[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
COMPETITION AND BANKRUPTCY IN THE AIRLINE INDUSTRY: THE PROPOSED MERGER
OF AMERICAN AIRLINES AND US AIRWAYS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
REGULATORY REFORM,
COMMERCIAL AND ANTITRUST LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 26, 2013
__________
Serial No. 113-22
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://judiciary.house.gov
_______
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio JUDY CHU, California
TED POE, Texas TED DEUTCH, Florida
JASON CHAFFETZ, Utah LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania KAREN BASS, California
TREY GOWDY, South Carolina CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, FLORIDA
KEITH ROTHFUS, Pennsylvania
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
SPENCER BACHUS, Alabama, Chairman
BLAKE FARENTHOLD, Texas, Vice-Chairman
DARRELL E. ISSA, California STEVE COHEN, Tennessee
TOM MARINO, Pennsylvania HENRY C. ``HANK'' JOHNSON, Jr.,
GEORGE HOLDING, North Carolina Georgia
DOUG COLLINS, Georgia SUZAN DelBENE, Washington
KEITH ROTHFUS, Pennsylvania JOE GARCIA, Florida
HAKEEM JEFFRIES, New York
Daniel Flores, Chief Counsel
James Park, Minority Counsel
C O N T E N T S
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FEBRUARY 26, 2013
Page
OPENING STATEMENTS
The Honorable Spencer Bachus, a Representative in Congress from
the State of Alabama, and Chairman, Subcommittee on Regulatory
Reform, Commercial and Antitrust Law........................... 1
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Regulatory Reform,
Commercial and Antitrust Law................................... 2
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 5
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Ranking Member, Subcommittee on
Regulatory Reform, Commercial and Antitrust Law................ 7
WITNESSES
Gary F. Kennedy, Senior Vice President, General Counsel and Chief
Compliance Officer, American Airlines
Oral Testimony................................................. 23
Prepared Statement............................................. 25
Stephen L. Johnson, Executive Vice President, Corporate and
Government Affairs, US Airways, Inc.
Oral Testimony................................................. 27
Prepared Statement............................................. 30
Kevin Mitchell, Chairman, Business Travel Coalition (BTC)
Oral Testimony................................................. 43
Prepared Statement............................................. 46
Christopher L. Sagers, James A. Thomas Distinguished Professor of
Law, Cleveland State University
Oral Testimony................................................. 100
Prepared Statement............................................. 102
Clifford Winston, Senior Fellow, Economic Studies Program, The
Brookings Institution
Oral Testimony................................................. 111
Prepared Statement............................................. 113
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 3
Material submitted by the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Ranking Member,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law 8
Additional Material submitted by the Honorable Steve Cohen, a
Representative in Congress from the State of Tennessee, and
Ranking Member, Subcommittee on Regulatory Reform, Commercial
and Antitrust Law.............................................. 16
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 21
APPENDIX
Material Submitted for the Hearing Record
Material submitted by the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Ranking Member,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law 146
Prepared Statement of Paul Hudson, President, Flyersrights.org,
and Executive Director, Aviation Consumer Action Project....... 199
Response to Questions for the Record from Stephen L. Johnson,
Executive Vice President, Corporate and Government Affairs, US
Airways, Inc................................................... 222
Response to Questions for the Record from Gary F. Kennedy, Senior
Vice President, General Counsel and Chief Compliance Officer,
American Airlines.............................................. 225
Response to Questions for the Record from Christopher L. Sagers,
James A. Thomas Distinguished Professor of Law, Cleveland State
University..................................................... 227
COMPETITION AND BANKRUPTCY IN THE AIRLINE INDUSTRY: THE PROPOSED MERGER
OF AMERICAN AIRLINES AND US AIRWAYS
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TUESDAY, FEBRUARY 26, 2013
House of Representatives,
Subcommittee on Regulatory Reform,
Commercial and Antitrust Law
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:02 a.m., in
room 2141, Rayburn Office Building, the Honorable Spencer
Bachus (Chairman of the Subcommittee) presiding.
Present: Representatives Bachus, Goodlatte, Farenthold,
Marino, Holding, Collins, Rothfus, Cohen, Conyers, Johnson,
Delbene, Garcia, and Jeffries.
Staff present: (Majority) John Hilton, Counsel; Ashley
Lewis, Clerk; (Minority) Perry Apelbaum, Staff Director & Chief
Counsel; James Park, Minority Counsel; Veronica Eligan,
Professional Staff Member.
Mr. Bachus. Good morning. The Judiciary Subcommittee on
Regulatory Reform, Commercial and Antitrust Law is in session.
By way of introduction, this is the first hearing of the
year for the Subcommittee. Chairman Goodlatte has given me the
great privilege of Chairing this Subcommittee. And under its
antitrust jurisdiction, the Judiciary Committee has the duty to
examine the competitive impacts of significant transactions on
the marketplace. It is responsibility that I take very
seriously from the standpoint of consumer choice and the
functioning of free markets.
Today's hearing is specifically to examine the proposed
merger between American Airlines and US Airways. The resulting
airline with a 24 percent market share would become the largest
of what might be called the four legacy U.S. carriers. The
Department of Justice will conduct a detailed review of the
proposed merger under the Hart-Scott-Rodino Act. There will be
several other layers of scrutiny both here and in the U.S. and
in Europe.
This hearing is intended to provide information to the
public, not to state a Subcommittee policy position, although I
think there obviously will be independent--I mean, each Member
will have independent opinions, and obviously are free to state
those.
The airline has been in a state of near constant change and
innovation since Federal deregulation in 1978. We have a
marketplace or we have a marketplace in which familiar names
that most of us grew up with, like Pan Am, TWA if you traveled
overseas, or in the south, Eastern, and Republic, and Southern
no longer exist. They have either merged, bankrupted, or gone
out of existence. But we have also seen the emergence of new
carriers with different business models, like Southwest and
Virgin.
The embracing of electronic technology has created online
booking and instant price comparison tools that have greatly
benefitted travel by expanding choice. That is the competitive
free enterprise system at work and is the cornerstone of our
economy. However, there are questions that naturally arise
during airline mergers and issues that have confronted some of
the mergers. And today's hearing offers an appropriate forum to
address those.
The issue that many consumers would be interested in
knowing about, to the extent it can be answered, is the
potential impact on their cost of flying. Service routes are
also a concern as are the levels of service that will be
offered post-merger at the current hubs of American and US
Airways. From a broad competitive perspective, there is the
issue of airline market share at individual airports and the
overall market share held by major carriers and the prospects
and implications of future consolidation.
Our goal today is to facilitate discussion just as
consumers are served by clear and transparent pricing, so when
they shop online for a plane ticket they are served by good
information by comparing different points of views.
We welcome all our witnesses and look forward to your
testimony.
I now recognize the Ranking Member for his opening
statement.
Mr. Conyers. Thank you.
Mr. Bachus. Either one, whatever.
Mr. Cohen. I yield to Mr. Conyers. I always yield to Mr.
Conyers.
Mr. Bachus. Thank you.
Mr. Cohen. An honor to serve with Mr. Conyers. He is Mr.
Rosa Parks.
Mr. Bachus. I have served with him, too, and I would
recognize him first.
Mr. Conyers. Well, I thank you both for your generosity. We
come here today looking at a very important part of the
economic system that has guided this country. And I have always
worried during previous airline mergers, and without prejudging
the merits of the ones that brings us here today.
We should recall that both parties to this merger bear a
high burden in demonstrating that further consolidation in the
airline industry is warranted. One of the arguments advanced in
favor of some past mergers--Delta, Northwest, United,
Continental--was the claim that there was too much capacity in
the industry, which led to excessively low fares that prevented
carriers, particularly so-called legacy carriers with their
higher costs, from earning a sufficient income.
We ought to consider whether this is still the case. While
American is in bankruptcy--pardon me--it is poised to
successfully reorganize with billions of dollars in cash and
reduce costs as a result of reorganization. Moreover, US
Airways posted record profits. These facts suggest that both
airlines are, in fact, perfectly capable of surviving, even
thriving, as stand-alone companies.
Industry consolidation may benefit the airlines that remain
by giving them power to raise fares and fees, but it comes with
costs to the consumer. And as has been noted, it may result in
higher fares, fewer consumer choices, particularly in hubs and
city fares where two carriers overlap. In retrospective studies
of the effects of Delta, Northwest, United, Continental
mergers, it suggests that, in fact, fares did rise on some
routes where the two merger partners used to compete.
Given the size of the big three, legacy airlines that would
remain after the merger, it is not entirely unreasonable to
suggest that they would have even greater power to tacitly
agree to raise prices, undermining price competition and
harming consumers in the process. Indeed, if American and US
Airways were to merge, more than 70 percent, and by some
estimates as high as 86 percent, of the domestic airline
industry would be controlled by just four airlines. I fear that
the flying public will see relatively few benefits while
bearing much of the costs of this potential merger.
Another related issue is whether the low-cost carriers can
continue to provide effective competitive pressure on what will
be the big three legacy airlines should this merger occur. One
of the arguments I hear most often in the prior airline
consolidations was that the industry would remain very
competitive after consolidation because the competition against
large carriers, which were able to offer lower fares because of
their lower operating costs.
But of the LLCs, however, only Southwest is large enough to
compete nationwide against the large legacy carriers. And there
is reason to wonder whether Southwest will continue to play the
traditional role of an LLC in competing on ticket prices given
that it is now part of the big airline club.
And finally, we must consider what impact this will have on
workers at the two carriers. In stark contrast to previous
airline mergers, the unions representing American and US
Airways, with the exception of the machinists, have come out in
public support of this merger. And the machinists have said
that they could support it, but only after US Airways renews
its contract with their own members first. Indeed, America's
unions have been instrumental in pushing for this merger.
And so I will submit the rest of my statement, Mr.
Chairman, and thank you for your generosity.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Ranking Member, Committee on
the Judiciary, and Member, Subcommittee on Regulatory Reform,
Commercial and Antitrust Law
This first hearing of the Subcommittee on Regulatory Reform,
Commercial and Antitrust Law in the 113th Congress is as good a time as
any to remind ourselves that the main purpose of antitrust law is to
ensure that business does not behave in ways that injures markets, and,
ultimately, consumers.
In the context of mergers, this means that any transaction that
would result in a firm having market power--that is, the ability to
raise prices or otherwise harm consumers without losing their
business--is contrary to basic antitrust policy.
So it is hardly a radical notion that we ought to be suspicious
when there has been a rapid succession of mergers in a given industry.
In my view, the very fact that many industries end up being
dominated by just a handful of very large firms should disturb us, as
basic economics and common sense should tell us that a few dominant
firms will raise prices on consumers and offer them suboptimal products
or services in exchange.
Yet, over the last generation, we have seen a wave of mergers in
industry after industry, including among large, direct competitors.
Just a few examples include the Whirlpool-Maytag, AT&T-BellSouth, AOL-
Time Warner, and JPMorganChase-BankOne. In the banking industry alone
there have been 47 mergers since 2001.
And during this time, merger review and antitrust enforcement did
not, in my view, account sufficiently for consumers' interests.
This hands-off approach to antitrust merger enforcement reflected
the view that corporate power should trump other interests, including
the public interest. For a long time, the trend in antitrust law was
against the American consumer.
While I am hopeful that the nearly blind acceptance of the validity
of mergers is coming to an end, I briefly review this history of
mergers and antitrust because I wanted to place our consideration of
the proposed merger of American Airlines and US Airways in proper
context.
Nearly five years ago, I chaired a hearing on the then-proposed
merger of Delta Air Lines and Northwest Airlines before what was then
the Task Force on Competition Policy and Antitrust Laws.
I noted during that hearing that the deal raised several potential
concerns, including that in the wake of several airline mergers up to
that time, consumers had been prejudiced as delays increased, service
declined, and fares rose.
I also expressed concern that should the Delta-Northwest
transaction be approved, it would spark a cascade of other mergers,
such as between United Airlines and Continental Airlines and between
American Airlines and US Airways, leading potentially to an unwarranted
level of concentration in the airline industry.
It appears that I was right to worry. In fact, two years after that
hearing, United and Continental did merge, and today we have for our
consideration the proposed merger of American Airlines and US Airways.
While I do not wish to pre-judge the merits of an American-US
Airways merger, there are several issues that the Department of Justice
and other regulators should keep in mind when reviewing this deal.
To begin with, the parties to the merger bear a high burden in
demonstrating that further consolidation in the airline industry is
warranted.
One of the arguments advanced in favor of the Delta-Northwest and
United-Continental mergers was the claim that there was too much
capacity in the industry, which led to excessively low fares that
prevented carriers--and particularly the so-called ``legacy'' carriers,
with their higher costs--from earning a sufficient income.
We ought to consider, however, whether this is still the case.
While American is in bankruptcy, it is poised to successfully
reorganize, with billions of dollars in cash and reduced costs as a
result of its reorganization. Moreover, US Airways posted record
profits last year.
These facts suggest that both airlines are, in fact, perfectly
capable of surviving, and even thriving, as standalone companies.
Industry consolidation may benefit the airlines that remain by
giving them the power to raise fares or fees, but it comes with costs
to the consumer.
As I noted with the Delta-Northwest merger, an American-US Airways
merger may result in higher fares and fewer consumer choices,
particularly in hubs and city-pairs where the two carriers overlap.
And retrospective studies of the effects of the Delta-Northwest and
United-Continental mergers suggest that, in fact, fares did rise on
some routes where the two merger partners used to compete.
Given the size of the ``Big Three'' legacy airlines that would
remain after the merger, it is not entirely unreasonable to think that
they would have even greater power to tacitly agree to raise prices,
undermining price competition, and harming consumers in the process.
Indeed, if American and US Airways were to merge, more than 70%--
and, by some estimates, as much as 86%--of the domestic airline
industry would be controlled by just four airlines.
I fear that the flying public will see relatively few benefits
while bearing much of the costs of this potential merger.
Another related issue to consider is whether the low-cost carriers,
or LCC's, can continue to provide effective competitive pressure on
what will be the ``Big Three'' legacy airlines should this merger
occur.
One of the arguments that I often heard in prior hearings on
airline industry consolidation was that the industry would remain very
competitive after consolidation because of the competition against
large carriers from LCC's, which were able to offer lower fares because
of their lower operating costs.
Of the LCC's, however, only Southwest is large enough to compete
nationwide against the large legacy carriers.
And there is reason to wonder whether Southwest will continue to
play the traditional role of an LCC in competing on ticket prices,
given that it is now part of the big-airline club.
Finally, we must consider what impact will this merger will have on
workers at the two carriers.
In stark contrast to previous airline mergers, the unions
representing American Airlines and US Airways employees, with the
exception of the International Association of Machinists and Aerospace
Workers, have come out in public support of this merger, and the
Machinists have said they could support it, but only after US Airways
renews its contract with their members first. Indeed, American's unions
have been instrumental in pushing for this merger.
The view of these unions is that a merger will strengthen the
future prospects for employees, both in terms of increased compensation
and long-term job security.
Nevertheless, it is difficult to ignore the possibility that at
some point jobs may inevitably be lost as a result of the merger. After
all, one of the rationales for merging is to cut inefficiencies and
duplication, which usually translates into job losses.
Nonetheless, I do accord great weight to the word of those who
actually do the work that makes both of these companies run. So I thank
the unions for making their views known to us as we review this merger.
I hope that we can have a fruitful hearing so as to assess the
benefits and the costs of this merger.
__________
Mr. Bachus. Thank you. The Chairman of the full Committee,
Mr. Goodlatte.
Mr. Goodlatte. Thank you, Mr. Chairman. I want to thank you
for holding this hearing, and on an issue that is of great
importance to me and to my constituents.
In a free market economy like ours, companies are generally
free to organize themselves and their assets as they see fit,
including by merger. There is nothing wrong per se with
mergers, even if they form large companies. The preservation of
free and fair competition, however, is critical to a free
market. Competition spurs innovation and ensures that the
market allocates resources efficiently.
It benefits consumers and fosters economic growth. Because
a free market cannot flourish without competition, a merger
that decreases competition can undermine a free market. Thus,
antitrust laws set important limits on companies, freedom to
merge with one another.
Specifically, Section 7 of the Clayton Act prohibits
mergers that substantiate lessen competition or tend to create
a monopoly. This is meant to strike a balance between
companies' freedom to organize their affairs while preserving
the competition that is essential to a healthy market.
Recently, two of the four legacy carriers in the U.S.
airline industry, American Airlines, which has been in Chapter
11 bankruptcy since late 2011, and U.S. Airways announced plans
to merge. The resulting entity would be called American
Airlines, but would be led by U.S. Air's chief executive
officer.
Pursuant to the Hart-Scott-Rodino Act, the Department of
Justice must review this proposed merger to determine if it is
anti-competitive. This is a highly technical inquiry, and the
Department should be guided purely by the facts and the law,
not by politics or ideology.
The basic question the Department should seek to answer is,
how this merger's impact on competition would affect consumer
welfare. Congress has an oversight responsibility to ensure
that the Department of Justice conducts its merger reviews in a
thorough, fair, and reasonably prompt fashion. The Department
should ask whether the merger would enable American to raise
ticket prices or raise other ancillary fees or reduce services
on particular routes, especially routes currently served by
both airlines. It should ask whether there is sufficient
competition on these routes, such as from low-cost carriers, to
keep a post-merger American Airlines in competitive check. It
also should ask whether post-merger a new carrier would move
into a route served by American and begin to compete.
To put it mildly, the airline industry has changed a great
deal since it was deregulated in 1978. New airlines with new
business models have sprung up to serve consumers. Other
airlines have gone bankrupt. Some of the latter have returned
from bankruptcy. Others have merged, and others have failed all
together.
In the last 5 years, the House Judiciary Committee has held
hearings on two major airline mergers: Delta-Northwest in 2008
and United-Continental in 2010. Five major airlines--United,
Delta, American, US Air, and Southwest--now control an
estimated 80 percent of the domestic market. If this merger
goes through, that number will decline to 4. Should this be the
last merger in the airline industry so far and no farther?
Would allowing this merger finally strike the right balance
between competition and the cyclical bankruptcies that have
occurred in the industry recently?
A major concern any time there is fluctuation in the
airline industry is how smaller airports, which depend heavily
on routes to and from larger hubs, would be affected. For
travelers leaving from my district, the airport in Charlotte,
North Carolina is a major hub destination, and US Air has
invested heavily in Charlotte.
Would American maintain or even expand this and other hubs
post-merger? It is by no means clear that this merger would
have all or any of the negative effects that an airline merger
can produce. American and US Air maintain that their routes are
mostly complementary, not overlapping, and that the merger will
enhance competition by giving the current 4th and 5th largest
airlines a stronger position from which to compete with the
other 3.
Congress has no formal role in the Department of Justice's
merger review process. Congressional hearings, however, provide
important public venues to ask, debate, and identify possible
answers to these questions which are of great importance.
Rather than rushing to judgment, my hope is that everyone
involved will take care to evaluate the evidence and do what is
best for competition and consumers.
I look forward to the testimony of the witnesses, debate
among the Members of the Subcommittee, and, in the end, a wise
decision by the Department of Justice that ensures a
competitive future for the airline industry and protects the
welfare of American travelers.
Thank you, Mr. Chairman.
Mr. Bachus. Thank you. At this time, Mr. Cohen, the
Subcommittee Ranking Member, is recognized.
Mr. Cohen. Thank you, Mr. Chairman. This is the first
hearing of the newly renamed Subcommittee on Regulatory Reform,
Commercial and Antitrust Law. We used to call it CAL. I call it
RRCAL.
I thank Chairman Bachus for choosing the topic of this
merger between American and US Airways for our first hearing,
and I want to say I look forward to what I hope and know will
be a productive working relationship in the 113th Congress. The
third Saturday in October is not the only time Alabama and
Tennessee get together.
As an initial matter, I note that unlike with previous
mergers, the unions representing workers at both these airlines
have expressed strong support for the merger, and that is
encouraging. Some news accounts suggest that the unions at
American were particularly instrumental in agreeing to this
move. Mr. Chairman, I would ask unanimous consent that the
final joint release, dated February 14, from the different
unions be entered into the record.
Mr. Bachus. Without objection.
Mr. Cohen. I also ask unanimous consent that the letter
from Laura Glading, president of the Association of
Professional Flight Attendants, and the statement from Captain
Coffman, Chairman of the Allied Pilots Association, expressing
support for the merger, both be entered into the record.
Mr. Bachus. Without objection.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Cohen. Thank you, Mr. Chairman. I understand why labor
supports this proposed merger. Employees of both carriers are
poised to get a better deal than they would otherwise, which is
more than I can say unfortunately for the employees of the
former Northwest Airlines, many of whom were my constituents in
Memphis.
As we consider the merits of this merger, we ought to look
back, though, what the similar effects of mergers that are
similar in the recent past to see how it benefits consumers and
what happens. And while I respect the views of labor in support
of this merger and recognize that no two mergers of airlines or
any other entities are necessarily alike, the merger of
Northwest and Delta has indelibly been shaped by an image of
airline mergers.
Prior to the merger, Northwest operated a significant hub
in Memphis, and for this reason and given Memphis' proximity to
Delta's hub and headquarters in Atlanta, I expressed concern
about the potential cost of the merger to consumers and
employees in my home district.
In this very room in 2008, Richard Anderson, Delta's CEO,
said about the future of the Memphis hub, it will be
additional. It will be more business for Memphis, not less. I
expressed concern to him about reduced service or even outright
elimination of the hub, and asked him about continuation of the
Memphis-Amsterdam international flight, of which we had great
pride. At that hearing, Mr. Anderson in this room testified
there would be no hub closures, and he said the merger would
maintain international flights to Amsterdam. He went further to
say we could expect more international flights from Memphis and
suggested Memphis to Paris was going to happen, and he said
there would be more flights. This will enhance the status of
traffic and service at the Memphis International Airport. He
said it would add, not delay--not take away from Memphis
International Airport.
He said he knew Memphis from when he was at Northwest, and
he loved the ribs, he loved the city, he knew how great the
airport was, how well-managed it was, how the time on the
tarmac and taking off was less, that they saved oil, and it was
the best connections they could possibly have. Those facts were
true. His response was not.
I asked US Air and American to look at Mr. Anderson's
statement and understand that Memphis International Airport is
a place they should be. And when other airlines did not come to
Memphis, US Airways did. They added additional flights from
Memphis to Washington at better prices, and I appreciate that.
We like that competition, and US Airways did something other
airlines did not.
When Frontier Airlines thought about coming into Memphis,
Northwest cut their prices. That eliminated the opportunity for
Frontier to come in. Later People Express expressed an interest
in coming into Memphis. And because Delta had such a dominant
market share, People Express did not.
The opportunity in Memphis is there. Before the merger,
there were 240 flights a day out of Memphis International
Airport. As of this December, there 40 percent of that service,
or simply 96 flights, not 240. It would not surprise me to see
further cuts. And on Saturdays it looks like Dodge City. So
ribs are plentiful. There is opportunity for US Airways to come
into Memphis and to fly these routes, US Airways/American, and
to serve Memphis.
Delta has used its base in Memphis to keep carriers out and
not have real competition. Memphis consumers pay higher prices
than almost any airport in the country, and this has cost
businesses to not choose Memphis as a place where they want to
come because they do not get the service. Federal Express needs
the service and supplies it. Federal Express takes some of
their product and puts it all in the airlines, which can help
your airlines serve Memphis.
Call Fred Smith, Mr. Johnson. He will tell you, come to
Memphis, and so do I.
So there are plenty of reasons why when we look at this
merger, and I understand wonderful things about--I have heard
about Mr. Johnson and Mr. Kennedy, and we need to look at it
differently. We have heard from Richard Anderson. We do not
want a repeat performance. But the basis upon which he made his
untrue statements are still valid. Memphis International
Airport is a fine airport, great service, great weather, great
opportunities to save on fuel, and a great city to serve.
I appreciate your being here. I appreciate Mr. Bachus
scheduling this hearing. I look forward to the testimony, and I
look forward to US Airways and American serving Memphis,
America's great city, and Memphis International Airport, the
great airport that it is.
Thank you, Mr. Bachus. And I will also give you a statement
and ask unanimous consent to enter a statement from Mr. McGhee
and Mr. Slover of the Consumer Union expressing concerns about
this merger.
Mr. Bachus. Without objection.
[The information referred to follows:]
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__________
Mr. Cohen. Thank you, sir, and I yield back the balance of
my time. It does not exist, but that is traditional to yield it
back. [Laughter.]
Mr. Bachus. I guess let the record show that Mr. Cohen does
not want you to merge with Delta Airlines. [Laughter.]
Our first witness is--well, without objections, other
Members' opening statements will be made a part of the record.
[The prepared statement of Mr. Johnson follows:]
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Mr. Bachus. And at this time, I will introduce the
witnesses.
Gary Kennedy, representing US Air--no, American. You are
going to go first, yeah, that is right. As senior vice
president, general counsel, and chief compliance officer to
American Airlines, Mr. Kennedy directs all of American's legal
affairs worldwide. Mr. Kennedy also directs American's
corporate compliance program and oversees corporate governance
matters.
Before joining American Airlines in 1984, he practiced law
in Salt Lake City. Mr. Kennedy is a magna cum laude graduate of
the University of Utah, where he was a member of Phi Beta
Kappa. He received his JD from the University of Utah School of
Law.
And we look forward to your testimony, Mr. Kennedy. And as
I have told you privately before the hearing started, I have
seen tremendous improvement in US Airway's operations, and the
staff, and the service. And it has been a real transformation,
and I compliment you and the management team at US Airways. And
actually, you are American and I'm complimenting you. I should
have been complimenting Mr. Johnson, right, so I apologize for
that.
And now I will get to Mr. Johnson and compliment you. Mr.
Johnson, executive vice president of corporate and government
affairs at US Airways, where he oversees corporate, legal, and
regulatory affairs.
Prior to joining US Airways in 2009, Mr. Johnson was a
partner of Indigo Partners, LLC, a private equity firm
specializing in acquisitions and strategic investments in the
airline and aerospace industries. Mr. Johnson also served as
executive vice president with American West Corporation prior
to its merger with US Airways.
He earned his MBA and JD from the University of California-
Berkeley and his BA in economics from Cal State University in
Sacramento.
Thank you, Mr. Johnson, for testifying. And what I said to
Mr. Kennedy about US Airways, obviously applies to you. And I
did tell both of you all, and I was thinking the testimony was
going to be flipped, but it really is a well-managed airline.
And I do not travel American, so I really do not have that many
occasions to travel on American. But when I did, they were very
professional.
Our third witness is Mr. Kevin Mitchell with the Business
Travel Coalition. He is chairman and founder of the coalition
where he advocates for the corporate travel community in North
America, Europe, and Asia. He has over 40 years' experience in
restaurant, hospitality, sports management, business aviation,
and business travel industries.
Before joining or founding BTC, Mr. Mitchell served as vice
president of CIGNA Corporation. And he received his BA in
international relations from St. Joseph's University in
Philadelphia in 1980.
We thank you for testifying.
Our fourth witness, Professor Sagers, Christopher L.
Sagers, professor of law at Cleveland-Marshall College of Law
in Cleveland, Ohio, where he specializes in administrative law,
antitrust law and economics, and business regulation.
Before joining the academy, Professor Sagers was in private
practice in Washington, D.C., at the law firm of Arnold &
Porter and Shea & Gardner. He earned his JD cum laude from the
University of Michigan School of Law and his masters of public
policy from the University of Michigan.
We thank you for testifying, Professor Sagers.
Our last witness is Dr. Clifton--it is Clifford, is it not?
Clifford Winston, Ph.D., at The Brookings Institution. He is
senior fellow in economic studies there. His research focuses
on analysis of industrial organization, regulation, and
transportation. He was the co-editor of the annual micro-
economic edition of Brookings' paper on economic activity, and
has authorized numerous books and articles. Before coming to
Brookings, Dr. Winston was an associate professor at MIT.
Dr. Winston received his AB and Ph.D. from the University
of California-Berkeley, and his masters from the London School
of Economics.
Thank you for testifying.
And, Mr. Kennedy, you will go first with your public
statement. Each of the witnesses' written statements will be
entered into the record in its entirety. And I ask each witness
to summarize his testimony in 5 minutes or less.
To help you stay within that time, there is a timing light
on your table, and when the light switches from green to
yellow, you will have 1 minute to conclude your testimony. When
the light turns red, it signals the witness' 5 minutes have
expired. But I am actually more lenient than most people, so if
you need to go on another minute, that is fine with me.
I now recognize Mr. Kennedy for 5 minutes.
TESTIMONY OF GARY F. KENNEDY, SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND CHIEF COMPLIANCE OFFICER, AMERICAN AIRLINES
Mr. Kennedy. Chairman Bachus, Ranking Member Cohen, and
Members of the Subcommittee, thank you for the opportunity to
testify today.
My name is Gary Kennedy, and I am the senior vice
president, general counsel, and chief compliance officer for
American Airlines. I have been intimately involved in both the
Chapter 11 restructuring of our company and the proposed merger
between American and US Airways.
As the Committee knows well, the airline industry has
experience severe economic turbulence over the past decade. The
shockwaves from the events of 9/11 created enormous difficulty
in the aviation industry, and all U.S. carriers grappled with
ways to survive in the wake of the emotional and economic
upheaval created by those terrible events.
In 2003, US Airways was on the brink of filing for
bankruptcy protection, but thanks to the willingness of our
organized labor representatives to take the steps necessary at
that time to reduce costs, we avoided a chapter 11 filing. For
the next 8 years, we struggled to find a way to financial
stability. Despite our best efforts, our losses continued to
mount, reaching $12 billion over the previous 10 years. In
November 2011, our board came to the painful conclusion that
time had run out. The only viable path forward was to
restructure our business under Chapter 11 of the Bankruptcy
Code.
There is no easy to describe how difficult our bankruptcy
reorganization has been for the company and our employees.
Beginning at the top of the organization, we reduced our senior
management ranks by 35 percent. We then moved through the
balance of the organization making necessary changes, including
the reduction of 15 percent of total management staff.
Meanwhile, we began renegotiating certain of our secured
obligations, our leases, and our contracts with vendors. We
also negotiated new long-term contracts with each of our
organized labor groups. These new contracts include
productivity improvements and changes to health and retirement
benefits. At the same time, we increased pay for our employees
and mitigated job losses by offering retirement incentives.
One of the most important objectives we achieved was to
freeze rather than terminate our employee pension plans. As a
result, we now expect to fulfill those obligations rather than
unload them on the PBGC as other airlines have done.
Of course all that we accomplished was done in the context
of our Chapter 11 case and in consultation with the official
Unsecured Creditors Committee appointed by the United States
Trustee. By mid-summer last year, we made sufficient progress
that we decided, in conjunction with the Creditors Commission,
to embark on a formal process to consider a merger with US
Airways.
It was clear from the outset of our review that a merger
with US Airways could create significant value for our
stakeholders and bring substantial benefits to the traveling
public. We have conservatively estimated that by 2015, revenue
and cost synergies will outweigh cost dyssynergies by over $1
billion. This combination will make our company a much stronger
competitor against the other large airlines.
We are under no illusions that mergers are easy or
seamless. We have agreed from the outside to do everything in
our power to learn both from the success and the mistakes of
those who have gone before us. Many of the most important
decisions have already been made. The combined company will use
the great American Airlines brand, the company will remain
headquartered in Dallas-Fort Worth area, and all hubs in both
systems will continue to be hubs in the new American.
Our CEO, Tom Horton, and US Airways CEO, Doug Parker, will
jointly lead both the transition team and the New American as
it emerges from bankruptcy. Mr. Parker will be CEO of the new
company, and Mr. Horton will be chairman of the board.
Now, I understand and recognize that many Members of
Congress are skeptical of promises made in these situations,
and also concerned about industry concentration. As to the
former, we do not intend to make commitments that we cannot
keep. And as to the latter, it is clear that this merger does
not create a high degree of concentration.
Above all, however, I would urge you to consider the facts
with which I began my testimony. Nothing has been more damaging
for the airline industry, our employees, our customers, and our
shareholders than the years of economic turmoil we have
experienced.
This transaction is unique in that it is endorsed by all of
our labor unions and embraced by management and the boards of
both companies. We know we have a solemn obligation to
implement this transaction with great care and thought, and we
are eager to do so.
Thank you for the opportunity to testify today.
[The prepared statement of Mr. Kennedy follows:]
Prepared Statement of Gary F. Kennedy, Senior Vice President,
General Counsel and Chief Compliance Officer, American Airlines, Inc.
Chairman Bachus, Ranking Member Cohen and Members of the
Subcommittee, thank you for the opportunity to testify today about the
issues of airline competition, bankruptcy, and the proposed merger of
American Airlines and US Airways. We appreciate the manner in which
this hearing is structured as all of these issues are inter-related.
As General Counsel of American Airlines, I have been intimately
involved in both the Chapter 11 restructuring of the company and the
proposed merger between American and US Airways. I would like to give
you a sense of how we arrived at this point from American's point of
view and why this transaction is so critical to the customers,
employees and communities of both companies. I believe Mr. Johnson from
US Airways will address what both companies hope to achieve going
forward.
As this Committee knows well, the airline industry has experienced
severe economic turbulence over the past decade. The shock waves from
the events of 9/11 created enormous difficulty in the aviation industry
and all US carriers grappled with ways to survive in the wake of the
emotional and economic upheaval created by those terrible events. This
was followed by the unprecedented run-up of jet fuel prices in the
summer of 2008 and the financial collapse of the economy that further
strained our industry as corporations cut travel budgets, and
discretionary spending on non-essential items plummeted. The
consequences were significant. During this period, there were a series
of airline bankruptcies, severe cuts in capital expenditures, the
furlough of thousands of employees, the loss of air service to many
communities, and three major commercial air carrier mergers.
For most of the past decade, American Airlines took a different
path than many of our competitors. In 2003, we were on the brink of
filing for bankruptcy protection, but thanks to the willingness of our
organized labor representatives to take the steps necessary at that
time to reduce costs, we avoided a Chapter 11 filing. For the next
eight years, as our major competitors reduced costs through their own
Chapter 11 cases and created larger and more attractive networks
through consolidation, we struggled to find a path to financial
stability, while maintaining a generous package of benefits for our
workers and quality service for our customers.
As we worked hard to avoid a bankruptcy filing, our largest
competitors were embarked on a different course and new entrants were
poised to take advantage of the turmoil being experienced by the legacy
carriers. In 2001, American was the largest airline in the world. With
the mergers of Delta and Northwest, United and Continental, and
Southwest and AirTran, American became the fourth largest carrier
domestically and dropped to the third largest carrier globally. At the
same time, low cost carriers, old and new, continued to grow and enter
more markets. Today, the vast majority of our passengers are flying on
routes with competition from one or more low cost carriers, and that
number is expected to increase. That will certainly be the case in the
Dallas/Fort Worth region and elsewhere when the Wright Amendment
perimeter rule is lifted next year.
In addition to the changes occurring on the domestic front, the
configuration of international global airline alliances was also
changing. Although the joint business venture among British Airways,
Iberia, and American was finally approved after 13 years, we had fallen
far behind our US competitors, all of which enjoyed the benefit of a
much earlier approval of their joint ventures. In short, on a
competitive and financial basis we continued to lag far behind the rest
of the industry.
American did not stand idly by during these years. We undertook a
variety of steps to position ourselves for long-term success. We
strengthened our network by focusing on markets with the greatest
concentration of business travelers, and we fortified our alliances
with the best international partners. We signed a historic and
transformational aircraft purchase agreement for 550 new aircraft, one
that promised to give us one of the most modern and fuel efficient
fleets in the industry. And, we began investing again in our products,
services and technology to create a world-class travel experience.
Despite our efforts and the substantial progress we made to succeed in
the long term, our losses continued to mount, reaching $12 billion over
the previous 10 years. And, there was no end in sight.
In November 2011, our Board came to the painful conclusion that
time had run out. The only viable path forward was to restructure our
business under Chapter 11 of the Bankruptcy Code. Of course, in the
months and years leading up to our Chapter 11 filing, we gave strong
consideration to possible merger partners. Given our weak financial
condition at the onset of our restructuring and the fact that we had
yet to establish a track record of financial improvement and value
creation, we determined that we must first get our own house in order
before we could properly evaluate a potential merger with another
airline. Indeed, until we had a line of sight to a far more stable
financial structure, both in terms of revenues and costs, we believed
we would not be negotiating from a position of strength and, as such,
would be more challenged in fulfilling our duty to maximize value for
our owners.
On the day we filed for relief under Chapter 11, we had a change in
leadership. Our new CEO, Tom Horton, asked everyone at the company to
work hard to achieve a successful restructuring, while continuing to
run a top notch airline with great service to our customers. He
reminded us that with a strong balance sheet, a competitive cost
structure and restructured contracts that allowed us to compete on a
level playing field, we could then appropriately consider a range of
strategic options.
There is no easy way to describe how difficult our bankruptcy
reorganization has been for the company and our employees. Beginning at
the top of the organization, we reduced our senior management ranks by
35 percent. We then moved through the balance of the organization
making necessary changes, including the reduction of 15% of total
management staff. Meanwhile, we began renegotiating certain of our
secured obligations, our leases, and our contracts with vendors. We
eliminated significant expenses and tightened our belts in every
department of the company. Most importantly, we entered into intense
negotiations with our labor unions in an effort to improve productivity
and reduce overall costs. While this was a long and difficult process,
we achieved new long term contracts with each of our organized labor
groups. These new contracts include productivity improvements and
changes to health and retirement benefits that put American on a level
playing field with the legacy carriers. At the same time, we increased
pay for our employees and mitigated job losses by offering retirement
incentives. One of the most important objectives we achieved was to
freeze, rather than terminate, our employee pension plans. As a result,
we now expect to fulfill those obligations, rather than unload them on
the PBGC, as other airlines have done.
Of course, all of what we have accomplished was done in the context
of our Chapter 11 case and in consultation with the Official Committee
of Unsecured Creditors appointed by the US Trustee.
As we worked our way through our Chapter 11 case, we were
approached by US Airways early last year with a merger proposal. At
that time, we declined to engage in discussions with them. Instead, we
continued to work on our reorganization. As we did, a number of
positive developments quickly emerged. First, we began to see
encouraging financial and operational results. Operating costs were
down and, just as importantly, revenues began to rise--topping the US
industry in year-over-year unit revenue improvement for six straight
months--and our operational performance began to improve to the best
levels in many years. By mid-summer we had enough certainty around our
standalone plan and our improving financial position that we decided,
in conjunction with the Creditors Committee, to embark on a formal
process to consider strategic alternatives.
As part of this process, we entered into a non-disclosure agreement
with US Airways that allowed both companies to share information and
engage in a detailed analysis of the potential benefits of a
combination. The Creditors Committee, through its financial and legal
advisors, actively participated in this undertaking. Later in the
process, an Ad Hoc Committee, consisting of substantial holders of our
unsecured debt, also reviewed the proposed combination in significant
detail. It is fair to say that multiple parties scrutinized and
evaluated this proposed transaction. Ultimately, we agreed to a
structure with American stakeholders owning 72% of the combined
companies.
It was clear from the outset of our review that a merger with US
Airways could create significant value for our stakeholders and bring
substantial benefits to the traveling public. We have conservatively
estimated that by 2015 revenue and cost synergies will outweigh cost
dis-synergies by over $1 billion. The majority of these revenue
synergies are derived by combining two complementary networks that will
offer consumers more service at more times to more places. And because
this will be a merger of complementary networks, these benefits come
with virtually no loss of competition. Of the more than 900 domestic
routes flown by the two carriers, there are only 12 overlaps. This is
one reason we are convinced that this merger is consistent with good
public policy. The combination will make our company a much stronger
competitor against the other large airlines. Consumers will have three
strong, healthy global network carriers from which to choose, as well
as a number of low cost carriers, including Southwest, JetBlue and
Virgin America. The new American will have the financial strength to
invest the resources needed to improve the customer experience,
including new aircraft, cutting edge products and services, and the
technology and tools designed to help our employees deliver superior
service to our customers.
The combined airline will offer new routings for our passengers in
thousands of additional markets. For American, the greatest benefit
derives from two principal components. First, US Airways offers a
substantial network in the Eastern section of the country. This will
complement our strong operations in the Southeast, Midwest, and West
Coast. Second, US Airways offers an impressive network in small and
medium size communities. We view these as great assets that will
provide us the opportunity to reach many communities that our customers
are not able to access today. Like US Airways, we value service to
small and medium size communities and have consistently looked for
additional markets that can enhance our entire network.
We are under no illusions that mergers are easy or seamless. We
have agreed from the outset to do everything in our power to learn from
both the successes and mistakes of those who have gone before us. Many
of the most important decisions have already been made. The combined
company will build on the great American Airlines brand and our
AAdvantage loyalty program. The company will remain headquartered in
the Dallas/Fort Worth area, and all hubs in both systems will continue
to be hubs in the new American.
Our CEO, Tom Horton, and US Airways' CEO, Doug Parker, will jointly
lead both the transition team and the new American as it emerges from
bankruptcy. Mr. Parker will be CEO of the new company and Mr. Horton
will be Chairman of the Board. I can personally attest that despite the
difficult path that got us here today, the spirit of cooperation and
determination in both companies is extraordinary.
For reasons that Steve Johnson will outline in greater detail, we
believe this transaction will be good not only for our two airlines and
employees, but also good for competition and the travelling public.
I know that many Members of Congress are skeptical of promises made
in these situations and also concerned about industry concentration. As
to the former, we do not intend to make commitments that we cannot
keep. And as to the latter, it is clear that this merger does not
create a high degree of concentration. Above all, however, I would urge
you to consider the facts with which I began my testimony. Nothing has
been more damaging for the airline industry, our employees, our
customers, and our shareholders than the years of economic turmoil we
have experienced.
This transaction will give us the opportunity to become a stronger
competitor, one with a degree of financial stability that we have not
experienced in many years. We will be a company that is better
positioned to deliver for customers and its people. This transaction is
unique in that it is endorsed by all of our labor unions and embraced
by the management and boards of both companies. We know we have a
solemn obligation to implement the transaction with great care and
thought. We are eager to do so.
Thank you again for the opportunity to testify today.
__________
Mr. Bachus. Mr. Johnson.
TESTIMONY OF STEPHEN L. JOHNSON, EXECUTIVE VICE PRESIDENT,
CORPORATE AND GOVERNMENT AFFAIRS, US AIRWAYS, INC.
Mr. Johnson. Thank you, Chairman Bachus, and Ranking Member
Cohen, Chairman Goodlatte, and Ranking Member Conyers. And
thanks to the entire Committee for having us here today. It is
an honor to testify before the Subcommittee about the merger of
American Airlines and US Airways.
The creation of the New American Airlines will be good for
competition, good for consumers, and good for choice. Expanding
our network for the benefit of our customers, our employees,
our shareholders, and our communities is the motivation for
bringing these companies together.
Integration of the complementary networks of American
Airlines and US Airways will enhance competition in an already
highly competitive marketplace. It will also deliver
significant benefits to each of those constituencies. Our
customers and communities will benefit from more and better
service. Our employees will receive improved pay, better
benefits, and greatly enhanced job security.
And, Mr. Chairman, I would like to acknowledge the fact
that there is about 30 of Gary's and my colleagues here in the
room with us today who came to join us for the hearing, and
thank them personally for joining us.
Our shareholders will benefit from improved financial
stability and from $1 billion of synergies created by the
merger. And we are proud that the combination has unprecedented
support from our 100,000 employees, the financial markets, and
the communities we serve.
The US Airways team has been a leader in delivering
exceptional customer service, but we have long recognized that
we could do more. Airline passengers have made it clear that
what they want are broader networks capable of taking them
wherever they want to travel whenever they want to go. By
combining the systems of American and US Airways, the New
American Airlines will build the network our passengers want,
one that will compete vigorously with the networks of Delta and
Northwest, and with low-cost carriers like Jet Blue and
Southwest.
The passenger benefits of the New American Airlines stem
from the complementary nature of our operation. By combining
these operations, we add origins, destinations, and hubs to a
network with very little duplication. Indeed, out of the nearly
900 domestic routes we will serve, American Airlines and US
Airways have only 12 nonstop overlaps.
Also US Airways has historically provided extensive air
service to small- and medium-sized communities, and this merger
will allow us to extend that focus to the American Airlines
system.
Combining these networks also will create new, exciting
international opportunities. We will provide thousands of
passengers better alternatives with over 1,300 new routes
worldwide. In addition, our customers will have the potential
to access 130--sorry, have the potential to access over 130
cities around the globe served by American, but not yet served
by US Airways, and 62 cities served by US Airways but not yet
served by American.
And by adding US Airways to the oneworld global alliance,
we will increase competition on international routes by
creating attractive opportunities for additional international
service to oneworld customers and to US Airways hubs.
Domestic markets will become even more competitive.
Although it will be the largest airline in the U.S., the New
American Airlines will have less than 25 percent of domestic
available seat miles, and will compete against the nationwide
networks of Delta with 21 percent and United and Southwest,
each with 19 percent. The New American Airlines will also
compete against Southwest's significantly lower cost structure
and a host of smaller, but fast-growing, lower-cost airlines,
including Jet Blue, Spirit, Allegiant, and Virginia America.
Also important, as we increasingly think about competing in
a global airline business, the combination of American and US
Airways will create a third U.S. airline that can compete
successfully with major international airlines in key markets
around the world.
The New American Airlines will be a financially stronger
company. The US Airways business has been consistently
profitable, and the successful restructuring of American will
return that business to profitability. And as a result of the
combination, we expect to generate over $1 billion in net
synergies as we increase revenues from new passengers taking
advantage of our broader network and improved service, and
reduce costs from scale and the elimination of duplicative
systems in management.
That improved financial performance will provide American's
bankruptcy creditors with an enhanced opportunity for a full
recovery, a result unheard of in airline bankruptcies. And it
will create more financial stability in the extremely cyclical
airline industry.
That financial stability also will provide very significant
benefits to our employees, including better pay and benefits,
greatly improved job security, and better opportunity for
advancement. Thus, it is not surprising that the merger has
generated unprecedented support from employees of both
companies, their labor unions, and from the communities in
which they live.
Antitrust review of these issues is important, and we are
already working with the Justice Department to demonstrate the
competitive benefits of this merger. We appreciate the
opportunity to address these issues with the Subcommittee today
and commit to working with you in your oversight capacity.
We announced the merger only 12 days ago, so there are many
issues yet to be resolved, but I will do my best to answer any
questions you may have today. Thank you very much.
[The prepared statement of Mr. Johnson follows:]
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__________
Mr. Bachus. Thank you.
Mr. Mitchell.
TESTIMONY OF KEVIN MITCHELL, CHAIRMAN,
BUSINESS TRAVEL COALITION (BTC)
Mr. Mitchell. Thank you. Mr. Chairman and Members of the
Committee, this morning I am going to explain one threat to
price transparency that would be enabled by this merger that
has been agreed to by airlines, but has not yet caught the eye
of the public. I am also presenting this testimony this morning
on behalf of the American Antitrust Institute.
In 2008, I warned this and other Committees in testimony of
the dangers of the then proposed Delta/Northwest merger and
what those dangers would hold for consumers. And I remember
well that Northwest CEO, Doug Steenland, testified that
Committee Members should not be concerned because the market
disciplining effect of third party distributors, such as
Expedia, is so pervasive and so important that they create this
transparency, he said, that will keep prices low. He used this
transparency, in fact, to justify the merger, and he was right
back then about the effects of transparency.
Today, however, airlines, including American and US
Airways, have agreed on a brazen new worldwide business model
for how to price and sell tickets. It is designed to destroy
price transparency, which is the very antidote to consolidation
needed to ensure a healthy marketplace. The model is called new
distribution capability, or NDC, and the airlines trade group,
IATA, is spearheading implementation.
NDC is designed to terminate, by agreement among
competitors, the current transparent model for the pricing of
tickets where fares are published and publicly available for
comparison shopping and purchase by all consumers on a non-
discriminatory basis.
What problem are the airlines endeavoring to solve? IATA
has decried publicly the commoditization of airline services
caused by low fare search capabilities of the very online
travel agencies that Mr. Steenland lauded. For example, Tony
Tyler, Director General of IATA, stated in a press interview
remarkably, and I quote, ``We've done a great job of improving
efficiency and bringing down costs, but we've handed that
benefit straight to our customers. As soon as someone has got a
cost advantage, instead of charging the same price and making a
bit of profit, they use it to undercut their competitors and
hand the value straight to passengers or cargo shippers, and
you've got to ask why,'' says Tyler. ``I think one of the
reasons is the way we sell our product. It forces us to
commoditize ourselves,'' end quote.
How does an NDC work? A binding resolution codifies that
airlines have agreed that they have the right to demand from
consumers, before they would be privileged to receive a fair
quote, personal information, including name, age, nationality,
contact details, frequent flyer numbers of all carriers,
whether the purpose of the trip is business or leisure, prior
shopping purchase and travel history, and of all things,
marital status
Why is this program so toxic? Air fares would no longer be
publicly filed and available on a non-discriminatory basis for
consumers to anonymously comparison shop and purchase through
travel agencies. Instead, each price would be unique depending
on the profile of the consumer. This personal information can
be used to extract higher prices from less price sensitive
travelers, such as business travelers.
In contrast, today when a consumer wants to travel from A
to B, she can go to a travel agency that has the fares and
schedules. All options in the marketplace are returned so she
could easily compare prices without having to divulge personal
information. It is this very price visibility that has checked
the power of airlines to raise fares lest they lose out to
competitors offering a better deal.
Price transparency is even more important today because
when Steenland testified there were six network carriers, then
there were five, then there were four. Now we are heading to
33. By eliminating transparencies, airlines will have created
by concerted actions a new system of completely opaque pricing,
and with it the ability to raise all fares across all systems.
The nexus between NDC and this merger, this merger
eliminates US Airways, a maverick on airline distribution
issues. It will be far easier to coordinate expressly or
tacitly among three network competitors, and far easier to
impose this model, especially given the clout that the New
American Airlines would have as the biggest carrier on the
planet.
The lack of transparency created by NDC further cements the
dominance of these mega carriers. And once NDC is established
here in the world's largest market, it is going to be lights
out, game over for consumers.
Two remedies. DoT has the authority to approve NDC. Given
its anti-competitive effects and unprecedented invasion of
privacy, DoT should reject it without condition.
Number two, DoJ. They should serve IATA and its members who
have been spearheading the NDC scheme with a CID to discover
the purpose and objectives of NDC and the process by which
horizontal competitors reached a binding agreement on how they
would price and sell tickets.
Thank you, Mr. Chairman. And I would just like to add that
the American Antitrust Institute is looking at the competitive
effects of NDC itself.
[The prepared statement of Mr. Mitchell follows:]
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__________
Mr. Bachus. Thank you.
Professor Sagers.
TESTIMONY OF CHRISTOPHER L. SAGERS, JAMES A. THOMAS
DISTINGUISHED PROFESSOR OF LAW, CLEVELAND STATE UNIVERSITY
Mr. Sagers. Thank you very much. So my friend, Diana Moss,
of the American Antitrust Institute told me that I should be
getting hazard pay for being here today. And I am here, I am
afraid, to suggest some reasons not to be so optimistic about
this merger. I will notice that there are kind of a lot of
captains uniforms behind me, and I have to say I am a little
afraid that when I leave here to go home to Cleveland today, I
am going to be on some sort of no fly list. And I hope that is
not true.
Mr. Bachus. They are all very friendly, I can tell.
Mr. Sagers. I am sure they are. I am not going to say what
airline I am on. And I will note as well that Dr. Winston, who
I think is--he is only coincidentally to my left, and he is
also going to probably say a few things in disagreement with
me. He is an eminent person. No person could study the
antitrust treatment and competition in airline markets without
studying his work. And yet he and I are going to disagree about
a few things.
But the most encouraging thing I have heard today so far is
Chairman Goodlatte's statement, which I was very pleased to
hear describe antitrust law as non-ideological. And I could not
agree more. It is non-ideological.
I do not have, you know, my own phalanx of supporters
behind me, and indeed I do not have any staff to come help
support me in these sorts of things because I am only here to
speak in favor of a policy that is supposed to protect
everybody, including us average folks. And so guys like me come
and talk about it alone.
So here is my basic thought in the very brief time I have
to describe this complex deal.
I think that in policy consideration of transactions like
these, complexity is the defendant's friend. Complexity is the
merging party's friend. It is not the friend, though, of most
other people that are affected by the transaction. I want,
therefore, to try to describe a few things that, to me, seem
relatively simple.
First of all, there will be a lot of discussion, and it is
going to seem complex because it seems to require a lot of
understanding of complicated industry facts, of benefits
proposed by the merger. Right? There is a lot of complexity
surrounding the purported benefits.
I am not even really going to talk about the benefits. I
personally do not think they are worth dwelling on, at least
not in this setting, because we all, every single one of us,
have been to this rodeo before. We have seen many many mergers
in many industries, and we have seen many mergers in the
airlines in the 35 years since deregulation. And they have
always been said to propose these same benefits or benefits
like them, and quite often they have been disappointing. My
sense is that the promises are typically not kept, and they
have led to sometimes very painful disappointments.
I am going to talk instead about what I also think is
relatively simple, and that is the competitive effects. There
is not time for me really to address it fully, but I will say
this. In the written statements that I read last night, and I
read them all, the most remarkable statement was that in this
merger, among the thousands and thousands of daily flights to
cities all across the United States that are controlled by
these 2 carriers, the only overlaps that matter in the whole
combined network will be 12 overlaps, 12 flights. We could
delve into some complexities. I would rather focus on what
seems to me simple. We should ask ourselves, among those
thousands and thousands of flights, are there really only 12
cities in which these 2 carriers provide competition with each
other that would be lost through this merger? I do not think
so.
For a brief introductory analysis to what are the more
likely effects, you can look at the white paper produced by the
American Antitrust Institute, which is attached to Mr.
Mitchell's written statement.
The final thing I will say, and unfortunately I have a very
brief remaining time to say it, is that a dominating theme of
all discussion of airline mergers since deregulation has been
the economic difficulties of the carriers. The claim is we have
to merge. We have to consolidate to strengthen ourselves so
that we can perform.
Here are a few thoughts about that. First of all, the
carriers really have never offered any very plausible
explanation why merger. It has to be merger that is going to
solve our economic problems. They can and they often have
suggested a lot of detailed arguments.
But again, I think the response is a relatively simple one,
and it is that, well, we have had a long time. We have had 35
years with dozens of mergers, every single one of which has
been sold on the claim that synergies, cost savings, et cetera,
are going to make us competitive. It has not worked. The
airlines have remained--the legacy airlines, at least, have
remained mostly economically in dire straits throughout that
whole time.
With that I will end. Thank you.
[The prepared statement of Mr. Sagers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Bachus. Mr. Winston or Dr. Winston.
TESTIMONY OF CLIFFORD WINSTON, SENIOR FELLOW, ECONOMIC STUDIES
PROGRAM, THE BROOKINGS INSTITUTION
Mr. Winston. Thank you. I am happy to be able to testify at
this merger. I testified at the Delta/Northwest merger in 2008
in support of that merger, and I support this merger. But I
have some new perspectives to bring. I am not just going to
read my old testimony. And what I think I will do in the short
amount of time, given what we have heard, is repackage my
written presentation in my oral presentation, beginning with my
conclusion.
All mergers, not just airlines, involve what we are to call
the Williamson tradeoffs; that is, mergers trade off benefits
from economies and expansion to get lower costs, okay. That is
the positive claim to them. And then the anti-competitive
concern that you are losing a competitor and that you will
raise prices. So traditionally, when we think of these things
we start off with tradeoffs, and naturally, you know, you will
hear them and you have heard them, as expected.
What I think is interesting now about airlines, and I did
not stress this enough before, but I think it is increasingly
true now, is we do not have to think of these any more as
tradeoffs. Now admittedly, I will be bringing in an additional
policy perspective, but I think that was appropriately done by
Mr. Mitchell raising just concerns about what is going on with
how tickets are distributed.
And that additional policy perspective is the growing
reality of where this industry is going, and that is the
globalization. This is a global airline industry, right? We
have to see where are we really going to be going. And when I
mean globalization, I mean full open skies, something we have
been moving toward, and ultimately cabotage, which is allowing
foreign carriers to serve in the U.S.
And, you know, if you think that is a strange policy,
consider the automobile industry and imagine what it would be
like if we did not have Honda, Toyota, et cetera, building and
assembling cars here. And one wonders what is wrong with a
picture like that when that is the case in autos, but we do not
allow British and Irish planes to fly in the U.S.
All right. Once you bring that perspective into mind,
things change radically. You do not have tradeoffs. In other
words, it is quite clear that with the airline's job to be as
efficient as possible, okay, and reduce costs, and what policy
makers' job to do is to promote globalization and policy,
promoting open skies, finish the job with that, and cabotage.
What that will do is give you your influx of competitors to
make sure that the efficiency improvements are largely
transferred to consumers. And so the concerns about competition
just go out the window once you start thinking about that.
All right. But something else very important becomes clear
then. You get a deeper and, I think, more intuitive
understanding of why carriers are merging. Think about what
airlines really involve. It is a very risky investment, okay?
And billions of dollars of seats that are in the sky, all
right? And it is risky because there are lots of shocks that I
will get to shortly, all right.
What you want to do deal with risk, as we know, is to have
a portfolio, and you could allocate those seats in response to
shocks and risks. And in a globalized economy, then you can
imagine what people will do. When things are tough in one
place, they will move their capacity to another place, all
right. Mergers enable you to do that.
So I would suggest that the main justification for mergers
which really has not been emphasized enough is really a way of
dealing with risk, which is the inherent challenge in this
industry.
All right. So let me turn to that, why I think that. This
all comes out of deregulation, you know. You can recall, but
you have read, that airlines operated with a load factor of 55
percent, so they have billions of dollars in capacity, and they
are using only half of it. So, you know, in retrospect you can
just see how crazy regulation was. What a waste, all right? But
at the same time, airlines were shielded from the fundamental
challenge; that is, matching capacity with demand and these
shocks.
So you have to commit to capacity to buy planes in advance,
and you think you know what demand is. And then you have got to
deal with fuel shocks, macroeconomic shocks, the Gulf War,
September 11th, and, to top it off, sequestration, all right?
That is really a very challenging thing to do.
So what do you want to do? You want to have the ability to
diversify, right, and be able to allocate your seats
appropriately. That is what mergers do, and that is why the
airlines have been doing it for all these decades, I would
contend.
Now, in the process of doing that, what do we see going on
in the industry? What are the long-run trends? Well, real
prices continue to go down. They continue to be below the SIFL,
the standard industry fair level, under regulations, so the
benefits of deregulation are preserved. And most importantly,
load factors are going up. That is the key efficiency thing
that we want to look at. We are not operating at 55 percent. We
are much closer to 80 or 90.
So I would suggest that, you know, these mergers are just
part of a tool. They are not the only tool, but to deal in the
long run with where this industry is going, and that is
globalization.
Now, I believe in the end, you know, Congress is critical
here in pushing for that, all right? And then we get a win-win,
and then presumably then the airlines should go along with it.
We are allowing you to be more efficient. You allow us to spur
competition in this industry.
[The prepared statement of Mr. Winston follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Bachus. Thank you. We will now proceed under the 5-
minute rule with questions, and I will begin by recognizing
myself for 5 minutes.
One thing, Mr. Mitchell, that you and Professor Sagers did
not address, you talked about some possible negative
implications of this merger. But if it does not go through, and
there are some demonstrable negatives, very many, and I just
wonder if you considered that. For instance, a failure of
American Airlines being financially unsustainable.
Mr. Mitchell. Well, American Airlines is exiting or will
exit bankruptcy reorganization as a lower-cost carrier with
billions of dollars in cash and cash equivalents, and new
aircraft are on order. And their CEO has said countless times
that they will be profitable as a stand-alone carrier. Likewise
US Airways is enjoying some of its most successful earnings in
its history.
So I just do not buy into the notion that these are failing
firms. It certainly does not apply as a failing firm against
the guidelines, the antitrust guidelines. They are fit and able
to compete. And to make the argument, as you hear now, then
that they need to be large enough to compete effectively with
the new Delta or the Continental-United, well, they claim
themselves they can compete against them. If you use the logic
that you always have to get bigger to compete with the next
biggest carrier, we are going to end up with two mega carriers.
I mean, the logic is flawed.
And then finally, there are many smaller independent
carriers that just do quite fine mixing it up.
Mr. Bachus. Okay.
Mr. Sagers. I would like to very briefly add one thing
because I think this seems like the biggest issue, right, if we
are going to have a huge business failure, we have to do
something.
My first point is I agree with Mr. Mitchell that it is
unlikely. We do not see airline liquidations that often,
despite the huge financial difficulty the industry has had in
35 years.
Much more importantly, we all have had a very painful,
unhappy experience during the past few years with this same
basic problem, which is that we in the United States do not
have the stomach for business failure. By not being willing to
tolerate it once in a while, we create a very serious problem,
which is that firms that know that they will be rescued fail to
learn how to compete in difficult markets, okay? And in this
case the subsidy----
Mr. Bachus. Let me say this. We have a bankruptcy law which
allows you to go into bankruptcy, and then it allows the
creditors, the company, the pension, the CBGC----
Mr. Sagers. Right, right.
Mr. Bachus [continuing]. To agree on the best route out of
bankruptcy. And that agreement has been made.
Mr. Sagers. We do have a bankruptcy law, but----
Mr. Bachus. But what I am saying, what these companies are
doing is exactly what the law avails of any company. And they
have made a decision through the bankruptcy process that this
is their best reorganization.
Now, you know, you could argue with that, but they have
availed themselves of the legal process.
Mr. Sagers. I disagree.
Mr. Bachus. Well, I know you do. But one thing that, and I
have read your statements and what you have said in the press.
But airline fares, I mean, you have talked about they have
escalated, but they have actually, as far as taking into
account inflation, they are one of the best, they are more
competitive than they have ever been. I mean, the only reason
they have been as cheap as they have is investors have pumped
billions of dollars into failing airlines.
And I would say this. You both mentioned that they maybe
had a few more complementary routes, or not complementary, but
duplications. But actually I cannot recall a merger of airlines
that had fewer duplications than this.
Mr. Sagers. I will reply if you allow me.
Mr. Bachus. What?
Mr. Sagers. I will reply if you will allow me.
Mr. Bachus. All right.
Mr. Sagers. Okay. First of all, they are not just doing
what bankruptcy law allows. They are emerging from bankruptcy
with a merger which is substantially uncompetitive. The subsidy
that we gave to the banks during the bailout----
Mr. Bachus. No, that is their bankruptcy plan, I think.
That is legal.
Mr. Sagers. Yes, sir.
Mr. Bachus. I mean, that is bankruptcy.
Mr. Sagers. That may very well be. Most people who emerge
from Chapter 7 do not do it through a horizontal----
Mr. Bachus. Well, most of them do not do it. But what they
do, that is an option.
Mr. Sagers. Yeah, unless it is illegal under antitrust
laws.
Mr. Bachus. And that is an option that the law gives them.
And I would just say this. I am a railroad attorney. I remember
Rock Island and where the government continued and turned them
down saying it was anti-competitive and you lost 10,000 miles
of rail and stranded over 4,000 shippers because you did not
allow a viable merger. And I can tell you that everything I
have read, this is going to make a stronger airline.
And I will say this. You could have stopped those mergers
before Delta and Northwest, I will agree with that. You could
have stopped it before Continental and United. But you did not,
and you created other airlines with a distinct advantage if you
do not let these two airlines merge.
And the employees are for this, you know. I have never seen
more favorable support from employees, from unions and in a
time of deficits from the Pension Guaranty Corporation, which
is not unimportant.
Mr. Mitchell. Mr. Chairman, could I add one point?
Mr. Bachus. Sure.
Mr. Mitchell. From ABC News, you know, we talked about the
12 overlapping routes. But there are 100 cities that these two
carriers currently compete on routes. That works out to 4,900
routes.
Mr. Bachus. Well, let me say this. If you call competing,
which I saw a list that if you fly from Birmingham to D.C. and
you want to fly through Dallas and take 12 hours as opposed to
2 hours from Birmingham to D.C., you can call that, if they
share that route. But I do not know of anyone that would take a
12-hour flight or an 8-hour flight when they could go non-stop.
Mr. Mitchell. But the real point----
Mr. Bachus. And that was on somebody's list.
Mr. Mitchell. The real point is that the 12 overlapping
routes, overlapping routes in general are not as important as
they were 4 or 5 years ago.
Mr. Bachus. All right, thank you. Mr. Cohen.
Mr. Cohen. Have all of you all flown through Atlanta? You
all have?
Voice. Atlanta?
Mr. Cohen. Have any of you all flown through Memphis? Mr.
Mitchell, is it more convenient and nicer to be in the Memphis
Airport or the Atlanta Airport? [Laughter.]
Mr. Mitchell. Every time I am there, I feel like I am
living the dream. [Laughter.]
Mr. Cohen. You got it, man. You have been there. Any of the
rest of you been and think Atlanta is a better experience for
your consumers than Memphis? Mr. Johnson?
Mr. Johnson. Sir, I am just not familiar with the Memphis
Airport. But after your discussion about it----
Mr. Cohen. You and Mr. Anderson.
Mr. Johnson. I am going to see the Memphis Airport as soon
as I can.
Mr. Cohen. Good. And you will like it. Is not the fact----
Mr. Bachus. He likes the ribs, right?
Mr. Johnson. He likes the Rendezvous, right?
Mr. Cohen. The Rendezvous and others. But, you know,
Memphis Airport is small. It is easy to get around. It smells
good. You smell ribs everywhere. [Laughter.]
Atlanta is just gigantic, and the only smell you get is
maybe, you know, congestion. Will US Airways-American--it will
be called ``American,'' Mr. Johnson--is there a likelihood that
you would look into Memphis? And with all the things about
competition, now are you going to leave Memphis to just to be
the stepchild of Delta, or would you look into coming in there
and providing competition, as US Airways has on the Memphis-
Washington route?
Mr. Johnson. We think both--am I on? Both airlines serve
Memphis now. We serve Memphis to a variety of our hubs. As you
know from our testimony, our written testimony, the creation of
the network that will come about by the New American Airlines
will create opportunities to provide additional service to
cities that we serve to our hubs, and we are hopeful that
Memphis will be among that. But at this point in time, we have
not had the opportunity to plan or talk about that, but
certainly Memphis will be on our list, sir.
Mr. Cohen. Mr. Mitchell, one of the things Mr. Anderson
said or others said was that since the Memphis Airport is so
much better, the time that airlines have to stay on the tarmac
or just approach, that they save money on fuel. Is that
accurate that that would be an attraction to an airline to come
to Memphis because of fuel costs just sitting on the runway?
Mr. Mitchell. I think there is abundant evidence of that.
All you have to do is look at the statements over time of
Southwest Airlines. They will, you know, stay away from any
airport where expenses and charges are just a little bit too
high for them. So, it makes an impact on the decision making at
the airlines for sure.
Mr. Cohen. Dr. Winston, you supported the Delta-Northwest
merger. When you did so, did you take into consideration the
horrific conditions that would result in a city like Memphis
because of this merger?
Mr. Winston. No, I did not. I had a broader perspective on
the merger. I qualified the danger of prospective assessment of
mergers because what we know is after the merger, there are so
many changes in the network, entry and exit, that may relate to
the merger, but in this case, as we know, probably had nothing
to do with the merger because April 2008 was when we had our
hearing, and the merger went forward, and then we had the great
recession.
How one could isolate what the merger did versus the great
recession is very, very difficult. So the great recession
should have----
Mr. Cohen. Well, we had our problems in Memphis, there is
truth to that. Should the great recession not have been made
Memphis a better airport, as Mr. Mitchell says, because of the
fact that you save money and you have less time. You are
burning fuel sitting there waiting to take off as you do in
Atlanta? And the great recession should have made Memphis a
more profitable hub for Delta. You do not agree with that.
Mr. Winston. I think that the problem with a place like
Memphis, as other, what we call, not the largest hubs, is
traffic. And again, if you are an airline, you want to fill
your plane with people, you want to go where the people are.
Mr. Cohen. Destination and origination. But nevertheless,
airports have become like Federal Express except the airlines
use people and Federal Express uses packages. And there are
just places where you move people around. And Memphis is a good
place.
But let me ask you this. Mr. Mitchell, Dr. Winston thinks
it would be good to have international competition. Do you want
to have Air Shanghai be our primary carrier?
Mr. Mitchell. I personally do not fly them too much.
[Laughter.]
But, you know----
Voice. Do they fly out of Memphis?
Mr. Mitchell. The notion that you can justify a merger
based upon some future change in the marketplace, such as
cabotage and open skies, is really not responsible. It is not
going to happen in our lifetime. None of the 30 pilots or
however many pilots are behind me want to wake up one morning
working to find themselves working for the Spanish government.
It is too complicated, and it certainly is no justification for
a merger.
Mr. Cohen. Thank you, sir. I was in Raleigh-Durham
recently, and I had a flight on US Airways. And I had some
time, and so I was able to look at the scheduling chart and saw
that American flew. And American had really much better prices
and much better deals on your frequent flyers going to
Washington from Raleigh-Durham. Is that one of the 12 routes
that you are talking about, or is that one of the some 100
routes that Mr. Mitchell mentioned?
Mr. Johnson. That is one of the 12 routes.
Mr. Cohen. And what will happen there?
Mr. Johnson. I imagine that we will retain a high level of
service between Raleigh-Durham and Washington, D.C.
Mr. Cohen. And will the price be US Airways prices or
American Airlines prices?
Mr. Johnson. I do not know. We have not talked about that
at all. You know, as I said, we announced this merger 12 days
ago, and those are things that we will work on over the coming
year as we----
Mr. Cohen. You know, it is not just Memphis. It was St.
Louis with TWA, it was Cincinnati, it has been Pittsburgh, lots
of hub cities who put a lot of investment in their airports.
And it was a business that is important to their communities,
suffered because of mergers.
Mr. Mitchell, do you see any of the hub cities that have
served American or US Airways seeing a similar fate as Memphis,
Pittsburgh, St. Louis, Cincinnati, and maybe others have
because of mergers?
Mr. Mitchell. Well, it is possible, and that is going to
have to be a very fact-intensive analysis by DoJ. But certainly
Philadelphia could be impacted, Charlotte could be impacted,
Phoenix could be impacted because of the geography of adjacent
hubs.
Mr. Cohen. Thank you, Mr. Bachus. I appreciate my time. Mr.
Johnson, when you come to Memphis, let me know. We will get
some ribs, and we will see Fred Smith. Thank you.
Mr. Johnson. I look forward to it.
Mr. Bachus. Mr. Farenthold.
Mr. Farenthold. Thank you very much. Mr. Chairman, when you
started out, you mentioned some of the airlines had gone away.
You skipped Braniff, a great Texas airline I grew up with. And
I mention that because it really looks like the only thing
consumers in the U.S. are looking on airlines right now is
price.
You go back to the days when Braniff and Southwest were
competing or Southwest and Muse Air, and you see some great
competition on something other than price. And really all you
have got now playing in that is Virgin is trying to offer a
little bit different experience.
But to me, it really is becoming commoditized, and I am
concerned as we get the number of carriers down, we drop--you
said there are 12 direct flights. And you are saying there are
only about 100 flights. Now, I am from Corpus Christie, Texas.
To fly anywhere from Corpus Christie, you got to change planes
in Dallas or Houston. I think there are a lot of folks who are
in non-hub cities or not traveling to hub cities, they are in
the same boat.
So, how many routes with one stop are you all competing on?
Mr. Johnson. I do not know the number, but what I can tell
you is any route with one stop in which we are competing has
very significant competition because everybody serves those
routes on a one-stop basis. And those routes you have four or
five----
Mr. Farenthold. And I do agree, US Airways typically has, I
see, as lower fares when I am booking. I do not have the luxury
I used to have of being able to travel on Wednesdays, you know.
I have got to fly on the busier days.
You were talking about no hub closures, and just looking at
the map of the hubs, I am going to have to agree with Mr.
Mitchell. The geography just does not seem to make sense. And
AA has a history of closing hubs. I mean, you had Nashville and
Raleigh-Durham, but on the East Coast now, you have Miami,
Charlotte, Washington, Philadelphia, and New York. That is a
whole lot of hubs in a closed proximity.
How much assurance can you give us you are not going to
shut one of those babies down?
Mr. Kennedy. Congressman, a couple of considerations. If
you look at the geographical distribution of the hubs, and you
look also at the primary purpose of certain of those hubs, we
have, as we have stated publicly, a high degree of confidence
that the hubs that we have today will remain in place.
For example, New York, which is the largest market in the
world, that serves primarily for American.
Mr. Farenthold. I am not worried about New York or L.A.
Mr. Kennedy. But just by way of example, that New York
serves as an international gateway, Miami as a gateway going
south. And then when you look at Charlotte, which is a north-
south hub, and you look at Dallas, which is, you know,
primarily Midwest and going east and west. When you look at
those, we find them to be highly complementary of one another,
and so I think it is unlike what you have seen in perhaps other
merger situations.
Mr. Farenthold. You guys are familiar that on some of the
blogs and messages boards, like Flyer Talk, you are getting 70
percent opposition to this merger from frequent flyers.
It seems like you have got the public against you all on
that. How are you all taking that?
Mr. Johnson. Congressman, I have not seen those numbers.
The feedback that we are getting from our customers, we are
getting from the communities we serve, is exactly the opposite.
Everybody is very excited about it.
Mr. Farenthold. All right. Let me get back to the price
competition, and maybe, Mr. Mitchell, you can help me out a
little bit on this. I know you expressed a great deal of
concern about sites requiring a great deal of personal
information from you to determine what fares you are going to
get. And I think this is partially the airline industry's fault
in that they have made this so difficult with all of the
ancillary fees.
I get two free bags on United. My wife gets one free bag on
United. I am a peasant on Delta, so I do not get any free bags.
And Southwest gives everybody free bags. So, I mean, you have
got to have some degree of information about the traveler.
Do you think there is a way we can create a system where
anonymously or semi-anonymously you can actually compare what
the bottom line price between two airlines is going to be?
Mr. Mitchell. Well, first of all, with respect to fares, we
have that system today. You can go to any online or brick and
mortar travel agency and understand all the options in the
marketplace. But when it comes to ancillary fees, like check
bag, baggage, and seat assignments, and so on, it is an
absolute mess.
For 5 years, the airlines' most important corporate
customers have been demanding that these data on the checked
bags be put into one place for comparison shopping.
Mr. Farenthold. Let us get the airlines' response real
quick, and I want to save about 15 seconds for me. Do you all
have a solution to that?
Mr. Kennedy. Well, let me just say a couple of things.
First of all, American, US Air, we are strongly in favor of
full transparency for consumers. That what we have been about.
Mr. Farenthold. I am sorry, I am out of time. I do want to
end this. I am concerned about this merger on a level as a
frequent flyer. But we have given the opportunity to compete to
all the other airlines. It seems to me with the merger that has
gone through, it is only fair to offer you the opportunity,
assuming you comply with the laws that are in place. But I
remain concerned. It is very difficult for new players entering
the competition. It is going to be a problem. And I will yield
back.
Mr. Bachus. Thank you, Mr. Farenthold. Those blogs, I think
that 98 percent of the bloggers think that we are incompetent.
[Laughter.]
Mr. Farenthold. And you could do a scientific poll that we
only get eight percent approval rating. [Laughter.]
Mr. Bachus. Mr. Conyers.
Mr. Conyers. Chairman Bachus, I want to ask a question you
started off with. Is this merger really necessary? I think that
there is a general thinking that there is support for it, but I
wanted to ask, what if we really did not have this merger going
on, Mr. Sagers? What do you think would happen?
Mr. Sagers. Well, as I said, we are not going to see a
liquidation of American Airlines I think in all likelihood. And
I do not think we are going to see frequent liquidations of any
carriers in the foreseeable future. We would preserve such
competition as we have left for the near term.
And I think that we would see perhaps an additional degree
of market discipline for cost containment that we have
forfeited, you know, in our airlines competition policy.
Mr. Conyers. Mr. Mitchell, if this hearing was not held and
that we would continue with our business, what do you think
would go on in the industry?
Mr. Mitchell. If the merger were not to occur?
Mr. Conyers. Yes.
Mr. Mitchell. Well, I think, you know, we will several
network carriers competing aggressively against one another. I
think both carriers will do just fine.
Let us be honest. This is going to really help creditors.
It is a better deal for labor. But it is all about the revenue,
and if this merger were approved, we are going to three network
carriers. The ability to coordinate fare hikes will be
unprecedented. Last year there were 15 proposed fare hikes.
Eight were rejected by one or two carriers.
The probability that they will be rejected in the future
begins to go way down when you have three carriers and
coordinated effects. We have to balance three network carriers,
if it comes to it, with more transparency in order to preserve
the marketplace and competition.
Mr. Kennedy. Congressman Conyers----
Mr. Bachus. I was going to suggest, Mr. Conyers, and we
will give you an extra minute to let the two representatives of
the airlines answer your question.
Mr. Conyers. All right.
Mr. Kennedy. Congressman, I have been in the airline
business for 29 years. I joined American in 1984. And in all
those years, this is the most competitive business I think on
the planet. It is ultra-competitive. And what is going to
happen when these airlines combine, that competition will
remain.
We simply are trying to become a stronger, more vibrant
competitor against those already in place. I think it is
important for this industry. It is important when you look at
the international alliances and the composition of both Star
and the Sky Team Alliance.
And so this is going to give consumers more choices. It is
going to allow us to better compete with the other airlines.
Mr. Conyers. Well, there is nobody that does not think you
are not coming out of bankruptcy.
Mr. Johnson. Congressman, if I might----
Mr. Conyers. Yes, please.
Mr. Johnson. It is, in fact, the case, and I thank Mr.
Mitchell for noticing how well US Airways has been doing
recently. And it is, in fact, the case that American has had a
terrific restructuring and could easily emerge on a stand-alone
basis.
That is not really the question. The question is, why are
we doing this and for whose benefit? Our customers have been
telling us that they want a bigger network. They want a network
competitive with United and Delta. They want more choices and
more opportunities. They have been telling us that directly.
And discouragingly for Mr. Kennedy and I, they have been
telling us indirectly by leaving American Airlines and leaving
US Airways to fly on Delta and United's new bigger networks. So
we help our customers by this merger.
Second, we help our employees. US Airways is a smaller
airline. Has a smaller network and a revenue generating
disadvantage versus the other big airlines. As a result of
that, to be successful we have to pay our employees less, and
we have made a bargain with our employees over time that we can
give them good jobs and good benefits, but they are going to be
less than those enjoyed by their counterparts at Delta and
United. By merging and creating a network like Delta's and
United's, we can pay our employees more, and we have an agreed
path to pay them the same as Delta and United.
In addition, when we talk to people in our principle
cities, in these hubs that we have talked about so many times
today, they do not talk to us about price issues or price
concerns. They talk to us about finding ways for there to be
more service, finding ways to grow the hub, finding ways to
create more destinations for travel. All of that can be
accomplished by this merger, Congressman. And that is what we
are trying to do today.
Mr. Conyers. Well, you are both doing okay now. You know,
what I hear you saying is that it may get tougher later, and we
want to be prepared, and so we are going to merge now. And I am
not sure if that goes along with the American Antitrust
Institute. Do either of you know what the economic scholars are
thinking in terms of this kind of discussion, Mr. Sagers?
Mr. Sagers. Yeah. I mean, you know, there are a lot of
econometric study of airline fare changes. And it is in some
dispute, but there is substantial evidence that on specific
city pairs, prices go up when concentration goes up. And we
hear a lot, by the way, about average prices going down, and
that is very misleading.
Mr. Bachus. Mr. Johnson, you respond, and then we will----
Mr. Johnson. Sure. I mean, first, I will respond, but I
want to make sure that we give Dr. Winston an opportunity to
respond because he is the expert on airline pricing here today.
What I can tell you is that after this merger, this is
going to be a very, very competitive industry. There will be
four airlines with each having less than 25 percent market
share and each with nationwide networks that are very
competitive.
There will be two airlines, Alaska and Jet Blue, that
provide significant competition in regions--Alaska in the west,
Jet Blue in the east.
Mr. Conyers. It will be more competitive after this merger.
Mr. Johnson. I expect so.
Mr. Conyers. And what would it be if there were not a
merger?
Mr. Johnson. In fact, the industry is very competitive now,
Congressman, and it is going to be very competitive after this
merger. After this merger, we will have Southwest continuing as
a low cost, Jet Blue continuing as a carrier with a significant
cost advantage. But three very fast-growing low-cost airlines,
Spirit, Allegiant, Virgin America, all providing competition
regionally and, as they grow, extra regionally.
Mr. Bachus. Thank you. And I think that is what Mr.
Winston's and others' testimony said.
Mr. Holding?
Mr. Holding. Thank you. I will preface my remarks by saying
that I am a very happy frequent flyer of American Airlines. It
serves the routes that I travel in best.
I know an airline that was omitted in our discussions,
Piedmont Airlines, which is a very fine North Carolina based
airline. It was Airline of the Year in 1984. And I spent many
an enjoyable mile flown on Piedmont Airlines.
I fly out of Raleigh-Durham International, and it is a very
important airline to my constituents. It is an economic booster
for the Research Triangle Park that is very important to our
businesses there.
It is even finer than the Memphis Airport, I might add, the
brand new, newly-built.
How much is the overlap between American and US Air in the
Raleigh-Durham market, Mr. Kennedy?
Mr. Johnson. The overlap, I think, is just on the
Washington, D.C. flight. American serves its hubs from Raleigh-
Durham. We serve our hubs from Raleigh-Durham. And so I think
the overlap is just limited to that one flight.
Mr. Holding. Right. And I noticed that the prices on
American and US Air are virtually the same flying out of
Raleigh-Durham to D.C. How much overlap do you have in
Charlotte?
Mr. Johnson. Virtually zero. American serves Charlotte to
its hubs, and we have a very large connecting hub in Charlotte.
Mr. Holding. Right. And I believe US Air serves D.C. out of
Charlotte. I think they are probably the carrier that has the
most flights out of Charlotte to D.C. What would you anticipate
that the price difference is between Raleigh to D.C. and
Charlotte to D.C. is?
Mr. Johnson. I do not, but it sounds like you might know.
[Laughter.]
Mr. Holding. It costs a lot more money to fly from
Charlotte to Washington than it does from Raleigh to
Washington. And that is concerning. It is very concerning. Your
direct competitors have a route from Raleigh to Washington,
whereas US Air does not have a direct competitor in Charlotte,
so it costs a lot more money. And that would certainly impact
the folks who live in my congressional district.
Do you anticipate that the fares would go up significantly
in the future in Raleigh to Washington when you are no longer
competing with one another?
Mr. Johnson. Congressman, as we have said before, I mean,
any discussion about fares or that sort of planning and
strategy is something that is down the road for us. And, you
know, those are issues that we will be discussing really with
respect to fares and things like that, probably not until after
the merger.
Mr. Holding. So what are the top three factors that you
would have under consideration when you are making your pricing
decisions down the future, whether it is in this route or
another route?
Mr. Johnson. The top three factors: demand, the cost of
providing the service, the opportunities to provide service
over a hug. In other words, if we can attract passengers to go
more places than the original destination, the hub, it gives us
an opportunity to operate more efficiently and provide a more
cost-effective service.
Mr. Holding. And the factor of whether or not you have a
direct competitor in that market is not in the top three
factors?
Mr. Johnson. The airline industry is a very competitive
business, and we compete, and we compete in virtually every
market that we operate.
Mr. Holding. American Airlines operates a direct flight out
of Raleigh-Durham to London Heathrow. It seems to be a popular
flight. Do you know if that is a profitable flight or an
unprofitable flight?
Mr. Kennedy. Congressman, I am not aware of whether it is
or is not profitable, but it is a service we have had for a
number of years. And as you know, with the combination we had
British Airways in terms of our joint alliance, we offer a
tremendous variety of service into Heathrow and elsewhere. And
I would hope that that service you are referencing continues,
but I just do not know about its profitability.
Mr. Holding. Is there any consideration of expanding the
international flights out of Raleigh-Durham Airport that you
know of?
Mr. Kennedy. You know, one of the things about the industry
is that we are always looking at where it is that we can expand
our service. As I had mentioned, you know, we have an aircraft
for 500 new aircraft that we just did the summer before last.
And that is going to allow us to not only replacing aging
aircraft, but also to expand our service.
So our route network people at the company spend a
tremendous amount of time looking at opportunities as to
whether or not we can increase service, I do not know. I am
going to have to ask our folks to look into this particular
question and get back to you. But if the demand is there, then
we would like to increase the service and provided, of course,
that we can get, you know, landing rights on the other side of
the equation.
Mr. Holding. Thank you, and I would appreciate that follow-
up, not only on the international routes, but on the question
of competition and how that will be in your analysis as far as
the Raleigh-Durham Airport is considered. Thank you, Mr.
Chairman.
Mr. Bachus. Thank you, Mr. Holding.
Mr. Johnson?
Mr. Johnson of Georgia. Thank you, Mr. Chairman. Thank you
for holding this hearing. And when I heard that my esteemed
colleague, Steve Cohen, had said some things about the Memphis
Airport and kind of compared it to the Atlanta Hartsfield-
Jackson Airport, I had to make sure that I came. [Laughter.]
Mr. Cohen. I am sure it hurts.
Mr. Johnson of Georgia. And I tell you, this is not to take
anything away from the Memphis Airport, and Memphis may, in
fact, have the best ribs and that kind of thing. But you will
never have an experience like you will when you go through
Atlanta's Hartsfield-Jackson Airport.
Mr. Cohen. That is true. [Laughter.]
Mr. Johnson of Georgia. I mean, the hospitality, the real
southern hospitality, the ambiance, the warmth of the people
there, and the food. I mean, everybody knows about Pascal's
Fried Chicken that you can get out there at the airport.
Everybody knows about the good peaches that come out of
Georgia, and they go into that peach cobbler that just melts
right in your mouth. You know, peanuts, pecans, Coca Cola. I
mean, it cannot compare. It is incomparable.
And so let us make sure that we clear the air on that
issue. I do love barbecue every once in a while, but I can eat
some fried chicken every day. [Laughter.]
Now, Mr. Steven Johnson, thank you for testifying. Thank
you all for testifying today on this issue.
I am interested in the effects of this merger on union and
non-union employees. You have indicated in your submitted
testimony that the combination of these airlines will generate
substantial net synergies, and establish the financial
foundation for a more stable company, and better opportunities
for our 100,000 employees. However, current and former
employees may also be concerned about how the merger will
affect benefits, such as their health care benefits and
pensions.
Mr. Johnson, how does the merger affect the benefits of
current and former employees?
Mr. Johnson. Well, Congressman, first I want to comment
that the statement that you made about Atlanta I think has a
lot to do with why most people consider Delta the most
profitable and successful airline in the United States today.
And that is one of the reasons why we need to create this new
network to compete with things like that. So thank you very
much for that.
Mr. Johnson of Georgia. Thank you.
Mr. Johnson. But could I ask Mr. Kennedy to answer this
question? He is very deeply involved in the negotiations about
that and more familiar with it.
Mr. Johnson of Georgia. Sure. Mr. Kennedy?
Mr. Kennedy. That was very well done, Mr. Johnson. Well,
first of all, with regard to current and former employees, as
to retirees, we are still working through our bankruptcy and
determining what will happen with retiree benefits.
I will say that as we have with current employees where we
have changed the medical insurance benefits upon retirement, we
are seeking to do the same with regard to retiree employees.
With regard to pensions, as you know, we were successful in
freezing our pension plans rather than terminating them, and
that is terrific for all employees because we will pay all the
benefits under our pension plans to our employees. We are not
sending those obligations to the PBGC for payment. I know that
has been done in the past, but we worked hard to go ahead and
freeze those plans rather than terminate, and that is a success
coming out of this bankruptcy.
Mr. Johnson of Georgia. Thank you. Do you see any changes
to the basic benefits occurring in years to come?
Mr. Kennedy. I do not know what will happen in future
years, but I will tell you that particularly with both our
union employees and our non-union employees, when we structured
our new contracts with our organized labor groups, we did so in
a way that would provide to the company productivity
improvements, but would also provide for pay increases for our
employees. And we now have new 6-year contracts.
Now, we do have work to do with this merger in terms of
getting, you know, one contract among all the labor groups, but
we have made substantial progress in getting that finished and
ready to go. So I believe that while some of the changes we
made with regard to productivity improvements are difficult,
that employees will benefit not only from the pay increases we
have in place, but as we grow the airline in the future.
Mr. Johnson of Georgia. Thank you, Mr. Kennedy. I yield
back.
Mr. Bachus. Thank you.
Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman, and thank you, panel,
for being here today. It has been a great discussion.
I live about five miles from the Greater Pittsburgh
Airport. When Pittsburgh lost its hub status about 10 years
ago, we dropped from over 500 flights to fewer than 50, and we
lost thousands of jobs in the process, and a world class
airport remains under-utilized. It has created an inconvenience
for the traveling public and also for our business community to
have not as many flights as we used to.
Currently we have about 41 US Air flights and 15 American
Airlines flights out of Greater Pitt. Can either Mr. Kennedy or
Johnson give us any kind of assurance that the number of
flights will not be reduced out of Greater Pitt?
Mr. Johnson. Congressman, those are flights that we operate
to our respective hubs. They work really well for both of us. I
would anticipate that the merger is not going to change air
service to Pittsburgh materially in any way.
I will say that the people of Pittsburgh will have some
advantages associated with those flights being combined on one
carrier. They will be able to fly online to more places. They
will be able to accumulate their frequent flyer miles on one
airline instead of two. Travel will be more convenient. But I
do not anticipate that it will change the air service to
Pittsburgh at all.
Mr. Rothfus. Has there been discussion about post-merger,
changing hubs at all, moving hubs, consolidating hubs?
Mr. Johnson. I think just the opposite. We anticipate that
we are very happy with the hubs that we have. As Mr. Kennedy
said, they are geographically diverse. They are functionally
diverse. They all work for the separate airlines, so we
anticipate they will be very successful after the merger. We do
not anticipate adding any hubs.
Mr. Rothfus. Well, I would like to talk a little bit about
some of the hubs you have, particularly those in the New York
area, you know, JFK, La Guardia, and then down to Philadelphia.
You always hear about constant overcrowding, delays. Leisure
and Travel magazine, for example, asked travelers to rank the
worst airports in the country, and the top three are La
Guardia, Philadelphia, and JFK. And here we have not only an
under-utilized airport out in western Pennsylvania that I think
could serve as a hub, and I would just ask the parties to
consider that as you do your planning.
Moreover, you know, we have a recent drilling arrangement
out there at Greater Pittsburgh Airport that is going to be a
benefit, or may be a benefit, to airlines to consider that. So
again, I would ask you to consider that.
Both of you testified a little bit about some of the small
and middle-sized communities, and I have some of those in my
district. And I'm just wondering if you either of you might
opine on expansion to some of the underserved communities that
might result from this merger.
Mr. Johnson. If I could, Congressman, again we have not
done any of that planning yet, and we will not be able to do
any of that planning until we close the merger. But one of the
great opportunities of this merger is the complementary nature
of the networks. I had mentioned in my opening remarks that
there are some 130 cities that American Airlines serves that US
Airways does not serve, 62 cities that US Airways serves that
American Airlines does not serve.
When we make decisions about serving any market,
particularly small- and medium-sized markets, there is an
economic calculus that we undertake, and that economic calculus
involves determining what the revenue potential is and then
subtracting, if you will, the projected costs. And when we at
US Airways look at new service, one of the big costs are
developing infrastructure, recruiting and training employees,
and creating a marketing presence in a community.
In Pennsylvania where there are a number of communities
that US Airways serves and American Airlines does not serve,
that infrastructure exists. We have really quality employees
there already, and there is a great marketing presence as you
know. Those are great opportunities for expanding service from
the American Airlines hub.
Mr. Rothfus. We would be looking for, you know,
opportunities to expand even additional communities, such as
Johnstown, Pennsylvania.
You know, related facilities that US Air currently has in
Pittsburgh include an operations center that employs about
1,800 people. Now, old American or American has an operations
center in Dallas. What is the consideration for the operation
centers for the respective airlines, and what can we expect to
happen to the operation center at Greater Pitt?
Mr. Johnson. Well, that is something we would have to
discuss. We obviously will operate separate airlines until we
close the merger, but then we will continue to operate separate
airlines for, I would think, 15 to 18 months. That will
continue to require two operation centers.
During that period of time we will talk and plan and see
what works in terms of ultimately combining those operation
centers or, you know, finding an alternative way to manage
that.
Mr. Rothfus. I guess you are considering then a
consolidation of the two at some point in the future?
Mr. Johnson. I think in general airlines, you know, operate
from a central operating system--sorry, central operating
center. And I would expect that at some point in time, once we
have completely merged the airlines and their operations that
we would as well.
Mr. Rothfus. We also have a maintenance center at Greater
Pitt. Any consideration on that with US Air?
Mr. Johnson. We have about 1,000 maintenance employees
engaged in heavy maintenance in Pittsburgh. It is a very senior
workforce, so it is reducing a little because of retirements of
our great employees, so we expect that to be about 975
employees at the end of the year. But it is a central part of
our maintenance operation. We expect it to be not affected in
any significant way by the merger, but as we plan and we look
out into the future, it is a little hard to say at this point.
Mr. Rothfus. Again, I would ask you to consider taking a
look at Greater Pitt in any post-merger----
Mr. Johnson. Obviously we are very close with your
colleagues in the delegation and the governor, and even our
friends in Philadelphia have asked that we do that. And I
promise in the next couple of weeks to go to Pittsburgh myself
and talk to the city and civil leaders there about these
issues.
Mr. Rothfus. Thank you. A question for Dr. Winston, a
fascinating----
Mr. Bachus. Well, actually----
Mr. Rothfus. Thank you. Thank you, Mr. Chairman.
Mr. Bachus. Thank you.
Ms. Delbene.
Ms. Delbene. Thank you, Mr. Chairman.
Mr. Johnson, you brought up earlier the demand from your
customers to have a larger network so that you would be able to
serve more of their needs and to be more competitive with some
of the larger carriers. Where do you see the balance between
having that larger network internally versus having
partnerships to meet those demands?
Mr. Johnson. Well, I think we would always prefer to do it
internally if we could. Partnerships serve a purpose that
accomplishes something like a network, but an imperfect
replication of a network. And you usually undertake that when
there is some reason that you cannot create the network you
want. Usually national ownership rules of airlines and things
like that, bilateral agreements between countries for
international flying. Those are the kinds of things that lead
to partnerships and business arrangements because you cannot
under the law achieve the network you want.
Ms. Delbene. And when you look, and Mr. Kennedy as well,
when you look at after the merger, do you intend to maintain
the partnerships that you have today? And I guess I will
preface that with I am from the other side of the country, from
Washington State. And Alaska, for example, is a big carrier in
our neck of the woods, and so the partnerships are very
important.
Mr. Kennedy. Alaskan Air has been a very important partner
of ours, and so while, again, as Mr. Johnson said, we have not
made any determinations of what the network will look
afterwards. But that partnership has been very important to us,
and it is a great airline. And so, you know, I would hope that
that partnership would continue.
Ms. Delbene. And I think Mr. Mitchell brought up the NDC
earlier, and I wanted to give a chance to either you, Mr.
Johnson, or you, Mr. Kennedy, to give your viewpoint price
transparency, and NDC, and you feel that would be impacted
after the merger, or just your view on NDC in general.
Mr. Kennedy. Well, two things. One is, and perhaps I had
said earlier this earlier, and I apologize if I did. But we are
strongly in favor of price transparency to consumers. It is
very important and always has been and needs to continue. I
think where we disagree is talking about whether or not there
ought to be a regulation or legislation that mandates how you
need to provide that information. We do not think that is
appropriate. We think particularly with the advent of
technological changes that there are different ways to get
information to consumers than what might be suggested
otherwise.
I am not particularly familiar with the IATA proposed
regulation or measure that is referenced here. We will be happy
to look at it and provide additional information, but I am just
not familiar with it.
Ms. Delbene. Okay. And your concerns, Mr. Mitchell, about
NDC are not necessarily specific to the merger. You have
concerns generally, is that correct?
Mr. Mitchell. They are specific to the merger because the
merger will allow an acceleration of this NDC in the
marketplace. US Airways has long been a maverick in
distribution issues. For example, in 2001 and '02 when the
airlines withheld web fares from travel agencies and corporate
travel departments, they only provided them to orbits. US
Airways broke rank and began to provide the fares to the
marketplace, likewise in 2006.
So the big American swallowing up the maverick US Airways
is only going to allow this to go forward more quickly. And
once embedded in the largest marketplace in the world, it is
going to cascade across all the other markets.
The problem is no publicly available fares and schedules
will be available anymore. It kills transparency. I will get a
deal that is crafted just for me, and I will have nowhere to go
to compare it publicly to see if I really got a deal at all.
Ms. Delbene. And, Dr. Winston, since you are the pricing
expert--I think someone said earlier--what do you think in
terms of prices, and competitiveness, and the ability for
consumers to have transparency? What do you think the impact of
the merger or NDC has on that?
Mr. Winston. Well, keep in mind, there is something very
special about this industry. A small percent of the people do a
huge amount of the flying. You know, something on the order of
five or six percent of the travelers do like 40 percent of the
flying.
It is absolutely ludicrous to think that an airline will
think, hey, a really good strategy for us to not have
transparent prices for people who fly all the time who probably
have these things memorized, and all of a sudden one day they
do not what they are. I mean, talk about a way of alienating
customers. I mean, I can imagine many strategies that are
concocted all the time. I do not know where they come from, but
this is just not how you make money in regular real businesses.
So I am certainly supportive of concerns about
transparency, but I think, you know, the nature of travel is
that this would just be crazy to do, and almost an
embarrassment really for anybody. If an airline proposed to do
this, I would hope they would feel embarrassed for doing it.
Ms. Delbene. Thank you. Thank you, Mr. Chair.
Mr. Bachus. Thank you.
Mr. Marino.
Mr. Marino. Thank you, Chairman. Good afternoon, gentleman.
Let me begin by saying I support the merger because the
employees want it and because of the gentlemen sitting behind
you in uniform took the time to be here. So I thank you for
doing that as well.
I do have some concerns, and my previous life was a
prosecutor. So I ask short questions. I expect a yes or no
answer. And if you have to follow it up, make it very brief.
What is going to happen to consumer rates? What is going to
happen to consumer rates? Are they going to go up?
Mr. Johnson. No.
Mr. Marino. Are they going to go down?
Mr. Johnson. I do not know. As we have said, Dr. Winston is
the man who can best describe that. But the studies show that
notwithstanding the earlier mergers that we have talked about
today, there have not been price increases of the sort that Mr.
Mitchell and Professor Sagers suggest might happen here. So I
do not expect prices to go up across the board.
Mr. Marino. All right. I did some private practice in my
time and did mergers and acquisitions. And whatever we call
them, mergers, acquisitions, takeovers, you know, that is not
important to me at this point. And in my experience I am told
that they will reduce costs, and then several months later when
I asked where the prices are, they said the prices do not go
down, but the answer is, well, we kept them the same and
prevented them from going up. And then several months later,
the prices went up.
So what is going to happen in the first 6 months, in the
first year, in the first 3 years about pricing?
Mr. Kennedy. Let me just say a couple of things. One is, we
do not know what will happen. You know, the airline industry
is, as I have mentioned, a highly competitive business with
very thin margins. And that is going to exist after the merger
as it is today. And that has an effect on pricing and what
those levels are. And so I do not know what will happen.
Pricing will simply be competing on price and schedule in the
future as we do today.
Mr. Marino. Thank you.
Mr. Johnson. Congressman, I could just add that it will be
a very competitive business, in many ways more competitive as
we create an alternative for consumers to the very large
networks of Delta and United. There will be four big airlines,
each with less than 25 percent market share, each with a
national network to serve customers, all competing with each
other. Two airlines that have very vigorous competitors on a
regional basis, Alaska Airlines and Jet Blue, and three fast-
growing low-cost carriers that compete with us at various
points around the United States. It is a very competitive
industry, and that competition is not going to decrease as a
result of the merger.
Mr. Marino. I think I know what the answer to this is going
to be, but with all due respect I have to ask it. I am assuming
that there has been no backroom deals that someone in the near
future is going to get whacked whether it is the employees, or
the pension, or the pilots?
Mr. Johnson. There have been none.
Mr. Kennedy. That is correct.
Mr. Marino. All right. I live in the 10th congressional
district of Pennsylvania, northeast, north-central
Pennsylvania. How am I doing on time, sir?
Voice. Fine.
Mr. Marino. Small airport Montoursville. I have to drive to
Montoursville to get to that. But then to get to D.C., I have
to take a plane from Williamsport, to Philadelphia, to D.C. It
takes over 6 hours when it is on time. I drive because it is 4,
4 and a half hours and it is less expensive.
Is anything going to improve for the smaller areas in which
I live where my county, Lycoming County, is about 130,000
people, but people have to travel into that county from
surrounding counties to catch a plane?
Mr. Johnson. Well, I cannot speak to your specific----
Mr. Marino. Could you put it in writing for me and get it
to me at some point?
Mr. Johnson. I would be happy to.
Mr. Marino. Okay. And my favorite pet peeve, and I am going
to raise this. We all fly, but there are certain reasons why we
have to change a flight. And no more who it is, what airlines.
If I am changing a flight 4 or 5 days in advance or find out at
the last minute that something has happened that I want to
change that flight, the price goes up substantially. By the
same token, when I call, just happen to be 6 days ahead of time
instead of 7 days ahead of time, the price doubles, even though
there are empty seats.
Can you explain to me why? And I know one of the answers is
going to say, well, you do not want to wait until the last
moment, but you have got to come up with a better answer than
that, please.
Mr. Johnson. I understand that sometimes consumers find
that frustrating, but we offer a variety of products. We will
sell you a ticket that is fully refundable, and we sell you
tickets that are non-refundable. And in general, if we sell a
ticket that is not refundable and then someone has to change it
or seek a refund, what we do is we charge them what they would
have paid for a non-refundable ticket in general--or, sorry,
for a fully-refundable ticket in general. That is how that
works.
Mr. Marino. Does anyone wish to respond to any of my
questions? I know I focused on that, but quickly, please. I
think I am running out of time or have run out of time.
Mr. Bachus. Yes, you have.
Mr. Marino. I have run out of time? Would you like to put
it in writing and get it to me, gentlemen, please? Thank you.
Mr. Bachus. Thank you.
Mr. Garcia.
Mr. Garcia. Thank you, Mr. Chairman. I want to turn your
attention from the delights of Memphis or the incredible
southern hospitality to the most southern airport in our
country, which is the Miami International Airport.
As you and Mr. Kennedy know, we have a huge dead service at
that airport, and part of it was making sure we had one of the
best terminals for American Airlines. Do you feel that we are
going to cut any flights there? Are we going to increase
traffic there and thereby help out our airport?
Mr. Kennedy. I do not know specifically what we will do in
the future at Miami, but----
Mr. Garcia. Mr. Kennedy, I need you to be a little more
specific because this not Memphis, and this is not a small
regional airport. This is the crown jewel, to some degree, of
international flying into Latin America, which I assume was one
of the reasons that this becomes an interesting target. So I
want a specific answer because in my community we are
leveraged, as you well know, to the hilt because of this
airport. And I am committed to this process going forward, but
I want to understand what impact it is going to have on my
community.
Mr. Kennedy. Congressman, I am to be specific as I can.
Mr. Garcia. Okay.
Mr. Kennedy. American Airlines is committed to Miami, and
we have been for many, many years. It is, as you know, a
tremendous gateway. Not only is it a terrific O&D traffic right
in Miami, but also going south into Latin America. And it is
something that is a prized part of our operation.
And so while I cannot specifically say what will happen in
the future, I can tell you that if you look at the history of
the last 5, even 10 years, we have grown our operation
significantly, and we were a major proponent of the development
of that airport. And I specifically in my previous job at
American ran our real estate and construction business, so I
know exactly what you are talking about in the terms of the
debt load at Miami. But I also understand that that airport now
is a first class airport. The new train, the new terminals, are
absolutely fantastic. And we remain enormously committed----
Mr. Garcia. It does not smell like ribs, though, unless the
Memphis Airport. [Laughter.]
Mr. Kennedy. No, sir, but it is a terrific airport, and
everything we do in Miami is wonderful.
Mr. Garcia. We had Secretary Napolitano down last week, and
I appreciated the American Airlines representative there to
help us. Clearly they are the biggest carrier at the airport;
therefore, it is important their participation.
One of the problems as you well know is that we have a huge
number of passengers have missed connecting flights. Obviously
we are very worried about the sequestration, the impact that is
going to have. Almost 40 plus thousand people miss connecting
flights on a monthly basis because the border and customs
agents, we just do not have enough of them. As you well know,
we built one of the largest reception centers in the country.
We cannot fully staff it during peak times because there are
not enough workers.
So one of the things that we propose with the Secretary,
and she seemed very willing to listen to, is the ability of us
picking up some of the costs of providing government workers.
So possible overtimes, training people, even paying for having,
what do you call it, a global pass entry system. Is this
something that the combined airlines could look at doing simply
to increase your efficiency and help us with that cost as we go
forward?
Mr. Kennedy. Throughput at the airport is very important,
and those lost connections just end up costing not only the
customer, but cost us, so we are with you there. I think we
have to balance whatever those costs might be to pay a portion
of those costs against the lost revenue, if you will, and the
inefficiency of having those lost connections. And we will be
more than happy to work with you to see if that is something we
should do.
Mr. Garcia. If you could get back to me on that because it
is certainly something that I know it would probably be a lot
cheaper to pay a little bit of overtime and not have, you know,
100 passengers or 50 passengers miss a flight every few hours
because of--I am sure my colleagues on the other side would
call it government inefficiency. I just call it maximum
capacity. And so we have got to make it more efficient to do
this.
But having you help us with that I think is key to
continuing our growth. I think we had a growth of 17 percent
last year, so we are very proud of that, and we are proud we do
not smell like ribs either. So it is Cuban coffee, Versailles
Cuban coffee that wafts around in our airport.
Just one final question. In terms of as you look at size,
right, clearly you want to be more competitive. Clearly you
want to offer more. Our airport is one of those throughput
places. Do you think we are going to get more folks in South
Florida working for you, or do you think we are going to reduce
the workforce, because we have been increasing, right? And so I
just want to----
Mr. Johnson. I can say just to echo Mr. Kennedy's comments
that people at US Airways are very excited about Miami and very
excited about adding back to the US Airways network in effect.
In fact, there are some 35 cities just on the east coast alone
that US Airways has service that are not served from Miami. All
of those are opportunities to look at.
Mr. Garcia. It is almost like living in the United States
it is so nice there.
Mr. Johnson. I spend a lot of time in Miami, so I agree
that it is a great place.
So, you know, I think you should be optimistic about
Miami's future. It is a critical part of the operation. Latin
America and South America in particular is going to be one of
the fastest-growing parts of the global economy. And the New
American Airlines is very well placed to take advantage of
that, and there is no better place than Miami as a jumping off
point for that. So I would be optimistic about the future.
Mr. Garcia. All right. Thank you very much. Thank you, Mr.
Chairman.
Mr. Bachus. Thank you.
Mr. Jeffries.
Mr. Jeffries. Thank you, Mr. Chairman.
The American airline industry is certainly extremely
critical to our economy, to our commerce, to ability to keep
families together, our social network, educational
infrastructure. By any measure, the airline industry is
critical, an important part of who we are. And I think all of
us, and certainly the American public, want to see the industry
succeed, be successful, be able to offer competitive rates and
transport people to their desired destinations.
But the experience that I think the industry has had over
the last 35 years paints a very different story or very
troubling story just when you consider the raw numbers. I
gather there have been 160 bankruptcies since 1978. US Air has
experienced two in the last decade. American Airlines is coming
out of bankruptcy.
Part of the response seems to have been the mergers. We are
now looking at our 3rd significant merger in the last 5 years.
I think there is bankruptcy fatigue, and we may be soon
experiencing merger fatigue.
But I would be interested in getting either of the two
airline representatives' perspectives on why over the last 35
years has the industry struggled to such a degree. And what
confidence can you convey to us that this merger is part of the
solution as opposed to simply another band aid on what has been
a persistent wound that we have seen over the last 35 years?
Mr. Kennedy. You are correct in your assessment of the
industry. It is one that has been fraught with difficulties. It
is a volatile industry. It is one, however, that is also, as
you point out, so vitally important.
And, you know, there are a number of measures that affect
the industry, whether it is high fuel prices, whether it is
problems overseas with different stability of governments, even
problems, sort of affect our industry and the demand for air
travel.
And so that is not going to go away. But what it does mean
I think for not only our companies but also for this country is
we need to have a strong airline industry, not only to be able
to service our own country, but also compete against the other
major international airlines.
And so to answer your question, I believe that this merger,
while not solving those external factors that so much affect
our industry, but having a healthy carrier and a healthy
industry, this will help us be stronger, and be able to
compete, and be able to withstand some of those external shocks
that affect us that are outside of our control.
Mr. Johnson. I mean, it really has been a very fascinating
35 years, and particularly the last 10 have been very difficult
as we have, you know, lurched from crisis to crisis. But the
airline industry is, I think, finally becoming more stable, and
as Mr. Kennedy points out, that is a really good thing.
We have finally gotten ourselves, I think, to a point where
we have the ability to, you know, to earn a fair return on our
investment, invest in new routes and improve service, to
provide good pay and job security for our employees. I mean,
over the course of the last decade, I think we destroyed
160,000 jobs or something like that in our industry.
And during that decade, we closed something like a dozen
hubs. I think they have all been mentioned here today. But we
have finally gotten ourselves to a point where we can continue
to pay--oh, I am sorry--where we can pay our employees, create
good job security, create advancement opportunities for them,
allow them to be more comfortable having a career in the
airline industry.
And we have gotten ourselves to the point as an industry
where we can make commitments to hubs like we have made today
and feel comfortable that we are going to be able to provide
that service and continue to grow it. Bu most importantly, what
this has allowed the airlines to do is become more competitive,
be more stable and, therefore, to be more competitive, to
provide more choice to customers, provide more products to
customers, to provide more innovation to customers both in the
United States and around the world.
Mr. Jeffries. Everyone has mentioned these external shocks
to the system, whether that is fluctuating oil prices and war,
terrorist attacks. I think even sequestration was mentioned by
Dr. Winston.
You said what was important for the industry is to have the
capability to match capacity with demand. And you indicated
that in your view, mergers would better enable these two
companies, and I gather, anyone in the industry to do that in a
more effective and efficient way.
Your theory seems to be based on the notion that the bigger
the company the better it is able to deal with matching
capacity with demand. Now, that seems to be a too big to fail
theory, and we have had some experience in that regard in other
areas. But I want to give you an opportunity, one, to indicate
why you think mergers will put these companies in a better
position, and also if you could reference some of the other
tools that are available that you indicated in your testimony,
to enable companies, perhaps aside from a merger, to match
capacity and demand.
Mr. Winston. Are you asking me? All right. The key thing in
matching capacity with demand is an optimal network, all right?
Now, what you have to understand is that for 40 years, airlines
did not have an optimal network. Matter of fact, they had a
sub-optimal network; that is, they were regulated from 1938 to
'78, okay? And they were not allowed to enter new routes if
they wanted to. It was difficult even to exit routes.
So they started off way behind in a very bad network, all
right? So it is not an accident that Southwest has had
advantages because they were not a legacy carrier. They were
intrastate and were able to develop their network from scratch,
so to speak, or, you know, in a better position under
deregulation, the other carriers, all right?
So really what we are observing, believe it or not, is
still the development of an optimal network, okay, subject to a
lot of shocks. It does not necessarily mean that bigger is
better, but given where you were often is to the extent that
you can balance traffic in particular areas, coordinate the
traffic better, and move your fleet around as appropriate in
response to changes in macro-economic conditions.
Now, of course, the best tool is also going to be pricing,
right? You want to fill up your plane, you lower your prices.
You obviously have high demand, you are not going to have to do
that.
So in combination with pricing, improved service, all
things that will help generate demand at the same time that you
have the freedom and flexibility to have a network with a fleet
that is aligned with that network, that gets you optimization
in terms of your operations and what your carrier is capable of
doing.
To the extent that the merger is a tool in creating that
optimal network--that is, you have some of your network
developed, but it would be a lot better if you could have
another part of it included with your network, balancing
traffic flows, coordinating operations, so on and so forth,
that is where the mergers can help. But let me stress that this
is something that takes a long time to achieve properly. The
carriers just do not come together and that is it. They start
then pruning the network.
Now, if you want to see a very clear example of this, look
at the railroad industry. That whole industry has completely
transformed to be state-of-the-art of the world where it was
close to liquidation because it was deregulated and did a lot
of restructuring through mergers. And that is an extreme case,
but in its own way, the airlines are trying to do a similar
thing. And mergers are a tool. Not the only tool. They do not
always work brilliantly, but that is really what they are
about.
Mr. Jeffries. Thank you.
Mr. Bachus. Thank you. We are going to go in a second round
of just Mr. Cohen and I, so we have got about 10 minutes left.
But anybody in the audience who needs to take a break now, you
can go ahead.
Mr. Winston, you are absolutely right. The regulations
almost put the railroads out of business, and deregulation
saved them. And we are seeing continuous innovation in the rail
industry. And it was capital starved and was not able to
generate enough profit to maintain its infrastructure. And so
that brings me really to my first question to Mr. Johnson or
Mr. Kennedy.
You are going to realize changes in efficiency in operating
structure of how many, a billion and a half? A billion, billion
and a half, is that what the number----
Mr. Johnson. We have announced net synergies of more than a
billion dollars. Those synergies on a gross basis, if you will,
are larger than that, but the creation of approximately $1.5
billion of synergies or $1.4 billion of synergies has allowed
us to make the arrangements with our employees that we have
talked about here today. We have invested about $450 million a
year in our employee wages, and benefits, and retirement.
Mr. Bachus. So of that $1.5 billion, almost $500 million
will be in improved compensation for employees?
Mr. Johnson. Four hundred fifty.
Mr. Bachus. Somewhere in that neighborhood. And how will
that other billion, how will it be used, and how will that
benefit the traveling public?
Mr. Johnson. I think in many ways. First, it will create a
more financially sound and stable company. We talked in
response to Congressman Jeffries' questions about the shocks
and the difficulties that the airline industry faced over the
last decade. First and foremost, we will be able to better
withstand shocks and better able to deal with the uncertainties
and the cyclicality of the airline industry.
The second thing is it will allow us to invest in our
airline. We have already talked about the investment that we
are making in our employees and their well-being. But as Mr.
Kennedy can talk about in more detail, it allows us to buy new
airplanes, to provide new products to customers, and
importantly, to have the financial wherewithal to experiment
and try different models and add destinations to our system,
knowing that if they do not work, we have the financial
wherewithal to deal with that.
So it allows us to take more risk and through that, provide
benefits to our customers.
Mr. Bachus. Now, I have noticed that the airlines that
generate enough profits to buy new airplanes, more fuel-
efficient airplanes, more modern airplanes, do tend to either
capture market share or they have to, if you have to compete
with, you are at a disadvantage. So I would think that you
would modernize your fleet, as you say, is a part of the plan?
Mr. Johnson. At US Airways we have been modernizing our
fleet for the last 6 or 7 years, and that is certainly the
experience we have had, Mr. Chairman.
Mr. Kennedy. I would just add that customers really are
asking for, demanding a new modern fleet not only for the
comfort, but for the products and services that we offer. And
that is all very capital intensive and inordinately expensive.
And so we need those funds to be able to continue to invest in
this business along the way.
Mr. Bachus. And American has not been able to make those
investments. At least it has become more difficult.
Mr. Kennedy. Indeed the last 10 years have been very
difficult for us, and we have really struggled financially. We
finally made the announcement of the aircraft orders a year and
a half ago, and that is what is necessary because we had quite
an aging fleet at American and not a fuel efficient fleet. And
given the price of oil, that is going to help substantially as
well. But nevertheless, it is a real significant financial
commitment.
Mr. Bachus. All right. Let me ask either one of you, you
know, American is a part of the oneworld system, and you have
some antitrust immunities. US Air is a part of the Star
Alliance and you do not. Would a combination benefit in that
regard?
Mr. Johnson. Well, the combination, yes, I think it will
benefit travelers very extensively. We are a member of the Star
Alliance, but we are in some respects a sort of second class
member of the Star Alliance. We are not involved in the
antitrust immunity joint venture. There is another Star
Alliance partner, United Airlines, which is very much bigger
than us.
By moving to the oneworld alliance, first and foremost, we
take the smallest alliance and make it roughly the same size as
the other two. We create opportunities for the oneworld
partners to serve the East Coast of the United States in ways
that they have not been able to before. They have certainly had
access to American's hub at JFK and their hub at Miami, but
those, as we have said, are kind of special purpose hubs that
serve a unique clientele.
We have more typical distribution airline hubs in
Philadelphia and Charlotte that will benefit oneworld
considerably. So we think it is great. Mr. Kennedy? He knows a
lot more about the antitrust immunity and that part of the
business.
Mr. Kennedy. As you may know, it took us about 13 years to
get our deal finished and get the antitrust immunity, which is
a good thing. We are behind the curve compared to the other----
Mr. Bachus. And I think it is absolutely essential that you
have that to be able to compete. That is a given to me. I would
think it would be a disadvantage for US Air not to have it now.
And this would be an advantage that would level the playing
field for you.
Mr. Kennedy. Yes, we would agree with that.
Mr. Bachus. My last question, I heard you all say that
American flies to 130 cities that US Airways does not fly. I
think that was the number, was it?
Mr. Johnson. Correct.
Mr. Bachus. And then US Airways flies to 62 cities that
American Airlines does not serve.
Mr. Johnson. That is correct.
Mr. Bachus. So I would think obviously that you are talking
about 192 cities that would be any one who is a customer either
American or US Airways would pick up an opportunity to fly on
one airline to 192 cities, which would be a tremendous benefit.
Mr. Johnson. As we look at the opportunities to develop the
network after the merger, Mr. Chairman, those 162 cities--
sorry--192 cities are, you know, the leading candidates for
added service.
Mr. Bachus. All right. And again, I want to close where I
tried to start when I complimented Mr. Kennedy. But US Airways
has shown, I think, a lot of innovation. Here at Reagan I have
noticed you are using two gates, and you have added probably 30
destinations, 30 or 40 new destinations, you know, all over the
east. And I think you have shown of imagination in how you did
that.
And as I said, I do not fly American that often. But, you
know, if I am going to go to Dallas, I am not going to go to
Charlotte first. I am going to fly American. And so I do not
see how that is a competition. I mean, if I go to Dallas, I am
going on American from Birmingham. If I got to D.C., I am not
going to go through Dallas.
But the service, the reliability on US Air, the customer
service is excellent. On the airplane, the on-time performance,
and all the airlines. I heard something about baggage, but, my
gosh, we have gone to 2 bags out of 1,000 are late. And it used
to 5 and 10, so it is an incredible success there. You know,
there was a time when, you know, there was a real chance that
you did not get your bag, and for the airlines, they have made
tremendous advances.
And I will say this. All the information says that airline
tickets have not kept pace with inflation. I mean, it is one of
the best deals going. I think it is six times less of an
increase than oil prices, which is hard to believe when that is
one of your main expenses. I do not how you do that other than
investors losing $30 billion.
Mr. Cohen.
Mr. Cohen. Thank you, Mr. Bachus.
Mr. Mitchell, Professor Sagers, I just wonder, you know, we
heard the testimony that there are 192 or whatever cities that
are served by American and US Air exclusively, and that, you
know, 132 are American. They do not compete, et cetera. And we
heard the same thing with Delta-Northwest. Well, Delta-
Northwest would be complementary because we do not serve too
many routes together.
Does this kind of sound like some companies might have got
together and cut up the country and determined, you know. When
you look at like the statement that none of them have over 25
percent and there are four of them, but they are close to 25
percent and you multiply by 4, and that is 100, does not that
sound like somebody is cutting up the pie?
Mr. Sagers. Very briefly, there is no reason to suggest
that they did this on purpose, that they got together and
agreed to do this. This sort of lack of head to head
competition, I mean, can be explained to some degree by the
lack of a significant number of competitors. It was not a
liberal firebrand who first came up with the idea that
oligopolies do not compete with each other. It was George
Stigler at the University of Chicago.
When there are a small number of competitors, it is easier
for them to sort of implicitly agree not to compete vigorously
head to head. So I do not know that that is exactly why the
networks have developed as they are, and there are regulatory
issues that have also contributed. But I think it is perfectly
reasonable to suspect that that is a contributor to the current
lack of overlap. Even if there is one, I do not think there is
that big a lack of overlap frankly. And it is reasonable to
expect that it will get worse when there are four big ones
instead of five.
Mr. Cohen. Mr. Mitchell, do you agree or disagree?
Mr. Mitchell. With his statement?
Mr. Cohen. Well, do you have an opinion on whether or not
there was some type of, you know, Pillsbury bakeoff.
Mr. Mitchell. You know, the way the hub system in this
country developed over time is long and storied. But as soon as
it reached a certain point, there were market divisions going
on where you stay out of my hub and I will stay out of your
hub. I mean, this is as old as deregulation and before.
That is why it is so critically important that if we do go
to three systems, three network systems, that we have all the
consumer protections in place, we have all the transparency in
place, because the NDC that I described earlier is the
structure around which and through which the markets can be
clearly, clearly divided. And that is going to be a problem far
worse than a fare increase.
Mr. Cohen. What you described really scares me, and it
sounds like big brother in a major way. And I understand you
have talked to maybe my staff here on the Judiciary Committee
about this. Is there legislation that you have suggested or
proposed or would propose to counter this?
Mr. Mitchell. Well, there is one piece of legislation that
I think would be a very important consumer protection, and that
would be we have this thing called Federal preemption where all
of the consumer protections are consolidated at the DoT. The
States have absolutely no authority here, and consumers have no
rights at the State level.
Now, if you put in legislation that allows every single
State to have its own consumer protection rules, you will have
a big, expensive patchwork. However, like the energy industry,
there is an opportunity to create one set of consumer
protections that are enforceable at the state level. That would
keep the airlines honest. And as we go down the three network
carriers, there is more opportunity to be dismissive of
customers, and we see it every day.
Mr. Cohen. We look forward to working with you on that.
What do you see as the impact of the prior mergers,
particularly Delta-Northwest, but also United-Continental,
overall on air fare, service quality, and consumer choice? Has
it been beneficial or not beneficial?
Mr. Mitchell. I think that we have had the great recession,
so it is very difficult to understand exactly what went on with
pricing. However, I believe that if you look at all the
promises, all the expectations, all of the projections, and
studies, and analyses, before this merger is approved, there
should be a forensic analysis of the outcomes of those two
mergers. That is very, very important.
Mr. Cohen. Dr. Winston, you used the great recession as a
reason why Delta would have cut the Memphis hub down to 40
percent, even though Mr. Anderson said it would not. Atlanta
did not suffer. Why did Atlanta escape the great recession?
They escaped Sherman. Why did they escape the great recession?
They did not escape Sherman, excuse me.
Mr. Winston. Traffic. Still a lot of traffic there.
Mr. Cohen. Because they routed it from Memphis to Atlanta.
That was simple enough. That was not the great recession. That
was Anderson's decision.
Mr. Winston. The country did not stop flying during the
great recession. The country still flew, and it was still
flying as it normally does in the big hub areas. I mean, that
is something that is sort of overlooked in this is that, again,
most of the travel, like 75 percent of it, it is in large hub
routes: New York, L.A., Chicago, San Francisco, D.C., New York.
You know, you go through those, and you have got most of the
travel unfortunately in this country where you have got a lot
of competitors. And that is where the airlines want to be.
I mean, unfortunately or fortunately, you know, there are
other places to go, but it is a much, much smaller part of the
system. And it is very vulnerable then to changes to what is
going on in the macro economy and so on and so forth. But
Atlanta is on the ``good side'' of things. Memphis
unfortunately, it is not.
Mr. Cohen. But it was not because of the great recession.
It was because they chose to divert the traffic. All of my
colleagues who flew through Memphis preferred flying through
Memphis from Louisiana, Arkansas, Mississippi. Now they have to
go through it because they cut out the regional routes. They
really eliminated Pinnacle Airlines from coming in to Memphis.
Mr. Winston. All else constant, I agree with you.
Unfortunately all else is not constant. The airlines have to
sort of, you know, route their planes where they are going to
be able to maximize traffic.
Mr. Cohen. Do you agree that a fortress hub, the old legacy
airlines created fortress hubs, and that fortress hubs can keep
other carriers out of those markets through pricing strategies?
Mr. Winston. What keeps airlines out of other hubs or
airports is airport policy, exclusive use gates. You want to
improve competition in this industry? Start looking at
airports. It is not the airlines, it is the airports, all
right?
The estimates on the increases in fares due to exclusive
use gates are in the billions of dollars, all right? So for the
next hearing, can I suggest we explore airport privatization
and allow airports to compete, and it could change an awful lot
of what is going on in this industry.
Mr. Cohen. Well, eventually you will own China to own all
of our airports. We are not selling
Let me ask this final question. Mr. Kennedy, you plan to
keep Mr. Johnson at American Airlines, or your family does. Is
that correct? He is going to continue to work for the merged
airline? [Laughter.]
Mr. Kennedy. Mr. Johnson?
Mr. Cohen. Yeah.
Mr. Kennedy. I do not know. Do you want to work for the new
airline? [Laughter.]
Mr. Johnson. I absolutely do.
Mr. Cohen. Good, because I do not want to waste ribs on him
if he is not going to stay with the airline. [Laughter.]
And you come, too. And Elvis is living in Memphis, so there
will be plenty of people still wanting to come there. Thank
you.
Mr. Johnson. I will look forward to that, sir.
Mr. Bachus. The CEOs started together at American Airlines.
Mr. Johnson. They did.
Mr. Kennedy. They did, yes.
Mr. Bachus. I would say this is the close of the hearing,
but for the record, Southwest had not gone out of business, so
there are four. There will be four networks at least. Some
people may wish they had gone out of business.
We appreciate your testimony, and I will say for one that
this is, as I said before, this is one of the most persuasive
arguments from everything I have read for the merger. And as
with any merger, there is a chance that there will be some, you
know, price increases. But I do not guarantee there are going
to be price increases in either respect because they cannot
keep flying for what they are doing now.
But thank you for your testimony. I think that your next
hearing will be in the Senate on the 19th. And hopefully this
will prepare you for that, particularly if there is a senator
from Memphis or---- [Laughter.]
Or Pittsburgh waiting on you over there. Thank you very
much for your testimony.
Mr. Johnson. Thank you.
Voice. Thank you, sir.
Mr. Bachus. Without objection, all Members shall have 5
legislative days to submit to the Chair additional written
questions for the witnesses, which we will forward and ask the
witnesses to as promptly as they can answer to be made a part
of the record.
Without objection, all Members will have 5 legislative days
to submit any additional materials for inclusion in the record.
With that, again I thank the witnesses.
This hearing is adjourned.
[Whereupon, at 12:27 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Material submitted by the Honorable Steve Cohen, a Representative in
Congress from the State of Tennessee, and Ranking Member, Subcommittee
on Regulatory Reform, Commercial and Antitrust Law
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]