Statement of
Leo F. Mullin
Chairman and Chief Executive Officer
Delta Air Lines

Mr. Chairman and Members of the Committee, I am grateful for the opportunity to appear before you today to deliver a message which I believe is of crucial importance to the continued health of our nation’s air transportation system. This is a very timely hearing and I commend the Committee for its attention to the issue of consolidation in the airline industry.

As you consider the proposed transactions among four of the seven major U.S. hub-and-spoke carriers – American, TWA, United and US Airways – you are reviewing what could become the catalyst for a complete structural and competitive alteration of U.S. airlines. The conclusions reached about these proposals will have an effect on the future course of the entire aviation industry – an industry of immense importance to the social and economic health of our nation – and it will also impact the viability and success of individual airlines.

Mr. Chairman, there are many issues that you must consider as part of this important hearing, but the eventual outcome must be accompanied by a decision, that, in approving the currently proposed transactions, so must there also be tacit approval of any further airline combinations – obviously with appropriate modifications for the public interest.

This morning, I would like to outline for you three primary implications of the proposed transactions which I hope will illustrate how such a decision would affect everyone connected with the aviation industry – including the 670 million passengers airlines serve each year.

These transactions will require that other airlines make dramatic competitive responses.

The option of future mergers and acquisitions must be available to these airlines if they are to continue to compete effectively.

As all airlines make responsive competitive moves, these first transactions discussed here today will have the effect of completely changing the airline business as we know it today.

THESE TRANSACTIONS WILL REQUIRE THAT OTHER AIRLINES MAKE DRAMATIC COMPETITIVE RESPONSES.

First, let me describe for you how the aviation marketplace will look if these deals are successfully implemented.

United will have 50% more capacity than Delta; American will have 42% more capacity. United will have 939 planes, American 991. Delta currently has 606 planes. United will have 26% of the U.S. airline market, and they will gain a substantial foothold in the lucrative domestic market east of the Mississippi River. American, through its acquisition of TWA, DC Air and US Airways assets, will have a market share of 22% of the domestic market. American too, will gain a sizable share of the East Coast market.

Clearly, the impact on the industry will be huge. These carriers are simply doing what their customers and shareholders are demanding: growing to meet customer demand.

The mission of every airline -- be it Delta, American, United or any other carrier -- is to create a network that allows us to take our customers from anywhere to everywhere. By doing so, we create the convenience as well as the benefits (such as frequent flyer programs) that cause our customers to call on one airline for all their travel needs. Because customers will choose as “their airline” the carrier that provides service to all the places they want to go, size definitely matters when it comes to networks and market share.

Mergers and acquisitions are a means to create a network large enough to accomplish that mission. Such transactions allow carriers to grow their business in an efficient, cost-effective manner – which is what American and United propose to do. As I have said since I joined this industry three years ago, mergers and acquisitions are essential strategic options for any industry, including aviation.

The proposed transactions before the Committee are not, per se, anti-competitive. However, if these transactions are allowed to go forward with an understanding that “the door is now closed” in terms of further industry consolidation, then consumers and other carriers may be required to deal with a huge duopoly. Essentially, Mr. Chairman, the current competitive balance in the industry will be disturbed – and the remaining airlines will be required to make dramatic competitive responses. And mergers and acquisitions must be part of the competitive response arsenal.

Hence, my second point:

THE OPTION OF FUTURE MERGERS AND ACQUISITIONS MUST BE AVAILABLE TO THESE AIRLINES IF THEY ARE TO CONTINUE TO COMPETE EFFECTIVELY.

Let me interject at this point that certainly Delta is among the airlines giving careful consideration to how we can continue to compete effectively if these transactions occur. My purpose here today is not to discuss any possibilities we might have under consideration, nor can I speculate about Delta’s planned response.

As I have stated on many occasions, we are always talking to a number of airlines about commercial opportunities, be they mergers, marketing partnerships, alliances, or other possible arrangements. And while my point is that we must ensure that the option of mergers and acquisitions remains open, I do want to emphasize that internal growth is a viable option for us.

Delta has been the most profitable network carrier for three straight years and we have the lowest unit costs of the large network carriers. We are confident of our ability to compete effectively with American and United in the near term.

Currently, Delta is the largest carrier in the Eastern U.S. Through strategic acquisitions and internal growth, we have targeted our franchise to be a strong competitor in this region, and we have been very successful in that effort.

Delta will continue to respond to this consolidation trend by choosing from all the tools of the marketplace those which best position us to be more effective competitors – and certainly that will include internal growth.

Now, the question often asked is why Delta and other airlines cannot rely solely on internal growth as a means of achieving parity and restoring balance to the industry. Mr. Chairman, if American and United grow to be mega carriers, then to ensure continued competition, all carriers must also grow in some proportionate way.

And while internal growth is an important component of our competitive response, we will require other sources of growth if we are to keep pace with the mega carriers. Consider the math:

Delta has grown traffic at an average annual rate of 5 percent for the past five years – in a vibrant market. Assuming United grows at 3% a year, it would take us more than 18 years to eliminate the network gap.

My point, Mr. Chairman, is that if and when other airlines need to access the powerful tool of mergers and acquisitions in order to remain competitive, they must be allowed to do so.

If the decision the government makes in this case is that “the door is closed” on mergers following these transactions, then the U.S. airline industry will face a competitive problem: dominance by two large carriers. The suggestion that competition would be preserved by closing the merger option to other carriers after the pending transactions are completed is an intellectually barren theory. If United and American are allowed to use mergers to expand their networks, others must be allowed to do so as well.

This brings me to my final point:

AS ALL AIRLINES MAKE RESPONSIVE COMPETITIVE MOVES, THESE FIRST TRANSACTIONS DISCUSSED HERE TODAY WILL HAVE THE EFFECT OF COMPLETELY CHANGING THE AIRLINE BUSINESS AS WE KNOW IT TODAY.

In short, Mr. Chairman, approval of the transactions under consideration must be viewed as tacit approval for those that follow. Once mega carriers have been created, then a competitive marketplace is possible only if the remaining airlines are allowed to respond effectively, with all the necessary tools, which must include acquisitions and mergers.

And thereby, the government will have initiated the process that will result in the total re-making of the airline business as we know it today. As Bismark once said, “Events will be in the saddle.”

None of us can predict today exactly where this will lead -- but we do know it will be profoundly different.

Mr. Chairman, we appreciate your consideration of Delta’s views on this critical issue. I would be happy to answer any questions that you or members of the Committee may have.