```

[Senate Hearing 107-220]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-220

              AIRLINE CONSOLIDATION: HAS IT GONE TOO FAR?

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 7, 2001

                               __________

                           Serial No. J-107-4

                               __________

         Printed for the use of the Committee on the Judiciary

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
76-913                     WASHINGTON : 2002

____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                     MARIA CANTWELL, Washington
                      Sharon Prost, Chief Counsel
                     Makan Delrahim, Staff Director
         Bruce Cohen, Minority Chief Counsel and Staff Director

                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Brownback, Hon. Sam, a U.S. Senator from the State of Kansas.....   105
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................   116
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin......................................................    25
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.    60
Hatch, Hon. Orrin, a U.S. Senator from the State of Utah.........     5
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...    19
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.    20
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................    24
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................    62
Thurmond, Hon. Strom, a U.S. Senator from the State of South 
  Carolina.......................................................   100

                               WITNESSES

Bethune, Gordon, Chairman and Chief Executive Officer, 
  Continental Airlines, Houston, TX, statement...................    27
Bond, Hon. Christopher, a U.S. Senator from the State of 
  Missouri, statement............................................     1
Carty, Don, Chairman and Chief Executive Officer, American 
  Airlines, Fort Worth, TX, statement............................    77
Compton, William F., President and Chief Executive Officer, Trans 
  World Airlines, St. Louis, MO, statement.......................    87
Franke, William A., President and Chief Executive Officer, 
  America West, Phoenix, AZ, statement...........................    40
Goodwin, James E., Chairman and Chief Executive Officer, United 
  Airlines, Chicago, IL, statement...............................    82
Johnson, Robert L., Chairman and Chief Executive Officer, DC Air, 
  Washington, DC, statement......................................    91
Kahn, Alfred, Emeritus Professor of Political Economy, Cornell 
  University, Ithaca, New York, statement........................    63
Leonard, Joe, Chairman and Chief Executive Officer, AirTran 
  Airways, Orlando, FL, statement................................    46
Levine, Michael E., Adjunct Professor of Law, Harvard Law School, 
  Cambridge, MA, statement.......................................    50
Meeks, Hon. Gregory W., a Representative in Congress from the 
  State of New York, statement...................................    15
Mullin, Leo F., Chairman and Chief Executive Officer, Delta Air 
  Lines, Atlanta, GA, statement..................................    35
Myrick, Hon. Sue, a Representative in Congress from the State of 
  North Carolina, statement......................................    10
Reid, Hon. Harry, a U.S. Senator from the State of Nevada, 
  statement......................................................     7
Warner, Hon. John, a U.S. Senator from the State of Virginia, 
  statement......................................................    13
Wolf, Stephen M., Chairman, US Airways Group, Inc., Arlington, 
  VA, statement..................................................    96

                       SUBMISSIONS FOR THE RECORD

American Society of Travel Agents, Richard M. Copeland, President 
  and Chief Executive Officer, Alexandria, VA, letter and 
  attachment.....................................................   113
Carnahan, Hon. Jean, a U.S. Senator from the State of Missouri, 
  statement......................................................     8
Davis, Hon. Tom, a Representative in Congress from the State of 
  Virginia, statement............................................   115
Griggs, Leonard L., Jr., Director of Airports, City of St. Louis, 
  MO, statement..................................................   117
LaFalce, Hon. John J., a Representative in Congress from the 
  State of New York, statement...................................   118
Lenosky, Lynn, US Airways Master Executive Council President, 
  Association of Flight Attendants, AFL-CIO, Washington, DC, 
  statement......................................................   119
Pilkington, Roberta Quinn, United Airlines Master Executive 
  Council Secretary/Treasurer, Association of Flight Attendants, 
  AFL-CIO, Washington, DC, statement.............................   121
Santorum, Hon. Rick, a U.S. Senator from the State of 
  Pennsylvania, statement........................................    39
Tettelbach, Betsy, Eastern Region Master Executive Council Vice 
  President, Association of Flight Attendants, AFL-CIO, 
  Washington, DC, statement......................................   122

 
              AIRLINE CONSOLIDATION: HAS IT GONE TOO FAR?

                              ----------                              

                      WEDNESDAY, FEBRUARY 7, 2001

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine 
presiding.
    Present: Senators DeWine, Hatch, Grassley, Leahy, Kohl, and 
Schumer.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Senator DeWine. Good morning. Let me welcome all of you to 
the Judiciary Committee hearing on aviation consolidation. A 
number of the other Senators, including Chairman Hatch, Ranking 
Member Leahy, and Senator Kohl, the Ranking Member on our 
subcommittee, will be arriving at 10 a.m. We are going to 
start, however, with our Member panel. We are going to take 
their testimony, and then we will begin with the Judiciary 
Committee opening statements at ten o'clock. So, that is the 
schedule.
    We have a very full schedule. We have several panels, very 
full panels of testimony, so we anticipate that we are going to 
be at this for some time. So I think it is important that we go 
ahead and start, and also because we have several colleagues 
who are here and we want to accommodate them as well.
    Senator Bond, good morning.
    Senator Bond. Good morning, Mr. Chairman.
    Senator DeWine. We appreciate you being here and we will 
start with you.

  STATEMENT OF HON. CHRISTOPHER BOND, A U.S. SENATOR FROM THE 
                       STATE OF MISSOURI

    Senator Bond. Mr. Chairman, I would like to submit my full 
statement for the record.
    I am terribly disappointed I will miss the opening 
statements of the members of the committee.
    Senator DeWine. We will send them to you, Senator.
    Senator Bond. I look forward to reading them very 
carefully.
    I want to give you an overview of the importance of the 
particular transaction, the American Airlines asset acquisition 
of TWA. TWA began Western Air back in 1925, Western Air 
Express. Then Transcontinental Air Transport in 1929, 
headquartered in Kansas City, started the first coast-to-coast 
air and rail route.
    Since 1930, when the Federal Government decided that 
airlines ought to be carrying passengers, TWA has been the 
centerpiece of the economy and the transportation system of the 
State of Missouri. It has fallen on difficult times. It had a 
number of owners who ransacked it and pillaged it. Howard 
Hughes did it and cut it free, and in 1985 and 1986, in the 
private sector, I was called on by the employees to try to help 
purchase the airline, to keep it out of the hands of several 
other people who might not have had the long-term interests of 
the flying public as their top priority. They were not 
successful.
    Carl Icahn bought the airline, sold off routes, sold off 
assets, imposed heavy financial burdens on it. And since that 
time, we see the headlines. In December 1974: ``TWA Unveils 
Plan to Halve Its Debts''; ``TWA Bail-out Ten Times Bigger than 
Announced,'' March 1995; ``For TWA, It's Chapter 11 Again,'' 
June 1995; ``Auditors Gloomy on TWA Prospects,'' March 1997; 
``TWA Juggles Top Executives after Treading in Red Ink for the 
Tenth Straight Year,'' March 1999. This shows the difficulties 
it has been through.
    I should mention, in 1992, I made a major effort to get the 
Pension Benefit Guarantee Corporation to review the charges it 
would impose on TWA to permit it to come out of bankruptcy. So 
it has been in and out of bankruptcy.
    Let me tell you, I fly the airline all the time. It is J.D. 
Power's best airline around in terms of on-time performance, 
great service. The financial burdens imposed on it by its 
previous owners, combined with the cost of fuel, have literally 
put TWA out of business. It would have been out of business 
January 10 had they not been rescued by American Airlines 
debtor in possession financing.
    Now, I confess here in public, I used to be a lawyer doing 
antitrust, and we all have things like that in our background.
    Senator DeWine. We all have our past, right?
    Senator Bond. I am a recovering lawyer now.
    Since this is the Judiciary Committee and we are talking 
about antitrust, I decided to go back and read the failing 
company doctrine case International Shoe v. FTC, 280 U.S. 291. 
In it, at pages 301 to 303, in relevant part they said, ``The 
evidence states the case of a corporation in failing 
circumstances, the recovery of which to a normal condition was 
to say the least in gravest doubt.'' If that isn't TWA, I don't 
know what is.
    They go on to point out that, ``In light of the case, a 
corporation with resources as depleted and the prospect of 
rehabilitation so remote that it faced a grave probability of a 
business failure, we hold that the purchase of its capital 
stock by a competitor, there being no other prospective 
purchaser . . . is not, in contemplation of the law, 
prejudicial to the public and does not substantially lessen 
competition or restrain commerce.'' Frankly, that is the 
failing company doctrine and TWA is there.
    TWA shopped around its assets. There are people here who 
want to buy pieces of it. Sure, they want to pick its bones. 
There is nothing like a fresh carcass to bring out birds of 
prey to pick little pieces off of it. What American Airlines 
proposes to do for TWA, for the 20,000 employees worldwide, the 
9,000 in St. Louis and 3,000 in Kansas City, is to buy the 
assets and keep it operating to provide the service that we 
need in the State of Missouri for our economic well-being and 
that I think air transportation needs in this country to make 
sure there is not a tremendous void left.
    I was in Kansas City when first Eastern and then Braniff 
went bankrupt and folded up, and I will tell you that the 
disruption to airline travel, the disruption to economy and 
transportation was significant. We cannot let that happen to 
TWA.
    I would love to see TWA continue. I want to see the Rams 
bring another Super Bowl trophy back to the TWA Dome. It is not 
going to be as TWA, but the Rams will be back, and I want to 
make sure that we have airline service that keeps the jobs, 
provides the economic benefits, and provides advantages to the 
traveling public.
    This is fundamentally different from other transactions you 
will be hearing about today which are potential combinations, 
mergers, acquisitions between competitive, profitable 
companies. There is nothing wrong with a profit motive. There 
is nothing wrong with seeking, if it is within the law, to get 
a better slice of the market.
    This one is an estate sale, and I urge and I beg my 
colleagues not to mess this one up. We are asking for prompt 
review in the Department of Justice and all other entities so 
that when the bankruptcy court acts early in March they will be 
able to conclude this sale. We look forward to continuing that 
airline service, but it can only go forward if nothing happens 
to prevent American Airlines from acquiring TWA's assets.
    Thank you very much.
    Senator DeWine. Senator, thank you very much for a very 
compelling and very good statement.
    [The prepared statement of Senator Bond follows:]

Statement of Hon. Christopher S. Bond, a U.S. Senator from the State of 
                                Missouri

    Good morning, Mr. Chairman and fellow colleagues. I thank the 
Chairman and the subcommittee for holding this hearing, and am pleased 
to appear before you to discuss the potential acquisition of Trans 
World Airlines or TWA. For years TWA was associated with the big names, 
big planes, and great service. It is sad to see those days come to an 
end.
                             History of TWA
    Let me start by providing some brief history of one of the most 
famous names in aviation and the longest-flying carrier in American 
commercial aviation, Trans World Airlines or TWA. for years TWA was 
associated with the big names, big planes, and great service. It is sad 
to see those days come to an end.
    TWA's beginnings go back to 1925 when it was known as Western Air 
Express. It quickly evolved into Transcontinental Air Trans World 
Airlines or TWA. For years TWA was associated with the big names, big 
planes, and great service, It is sad to see those days come to an end.
    A year later, in 1930, the federal government decided that airlines 
could and should carry more people than mail and the transcontinental 
lines emerged with what would become United, American, TWA, and 
Eastern. TWA had the central route through St. Louis, Missouri and TWA 
has had a major airline presence in St. Louis, Missouri ever since.
    Another interesting airline fact, and one that I like, is that St. 
Louis is the birthplace of one of today's leading airlines. It is not 
TWA, but American Airlines, whose earliest predecessor company--
Robertson Aircraft Corporation--launched its first airmail flight from 
St. Louis to Chicago on April 15, 1926.
                        TWA Has Been a Survivor
    Throughout the history of TWA, the airline has had its major ups 
and downs. A TWA plane crash in Kirksville, Missouri in 1935 killed 
U.S. Senator Bronson Cutting of New Mexico which served as the catalyst 
for the creation of the Civil Aeronautics Board. Howard Hughes was 
brought in the late thirties to help address the growing financial 
needs. By 1940, Hughes owned the company which lasted until 1965. Even 
though Hughes increased the name recognition of TWA, throughout his 
years of ownership he created a fair amount of difficulties that led to 
a financial drain on TWA. TWA was able to weather that storm and storm 
often led the airline industry in profits in the 1960s.
    In the 1970s, along came deregulation and TWA was not prepared. The 
good `ole days of TWA disappeared. The Constant struggle of survival 
began.
    Mr. Chairman, I have been through the struggles of Twa for many 
years now. As a Governor, a lawyer, and here in the United States 
Senate, I have answered TWA's calls for assistance, I was involved 
during the Which left TWA gasping for breath. I have been through two 
previous bankruptcies questioning day to day whether or not TWA would 
be in the air. We all listened in horror about the TWA flight 800 
crash.
    The newspaper headlines over the years give an example of the tense 
situation TWA was under.
 ``TWA Unveils Plan to Halve Its Debt''--December, 1994
 ``TWA Bailout 10 Times Bigger Than Announced''--March 1995
 ``For Trans World Airlines, It's Chapter 11 Again''--June, 
        1995
 ``Auditors Gloomy on TWA's Prospects''--March, 1997
 ``TWA Juggles Top Executives After Treading in Read Ink for a 
        10th Straight Year''--March 1999
    Time after time, TWA pulled it through. Time after time, TWA was a 
survivor.
    Those days are no longer. Unfortunately, despite the heroic efforts 
of TWA's employees and current management team, it is now clear that 
the airline can no longer survive.

                      TWA's Importance to Missouri

    Mr. Chairman, IF I could have my way, TWA would continue to be a 
survivor and once again be on top leading the way for other airlines to 
follow. Unfortunately, as is the case to often, I am not getting my 
way. The loss of the TWA name in the airline industry is disappointing, 
but more specifically, the loss of TWA and its operations to my home 
state of Missouri, would be huge.
    TWA has approximately 20,000 employees today. Approximately 9,000 
of those employees live and work in the St. Louis, Missouri 
metropolitan area making TWA and seventh largest employer in the St. 
Louis area. At St. Louis Lambert International Airport, TWA operates 
almost 1000 flights (departures and arrivals) per day.
    In Kansas City, Missouri, TWA offers 10 daily flights to St. Louis. 
TWA employees 3,500 people in Kansas City, including 2,500 at the 
Kansas City overhaul base.
    TWA's headquarters are in St. Louis, Missouri. TWA's support in the 
community has been apparent by the financial assistance provided 
locally. Having TWA's St. Louis hub has proven to be a tremendous 
economic benefit for the St. Louis metropolitan area and the entire 
State of Missouri.

                     American Airlines Acquisition

    I am not going to deny it. Almost everyone involved with TWA looks 
at the acquisition of TWA by American Airlines as the knight in shining 
armor riding in on his white horse rescuing the damsel in distress. For 
TWA, for TWA employees, for St. Louis for Kansas City, for the entire 
State of Missouri, and for the traveling public--this is the only 
option for us.
    American Airlines is offering TWA, the TWA employees, Missouri, and 
the traveling public a ``global'' solution. American Airlines has an 
acquisition plan that will keep TWA flying in the short-term, protect 
almost all of the 20,000 jobs, maintains the St. Louis hub, maintains 
the Kansas City overhaul base, and maintains a competitive airline 
presence in St. Louis into the future. Obviously, this is good news for 
us--the State of Missouri simply has too much at stake to lose those 
economic engines.
    American Airlines, in my view, has presented the best possible 
option. In fact, had American not provided immediate financing to TWA 
in early January, the carrier would have had to shut down, 
precipitating an economic crisis in Missouri. Likewise, air service 
from St. Louis to small and mid-sized cities throughout the Midwest 
would have been disrupted. Indeed, the loss of the St. Louis hub would 
in the long run, I believe, do significant harm to the airline industry 
and the hundreds of thousands of air travelers who depend on St. Louis 
Lambert as their connecting airport.
    American Airlines wants the whole pie, not just a slice. That is 
imperative for TWA, TWA employees, Missouri, and the traveling public.

                           The Final Chapter

    Let's be honest. There are some other airlines who are not happy 
with this American acquisition of TWA. Almost all of those airlines 
have considered at one time or another, the purchase of TWA, including 
US Airways, Northwest, Continental, and Delta. They all passed the 
opportunity by. At one time, acquiring TWA would have only been a 
liability. This is not the case today. Captain Bill Campton and his 
team, including the 20,000 employees, have led the turnaround of TWA, 
from an airline that nobody wanted to one that they now want to 
squabble over.
    In the past four years the employees of TWA have built their 
airline into an industry-leading operator--going from last in on-time 
performance to first, winning numerous customer service awards. In 
addition, TWA undertook an ambitious program of fleet renewal leaving 
behind one of the newest fleets in the industry.
    Unfortunately, despite the sterling success of the operational 
turnaround, continuing financial problems have overwhelmed TWA. Let me 
be clear. TWA is not crying wolf! Because of the inability to overcome 
the financial woes which were further burdened by high fuel costs, TWA 
would have ceased operations mid-January. This is where the knight on 
the white horse came in.

                 Antitrust and Competition Implications

    Mr. Chairman, I understand and share many of the concerns of my 
colleagues with regard to increased consolidation in the airline 
industry. The proposed deals between United, US Airways, American, and 
DC Air raise significant questions in the regard and should be very 
carefully scrutinized. However, I urge my colleagues not to mix those 
larger, more complex deals with the American transaction with TWA. To 
do so will only cause delay and put thousands of jobs at risk in the 
State of Missouri.
    One point I should make about the proposed arrangement between 
American Airlines and TWA is its effect on competition, or more 
particularly the antitrust laws. I confess to having been an antitrust 
lawyer in my private life; it was the practice of the law that drove me 
into politics. I do recall, however, some of the main principles of 
antitrust law, and I am particularly drawn in this situation to the 
failing company doctrine. This is not an instance where competition is 
going to be decreased by the transaction between American Airlines and 
TWA; it is one which will enable the service provided by TWA to 
continue. Mr. Chairman, this is a glorified estate sale. It is my view 
that this estate-sale of assets of a failing company is absolutely 
essential to maintaining airline service, competition, economic 
opportunities, and the jobs provided by TWA.
    Indeed, the on-going bankruptcy proceeding as well as TWA's 
relatively small size (only 3.9 percent market share) make the 
American/TWA transaction fundamentally different from the larger deals. 
It must be resolved swiftly through the bankruptcy court and cleared by 
the Justice Department to ensure the continued, long-term employment of 
the thousands of TWA employees in my State of Missouri and those 
elsewhere in the country.
    I hope and trust that the reviewing authorities will not inhibit 
this transaction from going forward, and I would strongly urge my 
colleagues not to take any steps that might interfere with this effort 
to save the service and the jobs of TWA.
    Thank you for the opportunity to be here today. I look forward to 
working with you on this and many other issues.

    Senator DeWine. Let me at this point turn it over to the 
Chairman of the full Judiciary Committee, Senator Hatch.

STATEMENT OF HON. ORRIN HATCH, A U.S. SENATOR FROM THE STATE OF 
                              UTAH

    Chairman Hatch. Well, I will be very short. I have other 
conflicts, but we welcome all of you here and are very 
interested in your comments about these matters.
    I am pleased that the Senate Judiciary Committee is holding 
these hearings on the present state of airline mergers and 
consolidation of the consumer aviation market. I commend the 
past and likely future Chairman and the Ranking Member of the 
Antitrust Subcommittee for their leadership and efforts in 
organizing and holding these hearings.
    This is an issue that affects all of us and our 
constituents. A robust airline industry helps get us from point 
to point across the country and around the world cheaper and 
faster. However, recent reports have indicated that 
increasingly accessible airline travel creates problems such as 
overbooked or delayed flights. Therefore, I think it is 
important at every stage of the antitrust inquiry to question 
the nature of the total effect of the competitive market on 
consumers.
    As many scholars have pointed out, including Robert Bork 
and Frank Easterbrook, consumer welfare is the touchstone of 
proper antitrust inquiry and enforcement. Because airline 
travel is an integral part of people's lives, we should be 
particularly mindful of the effect mergers and consolidation in 
the market could have on consumers.
    So I believe that it is wholly appropriate for us as 
representatives of consumers to ask probing questions when 
mergers of this magnitude are contemplated and when a chain 
reaction of other mergers may follow, magnifying consolidation 
in the market.
    I think it is fair to ask how mergers of this magnitude 
impact the parity in the marketplace with respect to other 
market participants. Will other carriers feel compelled to seek 
out partners in order to compete or even survive? Will such a 
domino effect create anticompetitive consolidation? These are 
issues that are important for antitrust enforcers to consider 
and for us as policymakers to examine.
    We should be mindful of the full effect of these actions on 
consumers, notably whether this is the first in a series of new 
mergers and whether the market will be one of robust 
competition that will get airline passengers to their 
destinations more quickly, cheaper, and more safely.
    We need to ask the questions now, how much real competition 
will there be in large hubs after these mergers and how much 
real choice in airline service will be available to smaller 
cities. As I have said many times before, effective antitrust 
enforcement today will prevent the need for stifling 
regulations tomorrow.
    I believe these hearings are a helpful step in working 
toward an equitable marketplace for the aviation industry and 
better service to consumers as a whole. Again, I want to thank 
Senators DeWine and Kohl for their leadership in examining 
these issues within the Judiciary Committee, and I look forward 
to reading the testimony today and being on top of what these 
leaders in the field have to say about this matter. I have an 
open mind and I am certainly interested in what happens in this 
hearing today. I really appreciate your leadership in this 
hearing.
    Senator DeWine. Mr. Chairman, thank you very much.
    Senator Reid, it is my understanding you need to open the 
Senate at ten. Is that correct?
    Senator Reid. I would like to, yes.
    Senator DeWine. If the other panel members don't mind, we 
will proceed with Senator Reid.

STATEMENT OF HON. HARRY REID, A U.S. SENATOR FROM THE STATE OF 
                             NEVADA

    Senator Reid. Thank you very much, Mr. Chairman. I 
appreciate very much Senator Hatch's statement, and I 
appreciate the work that you have done on this and other 
issues, Senator DeWine. I have introduced two pieces of 
legislation that deal specifically with the American air 
traveller.
    I would ask unanimous consent, Mr. Chairman, that my 
statement as prepared be made part of the record.
    Senator DeWine. Without objection, it will be made part of 
the record.
    [The prepared statement of Senator Reid follows:]
 Statement of Hon. Harry Reid, a U.S. Senator from the State of Nevada
    Thank you Chairman DeWine and Ranking Member Kohl for allowing me 
to speak today on an issue that is very important to me. As you may 
know, I have introduced two pieces of legislation specifically to 
protect the American air traveler. I look forward to work with the 
committee so that we may give the consumers a choice of an airline and 
decent airfares.
    I am here today because I deeply concerned with the increase in 
airline merger proposals. Many have predicted that if the mergers 
continue, we will soon have an industry dominated by three, two and 
essentially one carrier.
    Since deregulation, more than fifty airlines have been acquired or 
merged. For instance, in my own state of Nevada, the Reno-Tahoe 
International Airport lost fights when Reno Air was purchased by 
another airline. Flights were then reduced significantly and now it is 
harder for people to fly in and out of the Reno and Lake Tahoe areas.
    If this merger frenzy continues, we could end up with only three 
airlines in America. That could drive prices ``sky high'' and cut the 
number of available flights, to the detriment of the American consumer. 
The purpose of deregulation was to ENCOURAGE competition. Evidence 
seems to suggest a reduction in competition.
    On January 29th I introduced the ``Airline Competition Preservation 
Act ``(S. 199) to address airline consolidation and the ``Air Travelers 
Fair Treatment Act' (S. 200) to address the common problems of air 
travel such as flight delays, right to exit aircraft, right to in-
flight medical care. We must protect the American air Traveler by 
safeguarding an competitive airline industry. We should take our time 
and look into these airline deals thoroughly, and determine their long 
term impact. We must maintain as much competition as possible in the 
airline industry.
    Mr. Chairman, my bill will take effect and give the transportation 
secretary authority to step in if a consolidation or merger occurs 
between two or more of the top seven airline carriers, or if three or 
fewer of those air carriers control more than 70% if domestic revenue 
passenger miles.
    Highlights of my Airline Competition Preservation bill are as 
follows:
 Protects agains unreasonably high airfares.
 Prevents unfair practices against new entrants.
 Encourages increased competition at hubs.
    We are at a critical juncture for the future of a competitive 
airline industry. The inescapable lesson of 22 years of deregulation is 
that mergers and a reduction in competition often lead to higher fares 
for the American traveling public. We cannot stand idly by and allow 
the benefits of deregulation to be derailed by a ware of mergers.
    No one wants the federal government to micro manage private 
industry. But our airways are not just a private industry--they are a 
public trust. People need to be able to fly across our vast nation--to 
do business, to see family members, and to enjoy their lives. If these 
mergers proceed without the competitive protections I am proposing, 
then the ultimate irony of deregulation will be that we will have 
traded government concern for the public interest, for private monopoly 
control in the interests of the industry.

    Senator DeWine. We also have a statement submitted by 
Senator Carnahan which will be made part of the record as well.
    [The prepared statement of Senator Carnahan follows:]

   Statement of Hon. Jean Carnahan, a U.S. Senator from the State of 
                                Missouri

    Mr. Chairman, thank you for convening these hearings today.
    Like many of you, I have very serious concerns about the 
potentially adverse impact that consolidation in the airline industry, 
may have on consumers. Reduced competition may lead to fewer travel 
options, higher fares and lower levels of service. As such, I think 
that the recently proposed mergers warrant careful examination for 
potential antitrust implications.
    I also believe, however, while we may be initially inclined to view 
all of the current airline mergers in the same light, we must recognize 
a fundamental difference between the American/TWA transaction and the 
other airline mergers that are currently under consideration. The 
primary difference with the American/TWA deal is that TWA is a 
financially distressed firm and cannot be saved or revived without 
intervention like that proposed by American Airlines.
    American Airlines' acquisition of TWA ought to be considered 
independently of the other proposed mergers. Absent an offer to 
purchase substantially all of TWA's assets--as American has proposed--
the airline would be forced to enter into a piecemeal sale of its 
assets. Such a scenario would almost certainly result in the loss of 
more than 20,000 jobs--over 12,000 of them in Missouri
    And let me be clear: to me, this is about saving the jobs of over 
12,000 Missourians.
    I have met with officials of American Airlines and they have 
assured me that their proposal would mean continued employment 
opportunities for virtually all of TWA's employees--including those 
employed at TWA's Kansas City based maintenance facility. American has 
also committed to continuing to provide retirement benefits to 
currently retired TWA employees--including travel benefits. Moreover, 
American has said that they plan to continue operating a hub in St. 
Louis--that hub is critical to maintaining the economic vitality of the 
region.
    TWA remains in a precarious economic situation, in fact, were it 
not for the $200 million of debtor-in-possession financing that 
American provided, TWA would not even be operating today. The 
potentially adverse impact that the loss of jobs and hub service would 
have on the region underscores the immediacy of the situation. IT is 
critical that this transaction be dealt with swiftly.
    Mr. Chairman, as I have said, American Airlines' proposed 
acquisition of TWA is wholly separate and unique from the other mergers 
that are pending. The difference lies in the impact on real people. 
Many TWA employees are extremely concerned they will lose their jobs if 
this deal is ultimately disapproved. I will continue to work to promote 
a solution to TWA's financial difficulties that will protect the 20,000 
employees and their families. At this time, American's proposal 
represents the best way to achieve this goal.
    I urge the members of this committee to consider these 
circumstances when evaluating. the more general problem of airline 
consolidation.

    Senator Reid. Mr. Chairman, I am not here to pre-judge what 
should happen with American/TWA. I don't know. The situation 
has certainly been outlined very well by my colleague who 
represents that State. I do want to say, however, that I think 
there couldn't be a matter of commerce more important that this 
Congress is involved in than what is happening with American 
Airlines generally.
    We have seen over the last 15 years airline after airline 
go out of business. I believe in the free enterprise system, I 
believe in competition. But if we carry competition and the 
free enterprise system to its end, we wind up with one of 
everything, and I think the time has come where this 
Subcommittee and this full Committee must look at what is 
happening in the airline industry.
    We have situations; there are many of them, but take, for 
example, what happened recently in Nevada. An acquisition took 
place. Promises were made that with the purchase of Reno Air 
the routes would be maintained and the schedule would be 
maintained. They are gone, and Reno is really suffering as a 
result of that.
    If this merger frenzy continues, we could end up with 
three, two, maybe only one airline. I think we have a 
tremendous obligation to the American public to make travel 
more pleasant. I am convinced that one of the things that is 
happening in commerce generally is deregulation has come to a 
point where it is not working very well.
    I have worked on a lot of legislation in my years in 
Congress. The Chairman of this Committee and I came to Congress 
together, but there is nothing that I have worked on that 
wherever you go people say do something about it. This 
legislation that I have introduced, while it may not be 
perfect--and I met with a number of Senators yesterday saying 
rather than going off in a number of different directions, let 
us work together, let us come up with something that we can 
join together on.
    I think we have had enough press releases, enough press 
conferences. We need some work to be done by this Congress. I 
say, Mr. Chairman, that the issue is one where everyone who 
travels a lot like we do, you almost become depressed thinking 
you have to take another airplane ride. It is not a question 
whether something is going to go wrong; it is just a question 
of what is going to go wrong. Are you going to be stuck at the 
gate after you get on the airplane?
    You come and you look up and you see your flight is on 
time. You get there and the ticket agents say, well, it is 
going to be a little bit late. What is wrong? Well, we can't 
tell you. Then you finally get on the airplane and you don't go 
anyplace. Then you are so relieved. The plane pulls away from 
the gate and then you go out and wait on the tarmac. Then you 
land on a connecting flight. Mr. Chairman, I waited more than 3 
hours one night after landing in Dallas for a gate. This was 
after we flew from Washington to Dallas.
    We are at a critical juncture for the future of a 
competitive airline industry. An escapable lesson of 22 years 
of deregulation is that mergers and a reduction of competition 
often lead to higher fares for the American traveling public. 
We cannot stand idly by and allow the benefits of deregulation 
to be derailed by a wave of mergers.
    Again, Mr. Chairman, I say I understand the plight of TWA, 
and we all have great admiration for TWA and I hope that 
something can work out there. I am not directing my comments to 
botch up this deal. No one wants the Federal Government to 
micromanage private industry, but our airways are not just a 
private industry; they are a public trust. People need to be 
able to fly across our vast Nation to do business, see family 
members, and enjoy their lives generally.
    If these mergers proceed without competitive protections 
that I am proposing and others are proposing, then the ultimate 
irony of deregulation will be that we will have traded 
Government concern for the public interest for private monopoly 
control and the interests of the industry.
    Thank you very much, Mr. Chairman.
    Senator DeWine. Senator Reid, thank you very much.
    Senator Reid. Could I be excused? Senator Warner has agreed 
to answer all my questions.
    Senator DeWine. You certainly can hand your proxy off to 
Senator Warner.
    Representative Myrick, you have been very patient. Thank 
you very much for joining us. We appreciate it, if you would 
like to proceed.

STATEMENT OF HON. SUE MYRICK, A REPRESENTATIVE IN CONGRESS FROM 
                  THE STATE OF NORTH CAROLINA

    Representative Myrick. Well, thank you for this opportunity 
to testify today. I do appreciate it.
    I have watched closely in recent weeks as the public debate 
has focused on the American and TWA merger, and I have listened 
to the Senator this morning as he has explained some of the 
difficulties that have come from that. Others have spoken of 
the white knight role of American as it swoops in late in the 
eleventh hour to save a failing TWA, their hub in St. Louis, 
the jobs, the 20,000 employees, and serviced over 100 
communities. All of this is to be commended.
    However, the fact that American wants to acquire the 
remaining pieces of TWA through the bankruptcy court does not 
turn back the clock on the pain and anguish that has been faced 
by the entire TWA family over these years. All who are 
associated with TWA have confronted cuts in service and 
reductions in employment, a future that was very uncertain from 
day to day.
    In evaluating the proposed merger of United Airlines and US 
Airways, experts have focused on the structural weaknesses of 
US Airways. They have pondered whether the future is the same 
as TWA and Eastern and Pan Am and Braniff. We know those 
stories. You know other mid-sized pre-deregulation airlines 
that were confronted by a cost structure and a competitive 
environment which eventually, and I must say inevitably drove 
them from the competitive playing field.
    Today, the Senator made the case on behalf of TWA, and it 
would be unacceptable if in the near future the Members of 
Congress like myself who represent US Airways communities 
throughout the country had to come before you and plead the 
same case for our local airlines.
    US Airways is vital to our community. It is a huge hub for 
us. It is also an airline that faces, in my opinion, a 
desperate future without this proposed merger with United. I 
think we have got to be sure that we don't lose sight of that 
crucial fact in everything we are looking at here today.
    TWA's situation is very sad, but it is very illustrative of 
what happens to jobs and service and competition. If the US 
Airways merger is not approved, we see the same thing. I know 
they have gone through a lot of financial uncertainty 
throughout Missouri, and the communities and the employees. 
They have been in and out of bankruptcy, and we just cannot 
allow that to happen to another carrier because there is too 
much at stake for the American public.
    Make no mistake about it, US Airways is already on the 
perilous path that has already been taken by TWA, Eastern, Pan 
Am and Braniff before it. As a stand-alone carrier, it has 
suffered devastating financial losses, a staggering $269 
million this last year. It is trying to cope with unworkable 
costs and a limited route network, which is a big problem. It 
puts it at a severe disadvantage against low-fare competition.
    In my considered judgment, it is not a question just of 
financial instability. US Airways is now in serious trouble. 
This would be devastating for our constituents, our 
communities, the dedicated US Air employees, their families, 
their dependents, and the economic well-being of all the 
communities that US Airways serves. It is in this context today 
in which I hope the Committee will review the United/US Airways 
merger.
    Some scholars have theorized that the solution to US 
Airways' unique and untenable position in the industry is to 
restructure its labor contracts by demanding huge wage and 
benefit concessions. They have already done that before over 
and over again. In other words, again ask the US Airways 
employees to sacrifice pay cuts, lose their benefits, shrink 
the company's service, just like TWA has done over the past 
decade. It doesn't work. For evidence, look at what the years 
of self-sacrifice has done for TWA employees and their 
families.
    I cannot and I will not allow this to happen to US Airways 
employees and to the greater Charlotte community, which has 
become one of the country's leading economic and banking 
centers over these last few years. And that is a direct result 
of US Airways' hub and their commitment to provide extensive 
service throughout the region.
    There is an alternative to job losses, service reductions 
and hardship. The merger of US Airways with United provides a 
bright future for its employees, the communities it serves, and 
the economy of North Carolina. The terms of the agreement will 
guarantee not only the 10,500 US Airways jobs in North 
Carolina, but those of all of the 45,000 employees. Further, 
there will be no communities cut from the service network. 
Indeed, service is going to be added, and particularly in 
Charlotte we benefit from that.
    So you contrast that with the uncertainty and the distress 
experienced by TWA employees, their passengers, and the 
communities over the last decade as all those cuts took place. 
The merger with United will avoid that same painful scenario 
for US Airways, its employees and the communities, and it will 
guarantee air service and employment for those who have come to 
depend on US Airways.
    That is the end of my oral remarks, but I hope you will be 
kind enough to allow me to submit some further remarks on the 
competitive nature of it for the record.
    Senator DeWine. We would be more than happy to receive 
those and they will made part of the record.
    Representative Myrick. Thank you.
    Senator DeWine. Thank you very much.
    [The prepared statement of Representative Myrick follows:]

  Statement of Hon. Sue Myrick, a Representative in Congress from the 
                        State of North Carolina

    Good morning. Chairman Hatch, Senator Leahy, and Members of the 
Committee, I want to thank you for the opportunity to testify before 
this distinguished Committee today regarding the proposed mergers 
within the airline industry.
    The Judiciary Committee has a long-standing, solid track record of 
taking steps to protect and enhance the competitive marketplace. By 
holding these hearings, and closely reviewing these agreements, this 
Committee is living up to its tradition of protecting the American 
consumer and fostering innovation and economic growth.
    I have watched closely in recent weeks as the public debate has 
focused on the proposed acquisition of TWA by American Airlines. I have 
listened intently this morning as members from the Missouri delegation 
have spoken of the difficult times faced by the employees of TWA and 
the communities served by the company. Many have spoken of the ``white 
knight'' role of American as it swoops in, late in the eleventh hour, 
to save a failing TWA--their hub in St. Louis, the jobs of its 20,000 
employees and service to over a hundred communities. All of this is to 
be commended.
    However, the fact that American wants to acquire to remaining 
pieces of TWA through the bankruptcy court does not turn back the clock 
on the pain and anguish that has been faced by the entire TWA family 
over recent years. All who are associated with TWA have confronted cuts 
in service, reductions in employment and a future that was virtually 
uncertain from day to day.
    In evaluating the proposed merger of United Airlines and US 
Airways, experts have focused on the structural weakness of US Airways. 
They have pondered whether its future is the same as TWA, as well as 
Eastern, Pan Am and Braniff--other mid-sized, pre-deregulation airlines 
which were confronted by a cost structure and competitive environment 
which eventually--and inevitably--drove them from the competitive 
playing field.
    Today, the Missouri delegation made the case on behalf of a 
desperate TWA. It would be unacceptable if, in the near future, members 
of Congress who represent US Airways' communities and its 45,000 
employees needed to return to this Committee to plead this same case 
for our local carrier. US Airways is vital to the community I 
represent--it is also an airline that in my judgment faces a desperate 
future without this proposed merger with United. It would be 
unconscionable to lose sight of this crucial fact.
    TWA's situation is a sad but illustrative example of what will 
happen to jobs, service, and competition if the US Airways' merger is 
not approved. TWA's employees, the people of St. Louis and communities 
throughout Missouri have faced financial uncertainty for more than a 
decade as TWA has been in and out of bankruptcy. We cannot allow this 
to happen to another carrier. There is too much at stake!
    Make no mistake about it, US Airways in now on the perilous path 
already taken by TWA, Eastern, Pan AM and Braniff before it. As a 
stand-alone carrier, it has suffered devastating financial losses--a 
staggering $269 million last year--and is trying to cope with 
unworkable costs and a limited route network that puts it at a severe 
disadvantage against low-fare competition. In my considered judgment, 
this is not just a question of financial instability. US Airways is now 
in serious trouble.
    This devastating for my constituents, thousands of dedicated US 
Airways employees, their families and dependents, and the economic well 
being of the communities they serve. This is the context in which this 
Committee must review the United/US Airways merger.
    Some scholars have theorized that the solution to US Airways' 
unique and untenable position in this industry is to restructure its 
labor contracts by demanding huge and benefit concessions. In other 
words, ask U.S. Airways' employees to sacrifice pay cuts, lose their 
benefits and shrink the company's service--just like TWA has done over 
the past decade. This does not work! For evidence, just look what years 
of such sacrifices have done the TWA's employees and their families.
    I cannot--and will not--allow this to happen to US Airways' 
employees and to the greater Charlotte community, which has become one 
of the country's leading economic and banking centers as a direct 
result of US Airways' commitment to provide extensive air service to 
the region.
    There is an alternative to job losses, service reductions, and 
hardship. US Airways' merger with United provides a bright future for 
its employees, the communities it serves, and the economy of North 
Carolina. The terms of the agreement will guarantee not only the 10,500 
US Airways jobs in North Carolina, but those of all its 45,000 
employees. Further, there will be no communities cut from the service 
network--indeed, several will be added.
    Contrast this with the uncertainly an distress experienced by the 
TWA employees and passengers over the past decade as the company cut--
and cut--and cut some more. This merger with United will avoid that 
same painful scenario for US Airways, its employees and the communities 
it serves. Instead, it will guarantee air service and employment for 
those who have come to depend on US Airways.
    On a positive not, let me focus on the competitive benefits of this 
proposed merger and the real effect this merger will have on the people 
most directly affected by it--something few commentators have 
addressed. I am convinced that this merger is essential for Charlotte, 
essential for the Carolinas and essential for the nation.
    For you to fully understand my conclusion, let me begin by 
describing in further detail the current role of US Airways in my 
community. This company is literally part of the economic and cultural 
fabric of the Carolinas. US Airways is the fourth largest private 
employer in Charlotte with about 8500 employees. In my state, US 
Airways pays annual salaries of over $700 million and has annual 
overall expenditures of nearly double that amount.
    As you are all aware, US Airways is the most important carrier out 
of Charlotte and in the last year alone, the Company has launched its 
new service from Charlotte to London, Charlotte to Pairs and Charlotte 
to Frankfurt. In addition, US Airways recently opened a new airport 
club and invested $12.7 million to expand and crew training facility.
    And yet, with all of this wonderful news, there are real and 
practical limits to the growth and expansion of US Airways in 
Charlotte. US Airways has basically a domestic north-south route 
structure with less reach to the Midwest, the Rockies and the west 
coast. And, while the efforts by US Airways to expand to Europe through 
Charlotte are greatly appreciated, this is about as far as the Company 
is in a position to expand for the foreseeable future. And yet, we are 
all aware that is this global economy, the demands to remain 
competitive go past Europe, to Asia, South America and beyond.
    This is one of the reasons that a merger of US Airways with United 
has so excited may constituents. Fundamentally, the impending marriage 
of US Airways north-south network with United's complementary east-west 
routes and its substantial global network, will be a tremendous boon to 
the citizens of my state. by connecting Charlotte to a larger national 
and international network, the United-US Airways combination will mean 
more commerce, more jobs and more economic development. The result: 
substantial growth for the entire region.
    MR. Chairman, as a result of this merger, US Airways' hubs are 
going to have new opportunities to compete as alternatives to other 
existing hubs and gateways. Just think about what this means to 
competition up and down the east coast. The union of United with US 
Airways, as well as the emergence of start up DC Air teaming with 
American Airlines dramatically enhances the competitive environment on 
the entire east coast where Delta and Continental are already 
significant players. Overlay this with the growth and success of low 
cost carriers Southwest, Jet Blue and Airtran and it is hard to imagine 
a more beneficial picture emerging for consumers.
    I'm sure we can all agree that consumers are the beneficiaries of 
increased competition in the airline industry. Inasmuch as the proposed 
merger between United and US Airways enhances the competitive aviation 
marketplace, I am encouraged about the future of the airline industry. 
Thank you.

    Senator DeWine. Senator Warner, thank you very much for 
joining us.

STATEMENT OF HON. JOHN WARNER, A U.S. SENATOR FROM THE STATE OF 
                            VIRGINIA

    Senator Warner. Thank you, Mr. Chairman. I listened with 
interest to my colleagues talk about their situations. I am 
here this morning to assure you, Mr. Chairman, and other 
members of this committee, and indeed the Senate as a whole 
that I am going to work very diligently, as I have over almost 
2 years now, on behalf of the United and US Air merger.
    Mr. Chairman, I have been in the Senate 23 years and it is 
rare that I get into these antitrust situations. There are so 
many diverse parties and the clarity of these issues is not 
always right on the surface. But I have spent enough time on 
this one, particularly in private consultations jointly with 
the two CEOs and singularly with the two CEOs, and with 
representatives of communities throughout Virginia, 
representatives of the employees of these two airlines, and I 
am absolutely convinced that there is really no alternative but 
to let this go through. And I am going to diligently watch it 
as the role of Congress with regard to this merger to see that 
that happens.
    Behind me are the chiefs of these organizations, 
particularly Chairman Wolf, and I urge the Committee to listen 
carefully as he shows you some charts which were the final 
convincing bit of evidence to induce me to enter this fray and 
to represent these two airlines to see that it is done.
    When I say represent the airlines, we have a large 
constituency of customers in the area that I represent, 
Virginia, and in the District of Columbia that are very 
dependent on the services now provided by US Air. I am 
concerned about their employees, and these CEOs have given me 
certain assurances about the job situation, the price of the 
tickets in and out of my State, and the service to some of the 
small communities.
    So after a lot of careful consideration, Mr. Chairman, I 
appear before this Committee today solidly in favor of this 
merger. I hope the Committee will call on me if, in the weeks 
and months to come, the Committee desires to get into this 
further and there is any question. Also, this particular merger 
will allow a new airline to evolve, hopefully, named DC Air, 
and that has a future to serve this community.
    So all factors being considered, I decided to come in here 
today and to indicate my strong approval and commit to this 
Committee and to all the constituents involved here--the 
customers, the employees, the stockholders and others--that I 
will work hard to see this is done.
    I will submit for the record a more complete statement.
    Senator DeWine. That certainly will be made a part of the 
record, and we appreciate your very strong testimony, Senator, 
very much.
    [The prepared statement of Senator Warner follows:]

    Statement of Hon. John Warner, a U.S. Senator from the State of 
                                Virginia

    Thank you Mr. Chairman and Members of the Committee.
    I appreciate the opportunity to testify regarding the pending 
merger between US Airways and United Airlines.
    As you know, US Airways is based in my state of Virginia. I am very 
concerned that absent this merger, the customers now served by US 
Airways may lose this fine service and thousands of US Airways jobs 
will be lost. I am also enthusiastic about DC Air, a new airline 
created by the merger that will serve many of the areas currently 
served by US Airways and compete with United Airlines.
    In my years, I have seen Pan Am, Eastern, Braniff, TWA and others 
all file for bankruptcy. I am concerned that without this merger with 
United Airlines, US Airways may suffer the same fate. Last year, I am 
told US Airways reported a loss of $269 million.
    In today's air travel network, there seems to be less and less room 
for mid-size carriers such as US Airways. Mid-sized airlines face 
increasingly stiff competition from the larger, better-financed 
carriers and from the smaller, low-cost carriers. US Airways does not 
have the resources to compete with the large carriers and its fixed 
costs are too high to compete with the newer airlines.
    Several Virginia communities such as Charlottesville, Roanoke and 
Lynchburg have expressed their concern to me about the merger. In 
response to these concerns, I have personally met with Steve Wolf, 
Chairman of US Airways and Jim Goodwin, Chairman of United. They have 
assured me that all Virginia cities currently served by United or US 
Airways will continue to be served after the merger.
    In addition to guaranteeing continued service on all existing 
routes, Mr. Wolf and Mr. Goodwin assured me ticket prices will be 
frozen for two years and that all US Airways and United jobs are 
guaranteed for at least two years.
    Additionally, I have arranged for two meetings between several 
concerned Virginia airports and US Airways and United Airlines. My 
intent was to provide the airports with an opportunity to raise their 
concerns directly with the airlines. It is my sincere hope that these 
meetings were productive and I intend to sponsor another round of 
meetings if the merger is approved.
    While I take the concerns about the merger very seriously, it is my 
firm belief this merger will serve Virginia and as best any carrier 
can.
    I urge members of the committee to consider this merger within the 
context of saving jobs and preserving service to the communities 
currently served by US Airways.
    Thank you Mr. Chairman.

    Senator DeWine. Representative Meeks, thank you very much 
for joining us. You may proceed.

    STATEMENT OF HON. GREGORY W. MEEKS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Representative Meeks. Thank you, Mr. Chairman, for the 
opportunity to testify today. I am here because of the 
tremendous impact aviation has on my district's current and 
future economic welfare, as well as the significant role 
aviation has in our country's economic and national security 
infrastructure.
    For the record, I understand and share some of the concerns 
expressed regarding consolidation in the airline industry. 
Since I was elected to Congress 3 years ago, I have fought 
vigorously for service to smaller communities and increased 
competition. Despite much opposition from local elected 
officials in New York City, as well as civic organizations in 
my district, I and Senator Chuck Schumer successfully brokered 
a compromise in the historic AIR 21 legislation that increased 
service opportunities to upstate New York and other underserved 
destinations around the country from both of New York's 
airports.
    Furthermore, I worked tirelessly with former Secretary of 
Transportation Rodney Slater and Senator Schumer to get JetBlue 
Airlines the regulatory approval to operate out of John F. 
Kennedy International Airport which lies in the center of my 
Congressional district.
    However, the announced agreements between United Airlines 
and US Airways, as well as American Airlines' acquisition of 
TWA's assets, have my strong support because I believe that 
both deals will increase domestic competition, continue air 
service to communities that now have service, and protect the 
jobs and retiree health and pension benefits of thousands of 
current and former employees.
    I judge each deal on a case-by-case basis, weighing the 
merits and public interest benefits. In the United/US Air and 
American/TWA proposals, consumers, employees, creditors and 
other stakeholders will benefit from not having two financially 
distressed airlines, such as US Airways and TWA, go out of 
business like their former counterparts Pan Am, Eastern and 
Braniff.
    It is important for you to recognize the economic impact of 
having an airline go out of business. My district still suffers 
from the devastating economic losses of Eastern Airlines and 
Pan American Airways. In both cases, the court allowed the 
airline's assets to be liquidated to the highest bidder. It 
resulted in the two airlines' competitors acquiring Eastern and 
Pan Am's most prize routes only.
    However, it also resulted in thousands of permanent 
displaced workers who in many cases were employed by one of the 
carriers for more than 30 years. This action by the bankruptcy 
court left those American workers without a job and no benefits 
after a lifetime of service and dedication to Eastern or Pan 
Am.
    Despite the claims by opponents that are being made against 
the two announced consolidation proposals, if you look back 
closely to the Eastern and Pan Am cases, you will see a 
contradiction to the argument being made against the United/US 
Airways and American/TWA deals.
    Eastern and Pan Am's competitors achieved greater market 
concentration with their newly acquired assets from two 
liquidated, defunct airlines. Mr. Chairman, I ask how did this 
increase competition? It did not. As I stated earlier, it only 
resulted in the employees and retirees of Eastern and Pan Am 
being hurt the most. We must not repeat that mistake again.
    Let me be very clear. The proposed agreements between 
United/US Airways and American/TWA are in the public interest. 
As a result, a New York Times editorial said travelers in the 
Northeast will probably see more competition as a result of 
these agreements. I agree.
    For example, these deals will bring a strong third 
competitor into the lucrative Boston-New York-D.C. shuttle 
market. Meanwhile, the nationwide competitive impact will be 
enhanced greatly. For example, United's Charlotte hub will 
compete more vigorously with Delta's Atlanta hub, United's 
Philadelphia hub will compete more vigorously with 
Continental's Newark hub, and American's St. Louis hub will 
compete more vigorously with Northwest's Minneapolis hub.
    Furthermore, the DC Air/American deal will also ensure 
strong competition between United and DC Air in the Washington, 
D.C. region. DC Air's agreement with American Airlines also 
ensures the initial success of DC Air as an independent entity 
with a lower cost structure, which can be translated into lower 
fares for consumers which will be served on the 45 routes by DC 
Air.
    The DC Air/American Airlines partnership enables DC Air to 
move from a virtual airline, which it must remain until the 
United-US Airways merger is approved, to a fully operational 
airline serving some 45 communities from Washington National 
Airport overnight. It ensures that the commitment which DC Air 
has made to uninterrupted service to these communities will be 
kept.
    On a personal note, I am honored to support this endeavor 
by Bob Johnson. Bob has made significant contributions to the 
African-American community and our country. I enthusiastically 
welcome his entry into the aviation industry for three reasons.
    First, as a businessman Bob has successfully demonstrated 
time and again that he can effectively and efficiently manage 
an organization from the ground up. Second, Bob Johnson is a 
man of the highest character and integrity. He will be a 
welcome addition to an industry that once upon a time not too 
long ago was represented by two individuals who I believe had 
the lowest of character and no integrity, two individuals who 
intentionally bankrupted successful companies for their own 
personal gain. Third, and finally, he will be the first 
minority owner of an airline in over 30 years.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify. I hope that this distinguished 
Committee sees the many public interest benefits of the United/
US Airways, American/TWA, as well as DC Air transactions. 
Fostering an environment that allows low-cost carriers such as 
Southwest, JetBlue, DC Air and others to grow alongside the 
global network, full-service airlines is the best means to 
encourage competition and affordable air travel.
    Thank you, Mr. Chairman.
    Senator DeWine. Congressman, thank you very much.
    Let me just say to all of our panel members I thought the 
statements were excellent. Each one of you brought a very 
interesting and valid perspective to our hearing. It has been a 
real contribution.
    Senator Bond, let me just say that, as you and I have 
personally discussed before, you make a very compelling 
argument about the problem in regard to TWA. I think that those 
of us who do have some concerns about the big picture here and 
what is going on fully realize the unique TWA problem, and that 
our problem with these different proposals really does not have 
directly to do with TWA. We know that that has to be dealt with 
and we look forward to working with you to resolve that. We 
have a lot of jobs at stake and we understand that, and we 
appreciate your very compelling testimony.
    Senator Bond. Mr. Chairman, thank you very much for your 
understanding. If other members of this Committee or other 
members of this body wish to discuss it, I will be happy to 
discuss it either here or later and I am at your service. If 
there are questions, it would be my honor to be able to provide 
answers and such persuasion as I might muster.
    Senator DeWine. Well, you have done a good job in both 
cases.
    Senator Bond. Thank you, sir.
    Senator DeWine. We appreciate that very much.
    We thank the panel very much.
    Representative Myrick. Thank you.
    Senator DeWine. Thank you.
    I will have a statement that I am going to make right now, 
and then I will turn to Senator Kohl and Senator Schumer.
    We are holding this hearing today to examine the 
competitive impact of the announced mergers involving United 
Airlines, US Airways, DC Air, American Airlines, and TWA. Since 
the United/US Airways merger was announced in late May of last 
year, the Antitrust Subcommittee of the Judiciary Committee has 
been actively examining all implications of that proposed deal. 
We held a hearing last June, and at that time many of us noted 
that the most troubling aspect of the merger was the likelihood 
that it would lead to further consolidation. Sure enough, here 
we are again today.
    I am troubled about this. I am troubled because it seems 
that our worst fears are being realized, that we are headed in 
a direction that could cripple competition in the domestic 
aviation market. Just look at what has happened since our 
hearing last June.
    American Airlines has joined in the United/US Airways deal 
apparently because it believes it will not be able to compete 
effectively with the new United Airlines unless it also grows 
in size. Not surprisingly, the other major airlines also are 
considering their options for growth.
    The significance of this rapid consolidation cannot be 
overstated. The proposed mergers will dramatically restructure 
the domestic aviation market, likely leaving us with three or 
four giant mega-carriers. Each of these carriers, these mega-
carriers so to speak, will have extensive national networks 
that would make it very difficult for regional and for startup 
carriers to ever compete.
    As we have learned through experience, when airlines are 
able to dominate a hub city, for example, they are likely to 
raise prices in that particular market. And so it would seem 
that it is very likely that if several airlines are also able 
to dominate large sections of the aviation market nationwide, 
consumers across the Nation will have to pay higher ticket 
prices.
    The resulting mega-carriers would compete with regard to 
scheduling and frequent flyer benefits certainly, but price 
competition likely would suffer as a result. Those smaller 
carriers that remain and that are able to stay in business 
likely would be relegated to a role of serving regional markets 
with little chance of growth. In circumstances such as this, I 
believe that competition in the aviation market would clearly 
be at risk.
    Additionally, I believe that adverse consequences await 
U.S. travelers if we are forced to rely on only a few, a 
handful of mega-carriers for the bulk of our air transportation 
needs. We already have seen the serious congestion and 
frustrating delays that passengers face when one of the major 
airlines has labor difficulties. I shudder to think of the 
impact on the flying public if a merged United/US Airways would 
face a work stoppage.
    These disturbing facts are certainly not going unnoticed. 
Last week, Senator McCain chaired a hearing in the Commerce 
Committee to examine this issue. He and others on the Commerce 
Committee expressed serious concerns about these deals. Also, 
last week Senator Kohl and I, along with six of our colleagues 
from the Judiciary Committee, sent a letter to the Justice 
Department expressing our concerns and asking for a thorough 
review of the competitive impact on the aviation industry of 
consolidation on competition and consumers.
    Yesterday, I met personally with Secretary of 
Transportation Mineta to express my concerns, and I asked that 
the Transportation Department carefully scrutinize these 
transactions to determine whether or not they are in the public 
interest.
    Now, let me make it clear, as I did a moment ago to Senator 
Bond, that my primary concern lies with the larger proposed 
deals, those involving United, US Airways, and American. While 
it is certainly important for the Justice Department to examine 
the specifics of the agreement between American Airlines and 
TWA in the context of these larger deals, I believe that review 
must be done in an expedited manner.
    There is little dispute that TWA has been struggling for a 
long time. In fact, the airline has not been profitable since 
1988 and has just entered bankruptcy for the third time. Most 
people would agree that TWA is not viable in its present form.
    Moreover, we are all concerned about the preservation of 
20,000 TWA jobs and continuing service to the many communities 
that TWA currently serves. For that reason, we believe that 
review of this deal should be completed, whatever the result, 
as quickly as possible.
    The larger deal among United, US Airways and American will 
require much more scrutiny, and we will continue that process 
today. We are glad to have with us each of the airlines 
involved in the proposed mergers, as well as representatives of 
a number of other airlines and experts on airline competition.
    My hope is that we can gain a better understanding of the 
proposals and their competitive impact. However, based on what 
we have learned so far, it does not appear that these deals are 
good for the domestic aviation market, nor for the American 
flying public.
    Instead, it at least appears that the results of this 
consolidation will be to improve the fortunes of one or two 
giant airlines at the expense of the American consumer. That, 
in my opinion, would be simply unacceptable. I do think, 
however, that we have more to learn about these deals. That is 
why we are having this hearing today, and I look forward to 
further examining these issues.
    On a final note, I want to stress that these are important 
issues which have tremendous competitive implications and are, 
of course, very important to the individual businesses 
represented here today. We are fully cognizant of that fact--
the impact on businesses, the impact on the stockholders, and 
the impact on the employees.
    As we work our way through this process, it is important 
that we as policymakers continue to discuss these issues with 
those in the industry who struggle with these problems every 
single day. I would like to thank in advance those in the 
aviation community who have taken time from their busy 
schedules to be here with us today. You have all been very 
forthright and willing to work with us as we examine these 
issues and we certainly very much appreciate it, and we look 
forward to hearing your testimony.
    I am going to turn now to Senator Leahy, the Ranking Member 
of the committee, and then after Senator Leahy we will turn to 
Senator Kohl, the Ranking Member of the subcommittee.
    Senator Leahy, good morning.
    Senator Leahy. Mr. Chairman, I would yield first to Senator 
Kohl. This is the Subcommittee that is going to have the most 
work on this.
    Senator DeWine. Senator Kohl.

 STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE 
                          OF WISCONSIN

    Senator Kohl. Thank you very much, Mr. Chairman and Senator 
Leahy.
    Mr. Chairman, we thank you today for holding this hearing. 
This is indeed a crucial time for us to consider airline 
consolidation because we could be witnessing the beginning of 
the end of airline competition.
    If all the proposed mergers and acquisitions go through as 
announced, real competition among airlines could be virtually 
eliminated in many markets, and American consumers will pay. So 
we should say it: these proposed mergers are dangerous to 
American consumers. If we do not intervene to protect 
competition now, in a few years two or three large airlines 
could dominate the skies all across America.
    With all the mergers and acquisitions among the airlines 
announced in the last few months, we may be seeing the 
competitive situation in the airline industry, already far from 
ideal, take a sharp nose dive. The result of all these deals, 
if they are approved, will be a radically concentrated domestic 
airline industry.
    Two airlines, United and American, will collectively 
control about 50 percent of the domestic market, with their 
closest competitor, Delta, behind with about 18 percent of the 
market. Yet, in the last few days the press has reported that 
Delta and Continental are now in serious merger discussions.
    So this massive restructuring and consolidation among 
competitors whose size and scope has rarely been seen in modern 
times in any industry leads us to worry about the future of 
competition in the airline industry, or if indeed there will be 
any meaningful competition left at all.
    Today's hearing will closely examine these issues, but we 
need to do more. We need to consider legislation to help ensure 
that airline competition does not become a distant memory and 
to loosen the grip that large airlines have on essential 
facilities and airports.
    We do not criticize any airline for doing all that it can 
to make it the strongest and the best airline in its markets. 
Indeed, all of the CEOs who will testify before us today have a 
responsibility to their shareholders to do just this. But we 
here in the Congress have a very different and perhaps more 
important responsibility, for our responsibility is to the 
public to protect consumers and to ensure that no airline or 
small group of airlines gains a stranglehold over the market.
    We need to be sure that the announcement that we have all 
heard flight attendants say at the end of a flight, quote, ``We 
know that you have a choice among airlines,'' does not become 
as obsolete as airlines like Braniff, Pan Am, Eastern, 
Republic, Piedmont, People Express, and now TWA and US Airways.
    So we thank all of our witnesses for appearing here today. 
We look forward to your testimony on these very important 
issues.
    Thank you, Mr. Chairman.
    Senator DeWine. Senator Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman, and I compliment 
you and Senator Kohl and Senator Hatch and others for having 
these hearings.
    I worry that the airline industry is going in the wrong 
direction. I see many of the leaders whom I respect greatly 
here in the audience, but I look at it from the point of view 
as one who travels a great deal, perhaps more than I would 
like. And I worry that the region that is going to suffer the 
most is along the East Coast, States which I would remind 
everybody--each of those States have two Senators, including 
even the smallest State in the Northeast, Vermont, a lovely 
State.
    I worry that control of landing and takeoff slots and the 
control of gates by just two major airlines, United and 
American, could become a stranglehold on competition on the 
East Coast.
    I updated a chart which I used during our June hearing. 
Now, as you can see, the cost of a round-trip ticket--
incidentally, I realize you can always get tickets for less. I 
am talking about yesterday we called a travel agency and asked 
for a 1-week fare. Washington to Burlington, Vermont, is $772. 
Washington to London, a lovely city, I understand--many speak 
English there and everything else--is $338. Washington to San 
Francisco is $408.
    Now, I like London, I like San Francisco. I live in 
Burlington. I am going to be going to Burlington a lot more 
often than I am going to be going to London or San Francisco. I 
still have a hard time understanding why it costs twice as much 
to go 500 miles to Burlington than it would cost to go to 
London or San Francisco.
    If the airline mergers that are on the table are approved, 
two major carriers will control more than half the air traffic 
in the U.S., and I think that they will charge what the traffic 
will bear using monopoly slots. Landing slots, like the 
spectrum which carriers television shows and wireless phone 
calls, have become a priceless commodity, even though they are 
nothing more than the use of space for a period of time. But as 
Benjamin Franklin said in 1748, time is money.
    From a more national perspective, these mergers will put us 
one merger away from an oligopoly of three major carriers, and 
higher air fares and reduced competition will follow unless 
there is significant divestiture of slots and gates and other 
assets.
    The industry is going to be one work stoppage away from 
closing down one-quarter to one-third of America's air system. 
This prospect has become even more frightening when you read 
the papers the last couple of days and see the potential labor 
strikes at four major airlines--Delta, American, Northwest, and 
United.
    The American purchase of bankrupt TWA does not present 
serious competition issues. That was going bankrupt. It 
protects 20,000 jobs. I know Senator Carnahan and others have 
worked hard on that. But the United merger with US Air and the 
slots which American will receive, coupled with the next 
defensive merger which could be either Delta with Continental, 
or Delta, I guess, Senator Schumer, with Northwest--that means 
over 75 percent of airline service is from only three large 
airlines with large hubs, lots of slots and gates, alliances 
with overseas carriers, and frequent flyer deals galore.
    Now, when Vermonters write to me about air service, they 
don't talk about networks or connections. They tell me the 
prices are too high, service is poor, and they don't have 
enough choices. It comes down to price, and it is so difficult 
for somebody to say I can go 5,000 miles or I can go 500 miles, 
but the 500 miles is going to cost me a lot more.
    I don't see how this situation is going to improve in 
Vermont or a whole lot of other cities, especially along the 
East Coast. It is already an uphill battle for low-cost 
carriers to break into new markets. I think we need more slots 
for airlines like JetBlue and Southwest and AirTran and other 
low-cost carriers. If you don't do that, you are not going to 
have real competition.
    When we get through this merger, I think it is going to be 
impossible for any competitive low-cost carrier to break in 
unless we have some real conditions, Mr. Chairman. I don't have 
a magic wand to tell us exactly how to do it, but I know that 
if you are in rural America, and that can be Ohio, Wisconsin, 
New York or Vermont, you may find yourself with a real problem. 
If you are in one of the very, very large hubs where there is 
competition, then it is a different situation.
    Thank you.
    [The prepared statement of Senator Leahy follows:]

 Statement of Hon. Patrick J. Leahy, a U.S. Senator from the State of 
                                Vermont

    Mr. Chairman, the airline industry is going in the wrong direction. 
The region likely to suffer first, and the most, is th East Coast, 
which includes a lot of states with two Senators each, including a 
wonderful state called Vermont.
    As I have pointed out in the past, control of landing and takeoff 
slots and control of gates by just two major airlines--United and 
American--can become a stranglehold on competition on the East Coast.
    I updated a chart which I used during our June hearing. Now, the 
situation has just gotten worse.
    As you can see, the cost of a roundtrip ticket to Burlington, 
Vermont, is $722--whereas similar advance-purchase roundtrip tickets to 
London are $338, and a trip to San Francisco costs $408.
    If the airline mergers on the table are approved, two major 
carriers will control more than half the air traffic in the U.S. and 
will offer ticket prices based on what the market can bear--using 
monopoly slots, rather than providing low-cost service.
    Landing slots, like the spectrum which carriers television shows 
and wireless phone calls, have become a priceless commodity even though 
both are nothing more than the use of space, for a period of time.
    From a more national perspective, these mergers will put us one 
merger away from a oligopoly of three major carriers.
    Higher airfares and reduced competition will follow unless 
significant divestitures of slots, gates and other assets are mandated.
    The industry will also be one work stoppage away from closing down 
one-fourth to one-third of America's air system. This prospect has 
become even more frigthening with potential labor strikes at four major 
airlines (Delta, American, Northwest, United).
    The American purchase of bankrupt TWA does not present serious 
competition issues, by itself, and is needed to protect 20,000 jobs. I 
know that Senator Carnahan has worked diligently to help keep these 
current TWA jobs in Missouri.
    However, the United merger with U.S. Air and the slots which 
American will receive, coupled with the next ``defensive'' merger--
Delta with either Continental or Northwest--down the pike, will mean 
that over 75 percent of airline service is from only three large 
airlines with large hubs, lots of slots and gates, alliances with 
overseas carriers and frequent flyer deals galore.
    Proponents of the mergers say that consumers will benefit from 
wider networks and seamless connections. But when Vermonters call or 
write me about air service, they don't talk about networks or 
connections, they tell me that prices are too high, service is poor, 
and that they do not have enough choices.
    With the proposed merger, I don't see how this situation will 
improve in Vermont or in hundreds of other cities across the country. 
In fact, I'm afraid it can only get worse--and the worst of it will be 
on the East Coast.
    In many cases, it's already an uphill battle for low-cost carriers 
to break into new markets. We need to get more slots to JetBlue, 
Southwest and AirTran, and other low-cost carriers, to increase real 
competition.
    After this round of mergers, it might be like trying to scale Mt. 
Everest for a new carrier to break into the market.
    This is especially true in rural America.
    Mr. Chairman, if the United merger is approved without conditions 
it will upset the delicate balance that has allowed more Americans to 
fly at a lower cost. If we don't tread carefully re-regulation will be 
around the corner with all its inefficiencies.
[GRAPHIC] [TIFF OMITTED] T6913.001

    Senator DeWine. Senator Schumer.

 STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Schumer. Thank you, Mr. Chairman, and I want to 
thank you and Senator Kohl for holding this hearing in such a 
timely way on the proposed mergers by United, US Air, DC Air, 
American, and TWA.
    I also want to wish Senator Kohl a happy birthday. I am 
sure everyone here joins us in wishing him just that.
    I just want to say that these far-reaching proposals are 
going to have a dramatic effect on consumers, especially in my 
State, New York State, where upstate New York has been treated 
extremely poorly by airline service, not only costing consumers 
more but costing us jobs. When you interview corporate 
executives about why they don't move to upstate New York, 
infrequent, high-cost service is one of the top two or three 
issues that they mention. So I will make a number of points in 
that context.
    First, I would like to say that I support American's 
acquisition of TWA and agree with my colleagues from Missouri, 
with Senator Leahy, and with others that the TWA deal should 
move forward as a stand-alone proposal. The deal would, of 
course, save jobs, 20,000, and over 4,000 in New York State, 
and preserve the carrier's route network and St. Louis hub. The 
jobs, health benefits, and retirement security of thousands of 
TWA employees are at stake, and DOJ and the bankruptcy court 
must move quickly. This acquisition would not lower 
competition. It would actually increase it because if there is 
no acquisition, TWA is gone. So this is not a question of 
eliminating competition; this is a question of creating 
competition.
    Having said that, I am troubled by the other mergers before 
us, greatly troubled. First, the huge mega-merger between 
United and US Air, and then the division of some of the spoils 
of that merger with American, create real problems for 
competition. If we were to emerge, as most experts think we do, 
with three major airlines, competition suffers.
    When we deregulated airline competition over 20 years ago, 
we thought it would increase competition. How in God's good 
name can having only three major airlines increase competition?
    I have talked to Alfred Kahn, who couldn't be here today--I 
know he was invited--the architect of deregulation. He is 
appalled at this situation, and would be willing to say so to 
the committee. He believes that what he and others structured 
has gone awry, and our flying constituents see that everyday.
    For that reason, I am sending a letter today to DOJ asking 
for a moratorium on consideration of all these future mergers 
now. Let the Department of Justice study the situation for 9 
months, figure out where we are going, and not be dragged willy 
nilly, piecemeal, merger by merger, and end up with a situation 
that nobody wants and everybody feels will foster less, not 
more, competition.
    DOJ, the Antitrust Division, has a real challenge here 
before it. If they are simply to approve each merger on an ad 
hoc basis, they will end up undercutting antitrust law, as I 
read it. A moratorium to study the situation, to study how we 
can foster new competition particularly with low-cost carriers, 
to look at the issues of predatory pricing--in my State, Mr. 
Chairman, we have experienced, when a new, startup airline 
comes in, the big boys lower the price, put that new airline 
out of business, and then raise the price back up. All that has 
to be studied before the United, American, US Air and DC Air 
mergers are approved.
    Finally, and my No. 1 concern, is the issue of upstate New 
York. As I mentioned, we have been struggling with poor air 
service, and only recently with the advent of Southwest and 
JetBlue have prices begun to come down. They did come down when 
United, American, US Air and Delta provided most of the 
service. They got higher and higher, so that Buffalo, Rochester 
and Syracuse were in the top 20 in terms of price.
    The chart that my good colleague Senator Leahy showed in 
terms of Burlington could be repeated for Albany, Syracuse, 
Rochester and Buffalo. But all of a sudden, when competition 
came in, the prices have gone down, when low-cost air carriers 
came in.
    And in that regard, of particular troublesome nature to me 
is the creation of DC Air and then its purchase of 49 percent 
of its shares by American. American is a nice, good company, 
but they sure haven't done much for upstate New York. The 222 
slots which are being given to DC Air at what most experts 
believe is a reduced price are a public good.
    There is nothing in the merger proposal that would say that 
that reduced price should have the benefits passed on to the 
flying public. In fact, given the recent structuring of the 
deal and removal of a no-flip clause that required the 
forfeiture of any profits from the sale of DC Air within the 
first 3 years, I feel that DC Air will all too quickly be 
subsumed by American, leaving the U.S. market dominated by just 
three or four major carriers, leaving upstate New York, which 
has finally begun to see progress, in the same poor position.
    So, Mr. Chairman, these mergers are vital to the people I 
represent. They are vital to all consumers of New York because 
costs are important. They are vital, as well, to upstate New 
York, whose economic viability depends on getting better air 
service.
    I thank you, Mr. Chairman.
    Senator DeWine. Thank you very much.
    We have a statement from Senator Feingold which we will 
make a part of the record at this point.
    [The prepared statement of Senator Feingold follows:]

   Statement of Hon. Russ Feingold, a U.S. Senator from the State of 
                               Wisconsin

    Mr. chairman, thank you for holding this hearing. I share the 
concerns, voiced by some of my colleagues, about the trend toward 
consolidation in the airline industry. We feared that the proposed 
merger between United and US Airways announced last year would spur 
additional mergers. That fear was realized when, in January, American 
announced plans to acquire TWA and work with United to acquire a piece 
of US Airways. United and American are currently two of the so-called 
``Big Three'' in the airline industry. But if these mergers are 
approved, United and American will become the ``Big Two'' of the 
airline industry: together they will have a nearly 50% share of the 
domestic market. This raises real concerns about competition and 
consumer choice. I joined in the letter sent by Senators DeWine and 
Kohl and others on this Committee on February 1st to the 
Justice Department urging a full and thorough review of the 
implications of the merger transactions among United, US Airways and 
American on Competition and Consumers.
    Now, it appears that the concerns we raised in that letter are even 
more troubling. Just this week, we learned that Delta and Continental 
are reportedly in merger talks. Delta is the third of the ``Big 
Three.'' If Delta, in fact, enters a merger agreement with Continental, 
the ``Big Three''--United, American and Delta--would be poised to claim 
an even greater share of the domestic airline market, thereby 
threatening competition and consumer choice.
    I appreciate the need for efficiency and the airline companies' 
desires to reduce costs and increase profits. I also understand that 
there is a potential upside of a United/US Airways merger for some 
Americans who could benefit by ``seamless,'' one carrier travel, as 
United would gain access to some east coast markets that it previously 
serviced on only a limited basis or not at all. But I believe the 
federal government has an important role in ensuring that increased 
efficiency and profits do not come at the cost of lack of consumer 
choice or poor service.
    Airline consolidation, particularly when service is concentrated 
among only 2 or 3 major airlines, means fewer choices for consumers. If 
the mergers proposed by United and American are approved and completed, 
some markets may be served by only two carriers or even one carrier. 
This is devastating to consumers. Reduced competition means increased 
fares. This is especially a problem for small city and rural markets--
markets in places like my home state, Wisconsin.
    Take, for example, the Dane County airport in Madison, Wisconsin. 
Currently, there are eight commercial passenger airlines providing 
service to that airport. There are an average of 104 daily departures 
and arrivals fairly evenly spread among those eight airlines. But if 
the proposed acquisition of US Airways by United and American is 
completed, as well as the acquisition of TWA by American, there will be 
a concentration of departures and arrivals by the new United and the 
new American. Over half the 104 average daily departures and arrivals 
will be under the control of the BIG TWO airlines. Smaller airlines 
that already struggle to compete are likely to find it even more 
difficult to compete with the Big Two. Even Midwest Express, a 
successful regional airline, may find it difficult to compete with only 
about 9 average daily departures and arrivals. Mr. Chairman, our 
economy--both consumers and businesses--has thrived when there is 
healthy competition. And I believe the airline industry is no 
different. How can United US Airways and American assure this Committee 
and the American people that Americans will continue to have choice and 
competitive fares?
    Finally, I also would like to hear about how a proposed merger 
would affect employees. Our nation has already seen a spate of lay-offs 
in recent months. I fear that the proposed mergers would result in even 
more hard-working Americans losing their jobs.
    I think the Justice Department should consider the many issues that 
have been raised and will be raised at this hearing. I look forward to 
hearing about how United, US Airways and American propose to quell the 
very real fears of lack of competition, increased fares and continued 
poor service and delays.
    Mr. Chairman, I commend you again for holding his hearing and I 
look forward to hearing from the witnesses. Thank you.

    Senator DeWine. Let me invite our first panel to come up, 
and as you come up I will begin to introduce the members.
    Gordon Bethune is Chairman and Chief Executive Officer of 
Continental Airlines. He has held major management positions in 
several airlines and is also a licensed pilot and mechanic. We 
welcome him back to the committee.
    Leo Mullin is Chairman and Chief Executive Officer of Delta 
Air Lines. Prior to joining the airline in 1997, Mr. Mullin 
served as Vice Chairman for Unicom and served 15 years with 
First Chicago, culminating in his appointment as President and 
Chief Operating Officer of the bank. We also welcome him back 
to our committee.
    William Franke is the President and Chief Executive Officer 
of America West Airlines, and also serves as Chairman of the 
Board for the airline's parent company, America West Holdings. 
His career also includes service in U.S. Army Intelligence.
    Joe Leonard is Chairman and Chief Executive Officer of 
AirTran. He joined them in 1999. His experience in the airline 
industry includes executive positions with Allied Signal, 
Boeing, Northwest Airlines, and American Airlines.
    Professor Michael Levine is Adjunct Professor of Law at 
Harvard. His research interests lie in regulation and 
deregulation, with a specific focus on the airline industry. He 
has published numerous pieces regarding airline competition.
    Mr. Bethune, we will start with you and then we will just 
proceed right down the panel. Each one of you has submitted a 
written statement which will be made a part of the record. We 
would ask you to proceed as you wish. We will go through the 
whole panel and then we will open it up for questions.
    Mr. Bethune?

   STATEMENT OF GORDON BETHUNE, CHAIRMAN AND CHIEF EXECUTIVE 
         OFFICER, CONTINENTAL AIRLINES, HOUSTON, TEXAS

    Mr. Bethune. Good morning, Mr. Chairman and members of the 
subcommittee. I am Gordon Bethune, Chairman and Chief Executive 
Officer of Continental Airlines. It is certainly a pleasure to 
be here representing the 54,300 employees of Continental. Four 
thousand, I might add, work at our Cleveland, Ohio, hub and are 
honored to be represented by the distinguished Chairman of this 
subcommittee, Senator DeWine.
    Let me start with a short version of my written testimony, 
if I may.
    The proposed mega-merger of United, American, US Airways 
and TWA, if implemented, will create a cartel that will control 
the U.S. domestic market and marginalize smaller carriers like 
Continental. Unchecked by competitors anywhere near the same 
size, these 800-pound gorillas will be a certain disaster for 
consumers and communities.
    In the short run, the poor customer service which is 
characteristic of the current operations of these carriers 
seeking to merge will look glorious compared to the inevitable 
service disruptions and even worse customer service that will 
prevail ion a post-merger environment.
    Nearly 50 percent of U.S. air travel consumers suffer while 
the new cartel attempts to integrate the operations and the 
employees of four separate airlines. Continental, I might add, 
stands to gain in the short term because we will offer a 
welcome alternative to the surly and unreliable service offered 
by these mega-carriers.
    But we are not big enough and can't grow fast enough to 
offer a truly competitive alternative in the long run. 
Therefore, if these mergers go forward, as I fear they will, 
further consolidation will be inevitable and necessary if we 
are to preserve competition. So, Mr. Chairman, I believe the 
right answer to these merger proposals is just say no.
    I know the Department of Justice has the responsibility and 
capability to stop these mergers, and the Justice Department 
was just recently successful in opposing a much smaller airline 
acquisition, Northwest's purchase of 51 percent of the voting 
stock of my company. Federal approval of these mergers would be 
directly at odds with the Department's position in the 
Northwest/Continental case. In fact, it would be absurd, given 
the much larger size and scope of United and American's 
acquisitions.
    Everyone should understand that if the mergers are 
permitted to occur, the rest of the industry will be forced to 
consolidate. Let's look at what is being proposed here. 
American and United have proposed to build a cartel that will 
divide and conquer the United States aviation market. United 
and American actually have an agreement between them to 
stabilize the relative shares of the two largest airlines in 
the world. I am not making this up; it is publicly filed 
information. GAO testified that they had never seen such an 
extraordinary agreement. I have attached a copy of this 
agreement to my written testimony.
    Today, there is a competition equilibrium among the major 
airlines in the United States. Most significant viewers of the 
airline industry, whether they be academic or government, have 
concluded that the major network carriers provide effective 
competition. Concentration levels in the airline industry since 
deregulation have remained relatively low, and while each major 
airline has strengths in specific areas of the country, none is 
overly dominant.
    Today, we have the big three, who are roughly the same size 
and who really actually balance competition. The big three are 
considerably larger than the next group of airlines, but they 
provide an equilibrium for each other. The four medium-sized 
carriers, of which Continental is one, can remain competitive 
on a national basis because their scale disadvantage is not so 
large that they cannot at least partially overcome it by 
offering superior service or lower prices as compared to the 
big three. There are also three smaller national carriers that 
have added competition by way of their own regional focus. 
Finally, there are a number of new entrants and low-cost 
carriers that also compete in a limited number of individual 
markets.
    Against the backdrop of a competitive environment that is 
basically at equilibrium, United and American have proposed to 
divide and conquer the entire U.S. market. The immediate result 
will be two giant carriers that control nearly 50 percent of 
the U.S. airline market. The mega-carriers will each have twice 
as many hubs as Delta, Northwest, or Continental.
    They will be 50 percent larger in terms of capacity, 
traffic and revenue than the next largest non-merged carrier, 
Delta, and three times as large as ourselves, Continental. They 
will dominate America's Northeast and Western regions, as was 
said earlier, which accounts for most of the revenue and most 
of the business traffic. They will have frequent flyer loyalty 
programs two or three times as large as their nearest 
competitor. Post-mergers, their distribution and marketing 
systems will smother other airlines.
    Let me give you an example close to home. If this deal is 
approved, almost 80 percent of all the slots at the four 
federally controlled, slot-controlled airports will be 
controlled by the duopoly of American and United. At Washington 
Reagan and at New York's LaGuardia, where slot controls are 
likely to remain indefinitely, the two mega-carriers will have 
control of over 65 percent of the slots. By comparison, 
Continental operates with less than 5 percent of the slots at 
Washington Reagan or at New York's LaGuardia Airport.
    Should these proposals be approved, United and American 
will each be of such vast scale and scope that other U.S. 
airlines will be unable to offer effective competition to them. 
Significant harm to consumers, communities and employees is 
inevitable.
    Other airlines will be forced to combine, be carved up, or 
be put out of business by the onslaught brought upon by the 
United and American cartel. Communities will be adversely 
affected by the loss of competition, and the process of getting 
to that dismal future won't be pretty. If you thought last 
summer was bad, buckle up your seatbelt because with these 
pending mega-mergers, you haven't seen anything yet.
    These mega-mergers are bad for customers, they are bad for 
communities, and they are bad for their employees. In recent 
years, American has been through pilot and flight attendant 
slow-downs. Just last summer, United endured a work slow-down 
which created one of the worst operational and customer service 
problems this industry has ever known.
    For the year 2000, United ranked last in the Department of 
Transportation on-time performance statistics. Their future 
partner, US Airways, ranked seventh out of the ten major 
airlines. You put these two together and they will rank 17th. 
Their performance at this dismal level is without being in the 
midst of merging these two enormous airline systems.
    Just think about the service disruptions and service 
problems while nearly half of the airline service in the United 
States is integrating systems and operations and aircraft 
fleets, and most importantly four groups of fragmented and 
sometimes hostile workers.
    It is true that this would offer a short-term competitive 
opportunity to Continental, which was ranked, I might add, No. 
1 in on-time performance in the year 2000. We will be able to 
offer an alternative to surly and unreliable service, but we 
simply will not be big enough to offer a truly competitive 
alternative because we won't be in enough markets with enough 
planes and enough slots to put a dent in the market share of 
the mega-carriers. The vast majority of passengers will have no 
choice but to suffer whatever United or American may want to 
offer.
    Why can't we and Delta and others simply grow in order to 
compete with mega-carriers? Obviously, we could try to do that, 
but even if we grew at twice the aggressive way in which we 
have just grown over the past few years, it would take us 
nearly two decades to grow to something approximating the size 
of United and American. And that assumes that we could get the 
slots particularly at Washington and New York, the routes, the 
capital, aircraft and the employees necessary to grow that fast 
for that long, or are we going to put out of business by these 
guys during that time?
    So internal growth is not a long-term solution here. 
Consolidation won't be just inevitable; it will be necessary to 
preserve competition. Super-United and mega-American will 
dominate the aviation market unless a third and even a fourth 
network carrier of similar size can recreate the competition 
necessary to serve the traveling public.
    So let me end this testimony as I started it. Congress, the 
Department of Justice and the Department of Transportation 
should just say no, and say yes to continued, vibrant 
competition and constantly improving service for our Nation's 
airline passengers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bethune follows:]

  Statement of Gordon Bethune, Chairman and Chief Executive Officer, 
                       Continental Airlines, Inc.

    Good morning, Mr. Chairman and Members of the Subcommittee. I a 
Gordon Bethune, Chairman and Chief Executive Officer of Continental 
Airlines. It is a pleasure to be here representing the 54,300 employees 
of Continental. 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. Continental is honored to have such strong 
representation in the Senate and we thank you for your leadership.
    I thank you for your invitation to discuss the important topic of 
aviation industry consolidation, and specifically, the proposed mergers 
between United Airlines and US Airways, and between American Airlines, 
TWA, and US Airways. As the fifth largest airline in the United States, 
Continental has a unique perspective on the two proposed mergers and 
the effect these mergers will have on the U.S. aviation system and on 
the passengers that utilize air travel every day.
    My goal today is to explain to the Subcommittee why we at 
Continental believe that the proposed airline mergers should not be 
approved. The mergers will harm competition and consumers. Moreover, 
federal approval of these mergers today would be directly at odds with 
positions taken by the government just a few months ago when the 
Department of Justice successfully opposed a much smaller airline 
acquisition: Northwest's purchase of 51% of Continental's voting stock. 
While I know that it is ultimately the Department of Justice's decision 
as to the future of the proposed United and American mergers, it is 
important that everyone be fully briefed and that everyone understand 
the inevitable outcome if these mergers are permitted to occur. I 
intend to explain why other airlines will be forced to grow to remain 
competitive and to discipline the two new mega-carriers. I will show 
why this growth can only be achieved through further industry 
consolidation.
    Continental itself is an airline that emerged from a series of 
mergers in a very different era and a very different industry 
structure. Texas International, New York Air, PEOPLExpress and Frontier 
all merged into what is now Continental Airlines. As a result, 
Continental went through years of delivering poor service to customers, 
treating employees poorly and managing its finances poorly (including 
two bankruptcies). However, in 1995 Continental implemented a sensible 
plan and motivated its employees to turn things around, and over the 
past six years things have been very different at Continental. 
Continental is now recognized as the best major airline in the 
industry. In fact, over the past five years Continental has won more JD 
Power and Associates/Frequent Flyer Magazine awards for customer 
service (this year taking top honors for both long and short haul 
flights) than any other airline in history. Just two weeks ago, 
Continental was named 2001 Airline of the Year by Air Transport World, 
the second time Continental's worldwide peers have recognized it in 
five years. Finally, I am especially proud of the fact that we have 
been ranked in the top half of the past three Fortune magazine lists of 
the 100 Best Places to Work in America, this year ending up in the top 
twenty. No other major airline, except Southwest, is even on the list. 
It is from this perspective that I want to give you my thoughts on what 
is currently facing the U.S. airline industry.

I. The Airline Industry Currently is Characterized by a State of 
        Competitive Equilibrium
    Allow me to describe the current environment within the U.S. 
airline industry. There is currently a competitive equilibrium among 
the major airlines in the United States. Major reviews of the airline 
industry since deregulation have concluded that the major network 
carriers provide effective competition. Air travel has skyrocketed 
since deregulation, airfares (adjusted for inflation) have declined and 
the current system of carriers has been able to offer a wide variety of 
competitive services. The levels of concentration in the airline 
industry since deregulation have remained relatively low for a network 
business. Even after the airline mergers of the 1980's, concentration 
in the airline industry has stayed below critical levels. While each 
merger airline has strengths in specific regions of the country, none 
is truly strong in every U.S. region. Thus, national competition has 
been balanced and effective.
    The major carriers can be split into three distinct groups: very 
large national carriers (the ``Big Three''), medium national carriers, 
and small national carriers. United, American, and Delta make up the 
very large national carrier group. Each of these three airlines has 
over 16% of domestic system capacity and traffic. They are the largest 
three airlines in the world. They already have the largest frequent 
flyer programs and distribution channels, and they control more airport 
real estate than any other carrier. While the Big Three are 
considerably larger than the next group of carriers, they provide 
equilibrium for each other. Moreover, the medium national carriers can 
remain competitive because their scope and scale disadvantage is not so 
large that it cannot be at least partially overcome by offering 
superior service or lower prices compared to the Big Three.
    The medium national carrier group consists of Northwest, 
Continental, Southwest, and US Airways. Each of these carriers 
maintains between 7% and 9% of domestic capacity and traffic. These 
four airlines, while not as large as the Big Three, offer strong 
competition on a national basis and have found a niche in which they 
are able to compete. For example, US Airways holds many slots at the 
four federally slot-controlled airports and has a strong position in 
the important Northeast region of the country. Southwest competes based 
on price. Northwest has a strong North Central and Asia market 
position. Continental competes based on our internationally recognized 
superior customer service. Each medium sized carrier has found a way to 
be successful, even though they are about half the size of their larger 
counterparts.
    The final group, small national carriers, consists of TWA, America 
West, and Alaska. These carriers are each between 2.5% and 6% of 
domestic capacity and traffic. While these carriers have found it more 
difficult to compete against the seven larger airlines, all but TWA 
have been successful in their regional focus. TWA has historically 
shown strength at its Midwest hub, while both America West and Alaska 
have shown similar strengths in the West.
    Finally, there are currently a number of successful new entrant/low 
cost/niche carriers that help in maintaining balance and competition in 
the airline industry. Airlines such as Midway, Midwest Express, Air 
Tran, and JetBlue all compete vigorously with larger carriers in a 
limited number of individual markets.

II. The Proposed Mergers Will Harm Competition
    Against this backdrop of a competitive environment that is at 
equilibrium is the proposal of United and American to split up US 
Airways and for American to also absorb TWA. This will create an 
unbalanced competitive environment in which the two resulting mega-
carriers are significantly larger than their next largest competitors. 
Clearly United and American's plan is to reach detente, build a cartel, 
and carve up and dominate the U.S. air travel market. Look closely at 
the proposals; they include sharing the Northeast shuttle and sharing 
the Northeast region between the cartel members. Ultimately, the same 
way United and American have split Chicago O'Hare and London 
(Heathrow), they will split the rest of the U.S. (and maybe even split 
global aviation). The two mega-airlines have even incorporated a 
provision in their agreement that restricts American's ability to merge 
with other carriers and puts limits on American's growth. Should 
American grow faster than United wants it to, United would have the 
right to terminate the Northeast shuttle agreement the two airlines 
have proposed. United would also have the right to repurchase certain 
US Airways assets being divested to American and a right of first 
refusal for any assets American divests as part of a subsequent 
transaction. This provision is clearly a horizontal restraint between 
major competitors. It allows United to restrict American's future 
growth by acquisition, requires cooperation between United and American 
on future acquisition, and has the effect of stabilizing the relative 
shares of the two largest airlines.
    After consolidation, United and American will each be of such vast 
scale and scope that other U.S. airlines will be unable to offer 
effective competition against them. The airline industry will change 
for the worse, adversely affecting competition, consumers, communities 
and employees. Other airlines will be forced to combine, be carved up, 
or be put of business by the onslaught brought on by the United and 
American cartel.
    After the current wave of proposed consolidation, United and 
American will control nearly 50% of the U.S. airline industry and have 
twice as many hubs as Delta. Northwest, or Continental. The new United 
will serve one hundred more domestic destinations than its nearest 
competitor. Additionally, American and United will each become more 
than 50% larger in terms of capacity, traffic, and revenue than the 
next largest non-merged carrier (Delta), and they will be almost three 
times as large as Continental. After the mergers, United and American 
will also be the #1 and #2 airlines in the largest regions with the 
most revenue and business traffic, the Northeast and West regions. Via 
the mergers, United and American will have created the only two truly 
national networks. While other airlines may continue to maintain some 
regional presence, their ability to compete nationwide will be lot. 
Consummation of these mergers will allow United and American to ensure 
that they have eliminated competition on the national (and even on the 
global) stage. In conjunction with their national presence, the two 
mega-carriers will have frequent flyer loyalty programs two or three 
times as large as their nearest competitors, and distribution and 
marketing systems that no other airline will be able to match. The 
combined effect of this will be to produce a quantum shift in the 
distribution system that squeezes out other carriers in a manner that 
has never occurred before.
    Finally, the two airlines will operate almost 80% of all slots at 
the four federally slot-controlled airports (Washington Reagan, New 
York LaGuardia, New York JFK, and Chicago O'Hare). At Washington 
Reagan, where slot restrictions are expected to remain in place in 
perpetuity, and at New York LaGuardia, where the FAA has already 
stopped expansion and slot restrictions are likely to be reinstated, 
the two airlines will control over 65% of all slots. By way of 
comparison, Continental operates only 3% of all slots at the four 
airports, with less than 5% of the slots at Washington Reagan and New 
York LaGuardia.
    In order to compete with the two mega-carriers, other airlines will 
need to grow to at least a scale that is near that of the market 
leaders. Independent growth to the scale of United or American will be 
nearly impossible. An airline like Continental, with just over 8% of 
the current domestic capacity, would need nearly twenty years to grow 
to the size of United and American even if Continental could grow at a 
very aggressive average annual rate of 10% (2-3 times expected GDP 
growth) and if the two mega-carriers grew at expected GDP levels of 
about 4%. By comparison, over the past six years that I have been the 
CEO, Continental has only been able to grow at an average annual rate 
of just under 5%. Hyper-growth of 10% annually for Continental is not 
realistic over the long term.
    First, as I mentioned earlier, slot restrictions at Washington 
Reagan, New York LaGuardia, New York JFK, and Chicago O'Hare limit 
growth in major eastern markets. Not only is access to these airports 
limited, but United and American will hold the keys with their combined 
80% share of the slots. Additionally, the limitations on the supply of 
capital, mechanics, pilots, and aircraft, and limitations on the 
capacity of the air traffic control system, will also impede the 
ability of airlines to grow at such a hyper-rate for extended periods. 
More importantly, however, Continental is concerned that faster than 
historical growth will limit our ability to do what we do best, which 
is providing passengers with quality customer service. With hyper-
growth, an airline runs a serious risk of spoiling its product, 
something Continental is not willing to do.
    The destruction of the competitive equilibrium that is the obvious 
and direct result of these proposed mergers means that independent 
growth to compete with Unite and American is virtually impossible. 
Airlines will be left with no choice but to merge in order to compete 
effectively with the two mega-carriers. Additional airline mergers will 
be required to restore a competitive playing field to an airline 
industry that would otherwise be split by the United and American 
cartel.

III. The Proposed Mergers Will Harm Consumers, Communities, and 
        Employees
    The labor and service disruptions coupled with reduced customer 
service brought on by the integration of the four merging airline 
systems will, in the short run, benefit Continental as we attract 
passengers looking to escape the uncertainty and problems they will 
experience with the mega-carriers. The service disruptions and customer 
service complaints of the past few years are nothing compared to what 
is coming if the proposed mergers are approved. Think back over the 
past few years. American has been through pilot and flight attendant 
slowdowns. United also has been through work slowdowns which created 
some of the worst operational and customer service problems this 
industry has ever known. United ranked last in Department of 
Transportation on-time performance statistics seven times this past 
year, with an average quarterly on-time performance (in the second and 
third quarters) of barely 50% Continental, by way of comparison, ranked 
in the top three each quarter of the year. I might add that 
Continental's on time performance last summer was better than previous 
years and in December we beat our closest competitor by almost seven 
percentage points in on time performance. Continental was also the #1 
airline in on-time performance for the entire year 2000, out of all 
major network carriers. With regard to baggage performance, United 
again had poor performance, finishing each quarter in ninth or tenth 
place, with statistics at least 25% worse than the industry average. 
And regarding customer complaints, let's just say that United's record 
is so bad that by the third quarter of last year, United's number of 
complaints per 100,000 enplanements was more than double the industry 
average. Now think about the same service disruptions and service 
problems aggravated by the incredibly difficult task of integrating 
four systems, four aircraft fleets, and most importantly four distinct 
groups of fragmented and hostile workforces. If you think that the 
problems this industry has seen over the past few years have been bad, 
you have not seen anything yet! And while Continental stands to gain in 
the short run because we offer an attractive alternative to surly and 
unreliable service, we will simply not be big enough to offer a truly 
competitive alternative in the long run. The vast majority of 
passengers will have no choice but to be forced to suffer whatever 
service, or perhaps more accurately, lack of service, United or 
American may offer.
    Understand that this is not a call for legislation to re-regulate 
the airline industry. That is exactly the wrong way to go. I have long 
said that customer service is a competitive issue, not a legislative 
one; you simply cannot legislate whether someone enjoys coming to work. 
Continental has made great strides in customer service, and we have 
received much recognition for it. We are proof of what a competitive 
response to customer service issues can be. We have even gone to 
federal court to stop United from installing baggage sizing templates 
at security screening checkpoints here at Dulles Airport, which 
prevented Continental passengers from utilizing Continental's flexible 
baggage policy and large overhead bins. These bins were installed at a 
cost of many millions of dollars to accommodate customer expectations 
and desires. In its ruling in favor of Continental and finding that 
United violate antitrust law, the court said ``Indeed, if there is 
proof of failure in the market to be gleaned from the record, it is 
United's failure to provide what its customers desire.'' The court 
agreed that customer service is a competitive issue (it said, ``.  .  .  
the record unambiguously discloses that airline carry-on policy is not 
an insignificant aspect of airline competition.''), and it is worth 
noting that the carrier attempting to carve up its smaller rivals 
(United) is one of the least competitive with regard to service.
    The proposed mega-mergers are bad for consumers, bad for 
communities, and bad for employees. The picture I have painted clearly 
explains the problems that consumers face. Operational disruptions will 
be widespread. Customer service levels at the merging carriers will 
continue to tumble as those carriers will be able to do nothing more 
than keep just their systems running.
    The proposed mergers are also bad for communities. According to the 
General Accounting Office, in its report ``Aviation Competition, Issues 
Related to the Proposed United Airlines-US Airways Merger,'' released 
December 2000, 290 markets will have reduced competition or have 
competition eliminated completely because of only this one merger. The 
report goes on to state that ``About 16 million passengers traveled in 
those 290 markets in 1999.  .  .'' Last week in testimony before the 
Senate Committee on Commerce, Science, and Transportation, the GAO 
reported that ``the United and American proposals would each reduce 
competition in approximately 300 markets, with each affecting over 10 
million passengers.'' As a point of comparison, the Northwest/
Continental transaction opposed by the Department of Justice entailed 
reduced competition in only 63 markets affecting 2 million passengers. 
Finally, many more markets and passengers will be affected by the two 
proposed mega-mergers if the GAO analysis is expanded to include all 
markets.
    Communities will not only be affected by a loss of competition and 
deteriorating service, but also could face service cutbacks and route 
elimination as United and American rationalize their systems. By 
merging all of the routes each carrier serves from their pre- and post-
merger hubs, it is highly likely routes will be eliminated to reduce 
overlap. While United has given a ``commitment'' that it will not 
eliminate routes, this ``commitment'' is for only two years, does not 
hold for American, and does not extend to reductions of service on 
routes short of route elimination.
    It is clear that the proposed merger will be bad for consumers and 
bad for communities. The mergers will also be bad for employees. Unlike 
Continental, which prides itself on its excellent management-labor 
relationships and on the fact that it is a great place to work, history 
has shown that both United and American have different views on how 
they treat employees. The United and American mergers will occur on the 
backs of the employees of both the acquiring and acquired airlines. The 
ramifications of poor labor relations that we have felt over the past 
few years will be amplified and continue for years to come. Significant 
labor integration issues have accompanied virtually every major airline 
merger in the history of our industry, and these proposed mergers will 
not be exceptions to this rule. Think of how disruptive a relatively 
simple merger like American/Reno Air was. Now think of the complex 
issues raised by American merging with not one but two airlines much 
larger than Reno Air.

IV. US Airways and TWA Have Other Options Readily Available
    There are other options for the two acquired companies. While it is 
clear that TWA has significant problems, allowing it to merge with 
American and parts of US Airways is not its only option. A truly level 
process for competitive bidding, which Continental has fought for in 
the bankruptcy court, could provide alternatives for TWA. As an aside, 
as I have said publicly before, if American were to follow through with 
its statements and unconditionally commit in writing to hire all of the 
TWA employees and protect the benefits of all employees and retirees of 
TWA, and if this commitment were not contingent on the US Airways deal, 
then Continental would step aside and not oppose the American/TWA 
transaction. Of course, the Department of Justice would still face the 
task of prescribing remedies to restore competition, such as requiring 
the divestiture of some slots and facilities to smaller national 
network carriers, like Continental.
    Turning to US Airways, it is unclear to me that any merger is 
necessary, as US Airways has one of the richest pools of valuable 
assets in the industry. Their cache of lucrative slots and their 
Northeast strength cannot be matched. If Continental was able to turn 
itself around (with its more limited assets yet intensely focused 
management team) and become the financial and commercial success it is 
today, there is no reason that US Airways, with the right incentives 
and appropriate management, utilizing US Airways' crown jewels of 
assets, cannot do the same. But if US Airways is determined to sell 
itself, allowing the airline to be split by United and American is not 
the only option. Continental made an offer for US Airways' Washington 
Reagan position that was for a much higher price than the current DC 
Air/American deal. Continental's offer was turned down, not based on 
the economics, but based on the fact that it would put a crimp in the 
cartel's plan. Continental is also very interested in the significant 
slot and facility holdings of US Airways in New York. These assets were 
never even offered to anyone except American.

V. If the Proposed Mergers are Approved, Then Remedial Action Must be 
        Taken to Preserve What is Left of Competition
    So what is the answer to the proposed mergers that will create two 
mega-carriers that have the ability to dominate the market, reduce or 
eliminate competition and are bad for all constituencies? JUST SAY NO!
    The conspiracy by United and American to reach detente, create a 
cartel, and control the U.S. domestic market (thereby tightening their 
stranglehold on foreign markets as well), if implemented, will be so 
devastating that it should be disapproved outright. The government 
should stop trying to find fixes to mergers that should not be approved 
in the first place. And the government needs to clearly understand that 
it cannot fix, after the fact, the problems these mergers will create.
    It is important to note that, just last month, the Department of 
Justice prevailed in its antitrust challenge of Northwest's proposed 
acquisition of 14% of Continental's stock (representing a little more 
than 50% of Continental's voting rights). This case was brought to 
trial notwithstanding the fact that Northwest signed a governance 
agreement limiting its control of Continental for at least six years. 
The government brought the case because it believed that Northwest's 
partial ownership would lessen competition primarily on routes between 
the six Northwest and Continental mainland U.S. hubs. Today we are 
faced with the prospect of a combined United/US Airways (10 hubs) and 
American/TWA/US Airways (7 hubs). Consolidation of these carriers would 
give the combined firms more than 90% of the non-stop traffic on the 
routes between their respective hubs. Moreover, unlike the Continental/
Northwest transaction in which Continental and Northwest would have 
continued to compete, United and American will actually have eliminated 
their primary competition between those important hubs.
    While the facts should compel the government to reject the proposed 
acquisitions, I am not confident that the right thing will be done to 
protect airline consumers and competition from the United and American 
cartel. Because of my skepticism, I must impress upon you that if, 
against all of the best wisdom, United and American are allowed to move 
forward with their plans, further airline consolidation is inevitable 
and will be required to assure effective competition. The U.S. aviation 
industry will require at least three or four large national network 
carriers to recreate the equilibrium that we currently have and that 
will be lost if United and American are allowed to complete their 
proposed transactions. Only through the smaller airlines' ability to 
grow and their ability to further consolidate will marketplace 
protection be possible.
    If the proposed mega-mergers are approved, as I fear they will be, 
action must be taken by the Congress, the Department of Transportation, 
and the Department of Justice to give some small glimmer of hope that 
competition in the aviation industry can survive. The ability of 
airlines to obtain assets in order to create networks of similar scale 
and scope is key to disciplining the United and American cartel.
    Congress, the Department of Transportation, and the Department of 
Justice must ensure that appropriate slots, gates, and other facilities 
at slot and capacity constrained airports are made available to smaller 
network competitors by the two mega-carriers. Special attention must be 
paid to airports such as New York LaGuardia, Washington Reagan, Chicago 
O'Hare, Boston Logan, Los Angeles International, and San Francisco 
International.
    The Department of Transportation must also exercise fully its 
duties and responsibilities in determining whether the international 
route transfers occurring in these mergers are consistent with the 
public interest and what impact they have on competition in the 
domestic airline industry. The Department of Transportation should re-
award those international routes to competitors of the mega-carriers as 
necessary to preserve competition.
    It is crucial that the U.S. ensure that government operating 
privileges, such as slots, are not used to create monopoly power at the 
very airports necessary to provide effective competition among 
networks. Specifically, the U.S. must be prepared to insist that a 
concentration of slots by the largest of carriers does not occur and 
that a process exists so that competing networks can get the needed 
slots. As discussed above, post-merger United and American will control 
nearly 80% of the slots in the highly significant business markets of 
the Northeast and North Central. Competition simply cannot survive in 
those cities with that level of concentration between two carriers who 
actually are cooperating with each other.
    If the proposed mergers are allowed to proceed, there must also be 
assurances that the remaining U.S. airlines have more access to the 
capital they will need to sustain continued growth. Currently, U.S. 
carrier access to new capital is severely limited by unnecessarily low 
limits on foreign investment. The foreign ownership limits on U.S. 
carriers should be increased to 49%. This will provide new sources of 
capital while maintaining U.S. control and protecting U.S. employees.
    Finally, as United and American strengthen their domestic 
positions, the ability of other U.S. carriers to compete 
internationally will be reduced. For example, United and American are 
already the only two airlines with the right under the U.S.-U.K. 
bilateral to fly into London Heathrow airport, the most important 
business airport in Europe, United and American's growing control of 
the domestic market will make this already huge disadvantage to 
Continental and other U.S. airlines even greater. The U.S. should renew 
its efforts to negotiate more access to London Heathrow for competitors 
of the mega-carriers or negotiate to substitute other carriers at 
London Heathrow for the two mega-carriers. Additionally, United and 
American have a large array of foreign partners with which they have 
alliances, making their control of world air transport even greater. 
The ability of small network carriers to offer foreign partners enough 
scale and scope in the U.S. is limited, and it is clear that given a 
choice of partnering with a member of the cartel or partnering with a 
smaller carrier, foreign airlines will choose the cartel. As antitrust 
immunity only exacerbates this problem, I call for a serious re-
evaluation and possible revocation of the antitrust immunity already 
granted to the mega-carriers and their foreign partners.

VI. Conclusion
    Mr. Chairman, I know what I have discussed today will not be 
popular with many people, especially my peers at United and American. 
But I have no choice but to make sure that the U.S. Senate, your 
constituents, and all Americans are aware of the consequences that the 
proposed United and American mergers will have on consumers, 
communities, employees, and on the U.S. aviation industry as a whole.
    While I know that it is not ultimately this Committee's decision as 
to whether the deals are allowed to proceed, it is within this 
Committee's power to ensure that all of the facts are available and 
that the consequences are known. If the Department of Justice 
nonetheless decides to allow these mergers, you must insist on the 
action items I have proposed today. If these two mega-deals are 
permitted, other airlines will be forced to merge and those mergers 
will be necessary to restore effective competition. Therefore, once the 
Department of Justice approves the pending merger others will follow 
and must be approved.
    Mr. Chairman and members of the Committee, I thank you for giving 
me the opportunity to discuss this very important issue with you and 
for your attention. I would now be pleased to answer any questions that 
you may have.

    Senator DeWine. Mr. Bethune, we always appreciate your very 
candid testimony. Thank you very much.
    Mr. Mullin?

   STATEMENT OF LEO F. MULLIN, CHAIRMAN AND CHIEF EXECUTIVE 
           OFFICER, DELTA AIR LINES, ATLANTA, GEORGIA

    Mr. Mullin. It is always difficult to follow Gordon 
Bethune.
    I, too, am grateful to testify, Mr. Chairman, because much 
is at stake here. I submitted to the Committee an expanded 
version of my testimony and ask that it will be included in the 
record, and I will be brief in my comments.
    The apparent subject at hand is United Airlines and US 
Airways, and, of course, American and TWA. But actually 
decisions on this matter will not represent a simple ruling on 
these transactions. In fact, it will be the catalyst for a 
complete structural and competitive change to the industry.
    Mergers and acquisitions are a good, basic business tool 
for all industries, including aviation, but they require 
careful review. If approved, these deals will create two mega-
carriers with giant networks, and size matters. United 
Airlines, American Airlines and Delta currently have comparable 
shares, at 17 percent of the domestic market. As mega-carriers, 
the numbers will be United, 27 percent; American, 22 percent. 
And in the strategically important Northeast markets, where 
there is currently a balance of power and no dominant carrier, 
it will be changed dramatically, such as Senator Leahy has 
suggested.
    To take some statistics and to elaborate on what Gordon 
Bethune has said, the duopoly will represent 58 percent at 
LaGuardia, 64 percent at JFK, 60 percent in Boston, 60 percent 
at DCA, 76 percent at Dulles, and 76 percent in Philadelphia.
    Given the current issues in customer service and labor the 
current seven network carriers are experiencing, the act of 
concentrating air service with only two carriers must take 
careful review. With that as a context, let me address a 
specific area of concern about how the transactions before us 
might at some point proceed.
    Should these transactions proceed, then the airlines at the 
next layer down will be required to make dramatic competitive 
responses, including mergers and acquisitions. What cannot 
occur is that the current two transactions simply be allowed 
and that that be followed with some thought of a ``the door is 
now closed'' policy.
    If these deals go through, Delta, like other airlines, must 
use the full range of competitive tools, including internal 
growth. But internal growth, as Gordon Bethune has just said, 
will not suffice for any of the other airlines to reach the 
necessary size.
    In short, approval of these transactions, in my judgment, 
must be viewed as tacit approval for those that follow because 
it will be a necessary step for us to take in order to compete 
with them. Thereby, the Government will have initiated the 
process that will result in the total remaking of the airline 
business as we know it today.
    Mr. Chairman, it is my belief that such a dramatic 
structural and competitive change in the vital area of the 
Nation's transportation system requires time and forethought, 
and should not be accomplished simply as a consequence of 
approving current transactions.
    Therefore, I would recommend that the decisions on these 
very important issues, with the exception which I agree with of 
the American/TWA acquisition, which is essentially a rescue 
mission, in contrast with the US Airways situation which is 
clearly not a rescue mission--US Airways is not a failing 
carrier--I would recommend that all of these other transactions 
be delayed until we can fully assess the consequences.
    I am expressing, I find, in different words the same idea 
that Senator Schumer has just expressed. I propose we pause to 
aim before we fire. With such a pause--the Senator used the 
term ``moratorium''--we gain the time to fully consider what 
type of aviation system we want for our country.
    In 1792, while President Thomas Jefferson was confronting 
one of the most difficult decisions of the Washington 
administration, he wrote to then President George Washington 
and said, quote, ``delay is preferable to error,'' end quote. 
None of us can predict exactly where these consolidations will 
lead, but we do know that it will be profoundly different. And 
for that reason, I believe our next step should be to ensure 
that the decisions made about this important subject reflect 
the commitment we all share to ensuring that America's air 
transportation system remains the best and most competitive in 
the world.
    I will be delighted to answer any questions.
    [The prepared statement of Mr. Mullin follows:]

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.
    1. These transactions will require that other airlines make 
dramatic competitive responses.
    2. The option of future mergers and acquisitions must be available 
to these airlines if they are to continue to compete effectively.
    3. 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. Though 
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 suggestions 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.

    Senator DeWine. Mr. Mullin, thank you very much.
    We have a statement that has been submitted by Senator 
Santorum which will, without objection, be made part of the 
record.
    [The prepared statement of Senator Santorum follows:]
   Statement of Hon. Rick Santorum, a U.S. Senator from the State of 
                              Pennsylvania
    Thank you Chairman Hatch, Senator Leahy and members of the 
committee. I appreciate the opportunity to submit testimony today on 
the impending airline mergers. Last year, I appeared before the 
Antitrust, Business Rights, and Competition to express my concerns 
regarding the effect of this merger on my constituents. I have also 
joined Senator Specter at a subcommittee field hearing in Pittsburgh 
further investigating the specifics of the proposal. Finally, I 
submitted written testimony for the Senate Commerce Committee's hearing 
last week on this subject. In each of these instances, I have expressed 
my particular interest in how the United-US Airways merger relates to 
jobs and services for my constituents and how they impact competition 
in the airline industry.
    I made it clear when the United-US Airways merger was first 
announced that to gain my support the airlines had to address my two 
principal concerns--protecting existing jobs in my state and continuing 
plans to build a new maintenance facility in Pittsburgh. Since that 
time, I have received commitments from both United Airlines Chairman 
Jim Goodwin and US Airways Chairman Stephen Wolf that these concerns 
would be addressed.
    In particular, I was very pleased that United Airlines committed to 
the long-planned expansion of the maintenance facility in Allegheny 
County. As one of the largest employers of Southwestern Pennsylvania, 
this project is critical to the economic well-being of the region and 
to the thousands of maintenance workers that depend on these jobs to 
support their families.
    I have also heard from many of the small regional airports in 
Pennsylvania who are concerned that this merger threatens commercial 
air service to their facility. However, I am heartened by Jim Goodwin's 
commitment to continue providing the best small community air service 
possible. I appreciate Mr. Goodwin's recognition that these airports 
are economic development engines for their rural communities, and I 
will hold him to his commitment.
    I understand that there are still critics of the United-US Airways 
merger, but I respectfully request that you consider the alternative. 
Just a few weeks ago, US Airways reported that high fuel prices and 
expanding low-cost and network carrier competition combined to produce 
disappointing financial results for the company--a net loss of $269 
million for the year 2000. Absent this merger, US Airways would be in 
dire financial straits and jobs at US Airways would be in jeopardy. 
Previous air carriers didn't have the opportunity that US Airways has 
today. Consider the employees of Pan Am, Eastern and Braniff and how 
the states where they operated have been impacted.
    The status quo is not an option for US Airways. Without the merger 
to preserve US Airways' service network, the future of air service to 
Pittsburgh, Philadelphia and smaller communities across may state is in 
doubt. The merger would not only ensure but expand service to and from 
the Commonwealth of Pennsylvania.
    Thank you, Mr. Chairman.

    Senator DeWine. Mr. Franke, thank you very much for being 
here.

 STATEMENT OF WILLIAM A. FRANKE, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, AMERICA WEST, PHOENIX, ARIZONA

    Mr. Franke. Mr. Chairman, Senator Kohl, Members of the 
Subcommittee, thank you for the opportunity to appear today to 
consider the important issue of airline competition. I am Bill 
Franke and I represent the 16,000 employees and 20 million 
customers of America West Airlines.
    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 I 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--I might add 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, limited incumbent, low-cost carriers, 
approval of the United Airlines/US Airways merger and 
American's acquisition of TWA, coupled with the splitting of US 
Airways and 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 then control 
over 80 percent of the market.
    For 9 years, America West has worked to expand service from 
its Western hubs in 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 indirectly 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 major competitors.
    If these 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 can provide 
true stimulus to competition.
    With this background, I would like to briefly discuss what 
must occur with respect to airport gates and facilities, slots 
and 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 entrant 
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 
O'Hare, America West and others cannot obtain gates. We simply 
cannot obtain gates. America West and other new entrants must 
sub-lease gates and facilities from major incumbent carriers 
under short-term leases. New entrants have virtually no ability 
to expand service at these airports or to respond to demand.
    For example, at LaGuardia we currently sub-lease a gate 
from TWA, with which we have a joint frequent flyer program, 
and recently signed a code share 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-LaGuardia, as well as Boston and 
Philadelphia--the new American/United 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 for our own control and use. We have also been 
unable to secure gate space in Philadelphia.
    Another problem 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 49 percent 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 sub-leasing 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 were being built with private 
money, so the airport was powerless to provide access. We then 
offered to build two gates ourselves. No, they said, we can't 
accommodate that. By the way, these six new gates are going to 
United Airlines.
    The incumbents' control over many of these airport 
facilities is de facto 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 percent of 
all gates at these high-density airports.
    To ensure competition is a condition to approval of these 
transactions, if you should so be inclined, 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, low-cost carriers to 
these 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 
facilities to America West at Reagan National, LaGuardia, 
Hartford, JFK, Dallas/Fort Worth, and other airports.
    The second requirement for competition is the availability 
of slots at high-density airports. Every study ever issued on 
airline competition recognizes slots are a significant barrier 
to competition. Washington National, 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 American and 
United gaining 404 and 434 slots, respectively, at LaGuardia 
and Reagan National Airports, this 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 the potential 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 percent of the slots at LaGuardia. At high-
density airports, the two will control 69 percent of the slots.
    The FAA should exercise its authority to withdraw slots 
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 could exist at both LaGuardia and 
Reagan National to create the potential for new competition at 
these critical airports.
    The final and third component of competitive barriers that 
continue to exist is the perimeter rules at Reagan National and 
LaGuardia. Both DCA and LaGuardia are the subject of archaic 
rules which restrict the geographic reach of service to and 
from these airports. These rules prevent carriers like America 
West from flying non-stop from our primary hubs.
    Currently, the larger network carriers operate a minimum of 
7 to as many as 20 daily flights to primary hubs for 
connections to Western networks from these markets. 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.
    Well, why does all this matter, some might ask. I believe 
there are two major reasons. First, air fares to the consumers. 
The presence of America West or other low-cost airlines in the 
market gives the consumer a low-priced option, as well as 
placing pricing pressures on the larger airlines.
    A case in point is our service to 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, 
the DOT granted us a number of slot exemptions at O'Hare. An 
example of the impact has been that our Chicago-to-Ontario 
service has seen a 100-percent increase in market share, and 
average fares are 39 percent below United's service. In fact, 
as I have stated previously, our average fares from these 
Eastern business markets to the West are currently 29 percent 
below those of the larger carrier networks, and nearly 50 
percent below the 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 threatens the continuation or expansion of hubbing 
activity for smaller cities, for places like Columbus or 
Milwaukee which can support this activity only if they have 
access to important markets.
    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-constrained 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.
    Mr. Chairman, the commercial airline industry is a network 
business. You must be able to build a network to compete. In 
fact, my friend Don Carty, CEO of American Airlines, stated 
last week at the Senate Commerce Committee hearing that, quote, 
``If one airline is able to grow its route network 
significantly larger than its competitors, that airline would 
have a competitive advantage,'' end quote.
    Mr. Chairman, I certainly agree with that principle. We are 
trying to grow our network, we are trying to be competitive. 
Approval of these transactions without requiring remedial 
measures to guarantee access to these key markets is a recipe 
for disaster. And where would it all end? Fix two airlines and 
endanger five others? Force 75 percent of the markets into 3 
carriers? What about America West's 16,000 employees and 20 
million customers? We just want to compete. We just want to 
compete, Mr. Chairman.
    Thank you.
    [The prepared statement of Mr. Franke follows:]

Statement of William A. Franke, President and Chief Executive Officer, 
                   America West Airlines, Phoeniz, AZ

    Mr. Chairman, Senator Kohl and members of the subcommittee, 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 
legilsation 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 American 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 
otehr 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 anticompetive 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 taht 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 signfiicant 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, 
patticularly at LaGuardia, the net result was the maor 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 given 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 utimately 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 coasty 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. There 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 corssroads. 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 than 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 recipie for disaster.

    Senator DeWine. Mr. Franke, thank you very much.
    Mr. Leonard?

STATEMENT OF JOE LEONARD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
               AIRTRAN AIRWAYS, ORLANDO, FLORIDA

    Mr. Leonard. Thank you, Mr. Chairman, Senator Kohl, members 
of the committee. Thank you for inviting me here this morning.
    What the Government does or does not do in the next few 
weeks with regard to airline consolidation will have a very 
long-term impact on the costs and the quality of service in the 
airline industry throughout this country for decades to come.
    In my view, there is only one way to reconcile the public 
interest with the market forces that exist, and that is a new 
initiative of genuine competition. You implement that 
initiative by breaking open the door to the fortresses that the 
major carriers have skillfully constructed around the publicly 
owned and government-regulated assets, i.e. slots and gates. 
That can be done under existing authority, and it should happen 
without delay and without regard to whether any of these 
mergers go forward.
    DOT has the authority, and has exercised that authority in 
the past to open gates and slots to competition. In the next 
few days, AirTran intends to file a complaint with the DOT 
against American and United and TWA and US Air, without regard 
to what DOJ is doing on these antitrust issues, to open the 
facilities to us. I urge you to join in supporting that 
petition and I urge to join any other low-cost carriers that 
file similar petitions, which I believe there will be.
    Whatever else you think about these deals, it takes quite a 
bit of imagination or an intense sense of humor to argue that 
they comply with the antitrust laws and that they conform to 
the DOT's mandate to advance competition. These are not 
separate agreements, as has been announced. They are very much 
linked by the American role. Long-term control of assets 
without regard to who they belong to now is the end game here.
    Let's take a look at a couple of the terms of the deal. In 
this case, the devil is definitely in the details. American and 
United have agreed that for the next 20 years they will fix 
fares and schedules in the shuttle markets. They have agreed to 
fix both corporate discount rates and consumer rates as well.
    American and United have agreed not to operate or work with 
any other carrier in the high-frequency, competitive market 
between Boston and Washington. United has agreed to lease 
scarce gates and locked-in slots to American at a nominal rate, 
while at the same time every time we try to get a slot it is at 
an exorbitant rate. American and United have agreed to code 
share flights that feed hub-to-hub flights, including markets 
like San Jose-to-Denver where they are the only two 
competitors.
    United has essentially sold the D.C. slots to American, 
with the elimination of the no-flip turn, from its original 
agreement with US Air. Therefore, DC Air can sell its slots to 
American any time it chooses, and its supposed role as an 
independent competitor will vanish completely.
    American and United have agreed to limit each other's 
growth, with penalties if American gets too big. American and 
United have agreed to only sell and lease hangars to each 
other. This is simply another way of controlling yet another 
vital resource and asset in the aviation industry.
    This sounds to me more like an antitrust extravaganza than 
a remedy to the problem. The human tragedy is that the 
employees of US Air and TWA and the cities that they serve are 
inadvertently hostages whose future is presented to you as a 
tradeoff for this anticompetitive consolidation.
    For the cities affected, I would suggest that you study 
American's history in serving marginal cities after they 
acquire airlines. After the acquisition of Air Cal, all of 
those routes were eliminated. They have eliminated the Raleigh-
Durham hub, the Nashville hub, the San Jose hub, and more 
recently the Reno hub. Reno is now down to 11 flights a day by 
American Airlines. So if history is a good teacher here, and I 
suggest it is, if I lived in St. Louis or Syracuse or 
Charleston or Morgantown, I would start checking the train 
schedules.
    The only way to cure a monopolistic, anticompetitive 
practice is through real competition, which means open airports 
to low-fare carriers like AirTran and JetBlue. We will and can 
discipline the major airlines. We have demonstrated that in the 
markets that we currently operate in. Allowing us to develop 
networks is fundamental for competition to go forward.
    You can't accomplish this by distributing a handful of 
slots here and a handful of slots there. For us, that means 100 
to 150 slots so that we can build a meaningful network at DCA 
and in many of your States. Whether the slots come from the FAA 
or DC Air or United, American and TWA is irrelevant. What is 
important is that there be a redistribution of these vital 
assets to create a network service on the East Coast. We are 
certainly willing to compete; we just need some help in opening 
the door.
    Mr. Chairman, you and members of the Committee are the 
guardians of the consumers, the traveling public and the 
communities across America. You must speak out now before these 
events take place and it is too late. Otherwise, a year from 
now there will be another hearing talking about why fares are 
so high and service is so small and why service has been 
eliminated to small and medium communities.
    Mr. Chairman, thank you very much for permitting me to be 
here today.
    [The prepared statement of Mr. Leonard follows:]

Statement of Joe Leonard, Chairman and Chief Executive Officer, AirTran 
                                Airways

    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 business 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 taht 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 
publickly 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. 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 teh 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 devel 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 sould 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 affected, I would suggest that they study American's 
history of promises when it acquires airlines. When American bought Air 
al 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 goign 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 far 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 handfull of slots. In a place like Washington National, AirTran 
and other low fare carriers needs 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 why 
service is so poor to small and medium sized communities. At that 
point, 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.

    Senator DeWine. Mr. Leonard, thank you very much.
    Professor Levine, thank you for being here.

   STATEMENT OF MICHAEL E. LEVINE, ADJUNCT PROFESSOR OF LAW, 
          HARVARD LAW SCHOOL, CAMBRIDGE, MASSACHUSETTS

    Mr. Levine. Thank you, Mr. Chairman, and thank you for the 
Committee inviting me. I am, as you probably know, as a 
Committee witness. Unlike these gentlemen, I don't represent 
thousands of employees or anyone else, but I do have a 
perspective that I hope the Committee will find useful.
    I have been a lifelong student of the airline industry and 
airline deregulation. I was a student of Bob Bork's at the Yale 
Law School and I studied economics at the University of 
Chicago, and I am not hostile to very active business 
competition and I don't think that mergers are, per se, a 
terrible tool for managing a company.
    But we do have laws that are designed to keep mergers from 
forming monopolies, and I spent much of my early career trying 
to deregulate the industry so we could unleash the forces of 
competition. I have studied that. I was chief of staff for Fred 
Kahn at the CAB when we deregulated the airlines.
    I have had experience in the business with three different 
kinds of airlines--Continental, which was then a transitional 
carrier moving from regulation to deregulation and struggling 
to change itself; New York Air, which was a new entrant carrier 
and in which I discovered how difficult it can be to compete a 
new entrant carrier; and more recently Northwest Airlines, 
which is one of the larger network airlines. So I think I have 
a somewhat different perspective on the industry from most 
people.
    I am here because I frankly worry about the threat 
represented particularly by the American Airlines/United 
Airlines and US Air deal to deregulation and the fruits of 
deregulation.
    A little history might be useful here. American and United 
are the survivors of the big four of the regulated period. They 
included Eastern, now gone to its reward, and TWA, whose 
funeral we are sort of presiding over as we sit. They adopted 
after deregulation a strategy that was going to allow them to 
grow, to become very big, ubiquitous network airlines. They 
kind of started an arms race between themselves.
    Other airlines decided they didn't want to get left behind, 
and what you may remember from the 1980's was a sort of an orgy 
of expansion as everyone tried to become ubiquitous. The 
expansion was terminated abruptly by the recession of 1990 to 
1992. Ubiquity seemed like a sort of disastrous pursuit.
    Coming out of the recession, airlines built strong 
networks, as Mr. Bethune was saying, built around regional 
cores that also had a national extent. What happened, 
interestingly enough, is that market share actually began to 
move toward Delta and toward Continental and toward Northwest, 
particularly, and originally toward US Air as well for a while. 
That market share threatened to erode the network superiority 
that the ubiquity strategy was designed to achieve.
    What has happened is that basically they have decided--
United made the last move in attempting to put together a 
network by the US Air acquisition on its own. That has serious 
antitrust problems. It has been said that the so-called carve-
out solution with DC Air didn't pass the laugh test. I don't 
mean that unkindly to Mr. Johnson or his intentions at all, but 
no one seriously believes that DC Air can be a major competitor 
in Washington to a large trunk airline that controls assets up 
and down the East Coast, especially if it is operating at 
relatively high cost with relatively small airports. DC Air is 
going to have relatively few big jets. Regional jets are 
another matter and they don't represent the same kind of 
competitive arrangement.
    What happened was when that ran into trouble, American, in 
what I regard as a really brilliant move, concocted these two 
deals, the TWA deal which cast a kind of failing company, dark 
pall over the whole business and suggests that you can see this 
whole transaction--and it was presented here this morning as a 
transaction to save two failing carriers. There is only one 
failing carrier here, and that is important to understand.
    And then, in addition, to end the war for ubiquity by 
declaring a truce with United, they are going to divide up US 
Air. As has been pointed out here by other members of the 
panel, the most important asset you get is control of the 
fortress; that is, of the limited slots and gates that are in 
the Northeast which is the key to running any network in the 
country because of the large number of people who want to 
travel there and who originate there. Those people cast a 
benefit over your whole system, a benefit which will be locked 
up by United and American by this transaction.
    It is important to understand that this is a quantum leap. 
It is not just an evolutionary move, it is a revolutionary 
move. It is designed to end what had evolved into a rather 
competitive network industry. I don't mean to suggest there are 
no defects. I don't mean to suggest that some people don't pay 
some very high fares under some circumstances, and you can 
argue whether they should or not.
    But the business on the whole has been examined by scholars 
for 20 years and every one of them has found it to be 
relatively competitive and beneficial to most travelers most of 
the time. This is designed to end that arrangement and to 
restore what they regard as the natural, rightful leadership of 
American and United as a big two, and a big two protected from 
encroachment, as you have heard on the panel this morning, by 
the slot, gate and runway shortages in the Northeast which are 
going to be with us for a long time to come.
    I think it is important to understand this deal that way 
because this is not just another merger. It shouldn't be dealt 
with by the Justice Department as just one more business 
proposition put in front of them to examine. It should be 
understood in context, and I am trying to provide the Committee 
with some context this morning.
    Joe has just been through some of the rather odd aspects of 
the United/American deal. I won't highlight them any more, but 
there are a couple of really interesting points that ought to 
be considered.
    United and American have testified that they are arch-
rivals, or at least American has testified last week that 
United is its arch-rival and they can be expected to be 
extremely competitive. Why is it United is prepared to let its 
arch-rival, American, provide competition at National Airport 
rather than Continental, which offered to make an arrangement 
for carve-outs, and Joe Leonard's AirTran which offered to make 
arrangements? I know that there are some non-public offers that 
have been made.
    There is no question that these slots at Washington 
National are very valuable, and that there are several 
volunteers who would be happy to step up and assume the public 
duty of providing United with some competition here in 
Washington, D.C. I think it is kind of interesting that United 
has chosen its arch-rival, American, as its competitor.
    United is acquiring as part of the US Air deal the shuttle, 
which is really from a network standpoint a crown jewel, as 
Delta recognized a while ago when they took over the other 
shuttle, the one we started at New York Air, actually, many 
years ago. The reason it is a crown jewel is that a lot of 
people who buy a lot of tickets to a lot of other places fly 
the shuttle. If you can get them in your frequent flyer 
program, if you can get their corporations to make contracts 
with you on the shuttle, it gives you a big leg up in making 
contracts elsewhere in what is a network business.
    United has offered to share the shuttle with American, its 
arch-rival. Isn't that extraordinary? But the deal is off if 
American gets too big. That is also extraordinary. This is not 
a declaration of a new competitive war at a new level. This is 
a truce. This is at least an armistice that is meant to--I 
would say it is meant to last at least as long as the one in 
Korea has lasted. I don't really know what will happen 50 years 
from now, but it is probably good for another 50 years. I think 
that is also extraordinary.
    It has been suggested that you need not worry about this 
because Southwest and other low-cost carriers are going to 
provide competitive discipline. I have enormous respect for 
Southwest and the job they have done. I admire the consumer 
benefits they have brought. Their example and PSA's example in 
California I cited in an article 35 years ago when I urged the 
country to adopt airline deregulation as a strategy.
    But what Southwest does is not a direct substitute for 
network competition. It provides an extremely valuable 
alternative to people who want to use it and who, in effect, 
Southwest pays for using it. I think that is great, but it 
won't get you to either the biggest airports, because Southwest 
finds many of them too expensive to operate to, or many of the 
smallest airports because Southwest doesn't flow enough traffic 
to them to make them valuable parts of its network.
    Business people and leisure people need both network 
airlines and discount, quasi-network airlines to provide 
competitive choice. If the big two create a price umbrella, 
Southwest--I mean, Herb is a great guy and he is very 
benevolent, but Southwest will use that and take advantage of 
that to work their prices up--I don't mean to personalize this, 
but to work their prices up under that price umbrella. It gives 
them a lot more room. So customers will not only pay United and 
American, they will pay Southwest because of the United and 
American big two that has been organized.
    You will see attempts by some of the other members of the 
panel and by others not here to try to form coalitions in 
response. That will have the effect of hyper-concentrating the 
industry. I don't think that is really good. It certainly isn't 
the vision I had in mind when I worked on airline deregulation.
    I realize I have taken a lot of time and I am sorry for 
that. The written statement is even longer. I apologize.
    Senator Schumer. I don't want him to stop, Mr. Chairman.
    Mr. Levine. Finally, the Justice Department needs to take 
another serious look at its own guidelines for airline mergers. 
They are both too narrow and too broad. They focus on city pair 
competition and then they focus on share of the national 
market. What they don't focus on is the viability of network 
competition in a network business.
    A rework has been done. In my testimony, I suggest a little 
bit directions in which that might go. But I think that if you 
do end up asking the Justice Department to examine these 
mergers very closely, you ought to also ask them to rethink the 
criteria that they are using to judge airline mergers, not to 
abolish airline mergers forever, not to eliminate mergers as a 
tool of business, but to eliminate the possibility of snaking 
around the antitrust laws to build a so-called competitive 
position which cannot be eroded for years and years and years.
    Thank you. I will be happy to answer questions.
    [The prepared statement of Mr. Levine follows:]

        Statement of Prof. Michael E. Levine, Harvard Law School

    Mr. Chairman and Members of the Senate Antitrust Subcommittee: 
Thank you for giving me the opportunity to testify before you today at 
what I believe is a critical point in the development of the 
deregulated airline industry. I testify at the invitation of the 
Committee as a private citizen and not on behalf of any airline, 
industry group or other organized interest. My reason for testifying is 
simple: I have dedicated most of my career first to bringing about a 
competitive deregulated airline industry and then to demonstrating 
through my own personal efforts that it is possible for a well-managed 
airline to survive and prosper in a competitive environment. I see a 
threat to the continued success of airline deregulation, and I hope to 
play some part in countering that threat.
    I am at present a member of the faculty of the Harvard Law School, 
teaching courses in regulation and international joint ventures. I have 
attached a detailed biography to this testimony for your information, 
but let me say briefly that I have had the unusual opportunity to 
study, to regulate and to work in the airline industry. This experience 
has included work as a dean and scholar who has advocated and continues 
to advocate deregulation at USC, Caltech, Yale and Harvard. It also 
included a position as the senior staff member at the Civil Aeronautics 
Board under Alfred Kahn and then Marvin Cohen during the most pivotal 
deregulation period. And I also have had the opportunity to participate 
in the industry as a CEO or senior executive of a transitional network 
airline (Continental), a new entrant airline (New York Air) and finally 
at the fourth largest airline in the United States (Northwest).
    I am very concerned about the consequences for industry competition 
and ultimately for consumers of the proposed division of US Airways 
between United Air Lines and American Airlines.
    Before I discuss that transaction I should make clear that the 
``companion'' merger between American and TWA on its own presents no 
serious competition problems. That TWA is a failing company seems 
beyond doubt. The TWA deal may present difficulties for American in 
terms of labor, fleet and systems integration. Those problems may 
present service problems for the traveling public but if they 
materialize, the public can deal with them by avoiding American. They 
will still have that choice because the American-TWA transaction will 
not change the structure of the industry and does not present a threat 
to the competition that is necessary for deregulation to succeed as a 
public policy. This matter should be left to the marketplace and the 
bankruptcy courts.
    American has justified its merger with TWA on its own merits at the 
same time that it has presented it as part of a strategic package that 
includes American's agreement with United to divide US Airways. It 
seems clear to me that the most important purpose of the TWA deal is to 
help give a ``failing-company'' cast to the whole four-airline 
transaction, and to provide political cover (preserving 20,000 jobs and 
a large-airline hub presence at St. Louis) to politicians and 
government officials as they consider a total transaction much more 
difficult to justify on competition grounds. The second major benefit 
to American is not the chance to operate a St. Louis hub, but rather to 
use TWA's slots and facilities at congested East Coast airports to 
bolster American's New York and East Coast strategic position and to 
use TWA aircraft to achieve market share parity with United as part of 
the Big Two strategy discussed below.
    The significance of the TWA transaction is that a closer look at it 
raises suspicions about American's strategic motives. On its own, the 
TWA transaction is difficult to justify commercially. TWA has been 
carefully examined as an acquisition candidate by every major airline 
(more than once, in many cases), and I believe that those studies all 
came to the same conclusion: while St. Louis is well-located and can 
support a hub of some size, it would be very difficult for a ``normal'' 
network airline to make any significant profit there.
    First and most important, operating a hub on top of Southwest 
Airlines means that normal hub economics are impaired by the inability 
to charge normal hub fares to short-to-medium haul business travelers, 
and as Southwest's system continues to evolve out of its previous 
short-haul, point-to-point mode, that effect becomes more and more 
severe. Just ask America West, which has had considerable difficulty 
maintaining at Phoenix a revenue base adequate to support a 
significantly profitable hub operation, even at its very low costs. 
When you add into this equation American's labor costs and the 
transition costs of labor, systems and fleet integration, it's 
difficult to believe that American's better credit and better fuel 
purchase position and the overhead savings from eliminating TWA's 
management infrastructure make this transaction taken by itself 
additive to American's earnings or worth the risk. I know these numbers 
didn't work for anyone else, and would be surprised to learn that they 
suddenly make sense on their own for American.
    Second, this is clearly a case where American is acting in concert 
with United to achieve jointly-shared strategic goals. If United was 
only interested in solving the Washington, DC part of the antitrust 
problem presented by its own US Airways deal, any number of other 
airlines would have been willing to help them out. But rather than 
Continental or Airtran, who have publicly indicated a willingness to 
work with Robert Johnson to produce a DC Air that would be a full-
blooded competitor to United (or rather than the couple of other 
airlines who are rumored to have expressed serious interest), United 
has chosen to work with the airline that is its supposed arch-rival and 
that should be its most difficult competitor from the standpoint of 
network coverage (``scope''). In fact, when the transaction is taken as 
a whole United has cooperated in fashioning a deal that represents a 
giant step forward for American in achieving its stated goal of network 
ubiquity even as it impairs United's attempt to build a uniquely 
ubiquitous position. Why would United do this? To understand, I think 
we need to look at a bit of history.
    American and United are what remain of the prederegulation ``Big 
Four''. Eastern has gone to its reward and TWA, shrunk to a shadow of 
its former self, is about to follow. Both were victims not only of 
their own managements' strategic mistakes, but also of their inability 
to persuade their own labor forces to adapt proactively to the changed 
circumstances of deregulation. United and American, facing the same 
concerns about their ability to survive deregulation given their high 
costs, adopted a different management strategy: they persuaded their 
labor forces in the postderegulation period to reach accommodations 
that lowered marginal labor costs (``B''-scales, ESOP, periodic scope 
relief, etc.) and allowed fleet and system flexibility in return for 
assurances of growth, producing more job security and richer lifetime 
career paths for employees. They coupled this with adoption of a 
``ubiquity'' strategy, in which the size and reach of their networks 
would allow them to meet almost every air transportation need of every 
airline customer. This ubiquity would be used to differentiate 
themselves from new entrants for business travelers and to gain a 
revenue advantage over other network competitors. United announced 
shortly after deregulation that it had become the first airline to 
serve all 50 states. American moved to Dallas so that it could serve a 
very large, centrally located, facility-unconstrained O&D market as a 
national hub. The idea for both American and United was that they would 
ultimately overwhelm smaller network competitors as customers and 
travel agents chose to sign contracts with and use the frequent flyer 
benefits of the airline that could satisfy the largest portion of their 
needs.
    On their way to unchallenged ubiquity, two things happened. Other 
network competitors saw what was happening and refused to roll over 
quietly. First Texas Air, then Delta, Northwest, Allegheny/US Air 
(remember the Piedmont merger and the name change?) and Continental on 
its own attempted expansions designed to enhance their own ubiquity and 
thus survivability. A sort of ubiquity arms race ensued, which caused 
severe self-damage to more than one participant and nearly destroyed 
the entire industry when the economic expansion of the 1980s segued 
into the recession of the early 1990s. In the process, Delta became 
large enough to approach American and United in size, but more 
important, the recession-induced stunting of the growth process evolved 
the industry into an ``almost-national'' mode, with each successful 
network airline building and defending regional core positions that 
supported a large but incomplete national hub system. The traveling 
public benefited hugely from this process (shareholders benefited 
less!). The almost-national systems were very large and provided many 
of the benefits of complete network scope. People in spoke cities often 
had a choice of as many as half a dozen competing hub carriers that 
could meet a particular trip need, hub-located travelers could get 
nonstop service to 80 or more destinations comprising most of their 
travel needs and most travelers could meet virtually all their needs by 
concentrating their business on two systems, for which they were 
rewarded with frequent flyer benefits they valued greatly.
    But from United's and American's perspective, this was not such a 
splendid state of affairs. They had built their labor strategies around 
paying labor for growth and the ability to use their network strength 
to capture revenue premiums (monopolistic rents). Growth was slowing as 
it had become clear that capacity expansion would be defensively 
matched and there was not enough new business to support profitable 
expansion for American and United relative to the rest of the industry. 
The national market became more concentrated among the top five network 
airlines and Southwest, but almost all of the incremental share went to 
Southwest, Delta, Northwest and Continental. The development of 
alliances by smaller airlines as a way to achieve many of the benefits 
of network size without the risks of overcapacity further eroded their 
revenue premiums. The net result of twenty years of deregulation was 
NOT that American and United had become uniquely ubiquitous airlines, 
but rather that they had come to share the network industry with 
several competitors that not only wouldn't go away, but which 
constrained the possibility of further share expansion. For American 
and United, the strategic question became: how can we (either American 
or United or both) gain a network size advantage that can't be 
duplicated and eroded and which will yield monopoly rents to support 
our very high costs?
    Both airlines came to the conclusion that the key was the East 
Coast: United already dominated network service on the West Coast, but 
the West Coast has relatively few cities and while those cities 
wouldn't support more than one network (as American repeatedly found 
out through expensive tests--the Air Cal and Reno acquisitions and the 
San Jose north-south hub), its relatively uncongested, separated 
airports were ideal for expansion by Southwest. Further competitive 
shifts toward American/United were unlikely there. Delta's Atlanta hub 
operation along with expansion by Southwest and Airtran made the 
Southeast unpromising. The midline of the country provided as many 
opportunities to Continental and Northwest as to American and United, 
especially given the constraints at Chicago-O'Hare.
    By contrast, the East Coast has a variety of interesting features 
which might allow it to underpin a sustainable network size and scope 
advantage which could be leveraged into a dominant position: a large 
part of the nation's population and travel origin is located there. 
Airports are congested and facilities tight, making substantial 
matching expansion by network competitors difficult and substantial 
discount competition at the primary business airports nearly 
impossible. Four major population concentrations are the focus of much 
of the business traffic: Boston, New York City, Philadelphia and 
Washington. Northwest has no presence there except through the 
Continental alliance. Continental's and Delta's strength is largely 
limited to Newark (Continental) and north-south and transatlantic 
service (Delta). Transcontinental business is already dominated by 
American and United. Continental has only been able to build a 
significant transcontinental business from its Newark hub using 
narrowbody aircraft and Delta has been unable to make a significant 
dent in these markets. United has built a hub at Dulles and American 
has made a significant effort to build its presence at Boston, but 
neither of these efforts have produced a sufficient increment in East 
Coast presence to allow unduplicable network expansion that could cast 
a halo over the entire United States system.
    American started to build an alliance with US Airways, the only 
airline with strategically-located sufficient mass that could make a 
difference to its network strength. The alliance involved codesharing, 
a frequent flyer deal and computer systems integration which lowered 
American's costs. Northwest and Continental built an alliance which 
made Northwest a much stronger competitor to United in the Midwest and 
over the Pacific and strengthened Continental's position in New York. 
These developments concerned United greatly. United was offered the 
opportunity to do something decisive in response by US Airways 
management's conclusion that its structural and cost problems couldn't 
be overcome without major flexibility by its unions, and its consequent 
decision to save its shareholders by bailing out after an attempt to 
reach union accommodation failed. The result was the United/US Airways 
deal.
    What United expected to get out of the deal was an effective 
monopoly in Washington and Philadelphia, a greatly enhanced position in 
Boston and New York, and a major frequent flyer presence in the very 
important Shuttle markets. It hoped simultaneously to strengthen its 
revenue position vis-a-vis American, achieving through system market 
power what it had never been able to achieve through service and 
operations and to finally separate itself from the increasing 
competition offered by Delta, Continental and Northwest. That United 
paid too much is a tribute to Stephen Wolf's bargaining skills. That it 
did the deal without getting the union consents that would have helped 
manage transition costs is a confirmation of the priority that United's 
management gave the deal and how much impact on competition of the 
priority that United's management gave the deal and how much impact on 
competition they expected it to have. There are many who think that 
this transaction might have in the end cost so much that it wouldn't 
have made a profit for United. That the costs of integrating the two 
airlines might have been such that its shareholders might not 
ultimately have benefited does not mean that there were no monopoly 
profits to be made, but only that the monopoly profits would be 
distributed among US Airways shareholders, United's labor force and 
Robert Johnson.
    The only problem with all this is that the United/US Airways deal, 
despite its beautifully prepared political campaign, appeared to be in 
danger of failing. The DC Air ``cure'' to the Washington problem was 
not passing the laugh test. No one seriously believed that a United-
supported DC Air with a large commuter component was likely to provide 
significant stand-alone competition to United in Washington. Offers of 
``help'' by Continental and Airtran put United between the devil and 
the deep blue sea with respect to its transaction goals. Giving 
Continental a strong Washington position was the opposite from what 
United was trying to achieve in redistributing network system strength 
away from its pesky pursuers. And allowing a discount airline like 
Airtran to operate from the business revenue heart of its East Coast 
hub strength (bad enough to have Southwest at BWI!) would be very 
damaging to United's Washington economics and would make the 
transaction even more expensive by a substantial margin (in much the 
way that Southwest's presence at St. Louis makes the TWA transaction 
expensive for American).
    American, with the prospect of losing its US Airways relationship 
and of seeing its United rival get a structural lock on a superior 
network position, offered United a brilliantly-conceived truce that was 
much more valuable to United than a failed deal and a continued war 
with Delta, Continental and Northwest. In effect, it offered to jointly 
share ubiquity, establishing barriers to further merger. With the TWA 
deal and the deal as American and United have structured it, American 
and United would be almost exactly the same size at about 25% of the 
national market. Each of the Big Two could sustain a revenue premium 
relative to Delta, Continental and Northwest and generate network 
monopoly premiums to help stave off the economic impact of Southwest. 
Neither would have the incentive to erode those rents through price 
competition with the other (because little relative share gain would be 
possible), so pricing discipline would be maintained without collusion. 
While there would be a possibility that Delta or Continental might try 
to defend itself by combining with Northwest, none was a failing 
company and the Justice Department could be expected to be hostile, 
given its record in the Northwest/Continental control case. 
Paradoxically enough, the United/American joint monopoly position could 
be defended with the antitrust laws!
    Even if their rivals could merge, no one would have the combination 
of Boston, Philadelphia and Washington strength available to the Big 
Two and could achieve the same system leverage. American could make 
itself stronger in New York through the TWA system leverage. American 
could make itself stronger in New York through the TWA deal, achieve 
near-parity in Washington and Boston, and concede Philadelphia. It 
could make excellent network use of the Washington and other Northeast 
slots and gates it gets in this deal because of its success in using 
regional jets to maintain presence on mainline routes. Its ability to 
sustain a network advantage over ``the others'' would be assured. 
United would strengthen its position in Washington, Boston and New 
York, gain control of key facilities and slots, and build an East Coast 
North/South system. For both American and United, rivalry with each 
other along nonprice dimensions while each had market power relative to 
the rest was an attractive alternative to the status quo.
    The Big Two position that these transactions would create is likely 
to last a very long time. The large pool of customers available in the 
Northeast and the ability to use the scarcity of slots and gates at its 
congested airports to lock them up will make it impossible to duplicate 
the Big Two position that American and United will share. No comparable 
opportunity will be available to other big network airlines and 
therefore no other network airline will be able to match United's and 
American's ability to offer corporate contracts, travel agency and 
internet incentives and frequent flyer benefits. Over time, Delta, 
Northwest and Continental will find it increasingly difficult to 
capture East Coast business passengers, providing less flow at their 
hubs and supporting less service than American and United will be able 
to sustain. The gap between American and United and the ``others'' will 
grow.
    Among the strongest pieces of evidence that this narrative captures 
what the participants predict and intend in this deal is the treatment 
of the US Airways Shuttle, which is a crown jewel in any network scope 
strategy. The Shuttle is used primarily by a group of business 
travelers who are also the ones most likely to buy high-priced tickets 
to elsewhere from Boston, New York and Washington. In Delta's hands, 
the other shuttle is one of the assets most valuable in its efforts to 
move toward network parity with American and United. As a potential 
source of monopoly dominance, the US Airways shuttle is wasted in US 
Airways' hands because US Airways doesn't have the complementary system 
strength to take advantage of it. In fact, the Shuttle doesn't even 
serve Philadelphia, which is US Airways focus for much of its valuable 
business flying! American had a temporary advantage over United through 
its alliance with US Airways. United grabbed it back. United's giving 
up exclusive control of the network value of this Shuttle only makes 
sense in the context of a shared-dominance strategy in which both 
airlines see its principal value as enhancing their ability to suppress 
competition on the rest of their networks. This view of the transaction 
is confirmed by the fact that United gets to keep all of the Shuttle if 
American concludes an acquisition that makes its bigger than United!
    This discussion doesn't deal with all of the potential objections 
to this transaction, some of which are common to the United/US Airways 
transaction as well. For example, public vulnerability to labor 
disruption is increased as more of the system falls into fewer hands. 
The public consequences of a job action on an airline so big that the 
rest of the system simply cannot absorb its business are very serious, 
as are the consequences of the associated imbalance in bargaining 
power. I have tried instead to focus on the subtle and complex 
competitive dynamics that underlie this transaction in an attempt to 
explain why this is not just another merger and just another rescue of 
some threatened airline jobs. (On that subject, I should say that the 
notion that US Airways is, like TWA, a failing company is entirely 
wrong. Faced with no alternative, management and labor could work 
together at US Airways to achieve costs and revenues that would enable 
it to survive, although some surgery might be necessary. But that's 
another story for another time.)
    What can be said in favor of this transaction? Only that if 
consumers prefer to concentrate their business on one very large 
system, we should accomplish them. And there is no doubt that some 
consumers would prefer to do so, especially if all other things were 
equal. But all other things will not remain equal. This convenience 
will come at the price of choice and long-term competition. There are 
often conveniences to monopoly, as anyone who used to have only one 
number to call when they wanted to discuss their phone service will 
attest. But there are benefits from competition which have generally 
been judged superior as a matter of public policy. If one compares the 
utility to consumers of having competitive choices among airlines, 
almost any two of which can satisfy almost all their needs, with the 
``convenience'' of one-stop shopping in a duopoly, I believe that most 
consumers would prefer competition. That comparison is reflected not 
only in our antitrust laws, but in the regulatory policies of the past 
twenty-five years.
    It has been urged by at least one observer that we need not be 
concerned about loss of competitive pressure in the network business 
because Southwest in particular and other low-cost airlines in general 
represent a large enough share of the business to discipline United and 
American. I suppose that the first rebuttal is American and United 
clearly don't agree with him. It's difficult to justify the cost 
commitments and vulnerabilities which this transaction entails for 
American and United without assuming that they believe that they will 
earn substantial monopoly benefits from the transaction.
    There are good reasons for thinking they may be right, even if in 
the end the transition and labor costs of the deal are so large that it 
ultimately doesn't benefit their shareholders:
    First, although Southwest and its ilk offer a valuable service to 
their passengers, it is not a service, equally valuable to all 
passengers. These airlines do not have significant presence (indeed, 
Southwest has no presence) at the very congested and constrained 
airports that are the principal focus of this transaction. Business 
travelers value and will pay for airport convenience, which is why, for 
example, business fares are much higher from Boston to Reagan National 
than they are from Providence to Baltimore-Washington International.
    Second, these discount airlines do not maintain networks that are 
easy to use for complicated itineraries or which afford easy access to 
airports close to smaller cities. They rely on the willingness of a 
traveler to drive to reach an airport where fares are low. For many 
travelers, this is an excellent tradeoff, but for a substantial number 
of business travelers, it is not.
    Third, Southwest may be second in the nation in the number of 
passengers it carries, as some are fond of noting, but it is much 
smaller in terms of its overall volume of business, which is ultimately 
how economic impact is measured. Southwest is seventh in the number of 
Revenue Passenger Miles (the standard measure of output) and even if it 
grows as rapidly as analysts assure us it will, it will still be 
responsible for a substantially smaller share of industry total revenue 
or industry total output than its large network rivals, not to mention 
the Big Two.
    Finally, Southwest itself is not a charitable organization, fully 
conceding Herb Kelleher's legendary benevolence and charm. Its pricing 
is constrained by network carriers, just as network carriers constrain 
it. If the pricing umbrella is set higher by the Big Two, Southwest 
itself can charge more. Southwest claims that its main competition is 
the car, but that is only true in the short-haul, point-to-point 
markets that are no longer the mainstay of its system or the source of 
its growth. In fact, the car has become much more a complement for 
travel on Southwest than a substitute. Its customers drive significant 
distances to get to its uncongested airports. If the Big Two price 
higher, Southwest can charge more and still make it worthwhile for its 
customers to drive to its flights. Each rise in Southwest's price level 
would cost the public a very great deal. Southwest and its breathren 
are a very valuable part of the U.S. airline system, but its existence 
is certainly not a substitute for strong competition among network 
airlines.
    In conclusion, this is not just another merger and not just another 
bailout of a failing airline. The American/United/US Airways 
transaction is an attempt to undermine the competition created by 
deregulation. It will do this by building a wall of scarce East Coast 
infrastructure around a fortress occupied by a Big Two, who will use 
the protection of that fortress to attack their pursuers. With all its 
imperfections, deregulated airline competition has served the United 
States well. The Big Four of the CAB, protected from each other by 
regulation, is now a group of six highly rivalrous network airlines in 
which at least three of the smaller players are gaining on the larger 
two, supplemented and disciplined by a large and growing discount 
airline system. Congress and the Administration should not allow those 
who have the most to lose from this evolution to put a halt to it.
    What should be done? In my view, the current Justice Department 
merger guidelines are inadequate to deal with network airline 
competition. By focusing on city-pairs and national markets, they are 
simultaneously too narrow and too broad. Creating duopolies in affected 
nonstop city-pair markets ought not to be the goal of merger policy. 
Counting remaining networks as one by one gets picked off without 
considering the degree of effective rivalry that the survivors can 
offer is equally shortsighted.
    By considering mergers only one at a time, DOJ's policies allow 
eggs to be scrambled without gaining an understanding of the recipe of 
which they are a part. The Department should focus here on the fact 
that effective national network competition requires adequate traffic 
density to support competitive frequency and roughly comparable network 
scope, either directly or through alliances, to be able to meet 
competitively the transportation needs of a significant portion of the 
national market. Justice may wish to argue that the East Coast assets 
of US Airways and TWA when combined with existing American and United 
assets create a barrier to entry in national network competition 
because of the impossibility without them of building a network of the 
size and scope necessary to compete with the American and United that 
will emerge from this transaction.
    American and United will achieve Big Two dominance by using 
together network scope much larger than their competitors and an access 
lock on the Northeast markets that serve as a source and destination 
for much of the nation's traffic. If these transactions go ahead, it is 
to be expected that as the remaining firms fall behind, they will try 
to combine their Northeast strengths and then try to offset their 
Northeast weakness relative to American and United by building a 
national network even larger in scope. The ultimate result would be an 
industry with three network competitors, two jointly dominant and one 
large and struggling, instead of six. DOJ should develop a merger test, 
at least for network businesses, that allows or requires them to look 
at and take into account both the implications for network competition 
and the probable further transactional consequences of mergers before 
them. If it doesn't believe it can do that within the current statute, 
the Congress should help them by making clear that DOJ has the right 
and obligation to do so.
    I have already indicated why I don't think non-network discount 
airlines like Southwest represent a ``cure'' for the competitive 
illness this would produce. And I don't think that American and United 
should be given a ``failing company'' license to dismember US Airways. 
US Airways is a troubled, but not failing, company. Its management and 
labor have elected to sell out at a good price to a duopoly that will 
pay off shareholders and maintain above-market labor arrangements 
rather than to accept the hard choices that would be necessary to make 
their airline healthy again. It's the public that's expected to pay the 
bill.
    In short, we have reached a critical point. We can either preserve 
competition among four or five or six network competitors, none of 
which have the potential of achieving a level of dominance which makes 
the others unable to compete. Or we can turn the deregulated airline 
industry into the preserve of two powerful airlines who have pulled up 
the ladder of access to the East Coast and who expect to watch their 
rivals fade away as they struggle to overcome an impossible competitive 
disadvantage. The authorities and the Congress should not stand by 
while this happens.

    Senator DeWine. Professor, thank you very much for your 
testimony.
    Senator Grassley, do you have any opening comments, or 
Senator Specter?
    Senator Grassley. Are we going to ask questions?
    Senator DeWine. We will go to questions, but I wanted to 
see if you wanted to take the opportunity to make any opening 
statement, either one of you. Then we will go to questions 
after that.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE 
                         STATE OF IOWA

    Senator Grassley. Thank you very much. I have been 
following airline competition issues closely for several years 
because of their importance to my State of Iowa. Iowa air 
travelers and businesses have long been vocal about the lack of 
competition in air service and high air fares that have 
seemingly been much out of line for Iowa cities compared to 
other Midwestern cities like Omaha or Kansas City.
    Competitive air service is directly related also to the 
economic future of our communities. The ability of business 
people to get in and out on a punctual and competitive basis is 
very important for economic development in my State.
    I have been concerned about predatory pricing and other 
anticompetitive practices in the airline industry. I have also 
been concerned about airline mergers reducing competition and 
resulting in higher fares. I have been concerned that mergers 
between the large carriers could trigger other large airlines 
to merge, and then we would just have a handful of airlines 
controlling the lion's share of the United States market.
    Right now, a number of airline transactions are being 
considered. I won't list those now because of time, but I would 
like to distinguish the American acquisition of TWA as somewhat 
unique in the sense that this transaction seems to be the only 
solution in terms of saving thousands of jobs and sustaining 
crucial flights in and out of Iowa.
    I have gotten some assurances from Chief Executive Don 
Carty that American would not reduce flights into Des Moines, 
Cedar Rapids and other points in Iowa. So I believe that this 
particular asset buy, because of the dire straits and 
bankruptcy that TWA finds itself in, may be the only solution 
that is going to maintain competition in air service for these 
rural communities. I think that the alternative of TWA going 
out of business could be worse.
    All of the talk of mergers fuels my general concern that if 
the largest carriers control the majority of the market hubs, 
gates and networks, won't they also have the pricing power to 
restrict the entry of startup airlines? How will these mergers 
then help air travelers, and how will these mergers help 
competition?
    We also have to understand how existing regional airlines 
such as Great Lakes, Corporate Air, Chatauqua, Allegheny, 
Piedmont and PSA, will be treated under these mergers and 
acquisitions. They are, of course, the epitome of essential air 
service that we all talk about.
    In the past, I have urged both the Justice and 
Transportation Departments to make sure that they are doing 
everything under their statutory authority to investigate and 
take enforcement action for antitrust violations by airlines. I 
have pushed the Justice Department to closely review all 
airline mergers, alliances, and other contractual arrangements 
that might violate antitrust laws.
    A free market is the best system by which to solve the air 
service problems in the cities of Iowa and other rural parts of 
America. But I want to assure that rural communities like those 
in Iowa do not experience higher air fares, fewer flights and 
fewer connections just because there is no competition among 
airlines.
    The Justice and Transportation Departments obviously should 
enforce the antitrust laws. I just want to make sure that it is 
done in the proper way, and make sure that competition out 
there is always high on the Justice Department and 
Transportation Department's agenda.
    If you are wondering why we in Congress are talking about 
this--we are not enforcing the laws--we do it because we have a 
constitutional responsibility of oversight to make sure that 
the antitrust laws work and the resulting competitiveness of 
the U.S. airline industry or any industry is the result.
    Thank you.
    [The prepared statement of Senator Grassley follows:]

Statement of Hon. Charles E. Grassley, a U.S. Senator from the State of 
                                  Iowa

    I thank the Chairman for holding this hearing this morning and 
giving me the opportunity to speak and ask questions on this subject. 
As you know, I've been following airline competition issues closely for 
several years because their importance to my state of Iowa. Iowa air 
travelers and businesses have long been vocal about the lack of 
competition in air service and high air fares out of Iowa cities. On 
many occasions I've noted that competitive air service is directly 
related to the economic futures of these communities.
    Because of this, I've been concerned about possible predatory 
pricing and other anti-competitive practices in the airline industry. 
I've also been concerned about airline mergers, particularly how 
mergers between the larger carriers can reduce competition and result 
in higher fares throughout the country. Moreover, I've been concerned 
that mergers between the larger carriers could trigger other large 
airlines to merge, resulting in just a handful of airlines controlling 
the lion's share of the United States market. That unquestionably 
appears to be the case today.
    Right now, a number of transactions are being considered. United 
and US Airways, American and TWA, and the latest reports are that Delta 
and Continental are in preliminary discussions about a possible merger. 
Now, I want to distinguish the American acquisition of TWA as unique. 
This transaction may be the only the solution in terms of saving 
thousands of jobs and sustaining crucial flights into and out of Iowa. 
I've gotten assurances from American Chief Executive Done Carty that 
American will not reduce flights into Des Moines, Cedar Rapids or other 
points in Iowa. So, I believe that this particular asset but, because 
of the dire straits in which TWA finds itself, may be the only way to 
maintain competition and air service to these rural communities. The 
alternative, TWA going out of business, could be fare worse.
    Nonetheless, all this talk of mergers fuels my general concerns 
about continuing consolidation in the airline industry that if the 
largest carriers control the majority of the markets, hubs, gates and 
networks, won't they also have the pricing power to restrict the entry 
of start up airlines? How will these mergers help air travelers? How 
will these mergers help competition?
    We must also understand how the existing regional airline,s such as 
Great Lakes, Corporate Air, Chatauquea, Allegheny, Piedmont, and PSA, 
will be treated under these mergers and acquisitions. They help to 
provide service to smaller, underserved communities that the larger 
brands do not serve, though sometimes under a name directly affiliated 
with the larger brand. In many cases, they are the ``essential air 
service'' that all of us talk about. Media reports raise doubts about 
some of their futures.
    In the past, I've urged both the Justice and Transportation 
Departments to make sure they are doing everything under their 
statutory authority to investigate and take enforcement action for 
antitrust violations by the airlines. I've pushed the Justice 
Department to closely review all airline mergers, alliances and other 
contractual arrangements that might violate the antitrust laws.
    I still believe that the free market is the best system by which to 
solve the air service problems of Des Moines and other cities in Iowa. 
But if there is anti-competitive behavior, the free market system 
cannot work. If anti-competitive mergers go through, the free market 
system cannot work. I want to ensure the rural communities like those 
in Iowa do not experience higher airfares, fewer flights and fewer 
connections because there is no more competition among airlines. The 
Justice and Transportation Departments should enforce the antitrust 
laws. I want to make sure they do that. And we here in Congress have a 
significant role to play in terms of oversight of the competitiveness 
of he United States airline industry. So, I'm pleased that the 
Judiciary Committee will be reviewing the possible negative 
implications of excessive consolidation in the airline market.

    Senator DeWine. Senator Specter?

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you, Mr. Chairman. I begin by 
thanking you, Mr. Chairman, for convening these hearings. They 
are very, very important.
    As I take a look at the list of witnesses who have already 
testified and the others who are scheduled to testify, I am 
concerned about our other busy schedules, where we all have so 
many other commitments. I believe it may be necessary to carry 
over some of these witnesses to another day because the issues 
are extraordinarily complicated and extraordinarily important.
    I am very much concerned, to echo what Senator Grassley has 
said, about the wave of mergers, concerned about what is 
happening with the reported talks between Continental and 
Delta, American Airlines taking over TWA, those bankruptcy 
proceedings, and what is happening with the proposed 
acquisition of US Airways by United.
    The national implications are absolutely overwhelming, and 
they have a special application where one of the airlines is in 
a specific State, as US Airways is so dominant in Pennsylvania. 
It is a little hard to understand how the acquisition by United 
of US Airways is going to help United, where they have such 
major problems at the present time with so many complaints 
about customer service, so many complaints about baggage, so 
many complaints about late arrivals.
    I worry about 17,000 Pennsylvanians who are employed by US 
Airways. The acquisition is one which has so many potential 
problems to be weighed against the concerns which are expressed 
that US Airways conceivably might not survive and those 17,000 
jobs may be in jeopardy. That is a very hard issue to analyze 
and to make any determination on.
    As I have heard the testimony this morning about low-cost 
air carriers, American West and AirTran and their efforts to 
get gates and compete, it is candidly chilling. You can't 
compete if you can't get slots and if you can't get gates.
    And I wonder as I hear Mr. Leonard testify about the 
potential for private antitrust actions. The Justice Department 
has had some vigorous activities under Joel Klein, but the 
Justice Department can only go so far. It is my hope that the 
new Attorney General will be even more active and I have talked 
preliminarily to him about that, But Congress has provided for 
private rights of action to go into court and to stop these 
anticompetitive practices if, in fact, they are as serious as 
you say and if, in fact, they do violate the antitrust laws. 
And having had some experience in that field, it looks to me as 
if they do.
    Let me mention an unmentionable word, regulation or re-re-
regulation. That is anathema to a free enterprise society, as 
Senator Grassley points out. But is free enterprise working? I 
would not like to see the Federal Government back regulating 
the airlines, but I wonder if we are better off now than we 
were before deregulation occurred.
    I know that on the principal flight I take between 
Philadelphia and Pittsburgh, we had two carriers before 
deregulation and now we have one and what I consider to be 
very, very high fares. Problems about flying from Pittsburgh to 
Harrisburg: it is more expensive to fly from Harrisburg to 
Pittsburgh than it is to fly from Harrisburg to San Francisco 
with a stop at Pittsburgh. I have listened to long explanations 
which I still don't understand.
    So, Mr. Chairman, I hope this Subcommittee will have time 
to really do a job here and try to figure out this maze because 
there are an enormous number of problems, and I worry that 
these acquisitions and these mergers can only spell higher 
costs for the consumers and, in the long run, problems for 
employees of these companies.
    Thank you, Mr. Chairman.
    Senator DeWine. Thank you very much.
    Let me invite Professor Kahn, who is here, to come on up 
and join us. Professor, thank you very much for being here.
    The professor is Emeritus Professor of Political Economy at 
Cornell University and a special consultant to National 
Economic Research Associates. He is, of course, the former 
Chairman of the Civil Aeronautics Board, and is well-known 
throughout the industry as really the father of airline 
deregulation. We welcome him back to the committee.
    Professor, you did not have the opportunity to make a 
statement, but we certainly welcome you to the Committee 
hearing. Maybe you could just take a moment and explain what 
impact you think the proposed mergers would have on the airline 
industry.

   STATEMENT OF ALFRED KAHN, EMERITUS PROFESSOR OF POLITICAL 
         ECONOMY, CORNELL UNIVERSITY, ITHACA, NEW YORK

    Mr. Kahn. Well, when I testified last before this Committee 
on the United Airlines/US Air merger, I said that I hadn't 
totally made up my mind about it, partly because it appeared 
that there were some ways in which it might actually improve 
service. I noticed that Senator Rockefeller was a very strong 
proponent of it at that time, presumably because it did offer 
the possibility of improved service in an area that he 
represented.
    I identified three reasons why I was eager to have the 
Department of Justice look at it very, very hard. One, of 
course, was direct competition, not merely on O and D routes at 
which ends they were both represented, but one of the most 
powerful forms of competition in the industry, which is over 
different hubs.
    I noticed Senator Specter's example. The reason undoubtedly 
that he could get a lower fare Harrisburg to San Francisco than 
Harrisburg to Pittsburgh was that he had a choice of going 
Harrisburg-Pittsburgh-San Francisco, maybe Harrisburg-O'Hare-
San Francisco or Harrisburg-Cleveland, Cincinnati. So he had a 
choice of different carriers--respectively, US Air, probably 
American, or United. Cleveland would be Continental, Cincinnati 
would be Delta.
    So there you would have a direct elimination of competition 
even by this merger alone.
    The second was, of course, potential competition. I said 
that if it is really important for United to have a stronger 
hub in the Northeast, if it is really powerfully important for 
them, let them build one competitively rather than simply buy 
out the existing hub.
    The third was the snowball effect. It was obvious at the 
time that if they got the competitive advantages that they 
would get by merging, other airlines would be quick to follow. 
And, of course, now we are seeing American Airlines doing 
exactly that and Delta already expressing an intention to do 
the same.
    On that, there is nothing I can say that would improve on 
what Professor Levine has said. It has been effected in two 
splendid pieces of testimony. One is his and the other is by 
Don Carty, and I think both are brilliant. But if you read Mr. 
Carty's testimony, it is an elaborate and very powerful defense 
of this arrangement.
    What is clear is that American, faced with the United 
acquisition of US Air, would then find itself at a 
disadvantage, and so it then began to exert pressure, partly 
because of the Government holding its hand over the United one 
and threatening to disallow it, in order to get equivalent 
advantages for American.
    So the question is, is this a declaration of an intention 
to compete? In some ways, it probably will strengthen 
American's ability to compete for business traffic. Or is it a 
Treaty of Versailles, a non-aggression pact in which we too 
then will agree to accept equality of position?
    Of course, there are aspects of it that are hard to argue 
with, like the acquisition of TWA, although then I would like 
to worry a little bit about the Caribbean and whether some 
sloughing off of assets might be required. It is possible that 
DC Air would by this be converted into a much more effective 
and powerful competitor.
    But then look at the shuttle. I mean, what kind of 
increasingly effective competition is that if we agree to 
divide the shuttle between us? And indeed I understand that if 
American grows larger than United, the shuttle part of the deal 
is off.
    So in a sense, this is a fulfillment of my prophecy, for 
which I claim no originality. It was perfectly obvious. We are 
really judging the likely transformation of the industry into 
one dominated by about three carriers, and I just think that is 
very troublesome.
    Senator DeWine. Thank you very much.
    Because of time, we are going to limit the questioning, at 
least the first round, to 5 minutes apiece. I will start off.
    Mr. Mullin, TWA and US Airways have both argued that these 
transactions should be approved because they are both failing 
airlines. It seems pretty clear that TWA is, in fact, 
struggling. We have talked about that. But as someone who has a 
great deal of experience running an airline, what is your 
opinion of this statement?
    You have already said US Air is really not failing. Do you 
want to elaborate on that? Why do you say that?
    Mr. Mullin. Well, I feel very strongly about that, Mr. 
Chairman. I think, first of all, you could look at US Airways 
in many different ways. It is true that they have had net 
income losses in the past short period of time. But if you look 
at their cash from operations, as best I can tell from a quick 
review of their financial statements, their cash from 
operations has been extremely positive--$870 million in 1997, 
$1.2 billion in 1998, over $600 million, I think, in 1999.
    They have good, solid cash reserves on their balance sheet 
right now. In 1998, it was $612 million. I think it is about 
$500 million as we speak. They have completed a very, very 
extensive stock repurchase program in the period from 1997 to 
1999. How, in fact, can a failing carrier possibly be even 
giving the remotest of consideration to a stock repurchase 
plan?
    I think that the ultimate measure of that would be what 
United itself has, in effect, said by virtue of the bid that it 
has made. I mean, United is a wonderful airline, led by 
extremely competent people, and they have evaluated US Airways 
as worth $60 a share, when it was selling in the mid-20's.
    Now, how, in goodness sake, could anybody look at a 
situation like that and say that you have increased the price 
from in the mid-20's to $60 a share and pay that kind of price 
for a failing airline? I think it is absurd on its face. US 
Airways is not a failing carrier. It has a tremendous amount of 
capacity and great assets all up and down the East Coast. So I 
would reject that proposition as offering any justification for 
moving forward at this point.
    Senator DeWine. Any other panel members want to comment on 
that?
    Mr. Levine. Yes, I would like to if you don't mind. It is 
very unpleasant particularly in a network airline to do the 
things you have to do to become competitive if you currently 
find yourself in a high-cost position faced by some low-cost 
competition.
    I have enormous respect for Mr. Wolf and the CEO of US 
Airways, Mr. Gengwal. They have a lot of experience between 
them at reorganizing and fixing airlines. It is interesting to 
me. I believe they came in with the idea that they could fix US 
Airways. They might then be happy, make money from their stock 
options, but I also believe that they had an exit strategy.
    They worked with US Airways' unions. They could not come to 
an accommodation that gave US Airways competitive costs, and 
they have found a way out for them and for the shareholders of 
US Airways, but the people who are going to pick up the bill 
are the traveling public.
    Senator DeWine. Anyone else on the panel?
    [No response.]
    Senator DeWine. Senator Kohl?
    Senator Kohl. Thank you, Mr. Chairman.
    Mr. Mullin and Mr. Bethune, are your discussions defensive? 
Do you want to go through with your merger regardless of what 
happens? Are you willing to put it aside if the other mergers 
don't happen? What is behind the strategy with respect to your 
discussions?
    Mr. Mullin. I think from the standpoint of Delta Air Lines, 
we feel we have got a great competitive position as it stands, 
Senator Kohl, and that would be very much our preferred option. 
As I mentioned in my testimony, I think that in the decisions 
that are made on these specific transactions, it will, in fact, 
launch exactly the kinds of thought processes to which many of 
the witnesses here have referred.
    As all of us look for opportunities to catch the mega-
carriers, American and United, there is just no way through 
internal growth alone that any of us could proceed to reach 
that size. So it must by itself force us to consider this 
itself.
    As I said in my testimony, I think that given that these 
two transactions are going to launch the total remaking of the 
industry, it is a time to pause and step back and ask whether 
or not the industry that we have, with six major hub-and-spoke 
carriers, with Southwest Airlines as a terrific disciplining 
airline with respect to prices in the industry, and many small-
size carriers and discount carriers coming along--it is a great 
industry and we are about to totally transform it.
    Senator Kohl. Are you saying that your merger is only in 
response to theirs? If their merger doesn't occur, then yours 
doesn't occur?
    Mr. Mullin. I would say that I would prefer to stay where 
it is, and therefore not pursue those kinds of transactions, 
yes.
    Senator Kohl. Mr. Bethune, do you have the same position?
    Mr. Bethune. Yes, sir, Senator. We have come such a long 
way in the last 6 years and we have shown this equilibrium that 
I have discussed works for us. We have gone literally from 
worst to first in customer satisfaction and employee 
satisfaction. We can compete. We think the future for us is 
best if we are just allowed to compete in this equilibrium that 
currently exists.
    Should that change, then we know that ultimately things 
will change for us because we can't, long term, survive with a 
consolidated structure. But our preferred route, as my friend 
Leo just said, is to remain independent, continue to compete in 
the marketplace and offer real competition and consumer 
satisfaction.
    Senator Kohl. Do you all think that the Government should 
use its authority to control slots at major airports, when we 
can utilize that authority. Mr. Levine, what do you think?
    Mr. Levine. It is a little complicated. I think if it were 
up to me, I would allow slots to be bought and sold, subject to 
antitrust restrictions on acquiring so many that you dominate 
an airport. I think another alternative which might be even 
better would be to allow congestion pricing at the airports and 
to allow airlines to respond to those prices and schedule their 
flights according to how scarce the time of day they wanted to 
fly was. I have a problem with that.
    Airports are themselves monopolies, and one problem I have 
with congestion pricing is you are giving the airport owner, 
who is a monopolist, an incentive to exploit the airlines. So I 
have actually proposed at an FAA seminar that the congestion 
prices go into a fund that could only be used to build capacity 
at capacity-restricted airports, which I think would have the 
beneficial effect of both allowing competitive access to 
airports and getting more infrastructure. But we have probably 
gone off the subject here.
    Senator Kohl. Mr. Kahn, what authority should we use here 
that we have at the Federal level to control this?
    Mr. Kahn. Well, I think the antitrust laws should clearly 
be sufficient in this case. These are acquisitions that, taking 
into account all their effects, threaten the effectiveness of 
competition in the industry. I shouldn't say I can't think of 
any others. It would happen even more if they all got together 
completely. I think the antitrust laws should clearly be 
sufficient.
    Now, as Professor Levine points out, that does not solve 
what I think is the greatest failure of the last 22 years. And 
I am proud to say I gave a speech at the FAA in March 1978 in 
which I said exactly this, that deregulation was going to 
create a great new demand for infrastructure and we were not 
going to accommodate DOT by restricting or having slots. We 
wanted to unleash competition, and it was the job of the FAA 
and airport traffic control to respond to that. That was No. 1.
    Second, you can give a parrot a Ph.D. in economics by 
teaching it to say supply and demand. The other is that you 
have got to price intelligently. You have got to set up a 
system the way our bumping rules do. The people to whom time is 
less valuable than money accept the bribes and they get off the 
planes. The people to whom money is more valuable than time 
reject the bribes and stay on the planes. The latter pay higher 
fares. The people who are flexible pay lower fares.
    We just refuse to apply those simple principles to the 
pricing of this major input. The Achilles of heel of 
deregulation, I suspect more than lack of enforcement of 
antitrust, is that our institutions for providing and pricing 
infrastructure just stink. I think that Secretary Mineta is in 
a wonderful position if he can talk about how we will 
reorganize the pricing and the provision of airport capacity. 
That is something he can do now and nobody can understand the 
problem better than he. ``Stink'' is an economic term.
    [Laughter.]
    Mr. Leonard. Senator Kohl, I think that as a matter of 
public policy that any time there is a merger of airlines there 
ought to be a reallocation of a certain percentage of the slots 
that those airlines have.
    If you take the current case, slots were awarded to TWA, 
United, US Air and American under totally different 
circumstances than are being proposed today. If they had to 
give up 20 percent of their slots to get the deal done, they 
would calculate what that costs and then they could make a 
decision to go forward with the deal or not based on the 
economics.
    It has been done in the past. In 1983, when the FAA deemed 
that there was a misallocation of slots, a new lottery was 
provided and slots were taken away and reallocated to the pool 
and redistributed. So there is precedent for doing that. The 
DOT certainly has the power to do that today, but they don't. I 
think as a matter of policy, any time there is a merger or a 
misallocation, they ought to be reallocated.
    Senator Kohl. Thank you.
    Senator DeWine. Before turning to Senator Grassley, it is 
my understanding, Mr. Bethune, you have to leave. We will give 
you a 2-minute closing here, if you want to make any other 
comments.
    Mr. Bethune. Well, thank you, Senator. I certainly 
appreciate the remarks of my colleagues and I largely agree 
with the positions here. I think given our druthers, as Senator 
Kohl asked, Continental would like the right to compete. I 
think we have offered real choices to Americans to find that 
there is a better way to get from A to B that will actually get 
you there safely with your underwear in a very consistent 
fashion. We have been very profitable with that approach.
    We hate to be constrained in our ability to grow in the 
future by this behemoth that is on the table today for 
consideration, allowing two members to form a cartel to block 
what would be half of the American marketplace, which will 
certainly put a dampening effect on competition and certainly 
put a dampening effect on our ability to grow and to be 
profitable and provide literally thousands and thousands of 
jobs across America.
    Thank you, Senator, for allowing me to testify.
    Senator DeWine. We thank you very much for your testimony.
    Senator Grassley?
    Senator Grassley. Well, I am going to submit a question to 
Mr. Bethune because I wanted to know how the Continental/TWA 
deal might affect my State of Iowa and what would happen to the 
TWA route structure in my State.
    Senator DeWine. You have brought him back, Senator. He is 
still here.
    Mr. Bethune. Senator, I want to be clear that we have 
publicly said that we do not oppose the TWA transaction, as Mr. 
Carty has represented in public that he would consummate it. We 
ask only that he confirm that representation in a document and 
say that he will, in fact, protect the jobs of the 20,000 
people and protect the pensioners. When he does that, we will 
step aside in the bankruptcy court because we think those jobs 
are important.
    We made a business at Continental that we decided we would 
fly to places people wanted to go to, and we are listening to 
the public and their demands. We haven't been able to grow in 
capital structure to get to your State the way we would like 
to, but it is very much our intention to try to get there. 
Given this consolidation, I would seriously doubt we would ever 
have the ability to fly to Iowa.
    Thank you, Senator.
    Senator Grassley. Professor Levine, Mr. Schumer suggested a 
9-month moratorium at the hearing this morning. Are you 
advocating a moratorium or cooling-off period for these 
mergers, and would you then propose a change in merger rules 
and how would you do it?
    Mr. Levine. Well, first, I oppose these mergers. Cooling 
off is better than letting them go ahead. Disapproving them 
would be better than cooling off. I do think that the Justice 
Department does need to rethink the merger guidelines it is 
applying to airlines. I think that airlines are network 
industries. In fact, it is clear that the Justice Department 
needs to do some work more generally on what competition rules 
for network industries are to be.
    So it would be acceptable to me if these things were put on 
the back burner and the Justice Department was requested to 
restudy its posture with respect to competition in network 
industries. But as I say, I think under the antitrust laws you 
could disapprove the United/American/US Air transaction right 
now.
    Senator Grassley. The end result of such a moratorium would 
then be to permanently change the merger rules?
    Mr. Levine. Well, you are not changing the law, Senator. As 
I am sure you know, the Justice Department uses internal 
guidelines to decide what mergers it will challenge and what 
mergers it won't. The guidelines were developed for very 
different kinds of industries than the network industries that 
have emerged in transportation and telecommunications. In my 
judgment, the Department absolutely ought to take another very 
close look at those guidelines as they apply to these 
industries and come up with something that addresses the 
reality of network competition. I think right now the rules are 
both too narrow and too broad. They are not targeted right.
    Senator Grassley. So you are asking them to take a look at 
it and possibly change them, but you are not in a position from 
your position as a professor to suggest certain things?
    Mr. Levine. Well, I have given a few broad hints in my 
written testimony and I am certainly willing to talk to Justice 
about whatever it is they might want to talk about.
    Senator Grassley. Mr. Leonard, you may not be the only one 
I should address this too, but quite frankly you did a very 
thorough job of discussing the slot system with Mr. Kohl. I 
guess my question to you would be, other than the lottery you 
mentioned, what would be an equitable way to reallocate slots?
    My background on this is I think that since we do have a 
slot system at several of our busiest airports--and I doubt if 
anybody in Congress when it was first created thought that 
slots would end up being worth the money that they are today, 
and evidently they are worth a great deal of money. I happened 
to be a member of the AIR 21 conference Committee when that 
legislation was finalized. As a member of that conference 
committee, and even before that, I advocated that the slot 
system be eliminated through a phase-out. That is my position.
    Now, you have already spoken to Senator Kohl about it and I 
guess the only thing that you could cover for me that you 
didn't cover for him is if there is anything beyond the lottery 
system, then, as an equitable way of doing something about 
slots. Also, anybody else on this panel who wants to comment on 
this should do so if they wish.
    Mr. Leonard. Well, I think that if you take a look at 
JetBlue, in my view JetBlue is one of the four small, new 
airlines that will likely be successful. I include Southwest in 
that. They are not new anymore, but you have really got us, 
Frontier, JetBlue and Southwest that are new entrants that are 
doing quite well.
    JetBlue was awarded 75 additional slots by the Government 
to permit it to get started. One of the proposals that we have 
placed on the table is that as a condition of United/US Air, 
100 to 150 slots should be taken away from them and given to a 
low-cost carrier to create a network at Washington National. 
Now, we would like for that to be us. We have a self-interest 
in that, but it could be JetBlue or it could be someone else. 
It could be Bill Franke, but there needs to be creation of a 
network.
    If you give us four or five slots, we are going to fly to 
Atlanta. That is all we are going to do, and the network 
benefit of a low-cost carrier would be lost. We save the 
consumers in Atlanta $700 million. We believe that with a 
network of 100, 150 slots, we could create $600 million of 
value to the consumers in the Washington and upper Northeast 
region and would get the same kind of benefits. But there have 
to be enough slots to make the network work for that to happen.
    Senator Grassley. I have no further questions of this 
panel, unless anybody else wanted to comment on the slot 
question.
    Mr. Franke. I would make a comment, Senator. I think the 
slots, and to some extent the gates are an anachronism that go 
back in time that have no present place in the management of 
the airline system. As Mr. Leonard and I have pointed out, they 
are an impediment to successful competition by those of us who 
can provide lower-cost fares to the consumer.
    We now have an opportunity to right some of that because 
there are specific proposals before the Department of Justice, 
the Department of Transportation, and you regarding specific 
transactions which involve hundreds of slots. So whether it is 
a lottery based on proof of public necessity or who can provide 
the best results to the consumer, I am not here to day, but I 
do think it is important that we stop now and take a look at 
the opportunity so we don't, as I said in my remarks, end up 
back here in a couple of years with several of us trying to 
figure out what to do with our systems without our ability to 
compete because of the gates and slots restrictions.
    Mr. Leonard. Senator, could I make one more point?
    Senator Grassley. Yes.
    Mr. Leonard. One of the things that we experience is that 
we have been trying to buy or lease slots, and we are capable 
of doing that. What we frequently find is that when we get 
close to a deal, the person who has these excess slots who is 
willing to lease them or sell them then goes to our competitor 
and says, oh, by the way, we are going to sell these to 
AirTran, you ought to pay a premium. And they do; they pay a 
premium as much as $30,000 a slot. So it is another way that 
the big carriers are able to keep these vital assets out of our 
hands.
    Mr. Kahn. Senator, may I just interject one sentence on 
this? Slot purchase and sale is clearly better than allocation. 
I mean, after all, we were supposed to have deregulated this 
industry 22 years ago and here the Government is still 
allocating ration tickets to compete or not compete.
    Second is the point that is suggested right here by Mr. 
Leonard and by Professor Levine. If you just permit purchase 
and sale of slots, slots will always be more valuable to the 
incumbent to whom they are protection of monopoly power than to 
a new entrant, for whom it is merely an opportunity to compete.
    Slot allocation is an abomination. It has nothing to do 
with regulation. We should let the price system do it, and that 
will create large returns and those should be used, as Mike has 
clearly suggested and I have been saying for years, to develop 
subsidiary airports, which would relieve the congestion problem 
as well.
    You could have competition in England between Heathrow and 
Stanstead and Luten. Stanstead and Luten went out and got Ryan 
Air in there to compete with Aer Lingus, and so you have low-
fare competition. You don't get that now, except by Government 
allocation, which is not what we want. WE have got to get out 
of the business.
    Senator Grassley. Thank you.
    Senator DeWine. Senator Specter?
    Senator Specter. Thank you, Mr. Chairman.
    Mr. Franke and Mr. Leonard, in looking over your testimony 
you make some very, very strong charges. Mr. Franke, in your 
testimony at page 5 you recount your experience at O'Hare and 
say, quote, ``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 were 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, go to United 
Airlines.''
    In your testimony, Mr. Leonard, you use very strong 
language, and I am not disputing it. Perhaps somebody else 
will. We want to give others a chance to talk about it. At page 
2, ``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 that 
interlocking deals make sense.'' When you talk about cartels, 
you are talking about antitrust violations.
    Then you go on to say that American and United have agreed 
that for 20 years they will fix fares and schedules in shuttle 
markets. That certainly sounds to me like restraint of trade.
    And then you say at page 3, ``American and United have 
agreed not to operate or work with any other airline to operate 
high-frequency, competitive service between Boston and 
Washington.'' That again sounds like an agreement on restraint 
of trade.
    Then you say, ``United has agreed to lease scarce gates and 
locked-up slots to American at nominal rates. American and 
United have agreed to code share on flights that feed certain 
hubs,'' and some more language, and you say they won't code 
share with any new entrants.
    Have you considered a private right of action to sue under 
the antitrust laws for treble damages because of these injuries 
to your company?
    Mr. Leonard. We have considered it, Senator. We haven't 
done it to date, quite frankly, because we didn't have the 
money to afford the legal fees. We know this would be a very, 
very long fight. The legal fees would be quite expensive.
    Senator Specter. Some of those cases are undertaken on a 
contingent fee arrangement.
    Mr. Leonard. I understand that, but we have--
    Senator Specter. Well, how about it? Have all the lawyers 
turned you down on undertaking your case on a contingent fee?
    Mr. Leonard. We haven't pursued that yet, Senator.
    Senator Specter. Why not?
    Mr. Leonard. Because we are trying to pursue this through 
the Department of Justice and the Department of Transportation, 
which we think is the best course to take.
    Senator Specter. How long have you been pursuing it with 
the Department of Transportation and the Department of Justice?
    Mr. Leonard. Well, we have been pursuing predatory behavior 
for about a year-and-a-half, and we have filed formal 
complaints with both the Department of Transportation and the 
Department of Justice.
    Senator Specter. Maybe after this hearing airs on C-SPAN 
you will get some calls from lawyers who can show you a faster 
timetable.
    Mr. Leonard. We might. I think to your point, Senator, we 
have taken this language directly out of the public documents 
that have been filed, and we do believe each one of these is an 
antitrust violation, as does our antitrust counsel.
    Senator Specter. Well, how about it, Mr. Franke? It sounds 
pretty problemsome when new gates are being built and you ask 
for a share and you offer to put up some private money and they 
won't deal with you. How about some self-help there on a 
private right of action?
    Mr. Franke. We brought this to the attention of the Justice 
Department and the Transportation Department as an example of 
the kinds of practices that prohibit or limit competition for 
those of us who--
    Senator Specter. How long ago did you bring it to the 
attention of the Justice Department and the Transportation 
Department?
    Mr. Franke. At the time we were denied, which was about 8 
months ago.
    Senator Specter. And what have they done?
    Mr. Franke. They have taken it into account as a part of 
the same process of reviewing the United/US Air transaction.
    Senator Specter. They have taken it into account as part of 
the process and the transaction, but no direct assistance for 
you?
    Mr. Franke. No, sir.
    Senator Specter. Have you considered a private right of 
action to sue yourself?
    Mr. Franke. We haven't because we want to see this process 
played out and completed before we do that. As Mr. Leonard 
pointed out, it is expensive. It consumes a significant amount 
of management time and the results are not predictable. So we 
want to follow the regulatory process first and then we will 
see where we are.
    Senator Specter. Would your airline be better off, Mr. 
Franke, under regulation, before deregulation, with all the 
problems you are facing here?
    Mr. Franke. I don't think so, Senator. We believe strongly 
we can compete. We have the lowest unit costs of any of the 
major hub-and-spoke carriers. We have successfully competed for 
the last 5 years. We simply want the right to fly the markets.
    Senator Specter. Mr. Leonard, would you be better off with 
re-regulation?
    Mr. Leonard. No, Senator, the same as Bill said. We have 
demonstrated that we can compete. We have demonstrated that we 
are a highly profitable company. We are a rapidly growing 
company, but we do need access to the key business markets to 
be successful in the long term.
    Senator Specter. Mr. Mullin, I read in the media that 
Delta, as the bigger of the two as between Continental and 
Delta--there is talk about having Continental acquire Delta. 
How does it work out that the smaller of the airlines would 
acquire the larger of the airlines? What are the economics 
behind that if, in fact, those media reports are true?
    Mr. Mullin. It beats me, Senator. I don't know.
    Senator Specter. You only read it in the newspaper, too?
    Mr. Mullin. Well, there has certainly been some speculation 
about that in the newspapers.
    Senator Specter. Are you the last to know as the CEO?
    Mr. Mullin. No. I am saying that I am sharing your sense of 
incredulity about such a transaction. Certainly, Continental is 
a very fine airline. In 1998, we attempted to enter into a 
transaction with them, and that in turn led to their 
association with Northwest.
    We have kept in touch with all other airlines throughout 
this entire effort that has gone on that we are discussing here 
today, but Delta's fundamental position is we would very much 
like to continue with our current framework of competition. We 
have no great interest in any merger or acquisition 
transaction.
    I think that I have just attempted to reinforce the 
fundamental point that if, in fact, these transactions are 
allowed to go forward, that would in turn absolutely cause us 
to enter into some more serious discussions pertaining to such 
actions.
    Senator Specter. One final question, Mr. Chairman, if I 
may, to Professor Levine and Professor Kahn.
    You haven't exactly had a full picture, but based on the 
testimony of Mr. Franke and Mr. Leonard, do you think, prime 
facie, there is an antitrust violation here, Professor Levine?
    Mr. Levine. Well, the antitrust violation would have to be 
focused on particular airports. One of the problems, as you 
know, Senator, and I know you know a great deal about this, 
with private action is that it is focused on damage to 
particular firms at particular times in particular places, 
whereas the Department has the ability to fashion and request 
broader relief from the courts that is more structural in 
nature.
    Senator Specter. They have the right to do that if they do 
it, if they sue.
    Mr. Levine. You mean the private--
    Senator Specter. The Department has broader authority, but 
an inactive and an inert Department has less authority than an 
active private litigant.
    Mr. Levine. Well, as I have tried to testify here this 
morning, sir, I really believe the Department ought not to be 
inert and I hope it will not be inert. Transaction and 
litigation costs are very high. I have experienced this. I was 
CEO of a new-entrant airline for a while, and reaching for the 
lawsuit weapon when you are a relatively small company puts you 
in a position where you are consumed by the lawsuit, whereas 
your larger defendant opponent sort of departmentalizes it, 
except when you can get the CEO for deposition, and it becomes 
a pretty uneven contest.
    Senator Specter. Professor Kahn, will you take the case?
    Mr. Kahn. Fortunately, I am not a lawyer. I would be very 
reluctant.
    Senator Specter. I can understand why, since you are not a 
lawyer.
    Mr. Kahn. Oh, I can do better; I can speak quite freely. My 
life expectancy would undoubtedly be exhausted before--
    [Laughter.]
    Senator Specter. All of our life expectancies may be 
exhausted by the length of this hearing.
    Thank you very much, Mr. Chairman.
    Senator DeWine. Senator Schumer?
    Senator Schumer. Thank you, Mr. Chairman. I thank the 
witnesses for their testimony. As you probably heard in my 
opening statement, I am sending a letter to DOJ asking for a 
moratorium so they can study all of this. I know Mr. Mullin 
mentioned that he was in favor of it.
    Could I ask the other witnesses, would they support a 
moratorium so that DOJ could study this new situation and not 
just approve the merger piece by piece by piece? Mr. Franke?
    Mr. Franke. I think the answer is I agree with Professor 
Levine. There is plenty of room in the antitrust laws as they 
exist today for more time to be given this process. I mean, 
there is a second request process and it is not uncommon to see 
one of these major transactions drag on for over a year. So I 
don't think we need any special action to accomplish that 
objective.
    My concern is that we are acting on a piecemeal basis 
without any strategy, we understand, by the Justice Department 
for reviewing transactions in the airline industry, and that 
should be developed.
    Senator Schumer. Well, that is my point, Mr. Franke, that 
they ought not just delay, but they ought to delay and get a 
comprehensive picture of where we are going. I mean, you might 
look at each airline and not look at the whole consequence of 
where we will end up and come up with a different answer and an 
answer that wouldn't be--that is what the letter says. Would 
you support that letter?
    Mr. Franke. I agree with that, Senator.
    Senator Schumer. Thank you.
    Mr. Leonard?
    Mr. Leonard. Yes, sir, we would certainly support that, 
Senator.
    Senator Schumer. Professor Levine?
    Mr. Levine. I think I said earlier in response to a 
question about that that would be my second preferred solution. 
My first preferred solution would be that this merger be 
challenged and prevented from going forward, but certainly the 
suggestion you have made would be a lot better than considering 
it piecemeal according to the current guidelines.
    Senator Schumer. Professor Kahn?
    Mr. Kahn. I agree with what Mike has said. I would, before 
doing it, ask the people at Antitrust what they are doing. 
Maybe you have to wait until the administration decides who is 
going to be Assistant AG in charge of antitrust, but one way or 
another they have got to look at this thing.
    Senator Schumer. I would like to ask Mr. Leonard some 
questions. As you know, I have great concerns about this new DC 
Air in terms of the cost, in terms of the ability to fly, and 
in terms of their independence.
    Mr. Leonard. Yes, sir.
    Senator Schumer. Now, you have had certain preliminary 
discussions, or at least you have indicated that you would be 
interested in acquiring those slots on your own or somehow in 
conjunction with DC Air. Do you believe your costs would be 
cheaper than a DC Air/American proposed merger, and if so why?
    Mr. Leonard. Our costs would be substantially below the 
American/DC Air situation primarily because we start with a 
much lower base. Our costs versus American's are about 30 
percent lower than American's at a 500-mile stage length, and 
so DC Air will start with high costs, i.e. American's costs on 
the jet portion of it.
    Mr. Johnson has testified that he intends to expand the 
rest of the system with regional jets. Regional jets are much 
more expensive to operate on a seat-mile basis than our Boeing 
717s. So if you start with high costs and then you downsize the 
size of the airplane, you cannot under any circumstances--Mr. 
Johnson is an excellent businessman and has an excellent track 
record, but he cannot defy the laws of physics here. Smaller 
airplanes, RJs, cost more to operate than 717s on a seat-mile 
basis.
    Senator Schumer. Now, did you have any discussions? Did you 
let either United, US Air, DC Air, whoever, know that you were 
interested in getting involved here and maybe getting some or 
all of those slots?
    Mr. Leonard. Yes, Senator, we have let all three of those 
parties know--United, US Air and Mr. Johnson--that we would be 
certainly willing to partner with Mr. Johnson, take over the 
slots and run them ourselves, any number of things. We 
submitted several different plans to do that.
    Senator Schumer. Would you like to get those slots at the 
cost Mr. Johnson is getting them at?
    Mr. Leonard. We can arrange financing and buy those slots 
in short order, I can assure you.
    Senator Schumer. What happened when you made these 
requests? Did you hear anything back?
    Mr. Leonard. We didn't hear anything back from United. We 
had one limited conversation with US Air. We did have a number 
of conversations with Mr. Johnson and at the end of the day he 
decided to go with American.
    Senator Schumer. And why do you think he did that, given 
that you will be able to offer better service, lower-cost 
service, at least in your opinion, to the people of New York 
and elsewhere?
    Mr. Leonard. He obviously got a better deal from American 
than he thinks he could have gotten with us. I happen to 
disagree with him. I think he would actually make more money 
with us, but obviously with more risk with us than with 
American.
    Senator Schumer. Now, Professor Levine, you said that the 
DC Air proposal didn't support the laugh test. Could you 
elaborate on what you mean by that?
    Mr. Levine. Yes. That is not at all an insult to Mr. 
Johnson, who I understand to be an excellent businessman.
    Senator Schumer. I agree with you. He is an excellent 
businessman, very successful. That has nothing to do with it. 
Our job is to provide the best service to the consumers.
    Mr. Levine. The laugh test comment was related to the idea 
that DC Air as a carve-out to cure the monopoly problem in the 
Washington area just simply doesn't make any sense. What you 
are going to end up with is a relatively high-cost, small-
aircraft operation that will be tied by a frequent flyer 
program to either American or United, depending on whether you 
are talking about this version of the deal or the previous 
version of the deal. It is clearly designed, as Mr. Carty 
testified last week before the Commerce Committee, to work as a 
partner with American.
    I have already testified that I have some doubt that 
American and United will be vigorous price competitors. I have 
no doubt that they will elbow each other for the last point of 
market share. But that they will be vigorous fundamental 
competitors I think defies logic and defies anything you might 
know about game theory.
    It is clear that Mr. Johnson's role in this is to continue 
to provide service to small communities who are thought to be 
politically very important, and I don't mean to minimize at all 
the significance of that.
    Senator Schumer. It is far more than politically important. 
It is life and death for a lot of these communities.
    Mr. Levine. I don't doubt that. I am trying to, I guess, 
put together the strategic logic behind the construction of the 
deal, if you will. It was hoped that the DC Air aspect would 
operate as a sort of a reassurance and would gain political 
support for the deal as a result of being set up in that 
particular way. As originally constructed, it was meant to 
answer the objection that the slots will just migrate into 
other uses.
    The removal of the flip provisions calls that into some 
doubt as well, but I am not sure that this would be a good idea 
even if you got Mr. Johnson to swear on a large stack of 
whatever he holds dear that he would operate these routes 
forever. I still think there would not be effective competition 
in the Washington area from this.
    Senator Schumer. These slots are extremely valuable, 
obviously.
    Mr. Levine. Yes.
    Senator Schumer. Do you think a different arrangement could 
be made so that we would get a lower-cost airline flying to 
these places?
    Mr. Levine. With all due respect, Senator, I really oppose 
the idea of regulatory tinkering in which you decide that Joe 
Leonard or Bill Franke are really nice guys and they ought to 
get the slots and operate. The experience, by the way, with 
those experiments has been rather poor. The slots tend to end 
up ultimately in the hands of the big airlines, for reasons 
that Professor Kahn explained a couple of minutes ago.
    So I would hate to see a fundamentally anticompetitive deal 
approved with a kind of a carve-out bone tossed to a low-fare 
competitor who would have the incentive to operate at lower 
fares in Washington.
    Senator Schumer. Because you feel that wouldn't last?
    Mr. Levine. I don't think it would last and I don't think 
it would solve the fundamental problem, which is that the 
Northeast--Boston, New York, Philadelphia, Washington--
themselves are the lynch pin of any network system and it is 
all being gathered into one duly administered fold.
    Senator Schumer. You are saying, in other words, that in 
the context of the big merger a little solution like this 
wouldn't work?
    Mr. Levine. Absolutely, sir.
    Senator Schumer. I have got it, OK.
    Thank you, Mr. Chairman. I thank our panel.
    Senator DeWine. Thank you, Senator Schumer.
    Let me thank our panel very much. We appreciate your time. 
Your testimony has been very helpful. Thank you.
    We invite our next panel to begin to come up as I introduce 
you.
    Donald Carty has been President of American Airlines since 
1995, and became Chairman, President and Chief Executive 
Officer of American Airlines in 1998. He has testified before 
our Committee before and we certainly welcome him back today.
    James Goodwin is Chairman and Chief Executive Officer of 
UAL Corporation and United Airlines. Prior to his appointment 
in March 1999, he served as President and Chief Operating 
Officer. His service to United dates back to 1967, and he has 
held senior vice president positions for both the North 
American and international markets, as well as mechanical 
operations. He has also testified before this Committee and we 
welcome him back as well.
    William Compton is President and CEO of Trans World 
Airlines. He joined TWA in 1968 as a pilot and has worked for 
the airline ever since. He has maintained his pilot's license 
and continues to fly for the airline on a monthly basis.
    Robert Johnson is Chairman and CEO of DC Air. Mr. Johnson 
is also the Chairman and CEO of BET Holdings. He has also 
served on the US Airways Board and as a member of the Board of 
Governors for the Rock and Roll Hall of Fame, in Cleveland, 
Ohio. Mr. Johnson testified before the Subcommittee last June. 
Mr. Johnson, thank you for coming back again.
    Stephen Wolf is the Chairman of US Airways and of the 
company's airline operating arm, US Airways, Inc. Previously, 
Mr. Wolf served from 1987 through July 1994 as Chairman and CEO 
of United Airlines. Mr. Wolf's aviation career began in 1966 
with American Airlines. He has also testified before us on a 
number of occasions.
    Mr. Carty, we will start with you. Thank you, all of you, 
for your patience and waiting, and we are eagerly anticipating 
your testimony, particularly in light of the last panel's 
comments.

 STATEMENT OF DON CARTY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
              AMERICAN AIRLINES, FORT WORTH, TEXAS

    Mr. Carty. Good morning, Senator DeWine and Senator 
Schumer.
    Senator DeWine. Good morning.
    Mr. Carty. Thank you, in turn, for the opportunity once 
again to address this committee. Rather than read aloud my 
written statement, I would like to spend a couple of minutes 
trying to respond to specific concerns raised by several 
members of the Committee in your recent letter to the 
Department of Justice, by members, of course, of the previous 
panel, and by you, Chairman DeWine, in your testimony before 
the Senate Commerce Committee last week.
    Senator DeWine. That would be helpful.
    Mr. Carty. You are quite right to be concerned about 
industry consolidation and its ultimate impact on the consumer. 
So are we, but the real question is not whether any given 
transaction is desirable in the abstract. Rather, the question 
should be whether a given transaction is more desirable and 
pro-competitive than its alternative.
    In that regard, I believe that there is an overwhelming 
consensus that our proposed acquisition of the assets of TWA is 
by far a better alternative than allowing that carrier to 
simply shut down and liquidate, and that clearly was the only 
alternative for TWA. As Bill Compton, I am sure, will testify 
today, no other carrier was willing to acquire TWA, none.
    To turn the TWA deal would, as a number of people have said 
this morning, simply put 20,000 people out of work and 
eliminate the highly competitive St. Louis hub, and neither 
could possibly be beneficial either to consumers or helpful to 
the economy.
    The proposed United/US Airways transaction is clearly more 
complex. I would strongly argue that American's role in the 
United/US Airways deal is to provide the remedy that certainly 
we, but also many others sought in order to make the 
transaction pro-competitive.
    I was a little bit amused to hear charges made both last 
week and today that our agreement with United must be part of 
some grand conspiracy to divide up the market between us and 
then simply to declare a truce on competition. To us, that 
really is an absurd proposition, and I say that for a couple of 
reasons.
    First, if there were a conspiracy, then clearly the Justice 
Department would have to be a co-conspirator because if it 
wasn't for express concerns about the magnitude of the original 
transaction, United would never have entered into discussions 
with us that led to this deal.
    Second, I am fairly sure that the last thing that United 
had in mind a year ago when they began to think about this 
transaction was to make American a stronger player in the 
Northeast. In fact, contrary to what has been said by a number 
of people today, as Metropolitan Washington Airports Authority 
Chairman Jim Wilding stated, United and American are like the 
cobra and the mongoose. We are as fierce competitors as they 
come, and have been for many, many years.
    In fact, American entered into our proposed transactions 
with United and DC Air because we shared precisely the same 
concerns that many of you did about the original merger 
proposal. In our view, without remedies, under the original 
deal United would simply have become too large, with a network 
far greater certainly than ours. And it would have dominated, 
in particular, the Washington market, and its relationship with 
DC Air was troublesome to all of us.
    Now, our role in the transaction is to explicitly provide a 
remedy to each and every one of those problems. I have to 
remind the Committee that, to date, we have been a relatively 
small player in the Northeast corridor. By almost any measure, 
most of our competitors are far stronger in the Northeast than 
we are. After all, our closest hub is some 600 miles away, in 
Chicago. We are not in the shuttle markets. For us, the 
Washington airports have for many years simply been spokes from 
our hubs in Dallas/Fort Worth and Miami and, of course, in 
Chicago.
    In contrast, using the strength of their shuttles and high-
frequencies in all the airports in the corridor, the dominant 
north-south carriers on the East Coast are Delta and US 
Airways. United operates a major hub at Dulles Airport. Both US 
Airways and Southwest have hubs at Baltimore. Continental has a 
huge hub at Newark. Delta operates the largest international 
network in the Nation at JFK, and last year the Department of 
Transportation gave JetBlue 75 slots to establish a hub at JFK.
    So let's make it clear. In the Northeast corridor, American 
does not have the resources to divide the market because, to 
date, we don't have anything to divide. For us, this 
opportunity is about entering or expanding, at least, in an 
area of the country in which others have been firmly 
entrenched. In fact, insofar as these markets are concerned, 
American is the new entrant.
    By acquiring planes, gates and slots from United, we are 
bolstering our network in a part of the country where our 
competitors are already firmly entrenched and substantially 
larger than we are. As a consequence of this deal, we will for 
the first time be able to compete much more vigorously with 
them.
    Now, some have argued that US Airways' slots and gates 
should be divested to new entrant, low-cost carriers. That is, 
in fact, in my view, what is on the table with the proposed 
divestiture to DC Air. Over the past several weeks and months, 
I have gotten to know Bob Johnson and I can tell you that Bob 
Johnson is for real.
    American's role as an investor and a marketing partner with 
DC Air is simply to provide the resources and the cooperation 
to assure the success of DC Air. And make no mistake about it. 
If the transaction is approved, the Northeast will see a 
vigorous new competitor in DC Air. Moreover, this is the only 
competitor that has pledged not only to providing competitive 
air fares, but to serving the markets that clearly would lose 
service if the slots and gates were divided up among several 
others.
    DC Air is going to give United, it is going to give Delta, 
it is going to give Continental, Southwest, Atlantic Coast, 
JetBlue and AirTran a run for their money in the Northeast. 
Quite frankly, at American we are very proud to be a partner of 
theirs.
    In short, we have stepped up to the plate to provide very 
explicit, measurable remedies to the most pressing problems of 
the proposed United/US Airways merger. By any measure, this 
transaction will result in less concentration and more 
competition than what was in the original proposal.
    I thank you very much for the time this morning and I will 
be glad at the right time to be responsive to questions.
    [The prepared statement of Mr. Carty follows:]

      Statement of Don Carty, Chairman and CEO, American Airlines

    Good morning. Thank you for the opportunity to appear again before 
this Subcommittee and testify on consolidation in the airline industry. 
Ever since United Airlines proposed acquiring US Airways last May, 
airline consolidation has clearly been on the Congressional radar 
screen. And rightly so.
    I note that last week several Members of this Committee wrote to 
the Department of Justice to express strong concerns about the 
potential impact of United's proposal. That same day Chairman DeWine 
explained those concerns in testimony before the Senate Commerce 
Committee. Many others have warned that its approval would inevitably 
spark more mergers or acquisitions. In fact, I testified last September 
that United's proposed merger with US Airways had triggered us at 
American Airlines to think long and hard about a defensive response. 
That examination resulted in our announcement last month of an 
agreement that directly addresses many of our concerns about the size 
and scope of the United/US Airways merger while positioning American as 
a much more vigorous competitor in the Northeast.
    Coincidentally, an opportunity arose for us to enter into a 
completely separate and unrelated transaction. Quite simply, TWA's 
continuing downward financial spiral had finally reached a point of no 
return, threatening the jobs of its 20,000 employees and air service to 
communities throughout the nation's heartland. With only $20 million in 
the bank and needing $40 million to meet its obligations necessary for 
operating a normal schedule, TWA filed bankruptcy on January 9. We 
agreed to acquire substantially all of TWA's assets and have provided 
it $200 million in financing so that the airline can continue to fly 
during bankruptcy. As I will discuss in more detail later, the 
immediacy of TWA's situation as well as the carrier's significantly 
smaller size clearly dictates that this transaction be treated swiftly.
    Let me begin, however, by addressing the broader question of 
airline consolidation. In an increasingly globalized business such as 
ours, competition will suffer if one network is allowed to dwarf all 
other networks. From a customer perspective, the benefits of a much 
broader network are clear. Our customers--both leisure and business 
travelers--increasingly expect their airline of choice to be able to 
take them everywhere they want to go. Accordingly, if one airline is 
able to grow its route network significantly larger than its 
competitors, that airline would have a competitive advantage.
    The original United/US Airways proposal presented just such a 
scenario. Had its initial proposal been approved, United would have 
become 50 percent bigger than its nearest competitor, namely us. As you 
might imagine, for a company like ours that is determined to create a 
domestic and international network that is second to none, this got our 
attention. For air travelers, the unbalanced landscape caused by the 
lack of one or more competing networks of similar size and breadth 
would have surely led, I believe, to an eventual reduction in overall 
competition.
    The ultimate size of United's route network was not the only cause 
for concern. As we all know, high market concentration on routes to and 
from the nation's capital led United and US Airways to propose creating 
a new entrant at Reagan National Airport named DC Air. While I tip my 
hat to both carriers for being able to persuade such an accomplished 
businessman as Robert Johnson to get mixed up in our industry--where 
margins are think and headaches plenty--I think the relationship 
envisioned between United and DC Air caused most everyone, both inside 
government and out, to be somewhat skeptical. Simply put, it was hard 
to see any competitive benefit coming from the transaction given that 
DC Air's aircraft, flight crews, operational support, and management 
staff were mostly being supplied by either United or US Airways.
    The potential effect on competition in the Northeast and on routes 
between United's hubs and US Airways' hubs was also problematic. 
American has a relatively small share of the key business routes 
between Boston, New York, and Washington, D.C. Our fear was that the 
proposed merger would entrench United, complete with its new, vastly 
larger transcontinental network, in an effective duopoloy with Delta in 
these shuttle markets, an outcome that rightly alarmed outside 
observers as well.
    In the closing months of last year, it became apparent that the 
original United/USAirways proposal would not stand. This prompted 
American--and a number of other competitors--to enter into discussions 
with the merger parties regarding proposals of asset sales.
    In early January, we agreed to acquire certain key strategic assets 
from US Airways and to acquire a substantial stake in DC Air--both 
contingent upon the reconstituted United/US Airways merger receiving 
regulatory approval. In a nutshell, we would acquire from US Airways 14 
gates, 36 slots, 66 owned aircraft and an additional 20 leased 
aircraft, as well as the gates and slots necessary for us to operate 
half of the US Airways Shuttle. In addition, to introduce immediate new 
competition on United/US Airways hub-to-hub routes, we agreed to 
guarantee that the following routes would be served by at least two 
roundtrips a day for the next 10 years: Philadelphia-Los Angeles, 
Philadelphia-San Jose, Philadelphia-Denver, Charlotte-Chicago, and 
Washington, D.C.-Pittsburgh.
    As for DC Air, we agreed to take a 49 percent stake in the carrier 
and enter an exclusive marketing arrangement with it in which DC Air 
will participate in American's frequent flyer program. We will also 
provide DC Air with 11 100-seat Fokker 100 aircraft in an arrangement 
by which American Airlines personnel will be flying and maintaining AA 
aircraft marketed as DC Air service. American will also have the right 
of first refusal on the acquisition of the remaining 51 percent of DC 
Air.
    Taken together, we believe these transactions relieve the 
competitive imbalance in the Northeast. They will also increase 
competition by making DC Air a real competitor with significant 
independent backing while affording us, for the first time, a 
significant presence in Washington, D.C. and the Northeast. American, 
for example, now accounts for roughly 13 percent of passenger boardings 
at Reagan National and far less than that at Washington Dulles and BWI. 
As in the Washington area, our expanded presence throughout the upper 
East Coast will ensure that there are at least three major competitors 
of comparable size on the Shuttle routes and at least two competitors 
on the hub-to-hub routes. And, passengers travelling along the East 
Coast will also benefit by our establishing another source of 
connecting service to compete with the service offered by United, 
Delta, Continental and other East Coast competitors.
    Obviously, we have given the Justice Department and the Congress a 
lot to digest. American looks forward to working with both Justice and 
this Subcommittee as you attempt to determine whether what we have put 
on the table sufficiently remedies the United/US Airways merger and, 
ultimately benefits the flying public.
    On a more personal note, regardless of Justice's disposition of the 
transactions before it, I must say that I have gotten to know Robert 
Johnson over these past few months and am most impressed. He is a take-
charge executive who knows how to provide consumers a service, and 
quite frankly, how to make money. Let there be no mistake, Robert 
Johnson and his team will run DC Air. He will be the majority owner and 
he will make the decisions. He has already begun recruiting a seasoned 
management team. American will be his marketing partner, and we will 
work closely together to add value to our respective networks. DC Air 
will be a valuable addition to our industry and bring to it the first 
minority-owned airline. I know that I speak for each and every one of 
American's 103,000 employees when I say that it has taken our industry 
far too long to reach this milestone and that we at American are proud 
to be affiliated with it.
    As for the impact of America's entry into this equation, Jim 
Wilding, the president of the Metropolitan Washington Airports 
Authority, was recently quoted as being highly enthusiastic about the 
vigorous competition that American's affiliation with DC Air will bring 
to the Washington market in comparison with the original proposal. In 
Mr. Wilding's words: ``If American and United are anything, they're 
competitors. They're like the cobra and the mongoose wherever they 
go.''
    Now let me turn to TWA--a storied but beleaguered airline that 
after 12 consecutive years of heavy losses and 3 bankruptcies has, in 
spite of valiant efforts by Bill Compton and his team, simply run out 
of money, time, and options. Carl Icahn has stripped this company over 
a period of years, selling assets, such as the prized route rights to 
London's Heathrow Airport, just to pay the bills. Going into this 
winter, typically the leanest months in the airline business, with the 
price of fuel soaring, TWA had nothing left to sell or mortgage that 
wasn't already encumbered. It also had a debt of $100 million coming 
due on January 15. Unable to secure or justify additional financing 
from traditional sources and with no one willing to purchase the 
airline, TWA in early January faced the very real likelihood that it 
would have to shut down and liquidate.
    From time to time, we at American had looked at TWA as a possible 
merger candidate. Indeed, its centrally located St. Louis hub provides 
a nice complement to our operations at capacity constrained Chicago 
O'Hare. In addition, TWA's current management team had--in the face of 
some formidable obstacles--done a very good job of improving the 
airline's operation, and in particular, of modernizing its fleet. 
Unfortunately, very high ownership costs on TWA's new fleet and an 
unusual arrangement that allows an entity owned by Carl Icahn to sell 
TWA's ticket inventory at a substantial discount, made a potential AA/
TWA merger a non-starter.
    TWA's bankruptcy filing and looming collapse three weeks ago, 
however, presented a far different set of circumstances. We stepped in 
to provide--when no one else would--the cash TWA had to have to keep 
operating. We are proposing to acquire substantially all of TWA's 
assets, to hire all of TWA's employees and to continue a hub operation 
in St. Louis. Obviously, this transaction, which excludes certain TWA 
contracts such as Mr. Icahn's deal, is contingent on bankruptcy court 
approval.
    We look forward to adding TWA's 20,000 employees to the American 
Airlines family. We are keenly aware of TWA's illustrious history and 
know that were it not for the hard work and great performance of the 
people throughout TWA, they would not be the perfect fit for American 
that we believe they are. We also recognize what a good corporate 
citizen TWA has been in the state of Missouri and I can assure you that 
our company will be as well.
    In closing, permit me to be blunt. Time is of the essence with 
regard to TWA. We at American cannot commit our shareholders' money to 
keep TWA afloat indefinitely. There is simply not enough collateral for 
debtor in possession financing. Also, I fear, uncertainty will only 
serve to accelerate TWA's collapse as travel agents will likely book 
away from TWA, as was the case with the demise of Eastern Air Lines a 
decade ago. Similarly, consumer uncertainty will eventually cause 
travelers to not advance book flights on TWA, effectively shutting off 
the airline's already severely limited cash flow.
    As for the Justice Department review of this transaction, I think 
it is fairly evident that there is a failed firm here, which in itself 
should serve to expedite the review process. Even so, the transaction 
gives rise to very few competition issues. Indeed, the market share of 
this one-time giant of the skies has now fallen to only 3.9 percent in 
2000. Finally, even if TWA were not failing and therefore unable to 
compete on a going-forward basis, there are only two hub-to-hub routes 
where American and TWA both offer non-stop service. In the case of St. 
Louis-Chicago, for example, Southwest Airlines, which has 12 gates at 
St. Louis Lambert, provides 15 daily nonstop roundtrips between St. 
Louis and Chicago Midway, while United provides 4 daily nonstops 
between St. Louis and Chicago O'Hare.
    The bottom line is that TWA's situation presents a truly unique and 
exceptional circumstance. Indeed, our acquisition of its assets is not 
contingent on approval of the other deals. As such, it is truly a 
stretch of the imagination to believe that the American/TWA transaction 
would in any way trigger the merger of far larger airlines. Instead, 
what is before you is our taking on a financial risk that no other 
airline was willing to take and commitments to the 20,000 TWA employees 
and their families that no one else would make.
    Mr. Chairman, that concludes my statement. I would be happy to 
answer any questions you or the Members of this Subcommittee may have.

    Senator DeWine. Mr. Carty, thank you very much.
    Mr. Goodwin?

  STATEMENT OF JAMES E. GOODWIN, CHAIRMAN AND CHIEF EXECUTIVE 
          OFFICER, UNITED AIRLINES, CHICAGO, ILLINOIS

    Mr. Goodwin. Chairman DeWine, Senator Schumer, on behalf of 
United Airlines' more than 100,000 employees, it is good to be 
back in front of this committee, and I welcome the opportunity 
to discuss our proposed merger with US Airways.
    Last June, I appeared before this Committee to explain why 
United believes our customer-driven merger with US Airways 
should be approved, and how this transaction will significantly 
benefit consumers and the communities served by both carriers. 
Since that time, there have been several developments that 
United believes enhance the competitive benefits of our 
proposed merger with US Airways, and I appreciate the 
opportunity to describe them to the committee.
    Simply put, we believe a good deal for consumers has gotten 
even better. Let me explain the significant steps we have taken 
in response to concerns you and others have raised. Also, I 
wish to discuss the pro-consumer impact of other transactions 
related to our proposed merger.
    First, I would like to turn to DC Air. When I appeared 
before this Committee last year, United was very enthusiastic 
about the creation of DC Air, an independent carrier that will 
enhance competition at Reagan Washington National Airport.
    The committee's reaction to DC Air was cautious. 
Specifically, some Members of Congress were skeptical that DC 
Air would compete vigorously against us at United Airlines in 
the initial phases of the startup operation. There was also 
some concern expressed that DC Air lacked the experience to be 
a viable, long-term competitor. Last month, American Airlines 
entered into an agreement to acquire a 49-percent stake in DC 
Air, and we believe this transaction fully responds to the 
committee's concerns.
    First, the transaction provides DC Air with access to a 
substantial network and operating expertise which will allow it 
to provide strong competition against United. Now, American 
will provide the support that United would have provided to DC 
Air.
    Second, as this Committee knows, United and American are 
like the Hatfields and the McCoys when it comes to competing 
vigorously against one another, and I fully expect American to 
help DC Air carry on that tradition. Finally, with American as 
a partner, concerns about DC Air's long-term staying power 
should be laid to rest.
    In addition to DC Air, some concerns were raised about a 
potential loss of competition on a number of routes where 
United and US Airways were the sole non-stop competitors. 
Again, we have taken corrective action, we believe, that fully 
addresses that concern.
    Last month, we entered into an agreement with American 
Airlines under which it will provide non-stop competitive 
service on these key hub-to-hub routes. This service will 
ensure a minimum of two-carrier, non-stop competition on key 
United/US Airways hub-to-hub routes, thereby ensuring that 
competition is not only preserved but enhanced.
    There are additional elements of our agreement with 
American, including a joint venture to operate the Washington-
New York-Boston shuttle, and this agreement increases consumer 
choice in the Washington-New York-Boston shuttle markets.
    So what does United believe the net effect of our proposed 
merger and these recent developments will be for consumers and 
competition? We believe domestic competition will be enhanced 
and consumer choice and convenience will be improved. In fact, 
the New York Times in an editorial on January 11, 2001, 
expressed the opinion that the United/American/DC Air 
agreements are in the public interest. The Times went on to 
note, and I quote, ``This deal should assuage any lingering 
concerns about the United/US Airways merger. Indeed, travelers 
in the Northeast will probably see more competition as a result 
of these agreements,'' end quote.
    The United/US Airways merger will create a 21st century 
airline that offers consumers improved choices for more 
convenient single-carrier service on thousands of routes around 
the world. This transaction will enable United to fully use US 
Airways' assets to compete vigorously in a way not currently 
possible due to that carrier's financial challenges.
    Second, the transactions also will increase the number of 
competitors and level of competition in the Northeast region. 
Currently, three network carriers compete in the Northeast 
region--US Airways, Delta and Continental. As a result of these 
transactions, there will be four key network competitors--
United, American, Delta and Continental. In addition, Southwest 
continues to expand significantly its competitive presence in 
the Northeast, as do JetBlue and AirTran.
    Third, the transactions will greatly enhance inter-hub 
competition. I was pleased to see that Transportation Secretary 
Norm Mineta acknowledged the importance of inter-hub 
competition during his recent confirmation hearings. Secretary 
Mineta is absolutely correct. United believes consumers will 
benefit greatly from improved inter-hub competition resulting 
from our proposed merger. The transaction will enable United's 
Charlotte hub to compete more vigorously with Delta's Atlanta 
hub. Also, it will permit United's Philadelphia hub to compete 
more vigorously with Continental's Newark hub.
    In addition to those competitive benefits, I would like to 
take a moment to reiterate the significant guarantees United 
has made to the traveling public, employees of United and US 
Airways, and the communities served by US Airways.
    As you may recall, we have made the ground-breaking 
commitment that no United or US Airways employee will be 
furloughed because of this transaction. The daily reports of 
layoffs at companies across the country underscores the 
historic and important nature of this pledge to the employees 
of both companies and the communities in which they live.
    In addition, we will honor all labor agreements that both 
carriers currently have in place. Also, as I testified in June, 
United will continue to serve all cities currently served by US 
Airways. Further, for 2 years following the completion of our 
proposed merger, United has made the extraordinary commitment 
not to increase structure fares, with the exception only for 
increases in fuel costs and the Consumer Price Index.
    Finally, when I appeared before you in June, Senator 
Specter inquired about plans for a maintenance center in 
Pittsburgh. I am pleased to inform you that United has reached 
an agreement with the Commonwealth of Pennsylvania and 
Allegheny County contingent on regulatory approval to build 
that maintenance facility in Pittsburgh.
    Mr. Chairman, I would like to conclude by again thanking 
you for the opportunity to testify. We have listened and 
responded to your concerns. We continue to strongly believe our 
proposed merger should be approved, and I look forward to 
responding to any questions you and the other Senators may 
have.
    [The prepared statement of Mr. Goodwin follows:]

    Statement of James E. Goodwin, Chairman and CEO, United Airlines

    Chairman Hatch, Ranking Member Leahy, and other Members of this 
distinguished Committee, on behalf of United Airlines' more than 
1000,000 employees worldwide, thank you for the opportunity to appear 
again before you to discuss our proposed merger with US Airways.
    Last June, I appeared before your Subcommittee on Antitrust, 
Business Rights and Competition to explain why United believes our 
customer-driven merger with US Airways should be approved and how this 
transaction will significantly benefit consumers and the communities 
served by both carriers. Since that time, there have been several 
relevant developments that United Believes enhance the competitive 
benefits of our proposed merger with US Airways. We appreciate this 
opportunity to describe them to the Committee. Simply put, we believe a 
good deal for consumers has gotten even better.
    In my testimony before you last year, I pledged that I would listen 
carefully to concerns you raised and, to the extent possible, United 
would attempt to respond constructively to them. Let me explain 
significant steps we have taken in response to concerns you and others 
have raised. Also, I wish to discuss the pro-consumer impact of other 
transactions related to our proposed merger.
    Let me first turn to DC Air. When I appeared before your 
Subcommittee last year, United was very enthusiastic about the creation 
of DC Air, an independent, entrepreneurial carrier that will enhance 
competition at capacity-controlled Reagan Washington National Airport. 
In addition to providing consumers in the Washington-area with a new 
competitive choice in air service, we were pleased that DC Air 
committed to maintain the current service pattern from Reagan National 
to many small communities. United has a longstanding commitment to 
small city service and this was an important consideration for us.
    The Subcommittee's reaction to DC Air was cautious. Specifically, 
some Members of Congress were skeptical that DC Air would compete 
vigorously against United due to our commercial agreements with DC Air 
that were intended to assist that carrier in the initial phase of its 
start-up operations. There tow was some concern expressed that DC Air 
lacked the experience to be a viable, long-term competitor.
    Last month, American Airlines entered into an agreement to acquire 
a 49 percent stake in DC Air. We believe this transaction squarely and 
fully responds to concerns Members of Congress raised. First, the 
transaction provides DC Air with access to a substantial network and 
operating expertise, which will allow it to provide strong competition 
with United Now American will provide the support United would have 
provided to DC Air. Second, as this Subcommittee knows, United and 
American are like the Hatfields and McCoys when it comes to competing 
vigorously against one another. We fully expect American to help DC Air 
carry-on this tradition. Finally, with American as a partner, concerns 
about DC Air's long-term staying power should be laid to rest.
    In addition to DC Air, some Members also expressed concern about a 
potential loss of competition in a limited number of city-pairs where 
United and US Airways were the sole non-stop competitors. Again, we 
have taken corrective action we believe fully addresses that concern. 
Last month, we entered into an agreement with American under which it 
will provide competitive non-stop service on these key hub-to-hub 
routes. Specifically, American has agreed to provide non-stop service 
on the following routes for a minimum of 10 years: Philadelphia to Los 
Angeles; Philadelphia to San Jose; Philadelphia to Denver; Charlotte to 
Chicago O'Hare; and Reagan National to Pittsburgh (service to be 
provided by DC Air). This service will ensure a minimum of two-carrier, 
non-stop competition on key United/US Airways hub-to-hub routes. In 
some cases, as I will explain in a moment, United also agreed to sell 
or lease to American facilities and equipment to support this 
competitive service.
    Mr. Chairman, let me be clear that our agreement with American to 
ensure non-stop competition in these key United/US Airways hub-to-hub 
routes will not simply maintain the competitive Status quo. To the 
contrary, the agreement will improve non-stop competition in these 
markets. By increasing the number of combined frequencies and overall 
seats on these non-stop routes, competition and consumer choice will be 
enhanced.
    However, our efforts to make a transaction that is good for 
consumers enable better did not stop there. Let me explain.
    Last month, we agreed to sell American key US Airways assets at 
several capacity and facility constrained airports to ensure that it 
will be a meaningful competitor to United and other network carriers. 
At New York's LaGuardia Airport, we agreed to sell American 22 jet 
slots and 14 commuter slots. We also agreed to sell American five gates 
at LaGuardia, three gates at Reagan National, three gates at Boston's 
Logan Airport, one gate at Philadelphia International Airport, one gate 
at Atlanta Hartfield International Airport and one gate at Newark 
International Airport.
    In addition to slots and gates, we also agreed to sell American a 
large number of US Airways aircraft. Specifically, we agreed to 
transfer to American forty Foker 100 aircraft, thirty-four boeing 757 
aircraft and twelve MD-82 aircraft.
    Mr. Chairman, again, we did not stop there. United also entered 
into a 22-year joint venture agreement with American to jointly operate 
the US Airways Shuttle. Under this agreement, United and American will 
each fly half of the daily Shuttle flights between Reagan National, New 
York's LaGuardia Airport and Boston's Logan Airport, with each airline 
using its own planes and crews. Together, we will jointly market a 
Shuttle product and coordinate all relevant aspects of the operations. 
To ensure that consumers have the greatest choice possible, under the 
joint agreement, customers will be able to select their frequent flyer 
program of choice possible, under the joint agreement, customers will 
be able to select their frequent flyer program of choice--either United 
Mileage Plus or American's AAdvantage program--and earn reward and 
recognition regardless of which airline's Shuttle flight they have 
selected.
    Mr. Chairman, let me make several brief points relating to our 
agreement with American to jointly operate the Shuttle. This agreement 
increases consumer choice in the Washington, New York and Boston 
Shuttle markets. Instead of having the limited choice between US 
Airways and Delta as currently is the case, consumers of Shuttle 
service will have an added option of choosing between United, Delta or 
American. Moreover, our cooperative relationship with American on the 
Shuttle is strictly limited to the operation of the Shuttle. On all 
other routes, as is the case today, United and American will remain 
vigorous competitors.
    So what does United believe the net effect of our proposed merger 
and these recent developments will be for consumers and competition? We 
believe domestic competition will be enhanced, and consumer choice and 
convenience will be improved. In fact, the New York Times, in an 
editorial on January 11, 2001, expressed the opinion that the United/
American/DC Air agreements ``are in the public interest.'' The Times 
went on the note, ``This deal should assuage any lingering concerns 
about the United-US Airways merger. Indeed, travelers in the Northeast 
will probably see more competition as a result of these agreements.''
    First, the United-US Airways merger will create a 21 st 
Century airline that offers consumers significantly improved choices 
for more convenient, single-carrier service on thousands of routes 
around the world. The transaction will enable United to fully use US 
Airways' assets to compete vigorously in a way not currently possible 
due to that carrier's financial challenges.
    Second, the transactions will greatly enhance inter-hub 
competition. I was pleased to see DOT Secretary Mineta acknowledged the 
importance of inter-hub competition during his recent confirmation 
hearing before the Senate Committee on Commerce, Science and 
Transportation. Secretary Mineta is absolutely correct. United believes 
consumers will benefit greatly from improved inter-hub competition 
resulting from our proposed merger. The transaction will enable 
United's Charlotte hub to compete more vigorously with Delta's Atlanta 
hub. Also, it will permit United's Philadelphia hub to compete more 
vigorously with Continental's Newark hub.
    Third, by creating a finished national airline network, the 
combined United/US Airways will have the scope and network efficiencies 
to compete vigorously in ever region of the country.
    Fourth, the transactions also will increase the number of 
competitors and level of competition in the Northeast region. 
Currently, three network carriers mainly compete in the Northeast 
region--US Airways, Delta and Continental. As a result of transactions, 
there will be four key network competitors--United, American, Delta and 
Continental--in this region. In addition, Southwest continues to expand 
significantly its competitive presence in the Northeast and according 
to recent DOT data, Southwest remains the largest domestic O&D carrier.
    Finally, American's separate deal to acquire 49 percent of DC Air 
will also ensure strong competition between United and DC Air in the 
Washington, DC, region. The agreement gives DC Air a strong partner and 
will give its customers access to American's vast global network, which 
will also promote vigorous competition with United.
    In addition to these competitive benefits, let me take a moment to 
update the Committee on guarantees United has made to the traveling 
public, employees of US Airways and communities served by US Airways. 
As you Subcommittee will recall, we made the groundbreaking commitment 
that no United or US Airways employee will be furloughed because of 
this transaction. The daily reports of layoffs at companies across the 
country underscore the historic and important nature of this pledge to 
the employees of both companies and the communities in which they live. 
In addition, we will honor all labor agreements that both carriers 
currently have in place. Also, as I testified in June, United will 
continue to serve all cities currently served by US Airways. Further, 
for two years following the completion of our proposed merger, United 
has made the extraordinary commitment not to increase structure fares, 
with exceptions only for increases in fuel cost and the consumer price 
index.
    More recently, we have made several other important commitments. 
United has committed to build multi-million dollar maintenance facility 
in the Pittsburgh area. That decision is very important to the economy 
of the Pittsburgh area and Western Pennsylvania, and an important piece 
of our operational plan for the combined carrier. We too have committed 
to maintain the reservation centers that US Airways currently operates 
in Winston-Salem, North Carolina, Syracuse, New York and Pittsburgh. 
Again, we recognized the importance of these facilities to the local 
economies and we will be pleased to have them join our other 
reservation centers in providing the best service possible to our 
valued customers.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify. We have listened listened and responded to your 
concerns. We continue to stronly believe our proposed merger should be 
approved. It is in the best interest of consumers, communities served 
by both carriers and the U.S. economy. I'd be pleased to respond to 
questions at the appropriate time.

    Senator DeWine. Mr. Goodwin, thank you very much.
    Mr. Compton?

STATEMENT OF WILLIAM F. COMPTON, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, TRANS WORLD AIRLINES, ST. LOUIS, MISSOURI

    Mr. Compton. Thank you, Chairman DeWine and Senator 
Schumer, for allowing me, on behalf of the 20,000 TWA 
employees, to testify here today. I appreciate the chance to 
explain why our decision to pursue an asset purchase agreement 
with American Airlines should be approved, and why this 
transaction is a good global solution for TWA's customers, its 
employees, retirees, creditors, and the communities served by 
both carriers.
    I would like to begin by giving you my personal perspective 
on TWA and why, in my view, the proposed transaction is the 
only comprehensive solution that adequately serves competition 
and customers in light of the harsh realities facing TWA today.
    Since the late 1960's when I became a pilot for TWA, the 
airline industry and the economy have changed dramatically. It 
has been an uphill battle for TWA, particularly over the last 
15 years. To simply survive, TWA has struggled during that 15 
years, after the acquisition by Carl Icahn during the merger 
and acquisition period of that decade. Subsequently, TWA was 
stripped of many of its most valuable assets.
    Through the efforts and commitment of its employees, TWA 
eventually was able to secure a change in corporate ownership. 
At that point, however, TWA was saddled with enormous debt, an 
aging fleet, a pension fund that had been deemed to be 
seriously underfunded, and the loss through sale of many of its 
most valuable routes.
    The fact that TWA survived in those circumstances was due 
to the sheer dedication of its employees. They gave concessions 
and survived not one, but two bankruptcies, to ensure the 
continuation of the airline to the present time. In fact, 
notwithstanding our financial predicament, TWA has made a 
remarkable operational turn-around over the last 4 years. TWA 
has been ranked at or near the No. 1 spot in on-time arrivals 
since 1997. In 1998 and 1999, customers voted us the winner of 
the J.D. Power Award for Customer Satisfaction, and in 2000 we 
finished second among all the major airlines in both J.D. Power 
award categories.
    We replaced almost our entire fleet, and that results now 
in having one of the youngest fleets in the airline industry. 
We made these improvements without huge capital outlays or 
marketing campaigns. We did it with dedication, 
professionalism, and pride--hallmarks of TWA throughout its 75 
years.
    But TWA's operational successes have not been enough. We 
can no longer afford to operate, let alone sustain these 
advances. Despite TWA's many accomplishments, profitability 
remained illusive. The events of the 1980's had made it 
virtually impossible to compete effectively. Due to its fragile 
financial condition, TWA is paying premium leases for its 
aircraft, almost twice the industry average.
    The need to provide long-overdue wage increases for TWA 
employees and the recent staggering increases in the price of 
jet fuel have further drained TWA's reserves. TWA remains 
essentially a single-hub operation, putting us at a schedule 
disadvantage with the multiple-hub carriers.
    Finally, this winter, by January 10, 2001, we ran out of 
time. We had cash on hand of only $20 million, and needed more 
than that amount just to make it through the next day. With our 
cash reserves nearly depleted and a major commitment to lenders 
coming due, our backs were squarely against the wall.
    The financial crisis that hit TWA this winter did not 
materialize overnight. A year ago, we could see the problems 
looming on the horizon that culminated in our recent bankruptcy 
filing, and we tried very hard to do something dramatic about 
it. We recognized that the viability of our airline was at 
stake, and we went knocking on doors to find a solution. There 
is not an airline of any size in America that we did not 
approach. There is not an airline of any size in America that 
did not have an opportunity to step in and join with us.
    No one was interested in TWA as a going concern. In my 
view, most recognized that they would benefit from TWA's demise 
and they were willing, at best, to stand back and watch it 
happen. Only American Airlines saw fit to come forward with a 
proposal that was not merely an offer to cherry-pick a prized 
asset here or a prized asset there.
    American proposed a comprehensive solution that will 
realize for our creditors the value of TWA as a going concern. 
It will preserve jobs for our employees and medical benefits 
for our retirees, and it will promote competition by 
maintaining our St. Louis hub and safeguard TWA's service and 
major economic presence in additional communities around our 
system, most notably Kansas City, New York and Los Angeles, 
where we employ thousands.
    The transaction proposed with American Airlines offers a 
comprehensive solution to the problems facing TWA. It addresses 
the varying needs of TWA employees, retirees, creditors, 
consumers, and communities serves by TWA.
    The transaction protects TWA's 20,000 employees and many 
thousand retirees and dependents. American has made a bedrock 
commitment to retain the vast majority of TWA employees and to 
absorb responsibility for TWA's retirees' medical and dental 
insurance benefits. Not only does this speak volumes about 
American's integrity, it achieves TWA's goal of protecting its 
skilled and dedicated workforce. It is here that American is 
gaining TWA's greatest asset, its employees. American will find 
that it has acquired motivated employees who carry out their 
work with the highest level of quality and commitment.
    The consumers and communities served by TWA will also be 
better served by the American transaction than by a 
liquidation. Liquidation of TWA's assets without a commitment 
to maintaining TWA's jobs would result in vast reductions of 
service to vast numbers of communities. Certainly, other 
carriers would benefit from such a reduction in competition, 
but consumers would pay the price.
    The price to be paid in a TWA liquidation would be highest 
in our home State of Missouri and our hub city of St. Louis. In 
a court hearing the weekend before last, attorneys for the city 
of St. Louis stated that the economic contribution of Lambert 
International Airport in St. Louis to the local economy is $8 
billion per year.
    Other communities would also be harmed by the liquidation 
alternative. TWA's 187 aircraft would cease to be in service. 
Air service to more than 100 communities would be negatively 
impacted. The result would be lower capacity, higher prices and 
less service for the traveling public, and a diminished 
business capacity for dozens of communities.
    And acquisition of TWA's assets as a total operation best 
serves to protect the traveling public and the communities that 
rely heavily on TWA. American has committed to retain the St. 
Louis hub operations, and with additional aircraft from TWA's 
system American will be able to support TWA's route structure.
    As I look to the future of aviation, there are many 
chapters yet to be written. I believe, however, that TWA's 
final chapter will be viewed in years to come as having 
provided major benefits to the aviation industry. Among the 
ranks of our current employees, there are many young and 
talented folks who have benefited from their apprenticeships 
under seasoned TWA veterans. They can take with them to 
American and to every corner of the aviation world knowledge 
and experience that is invaluable. When I consider this 
possibility becoming a reality for so many of our workers 
through this transaction, I know that all of our efforts will 
have been worthwhile. Indeed, TWA's legacy, if not its grand 
name, will be carried forward by its people.
    Just as important, consumers will continue to see the same 
levels of service, without the dislocation that would otherwise 
have occurred if a bankruptcy with a parceling out of assets 
had occurred. Indeed, this is the only way that the public 
interest will be served in the long run.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify today. As I have said, we strongly 
believe that this transaction should go forward promptly.
    Thank you.
    [The prepared statement of Mr. Compton follows:]

    Statement of William F. Compton, President and CEO, Trans World 
                             Airlines, Inc.

    Chairman DeWine, Ranking Member Kohl, and other Members of this 
distinguished Subcommittee, on behalf of TWA's more than 20,000 
employees, I thank you for the opportunity to testify today. I 
appreciate the chance to explain why our decision to pursue an asset 
purchase agreement with American Airlines should be approved and why 
this transaction is a good global solution for TWA customers, 
employees, retirees, and creditors, as well as the communities served 
by both carriers. I would like to begin by giving you may personal 
perspective on TWA and why, in my view, the proposed transaction is the 
only comprehensive solution that adequately serves competition and 
consumer in light of the harsh realities facing TWA, its employees and 
retirees.
                           I. How We Got Here
    Since the late 1960s, when I became a pilot the TWA, the airline 
industry, and the economy have changed dramatically. It has been an 
uphill battle for TWA, particularly over the last 15 years, to simply 
survive. In 1985, TWA, during the height of Wall Street-driven mergers 
and acquisitions, was acquired by Carl Icahn. Subsequently, TWA was 
stripped of many of its most valuable assets.
    Through the efforts and commitment of its employees, TWA eventually 
was able to secure a change in corporate ownership. At that point, 
however, TWA was saddled with enormous debt, an aging fleet, a pension 
fund that had been deemed to be seriously underfunded and the loss 
through sale of many of its most valuable routes. The fact that TWA 
survived in those circumstances was due to the sheet dedication of its 
employees. They gave concessions and survived not one, but two, 
bankruptcies to ensure the continuation of the airline to the present 
time.
    In fact, notwithstanding its financial predicament, TWA has made a 
remarkable operational turnaround over the last four years. TWA has 
been ranked at or near the #1 spot for on-time arrivals since 1997. In 
1998 and 1999, customers voted us the winner of the J.D. Power award 
for customer satisfaction. In 2000, we finished second among all of the 
airlines in both J.D. Power award categories. We replaced almost our 
entire fleet, with the result that it is now, on average, one of the 
youngest in the airline industry.
    we made these improvements without huge capital outlays or 
marketing campaigns. We did it with dedication, professionalism, and 
pride--hallmarks of TWA throughout its 75 years. But TWA's operational 
successes have not been enough. We can no longer afford to operate, let 
alone sustain these advances.
             II. TWA's Many Successes Have Not Been Enough
    Despite TWA's many accomplishments, profitability remained elusive. 
The events of the 1980s had made it virtually impossible to compete 
effectively. Due to its fragile financial condition, TWA is paying 
premium lease prices for its aircraft--almost twice the industry 
average. The need to provide long-overdue wage increases for TWA 
employees and the recent, staggering increases in the price of jet fuel 
have further drained TWA's reserves. TWA remains essentially a single 
hub operation, putting us at a schedule disadvantage to multiple hub 
carriers.
    Finally, this winter we ran out of time. BY January 10, 2001, TWA 
had cash on hand of only $20 million and needed more than that amount 
just to make it through the next day. With our cash reserves nearly 
depleted and a major financial commitment to lenders coming due, our 
backs were squarely the wall.
    The financial crisis that hit TWA this winter did not materialize 
overnight. A year ago we could see problems looming on the horizon that 
culminated in our recent bankruptcy filing, and we tried very hard to 
do something dramatic about it. We recognized that the viability of our 
airline was at stake and we went knocking on doors to find a solution. 
There is not an airline of any size in America that did not have an 
opportunity to step in and join with us. No one was interested in TWA 
as a going concern. In my view, most recognized that they would benefit 
from TWA's demise, and they were willing, at best, to stand back and 
watch it happen.
    Only American Airlines saw fit this winter to come forward with a 
proposal that was not merely an offer to cherry-pick a prized asset 
here or there. American proposed a comprehensive solution that will 
realized for our creditors the value of TWA as a going concern. It will 
preserve jobs for our employees and medical benefits for our retires. 
It will promote competition by maintaining the St. Louis hub and will 
safeguard TWA's service and major economic presence in additional 
communities around our system--most notably Kansas City, New York and 
Los Angeles, where we employ thousands.
    III. American Airlines Transaction Offers Comprehensive Solution
    The transaction proposed with American Airlines offers a 
comprehensive solution to the problems facing TWA. It addresses the 
varying needs of TWA employees, retirees, creditors, and consumers and 
the communities served by TWA.
    This transaction offers protection for TWA's 20,000 employees and 
many thousands of our retirees and dependents. American has made a 
bedrock commitment to retain the vast majority of TWA employees and to 
absorb responsibility for TWA retirees' medical and dental insurance 
benefits. Not only does this speak volumes about American's integrity, 
it achieves TWA's goal of protecting its skilled and dedicated work 
force. It is here that American is gaining TWA's greatest asset--its 
employees. American will find that it has acquired motivated employees 
who carry out their work with the highest level of quality and 
commitment.
    The consumers and the communities served by TWA also will be better 
served by the American transaction than by liquidation. Liquidation of 
TWA assets without a commitment to maintaining TWA jobs would result in 
vast reductions of service to many communities. Certainly other 
carriers would benefit from such a reduction in competition, but 
consumers would pay the price.
    The price to be paid in a TWA liquidation would be highest in our 
home state of Missouri and our hub city St. Louis. In a court hearing 
the weekend before last, attorneys for the City of St. Louis stated 
that the economic contribution of Lambert-St.Louis International 
Airport to the local economy is $8 billion a year. TWA and its regional 
airline partners offer approximately 75 percent of the departures from 
Lambert. It is not difficult to envision the benefit of a continuation 
of this service under the auspices of American Airlines (or, for that 
matter, any other carrier that is willing to come forward in the 
auction process and commit to an acquisition of the TWA operation).
    Other communities also would be harmed by the liquidation 
alternative. TWA's 187 aircraft could cease to be in service. Air 
service to more than 100 communities would be negatively impacted. The 
result could be lower capacity, higher prices, and less service for the 
traveling public and a diminished business development capacity for 
dozens of communities.
    An acquisition of TWA assets as a total operation best serves to 
protect the traveling public and the communities that rely heavily on 
TWA. American has committed to retain the St. Louis hub operations. 
With additional aircraft from TWA in its system, American will be able 
to support TWA's route structure.
    Our assets will be sold through a bankruptcy auction process, and 
we remain open to higher and better offers. But, so far, the American 
Airlines plan is the only global solution on the table. It is the only 
solution that will preserve the competitive benefits of TWA as a going 
concern for the consumers and communities we serve. It offers the most 
benefit to the greatest number of TWA stakeholders.
            IV. TWA's Final Chapter Ends on a Positive Note
    As I look to the future of aviation, there are many chapters yet to 
be written. I believe, however, that TWA's final chapter will be viewed 
in years to come as having provided major benefits to the aviation 
industry. Among the ranks of our current employees, there are many 
young and talented people who have benefited from their apprenticeships 
under seasoned TWA veterans. They can take with them to American, and 
to every corner of the aviation world, knowledge and experience that is 
invaluable. When I consider this possibility becoming a reality for so 
many of our workers through this transaction, I know that all of our 
efforts will have been worthwhile. Indeed, TWA's legacy, if not its 
grand name, will be carried forward by its people.
    Just as important, consumers will continue to see the same levels 
of service without the dislocation that would have otherwise occurred 
if a bankruptcy with a parceling out of assets had occurred. Indeed, 
this is the only way that public interest will be served in the long 
run.
    Mr. Chairman, let me conclude by again thanking you for the 
opportunity to testify today. As I have said, we strongly believe this 
transaction should go forward promptly. It is in the best interest of 
TWA employees, retirees, creditors, consumers, and communities served 
by both carriers. I would be pleased to respond to any questions.

    Senator DeWine. Mr. Compton, thank you very much.
    Mr. Johnson, thanks for joining us.

 STATEMENT OF ROBERT L. JOHNSON, CHAIRMAN AND CHIEF EXECUTIVE 
               OFFICER, DC AIR, WASHINGTON, D.C.

    Mr. Johnson. Thank you, Mr. Chairman, Senator Kohl, and 
members of the committee. From the day that we announced the 
creation of DC Air, my vision for this ground-breaking company 
has remained intact. That vision is to build on the well-
established service from 44 communities throughout the Mid-
Atlantic region to Reagan National Airport that approximately 3 
million passengers have come to rely on, to provide safe, 
reliable, high-quality service at competitive to customers and 
communities in the region we serve, to compete vigorously on 
price and service in the communities we serve, to facilitate 
the growth and economic development that accompanies air 
service, and to develop and maintain an airline that the 
Washington community will be proud to call its hometown 
carrier.
    In addition, as Chairman, CEO and majority owner of DC Air, 
I pledged from our very first day to create, own and operate 
this new airline, America's first minority-owned air carrier in 
over 30 years, because in my heart I believed it would be good 
for the communities, ensure competitiveness in air travel, and 
do right by the 45 communities that we serve.
    As you are well aware, Mr. Chairman, from the first 
discussion of DC Air, critics speculated that its proposed 
agreement with United Airlines for transition period resources, 
however brief and arms-length they might have been, might have 
compromised our goal of establishing DC Air as a viable, 
independent carrier. Obviously, now this has all changed with 
our announced partnership with American Airlines. American's 
recently announced agreement to invest in DC Air as a minority 
partner and to provide these transition resources proves that 
DC Air will be an independent, competitive carrier.
    Why DC Air choose to partner with American? We had received 
expressions of interest from a number of carriers regarding 
partnership and entered into very detailed negotiations with 
several. While we could have chosen any of several different 
paths, I had the opportunity at a critical point to meet and 
get to know Don Carty, of American.
    It became clear to me in that meeting and throughout our 
subsequent discussions that not only were the economic terms of 
the arrangement favorable to DC Air and the benefits to our 
passengers outstanding, and particularly what I would call the 
premium frequent flyer program in the country, American's 
Advantage Miles, but more importantly--and this was very 
important to me--that Don Carty and the American team truly 
understand what DC Air and minority ownership is all about and 
they are looking forward to being really true partners.
    Let me clear about something that individuals have raised 
and have been questioned about. First and foremost, under the 
alliance with American I am the Chairman and CEO of DC Air, and 
under my leadership DC Air will be an independent company. Let 
me be absolutely clear about this. DC Air has no obligation 
whatsoever to sell additional shares to American. American has 
purchased a minority equity stake of DC Air. Consequently, as 
the majority owner, DC Air will follow my vision.
    Now, the other issue that has been raised about DC Air is 
this question of will we be competitive. Mr. Chairman, I assure 
you I wouldn't get in a business if I didn't think I could 
compete and create value. We will be competitive because we 
will fly the right size aircraft for our 44 routes.
    One thing that you heard from Mr. Leonard is that AirTran 
could be more competitive in flying the slots at DC Air. I 
think what Mr. Leonard failed to point out is that AirTran 
couldn't fly 104 of the 220 slots that we own because those 
slots are commuter and regional jet slots and AirTran's 717s 
couldn't fly those commuter and regional jet slots.
    Furthermore, I disagree with Mr. Leonard. Regional jets are 
not more expensive to operate in the smaller markets that we 
serve. They are, in fact, substantially less expensive to 
operate. If AirTran, as Mr. Leonard proposed, flew their 717s 
in some of the smaller markets that we serve, they would have 
to charge more. It would be the same as taking a 747 to 
Buffalo. Most of the seats would be empty and the passengers 
would have to pay more to get back and forth. That is why no 
one does it.
    So we will be a focused regional carrier with none of the 
overhead costs of some of the global major carriers. Our 
employees will be fairly paid at rates comparable to other 
regional carriers, below the rate of the major carriers and 
consequently far more productive.
    Our alliance with American, as I have pointed out, provides 
great customer benefits in the frequent flyer program. So DC 
Air provides competition not just non-stop to and from 
Washington, but up and down the East Coast. For example, we 
will serve northern cities like Burlington and Buffalo and 
Columbus to a number of southeastern destinations--Orlando, 
Tampa, Jacksonville, Atlanta, Huntsville, Columbia, Charleston, 
and so on. This is real new competition in over 450 city pairs 
throughout the route system.
    Mr. Leonard has talked about the slots and they should be 
carved up and handed out. When I accepted the responsibility of 
taking on the investment in DC Air, I made a pledge before this 
committee--I said I would do it before the Justice Department 
as part of a consent decree--that I will always fly those slots 
to the 44 communities that have had this service for over 40 
years. No one else in this industry will make that commitment 
that they will continue to serve, Mr. Chairman, the 44 
communities that have historically been served by US Airways. 
We will do that.
    So I disagree with Mr. Leonard's assumption that DC Air 
would not pass the laugh test. I believe DC Air is, in fact, a 
new entrant that will provide competition on the East Coast. 
When you look at the East Coast market right now, there are two 
major carriers, US Airways and Delta, flying the majority of 
passengers up and down the East Coast. Now, we have Southwest, 
AirTran and JetBlue. I should point out that DC Air on the 
first day of its operations will be almost the size of AirTran 
and significant larger than JetBlue.
    So after the proposed merger, you would have Delta very 
aggressive still, United very aggressive on the East Coast, 
American, with the new merger terms, very aggressive, as well 
as DC Air. In addition, you would have the low-cost carriers 
that we talked about earlier. This sounds to me like more 
competition, with DC Air being a part of it.
    Now, in concluding let me go to one other issue that has 
been raised, the so-called no-flip restriction on DC Air, and 
what that was eliminated out of the original deal with United.
    First of all, Mr. Chairman, I never supported that no-flip 
agreement anyway. It would be the same as if someone sold your 
house and said if you sell this house any time within the next 
3 years, you have got to give me all the profits. Well, even if 
you plan to live in that house for the next 25 years, no 
prudent business person or homeowner would put that provision 
into an agreement.
    There is nothing in eliminating that no-flip arrangement 
that implies in any way that I have any intention of flipping 
DC Air to American or any other carrier. By the way, I should 
point out there is nothing in the arrangement that prevents me 
from finding a new partner if I wanted to reacquire the 
opportunity from American.
    So I think it is unfair to assert that DC Air, of all the 
carriers in the industry who buy slots, should have a no-flip. 
But I will tell you what I will do. If every airline would 
agree not to take a profit off the flip of a slot, I will sign 
with that same group of airlines. I doubt very seriously if 
they will do it, and I don't think it is fair to impose it on 
DC Air.
    So, Mr. Chairman, I think when you look at the facts, DC 
Air is inheriting a very attractive route system in a very 
desirable airport, Reagan National Airport, and the opportunity 
to continue to provide service to these 44 communities with 3 
million passengers, flying a combination of business and 
leisure customers that have historically come to rely on the 
quality of service that US Airways provided. We will do it at a 
lower cost. We will do it more focused, with more competition, 
and we will serve the public, I believe, to the best of our 
ability.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Johnson follows:]

       Statement of Robert L. Johnson, Chairman, and CEO, DC Air

    Mr. Chairman, Senator Kohl and Members of the Committee, from the 
day that we announced the creation of DC Air, my vision for this 
groundbreaking company has remained intact:
 To build on the well established service from 44 communities 
        throughout the mid-atlantic region to Washington's National 
        Airport that approximately 3 million passengers a year have 
        come to rely on;
 To provide safe reliable, high quality service, at competitive 
        prices to customers and communities in the region we will 
        serve;
 To compete vigorously on price and service in the communities 
        we serve;
 To facilitate the growth and economic development that 
        accompanies air service; and
 To develop and maintain an airline that the Washington 
        community will be proud to call its hometown carrier.
    In addition, as Chairman, Chief Executive Officer and majority 
owner of DC Air, I pledged from our very first day to create, own, and 
operate this new airline--America's first minority-owned air carrier in 
over 30 years--because in my heart I believed it would be good for 
consumers, ensure competitiveness in air travel, and do right by the 44 
communities we will serve.
    Mr. Chairman, I am proud and happy to report today that we have 
made a number of significant strides forward in realizing the full 
scope of this vision.
    As you are well aware, from the first discussions of DC Air, 
critics speculated that its proposed agreements with United Airlines 
for transition period resources, however brief and arms-length these 
may have been, might have compromised our goal of establishing DC Air 
as a viable, independent airline. This has all changed with our 
announced partnership with American Airlines. American's recently 
announced agreement to invest in DC Air and to provide these transition 
resources proves that these theories could not be further from the 
truth.
    Make no mistake about it, the resources that American Airlines is 
bringing to Washington, DC--an experienced staff, capital, and 
infrastructure--as it grows its operations here and throughout the 
Eastern United States will go a long way toward making DC Air a 
powerful, competitive, and independent airline on day one of our 
operations.
    By far the most important outcome of the DC Air-American Airlines 
partnership is the benefits it will afford our customers. Of prime 
importance will be the consumer benefits associated with the 20-year 
marketing alliance between our two companies. This will allow 
passengers traveling on DC Air to earn American AAdvantage frequent 
flyer miles which they can redeem on DC Air, or anywhere in American's 
national network or its global system. Thus, passengers flying on DC 
Air will reap the benefits of what many consider to be the premium 
frequent flyer program in the industry. In addition, DC Air passengers 
may enroll in American's airport lounge program, accessing facilities 
in National Airport and worldwide.
    Through the alliance with American, DC Air's customers will also 
have access to a vast network of new destinations. For example, our 
passengers will be able to fly from Richmond to National on DC Air, and 
then from National to New York or Boston on American Airlines' Shuttle 
service. Additionally, DC Air passengers will have direct access to the 
rest of American's network, which includes service to Chicago, Dallas 
and Miami. And, should American's proposed acquisition of TWA be 
consummated, passengers could also take advantage of convenient 
connections over Reagan National to St. Louis and Los Angeles.
    The alliance with American will expand DC Air's reach from point-
to-point service to and from Washington and connections up and down the 
East Coast, into an established network that spans the globe. In turn, 
American Airlines will get a strategic partner with a significant 
network in the east, operating out of Reagan National Airport, to 
complement its planned growth within the east. By adding its 
relationship with CDC Air to its internal growth and announced 
acquisitions, American will become a major competitor for North-South 
traffic flows along the Eastern U.S.
    While the benefits to passengers bode well for the success of DC 
Air, many of the operational aspects of the DC Air-American alliance 
will go a long way toward addressing of the broader public policy 
concerns raised about DC Air's viability as a stand-alone entity and 
our ability to enhance the competitive landscape on the East Coast.
    As you may recall, our original plan for DC Air had been to manage 
a rapid transition into a network of 44 cities using 37 aircraft on our 
first day of operations. We had arms-length arrangements with United 
Airlines to provide 10 wet-leased jet aircraft, as well as services 
including ground handling and other items, to ensure that DC Air had 
full access to all needed services on ``day one'' of operation.
    Still, some observers of the process appeared concerned that any 
from of ongoing relationship with United Airlines, no matter what is 
was, somehow called into question DC Air's independence--in part, 
because United would be one of our major competitors in this region.
    In response to those concerns, we at DC Air accelerated the process 
of entering into relationships with carriers other than United to 
provide these services. We had received expressions of interest from a 
number of carriers regarding a partnership and entered into very 
detailed negotiations with several. While we could have chosen any of 
several different paths, I had the opportunity at a critical point to 
meet and get to know Don Carty, the Chairman of AMR, Americans parent 
company. It became clear to me in that meeting, and through our 
subsequent discussions, that not only were the economic terms of the 
arrangement favorable to DC Air, and the benefits to our passengers 
outstanding, but also that Don Carty and the American team truly 
understand what DC Air is all about and that they are looking forward 
to being our partner.
    First and foremost, under the alliance with American, I am the 
Chairman of DC Air and under my leadership DC Air will be an 
independent company. American has purchased a minority equity stake, 
49%, of DC Air, ensuring that the airline will follow the vision we 
previously have so clearly set out for DC Air.
    Under this alliance, American Airlines has stepped into provide 
between 11 and 14 jet aircraft that will clearly help DC Air provide 
quality service to more destinations each day and has agreed to provide 
ground handling and other services to DC Air during its transition 
period.
    Although I believe most of you view our independence from United in 
a positive light, I want to underscore to you that our alliance with 
American will only ensure that we will be able to compete aggressively 
in both service and fares with other airlines. United will no longer 
help to provide transition services. United is our rival, our foe, our 
adversary. And, we will face our competitors, including United, with 
the support of American Airlines behind us as we go into battle.
    I have received some queries about the cost structure of DC Air 
under the arrangement with American. American will benefit from the 
success of DC Air through its equity investment, and it providing 
services at very competitive rate to DC Air. In addition, American has 
significant economies of scale in various areas that can be passed 
along beneficially to DC Air. Therefore, our costs will be fully 
competitive and our vision of competing aggressively in both service 
and fares is not only intact, but enhanced.
    The American Airlines-DC Air alliance will ensure vibrant 
competition throughout the Washington area. Without this alliance, the 
metropolitan area would have one primary traditional carrier--United 
Airlines--offering nonstop service to a variety of destinations and 
connections to worldwide destinations from its hub at Dulles 
International Airport. Of course, other airlines, notably Air Tran, 
Delta Air Lines and Southwest Airlines, would continue to serve the 
metropolitan area, but each of these airlines offers a more limited 
scope of nonstop destinations to Washington passengers. Instead, this 
alliance will bring into this region a significant new competitor, DC 
Air, with the support of a traditional carrier, American, which is 
combination will become the largest presence at Ronald Reagan 
Washington National Airport. This will provide for intense competition 
for both East Coast and worldwide passengers that will keep prices down 
and help ensure high quality service for area travelers.
    And, with the new support provided by American Airlines, DC Air 
will have all the resources necessary to be fully operational on ``day 
one,'' pending the closing of the merger. When it is operational, DC 
Air will provide competitive air service to 44 communities--cities 
that, for the most part, currently enjoy direct access to the 
Washington area. As the majority owner of DC Air, I believe it is 
critical to sustain and enhance the existing US Airways network, which 
has provided affordable, safe, reliable service to cities in the 
Northeast for so many years. Nothing in the American agreement changes 
my long-term commitment to these communities.
    When I agreed to build and run DC Air, I strongly believed it would 
provide to be a strong, independent airline. The new alliance between 
DC Air and American Airlines brings us closer to achieving the goals I 
set out when I agreed to build and run DC Air--to provide high quality, 
safe, reliable air travel, to help preserve competition in the airline 
industry, and to make air travel affordable.
    Thank you for the opportunity to testify before you today.

    Senator DeWine. Mr. Johnson, thank you very much.
    Mr. Wolf?

STATEMENT OF STEPHEN M. WOLF, CHAIRMAN, US AIRWAYS GROUP, INC., 
                      ARLINGTON, VIRGINIA

    Mr. Wolf. Chairman DeWine and Senator Schumer, I appreciate 
the opportunity to come before this Committee once again.
    During my earlier opportunity to testify here, I stated my 
concern that there was no place long term for a mid-sized, 
mature-cost U.S. carrier in commercial aviation, recognizing 
that US Air was the only one left out of an original group of 
six airlines at the start of deregulation. Today, I am more 
concerned than ever about US Airways' status.
    In today's extremely competitive marketplace, there are 
only two platforms on which to operate an airline successfully. 
There is the low-cost, low-fare business model represented by 
carriers such as AirTran, America West, JetBlue and Southwest, 
and the mature, full-service network carriers such as American, 
Continental, Delta, Northwest and United. US Airways is 
neither, and there is no place for a ``neither.'' This is 
simply an economic reality.
    When I joined what was then US Air 5 years ago, the company 
was seriously lacking in several respects. We had a fleet that 
begged for rationalization, no strategic direction, 
questionable service, multi-year, multi-billion-dollar losses, 
and uncompetitive labor contracts. Clearly, we had to address 
these issues, but the predominant and overriding concern was 
one of size. We had to get substantially larger in order to 
compete long term.
    We committed ourselves to establishing US Airways as a 
vibrant, financially secure, global carrier. To this end, our 
superb and dedicated employees have made enormous strides. We 
have made significant improvements in our operational 
performance, established competitive labor agreements, launched 
the modernization of our fleet, purchased the shuttle, and 
expanded our international service.
    Despite these improvements, the fundamental problem the 
company faced of getting substantially larger has magnified 
itself as a result of a significant increase in intra-east 
competition. Allow me to share with you two gentlemen visually 
just four charts that will sort of depict this graphically.
    The first chart is US Airways' route structure, and of 
course you can't read the city names, et cetera. Just sort of 
look broadly at the lines. As you can see, US Airways is 
heavily oriented to north-south traffic in the eastern quadrant 
of the United States. If you look at the two vertical yellow 
lines, it shows that we serve 13 cities west of the 
Mississippi, and within those 13, 7 west of the Rockies. But, 
please, just focus on that eastern quadrant, that piece of 
geography, because I want to follow on with three charts that 
only show that piece of geography.
    This is Southwest's route structure when I joined the 
company now some 5 years ago, clearly a limited pattern of 
service, 9 cities served, 157 departures, deploying 19 
aircraft. This is Southwest's route structure today. I should 
add that in June of last year, Southwest placed its largest 
aircraft order ever for some 290 new Boeing 737 aircraft. On 
that occasion, Southwest's Chairman, Herb Kelleher, announced, 
quote, ``a significant focus on the East,'' end quote, going 
forward.
    Earlier this week, in Florida, Mr. Kelleher spoke before 
the Goldman Sachs aviation conference and indicated that 
Southwest would increase its capacity in the next 4 to 5 years 
by 50 percent, again heavily focused on the East Coast of the 
United States.
    What you are looking at here, gentlemen, is new jet routes 
that Delta Air Lines has initiated during this same period of 
time, 365 jet departures, 61 aircraft. Now, this is not Delta's 
system in the East. These are the net adds that Delta has added 
during this period of time.
    Senators, these are two particularly fine airlines doing 
what is in the best interests of their shareholders and 
employees, but enormously harmful to US Airways employees. For 
the 45,000 employees of US Airways and the communities we 
serve, the status quo is simply not an option. This merger 
preserves jobs, ensures the continuation of service to all 
communities on our system, and significantly enhances 
competition.
    Senators, there are two certainties. One, US Airways does 
not have the financial wherewithal to become a large network 
carrier. Two, you cannot shrink an airline to profitability.
    We all know all too well what happened to other similarly 
situated carriers such as Braniff, Eastern, Pan Am, and now 
TWA. Therefore, my strongly held view is that the merger with 
United Airlines, with a job guarantee for all 45,000 of our 
employees and a commitment to preserve and enhance service to 
communities large and small, is in the best interests not only 
of our employees, shareholders and the communities we serve, 
but of the traveling public as well. In the end, with a 
substantially larger American and United, competition in the 
East is going to be dramatically enhanced.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Wolf follows:]

     Statement of Stephen M. Wolf, Chairman, US Airways Group, Inc.

    Mr. Chairman and Members of the Committee, on behalf of the entire 
US Airways family, I appreciate the opportunity this afternoon to offer 
some additional comments on our merger with United Airlines.
    The have been some significant development in the aviation industry 
since I testified before the Antitrust Subcommittee last summer, when 
we first announced our merger. First and foremost, as a result of the 
intense competitive pressures at work in the marketplace, TWA has filed 
for bankruptcy, its third time in the last ten years. In connection 
with the bankruptcy filing, American Airlines has agreed to purchase 
TWA and provide immediate financing, allowing the airline to continue 
its operations. Second, American has agreed to acquire an equity 
interest in DC Air, the independent, new entrant carrier created from 
our merger with United Airlines, ensuring vigorous competition in the 
Washington, DC region. Third, American has entered into an agreement 
with United to initiate flights on a select number of routes from US 
Airway's hub cities and to operate the US Airways' Shuttle with United 
pursuant to a joint venture. Fourth, despite the best efforts of our 
hardworking and dedicated employees, US Airways reported a loss of $269 
million for last year.
    When I testified in June, I set forth in detail the driving forces 
behind our decision to merger with United, namely, our desire to 
provide comprehensive, global air service to our customers and our 
communities, while preserving jobs, service, and significantly 
enhancing competition. Importantly, the events that have transpired 
since my prior testimony serve to significantly enhance the pro-
competitive, pro-consumer, and pro-employee benefits of our merger.
    US Airways continues to be unique in the airline industry. There is 
no longer any other carrier in the country like us. We are the last 
mid-sized, mature-cost airline that remains out of an original group of 
six pre-deregulation carriers. All of the others have either gone out 
of business and disappeared completely, e.g., Braniff, Eastern, and Pan 
American, or while still operating, have gone through multiple 
bankruptcies, e.g., Continental and TWA (now, for the third time).
    Neither of these options, in my estimation, is an attractive 
alternative because of the serious disruption and uncertainty they 
would bring to our employees, to our passengers, and to the communities 
we serve. They are, however, real threats given US Airways' unique 
position. Accordingly, the status quo is not a viable option for US 
Airways, our employees, or the communities we serve. Let me explain.
    US Airways in its current from in an amalgamation of several small, 
pre-deregulation regional carriers such as Allegheny, Mohawk, and 
Piedmont. As a result, the airline has a route network that, like its 
regional airline predecessors, is largely confined to short-haul routes 
in the eastern United States. Indeed, U.S. Airways has the shortest 
average stage length of any major carrier. Combined with a route 
structure that is essentially confined to the East Coast corridor, this 
severely limits US Airways' ability to mass enough presence in other 
areas to support any material expansion of its system.
    As a consolidation of pre-deregulation carriers, US Airways also 
pays labor rates that are comparable or higher than those of American, 
Delta, Northwest, and United. The difference between US Airways and 
these other carriers, however, is that the other carriers have vastly 
larger route systems which permit them to spread their costs over a 
great number of more efficient, long-haul segments that are relatively 
less costly to operate.
    Caught in the vice between its short-haul, high cost route system 
and its mature labor structure, US Airways is far and away the highest 
unit cost U.S. airline. For the year 1999, US Airways' average system 
cost per seat mile, the measure most commonly used to determine costs, 
was approximately 14 cents. By comparison, the average system costs 
during the same period were approximately 9.5 cents per seat mile for 
the major carriers and 7.5 cents for low-cost competitors such as 
Southwest. In sum, when compared to Southwest, a carrier that is 
aggressively expanding throughout US Airways' East Coast operating 
territory, US Airways has costs that are nearly twice as high.
    When I joined what was then USAir five years ago, I recognized the 
historical reality that placed US Airways in such an ``in-between'' 
position--one that could not be sustained over the long run. US Airways 
was neither a ``national'' carrier with low costs and point-to-point 
routes. Accordingly, with the support of our employees, we committed to 
a strategic plan to restore financial stability to the company and 
establish the carrier's competitiveness, despite our high costs and 
incomplete route structure. To this end, we have made enormous 
progress. We have made significant and sustained improvements in our 
operational performance, established harmonious labor agreements, begun 
fleet modernization, and expanded our international service.
    However, the fundamental problems that constrain US Airways--high 
costs, short segments, and a limited network--remain in the face of 
increasingly intense competition. Unfortunately, US Airways does not 
have the financial reserves or the cost structure to support 
significant internal expansion.
    Meanwhile, competition from well financed, well managed low-cost 
carriers such as Southwest, JetBlue, AirTran and others has been 
increasing dramatically on US Airways' most heavily traveled and most 
profitable routes. In 1995, for example, low-cost carriers had 618 
departures per day in the eastern United States, US Airways' major 
service area. By 2000, that number had almost doubled to 1,098. These 
carriers now offer more than one out of every four domestic seats up 
for sale in that region. At the same time, major carriers' share of 
capacity actually fell one percent.
    In the last year alone, Southwest, AirTran and Delta Express, as 
well as new entrants such as JetBlue and Spirit, have added 181 daily 
departures out of East Coast airports--a 25.5 percent increase over 
1999. Since January 1, 1996, Southwest has increased its intra-East 
route system in terms of daily departures by 238% (157 to 531) and in 
terms of aircraft by 326% (19 to 81).
    Facing ever more low-fare competition on its key eastern routes, 
with costs well above the industry average and no realistic way to 
alter that condition, US Airways is increasingly limited in its ability 
to support its route network and achieve profitability. Accordingly, as 
a stand-alone carrier, US Airways, which has sustained huge losses over 
the past decade, does not have the luxury of maintaining the status 
quo.
    Neither did TWA and its fate is an example of what can happen. Over 
the past decade, TWA has been forced to reduce its employee base by 
almost half. Moreover, its once extensive global route network has 
similarly decreased, from 216 nonstop routes in 1989 to 114 in 2001. In 
sum, over the past decade, TWA has shrunk to a shell of its former self 
in a valiant, but now apparently unsuccessful attempt to survive.
    Fortunately, the downsizing we have witnessed with other carriers 
is today not he only option for US Airways and our employees. There is 
a viable alternative that allows US Airways to become part of a broader 
and more efficient transcontinental and global system, thereby 
preserving jobs, ensuring service to scores of communities that 
otherwise could lose flights, and enhancing competition in the 
industry--our merger with United airlines.
    For US Airways, this merger will help us provide the efficient, 
global service that our valued customers demand and deserve. Moreover, 
by merging with United, service to US Airways' communities of all sizes 
will be preserved, ensuring continued rather than decreased 
competition. The creation of DC Air, a vibrant, minority-owned airline 
that will have the benefit of American's frequent flyer program and 
access to its extensive network, will also add a new competitor based 
in the Washington, DC region with service throughout the eastern US.At 
the same time, thousands of high-paying, union jobs will be protected 
at a time of increasing economic uncertainty. For nearly a decade, the 
employees of US Airways have faced periods of uncertainty about the 
future of the company. Now they are guaranteed a secure future with a 
financially strong, global carrier.
    I have been involved with this industry for over 30 years, and I 
understand, and appreciate, that there is some concern about 
consolidation and the potential effect the two mergers we are 
discussing today will have on consumers. But we cannot examine these 
issues without recognizing the fundamental forces that are at work in 
today's deregulated marketplace and acknowledging what will happen if 
the transactions do not take place. Who would have thought 20 years ago 
that Southwest would be the second largest domestic carrier in terms of 
passengers carried and have, by a wide margin, the highest market 
capitalization of any carrier in the world, that the original Pan Am 
would be gone, and that TWA would be entering its third bankruptcy. 
Nonetheless, these changes are happening, and the question is whether 
the proposals we are discussing today to deal with these changes are 
good for consumers, employees, and the traveling public.
    The same can be said of American's proposed transactions. Like the 
US Airways/United transaction, American's purchase of TWA, as well as 
an equity position in DC Air, is not an issue of consolidation, but one 
of saving jobs, jobs maintaining service, and preserving competition. 
These transactions greatly enhance the scope and scale of American's 
route network, transforming American into a truly national carriers. By 
purchasing one-half of US Airways' shuttle operations, American 
dramatically increases its presence in three premier eastern markets--
Washington, New York, and Boston. And by obtaining gates and terminal 
space at several eastern airports, including Philadelphia and 
LaGuardia, and agreeing to operate flights on certain routes from US 
Airways' hub cities for up to ten years, American ensures that 
consumers on these routes will have competitive air service.
    Significantly, American's proposal to purchase 49 percent of DC Air 
will directly link DC Air to a vibrant, financially strong major 
carrier, ensuring competition in the Washington metropolitan area over 
the long term and delivering important consumer benefits to DC Air 
passengers. DC Air will be a participant in American's frequent flyer 
program and will be linked to American's expansive domestic and 
international network.
    As a former Chairman of United Airlines, I can attest to the fact 
that, despite the comments of some pundits who have declared that 
American and United are attempting to divide up the eastern seaboard, 
American and United are vigorous competitors and intense rivals. The 
proposed transactions under consideration today will introduce the 
benefits of this competition into new markets in the eastern United 
States, where Delta traditionally has been, and is, a leading force. 
They will also bring vigorous competition, innovation, access to the 
global marketplace, and sustained employment and job growth for airline 
workers. Importantly, by extending their rivalry into east coast 
markets, United and American will position themselves to by vigorous 
international competitors in the emerging open global aviation 
marketplace. This is a win/win for consumers. Millions of passengers 
begin or end their international trips in the eastern United States, 
and many new communities will now have seamless access to efficient 
global networks. At the same time, United American will be better 
positioned to complete in the new global marketplace where there are no 
guarantees. We know all too well, as we have witnessed radical changes 
in other industries, that American businesses will face increasingly 
challenging competition from their foreign competitors.
    It will serve us all well to think outside the box. This is a 
dynamic, changing global industry. We cannot--and we do not want to--
preserve the status quo. We must learn from our experiences in other 
industries--autos, steel, finance, aircraft manufacturing. We have an 
historic opportunity to create our first truly national and 
international network carriers--Delta, American, and United--who will 
compete vigorously with each to flow traffic over their systems, and, 
and vibrant group of new-entrant and low-cost carriers--led by 
Southwest, AirTran, and JetBlue--providing additional point-to-point 
competition.
    For most of the last century, U.S. aviation led the world in 
technology, efficiency, innovation, and the development of free 
markets. We are now in a period of revolutionary change. The U.S. 
industry is responding to dynamic market forces and positioning itself 
to maintain and enhance its leadership position. That same bipartisan 
government, which first saw the wisdom of deregulation over 20 years 
ago and last year passed historic legislation for this industry in AIR-
21, must not now constrain the industry's capacity to respond to 
marketplace force. The U.S. must continue, as it has during the first 
century of flight, to create conditions for innovation, efficiency, and 
growth, and to respond aggressively to real problems such as adequate 
infrastructure, air traffic control, and capacity that are serious 
threats to our industry.
    Thank you for the opportunity, once again, to share my perspective 
with you.

    Senator DeWine. We have a statement that has been submitted 
by Senator Thurmond. Without objection, that will become a part 
of our record.
    [The prepared statement of Senator Thurmond follows:]

  Statement of Hon. Strom Thurmond, a U.S. Senator from the State of 
                             South Carolina

    I am pleased that we are holding this hearing today on the 
consolidation in the airline industry.
    The competition that developed as a result of deregulation two 
decades ago was a boom to the airline industry and to consumers. It 
caused a drastic reduction in prices and a great increase in service.
    Unfortunately, the competition that has made the airlines industry 
so successful is increasingly at risk today. The proposed merger 
between United Airlines and U.S. Airways would give the new United 
control of about 27% of the U.S. market. I expressed concerns about 
this potential merger at the time, and the passing months have only 
made those concerns more real. American Airlines has now proposed a 
merger that goes beyond simply acquiring financially-troubled TWA. If 
all of these mergers are approved as proposed, United and American 
together will control almost half of the domestic airline market.
    However, it does not end there. It is likely that more airlines 
will see the need to merge to stay competitive, and we soon could have 
just a few giant airlines. In such an environment, it is hard to see 
how small or start-up carriers could compete effectively.
    It is true that mergers such as these create more convenience for 
consumers. However, they also cause less competition and fewer choices. 
This is not only a problem in hub cities, it is also a problem in 
smaller markets where the merging airlines compete today. For example, 
if United and U.S. Airways merge, the new United would control almost 
half of the non-stop daily flights in the capitol of my state, 
Columbia, South Carolina.
    The airline mergers that are pending today must be reviewed 
carefully in terms of their impact on overall competition. They could 
have widespread consequences for the entire industry and our nation's 
economy.
    We are at a crossroads for the airline industry, and we do not know 
what the future will bring. However, if history is any guide, 
competition, not consolidation, is in our long-term best interest.

    Senator DeWine. Mr. Wolf, let me just follow on your 
testimony. I appreciate the charts and I appreciate the comment 
about competition, but you heard Mr. Mullin's comments about 
your airline and his belief that US Airways can't be considered 
a failing airline. Professor Levine basically agreed and said 
the same thing. We have heard that comment from other 
individuals.
    I just want to make sure I understand what your position 
is. Is it your position that the merger is necessary for you 
all to avoid bankruptcy, or just what are you saying?
    Mr. Wolf. I heard Mr. Mullin's comments and I heard all the 
comments. I would actually group the four airline executives 
into two similar comments; that is, the comments of the two 
network carrier CEOs and the comments of the two low-cost 
carrier CEOs.
    Let me refer to a Bloomberg report of November 29 in 
Atlanta, where Mr. Mullin said, quote, ``US Airways needs help. 
It is the most troubled of the large carriers, and I think the 
Government may well be looking at this as a way to introduce a 
strong carrier, United, into a weak carrier situation, US 
Airways.''
    If I was Mr. Mullin or if I was Mr. Bethune operating two 
network carriers, if you look at that Eastern quadrant of the 
United States, we are the big three, Delta and US Airways 
bigger and about the same size. Continental is No. 3, at about 
a 7.8-percent share. And they fall off dramatically from 
there--American, about 7.5; United, about 3.
    If I was either of those two gentlemen, would I rather 
compete with US Airways in this market, as opposed to an 
expanded and enhanced United and American? There is no question 
about it, I would rather do that, and you would rather do that, 
also.
    The reality is, as I indicated, the facts are simply the 
facts. We are not a low-cost carrier and we will never become a 
low-cost carrier, no matter how many bankruptcies we go 
through, as much as I abhor even imagining it. We must become a 
larger carrier and we do not have the financial wherewithal to 
do that. That doesn't make anybody bad or stupid. It is just an 
economic reality.
    The merger with American Airlines addresses the issue. It 
preserves 45,000 jobs, it preserves service to all the small 
communities that we serve in the Eastern part of the United 
States, and it enhances competition significantly.
    Senator DeWine. Mr. Goodwin, both you and Mr. Carty have 
said American and United are, I think the term was arch-rivals, 
and will certainly vigorously compete. The professor posed the 
question of why you would enter into a deal with your arch-
rival instead of another airline. Do you want to answer that?
    Mr. Goodwin. That was in response to the joint venture on 
the shuttle agreement. I think both of us today do not 
participate in the shuttle marketplace. It is the purview of 
the Delta and US Airways. The shuttle market is a unique 
product, unique to the three cities that basically it serves, 
and we saw this is an opportunity, again in looking at the 
issues that have been surfaced by members of this Committee 
about concentration in the Northeast, to also introduce some 
competition into the shuttle market.
    We do not believe this is entering into a transaction with 
our arch-enemy. We believe this is inducing competition into a 
heavily traveled core market where the three major carriers 
will have an opportunity to compete for passengers.
    Senator DeWine. Senator Schumer?
    Senator Schumer. Thank you, Mr. Chairman, and I thank all 
of the witnesses for their testimony.
    The first question is to Mr. Carty. As you probably heard 
in my statement if you were here, the two parts of this merger 
that give me least pause are the TWA/American, and except for 
the DC Air part the US Airways/United original proposal didn't. 
I mean, that had potential to help my constituents and help the 
country.
    But the one thing that I am worried about in your situation 
is the domination that you, combined with TWA, would have at 
JFK. You would control three of the nine terminals, one-third 
of the real estate. What assurances can you give us that if 
this merger were consummated that you would make room for other 
carriers that are expanding, notably JetBlue?
    Mr. Carty. Senator Schumer, we are right in the middle of 
trying to assess our JFK needs in the context of both our own 
terminal and the TWA terminal. Now, we have got a pretty clear 
picture of the long term. We are building, as I think you know, 
in excess of a $1 billion terminal that will encompass the 
space historically that Terminal 8 and Terminal 9 had at 
Kennedy. In the long term, that is all the terminal we will 
need. We will not need the TWA terminal.
    Senator Schumer. So you would be willing to sell that to a 
competitor?
    Mr. Carty. Absolutely. During transition, whether or not we 
need some of the TWA space to be able to continue to operate 
all the flights we have got going on while we construct, is a 
question we are trying to sort out right now. We are working 
with the port on that.
    Senator Schumer. How long is transition?
    Mr. Carty. Well, what we have got to do is figure out--
    Senator Schumer. During transition, you have got to figure 
it out?
    Mr. Carty. Well, our construction process, Senator, is 
really 5 years. The question is does the availability of some 
gates that TWA is building allow us to accelerate that 
construction so we get gates quicker than we otherwise 
anticipate. I wish I could answer that question this morning 
and I can't, but we will have answers in the next couple of 
weeks.
    Senator Schumer. Would you?
    Mr. Carty. Yes.
    Senator Schumer. Could I ask, Mr. Chairman, that those be 
submitted in writing to me and to the record?
    Mr. Carty. I would be delighted.
    Senator Schumer. The next question is for Mr. Johnson, and 
let me preface this, Mr. Johnson, by saying I have tremendous 
respect for you as a businessman and what you have 
accomplished. I must do what I think is best for my 
constituents. As I read it, 98 percent of the experts I have 
talked to who are not part of any side, no airline, think that 
this merger is not good for upstate New York. So let me ask you 
a few questions about that.
    First of all, there are three issues here. The first is 
cost. Right now, for instance, United's round trip from Dulles 
to Buffalo is $700. Southwest's trip to BWI is $48 to $65. You 
have obviously gone over the numbers here. You wouldn't have 
risked so much money if you didn't.
    What is your estimated cost of your flights from Buffalo to 
National Airport?
    Mr. Johnson. Mr. Schumer, I too share your commitment that 
you are committed to upstate New York, and I respect your 
concern about your constituents. On the matter of giving you an 
actual price of a flight from Buffalo to D.C. based on the 
restructuring of DC Air with American, with the combination of 
American's frequent flyer program and all the assets, I 
couldn't give you an actual price quote, but I could certainly 
provide that information to you by working with your staff. I 
could provide it for all the upstate markets, for that matter.
    Senator Schumer. That would be very good. When we met with 
your staff, they said it would be about 30 percent lower than 
the existing flights, so you can see the huge gap between what 
at least this low-cost air carrier charges. Admittedly, 
National is more expensive to land at than BWI, but it is still 
an enormous gap.
    Mr. Johnson. I think that is right. I think we have got to 
make sure we are comparing apples to apples because we fly only 
from DCA. We don't fly from BWI or Dulles.
    Senator Schumer. Understood, but I would like to know what 
the costs are.
    Mr. Johnson. We will certainly provide that.
    Senator Schumer. A broader question which I am sure you had 
to investigate is what do you estimate your rate per passenger 
mile will be?
    Mr. Johnson. Again, Senator Schumer, I couldn't give you 
that number sitting right here, but I could certainly provide 
it through the talented individuals I have hired to help me run 
this airline. I probably couldn't tell you the spot cost of air 
time on BET, and I ran that for 20 years, but I certainly could 
find people who could give you that information.
    Senator Schumer. Again, I am not trying to put you on the 
spot.
    Mr. Johnson. No.
    Senator Schumer. This is vital information as to what the 
costs will be to upstate.
    Mr. Johnson. Absolutely, Senator, and we will respond to 
any question you give us in writing, I assure you.
    Senator Schumer. OK, thank you. Then we go to this 
memorandum of understanding, the so-called flip. I don't really 
care about the flip, how much profit you make or not. But I 
would tell you the analogy to someone buying a house is false 
because these slots are not your property, not Mr. Goodwin's 
property. They are the public's property, and I think they have 
been abused and that is one of the problems we face at the four 
airports with slots. They limit competition.
    So the bottom line is the experts I have talked to have 
said you are getting them for a lower cost than they would go 
for if they were just bid in the free market. I don't have a 
problem with that if I would have some assurance that that 
lower cost would be passed on to the consumer. I don't see any 
of that in the numbers or anything else that you have given us, 
but let me go to the flip agreement and then you can answer 
that one.
    Here is what I want to know. I want to know right now what 
your commitment is to continue running the airline and not 
selling your share to American. Is it a year, is it 2 years, is 
it 3 years? I mean, the whole argument here is we will have an 
independent airline. I think that is better than having a non-
independent airline.
    But now with this agreement, 6 months from now you could 
decide to sell to American Airlines. Because the slots at a 
lower price, you might make an enormous amount of money. God 
bless you, God bless America, but it wouldn't do much good for 
competition. So what commitment can you give us right here and 
now about how long you will keep this airline and not sell your 
51 percent, particularly to American?
    Mr. Johnson. Senator Schumer, as you said, God bless 
America. One of the things I just absolutely think is essential 
in this country is that businesses and individuals all be 
treated fairly and alike. I will answer that question by saying 
that I want to be treated just like the other carriers.
    Let's go to the no-flip provision. I will sign the same no-
flip agreement on slots, if they are a public trust, that every 
other airline will sign. If JetBlue were to sign a no-flip 
provision on its slots that it was granted at the airports, 
then I will sign the same kind of agreement.
    Senator Schumer. If I might, JetBlue is independently 
financed by investment bankers and different people. They are 
not owned 49 percent by one of the major carriers that you 
would compete against. That is not an analogy.
    Mr. Johnson. Senator Schumer, there is nothing in JetBlue's 
charter, I would imagine, that would prevent them from taking 
money from Don Carty. I imagine any airline here could take 
money from any other investor.
    Senator Schumer. The bottom line is you will not make a 
commitment of any amount of time that you will not sell the 
airline to American. Is that fair to say?
    Mr. Johnson. Senator, I will not make a commitment that the 
other airlines will not make. I mean, I am here as a new 
entrant. I am here as a minority American seeking an 
opportunity to get in the airline business, and I am not going 
to start that entry by signing agreements that the other 
carriers have never signed.
    If you could get the other carriers here to sign an 
agreement that they will hold on to their airlines for the next 
50 years or the next 10 years or the next 5 years, I will be 
treated equally the same as those other carriers. But I will 
not say what my business intentions are, as I wouldn't expect 
any business person up here to say.
    As far as I am concerned, we should all be treated equally, 
we should all be treated fairly, and given the opportunity to 
compete. I am paying full price. I didn't set the price. The 
price was set by the marketplace, as transmitted to me by US 
Airways. If I choose to sell, it will be based on my own 
business decision, just as any of these gentlemen would have 
the same right.
    Senator Schumer. Mr. Johnson, you are certainly entitled to 
that. I am entitled and my constituents are entitled to have no 
guarantee at that point that there will be an independent 
carrier with this huge bounty of 222 slots to compete.
    Mr. Chairman, thank you.
    Senator DeWine. Senator Brownback has submitted a statement 
and questions for the record which, without objection, will 
become a part of the record.
    [The prepared statement of Senator Brownback follows:]

   Statement of Hon. Sam Brownback, a U.S. Senator from the State of 
                                 Kansas

    Mr. Chairman, Thank you for holding this hearing on this important 
issue. I appreciate the opportunity to be here today although I am not 
yet officially a member of this Subcommittee. Aviation issues are on 
everyone's minds. In the Senate Commerce Committee on which I also 
serve, When we held a confirmation hearing two weeks ago for the 
Transportation Secretary Mineta, who I think will do an outstanding 
job, by the way, the questions to him were almost eighty percent 
involving aviation issues of one kind or another. Aviation issues are 
at the forefront of everyone's minds, whether it is mergers and 
acquisitions, delays and congestion, competition and pricing, or even 
customer service.
    I come from a rural State, which has no Hub Airports, and has a lot 
of rural communities with little air service, or no air service at all. 
Many of our communities are dependent on essential air service. I share 
my colleagues' concerns that consolidation in the airline industry will 
mean higher prices and fewer choices for consumers, particularly those 
in rural states or states with no Hub Airports. If you Think Fares are 
high in Hub Airport cities, Try Coming to Wichita, Kansas, where last 
night, the walk up, round trip, same day return fare to Denver ranged 
from $1,050 to $1,643, and the Cheapest Flight goes East to Kansas 
City, Before Going West to Denver, In Fairness, I must point out, the 
Walk up fare between Wichita and the number one Destination out of 
Wichita, Dallas--Fort Worth, Ranged From $349 to $369. Pretty High for 
a 50 Minute Flight. But if you Think Fares are high in Hub Cities, or 
medium size cities which are spokes on the Hubs, try going to goodland 
or Great Bend, Kansas, which have lost their essential air service, and 
flying is not an option at all.
    But as I Travel my home State, the number one aviation issue among 
my constituents is not fluffy pillows or whether the gate agent was 
helpful or not, or even which airline is going to combine with which 
airline. Although these are all important issues to one degree or 
another, the bottom line is, my constituents are tired of flying 
because of flight delays, cancellations and congestion at our airports. 
We have a capacity crisis in our nation's aviation infrastructure, and 
my constituents have caught on. They fly defensively, avoiding if at 
all possible certain airports because they are notorious for delays.
    We must increase the capacity on the ground at out Nation's 
Airports. We must build more runways and build them faster than we are 
doing now. The new runway at Memphis, took, what 12, 16 years to 
complete? That is absurd. The crisis is here it was last summers, and 
it was the summer before that, and we still have done nothing about it. 
I am committed to doing something about it, and I look forward to 
working with the panelists and my colleagues in the Senate and the 
House to see that at least this one aspect of our Nation's Aviation 
capacity crisis is addressed by this Congress.

    Senator DeWine. Mr. Carty, let me follow up a little bit on 
the questioning that you and I had a moment ago, and let me 
also reference your written testimony. In your written 
testimony, you noted some of the problems with the United/US 
Airways proposal and specifically indicated that United and 
Delta would effectively have been a duopoly at least on the 
Boston-New York-Washington shuttle routes. You said that that 
rightly alarmed outside observers.
    The new proposal allows American and United to jointly 
operate the shuttle route. It seems to me you could still argue 
that the shuttle route is going to be a duopoly of sorts, with 
American and United operating one route and Delta operating the 
other. Why shouldn't we continue to be rightly alarmed about 
that?
    Mr. Carty. Well, of course, the shuttle markets are a 
duopoly today. They are US Air and Delta.
    Senator DeWine. I understand.
    Mr. Carty. And the question is a very valid one. I can't 
remember who mentioned it earlier; I guess it was Jim who 
mentioned how important these markets were, not just in 
themselves but in their relationship to other markets, and you 
make a carrier a much more effective competitor in dealing with 
a corporate account.
    When I go in the door of Goldman Sachs and try to get their 
business and I am trying to sell them New York-L.A. and I don't 
have as part of my package a shuttle offering, then Jim in the 
context of United and Leo in the context of Delta have an 
advantage over me.
    So, in a sense, by allowing us access to the market, while 
we are still constrained to two operations--and God knows this 
is one more area that slots are constraining us. We would love 
to have our own shuttle. We don't want to operate anything with 
United, and I am sure Jim feels the same way, but once again we 
have got this supply problem that Alfred Kahn talked about 
earlier that is constraining us.
    So what we insisted on in this deal--and this was quite a 
negotiation; we wanted some things, United wanted some things. 
One of the things that we wanted was access to those shuttle 
markets, not just in the context of competing with United from 
New York to Boston and New York to Washington, but being able 
to go in the door to our big customers and say we have the 
entire product offering and we are just as good as United and 
Delta in that context.
    But you are right. In terms of operation in those markets 
exclusively, it is still two operations, and that unfortunately 
has got nothing to do with the airlines. That has got to do 
with the capacity we have at Washington National and at 
LaGuardia.
    Senator DeWine. Mr. Goodwin, yesterday the Washington Post 
reported the possibility of strikes at the four largest 
airlines this spring, big publicity on the nightly news. I am 
sure you would agree that if any of these airlines experienced 
a strike, the impact on air transportation would be 
significant. With effort, you also could argue that the five or 
six other carriers could probably handle the strain, at least 
to some extent.
    But if the proposed mergers are approved, a work stoppage 
by one of the much larger airlines, much bigger airlines than 
we see now, I would think could certainly cripple the Nation's 
air transportation system. Isn't that something that public 
policymakers have to look at and that the public should be 
concerned about? Doesn't the problem just get worse and worse 
and worse, and the effect much more dynamic if we are down to 
just a handful of major carriers?
    Mr. Goodwin. The short answer to that, Senator, is no, but 
I think it requires a little more explanation.
    Senator DeWine. You have got plenty of time.
    Mr. Goodwin. The industry at this point in time is 
unfortunately in a mode where we have a significant number of 
contracts coming due. We are just on that cycle. I didn't see 
the article, but I heard about the article that was in the Post 
and I assume that it was referring to the fact that Northwest 
and Delta and American and ourselves still have additional 
contracts to negotiate this year.
    I think the laws that we currently have today that govern 
bargaining in our country and with respect to our industry have 
anticipated that question you just asked of would not the 
country be in jeopardy if a significantly large airline or a 
group of airlines found themselves in a work stoppage in this 
country.
    The laws provide through the Presidential Emergency Board 
the capability to return workers to their jobs, which gives the 
country and the unions and the company an opportunity to get 
the parties back to the bargaining table to settle their 
differences. So I believe there are protections in place today 
that would preclude us having to worry about that.
    Senator DeWine. Well, I appreciate your answer. Yes, I 
understand we have laws in effect and they certainly do exist. 
I am cognizant of that fact. It seems to me that as we continue 
to merge and as we get smaller and smaller and smaller and 
fewer and fewer, anything that affects one of the much bigger 
airlines is going to have a bigger impact on consumers. It just 
seems to me to make common sense. Whether or not that can be 
remedied by the labor laws is certainly always an issue, but it 
seems to me that that is certainly a potential problem and it 
is something that at least this member of the U.S. Senate 
worries about.
    Senator Kohl?
    Senator Kohl. Senator Schumer has just one question.
    Senator DeWine. Sure.
    Senator Schumer. Thank you, Mr. Chairman. Before I ask my 
question, I would just mention that when I negotiated slots for 
JetBlue, they were treated the same way. We said they would 
lose those slots if they stopped flying to the underserved 
cities, and that is why they are 1-year renewable slots. I 
believe slots are a public slots, and that is why the public 
good should enter into them.
    Now, I have a question of Mr. Carty and Mr. Goodwin. I am 
not an expert on many things, but one of the few things I am an 
expert on is the shuttle. I take it probably more than just 
about anybody else because my family is in New York, and so I 
am Mr. Wolf's and Mr. Mullin's good customer.
    My question is this: Will United and American compete on 
price with their shuttle? Can we expect, with this new 
competition from the giants, to see the prices drop? I would 
ask Mr. Carty and Mr. Goodwin to each answer that.
    Mr. Goodwin. The proposal that we have put forth in front 
of the Justice Department today suggests that we would like to 
have permission to have a common price structure between 
ourselves for that market so that we could hold out to the 
consumer a common price structure. If we are going to fly at 
ten o'clock and American is going to fly at eleven, that was 
the initial proposal.
    Are we going to compete effectively in the marketplace 
against Delta Air Lines on a price basis? Absolutely, and we 
think we are going to have a better product to compete with.
    Senator Schumer. But I think if you asked the consumer, 
they would want you to compete on price. They would like to get 
more peanuts, they would like to get other things, but the No. 
1 thing they want competition on is price. It would certainly 
increase the percentage chance that the price of the shuttle 
would decline or not go up as quickly, whatever the 
circumstance may be--who knows what fuel oil will cost--if the 
three of you would compete rather than the two of you.
    Every economist knows that three is better than two in 
terms of competition. Frankly, Mr. Wolf and Mr. Mullin have not 
competed on price at all. They have competed in other ways. 
They keep changing their snacks around and you get different 
newspapers on different ones, but no price competition. So I am 
not too optimistic about a dual competition. Why wouldn't three 
of you compete on price?
    Mr. Carty. The current proposal that is in front of Justice 
doesn't have us competing on price.
    Senator Schumer. It does not?
    Mr. Carty. It does not.
    Senator Schumer. Thank you, Mr. Chairman.
    Senator DeWine. Senator Kohl?
    Senator Kohl. Mr. Carty and Mr. Goodwin, are you really 
going to make the argument that the best thing for the airline 
industry in this country is to have three airlines controlling 
75 percent of the market and a bunch of airlines fighting for 
the crumbs of what is left after that?
    It almost boggles my mind to think that you would suggest 
this is going to be a good thing for the consumers of America 
for just three airlines to have an enormously dominant position 
in our country, and the power and the control that inevitably 
will accrue. Are you making the argument that that is going to 
be a good thing for the consumers of America?
    Mr. Carty. Let me try to respond, Senator. An awful lot of 
our earlier discussion this morning defined competition by 
doing a tally of the number of airlines. When I was listening 
to Senator Leahy earlier, it occurred to me what is important 
to Senator Leahy and his constituents is not how many airlines 
there are in the United States, but how many are in Burlington, 
Vermont, and I would say the same thing is true of Senator 
Schumer's constituents and your own.
    What is important is how many players there are competing 
in every dimension of the business in a market where a consumer 
wants to go from A to B. I think what Steve's charts were 
trying to demonstrate to you is in the last couple of years we 
have had a dramatic increase on the East Coast. And while you 
think of American and United as traditional carriers, we are 
not traditional carriers in this market.
    By US Air and United doing this transaction, United begins 
to compete with Continental and Southwest and everybody else on 
the East Coast, and by them spinning off a number of assets to 
us, we enter this market now. So there are a whole bunch of 
markets where instead of having two carriers, you might have 
four, you might have five.
    In those markets, as you think about the consumer, he or 
she is much more concerned about that issue. When I go to the 
counter, how many airlines are there that are willing to take 
me from where I am to where I want to go, not how many are 
there in the country.
    I think what we have been trying to describe to you is we 
are not buying carriers that compete with each other. We are 
buying carriers that allow us to grow our system so we can 
become, as I said my remarks, the new entrant into markets that 
we are not present in today.
    Mr. Goodwin. Senator, I agree with what Mr. Carty said, but 
I would also like to point out that if you look at the 
potential combinations--and we talked about this the last time 
I was here--maybe you can get to give of the big carriers, but 
I don't ever see us getting down to the two or three that I 
keep hearing everyone talk about.
    I guess sitting here reflecting on some of the conversation 
this morning and listening to the testimony of some of my 
colleagues, we were involved in another major transaction. We 
took another bold acquisition step back in 1985 and we bought 
the Pacific Division from Pan American Airways, not in 
bankruptcy, prior to bankruptcy. It was a healthy, ongoing 
concern. We bought routes and we bought airplanes and we bought 
employees, and we made a lot of commitments when we did that.
    I was looking at some old clippings of some of the 
conversation that was going on when we announced that 
acquisition, and I found a lot of similarities between what we 
are talking about and the issues that we are wrestling with 
today, the first being you paid too much money. Two, this is 
going to create a wave of mergers in the industry because the 
largest domestic airline in the country just bought the 
Pacific.
    In fact, several of the competitors who were flying in that 
marketplace, notably in this case Northwest, publicly announced 
that they wouldn't be able to compete. They would have to 
totally withdraw and exit from the marketplace. I think 15 
years later, history has demonstrated that none of that 
happened. We have got more competition in the Pacific than we 
had 15 years ago. We have got plenty of new entrants, both 
foreign carriers and U.S. carriers.
    So I think, again, as I said the last time I was before 
this committee, putting together two airlines, two networks, is 
not as simple as just sitting here and saying it is going to 
happen. There has to be some fundamental value that is produced 
not only for the employees and the shareholders which we tend 
to talk a lot about, but the customers. We believe that what we 
are trying to do benefits all three of those constituencies.
    Senator Kohl. But your first responsibility is to your 
shareholders. Your responsibility is to take those actions 
which will do most to increase the value of your company. Your 
second responsibility is to your customer, and to the extent 
that those two things coincide, that is fine. To the extent 
they don't coincide, your first responsibility is to your 
shareholders, and if you say it is not, you will lose your job 
this afternoon. So we understand that.
    From our point of view, our first responsibility is to the 
public, to your customers. It is altogether possible that there 
is a difference, that your point of view, which is legitimate 
for what you want to get accomplished, is not the same as our 
point of view. You cannot be masters to both equally. There is 
a difference between what is in the best interests of the 
shareholders of United and American and what is in the best 
interests of the consumers of America. In fact, I would bet 
there is a difference.
    We are trying to represent different constituencies, and 
that brings us to the conflict that we have in this discussion. 
I hope that you can convince us--or I will just speak for 
myself, that what I am saying is not true, that your 
responsibilities on behalf of your shareholders are not the 
same as our responsibilities on behalf of the traveling public, 
that there is a conflict there.
    You will fight for what is best for you and we will do our 
best to fight for what is best for the consuming public. Where 
that takes us, who can speculate? But I think all the words 
that I have heard today don't dissuade me from that fundamental 
difference in what it is you are trying to do and what it is we 
are trying to do. I would suggest it is fairly important for 
you all to convince us that the American public doesn't need us 
to protect their interests. I am not sure that the American 
public feels that way.
    I know you have to go, Mr. Carty, but would you respond to 
that?
    Mr. Carty. Well, I would only say this. We run service 
businesses, and clearly the managers of service businesses, 
like managers of every business, have a primary responsibility 
to their shareholders. They are the people who hire and pay us.
    But our view as a corporation and our corporate philosophy 
is you cannot be successful in our business unless you are 
serving all three constituencies. You cannot have a business 
strategy that is articulated in a way that says if you 
continually abuse your customers and your employees and your 
shareholders' interests--that business model fails. We know 
that business model fails.
    Senator Kohl. Of course. That is an extreme point of view, 
and you are absolutely right.
    Mr. Carty. Similarly, your responsibility, of course, isn't 
just to the traveling public. It is to all our million 
employees in the business and our shareholders and everybody 
else. What we are really talking about here is whether these 
transactions are consistent with the antitrust laws, and I 
think what we have been trying to argue is if you look at the 
very specifics of market presence and market power market by 
market, as opposed to just saying there were ten airlines and 
now there will be nine, you will find that in many, many 
markets in this country the transactions that we are talking 
about will actually enhance competition.
    That is really the argument, and I do think that is what 
Justice is busy preoccupying themselves with analytically. It 
is the reason that they said to Jim Goodwin and US Air, you 
know, we have got five problems, you need to remedy them. That 
is really where the American transaction came from.
    Senator DeWine. Mr. Carty has to go.
    Senator Schumer, do you have any additional questions?
    Senator Schumer. Mr. Carty, what you just told me about 
failure to compete on price on the shuttle--you are saying 
bring more airlines in, but the consumer wants price 
competition probably at the very top of the list, and it is 
probably a valid difference in what Senator Kohl was bringing 
up.
    You would cut your margins further to better serve the 
consumer and not serve as well your shareholder if you competed 
on price. Is that an unfair statement?
    Mr. Carty. That is not an unfair statement. On the other 
hand, this is a game of balances. This is not a wildly 
profitable business. It is not a wildly profitable business 
anywhere. In fact, it is a disaster when you think about it 
from financial reward. So it is hardly a business, when you 
think about the antitrust problem, that has been busy milking 
the consumer in favor of the shareholder. Where all the money 
goes is a puzzle, but--
    Senator Schumer. With all due respect, the shuttle is very 
profitable. What you are saying is you won't compete there 
maybe to do something somewhere else.
    Senator Kohl. That may be true and I agree with you, but 
the one thing that does argue in their behalf is that the 
numbers in their industry are not very strong.
    Senator Schumer. That is true.
    Senator Kohl. Their return on investment and their 
percentage of sales as a profit are all very modest, for 
example, in contrast to the pharmaceutical industry, where it 
is a whole different ball game.
    So the one thing that does argue in your favor is you are 
not--we had a small supermarket and my parents were from the 
old country and they didn't know much about America at that 
time. Their customers were Jewish people and one customer came 
through my dad's store, I remember, one time and he thought the 
prices were really high and he said to the checker, ``plenty 
geskin to the people.'' That was a Jewish phrase that meant you 
skin the people a lot, which wasn't true. It wasn't true.
    So what I am saying is it is not true about you either on 
the whole. It is not true. Where they can, they charge more. We 
know that.
    Senator Schumer. Right.
    Senator Kohl. Where they have competition, they have to 
charge less. There is no question about that. But on the whole, 
your industry is not a big money-maker.
    Mr. Goodwin. It sure isn't.
    Senator Kohl. Mr. Wolf, is that true?
    Mr. Wolf. Senator Kohl, I so very much want to say 
something that I--
    Mr. Carty. Could I interrupt? I really apologize, but I do 
have to run off, and I apologize for that.
    Senator DeWine. Mr. Carty, thank you very much.
    Mr. Wolf?
    Mr. Wolf. I think that there is enormously more harmony 
here than I somehow think we are getting to. Senator Schumer 
and you and Senator DeWine are very concerned about 
competition, and we all know what the benefits of competition 
are to the consumer.
    If you look at that part of the United States right there, 
that Eastern quadrant of the country, and disregard the lines, 
just those States, in those States today there are two large 
carriers competing, Delta and US Airways, intra-east, those 
States, at about a 32-percent share. The next largest carrier 
is Continental, at about a 7.8-percent share. American is 7.5, 
United is 3 points.
    Now, these two big guys that are competing--let me describe 
Delta for 1 second: probably the strongest balance sheet in the 
industry, the lowest unit costs of the major carriers, the 
largest trans-Atlantic carrier in the world, runs the largest 
hub operation in the world in Atlanta, a significant and 
growing presence to South America, a growing presence into 
Europe, and has just acquired ComAir and, in the process, 
hundreds of regional jets.
    The other competitor is a ``neither.'' You missed my 
reference to ``neither.'' We at US Airways are neither a low-
cost carrier nor a network carrier. There is only one like us. 
We lost $290 million last year. Delta made about $1 billion. 
Delta is a particularly fine company. These are the two 
competitors there.
    If this transaction goes forward, Delta keeps it share of 
about 32 percent. United goes from 3 to, I would estimate, 25 
percent. American goes from 7.5 to, I would estimate, maybe 
sort of double that, 14-something, low teens percent. We go 
from one network strong, visible carrier to three overnight. By 
the way, Southwest is still there, and JetBlue and the rest of 
them policing all of us. Competition in this part of the 
country goes up enormously if this transaction goes forward 
versus what it is today.
    Senator DeWine. Mr. Goodwin, as you know, the proposed 
acquisition by Northwest of a majority share of Continental's 
voting stock was challenged by the Department of Justice. The 
General Accounting Office has released data showing that your 
merger would reduce competition in far more markets than would 
have the Northwest/Continental transaction. Do you believe 
there is something unique about your deal that makes it less of 
a concern?
    Mr. Goodwin. No. I think it is a significant concern that 
the Justice Department is doing a very due diligence job on 
reviewing. The GAO which has been widely quoted is a study that 
has created quite a bit of controversy because of some of the 
information and the decision criteria that was used.
    I think in their own study they suggested that it was not a 
review of the antitrust impact of this transaction. In addition 
to that, the study was completed in advance of a lot of the 
transactions you heard about today. It did not include the 
impact of DC Air in their analysis. It did not include the 
impact of American in their analysis. So I believe that a lot 
of the assumptions that were drawn and the conclusions that 
were reached as a result of that are no longer perhaps valid.
    Senator DeWine. Mr. Wolf, do you have a comment about that 
at all? You don't have to.
    Mr. Wolf. I think Jim covered it.
    Senator DeWine. Very good.
    Mr. Compton, let me just reiterate something that I said to 
Senator Bond when he testified, and that is we are all 
concerned about the employees at TWA and the people of St. 
Louis, and believe that the Justice Department really should 
expedite the review of the TWA/American acquisition to ensure 
that if the deal is approved, jobs are preserved and service is 
maintained. So we want to tell you that at least from this 
member that is my position, and we hope the Justice Department 
will move expeditiously forward.
    Mr. Compton. Mr. Chairman, we very much appreciate that, 
and the 20,000 TWA employees appreciate it very much. They are 
hanging on every word here and it is very important to them, 
and that reassurance will go a long way and I thank you for 
that.
    Senator DeWine. Well, thank you very much. Before we enter 
the fifth hour of this hearing, I think it is probably time to 
call it quits. I appreciate your patience, gentlemen. I think 
we have had very good panels. I think you understood from the 
time you entered the room today the skepticism of the members 
of the panel.
    You have given us something to think about, at least as far 
as this member is concerned, this Chairman of the Antitrust 
Committee. You will be hearing more from me on this, but I want 
to have a chance to kind of digest what you have said today. We 
appreciate your testimony very much.
    Thank you.
    [Whereupon, at 1:30 p.m., the Committee was adjourned.]
    [Submissions for the record follow:]

                       SUBMISSIONS FOR THE RECORD

                          American Society of Travel Agents
                                               Alexandria, VA 22314

The Honorable Mike DeWine
Chair
Senate Subcommittee on Antitrust,
Business Rights and Competition
161 Dirksen Senate Office Building
Washington, DC 20510

    Dear Senator DeWine:

    The American Society of Travel Agents (ASTA) Applauds your efforts 
to monitor competition in the aviation industry by conducting a hearing 
on ``Airline Consolidation: Has It Gone Too Far? '' As a proponent of 
airline deregulation and an advocate of the traveling consumer, ASTA is 
deeply concerned about the excessive concentration within the airline 
industry.
    With the looming American Airlines acquisition of Trans World 
Airlines' assets, the proposed merger of United Airlines and U.S. 
Airways, along with the potential for further mergers among Delta 
Airlines, Continental Airlines and Northwest Airlines, the Nation will 
be left with no more than three giant carriers. The result is an 
unregulated shared monopoly in which consumers face increasing prices, 
fewer choices and further deterioration in already unacceptable 
service.
    Attached is an editorial that was featured in the New York Daily 
News, on Sunday January 21, 2001, entitled, Mergers: The latest air 
rage. This editorial represents the views and concerns of ASTA, and we 
ask that it be included in the hearing record.

            Sincerely,

                                    Richard M. Copland, CTC
                                                    President & CEO

    Attachment
    [GRAPHIC] [TIFF OMITTED] T6913.002
    

                                

  Statement of Hon. Tom Davis, a Representative in Congress from the 
                           State of Virginia

    Mr. Chairman, Members of the Committee, I am pleased that the 
Committee has chosen to address the impending airline mergers, as I 
believe they will preserve jobs, enhance airline competition, and 
ensure quality service all of which benefit my constituents. 
Specifically, I believe the benefits of these mergers can be placed 
into three general categories: job security, greater competition, and 
more convenient travel.
    We are clearly, facing some difficult economic times. As the 
President has stated, a warning light is flashing on the dashboard of 
our economy. One does not have to look far to see signs of the flashing 
red lights. Lately, it seems a day doesn't go by without a major 
company announcing that it is laying off a substantial number of 
employees. In the last few weeks alone, companies like Daimler 
Chrysler, Lucent, AOL Time Warner, WorldCom and GE have indicated that 
they are planning major lay-offs. Other like Bradlees, Montgomery Ward 
and now, TWA have gone into the bankruptcy courts seeking relief.
    That being the case, it is inspiring that in both the United-US 
Airways merger and the American Airlines-TWA merger employees from both 
carriers will be offered jobs in the new airline. Much has been said 
and written about the need for the American Airline rescue mission of 
TWA. TWA is a company with a proud and memorable legacy in American 
aviation history. It is also a company whose time has passed in a 
highly dynamic--some might say, ruthless--post deregulation competitive 
environment in the aviation industry.
    TWA is a mid-sized carrier that is saddled with high costs and a 
limited reach. Although it has gone through the bankruptcy court--not 
one, but twice--it cannot escape its fundamental structural flaws. It 
is too small to compete against the United, Northwests, Americans and 
Deltas of the world. And, its costs are simply too high to cope with 
the competition provided by low-cost carriers, such as Southwest 
Airlines within its own region of service. Frankly, its demise was 
inevitable. And, we could all see it coming.
    Mr. Chairman, US Airways finds itself in exactly the same 
predicament. This company must merge or it will die. It is the last of 
the mid-sized mature cost carriers. Its fate is the same as TWA, as 
well as that of Eastern, Braniff and Pan AM. These were great companies 
in their era. Much like Mickey Mantle and Magic Johnson were great 
athletes in their era. But the magic ends and the era in which a 
company like US Airways can survive has come and gone. There are many 
benefits to the proposed merger of United and US Airways, but it begins 
with the fact that United will save the jobs of 45,000 US Airways 
employees--at a time when the major U.S. corporations are laying of 
hundreds of thousand of workers--or closing their doors altogether. The 
bottom line is that the United--US Airways arrangement is great news to 
my constituents, as US Airways alone employs over 3,000 in Northern 
Virginia.
    With regard to airline competition, knowing that many critics of 
these mergers cite competition as a key concern, I would like to offer 
a different view. Under these mergers, my constituents and other 
greater Washington area resident will see increased rather than 
diminished competition. One of the keys to enhanced competition is the 
creation of a new airline, DC Air, which will be based out of Reagan 
National and owned by one of the Washington area's top corporate 
citizens, Mr. Robert Johnson. By taking over most of US Airway's routes 
to 44 cities in and out of Reagan National, DC Air will shake things up 
at one of Washington's most convenient, but also most high-priced 
airports. Mr. Johnson has already suggested that he plans to operate 
his airline as a low-cost carrier. And, knowing that many of you fly 
through Reagan National on a weekly basis, I am sure you are painfully 
aware of the high fares that can be charged to fly through this 
slot=controlled airport.
    Clearly the introduction of this new carrier will be a welcome 
addition, but what can it really do to alter the competitive landscape 
in the greater Washington area.
    Think about it.
    United Airlines will have a hub at Dulles International, DC Air 
will have its strong presence at Ronald Reagan National Airport, and 
Southwest Airlines will have its strong presence at Baltimore-
Washington Airport and all three will be competing to provide service 
to the millions of people who travel to the nation's Capitol and 
surrounding areas each year. In the absence of these mergers, the 
greater Washington area faces the prospect of one primary carrier and 
no competition to keep down prices or ensure high quality airline 
service.
    Finally, with regard to travel convenience for consumers, these 
mergers are a win-win. In every case--US Airways with United Airlines, 
American Airlines with TWA, a partnership between American and an 
independent DC Air--will enable travelers to reach more destinations 
without switching airlines. Not only is direct travel more convenient 
in terms of connection times, baggage handling and frequent flier 
miles, it is also 55% cheaper than switching airlines.
    Mr. Chairman, I would like to close by saying that I wholehearted I 
believe that the mergers between United and US Airways and American and 
TWA will be good for my constituents and for air travelers across 
America. Most importantly, these transactions will provide secure 
employment for the thousands of hard working families who without these 
mergers would clearly lose their jobs, will spur rather than stagnate 
competition and will ensure high quality services for airline 
travelers. I believe that for these reasons, these transactions deserve 
your strong support.

                                

 Statement of Hon Richard J. Durbin, a U.S. Senator from the State of 
                                Illinois

    Mr. Chairman, Senators DeWine and Kohl, thank you for holding this 
important hearing today on airline competition.
    I represent the State of Illinois which includes O'Hare 
International Airport. Illinois has often been referred to as the 
transportation hub of the nation, and aviation issues, especially in 
the Chicago land region, are page one news.
    In fact, I'd suggest that we are at a cross roads in my home state 
when it comes to aviation. The issues revolve and around ensuring the 
Downstate Illinois communities enjoy access to the Chicago and St. 
Louis markets, expanding O'Hare, building a third Chicago airport, and 
protecting the rights of consumers. I'd like to discuss these briefly 
today.
    First, let me say that Chicago O'Hare International Airport is a 
vital economic engine in Chicago, the State of Illinois, and the 
Midwest. It is among the world's busiest airports and serves as the 
only dual hub with United and American Airlines basing significant 
equipment, employees, and assets at the facility. O'Hare serves more 
than 190,000 travelers per day, nearly 73 million in 1999. Some 2,7000 
flights leave the airport daily. O'Hare employees 50,000 people and 
generates about $37 billion in annual economic impact.
    As we all know, the proposed United/US Airways merger is currently 
under review by the U.S. Department of Justice. The American/TWA buy 
out is under the jurisdiction of a bankruptcy court. Both may have a 
major impact on O'Hare and Downstate air service. I prefer to let these 
authorities work through the details and pass final judgement.
    However, I continue to be concerned about Downstate Illinois air 
service in a consolidated industry.
    A Number of Downstate communities have struggled to gain or 
maintain access to Chicago O'Hare. This service is vital to community 
economic development and tourism. As we've faced concern over O'Hare 
access, the one constant has been St. Louis service for these 
communities. Obviously, the American/TWA buy out announcement has 
caused great concern in the eight Downstate communities currently 
served by TWA/TWE.
    I have written and personally spoken to both Mr. Goodwin at United 
and Mr. Carty at American to express my concerns about Downstate 
Illinois air service. Both are sensitive to the unique circumstances 
faced by these communities and have promised to work with the Illinois 
Congressional Delegation. In fact, Mr. Carty has accepted my invitation 
to meet with these communities in Illinois in the near future to 
discuss their concerns. As these mergers move forward, I will hold them 
to those promises.
    Finally, with regard to consumers, let me say that although the 
airlines have made strides toward more responsive customer service 
plans--ones that treat the traveling public with respect, provide 
timely information, an attempt to remedy problems as quickly and fairly 
as possible--there's still a long way to go. I hope the airlines will 
continue to aggressively address the consumer challenges that still 
exit.
    Mr. Chairman, there have been countless mergers and consolidation 
in the airline industry. It's a natural part of the business 
environment. The Department of Justice should continue to closely 
review all proposals. However, it is vitally important that small-to-
medium communities, like those in Downstate Illinois, continue to have 
access to the major markets. It's important for consumers to be treated 
fairly. It's important for fares to be addordable. It's important that 
we maintain and expand our aviation infrastructure where feasible. And 
it's important that airlines don't take unfare advantage of a 
deregulated industry.
    I think this hearing goes a long way toward ensuring that the 
public as well as the federal government continue to monitor airline 
competition. Mr. Chairman, I thank you for the opportunity to 
participate today.

                                

Statement of Leonard L. Griggs, Jr., Director of Airports, City of St. 
                            Louis, Missouri

    Mr Chairman and Members of the Committee: I am Leonard L. Griggs, 
Jr., Director of Airports for the City of St. Louis. The City is the 
owner and operator of the Lambert-St. Louis International Airport, 
historically the main hub for TWA. Thank you for allowing me the 
opportunity to submit the views of the City of St. Louis Specifically 
regarding the proposed acquisition of TWA assets by American Airlines.
    Mr. Chairman, not all mergers are created equal. As Senator 
Carnahan recently stated at a recent Senate Commerce, Science and 
Transportation Committee hearing: ``[W]hile we may be initially 
inclined to view all of the current airline mergers in the same light, 
we must consider the American Airlines' acquisition of TWA 
independently of the other proposed mergers.'' The City of St. Louis 
agrees. Even as we explore and review the wide ranging implications 
raised by the possible consolidation of the airline industry, it must 
be stressed that the proposed American-TWA transaction should not raise 
anticompetitive concerns.
             american--twa merger is not like other mergers
    The American--TWA proposed agreement is unlike any other mergers 
currently being discussed. Contrary to press reports, and the opinion 
of many pundits and even some critics in Congress, this proposed 
acquisition will not necessarily harm the development of the airline 
industry or be anticompetitive for consumers. On the contrary, given 
TWA's current financial condition, I believe that consumers would be 
worse off with the possible alternatives had American Airlines not come 
forward with its proposal to acquire TWA. This is why St. Louis fully 
supports the proposed transaction.
    It was recently stated in our local newspaper that ``TWA, after 
years of valiantly trying to turn around, is out of time and out of 
money.'' In Contract to its previous financial problems, this time it 
seems clear that without outside help TWA would have been forced to 
stop flying and simply liquidate its assets. American Airlines came 
forward with its proposal in the very same week that TWA would have 
stopped operating due to lack of funds. Reportedly, Mike Palumbo, TWA's 
CFO, testified before a Delaware bankruptcy court judge a couple of 
weeks ago that, without American's debtor-in-possession financing, TWA 
would have ceased to operate. Instead, American's commitment of $200 
million in debtor-in-possession financing has allowed TWA to continue 
serving the public until the transaction is completed.
    In short, Mr. Chairman, without the American deal, TWA would have 
ceased to compete in the marketplace. This acquisition should not raise 
concerns of reducing or stifling competition. Instead, it is my opinion 
that the proposed deal is simply making the best of a worrisome 
situation.
    Over the last few weeks, it became abundantly clear to us that 
TWA's options were fast disappearing. Since TWA no longer had the 
possibility of maintaining healthy, financially robust operations to 
compete with the other U.S. regional or network carriers, we were left 
with the choice of allowing American to take TWA as a whole, or 
allowing TWA to fail, and let others pick at the carcass.
             TWA is ``Failing Airline'' in Merger Parlance
    This is a classic example of a failing airline whose on-going 
business concern can only be rescued by allowing it to merge with a 
healthy airline. Indeed, although Federal policy does disfavor the 
acquisition of healthy air carriers by their competitors, there is a 
long-standing exception when the proposed acquisition involves a 
failing carrier. The rationale for the exception is that, no matter 
what, a failing airline will not remain in the market. I believe that, 
by now, there is enough evidence to conclude that TWA will simply cease 
to exist. Therefore, the key question that must be answered is how to 
maximize the public benefit in the distribution of its assets.
    Bill Compton, TWA's CEO, was quoted as saying that he has been 
``shopping'' the airline for some time, and has had no other viable 
offers for its acquisition as a going concern that would preserve its 
name and intangible assets. Moreover, although it is true that certain 
assets (such as slots and leased aircraft) could be sold and placed 
into service absent the proposed transaction with American Airlines, 
most of TWA's many valuable assets and resources (such as certain 
gatehold rights at Lambert, St. Louis aircraft maintenance facilities, 
and, more importantly, TWA's St. Louis workforce) would have been 
underused.
    For St. Louis, the choice is clear. If the proposed acquisition is 
not allowed to proceed, St. Louis risks losing its air carrier hub. 
Without a large airline hubbing at our airport, our community will lose 
large numbers of well-paying jobs, as well as its close link to 
national and international markets that makes our region a favored 
business location.
       Air Service Requirements of St. Louis Area Are Substantial
    Without TWA's operations, St. Louis risks the loss of substantial 
levels of air service. Although TWA is only one of nine major airlines 
serving the airport, it alone provides 73% of the daily flight 
departures from the airport. TWA's 374 daily flights out of St. Louis 
serve more than 100 non-stop markets, 65 of which would not otherwise 
receive non-stop service. Without the TWA-American agreement, St. Louis 
would lose valuable air service to many communities throughout the 
United States, and possible, the world. So far, other than American 
Airline's proposal, no other credible plan has been offered in the 
bankruptcy process which would maintain St. Louis' present level of air 
service.
      New St. Louis Runway Capacity Supported by American Airlines
    American Airlines's promise to serve St. Louis means the continuing 
use of the City's public airport infrastructure. In fact, American 
Airlines has stated that, after it completes its acquisition of TWA 
assets, it intends to use the St. Louis airport and TWA's gates for a 
mid-continental hub.
    And Mr. Chairman, in connection with American's commitment to the 
St. Louis community, I have been assured by American's senior 
management, following an extensive briefing on our new runway project, 
that American will be fully and enthusiastically supporting our new 
runway (W-1W) expansion plan. This early decision by American is 
critical to keeping our expansion on schedule so that Lambert can 
maintain its hub status and remain competitive.
                Local TWA Employment Would be Protected
    The risk of mass unemployment in our area is real. If TWA were to 
shut down, it could leave 20,000 TWA employees out of work, including 
almost 9,000 in our immediate area, and 12,000 throughout Missouri. TWA 
is the second largest employer in the City of St. Louis, and the 
seventh largest in the metropolitan region. It has been estimated that 
TWA's operations in St. Louis contribute more than $5 billion annually 
to the local economy. American Airlines has proposed to maintain TWA's 
unionized workforce and as much of its administrative employees as 
feasible.
                               Conclusion
    Mr. Chairman, the City of St. Louis asks that you consider American 
Airlines' proposal to acquire TWA assets separately from the other 
pending or proposed airline mergers. The American-TWA transaction is 
not a competition-reducing merger. If TWA were to shut done and 
liquidate, the City of St. Louis would lose most of its air service, 
close to 9,000 of its area citizens could be airport infrastructure 
would go unused, and valuable new national runway capacity might go 
undeveloped. We must not let that happen. That is why St. Louis fully 
supports the proposed acquisition of TWA.
    Thank you.

                                

 Statement of Hon. John J. LaFalce, a Representative in Congress from 
                         the State of New York

    Chairman DeWine, Ranking Member Kohl, and Members of the 
Subcommittee:
    I appreciate the opportunity to submit this testimony to you 
Subcommittee regarding the imminent consolidation of the airline 
industry into perhaps three dominant airlines.
    As you know, the current string of proposed airline consolidations 
including the merger of United Airlines and US Airways; the purchase by 
AMR Corporation/American Airlines of Trans World Airlines (TWA); the 
creation of DC Air; and now the possible acquisition of Delta Airlines 
by Continental Airlines would consolidate over 75% of the industry into 
three corporations.
    I have serious concerns about the impact of these transactions, 
which are a serious threat to the national economy, and specifically to 
the local economy of upstate New York.
    As an example of what limited competition can do to a small market, 
consider the plight of the business owners and residents of my district 
in upstate New York. This region has suffered from unacceptably high 
airfares for fare too long. In the past few years, Buffalo Niagara 
International Airport (BNIA) and Rochester International Airport (RIA) 
have been among the top five highest fare per mile destination in the 
country. In both cases, this was due primarily to the dominance of one 
carrier, US Airways, which had a market share of approximately 50% or 
more in both markets in 1997.
    This monopoly stifled competition and inflated fares. This cost has 
burdened both business and retail travelers alike, and has been 
extremely distressing to the whole region's economy. In fact, the 
region is home to several Fortune 500 companies who have struggled to 
remain competitive in no small part due to above market regional 
airfares.
    Today, through the efforts of federal, state, and local officials, 
this region's airfares are slightly more competitive with the addition 
of low fare airlines, such as Jet Blue, Southwest, Shuttle America, Air 
Tran, and others. As a result, the most recent statistics indicate that 
approximately 4.25 million passengers used BNIA in 2000, breaking the 
previous record of 3.6 million passengers set in 1984. This enhanced 
competition has allowed BNIA to fall from second to 48th 
nationally on the list of cities with high airfares. The Rochester 
market, with new low-fare service from JetBlue, has improved, but not a 
significantly. The pending TWA transaction will also permit American 
Airlines to invest in 49% of DC Air. I originally voiced by concerns 
about Air in May, 2000 when it was announced that this new airlines 
would assume the routes flown by US Airways from the Washington, DC 
metro erea. I fail to see how these concerns about DC Air are addressed 
by effectively transferring control of these routes from one dominant 
carriers, US airways, to another, American. Any solution that does not 
permit new competition, as opposed to repackaged monopolies, is 
unacceptable.
    Many people regularly fly between Buffalo/Rochester and Washington, 
D.C., and are forced to pay much higher fares than those paid on routes 
of similar distance. For example, it in now possible to fly between 
Buffalo/Rochester and New York City for $100 round-trip (where JetBlue 
provides real competition), but it is often necessary to pay almost 
$800 to commute to Washington National Airport from upstate New York 
because of the dominance of one carrier, US Airways, in the market. As 
just one more example, US Airways once charged over $400 on a round-
trip fare from Buffalo to Albany, New York. When Shuttle America began 
to compete on this route, offering a $200 round-trip, US Airways 
immediately matched that fare. Shuttle America has since discontinued 
this service and it comes as no surprise to me that the US Airways fare 
on this route is again close to $400.
    Clearly, fundamental economic theory and these examples dictate 
that the crucial ingredient to low air fares is competition. The 
national economy, and the economy of communities like upstate New York, 
rely on competition to keep air fares low and business expenses 
reasonable. These mergers threaten to eliminate the very heart of 
competition in the airline industry and will negatively affect business 
growth in every industry save this one.
    I urge you to keep these concerns in mind as you carefully examine 
airline consolidation.
    Thank you.

                                

    Statement of Lynn Lenosky, US Airways Master Executive Council 
          President, Association of Flight Attendants, AFL-CIO

    Thank you, ladies and gentlemen of the Judiciary Subcommittee, for 
allowing me this opportunity to provide written testimony on the 
proposed acquisition of US Airways by United Airlines. I am the US 
Airways Master Executive Council President for the Association of 
Flight Attendants, AFL-CIO, representing the more than 10,000 Flight 
Attendants of US Airways.
    In may of 2000, United Airlines announced its proposed purchase of 
US Airways Group. That announcement came only weeks after the US 
Airways Flight Attendants had ratified our new contract agreement 
following three years of collective bargaining. The sale of our company 
took all of us by surprise.
    In our initial public statement, the US Airways Flight Attendants 
said that we needed more details about the proposed transaction before 
we would pass judgment on it. Our concern then, our concern today, and 
our concern in the future is the long-term job security of the 10,000 
US Airways Flight Attendants and their families.
    We have literally hundreds of questions for United Airlines 
management about the transaction, integration, and future plans for the 
Flight Attendant group. If the transaction is ultimately approved by 
the U.S. Department of Justice, we are confident that those concerns 
will be addressed in our negotiations to merge the contracts that cover 
the US Airways and United Flight Attendants. These negotiations must be 
successfully concluded if United intends to merge the operations of the 
two airlines.
    Until now, the focus of debate has been mainly centered on 
consumers and pricing. The elected AFA leaders at US Airways want to 
ensure that the futures of the 10,000 US Airways Flight Attendants and 
their families, and all US Airways employees are considered by this 
Subcommittee.
    As a Flight Attendant for US Airways for the past 15 years, I have 
felt the brunt of this airline's attempts to make it through rough 
times. US Airways Flight Attendants made significant sacrifices in pay 
and work rules in our previous contract to help keep this airline 
afloat. But all the tinkering and reshuffling has not secured the long-
term viability of US Airways.
    US Airways Chairman Stephen Wolf and numerous airline industry 
experts have testified before you and stated in the press that the 
airline is very poorly positioned to continue in its current form. The 
squeeze has already started with US Airways reporting losses of $101 
million in the fourth quarter of the year 2000, and a loss of over $269 
million for the entire year. These losses resulted in spite of fact 
that revenues increased. Chairman Wolf and most of the experts agree 
that, if US Airways were to continue in its current state, it would 
likely fail.
    United is bound by agreement and by law to the US Airways Flight 
Attendant contract. While it contains language that protects our Flight 
Attendants from furloughs through 2004, that contract can only protect 
the jobs of our 10,000 Flight Attendants if US Airways is still in 
business, or if US Airways is purchased by another entity.
    Shutting US Airways' doors would have an irreparable, negative 
impact on the working families at US Airways and on the communities we 
historically have served.
    The reality is that bankruptcies and business closures severely 
hurt not only the working women and men involved, but also their 
families and the communities in which they live. A failed US Airways 
threatens the livelihood of every one of us at this company, and this 
air service to many of the medium and smaller communities we now serve. 
This Subcommittee frequently talks about the air service, but I implore 
you not to lose sight of what this airline means to the tens of 
thousands of employees who work for US Airways, as well.
    It is in the public interest to maintain these jobs, which provide 
medical and dental benefits, retirement benefits, and a living wage. 
Allowing US Airways to shut its doors will force tens of thousands more 
workers and families to seek state-sponsored support through 
unemployment compensation and, potentially, welfare.
    The risk of loss of air service, if this merger is rejected and US 
Airways is allowed to fail, will be worst where US Airways has a 
significant presence: in the eastern portion of this country. Medium 
and smaller cities such as Norfolk, Virginia, Harrisburg, Pennsylvania, 
and Dayton, Ohio depend heavily on US Airways for air service and 
connections to communities across the country and around the globe. If 
US Airways were to ``shut its doors,'' this service could end, leaving 
potential passengers in these areas essentially stranded.
    The nearly guaranteed impact of a US Airways bankruptcy is an 
unemployed workforce and undeserved communities.
    If things aren't allowed to change, this unacceptable alternative 
may be just a step away for US Airways. In the event of an economic 
downturn, it could happen much more quickly.
    You and I have constituencies to serve. As members of the United 
States Senate, I have no doubt you hold dear the livelihood and 
vitality of the individuals and communities within your state. As an 
elected labor leader, I, too, hold dear the well-being of my members. 
It is here that we have common ground.
    At stake are the jobs of tens of thousands of working families--
those of AFA members and your constituents. At stake is the air service 
to thousands of communities--where you constituents and AFA members 
live.
    Like many of you, we believe United Airlines still has many 
questions to answer before this deal should be allowed to be 
consummated.
    And with all of the questions we have about United Airlines' future 
plans for US Airways, and its Flight Attendants in particular, it is 
obvious the United is still struggling to get its current house in 
order. The one issue in particular that concerns Flight Attendants is 
United's stone-walling of discussions to provide a raise to its current 
Flight Attendant group. United has stated its commitment to utilizing 
the standards applied to other work groups at the airline in providing 
a raise, rather than an outdated system that treats Flight Attendants 
like second-class employees. But United has not yet fulfilled that 
promise.
    We urge United to come to a fair agreement with our sisters and 
brothers and we support them in their fight for equal treatment.
    Like your concern for you constituents, AFA's leadership is 
committed to ensuring that the Flight Attendants at US Airways are 
treated fairly in this merger process. As you do for your constituents, 
we remain committed to ensuring our member's futures by utilizing all 
of the legal and strategic means at our disposal. The security and 
future of the working families and communities that depend on US 
Airways should be the major focus of the debate over this proposed 
transaction.
    Thank you for the opportunity to submit the position of US Airways' 
10,000 flight Attendants.

                                

Statement of Roberta Quinn Pilkington, United Airlines Master Executive 
 Council Secretary/Treasurer, Association of Flight Attendants, AFL-CIO

    Thank you members of the Judiciary Subcommittee for providing me 
the opportunity to present this written testimony. My name is Roberta 
Quinn Pilkington. I am a United Airlines flight attendant and member of 
the Association of Flight Attendants, AFL-CIO (AFA), which represents 
more than 50,000 flight attendants at 27 carriers. AFA is the largest 
flight attendant Union in the world. I am the Secretary/Treasurer of 
the United Master Executive Council (MEC) which represents 25,500 
United Airlines flight attendants, located in twenty bases around the 
world. I am writing today to tell the Subcommittee why the United MEC 
has taken a position against the proposed US Airways/United Airlines 
Merger.
    Flight Attendants are known as safety professionals and passenger 
advocates, world-wide. Our presence has been required on aircraft since 
1952. The Association of Flight Attendants led the way to ``Smoke 
Free'' skies, prevention of the removal of the over-wing exit doors on 
the B-747, promotion of the international Air Rage Campaign, Air 
Quality standards onboard aircraft, and ``Whistleblower Protections.'' 
We work very hard to provide a safe and comfortable environment for our 
passengers on every flight, every day.
    When the US Airways/United Airlines merger was first announced in 
May, 2000, the United MEC maintained a neutral position. We wanted to 
wait and hear all the facts and information regarding the merger and 
assess the impact on our members. However, on November 6, 2000, the 
United MEC took a strong position against the merger.
    The summer of 2000 at United Airlines soon became known as the 
``Summer from Hell,'' for not only U.S. air travelers, but United 
flight attendants, as well. United's abysmal service record last summer 
was unprecedented. And, as badly as our passengers were treated, United 
management treated its flight attendants worse. Flight attendants were 
sent to drug infested, filthy hotels for layovers when flights were 
canceled. On several occasions, flight attendants were forced to get 
their ``legal rest'' on aircraft because Crew Scheduling personnel 
claimed they were unable to find hotel accommodations. Contract 
violations were too numerous to begin recounting here, and many of the 
situations are still unresolved more than six months later, despite the 
best efforts of our Union representatives.
    It is clear, that United Airlines continues to have difficulty 
managing its current operation as management violations of our contract 
persist unabated due to management's inability to schedule the airline 
properly. Allowing United to add thousands of flights and tens of 
thousands of employees at a time when it cannot properly manage its 
current operation is asking for trouble.
    We ask you to consider our opinion, as front-line employees of the 
airline, who get a first-hand look at United everyday. United's current 
management problems would be compounded exponentially--in terms of 
further labor and operations problems--If the airline's proposed 
transaction is allowed to go forward at this time.
    Thank you for allowing me to submit these written remarks on behalf 
of the United Airlines flight attendants.

                                

Statement of Betsy Tettelbach, Eastern Region Master Executive Council 
       Vice President, Association of Flight Attendants, AFL-CIO

    Thank you, members of the Judiciary Subcommittee, for allowing me 
this opportunity to provide written testimony on the proposed 
acquisition of US Airways and its wholly-owned subsidiaries by United 
Airlines. I am the Eastern Region Master Executive Council President 
for the Association of Flight Attendants, AFL-CIO, representing the 
more than 600 Flight Attendants at US Airways' wholly-owned express 
carriers Piedmont Airlines, Allegheny Airlines and PSA.
    I am also the Local Council President for the Piedmont flight 
attendants, and I continue to hold my position as a line flight 
attendant for the airline.
    The flight attendants at US Airways' wholly-owned Express carriers 
are worried about where our companies and our careers are headed. At 
this time, it is impossible for us to predict our future. We are a 
workforce dedicated to our company's continued success. We want the 
opportunity to continue our careers with a strong airline under a fair 
contract.
    But since this proposed acquisition by United, the flight 
attendants at the US Airways' wholly-owned airlines have received 
little or no information from management at either US Airways or United 
Airlines on how the proposed purchase of US Airways Group will affect 
our jobs and our communities.
    In the press, United has set off a landslide of speculation about 
whether the airline will continue the own the carriers, or whether they 
will sell our airlines before the proposed acquisition is completed.
    United's fippant treatment of the wholly-owned carriers is 
disturbing. It leaves for all the question the security and future of 
thousands of jobs and the continued, uninterrupted air service to the 
large number of smaller communities that we are proud to serve.
    The wholly-owned carriers are an integral part of the US Airways 
system. In fact, US Airways' Express carriers account for 1,600 daily 
departures. US Airways' mainline system has only 1,100 daily 
departures. That means United must fully outline for its employees and 
the flying public how it intends to maintain the jobs and essential air 
service to most of US Airways system of operation.
    The communities serviced by US Airways Express stand to suffer 
along with the employees. In many cases, US Airways Express is the 
primary link, and often the only link, between smaller cities and 
business and leisure destinations around the world. These communities 
count on the air service and jobs that US Airways Express carriers 
provide. If that service were to be cut off or interrupted because of a 
problem that arises from United's lack of planning, the effect on the 
community and its residents could be devastating.
    For United Airlines and US Airways Group to go forward in the 
merger process without a full and open guarantee of the continued 
existence of the express carriers and their routes is negligent.
    If current events are any indication, the wholly-owned carriers' 
employees are in for a drastic drop in working conditions or a 
potential job loss altogether, and air service to the communities the 
carriers serve is open to a questionable future.
    The chain of events that has already been set into motion is 
disturbing to say the least. A shadow company called Potomac Air has 
been created as part of the planned acquisition. This new airline is 
being set up to be spun off as the planned DC Air. The problem is, 
however, that this carrier is being set up in violation of our 
contract, and therefore the law.
    US Airways and United management have taken Piedmont management and 
Piedmont aircraft and given them to the new airlines, Potomac Air. As 
the new airline, these aircraft fly what were once Piedmont routes. 
This is clearly a shadow, or alter ego, corporation. It is also a 
successor to Piedmont. And, therefore under the terms of our contract, 
the flight attendants that fly on these flights should be covered by 
the Piedmont flight attendant contract.
    The timing of these anti-union activities is suspicious considering 
the flight attendants were forced to ask the National Mediation Board 
for a release from their contract negotiations at the end of December. 
After nearly 20 months of talks, progress has stalled. The flight 
attendants have already voted overwhelmingly to go on strike to get the 
fair pay and treatment they deserve.
    Regardless of which company ultimately owns the wholly-owned 
carriers, the flight attendants at Piedmont, Allegheny and PSA have 
contracts that will convey along with the airline because of the 
successor language we were able to negotiate into our contracts.
    But United's failure fully explain its plans for continuing the 
operations of the wholly-owned US Airways' carriers begs the question: 
Does United truly plan on maintaining the jobs at these airlines that 
are so important to the communities they serve? Will United maintain 
the air service that is also so vital to these communities?
    The flight attendants will continue to demand answers from United 
on these questions. And we thank you for hearing our voices and 
continue to look for the answers to these important questions, as well.


```