THE PROPOSED 

UNITED-CONTINENTAL MERGER: 

POTENTIAL EFFECTS FOR CONSUMERS 

AND INDUSTRY 

(111–120) 

HEARING 

BEFORE THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JUNE 16, 2010 

Printed for the use of the 

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THE PROPOSED UNITED-CONTINENTAL MERGER: POTENTIAL EFFECTS FOR 

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57–059 PDF 2010

THE PROPOSED 

UNITED-CONTINENTAL MERGER: 

POTENTIAL EFFECTS FOR CONSUMERS 

AND INDUSTRY 

(111–120) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

AVIATION 

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

June 16, 2010 

Printed for the use of the 

Committee on Transportation and Infrastructure 

( 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE 

JAMES L. OBERSTAR, Minnesota, Chairman 

NICK J. RAHALL, II, West Virginia, Vice 

Chair 

PETER A. DEFAZIO, Oregon 

JERRY F. COSTELLO, Illinois 

ELEANOR HOLMES NORTON, District of 

Columbia 

JERROLD NADLER, New York 

CORRINE BROWN, Florida 

BOB FILNER, California 

EDDIE BERNICE JOHNSON, Texas 

GENE TAYLOR, Mississippi 

ELIJAH E. CUMMINGS, Maryland 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

BRIAN BAIRD, Washington 

RICK LARSEN, Washington 

MICHAEL E. CAPUANO, Massachusetts 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

RUSS CARNAHAN, Missouri 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

MAZIE K. HIRONO, Hawaii 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

MICHAEL A. ARCURI, New York 

HARRY E. MITCHELL, Arizona 

CHRISTOPHER P. CARNEY, Pennsylvania 

JOHN J. HALL, New York 

STEVE KAGEN, Wisconsin 

STEVE COHEN, Tennessee 

LAURA A. RICHARDSON, California 

ALBIO SIRES, New Jersey 

DONNA F. EDWARDS, Maryland 

SOLOMON P. ORTIZ, Texas 

PHIL HARE, Illinois 

JOHN A. BOCCIERI, Ohio 

MARK H. SCHAUER, Michigan 

BETSY MARKEY, Colorado 

MICHAEL E. MCMAHON, New York 

THOMAS S. P. PERRIELLO, Virginia 

DINA TITUS, Nevada 

HARRY TEAGUE, New Mexico 

JOHN GARAMENDI, California 

HANK JOHNSON, Georgia 

JOHN L. MICA, Florida 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

VERNON J. EHLERS, Michigan 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

CONNIE MACK, Florida 

LYNN A WESTMORELAND, Georgia 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BRETT GUTHRIE, Kentucky 

ANH ‘‘JOSEPH’’ CAO, Louisiana 

AARON SCHOCK, Illinois 

PETE OLSON, Texas 

TOM GRAVES, Georgia 

(II) 

SUBCOMMITTEE ON AVIATION

JERRY F. COSTELLO, Illinois, Chairman 

RUSS CARNAHAN, Missouri 

PARKER GRIFFITH, Alabama 

MICHAEL E. MCMAHON, New York 

PETER A. DEFAZIO, Oregon 

ELEANOR HOLMES NORTON, District of 

Columbia 

BOB FILNER, California 

EDDIE BERNICE JOHNSON, Texas 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

MICHAEL E. CAPUANO, Massachusetts 

DANIEL LIPINSKI, Illinois 

MAZIE K. HIRONO, Hawaii 

HARRY E. MITCHELL, Arizona 

JOHN J. HALL, New York 

STEVE COHEN, Tennessee 

LAURA A. RICHARDSON, California 

JOHN A. BOCCIERI, Ohio, Vice Chair 

NICK J. RAHALL, II, West Virginia 

CORRINE BROWN, Florida 

ELIJAH E. CUMMINGS, Maryland 

JASON ALTMIRE, Pennsylvania 

SOLOMON P. ORTIZ, Texas 

MARK H. SCHAUER, Michigan 

JOHN GARAMENDI, California 

JAMES L. OBERSTAR, Minnesota 

(Ex Officio) 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

VERNON J. EHLERS, Michigan 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

SAM GRAVES, Missouri 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

CHARLES W. DENT, Pennsylvania 

CONNIE MACK, Florida 

LYNN A. WESTMORELAND, Georgia 

JEAN SCHMIDT, Ohio 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BRETT GUTHRIE, Kentucky 

(III) 

(V) 

CONTENTS Page 

Summary of Subject Matter .................................................................................... vii 

TESTIMONY 

Foer, Albert A., President, The American Antitrust Institute ............................. 111 

Friend, Patricia, International President, Association of Flight Attendants– 

CWA ...................................................................................................................... 111 

Gutierrez, Hon. Luis V., a Representative in Congress from the State of 

Illinois ................................................................................................................... 33 

Horan, Hubert, Aviation Analyst and Consultant ................................................ 111 

Kucinich, Hon. Dennis J., a Representative in Congress from the State of 

Ohio ....................................................................................................................... 36 

Mcgee, William, Consultant on Travel and Aviation Issues, Consumers Union 111 

Morse, Captain Wendy, Chairman, United Master Executive Council, Air 

Line Pilots Association ........................................................................................ 111 

Payne, Hon. Donald M., a Representative in Congress from the State of 

New Jersey ........................................................................................................... 34 

Pierce, Captain Jay, Chairman, Continental Master Executive Council, Air 

Line Pilots Association ........................................................................................ 111 

Roach, Jr., Robert, General Vice President of Transportation, International 

Association of Machinists and Aerospace Workers ........................................... 111 

Smisek, Jeffrey, Chairman, President, and Cheif Executive Officer, Continental Airlines ...................................................................................................... 39 

Strine, David, Portfolio Manager, Impala Asset Management, LLC .................. 111 

Tilton, Glenn F., Chairman, President, and Chief Executive Officer, United 

Airlines Corporation ............................................................................................ 39 

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS 

Carnahan, Hon. Russ, of Missouri ......................................................................... 140 

Cohen, Hon. Steve, of Tennessee ............................................................................ 141 

Costello, Hon. Jerry F., of Illinois .......................................................................... 142 

Johnson, Hon. Eddie Bernice, of Texas .................................................................. 148 

Mitchell, Hon. Harry, of Arizona ............................................................................ 152 

Oberstar, Hon. James L., of Minnesota ................................................................. 153 

Petri, Hon. Thomas E., of Wisconsin ..................................................................... 158 

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Foer, Albert A. ......................................................................................................... 191 

Friend, Patricia ........................................................................................................ 201 

Gutierrez, Hon. Luis V. ........................................................................................... 216 

Horan, Hubert .......................................................................................................... 217 

Kucinich, Hon. Dennis J. ........................................................................................ 234 

Mcgee, William ......................................................................................................... 242 

Morse, Captain Wendy ............................................................................................ 246 

Payne, Hon. Donald M. ........................................................................................... 248 

Pierce, Captain Jay ................................................................................................. 250 

Roach, Jr., Robert .................................................................................................... 252 

Smisek, Jeffrey and Tilton, Glenn F. ..................................................................... 270 

Strine, David ............................................................................................................ 282 

SUBMISSIONS FOR THE RECORD 

Coble, Hon. Howard, a Representative in Congress from the State of North 

Carolina: ...............................................................................................................

Letters in support of the merger ................................................................. 173 

Table listing all received letters of support ................................................ 166 

Page

VI 

Costello, Hon. Jerry F., a Representative in Congress from the State of 

Illinois: ..................................................................................................................

Letter from the Department of Justice ....................................................... 3 

Letters in support of the merger ................................................................. 6 

Hirono, Hon. Mazie K., a Representative in Congress from the State of 

Hawaii, letters in support of the merger ............................................................ 83 

LoBiondo, Hon. Frank A., a Representative in Congress from the State of 

New Jersey, letters in support of the merger .................................................... 50 

Petri, Hon. Thomas E., a Representative in Congress from the State of Wisconsin, letters in support of the merger ............................................................. 29 

Smisek, Jeffrey, Chairman, President, and Cheif Executive Officer, Continental Airlines, response to request for information from Hon. Garamendi, 

a Representative in Congress from the State of California .............................. 102 

ADDITIONS TO THE RECORD 

International Brotherhood of Teamsters, Airline Division, Captain David 

Bourne, Director, written testimony ................................................................... 290 

Virgin America Inc., David Cush, Predsident and Cheif Executive Officer, 

written testimony ................................................................................................. 294 

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(1) 

THE PROPOSED UNITED–CONTINENTAL 

MERGER: POSSIBLE EFFECTS FOR CONSUMERS AND THE INDUSTRY 

Wednesday, June 16, 2010 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON AVIATION, 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 9:30 a.m., in room 

2167, Rayburn House Office Building, Hon. Jerry F. Costello 

[Chairman of the Subcommittee] presiding. 

Mr. COSTELLO. The Subcommittee will come to order. The Chair 

will ask that all Members, staff and everyone turn all electronic devices off or on vibrate. 

The Subcommittee is meeting today to receive testimony regarding the proposed United-Continental merger and the possible effects for consumers and the industry. I intend to give a very brief 

opening statement and put the rest of my statement in the record. 

And then I will call on Mr. Petri for his opening statement. And 

then we will go immediately to our first panel, the Members panel. 

I welcome everyone today to the Aviation Subcommittee hearing 

on the proposed merger between United Airlines and Continental 

Airlines and its potential effects for consumers and the industry. 

In particular, I want to welcome the families of Colgan Flight 3407 

for being with us today and for their steadfast support to improve 

pilot training and safety in the industry. 

Given that we have several panels today, I will be brief with my 

statement and ask Mr. Petri to do the same so that we can go to 

our first panel. 

Last month, United and Continental announced they would 

merge to form an airline that by several measures will be the largest airline in the world. United and Continental claim the proposed 

merger will generate up to $1.2 billion in annual revenue and will 

create cost synergies for more effective aircraft utilization, a more 

comprehensive route network, and improved operation efficiencies. 

In 2008 this Subcommittee also held a hearing on the merger of 

Delta Airlines and Northwest Airlines. At that time there was 

speculation that other carriers within the industry would merge to 

create a U.S. airline industry dominated by just a few mega-carriers. 

Just 2 years later, as many predicted, we are meeting here again 

today to discuss another proposed combination that would surpass 

Delta as the world’s largest. This merger would leave our U.S. InVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 P:\DOCS\57059.0 KAYLA
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dustry with only four legacy airlines. We all have a shared interest 

in maintaining a safe, reliable, competitive, and profitable air 

transportation system, and we must ask critical questions on the 

long-term implications of continued mergers for the future of the 

industry. 

I am very concerned about how this merger, if approved, will affect ticket prices for passengers, how the merger will affect pilots, 

flight attendants, mechanics and employees of both airlines, how 

many employees will lose their jobs or receive reduced benefits and 

wages, and what will happen with existing union contracts. 

Less competition generally leads to higher prices, fewer choices, 

and a loss of jobs. I sympathize with the thousands of airline employees who have suffered as a result of airline financial problems 

in the past. Many have seen their hard-earned pensions drop during airline bankruptcies, seniority rights disappear, labor disputes 

go unresolved, wages frozen or cut, d jobs lost to outsourcing and 

consolidation. 

This merger should not take place at the expense of consumers 

or the workers who have already made tremendous sacrifices. Unfortunately, past mergers have not always demonstrated that consumers and employees will be better served by consolidation. 

Therefore, what I want to learn from this hearing is, number 

one, how is this proposed merger different from past mergers? And 

number two, how will this merger really affect consumers and employees? 

Currently, both the Department of Justice and the Department 

of Transportation are in the process of reviewing the merger. I understand that United and Continental are hopeful a decision will 

be made by the end of the year. Although we do not have a government panel testifying here today, I trust that the appropriate Federal agencies will make certain that this proposed merger receives 

a thorough review and will ensure that it is consistent with the requirements of the law. 

Finally, I am interested in hearing from the analysts on our second panel regarding the pros and cons of this merger, the prospects 

for future mergers, and whether low-cost carriers will be able to effectively keep airfares down in markets affected by the merger. 

Before I recognize Mr. Petri for his opening statement or remarks, I ask unanimous consent to allow 2 weeks for all Members 

to revise and extend their remarks and to permit the submission 

of additional statements and materials by Members and witnesses. 

Without objection, so ordered. 

Additionally, at my request, the Department of Justice has prepared a letter explaining its antitrust review process in general. 

The letter does not deal with this specific merger, but it may be 

helpful to Members of the Subcommittee in understanding the 

process. In addition, we have received letters from organizations 

concerning this specific merger. And I will ask unanimous consent 

that these letters be placed into the record. Without objection, so 

ordered. 

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Mr. COSTELLO. The Chair now recognizes Mr. Petri for his opening statement. 

Mr. PETRI. Mr. Chairman, thank you for holding this very important hearing. It is important that the Subcommittee use this hearing to fully explore the proposed United-Continental merger in 

order to gauge not just its potential effects on both companies, and 

their thousands of employees, but even, more importantly, on consumers. 

Since 2001 the airline industry has lost over 150,000 jobs and 

seen over 35 bankruptcies. In today’s economy airlines must significantly cut costs and increase operating efficiency or face closing 

their doors. 

Over the past decade commercial aviation industry has faced a 

variety of challenges, including terrorist attacks, volatile fuel 

prices, and a massive decline in demand due to the global recession. Unprecedented events such as SARS, H1N1 and the volcanic 

ash plume also have added to the industry’s woes. 

In addition to these financial strains, U.S. carriers must also 

compete in the world marketplace against financially strong competitors; some, national champions. We cannot deny that the airline industry is a global industry. Decisions to merge over the last 

few years have in part been driven by the need to improve U.S. 

Carriers’ ability to compete on a global basis. 

Last month United Airlines and Continental Airlines announced 

their intention to merge. Global competition, the struggling economy, and a need to improve operating efficiency are cited as the 

main reasons for this. Since the proposed merger was announced, 

aviation experts, labor groups, consumer advocates and other interested parties have commented both for and against airline mergers 

in general and the United-Continental merger specifically. 

The proposed merger’s impact on consumers, competition in the 

marketplace, air service, airfares, and a combined 89,000 employees has been the subject of a great deal of speculation. 

Today we have before us representatives of the interested groups 

to testify about airline consolidations, focusing on the United-Continental merger. We will also hear from the chief executive officers 

of both airlines. It is important that the Aviation Subcommittee 

hear from the interested parties to gain a better understanding of 

the proposed merger of United and Continental. 

Procedurally, the merger cannot be completed, as our Chairman 

has just pointed out, without approval from the antitrust division 

of the Department of Justice. That review, currently underway for 

the proposed merger, is a grueling and thorough process that ensures that the proposal will not have negative consequences on 

competition. 

In the interest of fairness, I urge the Department to continue 

their tradition of objectivity and impartiality as they conduct their 

antitrust analysis. 

I look forward to hearing from all of our witnesses. And before 

I yield back the balance of my time, I would ask unanimous consent that letters of support from various Wisconsin interests be included in the hearing record. 

Mr. COSTELLO. Without objection. 

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Mr. COSTELLO. The Chair thanks the Ranking Member for his 

opening statement, and now recognizes our first panel, our colleagues: The Honorable Luis Gutierrez, who is a Member of Congress from the Fourth District of Illinois; Mr. Donald Payne, who 

is the Member of Congress representing the Tenth District of New 

Jersey; and Congressman Dennis Kucinich, who is on his way, who 

represents the Tenth District of Ohio. 

Gentlemen, your full statements will appear in the record. The 

Chair now recognizes Congressman Gutierrez. 

TESTIMONY OF THE HON. LUIS V. GUTIERREZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Mr. GUTIERREZ. Thank you, Chairman Costello and Ranking 

Member Petri and the distinguished colleagues of the Committee. 

Thank you for inviting me to speak before the Committee on the 

proposed merger of United and Continental Airlines. 

While this merger has generally been greeted with enthusiasm, 

I believe we should not overlook the potential serious impact it 

could have on consumers and the employees. For consumers, the 

issues of airline fees, which we all know cover just about everything except the air you breathe on board those airplanes, requires 

further scrutiny. In 2009, United and Continental Airlines made $523 million in 

baggage fees alone. Recently, United announced that its passenger 

unit revenue was up almost 25 percent from a year ago and topped 

pre-recession levels. Given this good news for United, I believe it 

is a good time to review the fairness and the necessity of excessive 

fees. 

The airline industry reported $1.2 billion in 1 year in extra fees 

last year. They are almost as out of whack as the credit card industry is. I also want to ensure that lower customers of frequent flyer 

programs have easy access to their rewards without being misled 

by the airlines. After receiving complaints from residents in my district, I began to look at the fine print on these highly promoted programs, which are a significant source of revenue for the airlines. 

Unfortunately, I find they lack reliability, honesty, and fairness. If 

you read the fine print you will find, as I did, airlines can deny a 

ticket, change the terms of the awards, charge a fee, and even 

eliminate the program at will. Congress must stand up for consumers and protect their interests in the frequent flyer mile program. 

I am also deeply concerned with the impact this merger will have 

on United and Continental employees. To keep these airlines in 

business, workers have made serious concessions, and their requests deserve consideration. 

Last week I met with United and Continental employees in Chicago, and I heard from Christie Shagel, a United Airlines flight attendant. She shared with me the following, and I quote, Today I 

am at work 33 percent more, but my savings account is depleted. 

I am forced to sell my town home, I can’t afford a health-care deductible or meat at the grocery store. My family has suffered so 

United Airlines could succeed, and executives have awarded themselves with millions of dollars every year that we have struggled 

for, unquote. 

34 

I also heard from Richard Petrowski, a union shop foreman and 

a 40-year United Airlines employee. He shared with us, quote, In 

the past few years, as so many airlines have cut wages and benefits, they realized they could also save money by cutting maintenance jobs and contracting out critical aircraft maintenance to the 

lowest bidder. I am not talking about changing a light bulb in the 

laboratory, I am talking about critical maintenance, work that if 

not held to the highest standard puts you, your family and my fellow United employees at risk. 

United Captain Herb Hunter told me, From an industry perspective, perhaps the greatest concern of this Nation’s airline pilots is 

the continued outsourcing of pilots’ jobs. Nearly half the passengers 

in the United States are now carried, most unknowingly, by subcontract airlines. The subcontractors are in a continual churn to 

sell their services to the major airlines at the lowest possible cost, 

violating, many times, safety guidelines. 

I think United and Continental have said far too little about how 

this merger will actually affect their frontline employees. We do 

know, however—and this is something that causes me great consternation, Mr. Chairman, Members of the Committee—we do 

know, however, that the merger might affect a few employees like 

the chief marketing financial and operations officer for Continental 

Airlines. They stand to receive a severance package totaling $27 

million if they choose not to move to Chicago and join the new 

United. 

To put this in perspective, $27 million would be a 10 percent pay 

raise for each of United’s flight attendants, and it would be well 

deserved. 

Before Congress gives this merger a stamp of approval, I strongly 

believe that United and Continental need to bring their employees 

to the table and consider their request. In addition, these airlines 

need to make a commitment to reduce ancillary fees and better 

protect their loyal customers. 

I thank you for allowing me to speak, and end by saying we can 

stand up for the consumers, we can stand up for the 40,000 employees at United and Continental. They deserve us to stand up for 

them today. 

Thank you so much, Mr. Chairman. 

Mr. COSTELLO. The Chair thanks my friend from Illinois for his 

thoughtful testimony. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Payne. 

TESTIMONY OF THE HON. DONALD M. PAYNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PAYNE. Thank you very much Mr. Chairman, Ranking Member Petri, distinguished Members of the Committee. Thank you for 

this opportunity for me to testify, and also it is great to be with 

my colleague here. Generally we are 100 percent on the same page. 

I think that this page might be a little tilted in the other direction 

at this time. 

However, we are certainly here today to discuss the proposed 

merger of United and Continental Airlines. Continental Airlines is 

the largest employer in my city of Newark. I am here today to offer 

35 

my support for this proposed merger. As a general policy, though, 

I am generally concerned about mergers because, in instances, it 

does mean significant reductions in jobs, stifling competition, and 

some of the other situations that we heard the previous speaker 

talk about. However, this airline merger is different, in my opinion. 

These two airlines have very complementary routes with very little overlap. When there is very little overlap, there is no need for 

significant reduction of employees. This is a fact that Continental’s 

CEO has confirmed to me and the other Members of the New Jersey delegation. I know that Continental has lost $1 billion since the 

9/11 attack. And I know that the employees have lost jobs and have 

been forced to accept wage reductions and made other sacrifices 

during this time. This is not good for the many Continental employees who live in my district. 

However, the airline industry has also struggled with the high 

price of oil and with the impact of the 2008 recession. I have met 

with Continental’s CEO Jeff Smisek to discuss this merger. And it 

has been made clear to me and Members of the New Jersey delegation that without the merger, Continental cannot be assured of a 

long and prosperous future. They may be able to earn a modest 

profit for some years, but that is not a formula for long-term success if they are losing money in the other years. Continental seems 

determined to try to turn their fortunes around through this merger. I have talked to Jeff and we expect Continental to bring its 

more favorable labor-management relations culture to the new airline, as I have encouraged him to complete the necessary collective 

bargaining agreements early in the process. I trust that he will 

conduct those negotiations with all the unions with dignity and respect. 

The unions will be critical to the long-term success of this merger. Employees’ wages, retirement securities, and health benefits 

must be a top priority for the new combined carrier. 

It is comforting to know that Continental has fully respected the 

decisions of their employees to organize. Although it was a hard 

fought battle, in February of 2010 Continental’s ramp workers 

made history when ballots were counted and the results showed 

that an overwhelming majority of the workers voted to join the 

Teamsters Union. This was a strong testament to the fact that fleet 

service workers at Continental are working to help create an environment that will sustain positive relationships between Continental and its workers who choose to unionize. 

I believe this merger is good for my city of Newark, and for New 

Jersey, because it will allow for growth of jobs and service. Continental’s hub in Newark is a crown jewel. It is a premier domestic 

and international gateway to the New York and New Jersey region; 

the Nation’s, of course, busiest financial hub. 

The Newark International Airport has been one of the fastest 

growing airports during the past two decades, thanks to Continental. Without a doubt, the city of Newark and the State of New 

Jersey have benefited from the airline’s presence. Over the years 

Continental has not only made significant investments in infrastructure at Newark International Airport, but the airline’s leadership has successfully worked with local government to establish job 

36 

creation programs and promote other important growth initiatives 

in the State. 

Just this summer, there are nearly 75 young people benefiting 

from a summer internship program that allows them to learn valuable customer service skills as they spend each day working the 

crowds at the ticket counter. 

I have a long history of supporting Continental because they 

have a long history of supporting Newark and New Jersey. Newark 

is on the verge of a renaissance, and Continental is really one of 

the reasons for that. They have opened new routes to South America, Europe, China and Japan. While I have served in Congress, 

the additional new routes have really enhanced the airport. 

We have increased use of our airport by business to leisure passengers from around the country and around the world. And more 

importantly, we have increased jobs, jobs that come with good benefits from both part-time and full-time employees. 

As a Member of Congress and as a Member of the House Foreign 

Relations Committee, I travel the world to carry out my responsibilities, I see the other global carriers that Continental must compete with. And as much as Continental has changed and grown in 

the last decade, they need to be bigger if they are going to compete 

with British airline Iberia and KLM, combined with Air France. 

I realize that Chairman Oberstar and some of my colleagues may 

not agree about the benefits of this merger, but from my vantage 

point, given the current challenging economic landscape, the proposed merger between Continental and United is the best way to 

ensure sustainability for the airline industry for jobs in our region 

and to compete with the world carriers. 

So with that, Mr. Chairman, I appreciate the opportunity to testify before this Subcommittee. 

Mr. COSTELLO. The Chair thanks our colleague and friend from 

New Jersey. 

The Chair now recognizes the gentleman from Ohio, Mr. 

Kucinich. 

TESTIMONY OF THE HON. DENNIS J. KUCINICH, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO 

Mr. KUCINICH. Thank you very much, Chairman Costello and 

Members of the Subcommittee. Thanks for this invitation to testify 

on the proposed merger of United Airlines and Continental Airlines. 

In hindsight it is easy to see that the merger is a culmination 

of Continental’s efforts over the past 2 years to integrate its operation with United. But a year ago, Continental was insisting that 

it did not need to merge; rather, the company pursued antitrust 

immunity to join United and 20 other airlines in the far-reaching 

Star Marketing Alliance, and United and other airlines in the Atlantic, plus a joint venture for trans-Atlantic travel. 

Over the strenuous objections of the Department of Justice which 

speared substantial consumer harm, Continental received antitrust 

immunity and now can engage in flight code sharing, coordinate 

reservations and frequent flyer plans, and under the joint venture 

can even share revenues. Now Continental and United are back, 

pursuing a merger they said last year was not necessary. 

37 

When last month the proposed merger was announced, and at 

the request of the mayor of Cleveland, I directed staff of the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee, which I chair, to investigate its legal and 

policy implications. In addition to the significant antitrust concerns, which I will briefly outline here, we found the troubling possibility that Continental may not have been completely forthright 

with Congress and regulators with respect to its marketing alliance 

and joint venture last year or the proposed merger before us today. 

Yesterday I sent a document request to Continental that is directly relevant to significant concerns produced by the inquiry, and 

discussed below, regarding the legality of the proposed merger 

under section 7 of the Clayton Act and the Horizontal Merger 

Guidelines, the merger’s advisability as a matter of policy, and the 

veracity of Continental’s and United’s representations regarding 

the merger’s purposes and likely effects. 

When Continental pursued antitrust immunity for its marketing 

alliance and joint venture, key stakeholders concluded that the alliance was in lieu of a full-blown merger. Senator John Cornyn stated last month at a Senate Judiciary Subcommittee hearing that 

Continental officials informed him that the alliance and joint venture was an attractive alternative to Continental merging with 

United. Continental had explained to Senator Cornyn that a merger ‘‘wasn’t in the best interest of shareholders, employees or the 

communities Continental serves’’; antitrust immunity for the alliance and joint venture ‘‘would provide much of the benefit of a 

merger without the labor integration and financial risk’’; and, 

‘‘Houston and Cleveland would be some of the biggest losers in 

terms of jobs’’ in the event of a merger. 

Senator Cornyn and others wrote the Department of Transportation supporting antitrust immunity on the grounds that it was 

preferable to a full-scale merger between Continental and United 

that could lead to flight reduction and job losses. Yet only one year 

later, after receiving government support for its entry into a marketing alliance, Continental is now pursuing a merger. 

Is Continental’s change in business strategy just a coincidence? 

I find that hard to believe. It is more likely that this was their plan 

all along. Their apparent willingness to make whatever representations necessary to garner support for its plan cast doubt on both 

Continental’s stated motivations for the present merger and its intended postmerger conduct. 

Continental and United have stated they have no present plans 

to close hubs or reduce services but, instead, plan to moderately decrease overhead costs and more substantially realize between $800 

million and $900 million of revenue gains by more effectively routing network customers through hubs for more profitable business 

and international flights and more efficiently deploying New 

United’s larger fleet. Not surprisingly, Continental does not list 

cutting flights or raising fares as a means to revenue growth. 

Market observers, including some who support the merger, take 

a different view. First, they doubt the magnitude of the merger 

specific efficiencies. A substantial portion of the claimed network 

efficiency may have already been realized by Continental joining 

United in the Star ATI and the A++ joint venture. Moreover, anaVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
38 

lysts point out that the purported cost and revenue synergies of the 

past airline mergers have almost never materialized. And, despite 

the theoretical ability of low-cost and regional carriers to enter 

markets exited by merging airlines, service cuts and loss of hubs 

have been a common consequence. Most analysts flatly predict that 

my city, Cleveland, would lose its hub and the communities formerly served by hub will not be supplied either New United service 

out of surviving hubs or low-cost carriers entering the market. 

Perhaps more troubling is the way industry analysts believe new 

United may increase its profitability by eliminating up to 10 percent of its post-merger capacity and in raising fares. According to 

many merger supporters, the industry’s tens of billions of dollars 

of losses since deregulation are largely a product of destructive 

competition among airlines that has led to overcapacity and artificially low prices. The New United and the industry in general 

would profit from the decreased number of market participants in 

efforts to reduce capacity and raise fares. 

While sustained profitability for our domestic airline industry is 

important, Mr. Chairman, I don’t believe that destructive competition is the cause of the industry’s ills, and fear that as a remedy 

consolidation may well be worse than the disease. 

First, increased fares and declines in service are prototypical examples of the adverse competitive effects of exercise of market 

power. Revenue gains based on these practices are not merger-related efficiencies under the law. 

Second, it is possible that if any efficiency gains do materialize, 

they will be realized through the Star Alliance and the A++ joint 

venture. DOJ should carefully analyze the efficiencies from the alliance and joint venture and whether its fears regarding the possible 

anticompetitive effect of those immunized arrangements have materialized before it even considers approval of a full-pledged merger. 

In addition, there are a number of other possibilities for anticompetitive behavior that could be exacerbated by further industry 

consolidation, such as the merger of American Airlines and U.S. 

Airways that is predicted to occur if United and Continental merge. 

Others include increased market power negotiations with bulk-buying business clients, increased leverage to force concessions from 

vendors, travel agents, and even localities which may feel more 

pressure to provide publicly funded infrastructure and facilities. 

Finally, the size of the new United could raise the prospect of 

systemic importance if not systemic risk to the economy. Even if 

the new United is not officially considered, quote, too-big-to-fail, 

unquote, it would certainly be big enough to exert increased power 

over regulators. 

If the current financial crisis has taught us anything it is the difficulty in predicting ex ante the myriad ways in which immense 

and concentrated corporate entities can leverage their corporate 

power to the detriment of citizens. 

Mr. Chairman, Assistant Attorney General Christine Varney has 

explained that the administration’s pursuit of vigorous antitrust 

enforcement in this challenging era will involve the development of 

competition policy based not simply on the case before it, but on 

consideration of, ‘‘the overall state of competition in the industries 

39 

which we are reviewing’’ including consideration of market trends 

and dynamics, and not lose sight of the broader impact of antitrust 

enforcement. It will be important, Mr. Chairman, for this Subcommittee to hold the administration to that promise. While traditional antitrust enforcement would examine the danger that the 

competition would immediately be reduced between city pairs that 

have been served by both incumbent airlines, such a limited analysis is not sufficient because it does not adequately capture trends 

and dynamics in the industry. DOJ should consider whether the 

new United will exercise market power to the detriment of consumers through the adoption of anticompetitive practices outlined 

here and elsewhere. 

I really thank the Chair for his indulgence and Members of the 

Committee for the opportunity to testify, and thank you. 

Mr. COSTELLO. The Chair and Members of the Subcommittee 

thank you for your testimony. 

And, gentlemen, we thank all of you for taking time out of your 

busy schedule to offer testimony to the Subcommittee this morning. 

We recognize that there are a number of other hearings going on 

with other Committees, and out of respect for your schedule and 

time commitment, we thank you and would ask that the next panel 

come forward to offer their testimony. Thank you again. 

Mr. COSTELLO. The next panel will consist of both of the CEOs 

of United Airlines and Continental: Mr. Glenn F. Tilton, who is the 

Chairman, President and CEO of the United Airlines Corporation; 

and Mr. Jeffrey Smisek, who is the Chairman, President and CEO 

of Continental Airlines. 

Gentlemen, we appreciate you coming before the Subcommittee 

today to offer your testimony. As you know, your entire statement 

will appear in the record. We would ask you to summarize your 

statement in approximately 5 minutes, and then we will give you 

an opportunity for myself and other Members of the Subcommittee 

to ask questions and to follow up. 

TESTIMONY OF GLENN F. TILTON, CHAIRMAN, PRESIDENT 

AND CEO, UNITED AIRLINES CORPORATION; AND JEFFREY 

SMISEK, CHAIRMAN, PRESIDENT AND CEO, CONTINENTAL 

AIRLINES, INC. 

Mr. COSTELLO. So with that, the Chair now recognizes Mr. 

Tilton. 

Mr. TILTON. Good morning Chairman Costello, Ranking Member 

Petri and Members of the Committee. We appreciate the opportunity to offer our comments this morning. 

Let me start by simply saying that the status quo for our industry is clearly unacceptable. It is extraordinary and insightful that 

this industry has lost some $60 billion and 150,000 jobs in the 

United States in the last ten years, delivering the worst financial 

performance of any major industry, along with 186 bankruptcies 

over the last 30 years. Both before and after deregulation, this industry has been systemically incapable of earning even a modest 

profit, let alone a reasonable return, on the large investment that 

we have made in aircraft, facilities, and technology. 

It is ironic that this industry, unable to cover its cost of borrowing, is expected to be and indeed must be a key enabler of the 

40 

country’s economic recovery. As leaders, you all know the critical 

role our industry plays nationally in the communities that you individually represent, creating commerce, tourism, jobs and contributing to the overall economy. Regardless of one’s personal perspective, we can likely all agree serial bankruptcies and the asset distribution of failed companies cannot be an acceptable industry 

strategy. We must create economic sustainability through the business cycles. 

And to that end, our objective at United has been very consistent: to put our company on a path to sustained profitability. 

Without profitability we cannot provide a stable environment for 

the employees that Mr. Gutierrez mentioned. We cannot maintain 

service to communities, large or small, or invest in customer service, nor can we create value for our shareholders. To be profitable, 

we must successfully compete in the global market of today, a very 

different market than the market of ten years ago or, indeed, the 

market of 30 years ago. 

Today, low-cost carriers are very well established across the 

United States. And Southwest Airlines will continue to be our 

country’s largest domestic airline in terms of number of passengers 

carried after the United-Continental merger. Today, in the marketplace of today, international competitors have merged and powerful 

new entrants continue to gain ground across the globe. Today, the 

world’s largest airlines, measured by revenue, are Lufthansa and 

Air France-KLM with more than half of the trans-Atlantic capacity 

and more than two-thirds of the trans-Pacific capacity provided by 

foreign carriers. 

United and Continental have taken significant actions to improve 

our performance, competing across both international and domestic 

markets, and, at the same time, finding a way to connect small 

U.S. communities into our combined route network. In this dynamic, a highly competitive environment, these actions have not 

been enough. 

Our proposed merger is a very logical and essential next step toward our objective of sustained profitability. Let me be very clear: 

Without this merger we would not have the $1 billion to $1.2 billion in synergies to improve products and to improve service for our 

customers, nor would we have the financial means to create better 

career opportunities for our employees. We would not be as successful a competitor as we need to be to enable economic development across the country. 

Our merger enhances and strengthens service for those who rely 

on our network in nearly 148 small communities in metropolitan 

areas, providing business lifelines and collateral economic benefit 

to those communities that they otherwise would not have. Carriers 

compete vigorously on both price and service, and our merger will 

not in any way change that reality. There is significant low-cost 

carrier competition at every single one of our hubs, including the 

15 nonstop routes on which we overlap. 

Over the last decade ticket prices across the United States have 

declined by 30 percent, adjusted for inflation, with fares to small 

communities also declining. Our expected revenue synergies are derived from better service and expanded network; they are not based 

on fare increases. This represents excellent value in more destinaVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
41 

tions for consumers across the country. Consumers will benefit 

from intense price competition across the industry due to the prevalence today of low-cost carriers, other network carriers, and fair 

transparency. 

The competitive landscape has changed, and to be a company 

that attracts and provides value for customers, shareholders, and 

employees, our two companies also have to change. We are creating 

the leading global airline with the platform for a healthy company, 

a profitable company that can compete in the realities of today’s 

global marketplace, provide job opportunities and provide vital 

connectivity for the many customers and communities that together 

we serve. 

Thank you very much, Mr. Chairman. 

Mr. COSTELLO. The Chair thanks you, Mr. Tilton. 

The Chair now recognizes Mr. Smisek. 

Mr. SMISEK. Good morning. I want to thank the Chairman, the 

Ranking Member, and the Members of this Committee for the opportunity to be here today. 

I want to make four basic points. This merger is good for employees, it is good for communities, it is good for consumers and it is 

good for competition. 

Let me start with employees. The volatility and instability of the 

airline industry have had harsh effects on employment. Before 9/ 

11, Continental had over 54,000 employees. Today, despite being 

the only network carrier to grown since 9/11, we have less than 

41,000 employees and we have lost over $1 billion. Before 9/11, 

United had over 100,000 employees. Today it has about 46,000. 

After we merge, our employees will be part of a larger, financially stronger, and more geographically diverse carrier. This carrier will be better able to compete in the global marketplace and 

better able to withstand the external shocks that hit our industry 

with disappointing regularity. Because of how little we overlap, the 

merger will have minimal effect on the jobs of our frontline employees. 

We are committed to continuing our cooperative labor relations 

and integrating our workforces in a fair and equitable manner, negotiating contracts with our unions that are fair to the employees 

and fair to the company. United has two union board members, 

and those union board seats will continue after this merger. 

The merger will also enable us to continue to provide service to 

small communities, many of which you represent. The turmoil in 

our industry has been devastating to many small- and medium-size 

communities. As you know, low-cost carriers have not and will not 

serve small communities, as such service is inconsistent with their 

point-to-point business model that relies largely on local traffic. As 

a result, over 200 small communities are served only by network 

carriers. 

As a merged carrier, we plan to continue service to all the communities we serve, including 148 small communities. The merger 

will be good for consumers as well. The combined airline will offer 

consumers an unparalleled global, integrated network, and the industry’s leading frequent flyer program. It will have the financial 

wherewithal to invest in technology, acquire new aircraft, and invest in its people and its product. We will have a young and fuelVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
42 

efficient fleet, and our new aircraft orders will permit us to retire 

our older, less fuel-efficient aircraft. 

Continental brings to the merger its working-together culture of 

dignity and respect and direct, open, and honest communication. 

This culture causes an environment where employees enjoy coming 

to work every day, and as a result, give great customer service. 

United brings to the merger talented employees who are delivering 

industry-leading on-time performance. 

The merger will also enhance competition. Continental and 

United have highly complementary route networks. Our networks 

are so complementary that we have only minimal nonstop overlaps, 

each of which faces significant competition after the merger. Over 

85 percent of our nonstop U.S. passengers have a direct low-cost 

carrier alternative. Moreover, low-cost carriers compete at all of our 

hubs and at airports adjacent to our hubs. 

As a result of the robust competition in the U.S., airfares have 

declined by over 30 percent over the past decade on an inflationadjusted basis. 

We also face significant competition from foreign carriers which 

themselves have merged to create attractive global networks, including Air France-KLM, the Lufthansa group of companies, and 

British Airways Iberia. The merged Continental-United will enable 

us as a U.S. carrier to compete effectively against these large foreign carriers. 

In sum, the merger will create a strong, financially viable airline 

that can offer good-paying careers and secure retirements to our coworkers; great customer service in an unparalleled network to consumers; and reliable service to communities. The merger will provide us with a platform for sustained profitability and position us 

to succeed in the highly competitive domestic and global aviation 

industry, better positioned than either of us could be alone or together in an alliance. 

Thank you very much. 

Mr. COSTELLO. The Chair thanks you. 

And let me start with a few questions. In my opening statement, 

I expressed my concern, and you have heard from both the Members who testified here before us today, and I think every Member 

of this Subcommittee is concerned about the employees at both airlines, what happens to them. 

We know what has happened in past mergers. And we have 

heard your testimony, Mr. Smisek, that there will be minimal effect on the employees. And Mr. Tilton, you state in your written 

testimony that you maintain that any necessary reductions in 

frontline employees will come from retirements, normal attrition, 

and voluntary programs. 

Can you make a commitment to this Subcommittee that in fact 

the combined workforce, if the merger does go through, that there 

will not be layoffs, that people will not lose their jobs as a result 

of the merger? 

Mr. TILTON. I can speak, certainly, to the effect of the merger despite all of the external shocks that this industry has experienced 

that has resulted in the numbers that Jeff shared with you, the decline in employment at his company and the decline in employment 

at our company. This merger will not have a negative effect on our 

43 

level of frontline employment; in fact, it should give us the opportunity to grow frontline employment through the growth of the two 

companies themselves, absolutely. 

Mr. COSTELLO. Mr. Smisek. 

Mr. SMISEK. Glenn is correct. Now, I will say that because in any 

merger in headquarters jobs, overhead jobs, there is only one CEO, 

there is only one CFO, there is only one general counsel, et cetera. 

There will be reductions in headquarters jobs, as there would in 

any merger. But the vast majority of jobs at the combined airline 

are frontline jobs, and because we are so complementary we do not 

expect any significant effect on employment on frontline jobs. 

Mr. COSTELLO. In the Delta-Northwest merger in 2008, when 

they announced the merger, they also indicated that the pilot union 

had reached an agreement with the union prior to announcing the 

proposed merger. Is there a reason why that this wasn’t done in 

this proposed merger with the pilot unions of the respective airlines? 

Mr. SMISEK. Sure. Let me speak to that if I could. This merger 

came together very quickly. We learned that United Airlines, 

through pressure, of course, was in negotiations to merge with another carrier, and United was the right strategic partner for Continental. So we needed to move swiftly, and we did so over about a 

3-week period. That swiftness was such that the processes for 

reaching agreements during collective bargaining agreements with 

our pilots or other work groups could not move that swiftly. 

We are in the process, and you will be hearing from our pilots 

on the next panel, we are in the process of working together with 

the pilots’ union and hope to reach a joint collective bargaining 

agreement promptly. It is my strong desire to reach joint collective 

bargaining agreements as promptly as possible with all work 

groups. 

Mr. COSTELLO. It is my understanding that both United and Continental units for the Airlines Pilots Association formed a special 

committee to discuss potential merger issues in 2008. And you just 

indicated basically that there wasn’t enough time, that this came 

about quickly. If they formed a committee in 2008, and this proposed merger comes, the announcement, 2 years later, can you explain that? 

Mr. TILTON. So, Mr. Chairman, it is probably fair to say that the 

attention of our pilot union, the same as Jeff’s, was largely focused 

in the run-up to Jeff’s reengagement with myself on another transaction. So during that period of time we didn’t have any further 

conversations relative to a merger with Continental. And as Jeff 

appropriately says, we were having a discussion with another company. And our pilots’ union had a very distinct point of view about 

the difficulties associated with that transaction potentially, and 

they were focused on, as we were, the issues associated with that 

transaction rather than this one. And that is just a reasonable 

thing to have had happen. 

Now, let me be very clear. They also made it clear to me that 

they preferred this transaction rather than that one, but we 

weren’t preparing for it, Mr. Chairman. 

Mr. COSTELLO. Some United retirees and other stakeholders 

have made note of the fact that both of you have indicated that the 

44 

merger would generate $1.2 billion in synergies. And since United 

shed its obligation for employee pensions during bankruptcy, they 

are wondering if, with this merger, if in fact it takes place, is there 

any hope that employee pensions might be restored with the 

merged carrier? And they want to know how they are affected. 

Mr. TILTON. So, Mr. Chairman, you may recall that during the 

bankruptcy, the action taken relative to defined benefit plans was 

actually taken by the PPGC itself, and that was at their discretion. 

Along with the decision to guarantee at the PPGC guaranteed 

level, the defined benefit plans that the PPGC assumed responsibility for was a condition that a defined benefit plan at United per 

se not be restored. We replaced those pensions, those defined benefit plans, with defined contribution plans. 

We find ourselves in a situation where the two companies have 

slightly different retirement plans. We will work very hard together to make sure that the retirement plans that we put together 

for all employees are the best that they can be. 

Mr. COSTELLO. So the short answer to those who lost their pensions with the bankruptcy, how will they be affected? 

Mr. TILTON. That will be unchanged. For the current retirees, 

there is no provision in the merger that will affect the retirement 

plans of current retirees. 

Mr. COSTELLO. So they should not hold out hope that they in fact 

will see any of their—— 

Mr. TILTON. I don’t see any reversal of the decision made by the 

PPGC, Mr. Chairman. 

Mr. COSTELLO. The Chair now recognizes the Ranking Member, 

Mr. Petri. 

Mr. PETRI. Thank you very much, Mr. Chairman. The Chairman 

of our Full Committee often eloquently says the number one job of 

our Committee is to ensure, first and foremost, that safety in the 

traveling public is observed. And we have, as the Chairman pointed 

out, some representatives here of the Colgan flight from Newark to 

Buffalo. Sixty billion dollars of losses since 2001 as an industry 

puts an awful lot of pressure on the whole system. We have been 

fortunate, we have the most remarkable safety record overall. And 

I know—or certainly hope you are committed to maintaining that. 

But it has to be hard and puts a lot of pressure on frontline employees and others, as we saw with the Colgan crew and the difficulties that they had to operate under as individuals flying long 

hours and so on to make their work schedules and all the rest. 

And I just wonder if you could comment on any effect this would 

have or what—we have been having a lot of hearings, we are working on legislation to try to put standards in place. But of course, 

if the resources aren’t there at the end of the day, it is very difficult to maintain standards. And I just wonder if you could talk 

about any implications this might have for safety or for the traveling public, or for the safety of employees as well. 

Mr. SMISEK. Sure. Safety is always the number one priority of 

Continental Airlines, and will be the number one priority of the 

combined United. 

I would also like to, in honor of the Colgan families who are here 

today, express my condolences for their loss. That was a tragic acciVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
45 

dent and it saddened all of us throughout the industry and at Continental. 

This merger will not affect safety. Safety is important before the 

merger, safety will be important after the merger. Certainly, having a profitable carrier is something that one would rather have 

than a carrier that consistently makes losses and is eking out a 

hand-to-mouth existence. But no matter what level of profitability 

or loss, we are always focused on safety because that is the most 

important thing in the aviation business. 

Mr. TILTON. So, Congressman, let me simply add—echo what Jeff 

said emphatically: Regardless of how few dollars there may be, dollar one always goes to safety. But that having been said, I think 

you make an excellent point. I don’t think anybody in the room 

would conclude that an economically fragile and systemically unprofitable industry is a benefit to safety. That can’t be good. There 

is no way that anybody can suggest that that is a good thing for 

safety and security. 

So our view is that the more economically robust the new company can be, obviously the more resources we can dedicate to everything that is important to all of our constituents, including safety. We have a relationship with our regional carriers that is a partnership in safety. We share best practice, we conduct safety audits, 

we hold them to a high standard, and we value the fact that they 

appreciate that we have available to them at United a standard of 

safety that is of benefit to them as a learning. So we also are in 

a position to be able to do that. We will be able to do that more 

so as a new company. 

Mr. PETRI. One other question, I wonder—or area, I wonder, if 

you could each expand on. You touched on it briefly. But this is a 

global industry now, particularly for the major carriers. And we 

face very robust international competition, many of it in some ways 

with the more favorable environment because of government support or whatever and less competitive domestic markets and all the 

rest than we face in the United States. 

Could you discuss how we can prevent or how we can—what we 

can do to become—or how this merger will affect our international 

possibilities for competitiveness? I know we have links and alliances with international competitors, but we don’t want those to 

end up being ultimately international takeovers. We would like to 

see American, robust, global competition. 

Mr. TILTON. We couldn’t agree with you more, Congressman. And 

as Jeff said in his testimony in his prepared remarks, the majority 

of our competition across the Atlantic and across the Pacific is now 

foreign carrier. And we face competitors who have usurped the traditional positions of the network carriers in this country to become 

the number one and number two carriers in global markets: Air 

France-KLM, Lufthansa, who have already gone through significant consolidation. And, of course, now we have the announced BA 

Iberia. 

Our view is we have to have the same scope, scale, and economic 

robustness that they have to be able to offer a competitive response 

to the consolidation that has taken place across the Pacific, across 

the Atlantic, and in fact in Latin America as well. And we do think 

that this company will give us the opportunity to do that. 

46 

Mr. SMISEK. Congressman, that is correct. This is a global business, and we need a global scope and global scale in order to effectively compete. What we are finding is large carriers, especially 

large foreign carriers, offer a greater scope, a greater scale than we 

do. And they are picking off our passengers one by one, particularly 

picking off our business passengers. 

And in Continental, we are principally a business-oriented airline. We carry all passengers, leisure passengers and business passengers, but where we make our money is business travelers. We 

orient our product towards that. We orient our service towards 

that. And these large foreign carriers are being very successful in 

taking our passengers. And by combining, we will be able to be in 

a position competitively to compete effectively with them and to 

continue to compete in the United States, of course, against the robust competition that we find ourselves with today. 

Mr. COSTELLO. The Chair thanks the Ranking Member, and now 

recognizes the gentlelady from Texas, Ms. Johnson. 

Ms. JOHNSON OF TEXAS. Thank you very much, Mr. Chairman. 

I have not taken a position on this merger, but I am very concerned about what most passengers are concerned about, and that 

is the employees. 

In your joint testimony you state that customers must have access, will have access to 116 domestic destinations, and that small 

communities will continue to be served. 

Ms. JOHNSON. And that sounds good, but my question is, who 

will be serving these communities? And do you intend to subcontract out domestic groups that serve our smaller communities. 

And I would like to have both of you comment on that. 

Mr. SMISEK. Let me address that, Congresswoman. 

This merger will be very good for our employees. It will provide 

them with good jobs—careers, and not just jobs; and retirements, 

secure retirements, and not just hope. It will provide us with the 

synergies that will permit us to continue to invest in our employees. And I have made it very clear that the wealth creation of this 

merger, that I intend to share that with all work groups, whether 

they are unionized or not. 

In terms of service to communities, we allocate the aircraft that 

we have at the mainline carrier, the larger jets, depending upon 

the demand of the routes. And for smaller markets, we often use 

regional affiliates that we contract with, because those routes cannot bear a large mainline aircraft, a 124-seat or a 160-seat aircraft, 

but rather a 50-seat aircraft or, in United’s case, say, a 70-seat aircraft. And we will continue to do that. 

But what matters the most is the air service, because those regional carriers have employees, as well. And they will benefit, our 

regional carrier affiliates will benefit, our own employees will benefit from this merger. 

Mr. TILTON. So, Congresswoman, said in a similar way, the reason that the low-cost carriers do not serve those communities that 

you refer to and the 148 that we spoke to is because they don’t 

have the flexibility of access to the aircraft that Jeff mentioned. So 

737s won’t be flying to Minot, North Dakota, to pick up passengers 

and connect them to Denver, but our 50-seat regional jets will. And 

that is how they will get to Denver and then get on to wherever 

47 

they may be flying, domestically or internationally. And that is the 

way that the networks work. 

So, for the most part, you know, the low-cost carriers will not 

offer service to those communities if we weren’t in a position to economically do so. 

Ms. JOHNSON. Thank you. 

Mr. Tilton, I am much more familiar with Continental than I am 

the other airline, United. And you have built a reputation in the 

last 10 years of having a culture that is very supportive of passengers, and the employees seem to be quite pleased and happy. 

When you combine the pilots and complete this merger, what will 

be your position on the pilots’ authority? Will they come together 

prior? Or do you plan to—— 

Mr. TILTON. Congresswoman, I have only been in the industry 

for fewer than 8 years, so some of that relative to 10 years was 

probably—I was doing something else at the time. 

But, as Jeff said a moment ago, our pilot leadership is going to 

be given the opportunity to speak to their views of this combination 

and the extent to which they perceive it to be of benefit to the pilot 

profession and the two combined pilot groups. 

In answer to the questions that we had previously, although it 

has been a relatively short period of time, Congresswoman, they 

have had a good bit of opportunity to come together and to discuss 

their ambitions for the combining of their work groups. And I have 

to say on behalf of Jeff and myself, they have done a very good bit 

of work in a very short period of time. And I know they will share 

that with you when they come up here next. 

So that is made easier by, Congresswoman, the fact that they are 

represented by the same union. Across the other spectrum of our 

work groups, the two companies have different unions representing 

work groups, such as the flight attendants and ground workers and 

mechanics. 

So the first order of business there is going to be a determination, or at least an important order of business there is going to 

be a determination of which union ultimately is going to represent 

those professions in the new company. Because the workers are 

going to have to decide, they are going to have to choose between 

the different unions. So that is something that is going to have to 

be sorted out that, obviously, the pilot group is not going to have 

to attend to, because they are represented by ALPA, both. 

Ms. JOHNSON. Thank you. 

Now, I am basically a passenger, as you know, like the majority 

of American people in this business. And when I get on an airline, 

I want to be sure that the pilots are happy and healthy, that the 

attendants are happy and healthy, and that that plane has been 

serviced appropriately. 

Where do you get those planes serviced and maintained? 

Mr. SMISEK. Congresswoman, you and me both. We are most interested in safety and the professionalism of our crews. 

Our aircraft are serviced by a combination of our own employees 

and outside contractors. We use GE, we use Rolls Royce, we use 

Goodrich, we use HAECO, we use AAR. We use a number of very 

professional companies. 

48 

We are very focused on not only maintenance for safety but 

maintenance for dispatch reliability, as well; making sure, when 

you get on that aircraft, that there isn’t a problem, that it gets off 

on time, because we are a networked business and all those flights 

connect. 

So you and I share the same desires. And, as a result, we are 

very focused on all the things that you have pointed out. 

Mr. TILTON. Across the United States, Congresswoman, our line 

maintenance organization is represented by the International 

Brotherhood of Teamsters. We have a large maintenance base in 

San Francisco, a significant maintenance base in San Francisco, 

also represented by that labor union. 

But, as Jeff said, we also have maintenance partners worldwide. 

And because, as Jeff has also said, we are a global carrier, we use 

the opportunity to have our maintenance performed all across the 

world. 

Ms. JOHNSON. Is there code sharing across the world with the 

U.S.? 

Mr. TILTON. Do we co-chair across the world? 

Ms. JOHNSON. Code share. 

Mr. TILTON. Yes, we do. 

Ms. JOHNSON. Now, you also mentioned in your testimony that 

there would probably not be any changes, most especially in the 

front-line employees. What about the back-line? 

Mr. SMISEK. Well, Congresswoman, what you refer to are the 

headquarters. In any merger, there are efficiencies as a result of 

job redundancies in headquarters jobs. And we will have the typical efficiencies in any merger when you have two headquarters, 

two people doing the same job. There will be reductions in jobs 

both in Houston and Chicago. And there will be jobs, as well, that 

will move from Houston to Chicago, and there will be jobs that remain in Houston. 

But the vast majority of jobs will remain as they are today because we are such complementary carriers and we have so little 

overlap, that the front-line employees are largely unaffected. 

And the number of headquarters employees who are affected, although we have not determined the precise number at this time because we are early in the process of integration planning, that will 

be a relatively small number as measured against the total number 

of employees that the combined carrier will have. 

Ms. JOHNSON. Will you use retirement? Or how would you handle the people you have to cut? 

Mr. SMISEK. We always prefer if we have employees who retire 

or through attrition or through voluntary programs. And, also, for 

employees whose jobs are affected, we will assist them in finding 

other jobs, hold job fairs, assist them in all ways we can for them 

to find other employment. 

Ms. JOHNSON. Thank you. 

Thank you very much, Mr. Chairman. 

Mr. COSTELLO. The Chair thanks the gentlelady and now recognizes the gentleman from New Jersey, Mr. LoBiondo. 

Mr. LOBIONDO. Thank you very much, Mr. Chairman, for holding 

this hearing. 

49 

And, Mr. Tilton and Mr. Smisek, thank you for being here, as 

well as the other panelists. 

I want to say at the outset that I support this merger in the 

strongest of possible terms. I think that my colleagues, once they 

have the opportunity to review all the facts and the situation, will 

also agree with me. 

The merger of these two carriers will create a much stronger, 

much more sustainable airline that will be better able to survive 

in a struggling economy and succeed in an increasingly competitive 

market. It will enable dramatically needed new investment and 

products and services, and result in much more efficient flight operations to more destinations—something that I don’t think anyone 

can dispute and something that we all want to see. 

And, finally, it will vastly improve passenger convenience. I 

share the concern of some of my colleagues about the impact of the 

mergers on the workforce. Mr. Tilton, Mr. Smisek, I think you have 

answered that adequately and put it very well. But with little overlap, there should only be a negligible impact on this, as you have 

said. 

The merger will have a tremendous benefit in my State, and I 

think that is great. But, more importantly, I think it will have a 

tremendous benefit for aviation in the United States of America, 

which has been under assault, as we have heard the numbers of 

declining employees, since September 11th. 

And what do we want to see? Do we want to see our airlines go 

under while British and Iberia and KLM and all the rest of them 

suck up our passengers and people that could possibly work for us? 

Do we want to see our employees go by the wayside so foreign airlines can hire more of their people? And I think that is exactly 

what we are facing if we don’t understand the consequences of this. 

So, while it will have a big impact on New Jersey, the bigger, 

more important, beneficial impact will be on the United States of 

America. It will open up many more destinations around the world 

and, I think, will allow for all kinds of economic growth and job opportunities. 

I have 23 letters from New Jersey businesses and organizations 

in support of the merger. And, Mr. Chairman, I ask unanimous 

consent that these letters be made a part of the record. 

Mr. COSTELLO. Without objection. 

Mr. LOBIONDO. I thank you. 

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Mr. LOBIONDO. And, Mr. Smisek, you talked about this, as did 

Mr. Tilton, but I would like you to touch on it a little bit more, 

about the ability of Continental to, on its own, effectively compete 

against large, combined European carriers. And if this merger were 

not to take place, what are those implications for you? 

Mr. SMISEK. Congressman, we are very proud at Continental of 

the carrier that we have created. Our culture has permitted us to 

work together and provide great customer service and a great product for our customers. 

However, we are simply too small to compete effectively on the 

global stage that we find ourselves. We are finding greater and 

greater difficulty attracting and retaining our business customers 

and our other customers. We are facing increasing competition, not 

only here in the United States but, as you mentioned, abroad, with 

powerful foreign competitors who are well-financed, sometimes subsidized by governments, and who are profitable and can invest in 

their products and services, outstripping our own. 

It is very important for us to merge with United and put ourselves in a position jointly to be able to compete effectively on the 

global stage. 

At Continental, although I am very proud of Continental, I think 

we have done a very good job, candidly, Congressman, we are eking 

out a hand-to-mouth existence. And that is not a future that I want 

for my employees, it is not a future that I want for my customers, 

it is not a future I want for the communities we serve, it is not a 

future I want for aviation in the United States. 

Mr. LOBIONDO. Thank you for that answer. 

In closing, Mr. Chairman, I think it is right to be asking all the 

tough questions from the Committee Members, those who may be 

concerned. But I think if we have blinders on and are very shortsighted about the opportunity that we have here to create a stronger company, protecting jobs, protecting safety, keeping jobs here, 

that some future aviation Subcommittee is going to come back in 

the future and look at why United and Continental, if a merger 

were declined, had to witness some great demise. And I don’t think 

that is an overstatement, based on what has happened in the aviation industry. 

I thank you both for being here. And I urge my colleagues to look 

at the positive benefit that this is going to create. 

Mr. COSTELLO. The Chair thanks the gentleman and now recognizes the distinguished Chairman of full Transportation and Infrastructure Committee, Chairman Oberstar. 

Mr. OBERSTAR. Thank you, Mr. Chairman, for a contrasting view 

to that of my dear friend from New Jersey. 

The airways are the common heritage of all Americans. They are 

not the private estate of corporations engaged in airway service, in 

passenger service. The purpose of the deregulation act of 1978— 

and I was in this room, where it was voted on—was not to consolidate aviation but to expand competition, to take government out of 

the business of determining rates and market entry. 

In the first 5 years after deregulation, there were 22 new entrants into airline competition. But by the end of 8 years, there 

were only five of those new entrants left. Ten years, 12 years later, 

there was only one. And it, too, has been absorbed by U.S. Airways. 

78 

What we saw just recently was a further step in that consolidation, when the previous Justice Department looked the other way, 

sort of brushed aside my objections that approval of Delta at 

Northwest would result in a cascade of mergers. That has happened. You have proposed one. You did not object to Delta-Northwest because you were waiting in line with your own hat in hand. 

The third will be American Airlines and a domestic partner. And 

the result will be, with your international co-chairing partners, 

three global mega carriers that will dominate the world airways. 

There will be little choice for passengers, little choice for cities, little choice for competition. 

You will concentrate on long-haul service, which you have already said and which I have pointed out in my letter to the Justice 

Department. I will quote from my letter, that, ‘‘The networks of 

United and Continental overlap on 13 routes between some of 

America’s largest markets: the New York Metropolitan area; Washington, D.C.; San Francisco; Los Angeles; Denver; Houston; Chicago; and Cleveland, among others. Two carriers also compete in a 

number of international markets. That competition will be gone.’’ 

The Justice Department expressed its concerns over reduction in 

competition between United and Continental. Last year, you applied for antitrust immunity to collaborate on service and fares in 

a large number of international markets. The Justice Department’s 

comments on the application concluded that, ‘‘Fares are likely to increase by roughly 15 percent on routes where the number of nonstop competitors decreases from two to one and roughly 6 percent 

on routes where the number of nonstop competitors decreases from 

three to two. Competition will be significantly diminished in limited-entry markets, such as China, where United and Continental 

today present the best, and in some cases the only, service alternatives. Domestic competition between United and Continental 

may also be affected.’’ 

The purpose of deregulation was not to assure that you have the 

gravitas in this or that market, but that there be competition. And, 

instead, what has happened is sheer avoidance, manic avoidance of 

competition. You have said it already in your testimony: There is 

too much capacity in this market. 

You guys hate competition. You want to be the competitor who 

dominates the market, each one of you, not just you—Northwest, 

Delta, American, all the rest. I have seen it over all the years of 

deregulation. 

This is a blow to small-market service. It is a blow to air travelers. It is going to result in increase in fares and costs. And the 

purpose of deregulation is not to line the pockets of the big carriers 

but to give Americans more choices, lower cost, more opportunities. 

And what we have seen with the consolidation in the airline business is less of everything: less competition, higher fares, less service, $4 billion paid in baggage fares last year, for goodness sake. 

This is a terrible injustice to the purpose of the deregulation act, 

and I will continue to vigorously oppose it. 

Thank you, Mr. Chairman. 

Mr. COSTELLO. I thank the Chairman for his comments and remarks, and I think he made his position very clear. 

79 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Coble. 

Mr. COBLE. Thank you, Mr. Chairman. 

And thank you, gentlemen, for being with us. 

Let me generously lace my first question with local interests 

back home. I represent the area that includes the Piedmont Triad 

International Airport, both having service provided by Delta and 

Continental. 

My question is, gentlemen, how will this merger affect airports 

that have seen a decrease in passenger service as a result of the 

current dismal economy? And, if approved, would this merger provide the opportunity for communities such as the one I represent 

to attract additional service? 

Mr. TILTON. Congressman, as Jeff and I have both said, we serve 

148 small communities, and those 148 small communities have already made their case for service. As the economy improves, both 

of us are always mindful of opportunities that new markets might 

provide. And here very recently, certainly speaking on behalf of 

United, we have commenced service to small communities that we 

had not previously served. 

We are mindful, actually, of something quite different from what 

Mr. Oberstar mentioned a moment ago. Low-cost carriers are actually lowering their sites for new market entry to markets that previously may have been right on the margin of interest to them. So 

we are now finding ourselves in markets such as Greenville, South 

Carolina, which is not a trivial market but not a market that qualify as hub status. We are finding that those markets are now beginning to be competed vigorously, as well. 

So, as the economy improves, I think markets such as that you 

represent—— 

Mr. COBLE. Greensboro, North Carolina. 

Mr. TILTON. —Greensboro, North Carolina, are going to find 

themselves the object of service and opportunities from both of our 

companies, and certainly from the merged company. 

Mr. COBLE. Good. I thank you for that. 

Mr. TILTON. You bet. 

Mr. COBLE. And you concur, I presume? 

Mr. SMISEK. I do. We are always responsive to market demand, 

but, certainly, markets in all communities are better served by 

healthy carriers that have a future than carriers that are eking out 

hand-to-mouth existence. 

Mr. COBLE. Thank you for that. 

Gentlemen, has the development of the three international airline global alliances over the past 15 years had a positive or a negative impact on competition, pricing, and customer service? 

And is it your opinion that—well, strike that. Let me ask you a 

different way. Are three alliances enough or sufficient to ensure future competition? 

Mr. TILTON. As one of the founding members of the Star Alliance, 

I think that the alliances certainly serve the purpose of giving consumers the opportunity to fly across the globe with a multitude of 

different carriers who happen to belong to the same alliance, but 

able to do so seamlessly on the basis of the entry of one carrier’s 

ticketing into that alliance. 

80 

So United can be your entry into the Star Alliance, and a 

businessperson can make a multi-segment journey across the world 

and travel on three of our partner carriers, return to their place of 

business. I think that has been great for business. I think it has 

been good for business productivity. I think it has been good for 

consumers. 

Whether or not ultimately there are going to be three I think 

goes back to Jeff’s point that it is a very, very dynamic market and 

we see things constantly changing. 

One of the phenomena that we are seeing here recently, Congressman, is decisions made by companies such as Jeff’s, by Continental, to actually accept an invitation from United to depart an 

alliance where Continental was perceived to be a small participant 

in that alliance and come to the Star Alliance. And 2 years ago, we 

made that invitation to Continental. Continental accepted the invitation, left SkyTeam and came to Star, to the benefit of Star. 

But I think alliances are going to continue to be intrinsically 

competitive themselves, trying to bring the best carriers into the 

alliances. 

Mr. COBLE. I thank you for that. 

Mr. Smisek, you concur? 

Mr. SMISEK. I do. Alliances have been very good. For my business, entry into Star has been good. 

Recognize that those within the alliances, those are alliances of 

competitors. We compete with each other even though we are inside an alliance. The alliance assists us in offering destinations on 

a single ticket through carriage of baggage that we ourselves could 

not offer. 

They can be highly beneficial. For example, we recently announced nonstop service from Houston to Auckland in New Zealand. We did that in a couple of contexts: one, Star Alliance, because their New Zealand is a member of the Star Alliance and we 

are going into a hub even though we compete with Air New Zealand; and, secondly, the traffic flows that we expect from our merger gave us the confidence to launch that nonstop route, which will 

be on a new 787 Boeing aircraft manufactured here in the United 

States. 

Mr. COBLE. I thank you gentlemen. 

Mr. Chairman, I was going ask about how it would affect the employees of each company, but I think that has been adequately addressed. And I yield back. 

Thank you for being with us, gentlemen. 

Mr. COSTELLO. The Chair thanks the gentleman and now recognizes the gentlelady from Hawaii, Mrs. Hirono. 

Ms. HIRONO. Thank you, Mr. Chairman. 

This Committee is particularly concerned about the impact of 

this merger on employees, on customers, and on competition. And 

on the issue of competition, of course it is the Department of Justice that has the major responsibility to determine in a very complicated antitrust analysis as to the impact of this on lowering of 

competition. 

How long do you think the DOJ’s review will be, regarding your 

proposed merger? 

81 

Mr. SMISEK. Congresswoman, we expect a very professional and 

very thorough review from the Department of Justice, as one would 

expect. They are a very professional organization. We are being responsive to all of their requests for information. And we would anticipate to be in a position to close this merger by year end. 

Ms. HIRONO. Considering that this is going to be one of the largest aviation mergers ever and the fact that when Continental came 

in and requested an antitrust exemption and apparently the Department of Justice had some concerns about that, do you have any 

concerns about their approving this kind of a large merger? 

Mr. SMISEK. Well, Congresswoman, I can’t speak to the Department of Justice’s thought processes with regard to our application 

for antitrust immunity for the Atlantic Plus-Plus joint venture, 

which is, I believe, what you are referring to. 

But I will recognize that joint ventures deliver some degree of 

revenue benefits, some degree of cost savings, but not the efficiencies of a merger. And, therefore, from the Department of Justice’s perspective, I would imagine that the concern there had to do 

with the difference between a joint venture and a merger, where 

you can obtain significant efficiencies and consumer benefits from 

a merger that are not obtainable from a joint venture. 

Ms. HIRONO. Well, that leads me to my next question, which is 

that, when Continental came in for their antitrust exemption, the 

testimony was that antitrust immunity would provide much of the 

benefit of a merger without the labor integration and financial risk. 

So that was your testimony only a year ago. By ‘‘your,’’ I mean your 

company. 

So what changed, that suddenly you are saying, well, all of these 

risks aren’t there? 

Mr. SMISEK. No, ma’am. The risks are there, Congresswoman. 

The risks are there, without question. The risks are there in any 

merger. 

The joint venture and our entry into Star Alliance has been very 

good for Continental and has provided additional revenue. It has 

been necessary but not sufficient. We have continued to lose money 

and we have continued to be in a position of being concerned about 

our future. 

The merger will add significant revenue benefits, principally 

from our ability to improve the business mix onboard our aircraft. 

There is nothing in the merger synergies that is conditioned on 

fare increases, but rather improving the business mix, creating a 

network that is more attractive to business travelers and improving the mix of business travelers onboard our aircraft, and also optimizing our two fleets across the 10 hubs that we will have. 

So the merger is additive to a joint venture. We were hoping that 

Star Alliance would be sufficient to return us to profitability. It 

clearly is not. Last year, we lost $282 million, after having lost 

money the year before that. And since 9/11, we have lost a billion 

dollars. That is not a future I want for my coworkers. 

Ms. HIRONO. Well, I appreciate the fact that both of you have testified on the benefits of this kind of a merger. And before I continue, I would like to ask the Chair’s permission to submit for the 

record four letters from Hawaii supporting this merger, including 

one from the Governor of the State of Hawaii. 

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Mr. COSTELLO. Without objection. 

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Ms. HIRONO. I personally have not made a decision regarding 

this merger. I do expect that the Department of Justice will be 

very, very vigilant in its antitrust analysis. 

I am reading the testimony of the American Antitrust Institute, 

and they pose a very interesting possibility. And that is that this 

Committee should hold some hearings, retrospective hearings, on 

the Delta-Northwest merger. Because when that merger was 

brought to this Committee, there were various kinds of positive impacts, and we are not sure—I am not sure whether these impacts 

have been realized. 

So their suggestion is that we have such hearings and then, perhaps, to hold off on going forward with this merger or supporting 

this merger until we can find out what the Delta-Northwest merger 

resulted in. 

Do you have any comments about that kind of a suggestion? 

Mr. TILTON. You know, I do, Congresswoman. I think every 

transaction that you are asked to consider is considered in the context of a particular time and place and in a particular economic reality of the moment. 

If you think about the concern, the appropriate concern of all the 

Members who have asked us about the effect here of a proposal 

that Jeff and I make that will bring some measure of economic stability to the new company, as the new company has to confront the 

extraordinary—the extraordinary—economic shocks that this industry has had to confront, either post-deregulation or post-9/11, 

making a commitment in the context of an environment that is certain to change within 30 days of your making any such commitment is a challenging proposition. 

What Jeff and I are saying is that this combination will be positive for consumers. It will be positive for communities. It will be 

positive for employees. It will be positive for shareholders. 

What Jeff and I cannot tell you is what the next unexpected 

event might be and what the next economic shock might be and 

how our companies or the new company will respond to that. And 

making no representations here, either Jeff or myself or our colleagues at Delta, you would have to go over and say, what else 

changed from the point that they were before you? 

Ms. HIRONO. Mr. Chairman, I know my time is up, but as to 

that, yes, we realize that circumstances change, and that is why 

your coming and reassuring us that everything will be positive— 

I mean, circumstances can change. And I think that is where our 

concerns rise. Thank you. 

Mr. TILTON. And my point is, we will be better able to meet those 

circumstances with this combination than we otherwise would. 

Mr. COSTELLO. The Chair thanks the gentlelady and now recognizes the gentleman from Tennessee, Mr. Duncan. 

Mr. DUNCAN. Well, thank you, Mr. Chairman, and thank you for 

calling this hearing on this very important matter. 

I am sorry that I didn’t get to hear your earlier testimony. I was 

in another Committee. But I think almost everyone agrees that the 

country would be better off with more airlines instead of fewer and 

more competition instead of less. On the other hand, if the refusal 

to grant this merger is going to result in one or both of these airVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
88 

lines going out of business, then that would certainly not be a good 

thing either. 

But I have these concerns. We have two briefing papers. One 

from the majority says, ‘‘Concerns have been raised that a merger 

of United and Continental could result in substantial increases in 

fares.’’ And the minority briefing says, ‘‘The Department of Justice’s most recent antitrust analysis, with the support of empirical 

data, economic studies, and precedent, generally assumed that air 

fares increased by approximately 15 percent in markets where the 

number of nonstop competitors decreases from two to one.’’ 

Knoxville, where I am from, is fortunate to have probably more 

airlines than any city anywhere close to our size, larger or smaller. 

Though we don’t have any low-cost carriers, so-called low-cost carriers, so we get some extremely high prices, particularly on the 

flights from Knoxville to Washington. 

And I remember a few years ago, when I Chaired this Subcommittee, we had a hearing in Wichita, and the staff told me later 

that it cost $1,000 for me to fly round-trip from Knoxville to Wichita coach. And that same weekend in The Washington Post they 

had had an advertisement advertising a round-trip ticket to Madrid, Spain, and two nights in a hotel for $389. 

And so, you know, people have a hard time understanding how 

all these fares come about. And I was just wonder, maybe you have 

already given some assurances about these fares, but I would like 

to hear what you have to say about the lack of competition in some 

of these smaller or medium-size cities. 

But, also, several years ago, I was told that each one-penny increase in jet fuel or aviation fuel costs the aviation industry as a 

whole $200 million. Now, many people feel that there is going to 

be such restrictions put on the offshore oil production that the price 

of fuel is going to go way up. And I am wondering, have you all 

given that any consideration? And what effect would a doubling of 

jet fuel or aviation fuel have on your companies? 

Mr. TILTON. It is a rather multi-part question, I guess. 

Mr. DUNCAN. Yes, sir. 

Mr. TILTON. I will take the back end. 

A dramatic escalation in the price of fuel would likely eliminate 

the prospect of economic recovery for the industry this year, which, 

as advertised now, and we agree, as the incipient economic recovery in our markets, we are seeing the return of business travelers. 

But were that to happen, it would have such a collateral effect 

on overall GDP that, in all probability, it will put the cork in the 

bottle of economic recovery in business travel, and we could be 

back into one of the challenges that I mentioned to your colleague 

a moment ago that we systemically face that only stronger economic enterprises can actually survive. 

So that would be a very bad thing, irrespective of my hedge book 

and my colleagues’ hedge book, where we have tried to lock in a 

price that even by historic standards is a high price. I mean, if our 

average hedge price is a $70 barrel of crude oil, that is not an inexpensive consideration for that most important cost input. 

You know, one way of thinking about that is, those bags that we 

heard so much reference to here a little while ago weighing, let’s 

say for discussion’s sake, 50 pounds apiece, they consume a treVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
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mendous amount of jet fuel. And the idea that they should be 

transported for free when they are transporting that amount of jet 

fuel is debatable. 

Mr. SMISEK. We spend more on fuel at Continental than we do 

for our employees worldwide, our airplanes worldwide, our facilities 

worldwide. So a doubling of jet fuel would obviously be devastating 

to Continental and to the entire industry. 

As to pricing, first, let me be clear that this merger is not predicated on fare increases. The synergies are not predicated on fare 

increases. The merger is not predicated on capacity reductions. 

This is a brutally competitive industry, particularly in the United 

States, where low-cost carriers have essentially 40 percent of the 

market and continue to grow. Air fares have dropped 30 percent 

over the past decade on an inflation-adjusted basis. We have lost, 

over at Continental, over a billion dollars since 9/11. 

So, certainly, we are currently charging amounts that are clearly 

below our costs. We need to change the business mix at Continental, bring more business travelers into our system, who do pay 

a higher price because they consume inventory that we hold open 

until the very last moment, and we run the risk of that inventory 

spoiling—that is, the aircraft taking off without someone in that 

seat. 

And that is an expensive risk for us to take, and, therefore, the 

business traveler who books at the last minute and wants to be 

able to change at the last minute and take a later flight or an earlier flight pays for that privilege, compared to the leisure travelers 

who book far earlier than that and pay a much lower fare. Because 

we, as a company, are taking a much less business risk with respect to those people than we are with holding the seats out until 

the last. 

But I can assure you, this is a very competitive business. We do 

not have a single market in the United States where we overlap. 

And we only overlap on 15. There is not a single market where the 

number of competitors is reduced to just one. So that is not going 

to occur in this merger. 

Mr. DUNCAN. All right. Well, thank you very much. There is not 

an easy business out there, but I think your business has to be one 

of the most difficult in the world, with so much that is beyond your 

control—the natural resource problem, the weather problem, and 

so forth. But thank you very much. 

Mr. LIPINSKI. [Presiding.] Thank you, Mr. Duncan. 

The Chair will now recognize himself for 5 minutes. 

As Chicagoland’s only Member of this Committee, a top priority 

of mine is working to enhance and improve the region’s transportation network. And since Chicago is the transportation hub for the 

Nation, what is good for Chicago in many ways is good for the Nation. So I believe that this merger, if implemented correctly, will 

benefit the Chicago region. 

In addition, it has the potential to be good for O’Hare Airport 

and the O’Hare Modernization Program, which is definitely, without question, good for our Nation’s air traffic. 

However, there are a number of critical issues that need to be 

examined as this process moves forward. For instance, we clearly 

need to consider the merger’s impact on consumers, including how 

90 

the proposal would impact pricing and service. Chairman Oberstar 

carefully went through these issues, and I am sure that we will 

hear more about that. And we have spoken a little bit—you have 

provided in your testimony some answers on that. 

We also need to look at the impact the merger would have on 

jobs, especially with respect to job loss and to benefits. And, finally, 

we also need to make sure, I believe, that there is a commitment 

by the new United, the merged airline, to projects that increase 

system capacity, especially the O’Hare Modernization Program. 

So I want to start on that last point. Right now, OMP, O’Hare 

Modernization Program, most critically would provide parallel runways and will reduce delays by 75 percent at O’Hare. Two runways 

have already been completed. One runway project is currently 

being worked on. And there are three more runway projects remaining to be done. 

So I want to ask Mr. Tilton, are you committed, if this merger 

goes through with this new airline, or are you committed in general, to moving this critical program forward, specifically with respect to the three remaining runway projects at O’Hare? 

Mr. TILTON. Congressman, as you know, we have been supporters from the beginning of the modernization and the expansion 

of O’Hare. We are supportive of the runway development, the two 

that have been developed and the additional runway capacity. 

It goes significantly to something that Jeff mentioned in his remarks, that we are indeed and have been for quite some time the 

number-one on-time carrier, network carrier in the United States. 

Much of that has been enabled, Congressman, by the modernization and the development of those new runways at O’Hare. 

Before we get to, perhaps, the follow-on question, there are 

issues associated with the modernization of O’Hare that go to facilities that we think are perhaps no longer necessary. And those are 

terminal facilities and the expansion of terminal facilities in the 

current economy. But as you also know, we are at the table negotiating those issues with Mayor Daley and with Ms. Andolino. And 

I think that those discussions are going to be constructive and good 

for Chicago and good for O’Hare. 

Mr. LIPINSKI. Well, you mentioned the terminal project, but are 

you—— 

Mr. TILTON. Yes. 

Mr. LIPINSKI. —committed to the three runway projects when 

United—— 

Mr. TILTON. Yes. United, given the current economic circumstances we face, thinks those runways are justified. 

Mr. LIPINSKI. The other question that I wanted to get to is the 

impact on employees. Because, certainly, you understand the concern with the uncertainty that employees face at United and Continental. We have seen other mergers, and sometimes the impact on 

the employees certainly has not been what was expected; it has 

been detrimental to the employees. United’s bankruptcy, the employees certainly paid a high price in that for allowing United to 

continue to operate. 

I want to focus specifically here on pensions, because I understand—and this has been touched on a little bit already—that the 

defined benefit plans no longer could exist at United Airlines after 

91 

the bankruptcy. Now, some Continental employees do have defined 

benefit plans. There are going to be problems with putting all of 

the employees together in a merged airline. 

Will it be possible for the Continental employees to keep their defined benefit plans, or is this forbidden by the bankruptcy settlement? 

Mr. SMISEK. Congressman, let me speak to that. 

Yes, Continental’s defined benefit plans will continue after the 

merger. And we have received confirmation from the Pension Benefit Guaranty Corporation to that effect. 

As we go forward, as we negotiate joint collective bargaining 

agreements with each of our collectively bargained units, we will 

obviously be discussing a broad range of wage and benefit items, 

including the form of their pensions and amounts of pensions. 

Those defined benefit plans could change. For example, our own pilots union, in negotiations, determined to freeze their plan and go 

to a defined contribution plan, which we have been funding since 

that was negotiated. 

Last year, we at Continental lost $282 million, but nonetheless 

we put $283 million into our employees’ retirement plans. 

Mr. LIPINSKI. Does this mean, then, that there is a possibility 

that United—if the merger goes through, former United and former 

Continental employees now in the merged airline will have different pension plans? I just want a better understanding of what 

this will mean. 

Mr. TILTON. Well, it does, Congressman. 

If you think about it—we were saying earlier on, for example, 

our IAM-represented employees have a multi-employer plan that it 

is supported by the IAM. It was a product of the negotiations during the bankruptcy. The IAM represents employees at both companies. 

How the employees choose to be represented, just using their 

multi-employer plan as an example, in a course of their representation choices will determine whether or not more or fewer employees 

are given the opportunity to be beneficiaries of that plan. But that 

is a function of, at the end of the day, which union represents 

which employees at the end of the decisions made by the employees 

on that matter. 

So there are significant differences across the two employee 

groups. And the process, that will be made transparent to employees when they make it their selections. 

Mr. LIPINSKI. Well, I certainly believe, as we move forward with 

this in consideration of the merger, that this is going to be a critical piece of it. The more things, if possible, that can be worked out 

with the employees, the better off we will be and I think the, certainly, greater likelihood of this merger moving forward. But I 

think that is something that we have to continue to keep our eye 

on. 

With that, the Chair will now recognize—the gentleman from Arkansas is not there. We will go back over to the Democratic side 

here. The Chair will recognize the Chair of the Surface Transportation Subcommittee, Mr. DeFazio. 

Mr. DEFAZIO. Thank you, Mr. Chairman. 

92 

Gentlemen, I will read you two quick statements, and then you 

tell me how this merger I think is in reaction to this, but how it 

is going to solve this problem. 

Alfred Kahn: ‘‘I must concede the industry has demonstrated 

more severe and chronic susceptibility to destructive competition 

than I, along with other enthusiastic proponents of deregulation, 

was prepared to concede or predict.’’ 

And then former American Airlines CEO Robert Crandall: ‘‘Market-based approaches alone have not and will not produce the aviation system our country needs and that some form of government 

intervention is required.’’ 

I think your merger reflects that. Is this going to solve the problem once and for all of this cutthroat, deregulated, race-to-the-bottom industry? 

Mr. SMISEK. Congressman, I am not sure it will solve all the ills 

of the aviation industry. I don’t hold it to such a high standard. 

What we are trying to do is to create an entity that can be profitable, that can withstand the external shocks, that can offer a future and some stability to our employees, that can reverse the 

trend of the employment loss that this industry has suffered, particularly since 9/11. 

Mr. DEFAZIO. OK. Well, that is good. 

Quick, Mr. Tilton, because I have several other questions. 

Mr. TILTON. Congressman, I don’t think that the merger is going 

to be able to resolve many of the structural issues that lead to the 

cutthroat competition that you mention, such as the absence of apparent barrier to entry that allows a significant number of new entrants to come into the business and fail repeatedly but, in the 

process of so doing, destroy tremendous value. And they destroy 

value collaterally—employee value, shareholder value, and even, 

for that matter, community value, because they come and they go. 

Mr. DEFAZIO. OK. So there might be something in the statement 

by Bob Crandall, some form of government intervention might be 

required. 

And I guess that gets to my second point—I am sorry to interrupt, but I have very little time—Mr. Smisek, you said safety 

would not be affected. And, actually, I didn’t take that as positively 

as you might think, because I would hope it would be. 

And I would reference both the chairs of your Master Executive 

Council, when they are talking about, ‘‘Passengers do not want air 

travel that is provided by the lowest bidder. They want and deserve 

safe and reliable transportation provided by the network carrier of 

their choice.’’ That was Captain Jay Pierce. And then, ‘‘When a 

passenger buys a ticket from United Airlines, they deserve to have 

United pilots at the controls. This merger presents the opportunity 

to put an end to management’s preoccupation with outsourcing.’’ 

That was Captain Wendy Morse. 

Will this merger lead to any reduction in outsourcing or any improvement in who you contract with? 

Mr. TILTON. Congressman, we don’t really perceive at United 

that the regional carriers that are our partners and are really the 

entry level into the industry for coworkers of our employees as 

being outsourcing. You know, United is not going to fly an A319 

or a 320 to Minot, North Dakota, to collect those passengers—— 

93 

Mr. DEFAZIO. Right. But we are paying someone $18,000, $20,000 a year with a low number of hours to be the pilot. I mean, 

we tried to deal with that through government intervention in the 

FAA bill and in the safety bill. 

Mr. TILTON. Right. Right. All I am saying—— 

Mr. DEFAZIO. You are being pulled down by people who are—you 

may well require a higher standard, but you have to compete with 

these—— 

Mr. TILTON. Well, and, as I said, Congressman—I know you are 

in a hurry—as I said, we spend a lot of time talking to our regional 

partners about the very things that you just mentioned a moment 

ago, and that is taking our safety practices, sharing them with 

them, and expecting them to abide by them. 

Mr. DEFAZIO. OK. 

Mr. Smisek, would we see, perhaps, we wouldn’t go to the lowest 

bidder for outsourcing in the future and require a higher standard, 

or are we going to have to wait until we pass legislation to require 

more hours, more experience, et cetera? 

Mr. SMISEK. We support all improvements in safety in this business. Safety is incredibly important, as you know. However, the 

combined carrier will not be flying mainline aircraft into small cities—— 

Mr. DEFAZIO. No, I understand. 

Mr. SMISEK. —because demand won’t be there. So that service 

will always be provided by third parties. 

Mr. DEFAZIO. Well, you could operate a subsidiary that provided 

that service, or you can contract—there are different levels of contracting. 

Mr. SMISEK. Sure, sure. I appreciate that. But our practice at 

Continental and our practice at United and our practice as a combined carrier would be to use third parties to do that. But we are 

very committed to safety for ourselves, for our regional carriers. 

And we, like United, share best practices with them. 

Mr. DEFAZIO. OK. Well, I am out of time, Mr. Chairman, but I 

just want to say I think there are a lot of people out there trying 

to run airlines well and safely and with respect for their employees, 

but what we have seen is this pattern of destructive competition. 

And it may be a transient entrant who, you know, goes away, or 

it may be other people who persevere longer but they drag down 

the standards. 

And I think the industry should wholly support setting a much 

higher floor that everybody has to meet, and then there is no competitive disadvantage among any of the industry for any level of 

service out there. And I hope you would both support that. 

Thank you, Mr. Chairman. 

Mr. LIPINSKI. Thank you, Mr. DeFazio. 

Congressman Boswell has been called away, but he asked me to 

express his serious concerns that contractual arrangements with 

pilots, flight attendants, and other labor groups be worked out in 

fairness and completely fulfilled. 

At this point, the Chair will recognize the gentleman from Ohio, 

Mr. Boccieri. 

Mr. BOCCIERI. Thank you, Mr. Chairman. 

Thank you both, gentlemen, for your testimony today. 

94 

While I may not be as long in tooth as some of the Members here 

in the Committee who have experienced deregulation and such, I 

know that, from my experience in the State legislature and past 

airline mergers that have affected Ohio, to put it mildly, it has not 

gone well. Dayton, Columbus, Wilmington, Cincinnati have all experienced significant service and job loss, and a movement, if not 

complete outsourcing, of these jobs. 

And I remain concerned, while I have not taken a position on 

this, I remain concerned that this business model that is now being 

proposed would put added strain on the hub in Cleveland, especially after so many taxpayer dollars have been funded to expand 

the facility, as well as corporate investment. But I remain concerned about that. 

I want to just hone in on one thing. I am really concerned, and 

I have not been convinced by the testimony thus far, that by reducing the number of competitors—both of you are competitors currently—that we are going to increase competition. And we may be 

setting up a scenario of too big to fail. 

Can you give a brief comment to that? 

Mr. SMISEK. Certainly, Congressman. 

I think what we are creating is a carrier not too big to fail but 

big enough to succeed. We compete on a global scale. We compete 

with large foreign airlines. We compete with large domestic airlines, for example like Delta or American. And we are putting ourselves in a position through this merger to be able to successfully 

compete. 

I do not believe that competition is reduced by this merger because this is a brutally competitive industry as it is. It is today. 

It will be after this merger. There are essentially no barriers to 

entry; there are high barriers to exit. This industry does not earn 

anything on its invested capital. We have lost billions of dollars. 

Mr. BOCCIERI. Sure. Can you name one legacy carrier outside of 

bankruptcy that have merged where they have actually produced 

lower costs, lower operating costs, and have not had a significant 

reduction. 

Mr. SMISEK. Well, let me speak to what Delta Airlines—and we 

will leave the capacity reduction aside for the moment, because 

that, I believe, was caused by the global recession, not by the merger. But you will need to speak directly to Delta executives about 

that. 

But they have been on the public record saying that they believe 

that the synergies from their merger will be approximately double 

what they anticipated. And that gives me great hope at Continental. I am not saying we will be able to deliver that in this merger, but so far what they are claiming publicly is their merger has 

been very successful, both in cost efficiencies and in revenue generation. 

Mr. BOCCIERI. Hubert Horan provided testimony here, and I just 

want to read to you because I think it is pretty prescient. He said, 

‘‘United’s own public statements acknowledge that the merger will 

not reduce costs to disadvantaged versus low-cost carriers or more 

efficient legacy competitors, and that the industry does have financial problems, but those problems will not be solved by suspending 

95 

antitrust laws so business strategies that have moved into obsolescence can exercise artificial market power.’’ 

Again, he is suggesting that the costs are not going to be reduced 

and that this is going to put an added strain on you to cut corners 

down the line. How do you respond to that? 

Mr. TILTON. By its very nature, Congressman, it is sort of a contradictory statement. We have already established that there are 

going to be the elimination of overhead redundancies that are 

clearly going to reduce cost. So, on the one hand, we have a question as to, are you going to be sympathetic to the concerns of employees whose jobs are going to be eliminated because there is only 

going to be one headquarters? On the other hand, we have a statement that says that is going to be insufficient in the context of cost 

reduction. 

Whether or not the network hub-and-spoke model is obsolete and 

redundant is yet to be established. And creating a company that is 

going to have the hub structure that we have and the ability to optimize the hub structure that we are going to create from Newark 

to Washington to Cleveland to Houston to Chicago to Denver to 

San Francisco and to Los Angeles, to connect small communities 

into those hubs, is really the premise upon which we think we are 

going to succeed. 

Mr. BOCCIERI. Sure. 

Mr. TILTON. But if somebody thinks that the business model has 

failed, it actually doesn’t go to the point of the proposition of the 

merger. 

Mr. BOCCIERI. Well, the big money is where the international 

carriers are shuttling folks back from vacations over in Europe. 

Mr. TILTON. Right. 

Mr. BOCCIERI. But, more specifically to your point, Mr. Tilton, we 

talked about outsourcing jobs, and safety is a big issue for me, after 

having lived through testimony from the Colgan crash here, where 

the pilot, under the NTSB after-actions report, showed that they 

weren’t even trained in their own safety equipment that that airplane was required to have for saving the day. 

And right now we have 1,400 pilots furloughed by United, but 

you are flying routes from Washington, D.C., to Spain with foreign 

pilots. Can you guarantee me that those pilots are trained, educated, and have the same experience level, as well as the other air 

crew members that are aboard that aircraft, that our own domestic 

air carriers have? 

Mr. TILTON. That relationship with Aer Lingus is analogous to 

our offering our code on Aer Lingus as a code share partner, if one 

thinks about it, and telling a passenger, ‘‘You can book on United, 

but you will fly on Aer Lingus,’’ or, ‘‘You can book on United, sir, 

but you will fly on Lufthansa,’’ or, ‘‘You can book on United, but 

you will fly on US Air.’’ And that is a function of the reciprocal 

agreements that this industry has. It is a part of the joint venture 

that we have across the Atlantic with four participants in it: Air 

Canada, Lufthansa, Continental, and United. We share that. 

I take for a given that my Aer Lingus partner is as committed 

to safety as I am. And with Aer Lingus being the operator of that 

flight and United being the marketer, it is a relationship that is 

symbiotic between the two of us, and I ensure that they are. 

96 

Mr. BOCCIERI. Well, I am glad you share that, but I don’t know 

if I share that, and I don’t know if many other pilots who—— 

Mr. TILTON. Well, but think of the interrelationships that we 

have across the business, where all of that code is shared. 

Mr. BOCCIERI. I am OK with that, but, you know, if you asked 

your customers if they would prefer an American pilot versus an 

international pilot flying them from the United States over to Europe—because when you fly back from Europe, those are mainly 

American pilots, correct? 

Mr. TILTON. No, sir. If they are flying on Lufthansa, they are 

German pilots. If they are flying on BA, they are British pilots. If 

they are flying on ANA, they are Japanese pilots. 

Mr. BOCCIERI. Are Aer Lingus pilots United pilots? 

Mr. TILTON. No, they are Aer Lingus pilots. 

Mr. BOCCIERI. OK. That is my point. 

Thank you, sir. 

Mr. LIPINSKI. Thank you, Mr. Boccieri. 

The Chair now recognizes the gentleman from California Mr. 

Garamendi. 

Mr. GARAMENDI. Thank you for the testimony today. And also let 

me congratulate you on a new way to describe job loss as synergies. 

Very unique. Your PR folks should be congratulated. 

I do have some questions that are specific to safety. The San 

Francisco maintenance facility was discussed earlier today. It is my 

understanding that you are, in fact, at United moving jobs away 

from that maintenance facility to China, Singapore and the Philippines; is that correct? 

Mr. TILTON. So as I said in my response to a prior question, we 

have long had—— 

Mr. GARAMENDI. No, no. Get directly to answer this. Are you 

moving jobs out of San Francisco to foreign countries for maintenance purposes? 

Mr. TILTON. We have overseas maintenance facilities that do 

maintenance work for the company and have for quite some time. 

Mr. GARAMENDI. You did not answer my question. Please do so. 

Mr. TILTON. There are no plans to move any further jobs out of 

San Francisco, if that is your question. 

Mr. GARAMENDI. My question is very simple. Are you moving jobs 

out of San Francisco to foreign facilities, yes or no; and if so, how 

many? 

Mr. TILTON. No, we are not moving jobs out of San Francisco 

today to foreign facilities. 

Mr. GARAMENDI. Did you do so yesterday? 

Mr. TILTON. Yes. 

Mr. GARAMENDI. How many? 

Mr. TILTON. We have a maintenance facility in Beijing that is the 

maintenance facility for our 777 facility—for our 777 fleet, and it 

is a joint venture between Lufthansa and Air China. 

Mr. GARAMENDI. Does the FAA regularly inspect that facility? 

Mr. TILTON. That is FAA’s responsibility without a doubt. 

Mr. GARAMENDI. That is not the answer to my—that is not the 

question I asked. 

Mr. TILTON. Well, that is a question better posed to the FAA. 

97 

Mr. GARAMENDI. It is posed to you because it is your responsibility. 

Mr. TILTON. Well, my view is the FAA fulfills its obligation and 

its responsibility with respect to such facilities, yes. 

Mr. GARAMENDI. Then you must be aware of earlier testimony 

before this Subcommittee that the FAA doesn’t regularly inspect to 

the same degree that—— 

Mr. TILTON. No, I am not aware of that testimony. 

Mr. GARAMENDI. We will get the testimony for you. 

Mr. TILTON. I would appreciate that. 

Mr. GARAMENDI. With regard to the question of continued 

outsourcing, the question about pilots was asked. I want to follow 

up on that question. Are foreign pilots in the left and right seats 

of the United airline jets? 

Mr. TILTON. Are foreign pilots—— 

Mr. GARAMENDI. Aer Lingus or any other foreign pilot? 

Mr. TILTON. On our airplanes? 

Mr. GARAMENDI. Yes. 

Mr. TILTON. No. 

Mr. GARAMENDI. Thank you. 

One final question. Could you describe the personal benefits that 

the two of you will receive as a result of this merger, specifically 

golden parachutes and the like? 

Mr. TILTON. So I think I know I have made the decision already, 

I don’t know that Jeff has, that anything that I might receive is 

going to be converted into shares of the new company and deferred 

until such time as I eventually retire from my board seat. 

Mr. GARAMENDI. And the estimated value of that? 

Mr. TILTON. It will largely depend on how successful the new 

company is and indeed whether the new company is formed, Congressman. 

Mr. GARAMENDI. I would like have specific information on that, 

and I would not like to have to receive that from the SEC filings. 

So if you could deliver it personally. 

Mr. TILTON. I will do so. I have already filed it, as a matter of 

fact. 

Mr. GARAMENDI. Thank you. And you will be able to deliver it 

to me. Thank you. 

Mr. SMISEK. Congressman, my compensation is set by my human 

resources committee, which consist of independent directors. My arrangements regarding becoming CEO of United have not yet been 

negotiated. That is a process that is going to go through both Continental’s human resources committee and the compensation committee of United Airlines. The amount of compensation that I will 

receive thus has not been determined. 

Mr. GARAMENDI. What is your present compensation? 

Mr. SMISEK. I receive no salary whatsoever, sir. I have waived 

that until Continental is profitable. I am also not eligible for a 

bonus as a result of my waiver of my salary. 

Mr. GARAMENDI. And stock options? 

Mr. SMISEK. I have no stock options, sir. 

Mr. GARAMENDI. And you are receiving any benefits? 

Mr. SMISEK. I am participating in long-term performance programs, the pay-out of which is dependent on the amount of profit 

98 

sharing that we share with our employees, as well as the stock 

price. 

Mr. GARAMENDI. I thank you. 

Thank you very much, Mr. Chairman. 

Mr. COSTELLO. [Presiding.] The Chair thanks the gentleman and 

would ask any Members present if they have additional questions. 

I understand that Mr. Boccieri does. 

Mr. BOCCIERI. Thank you, Mr. Chairman. 

One follow-up question that came to my mind. My synapses 

aren’t working as quickly as they used to at 41. But you had suggested that Aer Lingus pilots are trained as well as domestic aircraft commanders, pilots and captains on board our aircraft. How 

can you make that assumption when your own regional carriers 

aren’t training to the same level as legacy carriers? We found this 

in constant NTSB reports. We found this over and over and over 

again. Explain to me how you draw that connection when your own 

regional carriers cannot commit to the same level of experience 

level that you have been training your pilots. 

Mr. TILTON. So back to the relationship between the network carriers and our regional partners, as I have said, and Jeff has echoed, 

our safety management organization works together with our regional partner management organization to ensure that the safety 

processes that we hold to best practice at United share it with the 

regional carriers. We audit them; we audit them together with the 

FAA. We share information with the FAA relative to our work with 

the regional carriers. We are mindful of the risks associated with 

new anything, new employees of any type, so we are mindful of 

that, we understand that. But as Jeff has said a moment ago, they 

are necessary, they are important. 

So just bear with me for a second. With respect to our relationship with all of our foreign partners, you have to think about it, 

all of them, All Nippon, Air China, Singapore Air, Lufthansa, all 

of British Midland, Austrian Air, all the carriers with whom we 

share code across the entire Star Alliance, we, either from an IATA 

perspective, the global international association carriers, all of the 

safety authorities that exist in all of those countries, we have to set 

a safety standard for the entire industry worldwide regardless of 

the nationality of pilots. That is the essence of the alliance structure. And we will fly a passenger across four or five of those carriers. And we know we are making an implied commitment to the 

training of all of those carriers, which is why, Congressman, to get 

into the Star Alliance or to get into a code-sharing agreement, you 

have to be approved across a spectrum of safety considerations before you are approved. 

Mr. BOCCIERI. Mr. Tilton, the after-actions report from the NTSB 

for the Colgan crash showed that the regional air carrier in part 

of their syllabus did not teach the pilots how to recover from a full 

stall. They taught only stall recognition through a stick shaker, not 

a stick pusher. What happens if the aircraft goes into a full stall 

recovery and what were the pilot’s reaction, that was not part of 

the training syllabus. When asked they said it wasn’t part of the 

FAA’s requirement. So what we have seen—Colgan has said this 

wasn’t part of the FAA requirement, so what we have seen is now 

where airlines had reached for the stars in terms of their training, 

99 

they are now reaching for the minimums in some of these regional 

carriers. 

And I have grown very concerned about this over my term on 

this Committee. But I want you to say to this Committee and for 

the record that you know that those aircraft that are flying out of 

Washington, D.C., while we have 1,400 grounded pilots in your airline, if they are trained, and you know for certain that they are 

trained to recover from a full stall. 

Mr. TILTON. So all of our foreign carriers, all of the foreign carriers with whom we do business, are trained to a level that is satisfactory to both the FAA, to ourselves, to ourselves, and to their respective safety jurisdictions in their countries. 

Mr. BOCCIERI. Mr. Smisek, was Colgan Air training to your satisfaction? 

Mr. SMISEK. No, it was not. 

Mr. BOCCIERI. And why did you keep them as one of your carriers? 

Mr. SMISEK. We were not aware of that training deficiency. That 

is the responsibility of the Federal Aviation Administration. We expect all of our regional carriers—— 

Mr. BOCCIERI. That is your responsibility. That is your responsibility. 

Mr. SMISEK. Let me tell you that we are very concerned with 

safety. We did not train those pilots, we did not maintain those aircraft, we did not operate the aircraft. We expect them to be safe, 

we expect the Federal Aviation Administration to do its job, we expect that you do your job—— 

Mr. BOCCIERI. Well, we expect you to do your job too, sir. 

Mr. SMISEK. And I expect me to do my job. 

Mr. BOCCIERI. You need to make sure that your domestic carriers 

in these international agreements that you are going to be making, 

outsourcing jobs and outsourcing training and doing all the other 

stuff that is going to move this type of level of expertise off our 

coast, needs to be maintained. I can’t sit here and guarantee as a 

representative of the people from Ohio who fly on your airline and 

fly on other airlines to be certain that this level of training is going 

to be maintained if we are going to be getting into these big agreements, too big to fail, with other international carriers. 

Mr. SMISEK. We are very focused on safety. The training of pilots 

across the globe is a responsibility too great for Continental Airlines. We do not have the resources. Each jurisdiction has its Federal regulators; each jurisdiction has its regulation over safety. We 

participate and share our best practices. 

But if you take a look at Star Alliance, Star Alliance has rigorous 

requirements for joining and rigorous requirements for safety. And 

I am confident in the safety of all the Star Alliance carriers. 

What you point to was a problem. There is no question about it. 

And everyone in the aviation business, and I personally and everyone at Continental, regrets that training failure at Colgan. That 

has been identified and will be, I am confident, corrected. And we 

need to make sure we all share your concern with safety. Safety 

is the most important thing that we have. But we can’t possibly be 

responsible with the limited resources we have for the safety of 

every carrier in the globe and every carrier that is out there. We 

100 

can be responsible for our own safety. We can certainly share our 

best practices, and we do so. And we support all improvements in 

pilot training, and we support regulatory reform within the Federal 

Aviation Administration if that is what is required for oversight for 

U.S. carriers. 

Mr. BOCCIERI. We are going to get to that reauthorization bill. 

We are going to make sure that it is mandatory that pilots know 

how to recover from a full stall. 

Mr. SMISEK. And I would support that. 

Mr. BOCCIERI. Thank you. 

Mr. COSTELLO. That Chair thanks the gentleman. And I was 

going to make that very point that is the reason why we passed 

legislation through both the Committee and out of the House, that 

when we come out of conference, we are going to have a reauthorization bill that has the Airline Safety and Pilot Training Improvement Act, which will in course raise the standards for pilots at the 

regional carriers as well. We recognize that the both United and 

Continental and some of the other major carriers do not hire at the 

lower standard even though they can, but many of the regionals do. 

And that is what we found with Colgan, and that is what we have 

found with other regional carriers. 

And I would just interject as well and agree with the gentleman 

that while it is the FAA’s responsibility, it is also your responsibility as CEOs of airlines that contract with regional carriers to 

make certain—not just rely on the FAA, but to make certain that 

these regional carriers are hiring pilots that have training in excess 

of the minimum requirements as opposed to the minimum even 

after we increase the minimum requirements in the conference report. 

With that, the gentleman from California Mr. Garamendi is recognized. 

Mr. GARAMENDI. Mr. Chairman, thank you. And thank you for 

bringing up that last point. You gave me an opportunity to cool 

down a little bit. 

I heard the most astounding testimony I have heard in my 34 

years, that the chief executive officer of an airline that contracts 

for services to provide services to that airline, in this case Continental—and I did not hear this from United, and pleased I didn’t 

hear it—that it is not your responsibility to ascertain the safety of 

the pilots with which you contract. 

Mr. SMISEK. Sir, I did not say that. 

Mr. GARAMENDI. I am delighted to hear you did not say that. 

Could you specifically tell me what your responsibility is with regard to the qualifications of those pilots with whom you contract 

on your flights? 

Mr. SMISEK. We do expect, we do require all of our regional carriers to be safe carriers. Colgan in this instance had a training failure. It resulted in a terrible accident, which we regret tremendously. 

We are as focused on safety as you are, sir. We expect safety, we 

require safety. You have to understand, however, that there are 

limitations on the resources. Since all airlines contract with large 

numbers of other airlines, for example in code shares, we do rely 

on the requirements and the safety audits of IATA, on the Federal 

101 

Aviation Administration, we have our on-line safety audits, safety 

audits that Star Alliance conducts with respect to its other carriers 

as well. 

Mr. GARAMENDI. I am particularly concerned about the domestic 

situation because that is where the accident occurred, that is where 

the training was inadequate. I would like to have you specifically 

in writing present to me and to the Committee exactly what you 

and United do to ascertain the quality and the safety record and 

training record of those pilots with whom you contract in your huband-spoke situation. 

Mr. SMISEK. Sure, we will do so. 

Mr. TILTON. And we will be delighted to do that. We will go beyond that. We will actually give the Congressman a report on the 

nature of our best practice transfer; on the nature of the relationship between the two safety organizations, the regional carrier 

safety organization and ours; the extent to which we have on occasion found them wanting, and suggested that until something was 

addressed, we would be suspending any contractual services of a 

particular sort with them. So we will be glad to do that. 

Mr. GARAMENDI. And I would hope that would also include the 

specific actions that your airlines take to verify individual pilots. 

Mr. SMISEK. We will do so. 

Mr. TILTON. We will be glad to do that. 

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Mr. GARAMENDI. Thank you. 

Mr. COSTELLO. The Chair thanks the gentleman from California 

and now recognizes the gentleman from Michigan Dr. Ehlers. 

Mr. EHLERS. Thank you, Mr. Chairman. And before I ask questions, I will just comment on the Colgan situation. 

I read the transcript, and I think beyond the training issue was 

the issue of the lack of competence of the individuals. It made me 

shudder to read the cockpit transcript and observed the conversation back and forth. They were totally preoccupied with personal 

issues and not with flying the plane. And so I think it is not just 

a matter of training, it is a matter of hiring responsible individuals. And I think anyone who reads that transcript would realize 

that was a good share of the problem. 

I just want to comment. We have had some other airlines coming 

together, and I understand all the advantages of airlines combining 

and working together and the many different ways they do that. 

But I am afraid what I have seen is that there is something lost 

every time we get some airlines going together. 

A very recent case, I won’t give specific names, but one airline 

that I thought was operating very, very well, and I got to tell you, 

everyone in the Congress is an expert on flying in the airlines because we do it every week ad infinitum. There is an airline that 

I thought was really operating very well was combined with a very 

large airline which had not operated as well, and now the combination of the two is not operating very well in a number of cases, so 

I won’t get into specifics. 

I really caution you, make sure that you are improving service 

for the public. And I know it is easy for you to say, yes, yes, yes, 

of course, that is our business, that is what we should do. That is 

not what happens in too many cases. And I want to warn you 

about that. And I hope you will give assurances that you will conduct frequent surveys of your frequent flyers and of the general 

public as well to evaluate how well you are doing in that of combining the two, because I am just astounded that the number of 

what I call poor judgments being made by executives who didn’t 

even bother to understand the culture of the company they were 

absorbing and have lost some very good people, but above all have 

lost a lot of good spirit, and the public is the worse for it. 

I am not convinced that all this combining of airlines is really 

that advantageous. It may reduce cost of the passengers very 

slightly, it may result in you making more money, which is your 

goal of course, but I am not sure the overall picture is really all 

that great. And I just wanted to caution you on that from my perspective, but also give you an opportunity to rebut what I have just 

said. 

Mr. TILTON. Well, what you just said may well present a competitive opportunity for Jeff and myself. 

Mr. EHLERS. It may well be. I know that Continental has had a 

very good history in the last decade of being extremely well run 

under the CEO that really renovated it. And I fly all the airlines. 

Unfortunately, being in Grand Rapids, Michigan, we have just 

about every airline under the sun flying in and out of there, so we 

have a large choice, and we exercise that choice depending on the 

service we get. 

110 

Do you have anything to say, Mr. Smisek. 

Mr. SMISEK. Sure, Congressman. You are right, we are well 

known for our customer service. I have been in Continental since 

the turnaround 15 years ago and have been part of all the decisionmaking at Continental during that 15-year period. We are very attuned to customers. We have corporate advisory boards, we bring 

in frequent flyers, we participate in a flyer talk forum. We are very 

attuned to our customers, and that is how we get the reputation 

for customer service. 

But largely, Congressman, our reputation for customer service is 

built around the culture of Continental Airlines. We work together 

very well. We may have disagreements. Working together does not 

necessarily mean saying yes; what it means is listening respectfully 

to someone’s position, treating each other and our customers with 

dignity and respect. And as a result—and being honest and open 

and direct. And as a result we do give very good customer service. 

And I anticipate the combined carrier, that with our combined 

cultures—United has very, very good people. They are delivering 

tremendous operational performance today. They have a fine product, they have great facilities, they have very good people. We will 

combine that into a culture of dignity and respect, which they have 

today, which we can bring together, and we can have a carrier that 

will have wonderful customer service. 

The reason I am so confident that we can deliver on the 

synergies is I am confident in the team that I will build, I am confident in the culture that we will have, and I am confident in the 

customer service that we will focus on. 

Mr. EHLERS. Well, if you are so great, why are you even doing 

this? 

Mr. SMISEK. Because alone we are too small. We compete on a 

global stage, and we are too small. We are a global carrier, but a 

small one, and we need to be big enough to succeed against our 

large foreign and large domestic competitors. 

Mr. COSTELLO. The Chair thanks the gentleman from Michigan. 

Mr. EHLERS. Well, Mr. Chairman, I just want to offer my services 

to you at some point to go in the planes and just ask people about 

what they think. 

Mr. SMISEK. That would be great. 

Mr. EHLERS. I did this last week. 

Mr. TILTON. I will take you up on that. 

Mr. EHLERS. I didn’t initiate it, but someone else in the airplane 

did sitting in the front row of first. And, of course, all the people 

in first were frequent flyers who said, this airline used to be good, 

what happened to it? 

Mr. TILTON. We appreciate both the competitive opportunity that 

you have advised us of, and we certainly appreciate the offer of 

your services. 

Mr. EHLERS. OK. But at any rate, this one individual said it, and 

the next person said, yeah, I agree with that, and pretty soon the 

entire first class section was saying it has really gotten lousy. 

Mr. SMISEK. We have a great competitive opportunity. I appreciate the heads up. 

Mr. EHLERS. That company has something to worry about. 

Thank you. I yield back. 

111 

Mr. COSTELLO. The Chair thanks the gentleman from Michigan. 

And, gentlemen, thank you for your testimony today before the 

Subcommittee. And with that we will dismiss this panel and ask 

the next panel to come forward. Thank you. 

Mr. COSTELLO. I will begin to do the introductions for this panel. 

Captain Wendy Morse is the chairman of the United Master Executive Council, Air Line Pilots Association. Captain Jay Pierce is the 

chairman of the Continental Master Executive Council, Air Line Pilots Association. Ms. Patricia Friend, the international president 

for the Association of Flight Attendants, CWA. Mr. Robert Roach, 

Jr., general vice president of the Transportation International Association of Machinists and Aerospace Workers. Mr. Albert Foer is 

the president of the American Antitrust Institute. Mr. Hubert 

Horan, who is the aviation analyst and consultant. Mr. William 

McGee, consultant on travel and aviation issues, Consumers Union. 

And Mr. David Strine, who is the portfolio manager, Impala Asset 

Management, LLC. 

Ladies and gentlemen, as you know, we will put your entire 

statement in the record. We would ask that you summarize your 

testimony in a 5-minute period. And that will allow both myself, 

Mr. Petri and other Members to ask questions. 

With that, the Chair will recognize now Captain Wendy Morse. 

Captain Morse. 

TESTIMONY OF CAPTAIN WENDY MORSE, CHAIRMAN, UNITED 

MASTER EXECUTIVE COUNCIL, AIR LINE PILOTS ASSOCIATION; CAPTAIN JAY PIERCE, CHAIRMAN, CONTINENTAL 

MASTER EXECUTIVE COUNCIL, AIR LINE PILOTS ASSOCIATION; PATRICIA FRIEND, INTERNATIONAL PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS–CWA; ROBERT ROACH, 

JR., GENERAL VICE PRESIDENT OF TRANSPORTATION, 

INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS; ALBERT A. FOER, PRESIDENT, THE AMERICAN ANTITRUST INSTITUTE; HUBERT HORAN, AVIATION 

ANALYST AND CONSULTANT; WILLIAM McGEE, CONSULTANT 

ON TRAVEL AND AVIATION ISSUES, CONSUMERS UNION; 

AND DAVID STRINE, PORTFOLIO MANAGER, IMPALA ASSET 

MANAGEMENT, LLC 

Ms. MORSE. Good morning, Chairman Costello and other Members of the Subcommittee. I am Captain Wendy Morse, chairman 

of the United Master Executive Council of the Air Line Pilots International. We have more than 7,700 active and laid-off pilots at 

United Airlines, and I appreciate the opportunity to speak before 

the Subcommittee regarding the United-Continental merger as proposed. 

Over the past decade the airline industry has experienced the 

worst economic storm in the history of commercial aviation. An unprecedented series of financial shots have taken their toll on airline 

service and on employees. Bankruptcies, employee layoffs, contractual concessions and outsourcing have all been well chronicled. The 

proposed merger between United and Continental represents not 

only an opportunity for both airlines, but a possible sea change in 

the economic direction and customer satisfaction for the airline inVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00135 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
112 

dustry. How this merger is handled will determine whether it has 

changed for the better. 

This choice could not be clearer, and a recent history of airline 

mergers provides a vivid picture of which path to choose. We are 

not traveling down uncharted territory. The obvious path to success, should it be selected, has already been established. The advantage of the knowledge of what has worked and what hasn’t 

worked must be recognized. 

The Delta-Northwest merger in which the company worked out 

a mutually satisfactory contract with the pilots has been a resounding success. It has exceeded initial estimates for financial 

synergies, leading to a more viable company that provides greater 

service for the flying public and provides greater employment certainty for its employees. The America West-U.S. Airways merger in 

which management failed to negotiate contract terms in advance is 

still run as two separate companies. Mired in lawsuits, America 

West-U.S. Airways has failed to realize the advertised synergies, 

even though the merger took place more than 5 years ago, and continues to have its share of unresolved labor issues, which benefits 

neither the company nor the consumer. 

One axiom in the service industry stands as a beacon of truth: 

Take care of your employees, and ultimately they will take care of 

the customers, and the business will take of itself. It is imperative 

that the combined United-Continental establish a management 

team not only capable of running the airline well, but also that cultivates a culture where the combined entity provides the revenue 

and capital generation for a great product. 

In order for this merger to be successful, there must be a joint 

collective bargaining agreement with assurances for wages, working conditions and job protections that are commensurate with the 

professionalism that our pilots exhibit each and every day. Thanks 

to the professionalism, commitment and financial sacrifice of pilots 

and other employees, our airline has weathered numerous challenges and now flourishes, but there are still challenges ahead. 

One of the biggest for the pilots of United and Continental, and 

indeed for the airline piloting profession, is the industry’s continued drive to outsource as much flying as possible to an ever-shifting collection of the low-cost subcontractors. Last year United Airlines laid over 1,437 highly experienced pilots, their jobs outsourced 

to these low-cost subcontractors. The average United Airlines passenger now has a 50/50 chance that their flight is being operated 

by United Airlines. This philosophy, which puts profits ahead of 

safety and the traveling public, must come to an end. 

While United Airlines has been on the Hill saying all the right 

things, seeking approval, I speak for the United pilots when I tell 

you that our contribution must be recognized in order for this 

merger to be successful and the synergies to be realized. We ask 

that as you consider the benefits this transaction will have for the 

industry and for consumers, you also measure whether managerial 

actions are consistent with their words. 

United and Continental managements now stand at the threshold of what could be a great airline, one that sees sustainable profits and will also provide unmatched service to our customers. A 

combined United-Continental could establish a new paradigm in 

113 

commercial aviation, one where management and labor work together to establish a solid, profitable airline, where employees are 

properly compensated and where job security is not a constant concern. 

As key stakeholders, the United pilots stand ready to embark on 

this new business opportunity. Our favorable participation will lead 

to a stable, sustainable airline. This in turn will produce an unprecedented level of success for United stakeholders and an exemplary level of service for the flying public. I thank you. 

Mr. COSTELLO. The Chair thanks you, Captain, and now recognizes Captain Pierce. 

Mr. PIERCE. Good morning, Mr. Chairman, Ranking Member 

Petri and Members of the Committee. I am Captain Jay Pierce, 

chairman of the Continental Airlines Master Council of the Air 

Line Pilots Association International. Thank you for the opportunity to speak regarding the proposed Continental-United merger. 

I am particularly thankful that you have taken the time to consider 

the effect this proposed merger may have on labor. 

I began my aviation career in the United States Army in the late 

1970’s and have been a professional airline pilot for over 25 years. 

I am in my second term serving in the Continental Pilot Group as 

its chairman. And as a Continental pilot I can assure you that I 

have been trained to recover from a full stall. 

I tend to think in terms of opportunities, risks and rewards. I believe that this merger will be an exercise in all three. The questions that have to be answered are, will the opportunities produce 

success; who will assume the risks; and finally, who will reap the 

rewards? 

To some, the initial value created by participating in the merger 

will allow for claims of success. However, if creating a story for 

Wall Street simply through participation is the goal, that bar is set 

very low. None of us should accept the philosophy of mediocrity as 

the standard for success. If done correctly this merger can 

strengthen our airlines and help resurrect a failing industry. This 

is the opportunity. 

Our merger partner United’s financial performance has been in 

critical condition, and although ours is better, has been in—could 

be considered somewhat anemic. Over the last decade network carriers have reported over $60 billion in net losses. Since deregulation there have been over 180 airline bankruptcies. Historical 

greats, such as Pan American, CWA and Eastern, have become extinct. Thousands of employees have lost their jobs, shareholder 

value has been erased, and communities have suffered. The industry is broken and is badly in need of an overhaul. 

Continuing down the well-traveled path of economic irrationality 

does not bode well for the traveling public, shareholders, or for the 

long-term interest of airline employees. It is incumbent on us to 

find rational solutions. I believe that a properly executed merger 

can be a better solution for the industry than consolidation by failure. 

Going third in this round of airline consolidation provides us an 

opportunity to examine what has worked and what has failed. It 

is clear to see that the difference between marginal success and 

real success can be tied directly to labor, and more specifically pilot 

114 

labor. In a merger it is not the executives, the bankers or the lawyers who assume the risk; it is the employees, and it is labor. If 

we must carry the risk, we must share in the rewards. 

I cannot guarantee that this merger will be successful, but I can 

with all certainty predict its downfall if our pilots do not support 

the path our managements have chosen. The merger is expected to 

produce over $1 billion in airline synergies. If the merger is successful, that success will be determined by the strength of the new 

entity, the value added to shareholders, and, even more importantly, by the pride of the airlines’ labor force. This pride can only 

be regained by first returning to labor what has been lost through 

years of concessions. As irrational as it is to continue to foster a 

failing industry, it is equally irrational to use the benefits derived 

from a merger to simply enrich those who put the deal together or 

to continue to throw good money after bad with ill-conceived business plans that reward only those at the top. 

It is also important that this merger provide benefits for passengers. We should use this opportunity to reexamine subcontracting and outsourcing. When a passenger books a trip with Continental from Houston to Newark and then beyond, they have an 

expectation that the entity they purchased the ticket from is responsible for their travel experience. Network carriers should be 

operational airlines, not merely ticket agents. 

Our passengers have a right to receive one level of service and 

one level of safety from the beginning of their journey to their final 

destination. To achieve that single platform experience, flights 

must be operated under the operational control of the network carrier and therefore be crewed by pilots working under contract with 

that airline. As Continental employees we bring an award-winning 

culture of customer service to an industry marked with sharp declines in customer satisfaction. We bring strong job protections that 

limit the outsourcing of flying to its lowest bidder. If done in the 

right fashion, this merger can bring the best of Continental to the 

United name. 

In closing, I would like to remind you that Continental Pilot 

Group did not search out or solicit this merger. We are, however, 

cognizant of the fact that if done correctly, this could be an opportunity to create a great airline, one enriched by Continental’s culture, with a route structure capable of transporting customers to 

almost anywhere in the world and a pilot group unmatched in professionalism and experience. Thank you for your time, and I look 

forward to your questions. 

Mr. COSTELLO. The Chair thanks you, Captain Pierce, and now 

recognizes Ms. Friend. 

Ms. FRIEND. Thank you, Chairman Costello, Ranking Member 

Petri and the Members of this Committee, for giving AFA–CWA, 

the world’s largest flight attendant union, the opportunity to testify 

on this proposed merger of United and Continental Airlines. 

The voices of the workers often take a back seat in these hearings and in the public pronouncements about the benefits of airline 

mergers. I am here today to give those workers a voice. As a 

United flight attendant for 43 years and the president of AFA– 

CWA for 15 years, I have had a unique perspective on the dramatic 

115 

changes that have reshaped the commercial aviation industry and 

eliminated thousands of jobs. 

Lately I have listened to airline CEOs testify before this Congress about the need to consolidate the industry in order to achieve 

a sustainable business model. After hundreds of airline bankruptcies, thousands of employee furloughs, devastating pay and 

benefit cuts, destruction of pensions and 32 years of deregulation, 

it seems that airline management has figured it out, albeit in the 

worst fashion, that our Nation needs a stabilized and a rational 

aviation industry. 

Mr. Chairman, the Nation’s flight attendants and all aviation 

workers also need a stable industry. The consumers are rightfully 

concerned that airline mergers will lead to higher fares and reduced service. We agree. But we also recognize the reality that airline fares must increase in order to stabilize this industry, provide 

a robust air transportation system, and provide more stable employment for thousands of aviation workers. 

To strike this balance between a stable industry and reliable air 

service, we assert today that the increase in consolidation activity 

requires appropriate regulatory oversight to protect the interest of 

employees and consumers. But while some protections are in place 

today for consumers and communities, since deregulation there are 

virtually no protections for airline workers. Of all the well-developed, prederegulation rules of the Allegheny-Mohawk Labor Protective Provisions, only one exists today, a provision that establishes 

basic seniority protections in the event of a merger. 

After deregulation the Congress was concerned that massive 

postderegulation restructuring of the airline industry would displace large numbers of employees. So in order to assist laid-off employees, they added the Airline Employee Protection Program to 

the Deregulation Act of 1978. Unfortunately, the almost 40,000 employees who lost their jobs in the immediate wake of deregulation 

never received the benefits that Congress promised since funding 

was never authorized for the benefits. 

As Congress looks into the impact of mergers on employees, it 

should definitely look at the failed EEP as a framework to provide 

meaningful protections to workers in the future. 

As we have testified in the past, we are not proposing to reregulate the industry, but we do think that at a minimum something 

needs to be done to shield workers from the harshest effects of this 

merger and all future mergers. 

So what can the workers at United and Continental expect as 

they combine their workforce and route structure? While management has provided information that is otherwise publicly available, 

management has not been forthcoming about critical and future 

business plans. I call on this Committee to compel United and Continental management to provide the information on their plans for 

current United and Continental employee-based and hub operations. 

In addition to the proposed merger, United is the architect of a 

new global alliance revenue-sharing scheme. They have contracted 

with Aer Lingus to operate an international route for them using 

Aer Lingus aircraft, but employing flight attendants from a thirdparty operator. We call on this Congress to stop this type of soVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00139 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
116 

called joint venture scheme by enacting H.R. 4788. We call on you 

to not let United and Continental management use this merger as 

a vehicle to outsource more good middle-class jobs. 

We also ask this Committee to consider the impact this merger 

may have on the contract negotiations under way between the Association of Flight Attendants, CWA and United Airlines. For almost 6 years the flight attendants at United have been working 

under a collective bargaining agreement that was negotiated while 

the company was in bankruptcy. They sacrificed nearly $2.7 billion 

in salary and benefit concessions in addition to the loss of their 

pension. We are asking your help to ensure that the current contract negotiations are satisfactorily resolved before this merger is 

finalized. 

We will not allow the negotiation process at United to be delayed 

as a result of this merger. The employees at United Airlines make 

deep sacrifices to keep the company flying, and it is time for the 

workers to share in those rewards. While much will be made over 

the coming months about the impact of this merger on consumers 

and communities, I urge you to remember the hundreds of thousands of airline employees across this country. Keep us in mind as 

you review this merger and the impact that it will have on our 

lives and our families. We are the ones who have the most to lose, 

and we have the least protection. 

I thank you for your time, and I look forward to your questions. 

Mr. COSTELLO. The Chair thanks you, Ms. Friend, and now recognizes Mr. Roach. 

Mr. ROACH. Thank you, Chairman Costello, and Ranking Member Petri, and Members of the Committee, for the opportunity to 

speak to you today. My name is Robert Roach, Jr. I am the general 

vice president of the International Association of Machinists and 

Aerospace Workers, the largest airline union in North America. 

The Machinists Union represents over 27,000 employees that could 

be adversely affected by this merger at Continental Airlines; the 

flight attendants, Air Micronesia, a subsidiary of Continental; the 

flight attendants, Express Jet, a regional partner of United and 

Continental; and fleet and passenger service, as well as other classifications at United Airlines. 

We echo Chairman Oberstar’s statement when he wrote to the 

Department of Justice, this merger will move the country far down 

the path of an airline system dominated by three megacarriers. If 

United and Continental merge, another domino in a chain of 

merges will fall, and there will also be additional consolidations to 

help them survive. Already the president of U.S. Airways of the regional—of a low-cost carrier has announced that if this merger goes 

through, that his airline will soon follow suit. 

We cannot look at the United-Continental transaction in isolation. The airline industry has been in turmoil since the passage of 

airline deregulation in 1978. The Machinists Union argued against 

deregulation. Our predictions have come true. Deregulation in this 

industry and others has had disastrous effects. In 2007, the financial and housing meltdown was a result of unregulated corporate 

greed in the banking and mortgage industries. Looking daily at the 

news reports about the catastrophe in Louisiana and the Gulf 

Coast, with oil spilling out, ruining the lives of people down there, 

117 

we can tell that deregulated industries only operate in their own 

best interest and not the interest of the consumers or their employees. 

The airline industry needs to be stabilized because it drives $1.4 

trillion in economic activity and contributes $692 billion per year 

to the gross national product. It is too vital an industry to leave 

to its own destructive devices. 

It is clear that the airline industry has failed to deliver on the 

promises of a stable, profitable industry, and staying the course 

will only continue the industry’s downward spiral. Albert Einstein, 

the great scientist, said, ‘‘Insanity is to continue to do the same 

thing over and over again and expect a different result.’’ 

Can we allow the airlines to continue to consolidate and merge 

and continue to lose money, lose employees, destroy cities and 

States with their supposed service without some sort of regulation 

to protect those interests? Even Alfred Kahn, the major architect 

of deregulation, said, ‘‘I must concede that the industry has demonstrated a more severe and chronic susceptibility to destructive 

competition than I, along with other enthusiastic proponents of deregulation, was prepared to conceive.’’ 

The industry is crying out for limited reregulation. Does anyone 

really believe that having only a few major airlines in operation, 

each with immense market control and offering consumers fewer 

choices, will benefit the country? If one of these megacarriers 

should fail, how will that impact the country? 

The Machinists Union has serious concerns not only about the viability of a combined carrier, United-Continental, but the industry 

in general. Although we have met both airlines jointly and separately since the airline merger was announced, IAM members still 

have many questions unanswered and concerns that need to be addressed. 

We estimate that United, the merger—the merger of United with 

Continental carrier would start out with $13.8 billion in debt. What 

is the business plan to deal with that debt structure? Will the 

merged carrier have any choice but to eliminate hubs in order to 

avoid competing with itself? Closing hubs initiates a cascade of job 

loss that begins with airline employees and continues throughout 

the communities to the firms that provide services to the airline. 

Will the merging of these two carriers and wholesale reshaping of 

the industry destroy competition and harm consumers? 

As details about the combined carrier business plan emerge, it 

must be closely scrutinized to determine if the merge will result in 

a successful airline or not. We ask Congress to help determine if 

this transaction will be good for employees. The carriers admitted 

that homogenizing pensions is a complex issue, and although they 

have given it much thought, they do not know how it will be resolved. 

The Machinists Union will not allow a member’s retirement security to become a casualty of this merger. United Airlines has 

passed billions in pension liabilities to the American taxpayer already. The Machinists Union is currently in contract negotiations. 

For all eight classifications we have members of the two carriers. 

It is premature for anyone to talk about combining the carriers’ 

118 

employees, and each airline must recognize a responsibility to continue bargaining in good faith. 

I would like to say that all the past mergers—U.S. Airways and 

America West, which is now being said we are going to another 

carrier, has operated as a separate carrier for 5 years. Although 

your announcements that Delta is working fine, Delta is working 

as a separate carrier in many of its classifications. 

And let me just say very quickly in closing that I am a product 

of one of these mergers. I was at TWA. My seniority was changed 

from 1975 to 2001. And we heard the same predictions, the same 

predictions that we hear from all CSOs and CEOs, that these airlines were not going to lay anybody off, that we were going to continue to service. St. Louis is a ghost town. The people in Kansas 

City have lost their jobs. As Mr. Tilton testified, planes are going 

over to China to be maintained. 

It is time to put a stop to this. Enough is enough. We need to 

reregulate the airline and put a halt to this airline merger until 

we have a stable airline industry. 

Thank you, Mr. Chairman. I look forward to your questions. 

Mr. LIPINSKI. [Presiding.] Thank you, Mr. Roach. 

The Chair now recognizes Mr. Foer. 

Mr. FOER. Thank you, Mr. Chairman, Members. 

Since most of my analysis today closely resembles my testimony 

before this Committee 2 years ago, my first recommendation, as 

foreshadowed by the gentlewoman from Hawaii, is that Congress 

ought to hold retrospective hearings on the Delta-Northwest merger. Has it accomplished its stated objectives? Were the projected efficiencies obtained? Has competition been adequately protected? Is 

the American consumer better off or worse off? I don’t have the answers, but there is no question that the answers would be invaluable in our efforts to predict what the implications of the UnitedContinental marriage are going to be. Indeed, it might make sense 

to actually delay the consummation of this merger until a fully 

credible study of the prior merger can be taken into account. 

The essential points of my written statement are the following. 

One, this is an industry in which there are substantial network effects, but the incremental costs of expanding an already large network may offset the network benefits. 

Two, the industry is already concentrated on a national basis, 

but this generalization underestimates the market power that is 

present at most hubs and on most routes. 

Three, a merger of this magnitude will in all probability lead to 

at least one more merger of similar size, and that will leave the 

U.S. domestically with three national network carriers, plus Southwest, and a fringe of other low-cost carriers. 

And four, this merger will itself likely lead to rationalizing capacity by closing or scaling back hubs, probably in the Midwest, which 

will harm a significant number of consumers. 

Now, these considerations require us to ask whether the four, or 

more likely three, national networks that will emerge from this 

process will be sufficient to provide a satisfactory range of choice 

and service and sufficient competition to keep prices close to cost. 

Standard antitrust analysis focuses on horizontal overlaps between 

airport pairs and, in certain markets, between city pairs. If an oriVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00142 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
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gin and destination route is served by only a few airlines, and the 

merger will leave the particular market more highly concentrated, 

then the DOJ will likely and properly require a divestiture or some 

other arrangement with respect to that route as a condition of approving the transaction. This is necessary, but it is not sufficient, 

especially if we look at competition among the systems and not 

merely within specific route pairs. 

Much has been made over the role of low-cost carriers in preserving competition. Southwest clearly influences prices wherever 

it competes, and there may be an effect even when Southwest is 

perceived as a potential competitor. But Southwest and the other 

low-cost carriers have found their success by competing indirectly 

rather than directly with the networks. They are called low-cost 

carriers in large part because they do not bear the cost of large networks. They do not offer the same type of one-stop shopping, frequent flyer benefits or airport amenities as network carriers. So decisions about the future of domestic air transportation should not 

rest on the concept that Southwest will always play its current 

role. Its strategies could change, its management could make mistakes. It could choose to relax under the price umbrella of a tight 

oligopoly of network carriers. 

The ultimate question is whether the public will be satisfied with 

three domestic and three global air transportation systems. There 

is little, if any, empirical knowledge that says how many systems 

are needed to provide a workable degree of intersystem competition. There is substantial data, both empirical and theoretical, that 

suggests that competitive problems increase as the market becomes 

highly concentrated. There is substantial experience with domestic 

air mergers that suggest how difficult they are to execute successfully, how few efficiencies have resulted from big carrier mergers, 

and how minimal entry has been at the network level. 

To the extent there is doubt about the United-Continental merger, it should be resolved as essentially a public policy question: Are 

we willing to interfere with private business decisions in order to 

preserve the few competing systems at the possible expense of 

whatever efficiencies might realistically be lost? 

We suggest that the magnitude and certainty—and I am just 

about finished—of these proclaimed efficiencies should be analyzed 

with great skepticism, and must be laid against inefficiencies due 

to other diseconomies of scale and scope, the cost of consummating 

the merger, and the reduction of competition arising from the 

merger. From a public perspective there should be no reason to 

rush to a decision on whether to allow United and Continental to 

merge, and it would make particularly good sense to examine the 

effects of the most recent similar merger, Delta and Northwest, before opting for further consolidation. 

Thank you very much. 

Mr. LIPINSKI. Thank you, Mr. Foer. 

Mr. Horan. 

Mr. HORAN. Mr. Chairman, the United-Continental merger and 

the ongoing airline consolidation process creates four major problems for consumer and industry efficiency. I believe all four problems have a common cause the Committee needs to address going 

forward. 

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Problem number one, as documented in Exhibit 1 of my testimony, is the overwhelming evidence that anticompetitive market 

power created by North Atlantic consolidation has already created 

consumer welfare losses in excess of $5 billion a year. These consumer welfare losses will be much worse in a few years after the 

implementation of United-Continental and American-British Airways. 

Problem number two is that United-Continental is part of a wellplanned, three-phase process to consolidate the entire legacy network business so that a permanent cartel of three too-big-to-fail 

collusive alliances control 80 percent of the overall U.S. aviation 

market, including 100 percent of the transatlantic and transpacific. 

In the North Atlantic phase 1, the DOT handed exclusive control 

of all intercontinental traffic to and from the United States to three 

companies. In phase 2 those three companies used that artificial 

market power to force the other three domestic legacy airlines out 

of business. Phase 3 began last year with the Japan ATI cases that 

are designed to create the same type of multibillion-dollar consumer welfare loss as we have already seen on the North Atlantic. 

Continental-United is an integral part of all three phases and can’t 

be evaluated as an isolated event. 

Problem three is the domestic market power threat. United-Continental will not cause immediate price increases in the local Chicago-Houston market, but broad categories of U.S. consumers are 

at risk. Legacy network carriers cannot survive without a strong, 

secure source of the international traffic that is the heart of their 

business model. When DOT gave three legacy companies exclusive 

control over all of this traffic, the DOT issued a de facto death warrant for legacy companies 4, 5 and 6. The Delta-Northwest merger 

eliminated number 4; the current merger eliminates number 5 and 

is designed to cripple or kill U.S. Airways, number 6, who has no 

hope of independent survival even though it is the most efficient 

of all the legacy carriers. 

The destruction of competitors in forced mergers where companies can be acquired for pennies on the dollar are market power 

abuses every bit as serious as the cartel pricing you see in international markets. 

Consumers also face the threat of oligopoly service reduction in 

hundreds of smaller cities once this control of the legacy 80 percent 

of the market shrinks from six to three carriers, a threat that will 

not be addressed or mitigated by low-cost carrier expansion. 

Problem number four is that these mergers cannot be justified on 

efficiency synergy grounds, the heart of the CEO’s arguments earlier, and are strictly motivated by the potential for increased anticompetitive market power. No previous merger between large airlines has ever produced a material reduction in unit operating cost, 

no previous merger between large airlines has ever produced large 

enough synergies to justify the enormous implementation costs of 

these mergers, and the vast majority of airline mergers since deregulation have been dismal financial failures. There is no evidence 

that the PR claims about the Delta-Northwest merger producing 

multibillion-dollar synergies are true. 

The single root cause of these four consumer inefficiency problems is the DOT’s willful refusal to obey or enforce longstanding 

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antitrust law. Antitrust law is not a barrier to any airline consolidation that can demonstrate public benefits, be they efficiency gain, 

service expansion, or lower prices, and that does not create or enhance artificial market power. But the evidence in this and in 

every previous case has been either nonexistent or fraudulent. 

The DOT refused to conduct the legally required Clayton Act 

market power test in any previous case. The DOT has not only 

willfully ignored the evidence of growing anticompetitive pricing 

that I have documented in my testimony, but they failed to collect 

any evidence on pricing or entry barriers whatsoever. The DOT 

simply made the false assertion the North Atlantic is a fully contestable market, even though there hadn’t been new entry in 23 

years. 

Every DOT ATI decision is based on completely fraudulent public 

benefits evidence, directly violating the horizontal merger guidelines requirements for verifiable, case-specific evidence that is neither vague nor speculative. The public benefits in each case rely on 

the completely false DOT claim that eliminating competition actually reduces prices in certain markets and does so automatically regardless of market or competitive conditions. And the DOT has 

used this ‘‘prices fall whenever we reduce a competition’’ rule to 

nullify the legal requirement for verifiable, case-specific evidence of 

public benefits in all future cases. 

The Committee and Congress must address this core problem 

that is DOT nullification of evidence-based antitrust enforcement 

means that airline competition is no longer being determined by 

consumers and investors in the marketplace in accordance with the 

Airline Deregulation Act, it is being determined by government bureaucrats working at the behest of politically powerful incumbent 

companies. The Committee cannot allow this merger review to proceed without full assurance there will be rigorous, independent 

scrutiny of the core synergy and market power claims, and, more 

importantly, the review cannot proceed until the DOT’s nullification of evidence-based antitrust enforcement has been clearly rejected, and the irreconcilable split that exists today between the 

DOT and DOJ approaches to antitrust has been resolved. 

Mr. HORAN. And my last point, the Committee must intervene in 

the current U.S.-Japan ATI case, where the DOT has clearly signaled they have no intention of enforcing the law, plans to rubberstamp a massive reduction in trans-Pacific competition that is 

going to weaken U.S. competitiveness and basically use multibillion-dollar consumer price increases in order to protect inefficient 

foreign carriers such as Japan Airlines. 

Thank you, Mr. Chairman. 

Mr. LIPINSKI. Thank you, Mr. Horan. 

The Chair will now recognize Mr. McGee. 

Mr. MCGEE. Thank you, Mr. Chairman and Members of the 

Committee. Good afternoon. My name is William J. McGee, and I 

appear before you today as a consultant on travel and aviation 

issues for Consumers Union, the nonprofit publisher of Consumer 

Reports. I thank you for the opportunity to express our deep concerns about the proposed merger between United Airlines and Continental Airlines. 

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Just as we have seen with banking and other businesses, we are 

now seeing the airline industry evolving into an oligopoly, and 

some carriers are rapidly approaching the too-big-to-fail threshold. 

In this environment, those who previously decried any form of assistance to financially struggling carriers would reverse that argument, claiming a mega-carrier, such as United-Continental, will be 

too big to fail. And they would be right; a shutdown would have 

immediate and adverse effects throughout the country. When the U.S. Airline industry received a $5 billion bailout in 

2001, it was argued that airlines were essential to America’s economy, infrastructure, security, and defense. Consumers Union 

agrees. Yet what we have been witnessing is an incredibly shrinking airline industry. With this merger, in less than 20 years we 

will have seen the demise of seven major brands in the United 

States: Pan Am, Midway, Eastern, TWA, America West, Northwest, and now Continental. 

While others can speak to the adverse effects on labor, the travel 

and tourism industries, and a host of suppliers, I will focus my 

comments on the potentially adverse effects upon passengers. 

In February 2001, the General Accounting Office reported on airline consolidation and identified several potential threats to consumers. We can’t predict with absolute certainty how the UnitedContinental merger ultimately would affect consumers, but we can 

examine the recent historical record to see how passengers were affected by American’s acquisition of TWA’s assets in 2001, US Airways’ reverse merger with America West in 2005, and Delta’s acquisition of Northwest in 2008. 

Unfortunately, the record for consumers is not good. In addition 

to the too-big-to-fail argument, we have identified other key problems that emerged. More details are available in my written testimony. 

One, less choice and fewer flights: Historically, we have not seen 

a merger among major carriers that has not led to reductions in 

service. United-Continental states it will maintain 10 hubs, eight 

of them in the continental United States. What we do know is that 

other mergers between major airlines eventually led to hub closures and flight reductions, despite promises to the contrary. 

Consider that TWA’s former hub in St. Louis saw a reduction in 

total passenger traffic from 23 million in 2002 to 12 million in 

2009. America West’s former hub in Las Vegas has shrunk as well. 

And although the full effects of Delta-Northwest have yet to be 

seen, Delta’s hub in Cincinnati is already experiencing cutbacks. 

Meanwhile, consumers on many routes are losing the opportunity 

that some airline executives suggest to ‘‘vote with their feet,’’ where 

there is no effective competition. 

Two, loss of service: It seems apparent the United-Continental 

merger would mean some cities, particularly smaller cities, would 

lose nonstop air service, if not all air service. The more mega mergers that are approved, the higher the probability that additional 

cities will lose service. 

Three, higher fares: A July 2008 report from the GAO concluded 

that mergers and acquisitions can be used to generate greater revenues through fare increases. Some analysts argue low-cost carriers 

will fill the void, but, one, there is no guarantee they will do so, 

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and, two, even when a low-cost carrier enters a former hub, prices 

fall only on selected routes, not on all routes. 

Four, reductions in service: Airline mergers tend to be contentious, and this case involves two mature companies. United was 

founded in 1926, Continental in 1934. So, therefore, a clash of corporate cultures is virtually guaranteed, particularly after layoffs. 

These sterile corporate terms—downsizing, right-sizing, 

outsourcing, off-shoring, furloughing—really mean two workforces 

will experience more trauma and jockeying for position on blended 

seniority lists. Inevitably, this will lead to employee morale issues 

and slowdowns due to melding of policies, procedures, and technologies. 

Five, fewer start-ups: Greater concentration of market share has 

a negative effect, according to a 2001 DOT report. It noted instances in which incumbent airlines drove new entrants out by cutting fares and flooding the market with capacity, only to later increase fares and reduce service. 

Six, less resistance: Since deregulation in 1978, we have repeatedly seen how one major carrier will initiate a fare increase and 

then watch if rivals will match. If enough key players resist, then 

the fare hike will be withdrawn. This same principle has applied 

to introducing airline fees and even to service initiatives. In a 

smaller industry, the likelihood of a rival carrier resisting a new 

fee or airfare increase will dissipate. 

Seven, widespread disruptions: With greater concentration, the 

United States faces a much greater threat of travel disruptions. 

Imagine the nationwide effects of a labor action or FAA grounding 

at a combined United-Continental, which analysts estimate would 

control nearly a fifth of all domestic airline seats. Even a 24-hour 

loss of service would have severe consequences. 

Eight, raising the stakes: Since the approval of the Delta-Northwest merger, some proponents of the United-Continental merger 

argue that ‘‘fair is fair.’’ That is why executives from American Airlines may soon appear before this very Committee seeking a merger with U.S. Airways, which, of course, just merged with America 

West in 2007. Ironically, this sudden leapfrogging in the airline 

ranks has not been due to genuine growth, expanding service, and 

creating jobs, but to reductions in service. 

It seems only fair to ask what the end game is here. At what 

point will this merger mania subside? Today we are told the domestic airline industry can only support only three large network 

airlines. How long before we are told that number has been reduced to two or one? Before further consolidation is approved, Consumers Union feels there should be more discussion about the airline industry’s ultimate goals and how those goals affect U.S. consumers. 

Thank you. And I look forward to your questions. 

Mr. LIPINSKI. Thank you, Mr. McGee. 

Mr. Strine? 

Mr. STRINE. Thank you, Mr. Chairman and Members of the Committee. 

Like you, investors in the capital markets have heard different 

arguments about why or why not mergers should take place in the 

U.S. airline industry. The balance of these arguments and the reVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00147 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
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sulting policy impact how the market prices risk and sets the cost 

of capital for the airline industry. 

To help you with your analysis, I will provide you with a perspective from the financial markets. So long as the airlines source their 

funding from the debt and equity capital markets, the boards of directors and management teams have fiduciary duties to their 

shareholders and creditors. In keeping with that duty, it is incumbent upon them to manage risk and work to enhance returns on 

invested capital. 

While managing costs and delivering products that customers 

value are important, making strategic structural decisions that permit their companies to adapt to changing market conditions are 

also critical. The airline industry is in dire need of lowering its financial risk and its cost of capital, and consolidation is one part of 

the solution. 

By several objective measures, the performance of the industry, 

including Continental and United, has been abysmal. The regularity of loss and failure goes unrivaled in corporate America. For 

example, looking at the performance over the past decade, we can 

see that the industry has reported an aggregate loss of about $68 

billion, there have been 58 bankruptcies, about 130,000 jobs lost, 

and defined benefit pension plans were offloaded to the Pension 

Benefit Guaranty Corporation. In addition, the average age of the 

fleet increased to about 11 years. 

To cap it all off, the value of the XAL, which is the New York 

Stock Exchange airline index, has dropped by about 77 percent 

since 2000. Taken as a whole, the body of evidence supports the 

need for profound change. The leadership at United and Continental are trying to address this need. 

The poor financial performance of the industry through a full 

business cycle can be attributed to its high fixed-cost structure, 

overleveraged balance sheets, low barriers to entry, higher barriers 

to exit, fragmentation, and fierce competition from low-cost carriers 

and recently consolidated, well-funded international carriers in Europe, the Middle East, Asia, and Latin America. These factors contribute to the higher cost of capital, which limits growth. 

Over the past year, airline asset-backed debt has frequently garnered yields over 10 percent. In one debt transaction, United paid 

17 percent. Further, in the autumn of 2009, every major network 

carrier except Delta issued equity at steep discounts in transactions that were highly dilutive to shareholders, which also raises 

the cost of capital. To this day, the weighted average cost of capital 

remains well into the double digits because of the significantly 

overleveraged balance sheets. 

Over the long term, value can only be created when the return 

on capital exceeds its cost. This is a fundamental financial goal the 

airline industry has never been able to achieve through a full cycle. 

Now, consolidation is certainly not a cure-all, but it is self-help. 

While the United-Continental merger is far to small to significantly 

change the competitive dynamics of the industry, given that the 

two carriers combined only produce about 18 percent of the available seat miles and they have de minimis route overlap, their focus 

on improving efficiency and creating synergy is a step in the right 

direction toward financial stability. 

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Although labor costs are likely to rise, as they typically do in 

mergers and after reductions and bankruptcy, the scale of the combined entity should enhance purchasing power with suppliers and 

the global network should be more attractive to high-yielding corporate customers. 

In addition, although United-Continental may gain additional 

corporate customers, which should improve their yield mix, it 

would be wrong to conclude that the merger would stop the domestic yield deterioration, which has been going on for the last 30 

years due to the continued growth of low-cost-carrier market share. 

Over the last 10 years, network-carrier market share has dropped 

by 33 percent. 

In conclusion, as you weigh policy objectives for the airlines, you 

may want to consider the benefits from having airlines in a better 

position to generate a return on invest capital in excess of their 

cost of capital through a full business cycle. 

The balance of positions which seek to socialize aspects of the 

airline industry without social funding versus those that promote 

growth in the free market will contribute to how the market prices 

airline capital risk and measures the required rate of return to justify growth. 

The ability to generate more consistent returns on equity and 

free cash flow is the path to repairing balance sheets and longerterm financial stability. Only then will there be a solid foundation 

for increased capital expenditures, rising wages, and increased 

service. 

Thank you. 

Mr. LIPINSKI. Thank you, Mr. Strine. 

I would like to thank the witnesses for their testimony. 

We will now move on to Members’ questions. And I will begin 

with the distinguished gentleman from Minnesota, the Chairman of 

the Full Committee, Mr. Oberstar. 

Mr. OBERSTAR. Thank you, Mr. Chairman. 

And I want to join his compliments to the panel for their splendid testimony. 

Vice President Roach, your very personal witness to your own experience, I remember it so well, of TWA. You are right, it did hollow out. St. Louis, it did empty out—Kansas City. The result of the 

acquisition meant the sale of their nonstop service between St. 

Louis and London Heathrow, which Mr. Icahn sold to American 

Airlines for $400 million. It should never, never have acquired 

value in a marketplace. These are rights given in the public interest for the public convenience and necessity, not for the personal 

enrichment of the carrier. 

And American made that money back in about a year. But St. 

Louis lost its connection to the world beyond, and an awful lot of 

people lost their jobs in the process. And, ultimately, TWA, one of 

the great proud carriers of years and decades past, was absorbed 

by American and now has to beg O’Hare for service to the whole 

country. That is the encapsulated summary of mergers and bigness. 

Yeah, ‘‘too big to fail.’’ United-Continental, as one of our witnesses just said, would control a fifth of the domestic market share, 

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115 billion of available seat miles. That is enormous capacity control. 

I asked several years ago, and I think Mr. Foer may recall this: 

Why would anyone, would any carrier spend $150 million on a 747 

when, for $50 million, you can buy a whole fleet? Do you remember 

what I had referenced to, Mr. Foer? Checchi and Wilson acquiring 

Northwest. For $50 million, they bought a whole fleet of 747s. And 

it took an airline that had $2 billion in equity and $1 billion in 

debt and turned it just the exact 180 degrees, $2 billion in debt and 

less than $1 billion in equity, and put it on a path towards the 

brink of bankruptcy. 

Now, this bigness and this merger mania, they spent 6 months 

looking for other carriers to acquire until they realized they needed 

to manage an airline. And all of you who have been captains, flight 

attendants, the maintenance personnel, all have seen this happen 

in the industry. Bigness leads to neglect and to difficult labor relations and to lower-quality service. 

Now, Mr. Foer, your testimony said, I predicted, along with many 

others, that a merger for Delta-Northwest would lead to a merger 

between United and Continental. I put it just the opposite of your 

testimony, your exact words, but that is what you meant. And that 

is what has happened. 

Now, isn’t it likely that the next shoe will drop if this one is approved—that is, American, US Airways, BA, Iberia, and Czech Airways, and JAL—and then have you three global mega carriers, 

right? 

Mr. FOER. Right. Basically, right now, on the international scene, 

we have three airlines operating under a variety of brand names. 

And I have been told by somebody in a position to know that, in 

those alliances, once there is antitrust exemption, the multiple 

companies can operate as if they are a single company. 

And so, why not face the reality? The reality is we are down to 

three international, global companies, supposedly competing 

against each other, but, you know, to the extent possible, they 

avoid head-to-head competition, just as domestically. 

Mr. OBERSTAR. They are just carving up the international pie, 

really, is what they are doing. 

Mr. FOER. Right. 

Mr. OBERSTAR. And with antitrust immunity, which they are all 

desperately seeking, which I opposed for United, and which they 

will want now with—and you have cited the U.S.-Japan case. ANA 

wants antitrust immunity for their alliance with United. Well, 

there is no competition in an antitrust-immuned alliance. And you 

will see fares goes up, service go down, more traffic concentrated 

on the most profitable routes, and the medium- to small-size hubs, 

the non-hubs in the United States get further downsized. That is 

really what happens. 

You said, hold retrospective hearings on Delta-Northwest. I will 

tell you what it has led to: baggage fees, $3.8 billion in baggage 

fees by the carriers, half of which are attributable to the Delta operation. You know, the next step is they are going to figure out how 

to charge us for printing out our boarding passes at home, how to 

charge us for our own paper that we use. 

127 

They are very good at this. They have little people who work day 

and night, they are little gnomes, in their economics and finance 

departments. And they work night and day, figuring out how to 

squeeze more money out of this turnip they have in their hand. 

And I am determined that won’t happen. 

Stable, profitable does not mean ever bigger and fewer. Who was 

it that said that airlines are looking for stability and profitability? 

That doesn’t mean that there should be fewer of them. 

They are always talking about rationalizing capacity. Mr. Horan, 

was that you who used that term? Rationalizing capacity, consolidating, too much capacity in the market. That wasn’t the purpose 

of deregulation. We didn’t say that they were going to take the government out of deciding market entry and pricing so that the airlines could consolidate and have more power. We wanted more 

competition in that marketplace, right? 

Mr. Roach, didn’t your members, and, Ms. Friend, didn’t your 

members have more options, more choices in the previous era? 

Have the machinists union and the AFA ever had to face each 

other in a consolidation in an election? 

Mr. ROACH. Not yet. 

Mr. OBERSTAR. Not yet. Well, if I have my way, you are never 

going to do it. I am doing my darnedest to make sure that that outcome doesn’t happen. 

In a hearing in this room in 1990—and I was Chair of that Aviation Subcommittee, and Mr. Petri, Bill Clinger was the ranking Republican on the Committee at the time. And I asked Secretary Sam 

Skinner, the Secretary of Transportation—this hearing was on airline finances and mergers and acquisitions. And I said, how many 

carriers really constitute competition in the marketplace? And the 

Secretary said, ‘‘Well, I think two.’’ Really? Then he stopped, ‘‘Well, 

maybe three,’’ he said. That is where we are headed, and that is 

not good. 

What I hear from the Uniteds and the Continentals and American and the rest of them is, ‘‘There is plenty of competition. Just 

look at what Southwest does to the marketplace. They drive the 

prices down. And legion are my constituents lining up to use 

Southwest Airlines frequent flyer miles to fly to London and Paris.’’ 

They don’t fly there. They are not in the world competition. You 

are all right. 

Thank you. 

Mr. LIPINSKI. Thank you, Mr. Chairman. 

The Chair will now recognize Mr. Petri. 

Mr. PETRI. Well, thank you. 

Thank you all for your testimony. It is very helpful. 

I guess I have a couple of questions. One for Mr. Strine: You 

talked about—and I have heard about low barriers to entry in the 

aviation industry because you can just lease a plane and have access to an airport and get in business. But what are the high barriers to exit that you refer to? 

Mr. STRINE. That references basically to the bankruptcy laws. 

Through the Chapter 11 process, we see companies who have pursued a path which was basically a failing business model survive. 

And, you know, I think today you have heard a lot about destructive competition. That law, in itself, is something that keeps a comVerDate Aug 31 2005 13:50 Oct 28, 2010 Jkt 000000 PO 00000 Frm 00151 Fmt 6602 Sfmt 6602 P:\DOCS\57059.0 KAYLA
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pany alive and keeps capacity in a market that was failing capacity. So that is the high barrier to exit. 

Mr. PETRI. And, second, you analyze the industry and its competitiveness and so on for a living. When you stand back and look 

at it, here is a very, very, very profitable industry for a lot of—not 

for the airlines, but for the auto rental companies, for the fixedbase operated airports, for the hotel business, for all kinds of people who have figured out how to make money from people traveling. But the airlines don’t. And probably the people leasing the 

planes to them are making a lot of money. 

But, for some reason, this center of loss seems to be among the— if the $68 billion figure is at all accurate, it is on the ones who are 

generating profit for everyone else on a systemic basis. 

What is different about that segment of the overall aviation 

transportation business that causes it to lose when everyone else 

is doing pretty well, or at least seems to be doing a lot better? 

Mr. STRINE. Well, there are several factors that contribute to the 

poor financial performance. One is that the industry has a very 

high fixed-cost structure. So, as we inevitably move through economic cycles, they cannot cover their costs with the revenue they 

can generate, given the amount of supply and demand in the market. It is as simple as that. 

You know, if you look at the capital expenditures that are required and the debt that is baked into these companies, they have 

overleveraged themselves. And the interest expense that they pay 

on the assets, the aircraft or the aircraft rental fees that they pay, 

contribute to the high fixed-cost structure. 

So, to finance a business which is highly asset-intensive is expensive. And when you have a structure that doesn’t generate enough 

revenue to cover the cost, the cost of capital, meaning the interest 

expense, goes up, which is the irony of all this. 

I think everybody wants to see a stronger industry; it is how you 

get there. One of the drivers will be the cost of capital. The more 

financially stable the industry is, the lower the cost of capital will 

be, which will then provide a lower hurdle for growth. 

Mr. PETRI. Now, one last thing. You would assume, if there had 

been a huge consolidation in industry and just a few big global 

players, that they would have more pricing power, and ticket prices 

would go up and they would make money. But what seems to be 

happening is that prices have been steady or even declining, and 

it is an increasingly better buy for the traveling public. 

So what is wrong, from the point of view of these people trying 

to create monopolies? Or will there be a pot of gold at the end, from 

their point of view? Will they eventually extract monopoly profits? 

Mr. STRINE. To apply that specifically to this merger, I think that 

the aim, if you listen to what the companies are arguing, is that 

they think they will get a better share of the corporate traveler, 

which is a higher-yielding customer, which will improve their mix 

and improve their yield. 

But I think when you look at the competitive structure, it is really, from a financial standpoint, it is important to look at it holistically and globally. I mean, certainly domestically, there is lowcost competition, there are companies that come and go. Internationally, we have seen consolidation in Europe. There has been 

129 

a lot of consolidation, now Air France-KLM. British Airways and 

Iberia are merging. Deutsche Lufthansa has purchased both Swiss 

and Austrian over the past 2 years. 

In Latin America, there is only one airline, outside of Brazil, that 

basically controls the whole region; that is LAN in Chile. And in 

Asia—in China, there are only three major carriers in China. You 

have Air China in Beijing, China Southern in Guangzhou, and 

China Eastern in Shanghai. And they have been consolidating. 

So part of the analysis has to be, the companies here are going 

to be competing for international travelers against those foreign entities. And I think that is something that we shouldn’t ignore. 

Mr. PETRI. Thank you. 

Mr. LIPINSKI. Thank you, Mr. Petri. 

The Chair will now recognize himself. 

During the testimony of Mr. Tilton and Mr. Smisek, I had raised 

the issue of what is going to happen with the employees. And judging by the prior experience with airline mergers and what has happened to employees—and Mr. Roach raised the experience that he 

has been through—I understand that there is a lot of uncertainty 

about the future of a merged airline, what is going to happen to 

the employees. 

And I had also raised the point that I think that, if there were, 

as this moves forward, this consideration of the merger moves forward, if there are agreements that can be worked out with the 

unions, it certainly would make this a much smoother path to the 

merger being approved. 

So I wanted to know, thus far—I wanted to ask Captain Morse, 

Captain Pierce, Ms. Friend, and Mr. Roach, have you been at the 

table thus far, as the merger has been discussed? What have you 

learned, if you have? If you have or if you hadn’t, what are the answers that you are waiting for? 

So I just wanted to throw that general question out there, and 

we will start with Captain Morse and go down the line. I just want 

to know what has happened so far and what do you want to see 

happen. 

Ms. MORSE. I would begin by saying we have started the process. 

We have negotiated an expense reimbursement provision that isn’t 

quite enough but it is a step in the right direction. We don’t think 

the employees should have to pay for the expenses of the merger. 

It is the CEOs that decided they wanted to merge, not the pilots, 

not the employees. So that was a step in the right direction, but 

just a very small step. 

We see indications that the managements are interested in doing 

the right things, but until we actually see what they propose at the 

negotiating table, we are working on a transition agreement. That 

transition agreement would be more of a standstill type of agreement. 

As we process down that path, our next step would be a joint collective bargaining agreement. And whether we will get to that 

quickly or not will be really the indication of how well this merger 

will go. If we do not get to it quickly and, to quote Captain Pierce, 

if management doesn’t learn the word ‘‘yes’’ and learn it relatively 

quickly, then the merger will be unsuccessful. 

130 

So, as we proceed down the path, we see great opportunity here 

to lead, but we can’t lead by ourselves. We must lead with the 

managements of the company to make it a successful merger. We 

see the right steps, but time will tell whether those steps are really 

taken. 

Mr. PIERCE. And I would agree with Captain Morse that the 

steps—— 

Mr. LIPINSKI. Would you pull the microphone closer? 

Mr. PIERCE. Yes, sir. 

I would agree with Captain Morse that, so far, since May 3rd, 

when the announcement was made, we have seen steps by management that would lead to cautious optimism, in terms of information 

sharing, in terms of working toward a transition agreement. 

I will say that the two pilot groups, United MEC and the Continental MEC, are working very well together. We have, I would say, 

outstepped our management counterparts, in terms of doing our 

due diligence and creating an environment for success. 

It has to be a sequential order. There has to be a certain order 

of things to occur that we have agreed upon. We are going to negotiate this transition agreement, and once that is complete, we will 

move to the joint collective bargaining agreement. And once that is 

complete, we will move to finalization of the seniority list integration. 

Each of those steps will be tests for our management groups to 

ensure that they are participating, good-natured, in good faith. And 

if they don’t participate in good faith, then things won’t progress. 

And as things don’t progress, then they don’t hit their synergies, 

they don’t meet their obligations, they don’t meet their commitments. It is very much in the hands of labor and our management 

counterparts, working together, if this is going to succeed. 

Mr. LIPINSKI. Thank you. 

Ms. Friend? 

Ms. FRIEND. Well, I am afraid we have no optimism at all. We 

have been at the bargaining table with this management team on 

an open and amendable agreement that was reached in bankruptcy 

for well over a year now. We have made no progress. The company 

has not moved on their opening concessionary proposals. 

Since they have announced the merger, they have been unwilling 

to discuss with us the expense reimbursement for what it will cost 

the employees to participate in putting this merger together. They 

have been unwilling to talk to us about what we refer to as a 

‘‘fence agreement,’’ which allows for separate operations while we 

work through these issues. 

In fact, they have been unwilling to talk to us at all about the 

merger, other than to provide us with information that is publicly 

available that we could simply read in the newspaper. 

So, a very difficult labor-management relationship has not improved, nor have the executives of United Airlines given us any indication that they would like to improve it. So, any synergies that 

they hope to get from a combined flight attendant workforce are 

very, very far on the horizon and will not happen unless there is 

a change in attitude. 

Mr. LIPINSKI. Thank you, Ms. Friend. 

131 

And, Mr. Roach, I know you were shaking your head immediately when I started asking questions. So I am afraid you are 

going to have a similar response here to Ms. Friend. 

Mr. ROACH. Yeah, we have the unique—the machinists union has 

the unique—we have bargaining relationships on both carriers. 

And we have met separately and with both management teams. We 

have asked a lot of questions, and they don’t have any answers. 

They have been willing to meet, and they continue to say they will 

give us the answers. 

Our concerns are obviously about pensions. We worked very hard 

during the bankruptcy to maintain pensions, during the bankruptcy, and getting the IAM National Pension Plan. We worked 

very hard on Continental to maintain a single-employer plan. And 

there is a lot of work. We have met with the PBGC, and they have 

expressed that there is a lot of work in trying to go through that 

process. And they haven’t started, and they said they have thought 

about it but they don’t have any answers. 

We are concerned about the regional partner, ExpressJet, we 

represent. They operate on United and Continental. What happens 

to them? What happens to the subsidiary of Air Micronesia? 

We are concerned about the overall business plan, that this is 

not too big to succeed and that we create this monster airline with 

two different, separate cultures that cannot be put together. 

Again, Northwest-Delta are not together. There are big problems 

over there. And their morale is down, and the employees are not 

happy. And there has been no integration. Although it is portrayed 

in the public as it is, that is not the case. 

And so we want to see the business plan. We want to see that 

this carrier can survive. We have asked for the information. They 

said it is forthcoming, and we look forward to it. But beyond the 

collective bargaining agreement, we want to make sure the carrier 

can survive and be successful. Having a good contract and no job 

means nothing. 

And so, if they build this carrier and the carrier fails because 

they are unable to pull it together, I guess there is an old cliche, 

‘‘When the camel dies, we all walk.’’ And we don’t intend to walk. 

We want to see the thing survive. So, we need information. 

Mr. LIPINSKI. Thank you. 

And I can’t emphasize enough how important it is that these 

issues are worked out. 

With that, I will yield back, and I will now recognize the gentleman from Ohio, Mr. Boccieri. 

Mr. BOCCIERI. Thank you, Mr. Chairman. 

I just have a quick question for the two gentlemen who seem to 

be on opposing sides with respect to their testimony. Mr. Strine 

and Mr. Horan, just if you could balance this out with your comments. 

Mr. Strine, in your conclusion, you said that, ‘‘The ability to generate more consistent returns on equity and increase free cash flow 

is a path to repairing balance sheets and longer-term financial stability.’’ 

However, Mr. Horan, from his testimony, has a very different 

picture or world view, suggesting that any merger between network 

airlines will produce modest connecting revenue gains, but without 

132 

major growth of their hubs, significant sustainable revenue 

synergies are impossible.’’ 

Can you guys balance those two comments out, please? 

Mr. Strine? 

Mr. STRINE. Well, I think when you look at returns of a company, 

you have to start with revenue, and you need to think about what 

drives revenue. And what drives revenue is supply and demand 

and price. 

And what is clear to us all is that the revenue has not been sufficient to cover the costs, the operating costs of the business and the 

interest expense of the business. So there have been losses, and the 

retained earnings have been negative. So the companies, to keep 

going, have borrowed more and more money over the years. 

And, as those balance sheets become more laden with debt and 

overleveraged, the cost of borrowing and the cost of equity rises. 

And that constrains growth. So the hurdle rate for growth becomes 

higher, so growth becomes more difficult. 

Mr. BOCCIERI. Sir, I don’t want to get into a theoretical debate, 

but please explain to me how reducing the number of competitors 

actually increases competition. 

Mr. STRINE. I am not arguing that, that it does. 

Mr. BOCCIERI. OK. 

Mr. Horan? 

Mr. HORAN. I think you have summarized my argument quite 

well. The core claim that these companies are making is that this 

is good for the public, this is good for consumers, this is good for 

the long-term health of the industry, because it will create measurable economic benefits in terms of network synergies or cost reductions. 

I believe both of those claims are fundamentally false. I believe, 

if you look at historical record, there is no evidence of anyone else 

having found this. I believe, if you look at the historical record of 

how networks work, you can create network synergies in a case 

where you build up a large hub—when TWA and Ozark merged in 

1983, there were huge network synergies. You can create network 

synergies in an environment where the merged carrier suddenly 

creates a new ability to expand, grow into new markets, things like 

that. 

I used to run these networks; I know where to look. And what 

I am saying is, there is no evidence in this case or from any public 

statement that they are going to do any of those things that would 

enhance what are legitimate network synergies. 

And the cost side, the cost of putting these companies of this size 

and these levels of complexity together runs into the billions. We 

have already heard plenty of testimony on the collective bargaining 

issues that need to be resolved. Those are expensive. And, equally 

important, the integration of the maintenance systems, core to all 

the safety concerns raised by many people today; the integration of 

the reservation and other financial infrastructure. 

All of those costs are 100 percent certain. They occur right away. 

Do you save because you don’t need two general counsels? Yes, but 

that is pretty trivial, and it is down the line. 

Mr. BOCCIERI. Do you think—— 

133 

Mr. HORAN. So I am just saying, if do you a simple cash flow— 

you know, United claimed, after 3 weeks of negotiation, their PR 

staff said, ‘‘We will get cost reductions equal to 0.6 percent of our 

combined operating costs.’’ And I am just saying that any person 

with common sense would look at that and say, that is what the 

PR guys are saying before the collective bargaining process has 

started and before you have done the hard, messy work of integrating maintenance systems and reservation systems. Chances are 

the cost synergies will be a big negative number. 

Mr. BOCCIERI. Do you think that previous mergers with the unintended consequences of these unforeseen costs that have been 

added have led to, sort of, farming out of some of these routes and 

some of the domestic routes to the low-cost carriers? 

Mr. HORAN. Well, people were discussing American-TWA, which 

was justified on the exact same kinds of synergies we are talking 

about today. There were no new hubs created. There was no expansion that was going to happen. It was just that somehow one plus 

one was going to equal three. And no one in the government scrutinized that. 

And, again, that is my message for the Committee. You pointed 

out the, sort of, difference in the arguments in what I am saying 

versus what the CEO is saying. The issue for the Committee is, 

you have to have absolute confidence that the DOJ is going to run 

through those very critical synergy efficiency claims. 

And, by golly, if they are proven to be true and Mr. Tilton and 

Mr. Smisek have found opportunities that every past airline manager failed to find, and that Continental management, who had 

been saying, you know, ‘‘We don’t want to do a merger because it 

is too risky for our shareholders, and that is not really where the 

benefits are, and it would be a bad thing,’’ he has found things that 

his previous management couldn’t find—God bless him, if the 

synergies are honestly there, they are verifiable, they ought to be 

able to proceed. Because then what Mr. Strine is saying is those 

are legitimate things, that would improve efficiency, that is selfhelp. 

But if those efficiencies aren’t there, it begs the basic question, 

well, what about all these anticompetitive problems? Isn’t that 

what you are really going after, and isn’t all the synergy stuff just 

a smokescreen? 

Mr. STRINE. Can we take a simple example to maybe elaborate 

on this? 

Let’s say you were running an airline and you were going to purchase 50 aircraft from Boeing. And then you were a much larger 

airline, and you were then going to purchase 100 aircraft from Boeing. Do you think you would get a lower price if you were purchasing 100? Do you think you would get a better deal on your 

service, your maintenance, et cetera? The scale, in terms of their 

purchasing power with suppliers, should have some benefits. 

Mr. BOCCIERI. Too big to fail, right. 

Mr. HORAN. Could I just quickly reply to that, sir? 

The idea that an airline the size of United Airlines isn’t big 

enough to compete and it needs to be bigger to be efficient is one 

the more ludicrous claims that anyone has made in this industry 

in the last half-century. 

134 

And the example I keep going to is that Mr. Tilton and Mr. 

Smisek ought to fly to Moscow and sit down with the Russians, and 

tell them what a terrible mistake they made when they broke up 

Aeroflot. It had such scale economies, it not only did all the commercial aviation, it did the military and the crop dusting. But they 

broke it up with this silly notion that, while you wouldn’t have the 

scale economies on ordering pencils and legal pads, benefits from 

competition and spurring innovation would greatly offset the reduced scale with many smaller companies. 

And, again, it comes back to a factual point. If the scale economies, which is the synergy claim that Mr. Smisek and Mr. Tilton 

are making, are really there, which no one else has found, great. 

If they are not—but this is a factual question that objective people 

can sort through fairly easily. 

Mr. STRINE. The fact is, United already did go bankrupt, and 

they are still here. 

Mr. HORAN. Yeah. Right. Look at the financial performance of 

U.S. airlines in the last 15, 20 years. There is almost a perfect negative correlation: Smaller airlines have earned the kind of return 

for their shareholders that Mr. Strine is taking about, and the big, 

entrenched ones do not. 

Mr. BOCCIERI. Well, I appreciate that. And I know that did receive some government taxpayer dollars right after September 

11th. 

Captain Pierce, I just want to comment. I know you talked about 

that your training would have prevented—or would have prepared 

you to recover from a full stall. And I concur that the legacy carriers have done a great job with training and the expertise that 

they have added. 

I want to see that same level of commitment now with the regional airlines. Not all, you know, have been deficient like Colgan 

have. But we certainly want to see that higher standard be maintained. And we are going to require the FAA, but we want to make 

sure that the companies do so, as well, because they are ultimately 

in charge of the training requirements. 

Mr. COSTELLO. [Presiding.] The Chair thanks the gentleman and 

now recognizes the gentleman from California, Mr. Garamendi. 

Mr. GARAMENDI. Thank you very much, Mr. Chairman. 

Chairman Oberstar has gone on and on about efficiencies at 

Northwest and Delta. I have my own story, Chairman. Due to the 

lateness of our session and the cancellation of the United flight out 

of National, I had to jump on a Northwest-Delta flight via Minneapolis on a through-flight presumably to Sacramento. It was 

about $990, as I recall, for that one-way ticket. 

When I got to your part of the world, Mr. Chairman Oberstar, 

I got off the plane and found out that it stopped, I wasn’t going to 

go any further, and I was dumped in Minneapolis-St. Paul for the 

night. All well and good, they handed me a ticket for the next flight 

out the next morning. I went to pick up my ticket, I went to get 

on the flight, and I wasn’t booked, much to my surprise and angst. 

Eventually, I was able to get on the very last seat, which I suspect may have been a pilot seat that somehow would cause a delay 

somewhere else. Anyway, the way in which the system worked was 

a telephone call—the computers didn’t work at all, which should 

135 

have been obvious since I didn’t have a seat. But the only way they 

did it was by telephone to somebody that they found in, I guess, 

Atlanta. So much for the efficiency issue of mergers. 

But that is just a personal problem. My real concern is one of 

safety all the way around. I was astounded by the information 

given by the two CEOs about who is going to make sure that the 

maintenance in China, Singapore, and the Philippines was of quality, as though they had no responsibility themselves for that; it 

was, in fact, an FAA responsibility. No, that is not the case. 

Similarly, with regard to the quality of the pilots and other personnel on those regional airlines that contract, in this case, with 

United or with Continental, it is the responsibility of the management of both United and Continental today, to say nothing going 

forward, it is their responsibility to provide assurances that the 

highest quality maintenance, wherever it may be, San Francisco or 

Shanghai or wherever, is done. 

Those are my comments. And I will do everything I can to hold 

the management responsible for the quality of the pilots as well as 

the quality of the maintenance facilities. 

Finally, with regard to the issue going forward of the financials 

on the merger and whether, in fact, the Justice Department is looking at it, Mr. Chairman, I might recommend, based upon what we 

just heard, the testimony, that we invite the Justice Department 

to come and testify as to what they have found with regard to the 

issue of synergies of all kinds. And if they are not even looking at 

them, we might want to beat them over the head and ask them to 

look at those, and, in fact, are there real synergies or is it just one 

way to put smoke up in the air. 

I don’t have any further questions. If any of the participants 

would like to jump in with my remaining 1 minute and 35 seconds, 

do so. 

Ms. MORSE. I think we both would. 

With regard to the outsourcing of flying that you both spoke so 

eloquently about earlier, we have a very good mentoring program 

that has worked for certainly more than the 25 years, probably 

since our inception in 1926. And that mentoring program is where 

a senior captain mentored the more junior first officer. 

Today, we have a different scenario, where we have 1,437 people 

on the street, highly experienced pilots that are not working, when 

instead we have less experienced pilots. You can’t train for that. 

We have a mentoring program, and we should have a flow down 

and a flow up. 

As the CEOs indicated, we don’t have those airplanes to put on 

those routes. Well, last I checked, they have yokes and ailerons and 

rudders. And there is no reason why we can’t fly those airplanes. 

We are very capable of flying those airplanes. And to say that that 

is the solution to the problem, is ‘‘we don’t have that size aircraft,’’ 

is ludicrous. 

The people that mentored us were the people whose very pensions were taken away. And we are going to have to solve for both 

the outsourcing problem and the disparity in the pensions as we 

move forward. 

Mr. PIERCE. And I would add on top of Captain Morse that, you 

know, the FARs, the Federal Aviation Regulations, for training 

136 

standards and for flight time and duty regulations basically set a 

baseline of acceptability. For years and years and years, ALPA contracts have increased those levels of safety, those levels of training. 

And what we saw through the concessionary period that began 

post-9/11 is that those were areas that got degraded in our contracts. 

Now, as we rebuild those contracts, we are going to have to pay 

more attention to reparations, the training standards and through 

flight time and duty time. And I hope we have your support, as 

well, in pushing through the training standards language that 

ALPA supports as well as the flight time and duty time regulations 

that have been stalled for so long and, you know, were born by 

Captain Babbitt over a year ago and do not seem to be making 

much progress. 

Mr. GARAMENDI. Mr. Chairman, just a very brief comment. 

We had two CEOs here. I have been sitting on a dais like this 

for some 35 years, and I can really recognize BS and being shined 

on. And I know that I was shined on, if not inundated with BS. 

There is a very, very serious problem here, in my view, about 

safety. And when they tell me that it is the FAA’s responsibility, 

and when they claim, and then backed away from it, that it is not 

their responsibility to the quality of the people they contract with— 

that is, the airlines and the people that are then hired by those regional carriers—I know that something is seriously wrong. 

And I, for one, have been too long at this game, not in this particular chair but in chairs in California, to listen to that kind of 

thing and find it acceptable. And they have said they are going to 

respond to me. They had better. 

Thank you, Mr. Chairman. 

Mr. COSTELLO. The Chair thanks the gentleman. 

And let me mention to the gentleman that we invited the Justice 

Department to send representatives over to testify today. It is their 

standard practice when they are reviewing a case that they decline 

to testify. They have sent a letter to us just explaining the procedure that they will follow in reviewing the proposed merger. 

And I will tell the gentleman that we will take your comments 

from the record and write a letter to the Justice Department, telling them that we specifically want them to concentrate on the 

synergies that are claimed by the CEOs on this proposed merger. 

Mr. GARAMENDI. Thank you, Mr. Chairman. 

Mr. COSTELLO. The Chair would ask Members if they have any 

other questions, comments. 

And, if not, the Chair would recognize the Chairman of the Full 

Committee, Chairman Oberstar, for closing comments. 

Mr. OBERSTAR. Thank you, Mr. Chairman. 

This has been a most enlightening and valuable hearing, especially this panel, with some very specific issues involved raised by 

mergers. And, of course, rather standard testimony we expected, I 

almost could have written it, with the two CEOs. 

But before I make a closing observation, Mr. Foer and Mr. 

Horan—Mr. Foer, you said, ‘‘Standard antitrust analysis focuses on 

horizontal overlaps. It is necessary but should not be considered 

sufficient.’’ 

137 

Mr. Horan, you observed, ‘‘The Committee needs to address the 

root cause of these problems: DOT’s nullification of longstanding 

antitrust law and evidentiary requirements.’’ 

Both comments go to the heart of the issue that we are dealing 

with here and in the Delta-Northwest merger, acquisition, however 

you want to phrase it. 

What are your suggestions for—just want your verbal response 

and then put something in writing as you think about it. How can 

we restructure the DOT role in the antitrust proceedings to give it 

more weight, give it more force in the calculations done on these 

antitrust proceedings? 

Because the antitrust law is limited, as you say, horizontal overlaps. I had to ask the Justice Department in the Delta-Northwest 

situation whether they would consider the domino effect, the downstream effect of a Delta-Northwest merger on other possible mergers, and it was like pulling teeth, but eventually they said, yes, we 

would give that consideration. They didn’t say it would be a factor, 

didn’t say it would be a decisive factor. 

But the antitrust role is very—it is like a straightjacket. It is 

very limited. The DOT has wider latitude in these matters, but 

they, nonetheless, have gone on to approve antitrust immunity, 

along with Justice, for international alliances. 

So what are your thoughts about how we can rephrase that authority? What provisions could we include in future legislation? 

Mr. FOER. Mr. Chairman, I don’t think the answer is with giving 

DOT a larger role. DOT had the role all by itself after deregulation, 

and it blew it. And Congress said, OK, let’s let the antitrust division handle these matters. DOT provides information that is very 

important. 

It is not that the law, the antitrust law, is necessarily that narrow. It has been interpreted in a very narrow way for 30 years. 

The Justice Department and the FTC have put forward for public 

comment revised horizontal merger guidelines. And in that, they 

recognize the role of incipiency, for instance. Section 7 of the Clayton Act is an incipiency statute. It is supposed to stop mergers before they become dangerously anticompetitive. And that is a trend, 

it is a prediction. 

I don’t think that that has been the way either of the agencies 

have been interpreting the law sufficiently in the past, but the law 

is there. And pressure from Congress to utilize the law to its fullest 

is what is needed. 

And I think that the agencies are capable of looking at not only 

the merger before it, but recognizing salami tactics and recognizing 

that companies interact on a strategic basis, and when one goes 

forward and changes the structure of the industry, the others have 

to respond. I think that that can be taken into account by antitrust, but it hasn’t been. 

Mr. OBERSTAR. And it should be. 

Mr. Horan, do you think there is not much more we could do 

with DOT? 

Mr. HORAN. I agree that the law as written is not the problem. 

There are no obstacles in the law to considering the actual economics of the applicant’s proposed a merger, but they refuse to do that. 

138 

The problem is that deregulation of the airline industry, Mr. 

Chairman, you understand this as well as anyone, was designed 

specifically on the concept that all other laws that apply to all 

other deregulated industries designed to create a level playing field 

and protect consumer interests—such as antitrust laws, consumer 

protection laws, and labor laws—were always intended to apply to 

the deregulated airline industry. 

The problem is that the Department of Transportation has been 

gutting the antitrust laws in response to the lobbying efforts of 

companies like United, Delta, and Continental. Those companies 

would like to distort competition to hurt the US Airways, hurt the 

Northwests, hurt the Southwests, hurt the JetBlues. And the Department of Transportation is a willing participant. And I am saying, consumers are already paying $5 billion a year 

in higher fares solely attributable to artificial pricing power, and 

the Department of Transportation’s major objective right now is to 

make sure those same kind of anticompetitive pricing impacts hurl 

into the Pacific. They are doing everything possible to stop scrutiny 

of those cases. They do not want evidence presented. 

I have had applications to examine the core claim of these Japan 

cases—the network synergies. I used to run a hub, the biggest hub 

in Tokyo, at Northwest. I was the person who developed antitrust 

immunity networks. I can evaluate this claim. If I am not the bestqualified person on the planet to look at it, I am in the top five. 

The Department of Transportation said, ‘‘No, absolutely not. We 

cannot have anyone evaluate trans-Pacific network synergies. We 

are creating a new rule that says only lawyers can do it. Mr. 

Horan, you may not evaluate this claim.’’ So I am saying they are 

going to any length to say, ‘‘No, we don’t want any scrutiny of these 

clients.’’ 

And so, just go back and allow verifiable scrutiny in accordance 

with the Horizontal Merger Guidelines, and I think you have 

solved two-thirds of the problem right there. Unfortunately for 

DOT, you would also bring the airline consolidation movement to 

a grinding, screeching halt. Because without the suspension of 

those antitrust laws, none of this would have happened. 

Mr. OBERSTAR. Well, you are quite right. From down there somewhere in the podium where I sat in 1978 and rubbed my worry 

beads about this deregulation, now, what is going to be the outcome here, we anticipated that the Carter Justice Department 

would ride herd on any mergers that might result. We didn’t count 

on Carter losing the election, Reagan winning, and the Reagan Justice Department never meeting a merger it didn’t like. 

But the argument made today and 2 years ago by Delta-Northwest was, ‘‘We need to be big, we need to really be big in the marketplace.’’ And I think you have said, the notion that United is not 

big enough to compete in the domestic and international market is, 

I will concur, ludicrous. 

But the language of the applicable provision of the antitrust code 

is, ‘‘Any activity affecting commerce in any section of the country, 

the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.’’ There is a large, how shall 

I say, judgmental opportunity in those words that has not been 

used in so many years by the Justice Department as to be flaccid. 

139 

And it needs to be—the people who are administering this law 

need to be strengthened and need a backbone and need to be encouraged. 

And that is why I am looking for something that we can—our 

Committee doesn’t have jurisdiction over the judiciary, but we do 

have over DOT. And I am looking for some way that we can 

strengthen the hand of DOT in this process. Look, what it has led to, the bigness, bigness has led to $2.7 billion in baggage fee collections for 2009. That is 10 carriers. Of 

those 10 carriers, Delta and Northwest combine for one-third of the 

total, $766 million in baggage fee collections. 

That is what big business has given you: more market power in 

the domestic marketplace, more suppression of passengers and 

travelers and communities. It hasn’t given you more choices. 

Maybe it will give you a few more choices on United or Delta, but 

not more choices for all travelers and consumers. It has led to job 

loss, it has led to a shift of employment from one city to another 

and downsizing and—well, I am now being repetitive. 

So I just want to say this is a terrible, awful, no-good thing, and 

the Justice Department ought to turn it down. And I will continue 

to do everything in my power to make that happen, because I think 

this is the very antithesis of deregulation and will lead to—the moment this thing is approved, I will draft and introduce legislation 

to reestablish market regulation by the government of airlines. 

Mr. COSTELLO. The Chair thanks the gentleman. 

And I was going to—— 

Mr. OBERSTAR. Maybe you shouldn’t. It is just going to give you 

more headaches. 

Mr. COSTELLO. I was going to mention that maybe what deregulation has led to because of the Justice Department is possibly reregulation. And we have discussed that on more than one occasion. 

And it may be something that we will have to move forward on, 

depending on what the Justice Department does. 

Ladies and gentlemen, thank you. We appreciate you offering 

your testimony today. I think Chairman Oberstar and others have 

summarized the issues. You heard in my opening statement, you 

heard from many of the Members deep concerns concerning safety, 

concerning the workforce, a number of other issues. And we will 

urge the Justice Department to specifically look at those issues in 

reviewing this proposed merger. 

Again, we appreciate your testimony. 

And the Subcommittee stands adjourned. Thank you. 

[Whereupon, at 1:38 p.m., the Subcommittee was adjourned.] 

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Æ 


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