Mr. Chairman, Senator Kohl and members of the committee, thank you for the opportunity to appear before you today to consider important issues of airline competition.
Four years ago I appeared before the Senate Aviation Subcommittee and warned that the task of airline deregulation had not been completed. I explained that in the Northeast the lack of access to airport gates and facilities, slot restrictions at New York LaGuardia, Reagan National and Chicago O’Hare, and the perimeter rules at LaGuardia and Reagan National represented the unfinished business of deregulation. They still do. In 1997, I noted that fares in the northeast were much higher than in the southwest where such constraints do not exist and urged Congress to take immediate action to level the playing field by creating access and enabling competitive new entry to promote more consumer choice and lower fares.
The Department of Transportation and Congress in last year’s AIR 21 legislation took some limited - very limited - steps to address these entry barriers. However, these actions were simply inadequate based upon the scope of the problem. Without significant remedial measures to ensure access to markets by new entrant/limited incumbent low cost carriers, approval of the United Airlines/U.S. Airways merger and American’s asset acquisition of TWA, coupled with the splitting of US Airways (including DC Air) between United and American, firmly closes the door on competition at major northeast airports. Fares will go up, particularly in the northeast to western markets where, upon completion of these transactions, American and United will together control approximately 62 percent of the market. With the publicly reported possible arrangement between Delta and Continental, the big three would control over 80 percent of this market.
For nine years America West has worked to expand service from its Western hubs at Phoenix and Las Vegas to the northeast. Today, America West is the only post deregulation full service, low cost network carrier to achieve major carrier status as defined by the Department of Transportation. We currently serve 91 cities in the U.S., Canada and Mexico directly or through America West Express.
In East Coast/West Coast markets our average fares are approximately 29 percent below the major incumbent carriers and our walk up fares in these markets are an average of approximately 50 percent below those of our larger competitors. If the proposed transactions are approved, our current level of service in these markets will be threatened, and our ability to grow will be stymied. Simply stated, these transactions represent an attempt by the two dominant carriers to insulate themselves against competition from low cost carriers such as America West. The transactions will do nothing to make gates, facilities and slots available to new entrant/limited incumbent carriers – the only carriers that provide a true stimulus to competition.
With this background, I would like to discuss briefly what must occur with respect to airport gates and facilities, slots, and the perimeter rules to preserve the potential for new entrant competition in the northeast. If the Department of Justice rejects all the proposed transactions, it will still be necessary for the government to take action establishing reasonable access for new entrants/limited incumbents if competition in the northeast markets is to exist.
First is the issue of gates and facilities – Nothing is more necessary to airline service than an airport gate. Unfortunately, at most of the northeast airports and Chicago’s O’Hare, America West and others cannot obtain gates. America West and other new entrants must sublease gates and facilities from major incumbent carriers, under short-term leases. New entrants have virtually no ability to expand service at these airports to respond to demand.
For example, at LaGuardia, we currently sublease a gate from TWA with which we have a joint frequent flyer program and a recently signed codeshare agreement that also provides us access to facilities at several key airports. When American takes over TWA, we have been advised that these arrangements will probably disappear, and without adequate conditions to ensure our access to gates at LaGuardia, our service there is threatened. At four airports crucial for business markets, Reagan National, New York’s LaGuardia, as well as Boston and Philadelphia, the new AA-UA duopoly will expand from a combined 70 gates to 160 gates. We have been serving the three New York airports for 15 years but still cannot obtain a gate of our own to control and use. We have also been unable to secure gate space in Philadelphia.
Another problem area for us is Chicago’s O’Hare airport. While American and United have long dominated this key market, after the proposed transaction they will control 94% of the traffic! While officials at O’Hare talk about building a new runway, building gates for new entrants seems beyond their ability. We are currently subleasing a gate from Continental. Recently when we discovered that six new gates were being built, we asked for two of them. We were refused. Airport officials explained the gates are being built with private money so the airport is powerless to provide access. We then offered to build two gates ourselves. No, they said, we can’t accommodate that. The new gates, by the way, are going to United Airlines.
The incumbents’ control over many of these airport facilities is defacto regulation and anticompetitive behavior. The Department of Transportation and the GAO have documented that the major incumbents do not fully utilize their airport facilities and simply refuse to make them available to the low cost competition. Significantly, United and American each stands to acquire, respectively, a total of 27 and 33 scarce gates at Logan, LaGuardia and Reagan National airports. Unless enforcement action is taken, United and American will control 60% of all gates at the high-density airports.
To ensure competition and as a condition of approval to these transactions, United and American should be required to make a sufficient number of gates and other critical airport facilities available to allow for meaningful competition by new entrant or low-cost carriers to their hubs, at the congested airports that United and American will dominate, either individually or in combination. In this regard, American should also be required to honor TWA’s existing contractual obligations to lease gates and other facilities to America West at Reagan National, LaGuardia, Hartford, JFK International, Dallas/Fort Worth International, and Philadelphia International airports.
The second requirement for competition is the availability of slots at the high-density airports. Every study ever issued on airline competition recognizes slots are a significant barrier to competition. Washington National, and LaGuardia and O’Hare are among the top ten markets for virtually every airport in the country. AIR 21 in part was designed to help alleviate the slot problem. Unfortunately, particularly at LaGuardia, the net result was the major airlines obtained even more slots while new entrants received a trickle of their need.
The transactions before us will result in AA and UA gaining 404 and 434 slots respectively at LaGuardia and Reagan National airports. This is at a time when America West cannot gain any slots for new service, and, in fact, is at risk to lose existing Columbus-Reagan National and Columbus-LaGuardia service due to a loss of slots. If through a lack of slots, we were forced out of the Washington National and LaGuardia-Columbus markets our Columbus hub, and the competition it generates, could be lost. This is at a time when United and American together would control nearly 75% of the slots at LaGuardia. At high density airports, the two carriers will control 69% of all slots.
Prior to these transactions slot concentration was at an all time high. The formation of a UA-AA duopoly will raise slot concentration levels to the point of monopolistic control. Competition among network carriers is possible only if they have sufficient slots at these constrained airports to enable them to provide a competitive level of service to their hubs. Control of these airports by the UA-AA duopoly directly threatens not only route competition but also ultimately the viability of any new entrants seeking to compete as network carriers.
The FAA should exercise its authority to withdraw slots that United and American would acquire pursuant to these transactions and create a substantial slot pool, made available on an as needed basis to ensure that new entrant/limited incumbents could operate up to 20 slots a day as contemplated by Air 21. This slot pool should exist at both LaGuardia and Reagan National to create some potential for new competition at these two critical airports.
The third component of competitive barriers is the existing perimeter rules at Reagan National and LaGuardia. Both DCA and LGA are the subject of archaic rules which restrict the geographic reach of service to and from these airports. These rules prevent America West and several other new entrants from flying nonstop to our primary hubs. Currently the larger network carriers operate a minimum of seven to as many as twenty daily flights to primary hubs for connections to western networks from these airports. These numbers will go up considerably if these transactions proceed as currently structured. Without adequate service between our western hubs and these two vital markets, America West’s ability to provide a substantial competitive option to consumers will be prevented and American and United will be able to raise fares dramatically on coast to coast service.
These rules provide no current benefit as their original purposes to stimulate use of Dulles and JFK have long been achieved. Today the LaGuardia perimeter rule not only contributes to the high cost of service but also encourages the misallocation of airport resources that has led to the current congestion problem. Only Congress can abolish the perimeter rule at Washington Reagan and it should proceed to do so immediately. Either Congress or the Department of Transportation, however, can override the perimeter rule at LaGuardia. These are critically necessary actions to benefit consumers using these facilities.
“Why does all this matter?” some might ask. I believe there are two major reasons:
First – airfares to the consumers. The presence of America West or other low cost airlines in a market gives the consumer a low-priced option as well as placing pricing pressure on the larger airlines. A case in point is our service at Chicago O’Hare. O’Hare is a slot constrained facility. Prior to 1999 we had only a few flights to O’Hare, mostly at less than optimal times. In 1999, DOT granted us a number of slot exemptions at O’Hare. An example of our impact has been that our Chicago to Ontario service has seen a 100% increase in market share, and average fares are 39% below United’s service. In fact, as I’ve stated previously, our average fares from the eastern business markets to the west are currently 29% below those of the larger network carriers and nearly 50% less for walk-up business fares.
Next - the issue of diversity of service. If essential facilities are concentrated in the hands of a few mega-carriers, they will be used primarily to serve the mega-hubs. This will threaten the continuation or expansion of hubbing activity in somewhat smaller cities, places like Columbus or Milwaukee which can support this activity only if they have access to the most important markets. These is no reason cities such as these should be denied the economic benefits of affordable and convenient air service as envisioned by airline deregulation.
As others have stated, we are at a competitive crossroads. Without immediate action in the short run to create access for new entrants at capacity restrained airports the northeast will face escalating fares and a lack of choice in air travel. United and American will not compete on price unless compelled to do so by low cost carriers. If these transactions are approved, without adequate conditions imposed by the Department of Justice coupled with actions by DOT and Congress to promote competition, there will be limited or no low fare competition at many major airports. In addition, the potential to extend competition into smaller communities, as America West does in the west and seeks to do in the east through Columbus, will be lost. These issues are discussed in detail in our submissions to the Departments of Justice and Transportation, which I have attached to my testimony.
Mr. Chairman, the commercial airlines industry is a network business. You must be able to build a network to compete. In fact, my friend Don Carty, CEO, American Airlines, stated last week at the Senate Commerce Committee hearing that “If one airline is able to grow its route network significantly larger that its competitors, that airline would have a competitive advantage.”
Mr. Chairman, America West agrees with that principle. We are trying to grow our network – to be competitive. Approval of these transactions, without requiring remedial measures to guarantee access to these key markets is a recipe for disaste