke systems by the major carriers. A significant body of economic literature reveals that the use of hub-and-spoke networks, as opposed to the point-to-point route structures widely employed prior to the deregulation of the airline industry in 1978, generates lower costs and other benefits for the major carriers. For example, studies have revealed that carriers operating large hubs have, on average, significantly lower marginal costs than their competitors serving the same routes out of those hubs.(see footnote 142) Other studies have demonstrated that funneling passengers through hub airports increases traffic densities and allows carriers to reduce their costs.(see footnote 143)
These findings were echoed in the testimony of the General Counsel of the U.S. Department of Transportation, Nancy E. McFadden, who testified before this Committee last week. She observed that hub-and-spoke networks evolved following deregulation in 1978 as carriers attempted to meet market demands and improve their efficiency. Her written submission to this Committee states that ''[h]ub-and-spoke systems enable airlines to serve the maximum number of city-pair markets with a minimum number of airplanes and to maximize traffic flow by consolidating connecting passengers with different destinations on each flight.''(see footnote 144) Given the widely acknowledged benefits that hub-and-spoke systems generate for their operators, the establishment and maintenance of these systems cannot be used as the basis from which to infer the existence of concerted action among the major carriers.
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Significantly, Deputy Assistant Attorney General for Antitrust John M. Nannes testified before this Committee on June 14, 2000 that hub locations as they exist today result from competitive battles among airlines and not from agreements to allocate markets. The testimony of Ms. McFadden also addresses this issue, noting that
The Suburban O'Hare Commission report rightly notes that airlines are reluctant to compete at the hubs operated by other airlines. In our view this results from the competitive advantages created for the hubbing airline by its operation of many more flights and service to many more destinations than other airlines and the high cost that any other airline would incur in establishing a competing hub at the same airport.(see footnote 145)
These comments indicate that carriers have battled for their hub locations and have reached an equilibrium in which it is generally consistent with each individual carrier's independent interest to refrain from attempting to operate a hub in a city that already serves as a hub for another carrier. This course of conduct, therefore, cannot provide the necessary inference of concerted action.
The final category of conduct identified by the SOC as purportedly justifying the inference of an unlawful conspiracy among the major carriers concerns the allegedly concerted refusal of the major carriers to use a third major airport in the Chicago metropolitan area if it is built. The SOC states that this conspiracy is manifested in a January 17, 1995 letter to the then-Governor of Illinois James Edgar, in which the CEOs of sixteen airlines ''express[ed] . . . concerns about further planning and development of the so-called Third Chicago Airport.'' According to its plain language, the letter's purpose was to inform the Governor that ''the airlines oppose further planning and construction of this facility.'' Several airlines sent a nearly identical letter to Illinois Governor George Ryan in April 1999. Although these letters say nothing about whether the airlines would use the third airport if it were built, the SOC inexplicably claims that they do, stating that ''[i]n those letters . . . the major airlines tell the Illinois Governor that they will refuse to use the proposed new metropolitan Chicago airport.(see footnote 146) The SOC attempts to excuse its mischaracterization of the letters on the basis that, ''in the popular jargon of the media,'' the airlines' position has been characterized as, ''If you build it, we won't come.''(see footnote 147)
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As explained more fully in the following section, the joint lobbying activities of the carriers in opposition to the construction of a third airport in the Chicago metropolitan area clearly are protected under the Noerr-Pennington doctrine as an exercise of their First Amendment rights. The SOC does not stop here, however, but attempts to use this lawful lobbying activity to argue that the carriers have agreed to boycott the third airport if built. This characterization of the carriers' conduct finds no support in the evidence proffered by the SOC.
It is important to note, moreover, that the economically motivated future decisions of independent carriers to refrain from using a third airport in the Chicago area cannot support inferences of a conspiracy among major carriers to boycott the third airport. It is my understanding, for example, that several carriers have conducted extensive economic analysis and have concluded that either splitting their operations between Peotone and O'Hare, or moving their operations to Peotone, would result in financial losses. It appears, therefore, that the decisions of carriers to limit their operations to O'Hare and Midway—even if a third airport were built—would be consistent with each alleged conspirator's unilateral business interests.
2. The Noerr-Pennington doctrine shields from antitrust scrutiny the only joint activity in which the airlines and the City of Chicago have engaged—the lawful petitioning of government.
The SOC claims that several major airlines have entered into a collective refusal to compete in the metropolitan Chicago market for passenger air travel. According to the SOC, this alleged agreement is evidenced by the hub-and-spoke operations independently employed by each major airline, and by ''the announcement by the Big Seven and its allies in the Air Transport Association that they would refuse to use a new South Suburban Regional Airport,''(see footnote 148) in their letters to two Illinois governors. The SOC also attempts to implicate the City of Chicago by pointing to its lobbying efforts against the construction of a third airport in the Chicago area. Thus far, I have focused on why the SOC cannot build its case on the carriers' unilateral pursuit of the efficiencies generated by the hub-and-spoke system. Let us turn now to a discussion of why the SOC cannot build its case on the lobbying activities of the carriers and the City of Chicago.
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The right to petition government for redress is a bedrock principle of First Amendment jurisprudence. The Framers recognized that a representative democracy, such as ours, depends on citizen input for its legitimacy and efficacy. In light of these maxims, the Supreme Court refused, nearly forty years ago in Noerr,(see footnote 149) to interpret the Sherman Antitrust Act such that it might encroach upon constitutionally protected rights or ''substantially impair'' the functioning of our democracy.
In Noerr, railroads, as one element of their attack against long-haul truckers, carried out a massive lobbying campaign designed to secure the passage of legislation harmful to the truckers and to prevent the enactment of legislation that would increase competition between the trucking and railroad industries. The trucking firms responded by charging that the railroads had conspired to restrain and monopolize trade in the long-haul freight industry in violation of the Sherman Act. In a unanimous opinion, the Supreme Court held that because ''the railroads were making a genuine effort to influence legislation and law enforcement practices,'' their conduct enjoyed absolute antitrust immunity, regardless of its anticompetitive purpose and effect.(see footnote 150)
Four years later in Pennington, the Court extended Noerr immunity to efforts to influence executive action.(see footnote 151) Certain large coal operators allegedly conspired with the UMW to eliminate small coal companies from the market. They collaborated to persuade the Secretary of Labor to establish higher minimum wages for workers supplying coal to the Tennessee Valley Authority and to induce the TVA to reduce its spot market purchases. The Court held that the plaintiff could not build its Sherman Act case on the defendants' efforts to influence the Secretary of Labor or the TVA to take particular actions, either standing alone or as part of a conspiracy involving non-petitioning activities.(see footnote 152)
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The letters written by the airlines' CEOs fall squarely within the protections of the Noerr-Pennington doctrine. They suggest only that the airlines agreed to petition the Governor of Illinois, asking him not to support the construction of a third airport in Chicago. They do not constitute, as the SOC asserts, a conspiracy to refuse to use a third airport if built. The SOC, therefore, cannot build an antitrust case against the airlines based on these letters or any other legitimate petitioning activity.
The cases cited by SOC do not help its cause. Trial Lawyers(see footnote 153) and its progeny stand for the proposition that Noerr-Pennington does not immunize private anticompetitive conduct used as a means of procuring government action. The Trial Lawyers Court ruled that it was illegal per se for a group of District of Columbia lawyers to agree not to represent indigent criminal defendants, until the D.C. Council increased the fees for such work. The Court explained:
[I]n the Noerr case the alleged restraint of trade was the intended consequence of public action; in this case the boycott was the means by which respondents sought to obtain favorable legislation. . . . In Noerr, the desired legislation would have created the restraint on the truckers' competition; in this case the emergency legislative response to the boycott put an end to the restraint.(see footnote 154)
Trial Lawyers and its progeny would have no bearing on a claim of Noerr immunity by the airlines for their legitimate joint petitioning efforts. The plain language of their 1995 and 1999 letters to Governors Edgar and Ryan shows that the airlines agreed to petition the government not to build a third Chicago airport. The SOC's unsupported allegations notwithstanding, there is no evidence that the airlines agreed not to use a third Chicago airport in order to influence Illinois not to build it in the first instance. Thus, like the facts in Noerr, a third Chicago airport has not yet been built as a consequence of government inaction, and, unlike Trial Lawyers, the airlines agreed only to petition government, not to restrain trade as a means of obtaining a favorable decision by the government.
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The SOC also suggests several times that there might be something sinister about the airlines' lobbying efforts because the City of Chicago might have been involved. It would make no legal difference if the City of Chicago were involved in the airlines' petitioning efforts. As many federal courts have recognized, ''[a] municipal corporation, like any corporation, is protected under the First Amendment in the same manner as an individual[, and t]he right to petition [government] is a basic First Amendment right.''(see footnote 155) The City's petitioning activity thus, likewise, would be cloaked in Noerr immunity.
The Noerr-Pennington doctrine does not only shield the airlines' and the City of Chicago's petitioning efforts from antitrust scrutiny. It strongly suggests that a federal court should not even admit evidence of this activity in an antitrust action. Fearful of chilling petitioning activity that is protected by the First Amendment, courts typically are quite wary of admitting such evidence, sometimes treating it as ''presumptively prejudicial.''(see footnote 156) Courts are especially reluctant to admit evidence of petitioning activity where, as here, it is the plaintiff's only direct evidence of an agreement.(see footnote 157)
3. Although it is not clear from SOC's vague allegations that the state action doctrine needs to be addressed , that doctrine would also shield a wide range of the City of Chicago's and the airlines' conduct from antitrust challenge.
In addition to challenging (1) the hub-and-spoke system and (2) the airlines' and City of Chicago's Noerr-protected activities, the SOC (3) makes vague, conclusory allegations that the City has ''participat[ed] in a monopoly'' through conduct other than legitimate government petitioning.(see footnote 158) Vague allegations, by their nature, are difficult to dispute. A more useful exercise, therefore, might be to clarify what conduct would be shielded by the state action doctrine if the SOC, or any other plaintiff, were to challenge it directly.
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In our federal system of government, the states are sovereign. Congress may encroach upon state sovereignty only when the Constitution permits. In 1943, in Parker v. Brown,(see footnote 159) the Supreme Court addressed the issue of whether Congress implicitly intended the Sherman Act to prohibit state-directed activities that might harm consumers. The Court refused to attribute such an intention to Congress, holding that restraints of trade or monopolies imposed by state governments are immune from antitrust scrutiny.(see footnote 160)
State action immunity is available to municipalities where the challenged conduct is undertaken pursuant to a ''clearly articulated'' and ''affirmatively expressed'' state policy.(see footnote 161) The state need not specifically authorize conduct with anticompetitive effects. It is sufficient that anticompetitive effects are a ''foreseeable result'' of engaging in the authorized activity.(see footnote 162)
Illinois has a clearly articulated state policy replacing competition with regulation with respect to the operation of airports and related services. Illinois granted municipalities the authority to establish and operate airports.(see footnote 163) To facilitate their exercise of this authority, Illinois granted broad powers to municipalities, including the power:
(1) to operate any public airport, buildings, structures or facilities relating thereto and to charge and collect rents, rates or other compensation for any use thereof or for any service rendered by the municipality in the operation thereof . . .;
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(2) to let to, or enter into any operating agreement with, any person for operation and maintenance of any public airport . . .;
(3) to let to any person, or grant concessions or privileges in, any land adjoining the landing field or any building or structure on such land for the shelter, servicing, manufacturing and repair of aircraft, aircraft parts and accessories, for receiving and discharging passengers and cargo, and for the accommodation of the public at such airport; [and]
(4) to regulate the use of such airports, the navigation of aircraft over such airports and the approach of aircraft and their take-off from such airports.(see footnote 164)
Moreover, it is the express policy of Illinois that state action immunity ''be fully available to all municipalities . . . to the extent they are exercising authority'' granted by the Illinois Constitution or Illinois Code.(see footnote 165) Because these and other statutory grants clearly authorize Chicago to establish, operate and regulate airports, the state action doctrine would shield any exercise of these powers from antitrust scrutiny.(see footnote 166)
To understand the breadth of authority Illinois has bestowed upon the City of Chicago, and other municipalities, it might help to look at a case decided by the federal district court in the Northern District of Illinois, Mustfov v. Rice.(see footnote 167) In this case, the plaintiffs, a group of livery and taxicab drivers and a limousine service company, launched Sherman Act challenges to various aspects of Chicago's regulation of taxicabs at O'Hare and Midway airports. In particular, the plaintiffs attacked an arrangement between the City and Continental Transport Bus Company and Airways Rental, which allowed only those two companies to solicit travelers as they arrive at O'Hare. Chicago argued and the district court agreed that Illinois has granted it broad authority to regulate the provision of taxicab services to travelers arriving at its airports.
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[We] conclu[de] [1] that §11–102–5(3) authorizes the City to grant exclusive contracts for transportation at the airports, and [2] that the City may choose to grant those privileges to a small number of parties was completely foreseeable.(see footnote 168)
Hence, the City successfully demonstrated that its challenged conduct was authorized by a ''clearly articulated'' and ''affirmatively expressed'' state policy of replacing competition with regulation.
To this point, only the City of Chicago's protections under the state action doctrine have been addressed. If the SOC were to expand, or clarify, its allegations against the airlines, they too might be cloaked with state action immunity. State action immunity is available to private parties when their conduct, in addition to being pursuant to a ''clearly articulated'' and ''affirmatively expressed'' state policy, is ''actively supervised'' by the state.(see footnote 169) A state ''actively supervises private conduct when it ''has played a substantial role in determining the specifics of the economic policy.''(see footnote 170)
I hope that my review of these fundamental principles of antitrust law has revealed the mistaken assumptions and principles upon which rest the allegations of the SOC with respect to anticompetitive conduct in the airline industry. I would be pleased to answer any questions you may have.
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Mr. HYDE. Well, that is an interesting charge, rule 11. I want to apologize for having to leave the room. We had a matter on the floor that I had to be involved in, so it wasn't any lack of interest, believe me, in what you are saying. I have so many questions, I am going to probably end up having to send you all a letter with the questions spelled out. But meanwhile I will ask some.
A press release from the city of Chicago, June 14th, said that this is an effort to shut down the economic engine that is O'Hare. I can assure you, on my part, that I celebrate O'Hare Field. I live where I live to be close to O'Hare Field. I fly out of O'Hare—yesterday I flew out twice. I went back home and came back the same day. So I am not trying to stop the engine.
I am concerned about the people who live around O'Hare. I am concerned that there will be a third airport and it will be at O'Hare. I am concerned that you are going to enlarge it, and enlarge it because you can't handle the traffic that wants to come in there and is going to come in there in the next 10–15 years. And I am just concerned for the quality of life, for safety, for pollution, and for noise for kids going to school.
And we have an honest disagreement. You have something going there that is good and great. We want it to be good and great, but we want consideration for suburban communities, too. And the notion that suggesting there has been a division, a dividing up of the geographical areas for hubs, that may raise the specter of rule 11 to you, but I am seeing a terrific billiard game whereby Minneapolis and Detroit get Northwest and Charlotte gets US Airways and Atlanta gets Delta and Minneapolis gets Northwest and Chicago gets American and United.
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It is just the luck of the draw that some places have the exclusive rights with nobody really seriously competing with them, and others not. I think it raises questions anyway.
Now, as we all know there is litigation going on in DuPage County, and Mr. Rill has suggested that the contentions embodied in the report of the Suburban O'Hare Commission border on misconduct—illegal misconduct.
Okay. The lawsuit out in DuPage has to do with whether or not the city of Chicago has plans to expand in some considerable measure O'Hare Field, and Mr. Quinn has said there isn't a shred of evidence to support—and those are his words—to support those allegations as well as the dividing up of cities for various hubs to be the preserve of individual airlines.
If you really believe that, then you would have no objection, I take it, to asking the judge—joining the plaintiffs in asking the judge to release the evidence that she has put under seal. Is that true, Mr. Quinn?
Mr. QUINN. Well, first of all, Mr. Chairman, let me just say I am sorry if we have not recognized your affection for O'Hare. Sometimes it feels like tough love, and we are as interested as you are in the safety, efficiency and quality of life issues and environmental issues.
Mr. HYDE. I risk my life every weekend at O'Hare. I want soft landings there.
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Mr. QUINN. As you know, Mr. Chairman, I grew up on the border in Des Plaines and O'Hare, and I recognize the quality-of-life issues. I think Commissioner Walker testified to that.
With regard to the pending litigation, obviously the plaintiffs' lawyer is sitting in a cherished spot here. We generally do not want to get into the merits of pending litigation. The judge has entered an order earlier this month, I believe in large part because she believed that plaintiffs' counsel was trying to try his case in the media. We don't see any reason right now to disturb that ruling, but I will be happy to take that request back to my client and talk to them.
Mr. HYDE. Okay. Now, of the total universe of total flights, and total enplanements out of O'Hare, what are the numbers and percentage of flights and enplanements that are United or American, or their affiliates United Express or American Eagle? Could you tell me, Mr. Quinn or Commissioner Walker?
Mr. WALKER. I don't have those exact statistics with me this morning, Mr. Chairman, but we would be happy to get you those numbers.
Mr. HYDE. All right. Also, of the total domestic flights and enplanements out of O'Hare, what of the numbers and percentage of flights and enplanements are United or American or their affiliates, and the breakdown on the remainder?
I will submit a letter to you so you don't even have to take notes, but I am just telling you now what I am interested in.
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Mr. WALKER. We will be happy to get that information to you.
Mr. HYDE. Very good.
[The information referred to follows:]
Mr. HYDE. Has Chicago—this is to anybody—prepared a demand forecast for the year 2005, 2010, 2015, 2020? Have you made a forecast as to what the demand is going to be?
Mr. WALKER. What we have done is done a capacity projection through the year 2012. And as you know, Mr. Chairman, we have moved forward on a plan to improve the terminal facilities, to enlarge the number of gates and to improve the land site infrastructure based on those projections. We believe that we have a current capacity to serve the needs projected through the year 2012. So we have, in fact, done that.
Mr. HYDE. Good. I believe there is going to be a tremendous influx of transfer traffic, additional traffic, and I believe northern Illinois ought to get its share. It ought not to go to Dallas or St. Louis or Minneapolis or Milwaukee or some other place. I believe a third airport is inevitable. If it were to be built within the confines of the city of Chicago, we would all be for it, but because it can't be, for environmental reasons and other reasons, it becomes anathema; it becomes the enemy of a healthy O'Hare and a Midway, which is just not so.
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But I think the so-called vision thing ought to apply with airport planning and capacity planning, and we ought to be thinking 15, 20 years ahead acquiring property, having environmental buffers and something that can expand, because it is going to happen. We may even live to see it happen, but the resistance to this notion is legendary.
Now, Mr. Baker, you said new airports have much higher operating costs than older established airports. What is the cost going to be of the World Gateway and the new runways at O'Hare, and how do they compare to the costs of the new airport?
Mr. BAKER. I am not familiar with the detailed costs of a new runway. There are several possible configurations of that runway or runways that carry different costs, but, in general, new runways, jet-capable runways, at airports are in the hundreds of millions of dollars apiece, and that certainly would add to the overhead costs or the capital investment that must be recovered through landing fees and so forth at O'Hare. So we would expect to see an increase to pay back those funds.
Mr. HYDE. And what did you say the world gateway is going to cost in those new runways?
Mr. WALKER. If I may, Mr. Chairman, I think there is a little confusion here. The World Gateway program that we plan to move forward on does not include any runways. These are only terminal facilities, gates, land site improvements, taxiways, aprons, those sorts of thing. No runways are included in the World Gateway plan. But that is about a $3 billion program that we have projected.
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We have not yet, however, done extensions of rates and charges to determine what those would be post-completion of that project, but the budget at this point, and it is a very rough budget at this point, is about $3 billion.
Mr. HYDE. Commissioner, are there currently enough gates at O'Hare to satisfy all new entrants? In other words, are gates available to new entrants at the same rate as gates provided to United and American?
Mr. WALKER. There are approximately 21 common-use gates at terminal T5, the international terminal, and these gates were provided under a common-use scenario, and those we are, in fact, making available to the new carriers that are taking advantage of the 30 slots that are being provided. There are five new carriers coming into the market. We will be able to accommodate them. We have already met with two of those carriers. Both National and Spirit we have already had meetings with. Sun Country is scheduled for next week. We are already accommodating America West and Mesa currently within the core area.
So we have gates available. We intend to make them available, and we are sure we will be able to accommodate all of these new carriers at O'Hare.
Mr. HYDE. That is very interesting.
Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
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I was sitting here trying to recall whether I had ever flown into or out of O'Hare, and I don't think I have, so I obviously didn't stay here for the purpose of asking more about O'Hare, although it is very interesting.
There is another part to this hearing that other folks have been kind of delving into, and it has to do with the proposed merger between US Airways and United.
I am from Charlotte, and we are happy to have the US Airways hub. It is a similar kind of relationship to the one you described, a tough love relationship, and it did not go unnoticed by me, Mr. Quinn, that the bar graph that you put up there, if you could ask your person to retrieve that, indicated that Charlotte had the second highest average airfares. Is that in the Nation, in the world, in the universe?
Mr. QUINN. I certainly didn't study the universe, Congressman.
Charlotte has been blessed with a hub with US Airways. Traditionally, the Department of Transportation, the General Accounting Office, other studies have shown that at single-carrier hub-dominated airports, there is a so-called supracompetitive pricing premium associated with that. There are many benefits, obviously, the travelers get for that price premium, but Charlotte is usually at the upper end.
Mr. WATT. Would you just give me that bar graph again? I can't read that one. The bar graph is a lot more graphic to me.
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Mr. QUINN. On the more detailed one that is more difficult to read, Congressman, Charlotte's average fare indicated by the third quarter DOT 1999 is $241.
Mr. WATT. I am not interested in the dollar figure. I am just interested in the relative rank and the reason for that. I think you have hit that pretty aggressively about the reason for that is that there is no competition.
Somebody said, I think it was Mr. Baker, airfares are clear evidence of competition. Wasn't that Mr. Baker that said that?
Mr. BAKER. Yes.
Mr. WATT. So I take it that the higher the airfares, the more likely it is to be an indication that there is not much competition going on there; is that right?
Mr. Quinn, Mr. Baker, whoever made the statement?
Mr. BAKER. I think you have to look at each market and understand the marketplace in terms of traveling.
Mr. WATT. I am looking at the Charlotte market, Mr. Baker, and I guess where I am trying to get to is do you see—you all see anything in this proposed merger that is going to improve the cost of airline services to my constituents in Charlotte, North Carolina, in and around Charlotte, North Carolina?
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Mr. BAKER. That is far more detailed than I am equipped to answer. We haven't looked at the merger from that kind of perspective.
Mr. WATT. Do you all have a position on the proposed merger?
Mr. BAKER. We do not.
Mr. WATT. Does anybody at this table have a position on the proposed merger?
Mr. WALKER. We have not formed a final position.
Mr. WATT. I am not trying to require you to do it. A yes or no answer is sufficient. If you don't have one, that is fine.
I take it that what you were arguing to Mr. Hyde was that Chicago has lower airfares because there are a number of airlines that fly into and out of O'Hare and/or Midway. You listed, what, six or seven different possibilities for—one, two, three, four, five—five different possibilities for a person trying to get to the Washington area.
Mr. QUINN. Those are just nonstop, Congressman. If you add connecting and direct, it adds another multitude there.
Mr. WATT. I understand that. Nonstop.
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Would it be fair for me to conclude, Mr. Baker, since you say airfares are clear evidence of competition, that if four of these five airlines that are listed on that chart, the Washington-O'Hare chart, four of those five airlines were not out there, that airfares would be higher between Chicago O'Hare and Washington?
Mr. BAKER. Well, clearly competition, but it comes in several forms, not just nonstop services. Clearly it will have an effect on fares.
Let me give you a statistic that I think is quite telling about Chicago, and I think you would find this true at other large hubs as well.
If you stage-length adjust our yields, American's yields, that is how many dollars per passenger mile do we achieve, those yields are a full 5 percent less than the rest of American's domestic system. That suggests to me——
Mr. WATT. At your hub, you mean?
Mr. BAKER. If you take all the passengers that come to and from and through Chicago, look at all of their tickets, equate them on a stage-length-adjusted basis, those yields—that is our measure of revenue per unit of carriage—are a full 5 percent less than the rest of American's domestic system. I suspect that other carriers see similar results where they are involved in large hub operations.
Mr. WATT. But why would then—why would the hub cost—the cost of flying into and out of a hub under those circumstances, I would surmise, would be lower. I mean, I enjoy the benefit of flying into the US Airways hub in Charlotte. I live in Charlotte. By the time I get home, some of my colleagues who fly into and out of Charlotte are just getting to the next gate. So it is a wonderful thing. But there is not a single one of those people who pays as much money as I do to get to their ultimate destination, whether it is Alabama, Tennessee, South Carolina. Wherever they are going, they pay less than I do—now explain that—to get to their destination, and I am at home before them.
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Now, explain that to me. How can that be?
Mr. BAKER. Well, I think both in the first panel and earlier in this one, the notion that for the local traffic into and out of the hub cities, there is a service premium.
Mr. WATT. Why?
Mr. BAKER. Because——
Mr. WATT. I mean, you just sat here and told me, I thought, that your costs were lower in the hub.
Mr. BAKER. No, our revenue achievement is lower; not our costs. I believe that the reason that that occurs is because of the higher frequency of service that commands the higher price in the local market.
As somebody indicated, and they demonstrated a market this morning, a typical local market had nine departures, when if you evaluated the demand only of the local market, it might justify only four departures. So those service premiums——
Mr. WATT. So I am subsidizing inefficiency is what you are saying?
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Mr. BAKER. No, no, I don't believe so. But you are paying a premium for having the availability of much more frequency than that local market would otherwise justify.
Mr. WATT. So if I were prepared to accept four flights a day between Charlotte and National as opposed to having nine flights a day, some of which might be underutilized, underpassengered, if that is a word, then my costs would be lower?
Mr. BAKER. If there were no hub at Charlotte, and a carrier from point A to Charlotte were only trying to evaluate how many schedules and at what price they would offer in that market, you would have fewer departures in just a local Charlotte market.
One statistic that is generally true in large hubs: If you take all of the people that get on airplanes at a hub, 70 percent of those people are connecting from somewhere else, and 30 percent came from the local market.
Mr. WATT. I understand that, but what I can't understand is why those people who are connecting from other places pay less money to get to their destination than I do when they are flying a lot further distances than I am.
I have asked that question of Mr. Wolf, I have asked it of a number of people, and still nobody has told me, other than that in the hub you just have to expect to have a higher fare because—and as I understand it, in the hub—in my case, there is just a monopoly.
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Mr. BAKER. And your colleagues going beyond to, say, Birmingham, have multiple ways to get there over multiple carriers' hubs that all compete with each other. So on a stage-length-adjusted basis, those fares are going to be lower, and part of it is this local premium.
Mr. WATT. Thank you, Mr. Chairman.
Mr. HYDE. Well, I would like to ask the gentleman if he would yield?
Mr. WATT. Yes, I would be happy to yield.
Mr. HYDE. I am trying to figure out the economics of what you are talking about, because I think it is a fascinating case study in competition and the absence of competition, and I, too, am trying to figure out why when you have more flights—I presume they are not altruistic or having these flights so that they amount to a nice round number. I assume they are profitable. Some days they are not, I suppose, but I thought the more economies of scale, the less the price should be, and apparently it is higher when they have more operations.
Mr. WATT. Mr. Chairman, that is because of the stage-adjusted rates—what was that term?
Mr. BAKER. Yes.
Mr. HYDE. I think you are paying a premium.
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Mr. WATT. I am joking.
Mr. HYDE. You are paying the premium because you are taking the flight to the hub terminal, and the fellow going on, he is being seduced with lower fares, although he is using the same equipment, occupying the same seat and gets off and maybe buys a hamburger.
Mr. WATT. He is using it twice.
Mr. HYDE. Well, the economics of airlines in scheduling are pretty interesting.
Anyway, thank you very much.
Mr. WATT. Thank you very much. I didn't mean to suggest that your O'Hare situation was not important. I think it is important, because what it does illustrate is how this whole thing works. O'Hare is blessed, it seems to me. If we had five different alternatives to get between Charlotte and——
Mr. HYDE. Try two.
Mr. WATT [continuing]. Or two alternatives to get between Charlotte and National Airport—which is why in the first panel I asked Mr. Johnson whether he was going to compete with US Air into and out of Charlotte. You know, if his low-cost carrier is going to provide competition to this United-merged airline, then presumably the price for a ticket to and from Washington National between Charlotte will be lower. If it doesn't, then the merged airline will be as much of a monopoly as US Airways is now, which is about 82 percent of the traffic into and out of Charlotte is US Airways.
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Mr. HYDE. Yes.
Mr. WATT. One hundred percent of the traffic into and out of Charlotte—between Charlotte and National is US Airways. There is no competition there. And so I believe that results in the U.S.—the taxpayer is paying more for my fare than somebody who comes through Charlotte, going just about anywhere, even as far away as Florida. People who come through Charlotte make a stop in Charlotte and go on to Florida, and that is a long, long way, pay less money to get to their destination than I do just to get to Charlotte.
Mr. HYDE. I wonder if it is illegal for you to buy a ticket to Florida and get off at Charlotte?
Mr. WATT. They have that covered. I can do it going, but if I buy a round-trip ticket, what will happen is when I come back to the airport in Charlotte, if I haven't used that leg from Florida back to Charlotte, then they have cancelled my flight from Charlotte to Washington.
So I guess I could—and if I did it one way, then I pay even more. Do you see what I am saying?
Mr. HYDE. Yes.
Mr. WATT. So they have it all connected up.
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Now, there is a bill that is pending in Congress that would make that illegal, and you might surmise that I am a cosponsor of it.
I yield back, Mr. Chairman. I appreciate it.
Mr. HYDE. Thank you.
Let me close this by thanking you all for being here and suggesting that there are questions that I will put in writing and solicit your response.
O'Hare is one of the best run airports, and I have been in airports all over the world, is one of the best run. It is courteous. The airlines, American and United, are courteous, and they handle people very well. My concern is that you cannot shoehorn too many more people and flights into O'Hare, and that we need to be expansive, that we need more facilities, more resources, and O'Hare is not the place for them. That is saturation. It is elsewhere. It doesn't have to be Peotone. It can be anywhere that the sky will absorb these planes.
But I am concerned about the mergers, as anybody would be; not just in the airline industry. In the banking industry and in other industries, where you have less and less and less competition.
If there is one rule of human conduct, it is that monopoly breeds indifference, and competition breeds customer satisfaction and better service. We have to be concerned about those things. It is part of our oversight responsibility. If we didn't, we wouldn't be doing our job as you are doing your job and doing it very well.
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Commissioner Walker, I welcome you after your first 8 months. I hope that it is 80 years and you are still there.
Mr. WALKER. Thank you, Mr. Chairman.
Mr. HYDE. Okay. But at a smaller, more efficient O'Hare.
Thank you very much, gentlemen. The meeting is adjourned.
[Whereupon, at 1:10 p.m., the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF HON. WILLIAM J. COYNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. Chairman, members of the Judiciary Committee, I commend you for holding this hearing on the proposed merger between United Airlines and USAirways.
I am very concerned about the proposed merger. I share Chairman Hyde's concerns about the impact of this merger on competition in the airline industry, and I think that the proposed merger deserves careful scrutiny from the Justice Department and the Department of Transportation. I have several other, broader concerns as well.
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I am concerned that USAirways employees be fairly treated in any such merger. That means no job losses, pay cuts, or benefit cuts for people who are currently USAirways employees.
I am also concerned about the impact that such a merger would have on people who fly into and out of Pittsburgh. I would oppose such a merger if it would reduce the quality of service, the number of available destinations, or the number of daily flights that United and USAirways currently provide at Pittsburgh International Airport.
In addition, I am concerned about the impact of the merger on the economy of southwestern Pennsylvania. The region's economy would be significantly damaged if the training and maintenance facilities that are currently located in Allegheny County be moved to another region. I would hope that United provide local governments with a strong assurance that those facilities would be kept in Allegheny County.
Mr. Chairman, in closing, let me thank the Committee for its efforts to focus the proper attention on the proposed United/USAirways merger.
PREPARED STATEMENT OF HON. JAMES T. WALSH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
I would like to express my strong reservations about the proposed merger of United Airlines and US Airways that will be discussed today here in the Judiciary Committee. While I am a strong proponent of economic growth and development, this recently announced merger could only have a detrimental impact on Central New York air service and our economy.
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Congress has already seen the result of what happened after we passed the Air Transportation Regulatory Reform Act in 1978 (PL 95–504). This law was enacted so that market forces in the airline industry could determine the quality of service, variety, and airline ticket prices of air services. We were told by the airline industry that deregulation would bring about greater competition, better service, and lower costs for the consumer. In many of our large, major urban centers this is exactly what happened; however, smaller urban areas haven't seen similar results. Many of these communities find themselves saddled with one dominant carrier and no competition resulting in extremely high airfares.
This recent merger is a prime example of anti-competitive tactics to reduce competition in the airline industry. One of the issues United has proposed to address these possible U.S. antitrust concerns is that United plans to sell operations here at Washington National Airport to BET Holdings, Inc. which will create a new airline called DC Air. Under the DC Air proposal, the number of flights from National Airport to Upstate New York will likely remain the same therefore continuing the combination of high rates, less competition, and less jet service which will in turn have a negative impact not only in the economic development of Syracuse and other neighboring cities but all of Upstate New York.
In my district alone, USAir already controls 42% of the travel market out of Syracuse Hancock International Airport. The combination of the two airlines would not only control about 27% of the U.S. market but over 50% of the travel market out of Syracuse, which already pays the fifteenth highest airfares in the nation. I cannot support a merger if increased travel costs, possible loss of service, and dismissal of longtime employees are part of the equation.
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I thank Chairman Hyde for the opportunity to express my interest in this matter.
| San Bernardino Associated Governments, |
| San Bernardino, CA, June 13, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: On behalf of the Board of Directors for the San Bernardino Associated Governments (SANBAG), the Transportation Commission and Council of Governments for San Bernardino County, I'm writing to inform you of our support for the testimony to be given before you committee on June 14th by the Honorable Mike Gordon, Mayor of the City of El Segundo.
San Bernardino County is home to three underutilized commercial airports (Southern California Logistics Airport, San Bernardino International Airport, and Ontario International Airport). As such, SANBAG is on record expressing grave concerns regarding the regional transportation, environmental, service, quality, safety and equity affects of the ''Fortress Hub'' represented by Los Angeles International Airport (LAX). In addition to concurring with Mayor Gordon's assessment of these impacts, we can confirm that the commercial aviation facilities in San Bernardino County, amidst the region's highest growth areas, remain underutilized, in part, because of the anti-competitive pricing and policies of LAX and the airlines.
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I appreciate your attention to this matter and applaud your committee's work on this vital issue. Please feel free to contact me should you have any questions regarding this or any other matter.
Sincerely,
| Norman R. King, SANBAG Executive Director. |
cc:
Honorable Mike Gordon, Mayor, City of El Segundo
David Turch, David Turch and Associates
TO ALL CONCERNED,
The acquisition of US Air by United Airlines raises some serious issues that need to be addressed. We are very disappointed that a deal of this magnitude was done without consulting the owners, which are the employees of United Airlines. Most of us heard of the acquisition through the media. We have no objection to company growth and we welcome all new hired abroad, but do not sacrifice us in the process.
The current employees concern is the seniority issue. We feel that OUR company has prospered because of the hard effort, devotion, and wage concessions that we have given the last six (6) years. Various task teams were organized throughout the ESOP and all were involved in solving various problems the company had. Much devotion and time was put in by the employees to make United Airlines the number one airline. As a result of our concessions throughout the last six (6) years, it helped United Airlines reach record number profits.
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We ask the company to seriously consider all the efforts your employees have devoted to this company. We feel that merging seniority will allow employees of United Air lines to be lowered in the ranks of the seniority list and allow employees of U.S. Air to reap the benefits that United Airlines employees produced. This was a buyout, not a merger.
Seniority determines layoff status, vacation bids, location of employment, shift preferences, lead bids, holiday preferences and travel benefits. It is unfair for United Airlines employees, who have brought this company to where it stands today to be asked once again to sacrifice their seniority and benefits. We were once asked to sacrifice our wages for job security, and we are now told to sacrifice our seniority for no job security. It simply does not make any sense.
We have heard Mr. Goodwin explain no furlough for two years, but what does this really mean? Look what happened to Grumman! If the economy takes a turn for the worst, it would be the original United Airlines employee/owners who will not pay the price if furlough takes place and non-owner employees will remain due to their seniority merging with ours. As we have seen in the past, many companies which have merged or been acquired by other companies, such as Chemical and Chase banks have resulted in job losses.
We strongly urge the company not to merge seniority, which may result in job losses in the future and/or relocation of United Airlines employees and secure jobs for acquired airline employees. We are also addressing this issue to law makers of our state and urge them to please use their influence on this issue which can seriously effect employees in each of their areas.
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Please remember, we helped build this home and now with proposed seniority merger, we may not have a home to come to.
Attached, please find a copy of an article regarding the United Airlines Pilots views on the seniority issues.
This letter was written on behalf of the Aircraft Technicians and shared with all the ESOP participants.
Sincerely,
| United Airlines |
| ESOP Participant Employees |
67330aa.eps
PREPARED STATEMENT OF HON. WILLIAM L. JENKINS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE
Mr. Chairman, I would like to thank you for scheduling this important hearing on the state of competition in the airline industry.
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In the First Congressional District of Tennessee, we are served by the Tri-Cities Regional Airport, an airport serving the citizens of Upper East Tennessee and Southwest Virginia. My focus on this hearing is to entertain new proposals that will bring new alternatives and cheaper fares for the constituents in this region.
Airports that serve smaller regions and communities, such as the Tri-Cities Regional Airport, face the problem of high fares and poor connections. Many citizens choose to drive long distances to other airports in order to avoid the higher fares charged at the local airport. From an economic standpoint this places Tri-Cities travelers at a significant disadvantage, and it places our region at a disadvantage when recruiting new business and investments.
Local officials and the airport commission have worked diligently for many years to improve air service. This work has been successful in many cases, bringing about improved service, additional destinations, and a new regional carrier. However, high fares continue to present a problem for the region.
On a number of occasions, the airport commission has communicated fare inequities to the airlines serving the Tri-Cities Airport. Unfortunately, the airlines have not been inclined to lower fares. This inequity will continue to present problems for East Tennessee.
Mr. Chairman, it appears that the current aviation marketplace in some ways adversely affects both large and small cities. Larger cities are finding their airports dominated by one airline controlling the ''hub,'' preventing competitors from having access to slots at the airport and dominating the fare structure to and from cities. Smaller cities suffer because their airports are the ''spokes'' of the current ''hub and spoke'' system. They are not large enough to attract and maintain low-fare carriers and are subject to the fares and destination offered by the major carriers.
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Since the Airline Deregulation Act of 1978, the aviation industry has become smaller and more concentrated. Many mergers and bankruptcies have occurred, essentially leaving us with seven major carriers. Pending mergers that have been discussed and announced will leave us with the potential of these numbers being cut in half. Airline fares are extremely high, particularly for fares that cannot be purchased in advance.
There are no easy answers to these problems. I appreciate having the opportunity to listen to the testimony of the witnesses. I look forward to working with the Congress, the federal agencies, and the airline industry to find solutions that will bring affordable, competitive choices to the First District of Tennessee and the rest of the nation.
COMMENTS OF AMERICA WEST AIRLINES, INC. ON PROPOSED ACQUISITION BY UNITED AIR LINES OF US AIRWAYS
America West Airlines, Inc. offers these comments in conjunction with the Committee's evaluation of the public interest impact on competition of the proposed merger between United Airlines and U.S. Airways and the sale of Washington Reagan National Airport slots to a proposed new airline DC Air. America West is very concerned that already serious competitive barriers, particularly at airports where United and U.S. Airways have dominant or strong positions, will only be exacerbated should the merger be approved in its proposed form.
For America West and other post deregulation carriers, government imposed or sanctioned competitive barriers including the perimeter rules at Reagan National and LaGuardia airports, continuing slot constraints at National, LaGuardia and Kennedy, and the unavailability of economically usable gates at many metropolitan airports including National, LaGuardia, Newark, Logan and O'Hare, make it virtually impossible for new post deregulation carriers to launch meaningful competition at these airports. America West appreciates the positive changes to the slot rules enacted by Air 21. However, the proposed merger highlights the immediate need, before any merger which contributes to these constraints goes forward, for more expansive Congressional action to induce badly needed new competition to key airports in the East and in Chicago.
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BACKGROUND
In 1977, Alfred Kahn, chairman of the Civil Aeronautics Board, noted that ''Whenever competition is feasible it is, for all its imperfections, superior to regulation as a means of serving the public interest.'' The following year, the Airline Deregulation Act was implemented, phasing out government control over fares and service. From that point on, Congress intended that market forces would dictate the price, quantity and quality of domestic air service. In the deregulated environment, consumers would reap the benefits of open competition in a free marketplace.
America West Airlines provides the model for post-deregulation success. It initiated service on Aug. 1, 1983, with three aircraft, 280 employees and a route system consisting of five destinations. As a small start-up carrier competing head-to-head against much larger and better-established airlines, its potential for success would be defined. by its ability to effectively distinguish itself from the competition and build a solid base of loyal customers. Today, America West, the nation's ninth largest commercial airline, is the only post deregulation airline to achieve major carrier status. It has established an effective marketing and operational niche as the only major network airline to offer a combination of full-service and low fares. Its customers enjoy the same full range of services provided by larger airlines, including advance seat assignments, First Class cabins in every aircraft, a competitive frequent-flyer program, an airport lounge club, electronic and online booking, onboard audiovisual entertainment systems and inflight meal service. America West's 1999 unit cost of 7.52 cents per available seat mile was, for the sixth consecutive year, the lowest unit cost of all full-service major carriers. These low costs enable America West to deliver upon deregulation's promise of expanding the reach of commercial air service by developing new markets to smaller communities not otherwise served by major carriers. America West's East Coast to West Coast ''walk up'' fares and average fares are substantially below those of the largest incumbent carriers.
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America West has achieved this success while weathering the storms of the marketplace. Mergers, bankruptcies, severe increases in the price of fuel, and deep traffic losses caused by war and recession have all been overcome. America West is committed to bringing more East-West competition to key Eastern airports like Logan, LaGuardia, Newark and Reagan National, and to expand at O'Hare. To provide viable competition for business travelers, America West must offer a total of at least five roundtrips a day to its hubs. Slots, perimeter rules and lack of gates prevent the full development of this service and deprive the public of the benefits of competition by America West and other lower cost carriers. These barriers to competition remain as a result of government inaction. Without Congressional action, regardless of the outcome of the pending merger these barriers will remain. Further consolidation of the industry without government action to alleviate these barriers to entry will doom the competitive environment. Congress must act to ensure complete and unfettered access to the marketplace by eliminating archaic slot and perimeter rules while ensuring all competitors have access to gates and associated facilities at federally funded airports.
SLOTS
Congress recently made some additional new entrant slots available at O'Hare, LaGuardia and Kennedy airports and repealed the High Density Rule (HDR) governing Chicago's O'Hare to be fully effective in 2001 and New York's LaGuardia and Kennedy airports in 2007. While this action was important, LaGuardia and JFK will remain subject to slot rules for seven more years. At these airports, slots will continue to hinder competitive entry. Moreover Air 21 did very little to stimulate competition at Reagan National Airport where the HDR restricts the number of hourly slots allocated for commercial takeoffs and landings to 37 for jets and 11 for commuter aircraft which total to approximately 760 commercial operations per day. The 24 daily exemption slots provided under Air 21 constitute only a three percent increase in slots. America West hopes to stimulate competition to the West at Reagan National with the slot exemptions it received under Air 21. However, its ability to do so is limited by the fact that it can operate only three daily round trips rather than the five it requested from the Department of Transportation. As a result of slot restrictions, DCA is one of the highest cost airports in the country, with virtually no ability to expand capacity or otherwise improve the competitive environment.
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As America West has pointed out over the last decade, DOT/FAA attempts to increase competition at slot-controlled airports in general and at DCA in particular have been woefully inadequate. See Government Accounting Office, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, Letter 3 (Letter Report, 10.18/96, GAO/RCED–9704) (hereafter, ''GAO Airline Deregulation Report''). According to the GAO, the trend toward market concentration at slot-controlled airports has continued throughout the past decade:
Since the early 1990s, a few established carriers have continued to build upon the favorable positions they inherited as a result of grandfathering. By contrast, the share held by the airlines that started after deregulation has remained low.
Because the number of slots is largely fixed and the holding of those slots is concentrated among a few established carriers, a seller's market has emerged, and slots have become very expensive. . . . Moreover, in order to mount competitive service in a market, an airline generally needs about six slots, with at least three slots falling during the peak periods so that the airline can offer a flight schedule that is attractive to business travelers. As a result, for the airlines that started after deregulation, the cost of purchasing the slots necessary to compete effectively may be prohibitive.
Even if financing can be arranged, buying slots is extremely difficult for newer airlines because the established carriers rarely sell their slots, and when they do, the buyer is usually an airline that already holds a large number of slots at the airport.
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GAO Airline Deregulation Report, Letter 3:1. The net result, according to the GAO: ''[L]ittle or no entry has occurred at'' Reagan National and other slot-controlled airports. GAO Airline Deregulation Report, Letter 3. America West urges Congress to advance the date for the termination of slots at LaGuardia and JFK, and to also act to abolish slots at Reagan National.
If the High Density Rule at Reagan National cannot be repealed, then slots must be added. In its 1995 slot study the Department of Transportation reported that DCA could easily handle an additional 7 slots an hour or 126 flights per day. Given the Stage 3 noise requirement, these slots could be added with no significant impact on noise or [copy missing??????]
New York LaGuardia
The perimeter rule governing LaGuardia was imposed decades ago primarily to control ground congestion at and around the facility and to generate service at the newly developed JFK. Subsequent changes at LGA and JFK as well as aircraft technology over the intervening years makes the rule a superfluous barrier to entry that deprives New York travelers the full range of options that should be available at all three airports serving the New York metropolitan area. The Department of Transportation has found LaGuardia constitutes a unique market apart from these other airports. Barring action by the Port Authority of New York and New Jersey, only Congress is in a position to enact legislation to preempt the locally imposed perimeter rule—a significant barrier to competition at this critically important New York airport. The proposed merger would likely further restricted East-West competition from LaGuardia unless the perimeter rule is abolished.
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GATES
Lack of adequate gate access and related facilities has hindered new entrants at many major Airport. Inability to obtain gates has hurt America West's ability to compete at major airports and remains a serious problem at eleven major airports including Newark, LaGuardia Philadelphia, Hartford, Baltimore-Washington, O'Hare, Atlanta and San Francisco. America West believes consumers would reap a high benefit from improved access by America West and other post deregulation carriers if gates at these airports were available, The gate and airport facilities problem will only be exacerbated by regulatory approval and closure of United-U.S. Airways merger, which consolidates gate holdings of United and US Airways at many of these airports. Without reasonable access to adequate gates and related facilities, new entry at key airports is effectively blocked. See Department of Transportation, FAA/OST Task Force Study, Airport Business Practices and Their Impact on Airline Competition, October 1999. Congress has responded to the Task Force Study by including in Air 21 a requirement for major airports to prepare a competition plan and requiring the Secretary of Transportation to ''ensure that gates and other facilities are made available at costs that are fair and reasonable.'' America West applauds this action but believes Congress needs to take more aggressive action in this area.
Airport officials at Newark where 84 percent of the gates are subject to exclusive-use leases recently confirmed there are currently no gates available at that airport. At LaGuardia and O'Hare, 83 percent and 85 percent respectively of the gates are the subject of exclusive use agreements. According to the Metropolitan Washington Airports Authority (MWAA), all 42 gates available for jet operations at Reagan National are leased to the incumbent tenant airlines until 2014. Reagan National Airport: Capacity to Handle Additional Flights and Impact on Other Area Airports (Letter Report, 09/17/99, GAO/RCED–99–234). Although MWAA officials are committed to addressing gate access, a recent GAO report remains decidedly pessimistic:
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MWAA may make a gate available to another airline when it is not needed to support the tenant airline's scheduled operations. While a tenant airline cannot prevent another airline from using the gate when it does not need it, the only effective opportunity for a new entrant to initiate service at key business times of the day or for an incumbent to expand service is through a contractual arrangement with the tenant airline. To date, this is how new entrants have gained access to the airports.
These arrangements have been generally inadequate for new entrants and today the incumbents are withdrawing gates they have made available in the past. While incumbents may not use some gates and under utilize other gates at these airports, America West has been unable to obtain its own gates and is forced to enter into short term handling agreements with incumbents subject to 30 or 60 day termination clauses to operate at these facilities. For example, at O'Hare America West uses Continental gates under a master handling agreement. However, if as expected, Continental expands its O'Hare service, America West may be forced out of the airport. In this connection, the rapid growth of regional jets will soon put additional pressure on gate availability and post deregulation carriers will likely be squeezed out of many key airports if action to protect access is not taken soon. In addition, at O'Hare where America West has attempted unsuccessfully for over a year to obtain its own gates, it pays an annual fuel surcharge of between $250,000 and $300,000 because it is not a signatory airline. These additional charges place America West at a competitive disadvantage to incumbent carriers. At BWI, America West's short term agreement with Continental was recently terminated forcing America West to relocate to the International terminal, where it is the only domestic airline using international gates for domestic service. Moreover, BWI officials have stated that if it obtains additional international flights America West must give up these gates. If America West cannot locate gates with another incumbent it will be forced out of this important airport. Finally at San Francisco, another United stronghold, America West currently is handled by TWA. America West has requested two own gate from the airport. However, despite the renovation of the airport and Congressional concern that airports be pro-active in providing access for new entrants, America West's request will be considered only if Delta, which as a signatory airline has a preference does not take these gates.
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America West's experience confirms the findings of the Department of Transportation and the GAO that exclusive use leases and majority in interest agreements to be barriers to entry. Task Force Study at 38. America West believes Congress should direct DOT to take immediate action to compel airports to provide reasonable gate access and other facilities to new entrant carriers where exclusive use or other agreements that are vestiges of the pre-deregulation system block competitive new entry. It is clear from the Task Force Study that current federal law—including Section 15 5 of Air 21, airport grant agreements with the FAA, and DOT's authority to prevent unfair trade practices by airlines—is sufficient to enable DOT to act aggressively to ensure new entrants gain reasonable access to gates. Should the Department of Justice consider approval of the merger, it must require United and US Airways to make available a reasonable number of gates at Reagan National, LaGuardia, Boston Logan, O'Hare and Newark to permit needed competition to be introduced by post deregulation carriers.
DC AIR
Like many of the witnesses who testified on the proposed merger at the Committee hearings, America West questions whether DC Air represents a real competitive force at Reagan National. Certainly, DC Air will not be independent of United and this lack of independence means there will not be real competition against the merged carrier. DC Air will wet-lease ten 737–200 aircraft from United for at least two years. United will provide gates to DC Air, which as emphasized above, it is not prepared to do for other new entrants at Reagan National that could compete against it. United will also provide maintenance services and DC Air will participate in United's frequent flyer program. Such dependence, as members of this Committee have pointed out, does not create the true independence required to provide meaningful competition to the combined United/US Airways in any market.
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America West and other post deregulation carriers have been essentially excluded from serving Reagan National. In this light, it would be unconscionable to permit United and US Airways to determine that a single start-up airline serving predominately short-haul routes, dependent on United for aircraft and support and linked to United's frequent flyer program and international alliance will solve any competitive concerns at the airport. In essence this would be like allowing American and British Airways to spin off a ''new'' airline at Heathrow that uses BA aircraft and crews and is a member of their oneworld alliance, to provide new competition at that airport.
CONCLUSION
Regardless of any conditions the Department of Justice may propose to United and US Airways to find this merger acceptable, America West believes additional Congressional action is necessary to eliminate those vestiges of the pre-1978 regulatory environment that continues to inhibit competition at key airports. Specifically, America West believes Congress should immediately:
Advance the date for abolishing the slot restrictions at LaGuardia and Kennedy airports.
Abolish slot restrictions at Reagan National or in the alternative provide 100 additional slots at to be made available to post deregulation carriers.
Abolish the perimeter rules at Reagan National and LaGuardia airports.
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Instruct the Secretary of Transportation to take the necessary steps to ensure that any post deregulation carrier can obtain sufficient gates and related facilities at major airports to operate up to five round trips a day to that carrier's primary hub airports.
By taking these steps, Congress will bring the benefits of deregulation to key airports in the East and Midwest where government policies and the historic dominance of the pre-deregulation carriers has prevented meaningful competition and unfairly tilted the playing field in favor of the major high fare carriers. Congress took an important first step in Air 21 to open up slots, and by permitting a few beyond perimeter flights at Reagan National. Now is the time for Congress to complete the process of deregulation and level the playing field so America West and other low cost highly competitive carriers can serve these important markets that remain subject to restraints that serve no purpose but to protect the largest incumbent airlines.
| Air Carrier Association |
| of America, |
| Washington, DC, July 24, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: We wanted to call your attention to inconsistent statements made by one of your witnesses, American's Vice Chairman, Bob Baker, at the June 23, 2000 House Judiciary Committee hearing on ''The State of Competition in the Airlines Industry: Part 2.'' In his testimony, Mr. Baker made it clear that American would not operate at a third Chicago airport.
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In that testimony, Mr. Baker emphasized the problems and costs associated with operating dual hubs in the same city, ''moving operations to a new airport would mean signing up for higher costs with no ability to recoup those costs through higher fares. That is just not good business.'' Mr. Baker added:
In addition to operating costs, American Airlines has made a tremendous investment in facilities and equipment at O'Hare. If a new airport was built and American split its hub operations between the two airports, we would nearly double our capital costs to serve the same city. We would have to buy additional jet bridges and ground service equipment, enter into additional catering contracts, provide at least minimal maintenance capability including line replaceable spare parts inventory and staff for ground services including baggage handling, refueling and aircraft cleaning. At the same time, we would likely underutilize the existing assets and investment at O'Hare, which would have fewer departures and passengers. This increased overhead expense would occur without any material increase in revenue as we simply split the same customers we were serving at O'Hare over the two airports. Increased overhead expense and no new revenue is not an attractive combination.
These statements are very interesting given that American, which is the dominant hub carrier at Dallas-Fort Worth (''DFW'') Airport, has chosen to operate out of multiple Dallas area airports—including Dallas Love Field Airport, just 18 miles from DFW. To open its Love Field facility and to operate at the airport, American has spent over $100 million. Therefore, while American opposes another airport in the Chicago area, they are expending tens of millions of dollars to operate at Love Field. American operates more flights at Love Field than at Midway Airport and continues to grow at Love Field.(see footnote 171) They have added those flights at Love Field as part of their campaign to stop Legend Airlines from competing. Apparently business concerns and costs are important if used in rallying to stop a new airport but they are not important if the mission is to destroy a potential competitor.
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As to delays in the ATC system and the need for airport capacity, I call your attention to comments made at the June 28 Senate Commerce Committee hearing. American CEO Don Carty, who also is chairman of the Air Transport Association's executive committee, did not place blame for delays on air traffic control or weather. He said the major problem is that the ATC system is operating at capacity. Carty noted that there was ''a huge increase in the number of regional jets flying in the Northeast,'' and he predicted that no matter what the weather the delays next summer will be bad as this summer. DOT Inspector General Kenneth M. Mead said he thought the tendency of the airlines to blame ATC for delays in the system ''is misplaced.'' If communities do not expand airports and runways, ''what can air traffic control do?'' he asked.
Of course, Mr. Carty did not mention the significant increase in regional jets at O'Hare where delays and cancellations are at record levels. Mr. Carty's comments appear to support a ''third'' Chicago airport.
Sincerely,
| Michelle M. Faust, Legislative Counsel. |
| Transportation Trades Department (TTD), |
| Washington, DC, June 12, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
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RE: Hearing on Competition in the Aviation Industry
DEAR MR. CHAIRMAN: As your Committee reviews matters related to competition in the aviation industry, and specifically the proposed merger between United Airlines (UAL) and US Airways, I write to share with you the views and concerns of the 29 affiliated unions of the Transportation Trades Department, AFL–CIO (TTD).(see footnote 172) Although we are not at this time commenting on the UAL/US Airways deal, more broadly we have been an active participant in the debate over so-called ''airline competition'' proposals.
As more fully explained in the attached policy resolutions adopted by TTD's Executive Committee, transportation labor opposes any initiative that needlessly threatens the stability and job security of the several thousand workers employed in the aviation industry.(see footnote 173) While we understand the concerns expressed by some regarding competition and service, it is patently unfair and contrary to sound transportation policy for the government to favor one segment of the industry over another. For these reasons, TTD and our aviation affiliates opposed the so-called predatory pricing guidelines proposed in 1998 by the U.S. Department of Transportation. Simply put, these regulations did not account for the higher fixed costs of operating a major air carrier and would have made it extremely difficult for these airlines to legitimately defend their market share against low-cost, typically nonunion operators.
Proponents of this policy and other competition proposals justify their plans as necessary to address some of the problems created by the 1978 decision to deregulate the aviation industry. Better than anyone else, we know that deregulation was a risky policy experiment undertaken without any understanding of the impact that it would have on air carriers, service to communities, safety, and workers and their families. While some were touting free-market principles, for working families the result of deregulation was the financial collapse of international pioneer air carriers, including Pan Am and Eastern, and the destruction of tens of thousands of high skill jobs paying good wages and benefits. Over the course of several years following deregulation, bankruptcy rates soared and outsourcing replaced sound investments in facilities and people. It took almost 20 years for the aviation industry to recover from this ill-conceived policy experiment, and that recovery is due in large part to the sacrifices and commitments made by aviation workers.
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With that backdrop, proponents of an array of competition measures declare that it is time for our government to intervene in the marketplace and alter the playing field. To do so, in our judgement, would be to ignore the mistakes made two decades ago by again hastily implementing significant policy changes without considering their effects on the core of the industry and on the men and women who make it the world's finest. Moreover, it would be an injustice for present and past aviation workers to see our government intervene on behalf of a special interest segment of the airline industry when our government refused to act on behalf of thousands of workers who were left powerless and with few or no rights during the destructive shake out that followed deregulation.
The fact is that aviation employees have done more than anyone to maintain a strong, safe and secure U.S. aviation industry. In the rush to meet the apparent objective of providing more and better air service to certain communities, Congress must reject proposals that sound good on paper, but fail to consider the effects on service, safety and good jobs.
Thank you for your consideration of our views, and I respectfully request that you include this correspondence as part of the official Committee record.
Sincerely,
| Edward Wytkind, Executive Director. |
Attachments
cc: The Honorable John Conyers, Ranking Member, Judiciary Committee Members, Judiciary Committee
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67330ab.eps
67330ac.eps
67330ad.eps
67330ae.eps
67330af.eps
PREPARED STATEMENT OF ED PERKINS, CONSUMER ADVOCATE FOR THE AMERICAN SOCIETY OF TRAVEL AGENTS, INC.
My name is Ed Perkins, and I currently serve as the Consumer Advocate for the American Society of Travel Agents (ASTA). I am also a nationally syndicated travel columnist and author of several travel buying guides. I was Founding Editor of Consumer Reports Travel Letter, from which I retired in 1998. In addressing you today, I am focused solely on the interests of American consumers, not on those of the travel industry or any of its components.
In my view, we can't view a proposed merger of United Airlines and US Airways in isolation. Instead, we must look at it in the broader context of concentration in the US airline marketplace. And in that context, I submit that the merger of United and US Airways—or any other merger between any of the six giant lines—would be highly inimical to the general public interest and the interests of travel consumers. I base that conclusion on two sets of issues: pricing and labor. Let's look at each.
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You've already seen and heard lots of claims about the merger's possible impact on prices. Many of the industry's most celebrated economists have published learned treatises, and they generally seem to agree: fares would either go up, go down, or stay about the same. Not to disparage those economists—I used to be one, myself—but we all know that, depending on how they structure an issue and the assumptions they make, capable economists can come to diametrically opposite conclusions about almost any issue. Certainly this one. More to the point: If we get bogged down in the details of relative costs, overlapping routes, hub consolidations, differential wage rates, and such, we'll quickly lose sight of the basic principles that should really govern the decision.
Instead of looking at all those murky details, we should focus on how one or more mergers would impact the process by which the giant airlines raise and lower prices—specifically, how they would affect the pricing dynamic in a commodity market, which is the way today's airline market behaves.
Price increases happen when one giant airline decides an increase would be a good thing. Immediately, the other giant lines study the increase and determine if they would also like to see higher prices. One by one, those that agree announce their own hikes—sometimes following the originator, sometimes with adjustments. As in the old saying, one airline runs the fare hike up the flagpole, and the others start saluting it.
What's critically important here is that it now only takes one of the six giant lines to reverse the hike. In effect, each of those six lines has veto power over price hikes in the entire national airline marketplace. If any one of them doesn't salute, the hike is quickly run back down the flagpole and returned to the closet.
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Clearly, the fewer the number of giant lines, the less chance that any given price hike will be vetoed. And, in a worst-case scenario, a concentration down to only three super-giants would make it far easier for any one of them to make price hikes stick.
The fare-cutting process works the same way. It takes only one of the six giants to kick off a nationwide fare war. And, as you probably know, that's when a lot of ordinary consumers buy their tickets. When it comes to starting a fare war, six chances for a price cut are far better than five, four, or three.
Labor issues, too, militate against further concentration. With the largest US line owning no more than about a 17% share of the domestic market, the nation's economy can survive the complete shutdown of any one giant airline. But only barely: The last American shutdown showed us how much disruption resulted from a loss of just 11% of the domestic lift, as measured in passengers.
If you liked that strike, you'd love a shutdown of a merged United-US Airways system. That would represent just about twice the American share. Even worse, of course, would be a merged American and Delta, with a staggering 28% share of total passengers.
We made it through the American stoppage as well as we did, at least in part, because other five giant airlines—plus the smaller players—managed to absorb most of American's travelers, over an extended period. But could fewer other airlines absorb twice as many displaced passengers without far more serious disruption? Or, in the worst case, could two remaining super-giant lines absorb 28% of the passengers? I don't think so. Instead, the effects of a super-giant strike would be devastating to the economy, and certainly to the travel plans of millions of consumers. As with pricing, for labor reasons alone, we just can't risk more market concentration.
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One more point: let's not forget the largely negative effects of an earlier wave of mergers and acquisitions. How such user-friendly lines as Air California, New York Air, PSA, Piedmont, and Republic disappeared in the black hole of mergers? Don't take my word for it; ask someone from Charlotte or Detroit.
''It needs more study'' is the classic way of evading a tough-minded decision. Or, in Carleton Green's construct, it's a way of handling a tough question by ''dissolving it in a weak solution.'' I would submit that we don't need any more study on the merger question. We can't afford a weak solution. This is one of those cases that should be decided by basic principles and common sense, not statistical models.
And those basic principles come in with a clear message: No more concentration by merger. No more buying out potential competitors rather than competing with them. We should take merger and acquisition among any of the six giant lines completely off the table, starting now. If any one of those lines is desperate to increase its market share anywhere in the US, let that line do it the old-fashioned way: earn it, with better service and lower fares.
Thanks for your attention.
(Footnote 1 return)
Paul Dempsey, Market Failure and Regulatory Failure As Catalysts for Political Change: The Choice Between Imperfect Competition and Imperfect Regulation, 46 Washington & Lee L. Rev. 1 (1988).
(Footnote 2 return)
The European Union defines a slot as ''the scheduled time of arrival or departure available or allocated to an aircraft movement on a specified date at an airport. . . .'' EU Official Journal No. L014, 22/01/1993, at 1.
(Footnote 3 return)
Ruwantissa Abeyratne, Management of Airport Congestion Through Slot Allocation, 6 J.of Transport Management 29 (2000).
(Footnote 4 return)
Paul Dempsey, Airport Planning & Development: A Global Survey 441–87 (McGraw Hill 1999).
(Footnote 5 return)
Paul Dempsey, The Rise & Fall of the Civil Aeronautics Board: Opening Wide the Floodgates of Entry, 11 Transp. L.J. 91 (1979).
(Footnote 6 return)
DOT Docket OST–97–2058–222 (May 21, 1998), citing Testimony of Donald J. Carty, p. 40, AMR Corporation and American Airlines, Inc. v. UAL Corporation et al, USDC for the SDNY, 91 Civ 773–781 F. Supp. 292.
(Footnote 7 return)
''In most business contexts, competition provides healthy results. But in air travel, with a finite number of gates at publicly owned airports, the temptation exists for large air carriers to lock in access to gates with long-term contracts. Then they're free to charge a captive ridership whatever fares they choose. . . . Twenty years after deregulation, consumers and business customers are complaining loudly about poor service, high fares and monopolistic practices.'' Feds' Inquiry Ought to Wake Up Big Airlines, Crain's Detroit Bus. (Mar. 16, 1998), at 8. See also Paul Dempsey & Andrew Goetz, Airline Deregulation & Laissez Faire Mythology 221–38 (Quorum 1992).
(Footnote 8 return)
US GAO Report, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (October 1996) RCED–97–4 [Excerpts].
(Footnote 9 return)
Paul Dempsey, Airport Planning & Development: A Global Survey 235–69 (McGraw Hill 1999).
(Footnote 10 return)
33 Fed. Reg. 17896 (1968).
(Footnote 11 return)
14 CFR Part 39, Subparts K and S.
(Footnote 12 return)
Prior to its sunset on December 31, 1984, the U.S. Civil Aeronautics Board performed this function; on January 1, 1985, the U.S. Department of Transportation assumed that jurisdiction.
(Footnote 13 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 885 (1996).
(Footnote 14 return)
37 Fed. Reg. 25, 508 (1982). During this period, more than 300 slots were transferred, of which more than 190 were sold. Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 884 n. 29 (1996).
(Footnote 15 return)
45 Fed. Reg. 62,406 (1980).
(Footnote 16 return)
49 Fed. Reg. 8237 (1984).
(Footnote 17 return)
45 Fed. Reg. 62,406 (1980); 54 Fed. Reg. 38,843 (1989); 56 Fed. Reg. 41,200 (1991); 58 Fed. Reg. 39,610 (1993);
(Footnote 18 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 891–96 (1996).
(Footnote 19 return)
The Metropolitan Washington Airport Act of 1986, Pub. L. 99–591 prohibited any changes in the 37 hourly slots authorized for air carrier operations.
(Footnote 20 return)
Stockman Urges Slot Auction at National, Av. Week & Space Tech. (Jan. 17, 1983), at 34; Douglas Feaver, Few FAA Proposals Depart from ''Open Skies'' Air Traffic, Washington Post, Feb. 4, 1984, at A1.
(Footnote 21 return)
49 CFR 93.233(a).
(Footnote 22 return)
Carriers with large numbers of slots can shift use between different slot numbers to cover non-use.
(Footnote 23 return)
Since 1986, the FAA has not held one additional lottery.
(Footnote 24 return)
50 Fed. Reg. 52,180 (1985).
(Footnote 25 return)
Typically, the lender takes possession of the slot and leases it back to the carrier whose debt is secured by the collateral of the slot. Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 902 (1996).
(Footnote 26 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 900 (1996).
(Footnote 27 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1 (1986).
(Footnote 28 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 896 n. 88 (1996).
(Footnote 29 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 929 (1996).
(Footnote 30 return)
''[As a result of the Buy/Sell Rule] the carriers holding the slots have a grip on the traffic operating out of [Washington National, Chicago O'Hare, and New York Kennedy and LaGuardia Airports]. Slots at peak times are said to be worth several million dollars each, but new entrant carriers allege that slots cannot be purchased at any price.'' Sally Gethin, Congress Is Under Pressure To Limit the Influence of America's Powerful Hub and Spoke System, Jane's Airport Rev. (Dec. 1, 1997), at 20.
(Footnote 31 return)
Ann Imse, Federal Rules Hurt Discount Air Carriers, Rocky Mountain News, Nov. 15, 1996), at 1B.
(Footnote 32 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 900 (1996).
(Footnote 33 return)
Gary Rawlins & Larry Marshak, USA Today, Jan. 9, 1992, at 8B.
(Footnote 34 return)
Donna Rosato & Darren Summers, Greenspan Raise, USA Weekend (Nov. 23, 1991), at 10B.
(Footnote 35 return)
Bankruptcy Court Begins Auction of Pan Am Assets, Los Angeles Times, Dec. 10, 1991, at D3.
(Footnote 36 return)
Stock Prices Fall, Washington Post, Nov. 29, 1991.
(Footnote 37 return)
Auction Splits Up Eastern Airlines Assets, Los Angeles Times, Feb. 5, 1991, at P3.
(Footnote 38 return)
U.S. Airlines Bid for Eastern Remains, USA Today, Feb. 6, 1991, at 8B.
(Footnote 39 return)
Stanley Ziemba, Midway Sells 14 Slots in N.Y. and Washington, Chicago Tribune, Oct. 13, 1990, at 1C.
(Footnote 40 return)
Business Digest, The Courier-Journal, Dec. 19, 1990, at 12B.
(Footnote 41 return)
Secretary's Task Force on Competition in the U.S. Domestic Airline Industry, Airports, Air Traffic Control, and Related Concerns (1990).
(Footnote 42 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 907–908 (1996).
(Footnote 43 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 910 (1996).
(Footnote 44 return)
U.S. General Accounting Office, Airline Deregulation: Barriers To Entry Continue To Limit Competition In Several Key Domestic Markets 21 (Oct. 1996).
(Footnote 45 return)
See Paul Dempsey, Robert Hardaway & William Thoms, 1 Aviation Law & Regulation §7.25 (1993); Robert Hardaway, Airport Regulation, Law and Public Policy 197–205 (1991).
(Footnote 46 return)
Paul Dempsey, Robert Hardaway & William Thoms, 1 Aviation Law & Regulation §5.05 (1993).
(Footnote 47 return)
See Robert Hardaway, The FAA ''Buy-Sell'' Slot Rule: Airline Deregulation At the Crossroads, 52 J. Air L. & Com. 1 (1986); James Gesualdi, Gonna Fly Now: All the Noise About the Airport Access Problem, 16 Hofstra L. Rev. 213 (1987); Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877 (1996).
(Footnote 48 return)
DOT Response to Questions from Sen. Richard Shelby, Hearings On the Implications of Airport Deregulation (Oct. 21, 1997).
(Footnote 49 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1, 27 (1986).
(Footnote 50 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1, 30 (1986).
(Footnote 51 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1, 72 (1986).
(Footnote 52 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1, 52 (1986).
(Footnote 53 return)
Robert Hardaway, The FAA ''Buy-Sell'' Rule: Airline Deregulation at the Crossroads, 52 J. Air L. & Com. 1, 71 (1986).
(Footnote 54 return)
Nat'l Comm'n to Ensure a Strong Competitive Airline Industry Change, Challenge and Competition: A Report to the President and Congress (Aug. 1993).
(Footnote 55 return)
A ''new entrant air carrier'' is defined as an air carrier or commuter operator that holds or operates (or held and operated, since December 16, 1985) fewer than 12 slots at the airport in question, not including international, Essential Air Services, or certain night time slots at Reagan or LaGuardia airports. 49 U.S.C. §41714(h).
(Footnote 56 return)
49 U.S.C. §41714(c)(1).
(Footnote 57 return)
For example, in 1994 DOT granted Reno Air slot exemptions to serve O'Hare from Reno, Nevada, a market which then had no nonstop service. DOT Order 94–9–30 (1994).
(Footnote 58 return)
DOT Order 95–8–38 (1995).
(Footnote 59 return)
DOT Order 96–5–33 (1996).
(Footnote 60 return)
DOT Order 94–9–30 (1994).
(Footnote 61 return)
The DOT subsequently acknowledged that the standard had been applied narrowly. See Application of Frontier Airlines, DOT Order 97–10–17 (1997).
(Footnote 62 return)
U.S. General Accounting Office, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED–97–4, October 1996).
(Footnote 63 return)
Id. at 9.
(Footnote 64 return)
Id. at 22–23.
(Footnote 65 return)
Id. at 23.
(Footnote 66 return)
Testimony Before the House Subcommittee on Aviation, Committee, June 25, 1997 (GAO/T–RCED–97–187), at 6.
(Footnote 67 return)
Testimony Before the Senate Commerce, Science and Transportation Committee, October 28, 1997 (GAO/T–RCED–98–32), at 2.
(Footnote 68 return)
DOT Response To the GAO Report (Jan. 6, 1997).
(Footnote 69 return)
DOT Order 97–10–17 (1997).
(Footnote 70 return)
Id.
(Footnote 71 return)
Id.
(Footnote 72 return)
For example, the DOT awarded slot exemptions as New York LaGuardia Airport to Frontier Airlines, Spirit Airlines, Pro Air, AirTran, and American Trans Air.
(Footnote 73 return)
Application of New Air Corporation, DOT Order 99–9–11 (1999). New Air changed its name to JetBlue. JetBlue inaugurated service from New York Kennedy to Ft. Lauderdale, FL, on February 11, 2000. It expects to serve 30 cities with 32 aircraft by 2002. Business Wire, Apr. 5, 2000.
(Footnote 74 return)
DOT Order 99–9–11 (1999).
(Footnote 75 return)
Applications of the Communities of the Virginia Peninsula, DOT Order 99–3–12 (1999).
(Footnote 76 return)
Major U.S. carriers have insisted that the U.S. Department of Transportation use its power to force British authorities to surrender landing slots at London Heathrow and Gatwick Airports:
(Footnote 77 return)
Statement of Cyril Murphy Before the U.S. Senate Judiciary Antitrust, Monopolies and Business Rights Airline Subcommittee (April 22, 1997).
(Footnote 78 return)
Id.
(Footnote 79 return)
Richard Williamson, United Slaps Back At Frontier, Rocky Mountain News, April 10, 1997, at 1B.
(Footnote 80 return)
United Airlines News Release, May 8, 1997.
(Footnote 81 return)
49 U.S.C. sec. 41714(e)(1).
(Footnote 82 return)
Eileen Gleimer, Slot Regulation At High Density Airports: How Did We Get Here and Where Are We Going?, 61 J. Air L. & Com. 877, 921–924 (1996).
(Footnote 83 return)
International Air Transportation Competition Act of 1979 §29, P.L. No. 96–192, 94 Stat. 35, 48–49 (1980). The amendment has never been codified. It was upheld as Constitutional in State of Kansas v. United States, 16 F.3d 436 (D.C. Cir. 1994).
(Footnote 84 return)
Department of Transportation and Related Agencies Appropriations Act §337, P.L. No. 105–66, 111 Stat. 1425, 1447 (Oct. 27, 1997).
(Footnote 85 return)
See Love Field Service Interpretation Proceeding, DOT Order 98–12–27 (1998).
(Footnote 86 return)
Transportation Research Board, Special Report 255: Entry and Competition in the U.S. Airline Industry (1999).
(Footnote 87 return)
Testimony of Nancy McFadden Before the House Aviation Subcommittee (October 21, 1999)
(Footnote 88 return)
Letter from Iowa Attorney General Tom Miller to the House Aviation Subcommittee (October 20, 1999).
(Footnote 89 return)
This does not include commuter slot holdings.
(Footnote 90 return)
Federal Document Clearing House (Apr. 14, 2000).
(Footnote 91 return)
Aviation Competition, Hearings Before the Senate Comm. on Commerce, Science & Transportation (testimony of Sen. Wendell Ford) (Oct. 28, 1997).
(Footnote 92 return)
Federal Document Clearing House (Apr. 14, 2000).
(Footnote 93 return)
Federal Document Clearing House (Apr. 14, 2000).
(Footnote 94 return)
49 U.S.C. §41718(a).
(Footnote 95 return)
49 U.S.C. §41715(c).
(Footnote 96 return)
49 U.S.C. §40101.
(Footnote 97 return)
Alan Sipress, Airlines Battle to Land Slots at Reagan National, Washington Post, May 15, 2000.
(Footnote 98 return)
Testimony of Robert Ferguson Before the Senate Judiciary Comm, FDHC Congressional Testimony (May 2, 2000).
(Footnote 99 return)
Many studies have shown a correlation between slot constraints and higher air fares. See Paul Dempsey, Airport Planning & Development: A Global Survey 466 (McGraw Hill 1999).
(Footnote 100 return)
Address of DOT Assistant Secretary Patrick Murphy Before the ABA Forum on Air & Space Law (San Francisco, CA, July 8, 1998).
(Footnote 101 return)
Testimony of DOT Assistant Secretary Patrick Murphy Before the U.S. Senate Appropriations Subcommittee (May 5, 1998).
(Footnote 102 return)
Julius Maldutis, Airline Competition at the 50 Largest U.S. Airports—Update (Salomon Bros., July 23, 1997).
(Footnote 103 return)
Round-trip fares at DFW averaged $394 from the first quarter of 1994 through the second quarter of 1999, surpassed only by Minneapolis in this group.
(Footnote 104 return)
Julius Maldutis, Airline Competition at the 50 Largest U.S. Airports—Update (Salomon Bros., July 23, 1997).
(Footnote 105 return)
Mike Meyers, Minnesotans Indeed Pay More For Air Fare, DOT Says, Minneapolis Star Tribune, Apr. 25, 1996, at 1A.
(Footnote 106 return)
United Airlines had a nonstop monopoly on the route for the first 11 months of 1997.
(Footnote 107 return)
Airline Concentration, Competition Concern Senate Subcommittee, Aviation Daily (Apr. 10, 1990). At 67.
(Footnote 108 return)
Factors Linked With Higher Fares, Aviation Daily (Apr. 10. 1990), At 67. See Statement Of Kenneth M. Mead Before The Subcomm. On Aviation Of The Senate Commerce Comm., Apr. 5, 1990.
(Footnote 109 return)
Chicago Department of Aviation management records.
(Footnote 110 return)
OAG Worldwide Desktop Guide, June 2000.
(Footnote 111 return)
Chicago Department of Aviation management records.
(Footnote 112 return)
An additional source of statutory immunity for the City is the Local Government Antitrust Act of 1984. In pertinent part, it provides that no city, ''special function governmental unit established by State law,'' or local government official or employee ''acting in an official capacity'' can be sued for antitrust damages. 15 U.S.C. §34–36.
(Footnote 113 return)
SOC Paper, at 16.
(Footnote 114 return)
SOC Paper, at 2.
(Footnote 115 return)
Id. at 1.
(Footnote 116 return)
Id. at 2.
(Footnote 117 return)
15 U.S.C. §1 (1994).
(Footnote 118 return)
See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767–68 (1984) (''Section 1 of the Sherman Act . . . reaches unreasonable restraints of trade effected by a ''contract, combination . . . or conspiracy'' between separate entities.''). Proving concerted action among two or more actors requires a plaintiff to demonstrate ''unity of purpose or a common design and understanding, or meeting of the minds in an unlawful arrangement.'' See American Tobacco Co. v. United States, 328 U.S. 781, 810 (1946).
(Footnote 119 return)
See Interstate Circuit, Inc. v. United States, 306 U.S. 208, 222–23 (1939).
(Footnote 120 return)
See Local Union No. 189, Amalgamated Meat Cutters v. Jewell Tea Co., 381 U.S. 676, 720 (1965).
(Footnote 121 return)
See Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984).
(Footnote 122 return)
465 U.S. 752 (1984).
(Footnote 123 return)
Id. at 768.
(Footnote 124 return)
475 U.S. 574 (1986).
(Footnote 125 return)
Id. at 588 (citations omitted).
(Footnote 126 return)
See Julian O. Von Kalinowski et al., Antitrust Laws & Trade Regulation §11.02[2], at 11–26 (2d ed. 1996), citing Susan DeSanti & William E. Kovacic, Matsushita: Its Construction and Application by the Lower Courts, 59 Antitrust L.J. 609, 618 (1991).
(Footnote 127 return)
See id.
(Footnote 128 return)
See id.
(Footnote 129 return)
Some courts have framed the issue in terms of burdens of proof, holding that once a defendant proves that the challenged conduct was in its independent self-interest, then the burden shifts to the plaintiff to adduce evidence tending to exclude the possibility of independent action. See, e.g., Market Force Inc. v. Wauwatosa Realty Co., 906 F.2d 1167, 1171 (7th Cir. 1990).
(Footnote 130 return)
186 F.3d 781 (7th Cir. 1999).
(Footnote 131 return)
Id. at 787, citing Matsushita, 475 U.S. at 587–88.
(Footnote 132 return)
Id. at 788.
(Footnote 133 return)
Petruzzi's IGA Supermarkets v. Darling-Delaware Co., 998 F.2d 1224, 1242–43 (3d Cir. 1993).
(Footnote 134 return)
See Theatre Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537, 541 (1954).
(Footnote 135 return)
Id.
(Footnote 136 return)
See, e.g., Todorov v. DCH Healthcare Auth., 921 F.2d 1438, 1456 (11th Cir. 1990) (''[w]e require more than mere evidence of parallel conduct by competitors to support an inference of conspiracy''); Petruzzi's, 998 F.2d at1232 (''[I]n a conscious parallelism case, a plaintiff also must demonstrate the existence of certain ''plus'' factors, for only when these additional factors are present does the evidence tend to exclude the possibility that the defendants acted independently.'').
(Footnote 137 return)
See, e.g., Interstate Circuit, Inc. v. United States, 306 U.S. 208, 222 (1939) (''without substantially unanimous action [on the part of the defendants] . . . there was a risk of substantial loss of business and goodwill . . ., but . . . with it there was the prospect of increased profits'').
(Footnote 138 return)
475 U.S. at 596–97. See also Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir. 1987) (decision not to deal with competitor carriers was consistent with unilateral business behavior).
(Footnote 139 return)
See Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1369–70 (3d Cir. 1996) (finding no conspiracy because conduct was in defendants' independent best interests).
(Footnote 140 return)
See American Ad Management, Inc. v. GTE Corp., 92 F.3d 781, 788–89 (9th Cir. 1996).
(Footnote 141 return)
See Greater Rockford Energy & Tech. Corp. v. Shell Oil Co., 998 F.2d 391, 396–97 (7th Cir. 1993) (mere opportunity to conspire, without more, cannot support an inference of conspiracy), cert. denied, 510 U.S. 1111 (1994); Ralph C. Wilson Indus. v. Chronicle Broad. Co., 794 F.2d 1359, 1365–66 (9th Cir. 1986).
(Footnote 142 return)
See, e.g., S. Berry, M. Carnall and P.T. Spiller, Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity, Working Paper 5561, National Bureau of Economic Research (May 1996).
(Footnote 143 return)
See, e.g., J. Brueckner and P.T. Spiller, Economies of Traffic Density in the Deregulated Airline Industry, 37 J. Law & Econ. 379 (1994).
(Footnote 144 return)
Statement of Nancy E. McFadden, General Counsel, U.S. Department of Transportation, before the Committee on the Judiciary, House of Representatives, U.S. Congress (June 14, 2000).
(Footnote 145 return)
Id. at 2.
(Footnote 146 return)
See SOC Paper, at 24.
(Footnote 147 return)
See id. at 2.
(Footnote 148 return)
SOC Paper, at 2.
(Footnote 149 return)
Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, reh'g denied, 365 U.S. 875 (1961).
(Footnote 150 return)
See id. at 138 n.18, 141, 143–44.
(Footnote 151 return)
United Mine Workers v. Pennington, 381 U.S. 657 (1965).
(Footnote 152 return)
See id. at 670.
(Footnote 153 return)
FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411 (1990).
(Footnote 154 return)
Id. at 424–25 (emphasis in original). See also In re Brand Name Prescription Drugs Antitrust Litig., 186 F.3d 781, 789 (7th Cir. 1999) (Noerr ''doctrine applies when [anticompetitive] action is the consequence of legislation or other governmental action, not when it is the means for obtaining such action''); Sandy River Nursing Care v. Aetna Casualty, 985 F.2d 1138, 1143 (1st Cir.) (Noerr immunity ''inapplicable when private actors impose the challenged restraint of trade through a boycott or other traditionally unlawful economic measure, even when the boycott's sole purpose is to instigate favorable governmental action''), cert. denied, 510 U.S. 818 (1993).
(Footnote 155 return)
County of Suffolk v. Long Island Lighting Co., 710 F. Supp. 1387, 1390 (E.D.N.Y. 1989) (citations omitted); see also LaSalle National Bank v. DuPage, 777 F.2d 377, 384 n.6 (7th Cir. 1985).
(Footnote 156 return)
United States Football League v. NFL, 634 F. Supp. 1155, 1181 (S.D.N.Y. 1986), aff'd, 842 F.2d 1335 (2d Cir. 1988).
(Footnote 157 return)
See, e.g., Weit v. Continental Illinois Nat'l Bank & Trust Co., 641 F.2d 457, 466–67 (7th Cir. 1981), cert. denied, 455 U.S. 988 (1982).
(Footnote 158 return)
SOC Paper, at 27–28 n.27.
(Footnote 159 return)
317 U.S. 341 (1943).
(Footnote 160 return)
See id. at 350–52; FTC v. Ticor Title Insurance Co., 504 U.S. 621, 632–33 (1992).
(Footnote 161 return)
See California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980); Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985).
(Footnote 162 return)
Town of Hallie, 471 U.S. at 42.
(Footnote 163 return)
See 65 Ill. Comp. Stat. Ann. 5/11–101–1. The exercise of this power is subject to the Illinois Aeronautics Act, 620 Ill. Comp. Stat. Ann. 5/1 to 5/83 (West 1993 & Supp. 1999).
(Footnote 164 return)
Id. §5/11–102–5.
(Footnote 165 return)
Id. 5/1–1–10.
(Footnote 166 return)
The SOC suggests that the state action doctrine might not apply in certain cases, because ''the State of Illinois . . . has actively spoken out against the monopoly problem'' at O'Hare. SOC Paper, at 28. By this statement, the SOC suggests that, for state action immunity purposes, state ''authority'' or ''policy'' can be found by looking to the public statements and actions of officials in the executive or legislative branches. This is not an accurate statement of the law. When looking for ''authority,'' courts look ''to powers flowing from state constitutions or legislation.'' Areeda & Hovenkamp, I Antitrust Law 224b, at 411 (rev. ed. 1997). In other words, the only entities that constitute the ''state itself,'' in this context, are ''the legislature itself (including the governor as part of the enactment process)'' and ''the state's highest court.'' Id.
(Footnote 167 return)
663 F. Supp. 1255 (N.D. Ill. 1987).
(Footnote 168 return)
Id. at 1276–77.
(Footnote 169 return)
Midcal, 445 U.S. at 105.
(Footnote 170 return)
FTC v. Ticor Title Insurance Co., 504 U.S. 621, 635 (1992). In Puerto Rico, a regional air carrier named COPA, alleged that the Ports Authority of Puerto Rico and American Airlines violated the Sherman Act by entering into an outsourcing agreement, under which American built and operated a federal inspection facility on behalf of the Authority. See Ports Authority of Puerto Rico v. Compañia Panameña de Aviacion (COPA), S.A., 77 F. Supp.2d 227 (D. P.R. 1999). The Authority and American argued, among other things, that the outsourcing arrangement was shielded from antitrust scrutiny by the state action doctrine. Puerto Rico had a clear policy replacing competition with regulation in the provision of air transportation facilities and services. The key issue in dispute was whether Puerto Rico was actively supervising American's conduct. American argued and the court agreed that the active supervision requirement was satisfied by the contractual obligations imposed by the Authority. The Authority specified a ''detailed contractual formula'' for calculating the access fee to the inspection facility, which ''leaves American virtually no discretion.'' Id. at 235.
(Footnote 171 return)
American also operates at all the New York area airports (Newark, LaGuardia and JFK) and all the Washington, DC area airports (Dulles, National and BWI).
(Footnote 172 return)
Attached at 1 is a complete list of TTD's affiliated unions. Specifically, the following aviation unions are members of TTD: the Air Line Pilots Association; the Association of Flight Attendants; the Communication Workers of America; the International Association of Machinists and Aerospace Workers; the International Brotherhood of Teamsters; the National Air Traffic Controllers Association; the Professional Airways Systems Specialists; the Transport Workers Union, and the American Federation of State, County and Municipal Employees.
(Footnote 173 return)
Attached at 2 are policy resolutions adopted by the TTD Executive Committee in September of 1998 and September of 1999.