Mr. Chairman and Senator Kohl, members of the Committee, I thank you for the opportunity to testify this morning. I commend you for your leadership in acting quickly to investigate proposals that will transform the airline industry as profoundly as did deregulation.
Make no mistake—what the government does, or does not do, over the next several weeks with regard to airline consolidation will have a long-term impact on our economy and on businesses and communities throughout the country. Unchecked and unmodified, the pending agreements will stifle competition, raise fares, and condemn hundreds of small and medium size communities to limited and high-cost air service for years. No one can seriously doubt that outcome.
Regardless of what happens with the pending proposals, this problem is not going away. The gravitational pull of market forces have brought these deals together, and those same forces will bring them back to you time and time again.
Interlocking networks, and the ability to flow passengers to multiple destinations, is the lifeblood of an airline –whether it be an old-line institutional carrier or a low fare provider. These deals are on the table because airlines want slots, gates and big networks – Don Carty told us that last week. What he didn’t say was that American and United want these resources without the inconvenience of effective competition.
In my view, there is only one way to reconcile the public interest with these market forces— a new initiative on genuine competition.
You implement that initiative by breaking open the door to the fortress that the major carriers have skillfully constructed around publicly owned or government-regulated assets – slots and gates. That can be done now under existing authority and it should happen without delay and without regard to whether any of these mergers go forward.
Let me turn to the issues that confront the Subcommittee today—the legal and anticompetitive implications of the pending consolidations and acquisitions.
Whatever else you might say about these deals, it takes a lot of imagination or a great sense of humor to argue that they comply with the antitrust laws and conform to DOT’s mandate to advance competition.
These are not separate agreements – they are linked by American’s role. Control of the assets is the issue and how they fall into American’s hands to the advantage of American and United is not a particularly relevant consideration. TWA’s slots and gates are as much public assets as those belonging to USAirways and putting them under American’s control has the same anticompetitive consequences – the consumer pays and American profits.
All of these agreements among American and United, United and USAirways, American and DCAir and American and TWA are linked. They cannot be reviewed, approved or rejected separately. They are linked in terms of the business plans that stimulated them and they are linked because collectively they will define price and service for the consumer for years to come.
American and United will control 50% of the airline seats in the nation with levels of concentration that would make the robber barons of old green with envy:
94% at Charlotte
80% at Philadelphia
65% at Washington National
92% at Pittsburgh
These agreements provide American and United with a major structural advantage that they do not have today. That structural competitive advantage – the carving of the nation into three or four cartels – is the only reason these interlocking deals make sense. As my colleague at TWA, Bill Compton, has acknowledged, no offer came to his table until the original USAirways/United deal was on the radar screen. It also did not come until it appeared that DOJ was saying no to the original proposals.
Lets take one moment to look at some of the terms of these agreements – in this case the devil is definitely in the details –
American and United have agreed that for 20 years they will fix fares and schedules in the shuttle markets - one of the most important business markets in the nation – they have even agreed to fix corporate discount rates on the shuttle and if that is not enough, they have also agreed to fix their non-published fares – the net fares and those discounted fares that are sold through consolidators– all of this on the back of their control of slots and gates in these markets;
American and United have agreed not to operate or work with any other airline to operate high frequency competitive service between Boston and Washington;
United has agreed to lease scarce gates and locked-up slots to American at a nominal rate;
American and United have agreed to code share on flights that feed certain hub-to-hub flights including markets like San Jose/Denver where they are effectively the only two competitors. At the same time they won’t codeshare with any new entrants;
United has essentially sold the DCA slots to American with the elimination of the “no flip” term of its original agreement with USAirways; what this amounts to is that DCAir can sell its slots to American at any time and its role as an independent competitor - if it would in fact ever be one - is totally dependent on a “trust me” representation by its owner. I happen to have a great deal of respect for Bob Johnson as an honorable and smart businessman. But I have to note that when he was talking recently to the Washington Post about slots he commented that every businessperson has to have an exit strategy. Based on published reports, he appears to have financial incentives to sell his assets sooner rather than later. Whatever tiny element of competition comes with DCAir goes away when American controls it;
American and United have agreed to limits on each other’s growth – if American acquires any major airline that makes it 7.5% larger than United, American has to sell back all of the shuttle assets and if there is a divestiture in any acquisition deal, American must first offer to United the assets to be sold – a good way to avoid nuisance hearings before Congress;
Finally and here I must say this one is a bit of a puzzle – we have the “mystery of the maintenance bases”. American and United which each have multiple line and heavy maintenance bases have agreed that for 10 years they would not sell or even lease any such base without offering it first to the other. Don Carty last week testified that the four TWA maintenance bases were scarce resources and that that was one of the reasons American wanted to acquire TWA. That suggestion of control of scarce resources may explain the “mystery” but what is that agreement doing in a deal that is supposed to be remedying antitrust concerns arising out of a carving up of USAirways?
As I said earlier, the devil is in the details. The details of these agreements sound awfully like an antitrust problem rather than a remedy.
The human tragedy is that the combined employees of USAirways and TWA and the cities that they serve are inadvertent hostages whose future is presented to you as the trade-off for an anticompetitive consolidation.
For the cities effected, I would suggest that they study American’s history of promises when it acquires airlines. When American bought Air Cal and Reno, it trumpeted the same promises of more and better service and ended with American slipping out of town and leaving the communities with less service than before.
History is a good teacher here and if I was in St. Louis or Syracuse or Charleston or Morgantown – I might start checking train schedules.
Let’s also not be fooled by the now familiar theme that Southwest will save the consumers with the “Southwest effect” on fares – essentially this amounts to American and United saying “don’t worry if we gouge you on fares – Southwest will protect you”. Well, Southwest is big in Baltimore but travelers out of Washington National still pay premium rates going to the same places. That is not going to change simply because American replaces USAirways in Washington. As Mike Levine testified last week, Southwest appeals to a different market and is not going to save the nation from the major airlines as they consolidate.
As obvious as it is, it bears repeating now – the only way to cure a monopolistic, anti-competitive practice is through competition. Opening airports to low fare providers like AirTran can and will discipline the major airlines. It will spawn a new generation of low fare providers like AirTran and Jet Blue. Allowing us to develop networks is a foundation stone for competition going forward.
You cannot accomplish this with an Air 21 type solution of handing out a handful of slots. In a place like Washington National, AirTran and other low fare carriers need a significant number of slots and a fair number of gates to effectively compete. For us that means we need at least 100 slots to put together a meaningful network to bring low fare service to Washington National. Whether those slots come from the actions that the FAA should take to fairly distribute these public assets or from DCAir or from the hundreds that American, United, USAirways and TWA collectively control is not the issue. What is at stake is the use of these public assets to bring competitive choice to consumers. We are prepared to compete against all of them – just let us get in the door.
DOT has the authority to open the gates to competition and in the next few days AirTran intends to file complaints at the DOT against United, American, USAirways and TWA to proactively force divestiture of slots without regard to what DOJ says on antitrust issues. I urge you to join in supporting that petition or similar petitions by other low fare carriers.
Mr. Chairman, you and the members of this committee are the guardians for consumers, travelers and communities across America. You must speak out now before events make it too late. Otherwise, a year from now you will be having hearings on why fares are too high and service so poor to small and medium sized communities and it will be too late to do anything.
Do not let this situation turn into an airline version of the California power deregulation crisis. Do not put yourselves or the American people into a position a year or two from now when everyone may be saying – “how in the world did we get into this mess?” You have the answer to that question today.
Thank you again for letting me appear before you today.