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Congressional Testimony
June 13, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4200 words
HEADLINE:
TESTIMONY June 13, 2000 NANCY E. MCFADDEN GENERAL COUNSEL US DEPARTMENT OF
TRANSPORTATION HOUSE UNITED-U.S. AIRWAYS
MERGER
BODY:
June 13, 2000 STATEMENT OF
NANCY E. McFADDEN GENERAL COUNSEL U.S. DEPARTMENT OF TRANSPORTATION before the
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE Mr. Chairman, Ranking Member
Oberstar, and Members of the Committee: I appreciate the opportunity to come
before the Committee to discuss the state of airline competition and to describe
the Department of Transportation's role in reviewing airline
mergers and acquisitions. The hearing today is precipitated by
the announcement by United Airlines and US Airways of a major
merger proposal. On behalf of Secretary Slater, I want to
assure the Committee that this proposed transaction, indeed any major
transaction, will be thoroughly examined by the Department of Transportation
with the goal of preserving competition in the airline industry. We cannot, of
course, discuss the merits of any individual transaction. However, we understand
the Committee's great interest in this matter, and so I would like to describe
generally how the Department examines any such transaction. My testimony today
will cover three subjects: the background to the current state of competition in
the airline industry, the Department's role in reviewing airline
mergers and acquisitions, and the factors that we will look at
in analyzing a merger or acquisition. The structure of the
airline business today reflects Congress' decision to deregulate the industry in
1978. Congress correctly determined that the public would obtain better service
and fares if airlines had to respond to consumer demands and competition.
Congress therefore phased out the economic regulatory regime that had long
authorized the Civil Aeronautics Board to dictate where airlines could fly and
what they could charge. In responding to ' market demands and the need to
improve their efficiency, airlines reshaped their linear-point to point-route
systems into hub-and-spoke systems. Hub-and-spoke systems enable airlines to
serve the maximum number of city-pair markets with a minimum number of airplanes
and to maximize traffic flow by consolidating connecting passengers with
different destinations on each flight. Operating at a hub creates service
advantages for many travelers, since it gives .travelers at hub cities many more
flights and enables airlines to offer more service in markets that do not have
enough traffic to sustain non-stop service. On the other hand, an airline
operating a hub gains such great competitive advantages on the spoke routes at
its hub that other airlines without a hub at one end point of such a spoke route
find it hard to compete with the hubbing airline. The resulting lack of
competition in many hub routes usually causes fares in hub markets to be higher
than fares in comparable non-hub markets. Another development in the first years
after deregulation was new entry - quite a few firms entered the airline
business (or began interstate service for the first time). Relatively few
survived the 1980's, but one of those that did - Southwest Airlines - has since
expanded its low-fare operating strategy throughout most of the country. Two
other entrants of that era - America West and Midwest Express - are also
operating successfully today. The 1980's saw a wave of airline
mergers. At that time, federal law still required all such
transactions to obtain the prior approval of the Department of Transportation.
The Department approved almost all of the merger proposals
submitted to it before the complete phasing-in of deregulation ended the
Department's "Section 408" authority over airline mergers and
acquisitions. Since the end of 1988, the Department of Justice has been
responsible for determining whether mergers and acquisitions in
the airline business should be -challenged as anticompetitive. In the 1990's,
airlines developed new strategies for delivering their services. They viewed the
ability to offer a broader network of services as critical. This led to the
creation of alliances in both domestic and international markets that included
code-sharing arrangements and frequent flyer program reciprocity. The
development of international alliances has been part of the larger process of
globalization. Responding to this increasing globalization, the Clinton-Gore
Administration has worked hard to open up international markets to competition
and entry by U.S. airlines. In the last seven and one-half years, the United
States has reached open skies agreements with forty-six countries that allow any
U.S. airline to serve points in those countries from any U.S. point and to set
fares free of government regulation. As a result of these successful efforts, we
have seen the development of global airline alliances that have promoted
competition in thousands of city-pair markets throughout the world. More
recently, major U.S. airlines began forming alliances with one another. In 1998,
United planned an alliance with Delta, Northwest with Continental, and American
with US Airways. These domestic alliances were different from
the international alliances. The latter usually created new networks by linking
route systems of U.S. and foreign airlines on an end-to-end basis and involved
airlines that could not enter each other's domestic markets due to the
constraints of bilateral aviation agreements. The alliances between U.S.
airlines, on the other hand, involved airlines that already had the authority to
enter any domestic market. These alliances were potentially more problematic. In
the face of these proposed domestic alliances, Congress enacted legislation
requiring the major airlines to submit to the Department of Transportation any
joint venture agreements between them that covered frequent flyer programs,
code-sharing, and wet leases. The Department has used that authority to obtain
modifications that eliminated potentially anticompetitive features in joint
venture agreements. In addition, the Justice Department filed suit against
Northwest's acquisition of the major block of Continental stock. The other two
alliances - the United/Delta and American/US Airways alliances
- have not gone beyond frequent flyer reciprocity arrangements and provisions
for the reciprocal access to airport executive lounges. In the 1990's, we also
saw increased focus on the value of new airline entrants, especially their
presence in donated-hub markets, and the difficulties faced by those new entrant
carriers. This Committee has spent much time over the past few years looking
into airline competition and impediments to new entry. You have addressed this
issue most recently in several pro- competition provisions in AIR-21, the FAA
reauthorization act signed into law in April of this year. And the DOT has taken
a number of steps to promote competition and protect against anticompetitive
practices. As a result of all these developments, we have an industry that, for
the most part, has proven deregulation to be a success. But deregulation can
only be successful for the consumers it was meant to benefit if there is
adequate competition in the airline industry. That is why close scrutiny of the
proposed merger between United and US Airways
is critical for the country's airline travelers. With that backdrop, let me now
address the role the Department of Transportation plays in the review of airline
mergers and acquisitions. Both the Department of justice and
the Department .of Transportation have responsibilities for reviewing the
proposed transaction between United and US Airways. The Justice
Department is responsible for enforcing the antitrust laws and determining
whether mergers and acquisitions in the airline industry should
be challenged on competitive grounds. The statute now governing airline
mergers, section 7 of the Clayton Act, prohibits
mergers and acquisitions that may substantially lessen
competition in any relevant market or tend to create a monopoly. As the agency
with transportation expertise, the Department of Transportation will conduct its
own analysis of the merger and submit its views and any
relevant information in its possession to the Justice Department, as we have
done in past cases. This process is confidential. We have asked United and
US Airways to provide us all the information necessary to
thoroughly analyze the transaction. In doing that analysis, we will also rely on
the fare and traffic data periodically reported to us by the airlines. In
addition, the Department has separate regulatory authority and must grant its
approval before some parts of the transaction may go forward. First, the parties
have announced plans to spin off most of US Airways' operations
at Washington Reagan National Airport to a new airline. This new airline must
obtain economic operating authority from the Department as well as safety
authority from the FAA. In determining whether to grant economic operating
authority, we will determine whether the firm is "fit, willing, and able" to
perform air transportation and comply with applicable legal requirements. In
making fitness determinations, we review an airline's financial resources,
managerial capabilities, and compliance disposition. The FAA, under its safety
authority, conducts a separate, comprehensive safety fitness analysis of the new
carrier before issuing the Air Carrier Certificate and Operations
Specifications. Second, the proposed acquisition will also involve the transfer
of US Airways' international route authority in some limited-
entry markets. Here too, the Department must first approve the transfer of
US Airways' certificate authority, under 49 U.S.C. 41105. We
may approve a transfer only if we find that it is consistent with the public
interest. The Department by statute must specifically consider the transfer's
impact on the viability of the parties to the transaction, on competition in the
domestic airline industry, and on the trade position of the United States in the
international air transportation market. The Department will also examine any
other public interest issue raised by the transfer. The Department will only
decide whether to approve the transfer of the international route authority
after it has established a formal record and given all interested persons the
opportunity to comment on the proposed transfer. The Department's discussions
with the Justice Department on the overall merger will include
a discussion of the competitive effects of the transfer of US
Airways' international routes. If the Department determines that the
transfer would be contrary to the public interest on competitive grounds or for
another reason, the Department may disapprove the transfer in whole or part.
Alternatively, the Department may condition its approval on 'requirements that
would protect the public interest. Third, the Department additionally has the
obligation to protect consumers from unfair and deceptive practices by airlines.
In carrying out that responsibility, we will review the
merger's arrangements to protect the rights of consumers. For
example, the merger may well affect the existing reciprocity
benefits available to members of the United and US Airways
frequent flyer programs. We will look at whether the airlines will give
consumers reasonable notice and an opportunity to adjust to any changes in such
programs. If we find that the provisions in their frequent flyer agreements fail
to provide adequate notice and an opportunity to obtain award travel, we will
ask the airlines to modify the agreements. Accordingly, we have asked United and
US Airways to provide us with their relevant frequent flyer
program reciprocity agreements, and their plans for accommodating their members
concerning any potential changes. Finally, I would like to outline the factors
we will consider in our competitive analysis of the proposed United/US
Airways merger. The statement of John Nannes, the Deputy Assistant
Attorney General for the Antitrust Division, describes in detail the nature of
the Justice Department's review. We too will be looking at the
merger's likely impact on competition in all relevant markets.
We will examine such issues as whether the acquisition will substantially reduce
competition in relevant markets because other airlines either do not offer
effective competition now or will be unlikely to enter if United raises fares or
reduces service. A key question will be whether the proposed spin-off of
US Airways' operations at Reagan National to DC Air will create
an effective competitor in the Washington, D.C. markets affected by the
merger. The relevant markets include city-pair markets, both
those served by the parties with nonstop flights and those served with
connecting flights. In examining the markets affected by the
merger, we may well consider flights operated by United from
one airport in the same metropolitan area as competing with flights operated by
US Airways from a different airport in the same area. If a
significant number of travelers strongly prefer to use one airport, the relevant
markets may also include routes between specific airports. In analyzing whether
entry by other airlines into markets served by the combined airlines is likely,
the Department will examine whether the combined market share of the merging
airlines will become large enough at individual cities to discourage entry by
other airlines. We must also consider whether airport facilities will be
available to airlines wishing to enter markets served by United and US
Airways. We will additionally investigate whether the relatively large
size of the airline created by combining United and US Airways
will make entry into the industry by new airlines more difficult. We will also
examine the potential competitive reactions of other airlines. Looking at the
merger's competitive effects will carry out Congress' judgment
that market forces, not government regulators, should determine the routes flown
by airlines and the fares charged by airlines. But market forces will enable
consumers to obtain the best service at the best price only as long as the
airline industry is competitive. Members of Congress and local communities have
understandably expressed concern about whether the service now provided by
US Airways will be maintained after its acquisition by United.
For example, some communities have questioned whether they will continue to have
access to nonstop flights to Reagan National. We cannot directly answer these
questions, since we cannot predict United's long term plans for operating the
combined business, and we have no way to guarantee that United or DC Air would
maintain existing levels of service. Nor can we know whether other
airlines-existing or new--might - choose to inaugurate new services to these
communities. Under deregulation, each' airline decides for itself which routes
it will fly and what fares it will charge. However, together with the justice
Department, we will seek to ensure that the proposed merger
does not diminish competition and prevent other airlines from entering and
competing in markets where United may reduce service or raise fares. The key
question in determining whether the United/US Airways
acquisition will lead to better or worse service and fares for consumers is
whether the combined airline will face competition and therefore must meet the
demands of consumers. The justice Department will address that question by
applying the antitrust laws. We at the Department of Transportation will provide
the justice Department with the results of our own analysis of that question. In
conclusion, I wish to reaffirm our commitment to ensuring that consumers
throughout the United States continue to benefit from airline deregulation. That
will require us to continue our efforts to promote airline competition. The need
to ensure competition will both guide our review of the United/US
Airways transaction and guarantee that we will carefully examine its
potential impact, and it will underpin the use of our other economic regulatory
authority over the airline industry. Thank you Mr. Chairman. This completes my
prepared statement, and I would be pleased to respond to your questions and
those of the Committee.
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