Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
June 21, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4294 words
HEADLINE:
TESTIMONY June 21, 2000 JOSEPH LEONARD CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AIRTRAN AIRWAYS, INC. SENATE COMMERCE, SCIENCE AND
TRANSPORTATION UNITED AIRLINES-U.S. AIRWAYS MERGER
BODY:
June 21, 2000 The State of Airline
Competition An Opportunity to Create Lasting Competition with Significant Public
Benefit Statement of Joseph Leonard, Chairman and Chief Executive Officer
AirTran Airways, Inc. "Given the opportunity to compete at Reagan National ...
the consumer benefit of a true low fare network would easily exceed $690 million
in the first year" Mr. Chairman and Members of the Committee: As you go about
the difficult work of considering the implications of the proposed United and
US Airways merger, here are the key points that I think you
should consider: 1) The merger of United and US
Airways would NOT alter the already desperate condition of competition
in the airline industry, and it WOULD strengthen both airlines. 2) The key
element in the merger proposal is the structure of the
divestiture of US Airways slots at Washington's Reagan National
Airport. Does the divestiture create an effective remedy for the competitive
problem it was designed to address? 3) The disposition of those slots through
the proposed creation of DC Air would NOT provide meaningful competition, and it
WOULD sharply curtail service in many communities currently served by US
Airways. It also will almost certainly lead to fare increases in those
markets. 4) Finally, and most important, this merger has opened
the door to what I believe is a historic opportunity to expand service and lower
fares in the most heavily protected bastion of the major airlines-Reagan
National. The Executive Branch and the Congress are now facing the best and
perhaps the last meaningful chance to stimulate service and lower fares at
Reagan National for years to come. Mr. Chairman, members of the Committee, I
appreciate the opportunity to address you today on competition in the airline
industry. Similar to Mr. Wolf and Mr. Goodwin, I have more than 30 years
experience in aviation, having spent all of my adult life in this industry. My
experience includes running maintenance operations for Northwest and American
Airlines, COO and President of Eastern Airlines, President and CEO of Allied
Signal's aerospace division, and for the past year a half, Chairman and CEO of
AirTran Airways. In that time I have experienced the highs and lows of the
industry and have learned a thing or two about competition. The state of
competition in the airline industry is at best poor. In terms of the type of
competition that is most beneficial to consumers - price competition - it is
limited to those relatively few markets where a low fare carrier, like AirTran
Airways and Southwest, provide competition. The fact of the matter is the big
six carriers do not compete on price. And the combination of United and US
Airways will not change that fact or significantly worsen an already struggling
situation. The big six carriers are already combined as a result of marketing
and code share alliances into three distinct camps; this proposed merger will
only formalize the relationships and change some of the dance partners - but the
dance will go on. I say this from the perspective of someone who has been
struggling against the anti-competitive practices of the major airlines for some
time, and with some success. Over the past week, several members of congress
have expressed concern about the concentration of the airline industry,
particularly hub concentration. Unlike most low fare carriers, AirTran Airways
chooses to compete in what would otherwise be a dominate hub - Atlanta - and
while Delta still maintains 72% of the market to our 8.5%, the resulting price
competition has made Atlanta the busiest airport in the world. Airfares in the
markets we serve are 40 to 60% lower than other monopoly hub markets. The
impact, however, goes beyond Atlanta. AirTran Airways' low fares create
competition in connecting markets as well, as evidenced by lower average fares
in markets like Buffalo to Dallas-Ft. Worth or Biloxi to Boston. Our low fare
network provides the type of price competition that creates discipline among the
major carriers and maintains the consumer benefits envisioned by deregulation. I
applaud Congress for the attention it has given to airline competition issues.
It is clear to me without your vigilance, the few gains that new entrant
carriers have made, and the consumer benefits resulting from those gains, would
not have been possible. The provision within "Air 21 " which requires large
airports to file competition plans clearly and wisely recognizes the need for
low fare, new entrant carriers to create beneficial competition. However, in
terms of the overall trend in low fare competition, government policy on this is
very much like the weather, everyone talks about it, but no one is doing
anything about it. I am proud to say that I have presided over the turnaround
and return to profits of AirTran Airways. We have established a profitable low
fare network by focusing on maintaining low costs and providing a safe, quality
product with affordable fares. We have taken delivery of I I brand new Boeing
717's and have orders for another 39 aircraft that will be delivered one per
month over the next three years. This puts us in the enviable position to
regulate our growth based on economic conditions and market opportunities. We
can expand at a high rate by deferring aircraft retirements or increase
retirements and maintain a steady state. AirTran Airways is uniquely positioned
to provide the type of competition that is called for in the merger of United
and US Airways. As you know, both United and US Airways acknowledge the need to
divest of assets at Reagan National Airport as a condition of approval. Without
this divestiture, the combined United would control two thirds of all flights
from the Washington metropolitan area. The question then, is whether the
proposed creation of DC Air is a divestiture that will result in meaningful
competition or in any way be in the public interest? The answer, quite simply,
is "no". Even a cursory review of the business plan clearly indicates that DC
Air will not be an independent carrier. DC Air will lease United aircraft and
flight crews, adopt the United pilot contract terms, use United maintenance and
ground facilities, participate in the United frequent traveler program, all
under the direction of a current US Airways Vice President. To affirm this
control, United placed strict limitations on the sale and control of the DCA
slots - the primary asset of the new carrier - which is a clever means to keep
any real competition from entering the Washington metropolitan marketplace.
Given the structure of the proposed new airline, DC Air would have some of the
highest costs in the industry. (See appendix pages 4-5) High costs and the
extensive use of smaller aircraft are not a realistic formula for low cost
service. Clearly no real competition and no consumer benefits will result from
the new carrier. In fact, several markets would lose service as a result. (See
appendix page 6) For example, upstate New York communities will have 48% to 56%
fewer seats post-merger; Louisville will have 69% fewer seats while Greensboro
and Raleigh-Durham will each lose more than 50% of current capacity. Where is
the public benefit? The new carrier will reduce capacity in key East Coast
cities, but not add significant capacity in any of United's mega-hubs - such as
Charlotte or Pittsburgh, and no service to Chicago O'Hare. Real competition
comes from carriers with quality low fare service. AirTran Airways competition
in Atlanta resulted in consumer savings of $700 million last year. In 1997 the
DOT wisely granted AirTran Airways exemption slots to serve New York LaGuardia,
the resulting competition saved New York consumers more than $175 million last
year. One of the most significant markets not benefiting from low fare
competition is Reagan National Airport - and while nearly every major airport in
the United States is reporting record boardings, Reagan National is actually
shrinking. This is a direct result of a lack of competition - clearly there is
not a lack of demand for travel to Washington, but rather outrageously high
fares suppressing demand. Given the opportunity to compete at Reagan National
with a network similar to that proposed for DC Air, we estimate the consumer
benefit of a low fare network would easily exceed $690 million in the first
year. (See appendix pages 12-14) The conditions for approval of this acquisition
- and we believe it should be approved - must include provisions for real
competition by independent, new entrant carriers. This is the key part of the
merger equation-if the DC Air proposition is brushed aside, how will slots be
reallocated? How that question is answered will have far more impact on
passengers and fares than the merger itself. If those slots become available,
the Congress and the Executive branch can follow the traditional ineffective
path of distributing them one by one to selected communities. I would call that
the "let's feed all our children" scenario. Or you can do what the merger
partners declined to do for obvious and self-serving reasons- reallocate the
slots to one or two low fare carriers who would be required to network them to
many cities, and in doing so break open the Reagan National monopoly.
Reallocation of slots to AirTran Airways, either by voluntary divestiture or
withdrawal, will clearly result in a level of competition never experienced at
Washington's primary airport. Similar measures must be taken at other airports
to ensure facilities are available for new entrant competition and to prevent
the public harm that will result from increased monopolies. If I was planning
the legislative and regulatory tactics of the merger airlines, this would be my
strategy: put DC Air on the table, knowing that it would be the best possible
outcome for the merger airlines. If it runs into heavy flak, I'd fight the fight
as long as I could, and then unveil a plan to disburse those Reagan National
slots piecemeal, and to as many airlines as possible. That would be the way to
guarantee that the slots could not hurt me -- if they were fragmented, there
would be no consolidated market power leveraged against me. It will not surprise
you that AirTran Airways has ideas about how to carry out what I describe, and
in the back of the handout that accompanies my statement you will see exactly
what I describe along with the fare impact. These are not back-of-the-envelope
computations-they are reflective of the well-documented impact AirTran Airways
competition has had on prices and passenger demand in similar routes. AirTran
Airways has successfully demonstrated its ability to operate the type of low
fare hub network envisioned by the DC Air proposal. We have competed profitably
with Delta and other major carriers in Atlanta and other large and small markets
throughout the Eastern United States. We are prepared to expand our low fare,
quality brand of service from Washington National to markets such as
Akron-Canton, Bloomington, Buffalo and other upstate New York markets,
Greensboro, Charleston and Savannah as well the major markets we serve today,
including Chicago and Minneapolis. AirTran Airways has repeatedly demonstrated
in small and large markets that low fares and quality service significantly
increase demand and consumer benefits. Ronald Reagan Washington National is one
of the few markets on the East Coast not to experience this benefit. We are
seeking the opportunity to provide significant low fare service in this market -
this is a unique opportunity to act to create real competition. But the point,
of course, is not whether AirTran Airways receives these slots-the point is what
real, low-fare competition could do in this market place- be it AirTran Airways
or another new entrant, low fare carrier. Mr. Chairman, this concludes my
prepared statement. I would be glad to respond to any question that you or any
Members of the Committee may have.
LOAD-DATE: June 29,
2000, Thursday 
