March 21, 2001

Good morning Mr. Chairman and members of the Subcommittee. I am Hershel Kamen, Staff Vice President, International and Regulatory Affairs for Continental Airlines. On behalf of the 53,400 employees of Continental, I thank you for inviting me to appear today. It is a special honor to be able to appear before a Subcommittee headed by Chairman Mike DeWine of Ohio, who represents our Cleveland hub and the thousands of people we employ in Ohio. Continental is honored to have such strong leadership in the Senate and we thank you for this leadership.

The topic I would like to discuss today is the important issue of concentration of takeoff and landing slots in the hands of the largest airlines and the need to protect competition in the aviation industry by limiting the ability of airlines to dominate slot-controlled airports. I would specifically like to discuss S.520, introduced by Chairman DeWine, Ranking Member Kohl, and Senators Grassley and Reid. This legislation is a very important step in maintaining effective competition in the aviation industry and ensuring that airports where access is limited by federal mandate will not be dominated by one or two of the largest air carriers.

Introduction

There are currently four federally slot-controlled airports: Washington Reagan, New York LaGuardia, New York Kennedy, and Chicago O’Hare. Air-21, enacted last year, ends slot restrictions at Chicago O’Hare in 2002 and at both New York airports in 2007. No end to slot restrictions was legislated for Washington Reagan. In the interim, the Department of Transportation was mandated to award slots to new entrant and limited incumbent carriers and those airlines that use small aircraft to serve small communities from the New York airports. Based on the high level of demand for the slots and the inability of the airport to handle such high levels of demand, the FAA capped the number of slots at New York LaGuardia and allocated slots to new entrant carriers and carriers using small aircraft to serve small communities based on a lottery system. New York JFK has not faced as much demand and no special limitations have been implemented there.

Given Air-21 and the developments that have taken place since its enactment, it can be safely assumed that slot restrictions at New York LaGuardia are likely to be reinstated. Additionally at Washington Reagan, slot restrictions are expected to remain in place in perpetuity. S.520 therefore correctly identifies Washington Reagan and New York LaGuardia as the airports that require special rules to ensure continued competition and to prevent undue concentration of slots in the hands of any air carrier.

S.520 and the Current Environment

In the current environment, there is only one airline, US Airways, that controls over 20% of the slots at either of the two airports in question. The remaining slots are distributed among the other carriers in the industry. While US Airways is a significant slot holder, this has been US Airways’ competitive advantage, giving it the opportunity and the ability to compete with airlines more than twice its size. With less than 9% of domestic capacity (as defined by available seat miles), US Airways is classified as a medium sized national carrier. As such, it is not a dominant national player, and its disproportionate share of slots at Washington Reagan and New York LaGuardia has not raised significant competitive concerns. In fact, US Airways has been successful in large part because of the niche it has been able to create with its large slot holdings.

S.520 would have no immediate effect on the current distribution of slots at the two aforementioned airports, including for US Airways. All current slot holders would keep their relative positions and the current competitive equilibrium would remain in effect. What S.520 would prevent, however, is a nationally dominant carrier from acquiring the slots held by another carrier and thereby increasing the concentration of slots, which would permit it to use this large cache of slots to effectively exclude competitors and leverage that market power nationwide and globally thereby harming competition and consumers.

Under the proposed legislation, a carrier that has more than 15% of the national air capacity (as defined by available seat miles, a standard measure of industry capacity) cannot control more than 20% of the slots at either Washington Reagan or New York LaGuardia. While there are currently three airlines that have more than 15% the national available seat miles (United, American, and Delta, “the Big Three”), none currently has the significant level of slots envisioned in the Bill. Because these large national carriers have not been able to dominate the slot controlled airports, arguably the two most important business airports in the United States, a competitive equilibrium among the major airlines has developed. Along with the “Big Three”, the industry is made up of four medium sized national carriers (Northwest, Continental, US Airways, and Southwest) and three small national carriers (TWA, America West, and Alaska). There also are a number of successful new entrant/low cost/niche carriers that help maintain the balance in the airline industry, all of which hold slots at various slot controlled airports (i.e. Frontier, Midway, Midwest Express, Jet Blue, Spirit, Air Tran).

S.520 and the Proposed Aviation Mega-Mergers

I previously stated that S.520 would have no immediate effect on slot distribution. Given this, I think it is important to explain why we at Continental support such a preventative measure.

Just two months ago the Chairman and CEO of Continental, Gordon Bethune, sat before the full Judiciary Committee and warned of the impending threat that United and American were about to impose on competition within the airline industry. Mr. Bethune said that the mega mergers being proposed by United and American would create an unbalanced competitive environment in which each of the two resulting mega-carriers would be significantly larger than their closest competitor and three times as large as Continental, and would ultimately drive the remaining major carriers out of business or into each others’ arms in defensive mergers. Mr. Bethune stated that, “The airline industry will change for the worse, adversely affecting competition, consumers, communities and employees.” He called on Congress, the Department of Justice, and the Department of Transportation to work together to ensure that competition can survive. He urged the Department of Justice to fight the proposed plans of United and American to form a cartel to dominate the aviation industry, and say no to the mega-mergers. United and American, the two largest airlines in the world, should not be permitted to split US Airways and its rich pool of assets.

Mr. Bethune is not the only person to call for action. In hearings before the Judiciary Committee and the Senate Committee on Commerce, Science, and Transportation, the GAO, academic scholars, and many other airline executives explained the havoc the mega-mergers would cause and discussed specific actions that must be taken to ensure that even a small chance of competitive survival would remain.

At the Judiciary Committee hearing, Mr. Bethune stated that “Congress, the Department of Transportation, and the Department of Justice must ensure that appropriate slots, gates, and other facilities at slot and capacity controlled airports be made available to smaller network competitors by the two mega-carriers.” S.520 is an excellent first step in this direction and on behalf of Continental we applaud Senators DeWine, Kohl, Grassley, and Reid for this proposed legislation.

If the mega mergers are allowed to proceed, United and American will operate almost 80% of all slots at the four federally slot-controlled airports. At Washington Reagan and New York LaGuardia the two airlines will control over 65% of all slots. By way of comparison, Continental (which would be only one-third the size of the mega-carriers) operates 3% of all slots and less than 5% of slots at Washington Reagan and New York LaGuardia. It is clear that such a stark difference in the ability to offer service to consumers would substantially reduce competition.

Under the proposed legislation, United, American, and other similarly situated carriers would have a choice of how to reduce the size of their slot holdings to a level which would allow the minimum essential level of competition at these slot-constrained airports. Carriers could either sell their slots through a blind auction, a fair way to dispose of slots that ensures that carriers as big as Continental, Alaska, and America West or as small as Air Tran, Spirit, Midway, Frontier, or JetBlue, could bid in an unbiased manner, or, if a carrier chose not to use the blind auction procedure, the slots would simply be returned to the FAA for redistribution. The Bill would thus prevent carriers from both dominating the airline industry and leveraging that dominance by controlling the limited resources at Washington Reagan and New York LaGuardia. Congress must act now, in the face of the impending duopoly, to ensure that consumers are spared the turmoil and loss of competition that the United and American mergers would bring.

Mr. Chairman, the ability of small and medium sized carriers to compete is vital to retaining competitive equilibrium in the airline industry. This competitive equilibrium has provided great benefits for consumers and must be strengthened, not weakened by concentration of takeoff and landing slots at two of our nation’s most vital airports. S.520, is a very important step in ensuring that the competitive equilibrium is not replaced with a duopoly and that competition in key airports that are federally restricted, and which have high levels of demand, is retained.

Two months ago, after my Chairman and CEO testified before you, Chairman DeWine, you stated that his comments are always candid. While Mr. Bethune is admittedly a hard act to follow, I hope that I have been able to express the importance of the proposed legislation Senators DeWine, Kohl, Grassley, and Reid have introduced. Continental urges all members of Congress to take this bill, and the threat it is trying to protect against, seriously. We urge its swift passage and enactment.

Mr. Chairman and members of the Subcommittee I thank you for your giving me the opportunity to discuss this important topic and for your attention. I would be pleased to answer any questions that you might have.