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Federal Document Clearing House
Congressional Testimony
June 21, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2267 words
HEADLINE:
TESTIMONY June 21, 2000 HOLLINGS SENATOR HOUSE COMMERCE
UNITED AIRLINES-- U.S. AIRWAYS MERGER
BODY:
June 21, 2000 STATEMENT OF SENATOR HOLLINGS
Hearing on the United-USAirways Merger Good morning. I wish to
thank the Chairman for holding this hearing. Many other groups and individuals,
including Members, the press and "so-called" experts, have commented on the
proposed United-USAirways deal, and now it is our turn. Let's start with one
fact -- deregulation has not given us what we wanted, and it is about to get
worse. When we passed the Airline Deregulation Act in 1978, we were promised
many things -- low fares, better service, and the absence of predatory conduct,
given that planes can easily be moved from one market to another. The government
applied those theories to every transaction proposed, and with one exception,
approved them all. The result is what we have today -- a balkanization of our
aviation system - -- major hubs dominated by single carriers. Such concentration
will only get worse if we end up with 3 mega-carriers. My concerns with the
proposed merger have less to do with the transaction before us,
thoug4 it raises serious issues, than the path that we have allowed ourselves to
be led down. If we are reduced to three mega-carriers, we will have to consider
some form of consumer fare protection. Action may include zones of
reasonableness for short-haul, non-stop flights out of the hubs or conditioning
all of the deals on divestiture of a substantial percentage of gates at the
dominated hubs. The proposal before us today is controversial because of its
scope and because of the industry-wide implications. The folks that will
testify, Mr. Goodwin, Mr. Wolf and Mr. Johnson, are all businessmen who will try
to convince us on the reasons why the deal -- despite its antitrust issues
should be approved. Mr. Johnson clearly wants his turn to lose a fortune in the
airline industry, and Mr. Goodwin and Mr. Wolf are more than willing to take his
$144 million. Of course, they want to see Mr. Johnson succeed, or be in a
position to succeed, and I know that Mr. Johnson is an independent, driven, and
creative executive who wants to succeed. Some, however, have posed the essential
question of whether the spinoff really creates an independent company. DCAir
will have planes provided for by United -- at market rates; slots and gates
provided by USAirways -- and paid for by Mr. Johnson; DCAir will offer its
passengers United's frequent flyer program and provide other backup services.
Yet, some will argue that all of this "assistance" from United prevents it from
being independent. Mr. Johnson knows that for the spinoff to be successful, DOJ
must determine that DCAir is independent. To achieve this status, DCAir must be
able to set its own fares -- and hopefully lower than they are today. This is a
critical factor. One thing that we must bear in mind -- DCAir has given us
assurances, and we will hear them again today -- that it will continue to serve
the 43 communities from Washington that are today served by US AIRWAYS. Service
criteria may not be one of the matters DOJ will consider if it finds DCAir too
dependent upon the consolidated carrier. Furthermore, DOJ or DOT can impose
additional conditions on DCAir, if either determines from an antitrust or other
perspective that such measures are necessary, i.e. prohibiting DCAir from
code-sharing with United or requiring DCAir to contract with another carrier for
frequent flyer miles. One other thing DOJ may want to consider -- giving DCAir
the shuttle flights, rather than allowing the United to keep these valuable
routes. Giving DCAir these valuable routes may lead to lower fares between
Washington and the Northeast. Let's look at the hub concentration levels. Right
now there are 16 hubs where one carrier accounts for more than 50% of the
traffic. After the deal is approved, the number will stay the same. This is
where the market power resides. For years, we have heard that the potential
competition would keep fares low. We were told that carriers would not raise
fares in markets such as that between Charleston and Charlotte, because if they
did then someone else would bring their planes into the market. However, with
the way the industry functions today, that never happens. The home team can
raise or lower fares, with little likelihood of competitive entry. US Airways
today has almost 90% of the traffic at Charlotte, and the combined carrier would
have 9 1 %. While this is not a significant increase, and the transaction
transfers power from one entity to another, it still leaves the folks at
Charlotte with only one choice in the short-haul, non-stop markets. According to
DOT, the theory was that there was lots of competition in the longer haul
markets where hubs compete with another. Flights from non hubs such Columbia, SC
to destinations in the Midwest may have 3 or 4 carrier options, each with one
stop through a hub. DOT has told us in report after report that deregulation was
working -- more people were traveling, and at lower prices. Yet, how does this
square with 16 major metropolitan areas being dominated by one service provider.
We now have local markets where 40% of the passengers no choices in price or
service. DOJ and DOT also must focus on the number of one-stop markets where
competition may be lessened. We know that the consolidated United/US Airways hub
flights will have no competition, but will there also be an erosion of
competition in other markets? Finally, putting Reagan National Airport aside, at
Dulles the combined carrier will have more than 50% of the market, giving United
monopolies on several routes. DOJ must look at Dulles. Who else will go in
there? In the recently enacted FAA bill, FAIR-2 1, we have directed DOT to stop
funding these mega-fortresses, unless we have some assurance that the airports
will make every effort to provide facilities for other carriers, and thus help
address the market power concerns. With respect to airports, and barriers to
entry, we asked GAO to give us information on the ability to get gates at some
of the hubs. Gates are there for the taking at some hubs (Pittsburg and
Charlotte), but no one wants to challenge the home team. We have heard that it
is harder to get gates since the major incumbent may have a say in the use of
gates at their respective airports. We have given the DOT the ability to stop
that. As I mentioned, they now must exercise the authority to ensure
competition. What else has the government done? Last year, DOJ filed suit
against American for its use of hub market power to drive out 3 new entrants at
Dallas-Fort Worth. DOT has proposed predatory guidelines, but has yet to issue a
final set of guidelines. I know that the proposal was controversial, but it is
time to address those concerns and issue the final rules. In 1998, the
Department of Justice challenged the Northwest- Continental deal based on an
overlap of mere 7 markets affecting 4 million passengers. DOJ is finally waking
up to the fact that we have untoward levels of market power -- which were
granted or obtained in the name of efficiency -- which must be checked. This
deal before us involves at least 4.9 million passengers in just the hub-to-hub
routes of the two carriers, where there will a reduction from 2 carriers to 1,
or from 3 to 2, depending upon the market. In many of those routes, there is no
likely carrier able or willing to enter the market. Few times do we see a
carrier, be it a low cost carrier or a network carrier, challenge routes
connecting two hubs. With the feed traffic at each hub, the combined carrier
effectively controls price, service and scheduling. In addition, several cities
like Boston and New York will see significant increases in concentration, as
will Dulles. Proponents of the merger contend the merger will benefit the
traveling public. The advantages include -- 64 new non-stops, 560 new on-line
connections, and 29 new international routes. Yet, both of these carriers rank
near the bottom of the DOT on-time list, 7th and 10th. The new carrier will have
to coordinate over 1,000 aircraft, and 146,000 employees. If United or US
Airways can not provide satisfactory customer service with their current size,
how will they coordinate even more passengers and aircraft? We will be back here
next year looking at how best to address competition policy matters. We took the
authority away from DOT in 1988, leaving it to our antitrust regulators. Next
year, we will need to rethink that position if we are continue to be beset by
the types of problems we know exist, and will continue to exist, absent concrete
action.
LOAD-DATE: July 6, 2000, Thursday
