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June 21, 2000, Wednesday

SECTION: CAPITOL HILL HEARING

LENGTH: 26783 words

HEADLINE: HEARING OF THE SENATE COMMERCE, SCIENCE AND TRANSPORTATION COMMITTEE

SUBJECT: THE UNITED - U.S. AIRWAYS MERGER

CHAIRED BY: SENATOR JOHN MCCAIN (R-AZ)

LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:30 AM. EDT DATE: WEDNESDAY, JUNE 21, 2000

WITNESSES:

NANCY MCFADDEN, GENERAL COUNSEL, TRANSPORTATION DEPARTMENT;

JAMES E. GOODWIN, CHAIRMAN AND CEO, UNITED AIRLINES;

STEPHEN WOLF, CHAIRMAN, U.S. AIRWAYS;

ROBERT L. JOHNSON, CHAIRMAN AND CEO, DC AIR;

DON CARTY, CHAIRMAN, PRESIDENT AND CEO, AMERICAN AIRLINES;

JOE LEONARD, CHAIRMAN AND CEO, AIRTRAN;

BERT FOER, PRESIDENT, AMERICAN ANTITRUST INSTITUTE;

BODY:
SEN. JOHN MCCAIN (R-AZ): We will begin the hearing. First I want to thank our witnesses for testifying today on the proposed merger of United Airlines and US Airways. It is no secret that I am extremely skeptical of the proposal the carriers have laid before us. I look forward to a thorough discussion of the consumer benefits as well as detriments that could result from the deal. A combined United Airlines and US Airways would be twice as big as the next largest competitor, American Airlines. Its market power would be unprecedented.

On the one hand, I would like to think that the merger would shake things up in the industry enough to see American and Delta, for instance, cut fares as they compete for their lives. On the other hand, I am realistic, or perhaps cynical enough to conclude that if the Nation's biggest airline is allowed to acquire another major carrier the rest of the airlines are sure to fall in line with their own merger transactions.

Consolidation in the industry does not bode well for new entry, which is key to a competitive airline environment. Already, most successful, recent new entrant carriers acknowledge that they will not enter the majors' hub markets because they cannot survive in a head- to-head battle. This perception is our reality. Additional consolidation would only make it worse. Prospects for this merger, as well as further consolidation, are worrisome enough that even an established carrier like Southwest Airlines is concerned that a megacarrier or carriers would have deep enough pockets to drive them into the ground. Southwest, of course, is one of the clear success stories of airline deregulation. The Department of Transportation has documented that Southwest Airlines alone is responsible for many billions of dollars of consumer savings. The question we must ask is whether we can continue to depend on Southwest's ability to discipline prices of the deck is shuffled in their competitors' favor.

I want the record to reflect that I have made no final decision on whether this merger should proceed and in fact have serious concerns as to whether it is indeed in the public's best interest.

Statistics demonstrate the merger would likely result in at least seven hubs where a combined United-US Airways airline would have a dominant position in terms of passenger share. United would be a virtual behemoth in the East. Government restrictions such as slot controls and perimeter rules would only enhance and protect United's superior position on the East Coast.

Airport restrictions, particularly on the East Coast, represents an area where the Congress and the Department of Transportation must take an active procompetitive stance. We've made strides at New York's La Guardia and Kennedy Airports, for instance, but what good is it to loosen slot restrictions if new competitors do not have access to publicly funded gates.

I turn now to the slot restrictions and perimeter rule at Reagan National. They must go away if we really expect to see competition at Reagan National. At the very least the parties here today who are asking us not to stand in the way of the marketplace cannot continue to stand in the way of our efforts to let market forces rule elsewhere.

The father of deregulation, Professor Alfred Kahn, recently sent me a letter outlining his preliminary concerns with the proposed United-US Airways merger, which I would submit for the record.

SEN. MCCAIN: He urges the Government to focus on a few areas, overlapping routes between the United and US Airways, the continued ability of the potential for competition to discipline prices, and the likelihood and effects of additional consolidation downstream.

I want to highlight another point that Professor Kahn makes. He states that United's main justification for the merger is the need for a hub in the Northeast. Why, then, doesn't United create one, rather than following the path of least competitive resistance by trying to acquire one of its competitor's hubs? I know that is the vision of airline deregulation we all shared.

Again, I want to point out Mr. Kahn's letter, where he points out the likelihood that a US United Airways merger would result in suppression of this potential competition would seem to be enhanced by what I take it would be United's explanation and justification, namely its need for a strong hub in the Northeast, commented on widely in the literature, along with attributions of a similar need to American Airlines, but if United really does feel a need for a big hub in the Northeast, this suggests that it is, indeed, an important potential competitor of US Airways, and that denied the ability to acquire the hub in the easiest noncompetitive fashion by acquisition, it might instead feel impelled to construct a hub of its own in direct competition with US Airways.

I hope that all of the witnesses today will take a careful look at Professor Kahn's letter, because I think he outlines very accurately the questions that arise concerning this proposed merger. Also, we will get into exactly what the new airline out of Reagan National Airport will entail.

I think a very legitimate concern is that if an airline uses the assets, the employees, and all of the other facilities of another airline, there is a legitimate question as to whether that airline is indeed a new airline or simply an ancillary of the existing airline. That is a legitimate question and I think one that needs to be addressed, and also the knowledge and expertise of those who are running that airline, also their qualifications need to undergo examination as well.

Senator Hollings.

SEN. ERNEST F. HOLLINGS (D-SC): Thank you very much, Mr. Chairman. I am skeptical also, and I agree the question is legitimate.

I began as a born-again regulator. We made a mistake in deregulation, and it took sometime to prove that. Otherwise, I am always worried about the hubs. The best I could get with the recently enacted FAA authorization was a passenger facility charge would not be permitted until the various airlines submitted their plans to promote competition, and that's sort of the best I could do.

That is rather spurious, but in any event it is my record, and it is not because of this particular merger, otherwise I have been a student of US Airways because I pay regularly the Government rate, which is high, but I pay for my wife, Senator Collins, which is absolutely exorbitant, $700. If I called this afternoon and said I want to fly Friday morning, if I could hear from Senator Lott we are not going to have any votes on Friday, I would want to get that 9:30 direct flight. That is a little puddle-jumper. It has got a little motor to it. It is not a jet, and it is $700, and there is no coach. Everybody's on coach, and they give you a pretzel I think it is, but I am glad to get it because that is worse, or better than going all the way through Charlotte.

So in trying to study US Airways I have come upon the conclusion from experts that I have talked to in the airline business that they had and have had historically and unusually rich -- and I want Mr. Johnson to listen to this, because I want to know how he is going to work his way out of it -- an unusually rich pilot's pay schedule, and unusually rich attendance, way above everybody else, and in fact they cannot make money, and in fact that is why they show they lose money even charging the $700 with the hub control and everything else of that kind.

And I said, well, this merger here, I guess they can get out of there, and they said no, Mr. Wolf really sold them a real good sale, and he did an outstanding job. We cannot understand why United would want to buy it, other than to get to the East Coast that way.

But they would still have that rich thing, and what has happened with the rich one, when they had all the business on the East Coast, and now all the little connecting carriers have come in and taken off a modicum of competition that is infused, whereby the volume is reduced and they cannot make it with those kind of contracts, so one of the questions is, how can we work out of that?

And of course you have got the obvious skepticism, selling US Air to form a DC Air to Bob Johnson. Now, I happen to know him from years back. He is the most deserving fellow in the world, and we in Washington always say when you do not like somebody, I respect him. I not only respect him, I like him, but why didn't you all give that to Senator McCain and me? We could help you.

[Laughter.]

SEN. HOLLINGS: Why give it to Bob Johnson? I know about control, because I am very sensitive, and I am like my friend Oberstar using the wrong language in this politically correct world in which we live, but I know -- let's don't say captive or control, but I know Mr. Johnson is not an ingrate.

And so when you get the equipment and you get the slots and you get the frequent flyer plan and you get everything else like that, although he wants to tell the committee that oh, yeah, he is going to get competitive and reduce those rates, after all, he is not an ingrate, I think he would sort of go along with the merger, because it was the merger, somewhat like Vice President Gore going along with the President. After all, why should be raise sand about the President's conduct when the President made him the Vice President? Why should Mr. Johnson try to start competing and everything else when, after all, he would not even have the airline to begin with?

So it is going to be a real question in my mind how he can get out from under US Air's expensive overcostly arrangements with their pilots and attendants so that they can get down to a competitive carrier and give us some service, because we do not have it.

Thank you, Mr. Chairman.

SEN. MCCAIN: Thank you, Senator Hollings.

Senator Frist.

SEN. BILL FRIST (R-TN): No statement, Mr. Chairman. I am just glad to be here.

SEN. MCCAIN: God bless you. Senator Rockefeller.

SEN. JOHN D. ROCKEFELLER, IV (D-WV): Mr. Chairman, I would be glad to yield to Senator Collins. I do not see any reason to keep her here. I do want to make a statement.

SEN. MCCAIN: Senator Rockefeller, we will proceed with the way that the Senate Commerce Committee proceeds, and that is that sitting members will make their statements. If you do not wish to make a statement, we will move on to Senator Kerry.

SEN. ROCKEFELLER: I plan to make a statement. I will make a statement.

SEN. MCCAIN: You are recognized. You are recognized for 5 minutes.

SEN. ROCKEFELLER: I am going to make my statement. Thank you, Mr. Chairman, very much for recognizing me for the period required in which to make my statement.

When United first announced this kind of intention to purchase US Airways nearly a month ago, I was like the chairman and the Ranking Member, and I had some sense of initial nervousness and skepticism, and if you come from West Virginia, if you do not have skepticism you are not West Virginian, particularly when it comes to mergers and deregulations, as Senator Hollings has said.

As I listen more closely to the details of the deal, however, and as I talk with the principals, I came to have a little bit more of an open mind, a little bit more hopeful, though still cautious.

Then I began digging into the details of it, because airline service is everything to us, as it would be to Senator Collins in Maine, and several of the other panelists. I actually became much more optimistic and, in fact, rather enthusiastic about the prospects of this merger and to be quite honest somewhat relieved.

I, of course, reserve my right to raise concerns, as any responsible committee member would. I know there are many questions to be asked. I know we have to hear from DOT and DOJ and all the rest, but from where I stand today the United-US Airways-DC Air deal looks like one that will be good for West Virginia and, quite frankly, since West Virginia shares rural backgrounds with many other States, I think it is going to be good for other small communities and other States now served by US Airways.

Let me make clear that I do not make such a positive statement lightly. I have given it a good deal of thought, and I will continue to give it a good deal of thought. I know this is a major merger, and any time that happens there are questions that are raised.

The rail merger is something that I have been fighting for 16 years, without any success in this committee whatsoever. I am still right, and those who voted against me are still wrong, and it has hurt West Virginia's economy tremendously, so I am very sensitive to what it is, and very delicate and precise about what helps and what hurts West Virginia's economy, and I care about that a lot.

Certainly for West Virginia competition and service in the pre- merger environment is the starting point for any meaningful discussion of this subject. Quite honestly, today the picture is not very pretty. US Airways is our biggest carrier. In fact, it is virtually our only carrier to most of our markets.

I have great respect for Steve Wolf, but too much of our service from US Air in West Virginia is provided by weaker regional affiliates. It is not of the best quality.

It has high fares, cramped aircraft, what I would call lousy schedules, frequent cancellations, and virtually no marketing, so in fact we have virtually no competition today in West Virginia as it is.

On the other hand, I have been working with Mr. Wolf and others at US Airways to improve this situation for sometime, and I will continue to do this while the merger is pending and beyond, if the merger is not ultimately approved, and I know that Mr. Wolf's people have worked hard on this, have had meetings with us, Pittsburgh and other places, when others, other airlines have turned up their noses at serving West Virginia.

I do not like that. That makes me angry. I represent that State, and I do not like it when people do that. I do not have the luxury of having Phoenix and other places, or Boston for that matter. We have small places, but our people are just as good as anybody in Arizona or anybody in Massachusetts.

But I hope my colleagues and our witnesses can understand that as we begin this consideration, what I do not like is the status quo, and things cannot get a whole lot worse, and so what I see in talking with Mr. Johnson on behalf of the new DC Air is mostly this.

First of all, somehow the concept raised by the chairman that Mr. Johnson, who runs about a $3 or $4 billion company, somehow he implied that somehow he may not be particularly skillful in airlines is something that I do not necessarily reject.

People come into the United States Senate from a variety of professions, and if they get elected people treat them as Senators, and there is another school of thought which says that really good managers pick good people, and those good people help them run airlines.

And I have full confidence, after a long talk with Mr. Johnson, that he is that kind of person, with a very, very strong commitment to doing this and, frankly, with a commitment to Washington, D.C., which is where a lot of our people want to go, and with a unique commitment to Washington, D.C. that virtually no one else would have.

So I see, one, a strong commitment to serving every one of our communities in West Virginia if this merger were to succeed, as I see it so far, a commitment to keep fares stable, or lower, for the next 2 years at least, a second and competing carrier into Washington, D.C., which would be very good for us, from several of our markets, a dramatic increase in the number of cities we can travel through to nearby hubs, which is vital for our people, the attention to quality that seems to come from a mainline service carrier, rather than an affiliate service, and meaningful opportunity to do something which people often overlook, which is market, marketing your airports, your facilities.

So I want to say that basically, Mr. Chairman, I go at this with a fairly positive point of view, and I am looking forward to the hearing, and I thank you for your consideration.

SEN. MCCAIN: Senator Brownback.

SEN. SAM BROWNBACK (R-KS): Thank you, Mr. Chairman, and thank you very much for holding this timely hearing. I think this is a very important subject, and I am delighted the committee is holding a hearing on such an important subject and in such a timely fashion.

I want to raise a couple of concerns that I hope the witnesses will address during the hearing as they come forward, particularly from the industry. I, as other people on the dais, am going to be looking at it for its impact on Kansas and the people in my State using US Air and United. I would hope that they would be able to assure us that the level of service we have had to date will be a floor above which hopefully this will go. I must admit some skepticism about whether that is going to take place or not, but I want to hear from the witnesses how they view that, and how they intend to provide those services into my State.

A second concern is the survivability of DC Air. I wonder, if United and US Air, or US Air is being merged into United because they do not view themselves as big enough to compete or strong enough to continue, is DC Air going to be able to do that over a period of time? Certainly over a 2 to 4-year period of time, probably, but over a longer period of time, is that going to take place and, if it does not, what is it going to merge into, or what would we see taking place down the road, because I really wonder about that issue, given the premise of why this merger is taking place as well.

I know there are other factors as well, not just being able to be competitive, is why the merger is taking place, but I know that is also a major factor as well, and DC Air will not be the size of US Air.

And finally, our comments on another round of mergers, will this cause that to take place throughout the airline industry? That has been a concern that was raised in railroads earlier, that if you start this one, will it be another set, and what will that do to competition and availability of air flights across the country, and I hope that that question gets addressed squarely during the hearing as well, because I think these are all substantive issues.

One is a parochial one for me that I think each of us carry, but the other one is industry-wide, their impact, that I hope to get to directly address, as I certainly have some questions about each of those areas.

Thanks, Mr. Chairman.

SEN. MCCAIN: Senator Kerry.

SEN. JOHN F. KERRY (D-MA): Mr. Chairman, thank you. This is obviously a very important topic, an important hearing, and I appreciate that you are proceeding forward with it.

I listened carefully to my friend from West Virginia, whose opinion I value greatly on these issues, because he is the Ranking Member on the subcommittee and puts a lot of attention into it, and I think -- and he always speaks very forcefully for West Virginia.

I think, though, some of the questions we need to look at are beyond our States. I mean, I have concerns, obviously, about Boston and getting from Massachusetts to anywhere, let alone here, but I am also concerned about the national network, and what the outcome of this may be, and I am particularly appreciative to both Steve Wolf and Jim Goodwin for taking the time to come and meet and frankly answer a lot of questions and I think provide some insight, certainly, to calm some initial concerns, but it does not erase all the concerns about this. I think every colleague on the panel is voicing some of these concerns.

Not so many years ago, when I first came to the Senate, you know, we had 14 airlines to choose from flying from Boston to anywhere, and now we are down to about four, and it is a lot harder -- I have to tell you, it is harder to get certain places than it used to be, and very few of us would be comfortable saying that we think the quality of air traffic today is better.

Sometimes it is. Sometimes it works out pretty well. Obviously, a lot more people can be moved a lot more rapidly. There are a lot more aircraft in the air. The entire system has expanded dramatically, and more Americans have access to travel than ever before, and that is a great benefit in many ways. It is a democratization of access, if you will, but it ain't better in many, many, many regards.

In terms of the facilities are crowded, it is difficult to move, the aircraft to the great benefit of the airlines seem to be full, but obviously are more crowded, the quality of service more difficult, and so forth, and these are all issues that I think need to be worked out.

In the context of this merger we need to think about the impact overall on ticketing, on access, on routing overall, and particularly on competition. This merger will have an impact on service, prices, and competition, and none of us are precisely sure or capable of saying that that is going to be pure upside, or even be able to define exactly where the upsides are.

What we do know is that the combination of United Airlines, the Nation's largest carrier, and US Airways, the sixth largest carrier, is going to create a giant airline with nearly twice as many flights as the nearest competitor, and that is of concern, so we have to ask questions about what that will do precisely to competition.

Now, I understand, and both Mr. Goodwin and Mr. Wolf made a good case about the East-West versus North-South current structure, so they do not compete directly today, but that does not mean that when they come together their market force and what has been created is not going to have a significant impact on other airlines, even pressure other mergers to take place, and that is one of the most important considerations. If this merger is approved, what happens to the rest of the fabric of the American airline industry?

There is currently a relative equilibrium in the airline industry as far as the number of flights per day. Of the top three carriers, United has approximately 3,200 flights, American approximately 3,000, Delta approximately 2,700. After the merger, United would have somewhere in the vicinity of 6,400 plus or minus, depending on what happens, with what restrictions are placed on it, and with those kinds of figures it is very, very hard not to imagine other airlines coming up with their own merger proposals.

We already hear of various discussions, but that means we could be reduced to the big three if the number of speculated mergers follow, so I think we have to ask what happens to prices and what happens to service, both of which are already very complicated.

It is really -- I mean, the fare structures are such that they can drive you nuts trying to transition from one ticket into another, as people in the business world often have to do because of last- minute arrangements, and as we have to do, is both expensive and complicated, and I think we have to find out whether there will be any incentive for the new United to keep the fares low, notwithstanding a promise for a 2-year nonstructured fare change, and that raises its own questions.

When you are only promising to deal with nonstructured fares, I think we have to look at the routes, and really try to figure out what assurances consumers are going to have that they are going to have choice when it comes to airlines and the competition that we want when it comes to price.

It would be a very sad result, in my judgment, if this triggered a major consolidation in an industry that has already seen so much consolidation that you are beginning to see, I think, some restraints on the level of choice that consumers have, and the competition, the market forces that we want so badly to encourage seem to be diminished.

Another concern I have, and I think many of my colleagues share this, is the impact, and Senator McCain mentioned it and others have mentioned it, is what happens in Washington, and here it is absolutely no commentary at all on Mr. Johnson, but it is just a simple question of how viable that entity will be.

Mr. Goodwin and Mr. Wolf made some very, I thought important observations to me about the time schedule on which complete independence would exist, and complete recapitalization of their own equipment and so forth, and own facilities, and I think that is encouraging, and I think that is an important point to be made, so that is obviously something to look at.

There are many reasons for the current problems that airlines face, and they are not -- and I think we understand this. They are not the sole fault of the airlines themselves. The FAA has been very slow. We have been slow. Congress has only just resolved this issue of the trust fund. It has taken far too long to get the capital improvements out there that are needed, and that has had a profound negative impact on the industry, too. We have to be honest about it and take blame for some of that.

But nevertheless, the size issue remains a very important one. We have two very able CEO's who I think can help answer a lot of these questions and my mind, Mr. Chairman, will remain open subject to the kinds of issues that I have raised, which I think it is very important to resolve for the American people, and I thank the chair.

SEN. MCCAIN: Senator Wyden.

SEN. RON WYDEN (D-OR): Thank you, Mr. Chairman. I believe strongly Congress should not voice support for this merger until the implications for the entire airline marketplace are reviewed.

I think it is worth noting that Bob Pitofsky, the head of the Federal Trade Commission, sat where Senator Collins is just a few months ago and he said one of his great concerns about the American economy is the threat of copycat mergers, and what we have seen in industry after industry is, you allow one of these gigantic deals to go forward, and as sure as the night follows the day, everybody else says, I have got to be just as big or else I will not be able to compete.

I think what Senator Kerry touched on is the reality of what will happen, is if this deal goes forward, based on what we know now, we will see Delta ask for the opportunity to have another big merger, we will see American ask for it, we will then have three behemoths that will dominate the American airline marketplace, and the history of those kinds of mergers is for the public, the consumer gets less service, they get higher prices, there are more hubs, and there are fewer spokes.

So I know we want to get on with the hearing, and I would only note that in the short term, and I was very pleased and grateful to you, Mr. Chairman, and to Senator Hollings and to Senator Rockefeller that you all joined me as part of the debate on the transportation appropriations bill in indicating that we are going to review whether there ought to be a new yardstick for determining these airline mergers, and that yardstick would specifically focus on customer service.

In the past, as we all know, it has been based on competition. Certainly we want to produce more competition. We have not seen that in all the marketplaces, but what we have seen is a deterioration in customer service, and when the Inspector General comes in with his report in a few weeks with respect to customer service, we are going to see that despite all those voluntary pledges that we got from the airline industry with respect to finding out about the lowest fare, with respect to getting the facts about overbooking, things are getting worse rather than better, and I look forward, as this committee has done so often, to working in a bipartisan fashion.

SEN. MCCAIN: Senator Breaux.

SEN. JOHN B. BREAUX (D-LA): Very briefly, Mr. Chairman, thanks for having the hearing -- it is important we look at this -- and the Ranking Member, Senator Hollings, for setting this hearing up.

It seems like more and more in this country we have less and less. More and more we have fewer railroads, more and more we have fewer communication companies, more and more we have fewer oil companies, and now today more and more we have fewer airlines.

I am not suggesting that just because there is consolidation, that it is not something that cannot possibly increase efficiency and actually provide more competition in some areas. The railroad situation has gotten so bad the committee has actually put a moratorium on any more consolidation of railroads for 15 months and say, wait, let's stop and take a look at where this country is going in the areas of transportation, communications, and so many other areas.

So I am not against this. I am not supportive of it. I want to hear what I think all of our Members want to hear about it, but I have a great deal of concern that more and more we are having less and less.

Thank you very much.

SEN. MCCAIN: Senator Snowe.

SEN. OLYMPIA J. SNOWE (R-ME): Thank you, Mr. Chairman, and obviously this is a very significant issue. The quality, the reliability, and the adequacy of air service in this country is no longer just a luxury or convenience. In fact, it is a major necessity, and it is an imperative.

It is obviously crucial to economic development, to the quality of life, to any given region of the country, and that is why I think it is in our national interest to evaluate and to ensure that every region of the country has the ability to compete in this very competitive environment, and that means having quality, reliability, and service.

I believe, Mr. Chairman, that it is important that we exercise our critical oversight responsibility to evaluate this merger between United Airlines and US Airways not only in terms of whether or not it is going to have a significant impact Nation-wide on prices, but also in terms of the impact it is going to have on small and medium-sized communities throughout the country.

There is no question this merger would be a pivotal chapter in the aftermath of deregulation. We know that small and medium-sized communities have not fared well under deregulation, and the question is whether or not, and how could they fare well in the era of consolidation? The General Accounting Office did a report evaluating the effects of deregulation on small and medium-sized communities, and the benefits of deregulation were uneven.

In fact, the GAO went on to say that many small and medium-sized communities like communities in the State of Maine have witnessed a decline in the number of available nonstop service options, and the amount of jet service versus turboprop service, have experienced higher fares and poorer services since deregulation, and went on to say some analysts have observed that competition in certain markets has diminished due to the Federal Government's acceptance of most airline mergers.

So clearly, we have experienced personally, as one who has been traveling and commuting for more than 20 years from the State of Maine, since the beginning of deregulation to now, that we have seen the quality of service decline. We have also seen prices rise significantly. In fact, in Northern Maine up until recently it almost did not have any airlines serving those communities, when in fact 20 years ago it had a 727 as well as other airlines, and fortunately US Airways was willing to come in and provide that service.

Bangor, Maine, another major community in the State of Maine, up until recently did not have any jet service to any major community on the eastern seaboard. It did manage to attract a regional jet just in recent months.

So clearly, deregulation has had a significant effect on the quality of air service to a State like Maine, so we might ask the question, why would this megamerger not further undermine service to areas such as small and medium sized communities in a State like Maine? Our best efforts to attract United to Bangor have not resulted in service to this key Maine city, so why would an airline maintain service to such markets in the long run?

United and US Airways already serves Portland, the largest community in Maine, as they do many other cities, so is it not logical that consolidating these two competitors would reduce competition in places like Portland, where both carriers already serve a given city, and couldn't this reduced competition ultimately lead to higher prices?

My concerns run the gamut, because of the experience that we have already seen in smaller and rural States throughout the country. I mean, Maine is one such example. That is why Senator Dorgan and I a couple of years ago asked the Department of Transportation to examine the impact of deregulation on small and medium-sized communities throughout rural America, and we have seen the answers to that question. It obviously has had an impact, and so this consolidation certainly further raises those questions.

Both United and US Airways have four hubs in the East. Again, would it be likely that Portland, for example, that has been able to have access to four of those hubs, because they have both United and US Airways serving Portland, Maine, as a community, would they continue, or would that consolidation reduce the access to those four major hubs on the eastern seaboard?

So those are some of the questions that I have a concern about. Further, obviously, the creation of DC Air here in Washington to serve the Northeast Region of the country also raises questions about whether or not an operation just working out of one major airport can maintain long-term viability for air service to the Northeast quadrant of the country.

So Mr. Chairman, I think it is important that these questions are evaluated. This merger does require the strongest scrutiny by the Justice Department, particularly because we have to be exploring whether or not there is already too much consolidation in the airline industry, and whether or not, as a result of this potential consolidation, it would invite further mergers in the future, so that we have three major air carriers Nation-wide, and whether or not this would accelerate and advance an erosion of service that already has impacted many communities, as I have cited, in a State like Maine.

Thank you, Mr. Chairman.

SEN. MCCAIN: Senator Dorgan.

SEN. BYRON L. DORGAN (D-ND): Mr. Chairman, I know that you have witnesses, and I will be brief.

We all know there has been an orgy of mergers in this country in recent months and years, and it is true in every industry, and I think it is unhealthy for our economy. We do not need more concentration, especially in the airline industry. We need more competition.

Post deregulation, the Federal Government in virtually every area that had some relationship to jurisdiction here had one huge rubber stamp, and it said approved. Want to get married? We approve it. Want to merge? We approve. I mean, you are hard-pressed to find anybody that says no with respect to this growing concentration.

I happen to think that both of these companies are good companies, but again I say that the proposal that this will create seamless transportation capabilities is in my judgment something that ignores the consumer. The ultimate seamlessness for the airline, I suppose, would be to have one airline all across America. There would be no seams then, but of course there would be no competition, and that would not be in the interest of the consumers.

We have created a system of regional hubs that are now largely dominated, and so we regional monopolies that are unregulated in the airline industry. The consumer in most cases has fewer choices and higher prices, and Mr. Chairman, because you are an old pilot, you understand when you pick up the microphone and call approach control, in most cases when you are calling approach control in rural areas, they are not working with a whole lot of traffic. They say, just come right on in, you are cleared to land, 100 miles out of the airport, because frankly, we have less service and fewer choices in rural areas.

Now, with respect to this proposed merger, I would say that I again think both of these are good companies. I like the companies, but we must, it seems to me, worry a lot about the consumer and whether we have robust, aggressive competition providing expanded choices and competitive prices in this industry to the American consumer. That is what needs to be our significant concern here today.

SEN. MCCAIN: Thank you, Senator Dorgan. Senator Collins, thank you for your patience. Welcome to your appearance before the committee.

SEN. SUSAN M. COLLINS (R-ME): Thank you very much, Mr. Chairman. Mr. Chairman, members of the committee, I very much appreciate the opportunity to testify this morning about an issue of considerable importance to the people of Maine, and to share some of my concerns about the proposed merger of United and US Airways.

In contemplating what this merger may mean for the American people, one critical question that I would urge the committee to focus on is whether rural areas will lose access to quality, affordable air service or be left with fewer choices in the number of air carriers that serve their State.

The importance of air service to small and medium-sized communities simply cannot be overstated. Our region's ability to attract and retain jobs in the global marketplace is inexorably linked to its transportation system. Unfortunately, many rural areas, including northern and eastern Maine, have not fared well under airline deregulation.

I share many of the concerns expressed by Senator Hollings in this regard. Just last Friday, when I was flying back to Maine from Washington via Boston, I sat near a business executive who was flying to his summer home in Maine.

He told me that his large company considered buying a business in Eastern Maine, and that the sole reason they ultimately decided not to make the investment was the fact that the area in Eastern Maine was so poorly served by convenient air transportation. Ultimately, that factor alone made them decide to not go forward with the purchase.

I might add that this business executive and I had a long time to discuss this issue, as we sat on the runway at Logan for over an hour in a US Air Express plane in an unairconditioned plane before returning to the gate due to a mechanical failure.

I got to hear a lot of opinions on that plane about the adequacy of air service to the State of Maine. Indeed, the number of cities served by more than two airlines has fallen by 41 percent since 1989, and for many residents of smaller communities the result of deregulation has been poorer service, fewer choices, and higher costs. Add to that the ongoing consolidation within the airline industry, and it is very easy to see why this huge merger raises a number of red flags.

In Maine, we are heavily dependent upon US Airways for our transportation needs. It provides service to Portland, Augusta, Rockland, Bangor, Bar Harbor, and Presque Isle, and we are grateful to the airline for providing this service.

In each case, the service is critical to these communities and the surrounding area. For some of these communities US Airways is the only air service carrier. This service is essential not only for the residents but also for the businesses that provide the economic foundation of the region.

So the question to me is, if this merger goes forward, will the result for Maine be less frequent and more expensive air service with fewer choices of air carriers? I recognize that the airline industry is seeking to meet the demands of a global economy, but that should not be used as an excuse to abandon or slash service to our smaller communities. The airlines are supported by billions of taxpayer dollars that the Federal Government has invested in our air transportation infrastructure.

With this investment comes a certain amount of public responsibility that I believe the airlines need to assume. Clearly, each proposed merger should be reviewed on its own merits. Those that will enhance quality air service for all Americans, including those in rural areas should be allowed to move forward, but those mergers that fail to meet this threshold should surely be subjected to a heightened standard of review.

Mr. Chairman, I very much appreciate your exploring this issue. I think it is tremendously important, and I hope that if this merger is approved, that it will only be approved if we are sure that it will not result in less service, diminished competition, and fewer choices to the people living in rural America.

Thank you very much, Mr. Chairman. I would be happy to answer any questions that you or the members of the committee might have.

SEN. MCCAIN: Thank you very much, Senator Collins. We know you have a busy schedule, and we thank you for your patience, and you are always welcome before this committee. You and your compatriot are a sizeable force here, as well as other parts of the United States Senate. Thank you for being here this morning.

SEN. COLLINS: Thank you very much.

SEN. MCCAIN: May I ask the members of the first panel, Mr. James E. Goodwin, chairman and CEO of United Airlines, Mr. Stephen Wolf, chairman of US Airways, Mr. Robert L. Johnson, chairman and CEO of DC Air, and Mr. Joe Leonard, chairman and CEO of AirTran, to please come forward.

Welcome gentlemen. We will begin with you, Mr. Goodwin. Welcome. Thank you all for your patience this morning. It is obvious that many members of the committee have great interest in this issue, and I appreciate your patience.

Mr. Goodwin.

MR. JAMES E. GOODWIN: Good morning, Chairman McCain, Ranking Member Hollings, and other members of this distinguished committee. On behalf of United Airlines, more than 100,000 employees worldwide, thank you for the opportunity to testify today. United Airlines appreciates the chance to discuss our merger with US Airways and explain how it will significantly benefit consumers and the communities served by both airlines.

In short, my name is Jim Goodwin. I am chairman and CEO of United Airlines. Before assuming my current position I was president and chief operating officer. At various times I have managed North American operations, international operations, maintenance and marketing. I began my career at United 33 years ago this month. In short, I am an airline guy. I have spent my entire career learning how airlines work, and I have also learned how important it is to listen and listen carefully to what others have to say.

Well, I have been listening over the last few weeks to what Members of Congress are saying about our merger, and today I want to address clearly what I have heard. The concern I hear most frequently is whether this merger will spark a future round of consolidation, and related to that is a concern about competition in the airline industry. A second deals with customer service and whether it will improve as a result of this transaction.

Let me first talk about possible consolidation. It is a serious question, and one that deserves your serious attention, but I cannot predict what may happen. I can only tell you that consolidation in the airline industry remains an open issue, not an absolute certainty.

I do know, and this I can predict with certainty, that this merger will create immediate and sure competition. Why? Because if fear of consolidation stops this merger, it will prevent Charlotte from growing as a hub and becoming a more vigorous competitor to Atlanta in the Southeast. If fear of consolidation stops this merger, it would prevent consumers from realizing the competitive benefits of the country's first truly national airline, an airline that will increase single carrier service to communities large and small across America, and deliver more convenience and more travel options to consumers.

In short, this merger will expand customer access and choice. It will do so by introducing 93 new nonstop flights that United plans to immediately offer to U.S. and international destinations, half on routes where no airline offers nonstop service today. It will do so by offering single carrier service on 560 planned new city-to-city routes, routes not available today to customers of either airline. I believe that adds up to more competition.

This is an industry open to new competition. Today there is a long list of airlines that did not exist 20 years ago, Frontier, National, Legend, Jet Blue, Midway, AirTran, Vanguard, Spirit, and America West among them. They are just not competing. They are each competing against a major carrier in various regions of the country. Today, for a variety of reasons, the average domestic airline ticket costs 40 percent less in real dollars than it did 20 years ago.

Now, I do not expect that others will defer to my sense of where the industry is heading. That is why this committee will conduct its own review and why Congress has established a regulatory process to study mergers like this one.

We welcome this scrutiny. We welcome it because we are confident that those who will be reviewing this transaction will conclude, just as we have, that this merger will benefit consumers. In my years in the airline industry I have looked at every single possible combination for United, and I am here today because this merger is the only one that will deliver what our customers tell us they want.

United takes customer service seriously. As good as our record is, we know we can do better. Last year, 99.3 percent of our customers arrived at their destination without any baggage problems. I can tell you that I will not be happy until it is 100 percent. Today, we are demonstrating our resolve to improve customer service through our United commitment. To cite just one example, United was the first airline to put leg room back on the airplane, 5 inches of extra space in economy plus on our domestic fleet of 450 aircraft.

Should we do more? Of course we should. United must deliver the superior service that our customers deserve, and I pledge that we will do everything we can to fulfill that promise now and after the merger is complete.

It is good business, and it is the right thing to do.

There is a lot more I could say, Senator, about the benefits of this transaction. In the meantime, I look forward to talking with each of you during the course of this hearing.

Thank you.

SEN. MCCAIN: Thank you, Mr. Goodwin.

Mr. Wolf, welcome.

MR. STEPHEN WOLF: Mr. Chairman, Mr. Hollings, on behalf of the entire US Airways family I appreciate the opportunity to be here this morning.

I had prepared comprehensive remarks.

SEN. MCCAIN: I would ask you pull the microphone a little closer, please.

MR. WOLF: Although I submitted by testimony, I had prepared comprehensive remarks, I thought insightful remarks for today's hearing, but as I read them earlier this morning I concluded I had missed the mark. They did not respond to the many comments I heard from Members of Congress over the past week to 10 days.

Those comments fell into very broad categories, but in all cases they were tinged with angst, real angst, sincere angst: What is the business, how does it work, why is this happening and, importantly, what does it mean for my constituents, and in 4 minutes I am going to try to answer.

SEN. MCCAIN: Mr. Wolf, please take as much time as you wish to consume. That is true for the other witnesses as well.

MR. WOLF: Thank you, Senator.

What is the business? Above our obvious understanding, it has the four characteristics that you never want in your business. It is capital-intensive, labor-intensive, exceedingly complex, and phenomenally competitive.

Capital intensity, $175 million to buy one airplane, to fly maybe 12 hours a day. Labor intensive, hundreds and hundreds of job categories merely to get one aircraft out on time and the bags on board and to its destination safely. Exceedingly complex, computer systems for inventory parts through tracking, aircraft availability, et cetera, beyond man's ability to almost deal with, and indeed, phenomenally competitive. I do not think I need to speak about that.

Why is this happening, this merger between US Airways and United Airlines? From US Airways' perspective it is happening for two reasons. One is a push reason, and one is a pull reason.

The push reason is, my concern when I joined the company 4 years ago was not about its then-precarious financial condition, its absence of strategic direction, its fleet plan that was somewhat unexplainable. My concern 4 years ago when joining the company was, was there room long-term for a mid-sized mature cost carrier in the country, recognizing there were six when deregulation came into being, and there was only one remaining.

Braniff, Eastern, Pan American had gone away, and Continental and TWA had each gone through bankruptcy twice and in the process dramatically altered the cost structure. There was one remaining mid- sized mature cost carrier left, and the question remains, the pull reason, the communities we serve and the consumers who live there wanted, they want a large online network with all of its associated benefits.

Two anecdotal comments. I was in my job for 4 or 5 weeks when Governor Ridge from Pennsylvania was in Washington and came to see me, and the upshot of that conversation was, he wanted me to provide long- term online nonstop service, or at least one-stop service throughout the Pacific.

The second anecdotal comment was, some 10 weeks ago when we initiated nonstop service from Charlotte to Paris, Governor Hunt came over on the trip, along with a group of sort of economic delegates from the State, and at a reception we hosted that night, Governor Hunt said to me, Steve, if there is anything you can do for us, at the top of my list is online non-stop or one-stop service to Latin America.

Now, I did not really tell them at the time that I doubted within their natural life we would be able to provide it. I did tell them we would do everything in my power to do so, and this transaction gives Governor Ridge one-stop service from Pittsburgh and Philadelphia to Hong Kong, Tokyo, Seoul, throughout the Pacific, and it gives Governor Hunt of North Carolina one-stop service throughout Latin America, Buenos Aires, Sao Paulo, Rio de Janeiro, et cetera.

Importantly in this transaction, our unit cost, US Airways, the highest in the industry, becomes dramatically lower, and indeed enabled us to compete and become a viable carrier long-term, all under the banner of United Airlines.

How does the business work? Hubs compete with hubs and in the process bring enormous consumer benefit, although this is clearly not understood. One example, we fly from Buffalo to Pittsburgh four times a day.

In Pittsburgh we run off US Airways' hub complexes, where we have 508 flights per day. There are 24 passengers per day who fly from Buffalo to Pittsburgh. On average, we have six per flight, but as a result of our hub complex in Pittsburgh, where we have a product offering in Pittsburgh than is far greater than you could economically justify in the city of Pittsburgh, Pennsylvania, we are able to offer those flights because on those flights we not only sell Pittsburgh we sell a host of connecting cities.

We compete vigorously in Buffalo for not only the Pittsburgh passenger, but even more so for the connecting passenger, and we compete against every network carrier in the country in Buffalo for those on-board passengers.

Why do we fly Charleston, South Carolina to Charlotte eight times a day? There are only 34 people who want to go there. We have about four passengers, on average. We do it because we run a big hub in Charlotte, just short of 500 departures a day, on which they can connect and go onward.

For the first time, passengers traveling between 515 city pairs will have a choice of online carriage all the way through. 4,943 city pairs will have online service for the first time, 103 new flights will be added almost immediately, mostly transcontinental and international. Indeed, providing Charlotte hub as an example with new service to Austin, San Antonio, and Portland, Oregon, along with Aruba and Barbados and, indeed, enabling Charlotte to compete in a more aggressive fashion with Atlanta.

Fares. Boy, do they get their attention, and they should. At the time when deregulation came into being there was first, economy, night coach, and family fares. That was effectively it. Today, fares are far more complex and far more prolific than one can even imagine, all designed to attract the last remaining passenger.

The industry had 68,000 fare changes yesterday. US Airways had 8,000 fare changes yesterday, each one of those designed to attract the last possible passenger onto their system.

Service. It is the best commercial aviation service in the world, and does it have its warts? Of course it does. Do we misconnect a bag? Are the lines too long? Did we get the special meal on board? Not in all cases, but in the 600-plus million Americans who flew last year -- excuse me, passengers, it worked for the vast, vast majority of them. It is the best system in the entire world, and we spend some money on infrastructure, it is going to get even better.

What does it mean? None of us could have predicted 20 years ago that Southwest would be carrying more passengers than all but four airlines in the world today. The aviation marketplace today is global in scope. It demands ease of access to Beijing and Budapest as well as urgency of access to Sacramento and Knoxville, and hence United Airlines will lead the way in that new future with opportunities for communities across the country unlike anything we could provide or they could provide independently.

Mr. Chairman, we have a unique opportunity, and we look forward to putting in place the first network of the 21st Century.

Thank you.

SEN. MCCAIN: Mr. Johnson, welcome. Take the microphone, please.

MR. ROBERT L. JOHNSON: Chairman McCain, Senator Hollings, and members of the committee. I thank you for the opportunity to be here this morning. I am the founder and chief executive officer of BET Holdings, a multimedia company whose principal business is the operation of the BET cable network, a 24-hour basic cable programming service that reaches 60 million cable households across the country. From an initial investment of $1/2 million by TCI in 1980, BET celebrates its 20th anniversary with a market cap of approximately $2- 1/2 billion, and is a preeminent business serving the entertainment and information needs of African Americans.

I own 65 percent of the equity of BET Holdings. In addition to being a member of the board of directors of US Air, I also serve on the board of directors of Hilton Hotels and General Mills, and of course the United Negro College Fund.

Mr. Chairman, last week I testified at two hearings before the House and Senate. The issues raised in both hearings concern my plan for building a competitive new airline based here in Washington, D.C. called DC Air. They were limited to a few key concerns, and let me take this opportunity to address them now for this committee.

First of all, I was asked if DC Air, a regional carrier which will serve 43 cities from Washington Reagan National Airport, can be competitive. It absolutely will be competitive.

I am purchasing from United the slots to allow me to serve routes that US Airways has served profitably for in some cases as many as 50 years, and my costs will be lower than US Airways' or United's, because I am starting an all-jet carrier focused on D.C. that would not have the burdens or complexity or mature cost structure that US Airways has. DC Air will be competitive on both price and service with anyone who flies to Washington, D.C., Dulles Airport or BWI.

I was also asked if DC Air would be truly independent. Would it be a truly independent carrier that would provide competition, with some concerns being raised by the memorandum of understanding with United Airlines because it provides transition service.

Let me make the point here, 3 million people depend on the US Air routes to get back and forth to D.C. On the day that this transaction closes, if it is consummated, those same 3 million people annually will look for this service to be there. In order for any new entrant, myself or anyone, to provide that service, we have to have a transition operation that can fly on day 1, and this arrangement I have with United will provide for that.

It is an arrangement that I have the right to escape from on 4 months' notice, 4 months' notice to United Airlines, and it is an incentive for me to escape that arrangement, because I am paying higher costs for those services, so I have negotiated these transition services because I plan to run a full-fledged operation with 37 aircraft serving 43 cities on day 1.

We are ready to begin discussions with other major airlines such as American, Delta, Continental, and Northwest to seek out partnering opportunities such as code-sharing and frequent flyer arrangements. We see these as beneficial to our passengers, who would be able to earn frequent flyer miles in the major airlines program while flying DC Air. We believe our services at National Airport will be perceived by these carriers as desirable features of their extended networks.

I was also asked if this is a sweetheart deal, and I responded, if it is, it is a very expensive sweetheart. I am paying fair market value for the assets I purchased. Not only am I paying fair market value, I plan to invest hundreds of millions of dollars in jet aircraft, and I am paying market rate for every service I am buying. I am putting $200 million of my own money into this venture, and I am not doing it to help Steve Wolf or Jim Goodwin out of the goodness of my heart.

And Senator Hollings, I think you are right, I think Vice President Gore desperately wants to be President, but I think his desperation pales in comparison to my desire to get a return on my $200 million. I am not doing this to curry favor with anybody. I am doing this because I have a history of creating value, and I have created value to the tune where today I have a personal net worth of $1.65 billion. I am not mad at my money. I am putting money into this venture because I believe it will be a competitive and profitable opportunity for me.

I was asked why I felt that I should be the recipient of 222 valuable slots at Washington Reagan National Airport. Well, my answer to that is, why not me? I am certainly capable in putting together the finances to acquire and operate this airline. I am certainly capable of hiring the best and brightest talent to run this airline, and I can be as competitive in operating this airline as anyone in this room, including the gentleman on my right and the gentleman on my left, and so I say why not a new entrant, and if that new entrant is DC Air, I want to be the one to operate it.

One thing I will add, though, if these slots are sold off in an auction process I believe these slots will be sold to the highest bidders that will certainly not use these slots to fly to the small and mid-size cities that DC Air will serve, communities such as Portland, Maine, Knoxville and Nashville, Tennessee, Charleston, Columbia, and Greenville, South Carolina, and Charleston, West Virginia, and Providence, Rhode Island, just to name a few. Instead, they will be used to increase existing service to other airline hubs.

And on the contrary, I am a resident of Washington, D.C. I have lived here for almost 30 years. I pay a huge amount of taxes here. BET is located in Washington, D.C. in one of the most depressed neighborhoods of this community. I am committed to this community, and I am committed to the economic development of this community, and DC Air will be Washington's home town carrier.

The communities we serve from Washington, D.C. will not just be another spoke in a carrier's vast hub and spoke network. They will be our entire business.

I was asked what impact the transition from US Airways to DC Air would have on the service to the communities we serve. The answer is simple. It will improve.

Today, one third of the service provided to these communities are turboprops, while two-thirds are jets. On the day of DC Air's operations we will increase to 75 percent jet service, and we will move as rapidly as possible, subject to aircraft deliveries, to 100 percent jet service for all of these communities.

I was asked what sort of employer would I be. I fully expect DC Air to be a union carrier. I intend to foster strong employee relations with all employees, because that translates into great service for our customers, and great service is what DC Air will be about.

So in summation, my vision for DC Air is straightforward: to build on the well-established East Coast service that Washington Area passengers have come to rely on from Washington National Airport, to provide safe, reliable high quality service at competitive prices to customers in the 43 communities we serve, to compete vigorously on price and service in the markets we serve, to facilitate the growth and economic development at our company's air service, and to develop and maintain an airline that the Washington community will be proud to call its home town carrier.

Thank you very much.

SEN. MCCAIN: Thank you very much, Mr. Johnson.

Mr. Leonard, welcome.

MR. JOE LEONARD: Mr. Chairman, Senator Hollings, and members of the committee, thank you very much for letting me be here this morning. Similar to Mr. Wolf and Mr. Goodwin, I have spent more than 30 years in aviation. In fact, I have spent all of my adult life in this industry. My experiences include running operations for Northwest and American Airlines. I was chief operating officer and president of Eastern Airlines, president and CEO of Airline Signals Aerospace Services Division, and for the past year-and-a-half I have been chairman and CEO of AirTran Airways.

In that time, I have experienced some highs and some lows in the industry, and have learned a thing or two about competition.

I am proud to say that I presided over the turn-around and return to profitability of AirTran Airways. We have established a profitable low fare network by focusing on low cost and providing a safe, quality product.

We currently operate 52 jets. We have taken delivery of 11 brand-new 717's, which we were the launch customer for, and we have orders for an additional 39, which will be delivered at one a month over the next 3 years. This puts us in an enviable position to regulate our growth based on the economic conditions and market opportunities.

To accomplish this, however, has not been very easy. It is a result of overcoming undaunting bouts of anticompetitive behavior by major carriers and an array of barriers to entry that are so commonly employed to discourage genuine low fare competition. That is the key point, Mr. Chairman. The state of competition in the airline industry today is at best poor in terms of the type of competition that consumers benefit from the most, that being price competition. It is limited to those relatively few routes where carriers like AirTran Airways and Southwest Airlines compete.

The big six do not compete on price today, and in fact the United and US Air Combination will not change that fact materially. The big six already operate like the big three with code-sharing agreements and marketing alliances. The proposed merger will only formalize those relationships.

From the perspective of someone that has been struggling against anticompetitive practices of the majors for sometime, I can tell you that it really does not matter if you are squished by the 800-pound gorilla or you are squished by the 1,100-pound gorilla. You are still squished and it still hurts.

I believe that most of the critics of the merger will agree that the key provision is not whether it will help United and US Airways. It definitely will. It is also clear that the merger acknowledges the requirement to divest of the assets at Reagan National Airport. They have made that part of their proposal.

The question is whether the proposed DC Air is a true divestiture. Will it result in meaningful competition and provide a remedy for competition resulting from the merger? I submit, based on the facts presented here, that the answer is a resounding no. Even a cursory review of the business plan clearly indicates that DC Air will not be independent, contrary to statements made.

DC Air will lease aircraft from United, flight crews from United, maintenance facilities from United, maintenance crews from United, ground facilities from United, and participate in United's frequent flyer program, all under the direction of a current US Airways vice president. To affirm this control, United has placed very strict limitations on the sale or lease of slots at DCA, the primary asset of the new carrier. It is a very, very clever way to make sure that no real competition will enter the Washington metropolitan marketplace.

Given the structure of the proposed new airline, DCA would have the highest cost in the industry. Perhaps in time DC Air will be able to achieve a more competitive cost structure and even reduce fares, but it certainly will not happen for years, if at all, and I doubt that it will be.

Furthermore, in regard to FAA activity in this area, most new carriers these days are requiring a year-and-a-half or 2 years to get certification, and the FAA has had a very dim view on virtual airlines, which this looks very much like, and both the FAA and the Department of Transportation in the past years have rejected similar proposals.

So I do not know if there is a plan to give DC Air a special handling, but if it does not get special handling it will take a very long time to get this situation put together based on recent history of Legend Airways, Access Air, and others who have recently started.

High cost and extensive use of smaller airplanes is not a realistic formula for low fare service. Clearly, no real competition and no consumer benefits will result from this new carrier. In fact, most markets will lose seat capacity as a result, so where is the public benefit?

The new carrier will reduce capacity in key East Coast cities in accordance with their own schedule, but not add significant capacity in United's megahubs, such as Charlotte, Pittsburgh, or Chicago. The new carrier will not provide effective remedy to the lack of competition in the Northeast.

Real competition comes from low cost carriers with quality service. AirTran Airways has been competing in Atlanta, and last year saved the consumers in that marketplace $700 million. Unlike most low fare carriers, we choose to compete in what would otherwise be a dominant hub, Atlanta, and while Delta still maintains a 72-percent market share versus our 8.5, the resulting price competition has made Atlanta the busiest airport in the world.

Air fares in the market that we serve are 40 to 60 percent lower than other monopoly hub markets. In 1997, the DOT wisely granted AirTran exemptions to fly into La Guardia Airport, New York, and last year alone we saved New Yorkers $175 million as a result.

One of the most significant markets not benefiting from low cost competition is Reagan National Airport. While nearly every airport in the country is seeing record boardings, Reagan National is actually shrinking. That is the result of lack of competition.

Clearly there is no lack of demand for travel to Washington, but the outrageously high fares are suppressing that demand. Given the opportunity to compete at Reagan National with a network similar to that proposed by DC Air, we estimate the consumer benefit of a low fare network would easily exceed $600 million in the first year.

The conditions of approval of this acquisition I believe must have provisions for real competition by independent new entry carriers. It will not surprise you that AirTran has some ideas about how to do that. We have included in our material a detailed plan to operate a network in Washington and up and down the East Coast. These are not back-of-the-envelope computations, but are reflective and well-documented, and show the impact of AirTran Airways competition has had on prices and passenger demand in similar routes.

Typically when we enter a new route, fares drop 40 to 60 percent, and passenger demand increases by 50 percent. We stimulate market. AirTran 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 cities in the eastern half of the United States. We are prepared to expand our low fare quality brand of service from Washington National to all the markets outlined.

I applaud Congress for the attention it has given to airline competition issues. It is clear to me without your vigilance the gains the new entrants have made, the consumer benefits resulting from those would be impossible. The provision in 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 is very much like the weather. Everyone talks about it, but no one does much about it.

AirTran is uniquely positioned to provide the type of competition that is called for in the US Air-United merger. We are prepared to offer significant low fare service at Reagan National and all along the eastern seaboard. This is an opportunity to act to restore real competition in the airline industry, the type of competition that will mitigate the hub concentration of the majors, the type of competition that is viable in the long term and has a lasting public benefit.

Mr. Chairman, thank you for the opportunity to be here this morning.

SEN. MCCAIN: Thank you, Mr. Leonard.

Mr. Goodwin, you and Mr. Wolf and I had a helpful meeting and following that meeting you sent a letter with regard to the fare premiums at hubs, disputing the General Accounting Office at the Department of Transportation findings that higher fares exist where one airline dominates a hub, particularly in reference to O'Hare, and you said, quote, we think it is significant that the GAO identified the presence of Government-imposed take-off and landing slots as a principal cause of higher fares there.

As you may or may not recall, I tried to address the slots contribution to high fares by recommending new entrants at O'Hare have access to more slots, including here at Reagan National, so let me just refer to the fact that the highest fares in the country exist at Reagan National because of slot restrictions.

And yet it was United that opposed the increase in slots at O'Hare. It was United that vociferously opposed the elimination of slot restrictions at Reagan Airport, and you were largely successful at Reagan National Airport because we won frankly what is a pyrrhic victory. In 1997, former United chairman Jerry Greenwald stated, United does not advocate removal of the high density rule.

So let me get this straight. Your position is to disclaim that there are relatively high fares at your hub, then claim that the Government is responsible for high fares because of slots at O'Hare, and then finally to oppose Government efforts to mitigate high fares that may be caused by Government-sponsored slots.

MR. GOODWIN: Mr. Chairman, maybe we can clarify those all at one time. As far as O'Hare is concerned, United Airlines as part of the AIR-21 project was an active supporter of the removal of high density rule slot constraints at O'Hare. We worked actively with members of this committee and members of the House Transportation Committee to see that slots were removed. In fact, we would like to have seen them removed much quicker than the bill called for.

SEN. MCCAIN: In other words, it was a change in policy from when Mr. Greenwald testified in 1997 and later on, or was Mr. Greenwald wrong in his testimony?

MR. GOODWIN: I cannot speculate on what Mr. Greenwald testified.

SEN. MCCAIN: He reflected the position of United Airlines. Quote, United does not advocate removal of the high density rule.

MR. GOODWIN: Under my leadership, I did advocate the removal of the high density rule at O'Hare, and we were successful at getting the 2-year removal on the O'Hare high density rule. The first new carrier slots were put out for bid. As a result of that removal six airlines filed for new service to O'Hare, not one to a small city or medium- sized city, I might add, basically to Los Angeles and Minneapolis and other major travel centers.

As a result of that, I did see rule removal at O'Hare. There were also numerous slots created for small cities, and there were a lot of comments made here this morning by members of this committee relative to service to small cities, and I am happy to say that as part of our commitment of what we as a company would do at O'Hare should the high density rule be relaxed was to add service to small cities, and that is exactly what we have done, Senator.

With respect to your question about Washington National and Reagan, I agree with your point of view that we did have a different point of view on the lifting of the perimeter rule and the addition of slots at National, Reagan National.

SEN. MCCAIN: In fact, there was an intense lobbying effort on your part, which again was largely successful.

Mr. Wolf, I would like to read a few excerpts from a January 6, 1999 letter that you wrote to Secretary Slater regarding United Airlines announced increase in service at Dulles Airport, and I quote from your letter.

In the domestic arena, the threat to unobstructed competition continues to grow. The most recent visible sign of dominant carrier predatory action is United Airlines' newly announced 60 percent service increase at Dulles Airport. This action follows US Airways announcement of its expanded operations at Dulles, as reported in today's edition of USA Today. US Airways is the target.

In today's Wall Street Journal, and you were talking about a January 6, 1999 Wall Street Journal, Sam Buttrick of Paine Weber was quick to point out that United's expansion, quote, is about beating US Airways out of Dulles, not about maximizing profits. He said that because United intends to put too much capacity too quickly into these markets its new flying is unlikely to be profitable, and you go on to say, as you well know, predatory actions often sacrifice short-term profits to protect dominance.

Anticipating the unmasking of United's intent, its senior vice president Ron O. Duda attempted to deflect attention from the obvious by stating that United's actions may appear to respond to Washington area expansion plans by Southwest and US Airways, but growing Dulles has been part of our long-term plan. No one, however, can be found who believes in the tooth fairy.

The unrelenting -- and you go on to say, the unrelenting attempts of the major trunk carriers to undermine the operations and expansion of smaller carriers both domestically and internationally is a clear and present danger to free market competition. If successful, this will ultimately deny price and service options that have grown passenger traffic enormously, and have been made available to a broad spectrum of consumers, and you go on to ask the Department of Transportation, to say, quote, your vigilant intervention into this type of destructive activities is required in order to provide the public benefits of two decades of deregulation.

Is it your position, Mr. Wolf, that United Airlines carried out predatory activities against US Airways at Dulles?

MR. WOLF: It was my view then, and it is my view today that with US Airways having the highest unit cost in the industry, something I am not particularly proud of but is a fact, we are not interested in seeing any incremental competition at all, because all of our competitors have lower costs than we have, the mature big carriers and the low cost carriers like Air Tran, and the only way in which we can address that is to get substantially larger, and that is what we are trying to do here.

SEN. MCCAIN: Mr. Leonard, Mr. Johnson said in his testimony that he is paying fair market value for the assets that will go to compose his airline. This purchase price, I figure of $141 million for DC Air, that puts a per-slot value at about $636,000 each. Does that price surprise you?

MR. LEONARD: No, sir, it does not. I think it is pretty low, and I think if those slots were bid out they would go at a much higher rate than that.

SEN. MCCAIN: At a 1997 hearing before the Commerce Committee, former United Airlines President John Edwardson stated that 100 slots at O'Hare would have a market value of up to $200 million. By the same calculations, 222 slots at Reagan National would have a market value of about $444 million. Mr. Johnson, is that fair market value that you are paying for these slots?

MR. JOHNSON: Yes, Senator, it is fair market value, because I am acquiring these slots with the full intent of continuing to serve the 43 cities that I believe if they were to go out at, quote, fair market value, would not be served, places in West Virginia, places in South Carolina and North Carolina.

These communities have been having service for over 50 years, and I am sure that these communities want to continue to have service, and by selling these slots intact to a home town carrier whose sole focus is to serve Reagan National Airport from these 43 communities, in my opinion is absolute highest and best use of these slots.

SEN. MCCAIN: I appreciate your opinion. Do you have any analysis or anyone's calculations that this is fair market value, no matter where the destination of these routes are?

MR. JOHNSON: Based on the market analysis that has been reported to me, the slots that have been sold prior at Reagan National have gone for these kind of market rates.

SEN. MCCAIN: Who reported that to you, Mr. Johnson?

MR. JOHNSON: That was reported to me by the analysis that was done by US Air and United when they priced the slots.

SEN. MCCAIN: So would you be willing, then, to allow these slots to be put up for open bidding?

MR. JOHNSON: No, Senator. I would only invest in this if I am able to acquire all of the slots, because all of the slots are necessary. Keep in mind we have got slots with great times for arrival time and not so great times for arrival. The value of these slots is getting all 222 to continue to serve the 43 communities that DC Air is committed to serve.

SEN. MCCAIN: Suppose someone else wanted to bid on all of the slots. Would you agree to openly competing for all of the slots?

MR. JOHNSON: Senator, to me, this is an opportunity that was presented to me by the sellers, and as a buyer I am going to take advantage of this opportunity because my goal is to run a focused airline from Reagan National to these 43 communities.

It is not to bid with the idea that I can increase the profitability on some slots by flying to Los Angeles, or flying to another big city, or trying to create additional hub sites. It is to try to keep focused on serving these 43 communities. That is the value of this business to me, and that is where I think we can get the maximum return, and that is why I would only acquire these slots as a full, intact, 222 slots to serve these 43 communities.

SEN. MCCAIN: I think your point is well-made, Mr. Johnson. I have some difference of view, particularly since these slots are owned by the American taxpayer. These airlines acquired them for free, without paying for them, at least the vast majority of them, and I believe that the taxpayers, like spectrum and other public property, the American taxpayer should accrue maximum value from them.

Obviously, you wanted to say something, Mr. Wolf, about that.

MR. WOLF: Yes, Senator. I just wanted to clarify the price. We indeed did a detailed analysis of the value of these slots. Individually, these slots come in two buckets. They are express carrier slots, crop airplane slots, and main line slots.

Express carrier slots go for dramatically less, $200,000, $300,000, at prime time maybe more. Main line jet slots go for substantially more, maybe $2 million for a 5:00 slot, maybe $1.2 million, $900,000 for a 2:30 in the afternoon slot. They were all priced individually. These were fair market values based upon what they had been selling for over the past couple of years.

SEN. MCCAIN: Again, Mr. Johnson, I have no problem with you getting the best deal you possible can as a buyer. My obligation is to the American taxpayer as well, to see that they receive maximum value for an asset which they own, and I dispute the value placed on those assets, which therefore makes me skeptical about your statement about, quote, fair market value.

Mr. Leonard, did you have any comment on this?

MR. LEONARD: No. Obviously, I agree with Mr. Johnson about the network value. I think if these slots were parceled out a few here and a few there, the outcome would be a loss of service to the smaller communities.

I think the network nature of these slots is important, and I think that is why we would argue that they should be disposed of in a network fashion to assure that that service continues, but to do it in a more realistic forum to somebody like AirTran. Obviously we would like it to be AirTran, but if not us, somebody else.

But the transition period that we are looking at here is going to be years. Using smaller airplanes is going to increase cost. As proposed, it is virtually impossible to fly regional jets at the types of cost you fly mainline jet aircraft, and they will either have to raise prices, or they will withdraw from markets because they will not be able to make money.

SEN. MCCAIN: I thank the witnesses. We would like to submit, all of the committee members would probably like to submit questions in writing, and if I could indulge my colleagues, it looks like all witnesses wanted to make a final comment on the comment, and so I would like to allow that to happen. Could we just begin with Mr. Goodwin and go across? Did you have any additional comment?

MR. GOODWIN: Senator, the only thing I would like to state from United's perspective is the point that Mr. Leonard just emphasized. When we looked at the concentration issue in Washington and recognized that we were going to have to divest a portion of the US Airways activities in the Washington Metropolitan Area in order to satisfy that concentration issue with the Justice Department we were very concerned about service to small communities, and we were very concerned about being able to protect the service and benefits that those communities have had for a long time. That is why we looked at packaging the transactions there.

SEN. MCCAIN: Mr. Wolf.

MR. WOLF: Yes, two comments, Senator, and thank you.

One, very briefly, is the perspective of this transaction from our board of directors, a group of individuals who are selling the company, who have spent a lot of time in this, they felt that it met the needs of our three constituents in a very significant fashion. One, of value to our shareholders, that it was a fair price and the shareholders would vote overwhelmingly for it. Two, it protected the jobs of all of our employees, which is a rather unprecedented 2-year job guarantee, which Mr. Goodwin has now extended. No one gets laid off.

And three, it preserves and enhances dramatically the service in communities we serve. You think of Charlotte, or Charleston, South Carolina, if you just take the US Airways name off it and put United on, you are part of a much bigger system, a much more attractive network, and it brings all sorts of economic advantage.

Too, I feel somewhat guilty in letting this DC Air thing go. We spent long and hard talking about the fact that we were going to divest 222 slots to somebody. Some of these communities we have served for over 50 years.

Could we have done something more economically attractive with the slots in serving those communities? The answer is yes, and we felt very strongly about continuance of those patterns of service, and we found somebody who would assure us that they would continue to fly the routes, and what he is going to do is take all the regional prop aircraft off and put on regional jets as well as full-size jets in many of these communities.

Mr. Leonard, you could not fly a 717 and make it work, because there just is not the population to do that, although indeed Mr. Johnson is going to have active discussions with Boeing about flying the 717 to serve some of the larger ones. It is a case of matching the equipment type with the size of the market.

Most importantly, Mr. Johnson is committing to continue to serve the market, big aircraft or small aircraft, as a new startup carrier with dramatically lower costs than we have, and that should benefit the consumer with lower fares.

Thank you, Mr. Chairman.

MR. JOHNSON: Mr. Chairman, I think to respond to the points Mr. Leonard raised, first of all I think there is a decline in passenger service at Reagan National Airport, but it is primarily due to the competition that Southwest Airlines has brought to the region both at BWI and at Dulles, and we will be flying against Southwest in those regions, and that will impact on our cost, which will make us that much more competitive.

Let me go to the issue of, as Mr. Leonard said, someone should get them but not DC Air. At one point AirTran was a new entrant, or ValuJet, the predecessor airline, was a new entrant, and the argument is that this should go to some other, quote, new entrant. I am here today telling you that DC Air is a new entrant. The fact that we are leasing 10 planes from United and some facilities is to provide for a seamless transition to these 3 million passengers.

We are also leasing 19 aircraft, regional jets, from Mesa. Mesa provides this service, which is customary and standard throughout the industry, to other airlines and they will provide that service to us.

We will also have our own eight aircraft, and we will quickly, as anyone in this business knows we will quickly bring on your own pilots wearing your own uniforms, your own flight attendants wearing your own uniforms, working for you at your cost structure, and that is exactly what we intend to do, and I expect that if I have to I could find the kind of talent that Mr. Leonard has in his operation to give us that low cost structure, because we are a focused airline.

We are not a publicly traded company. We do not expect to be worried about quarter-to-quarter earnings. All I expect to be focused on is serving the 43 communities we serve.

And so in my opinion we are absolutely a new entrant, absolutely deserving, absolutely capable, and will be independent and competitive in providing a lower cost structure and a competitive price.

SEN. MCCAIN: Thank you. I thank the witnesses.

Senator Hollings.

SEN. HOLLINGS: Well, there are so many questions. Mr. Johnson, you just stated that the reason for the diminution in traffic there at Reagan National Airport was the infusion of competition by Southwest at Dulles and BWI.

Now, you are going to solve that problem by owning US Air, or now to be named DC Air, but you have been a member of the board for 2 years over there, during these past 2 years that Southwest has been in there. Why have you not all met the competition as US Air, and why wait until DC Air comes in to do it? I mean, that is a logical question to me. It seems like you are reflecting on Mr. Wolf.

MR. JOHNSON: No. I am reflecting on the operation that Mr. Wolf had to run. Mr. Wolf had to run a vastly different airline than I am going to be running. He had a mature operation with a mature cost structure and expenses that would not flow through to DC Air. DC Air is not going to be flying to London and to Europe as part of US Air's current operations.

SEN. HOLLINGS: Some of those expenses are flowing through to DC Air. What you are saying is that -- and I have been subsidizing all those other long distance flights on my flight to Charleston, is that right?

MR. JOHNSON: I am going to let Mr. Wolf, who is the CEO of US Air, answer that question, but I will say though, Senator --

SEN. HOLLINGS: Well, you are on the board at US Air. Come on. This is sort of an inside deal, so don't act like you are all just getting together for the first time.

[Laughter.]

SEN. HOLLINGS: Well, let me let you think that question over.

Now, Mr. Wolf, let me qualify, all of you witnesses talk about 30 years in the airline business. I have been 50 years in the airline passenger business.

[Laughter.]

SEN. HOLLINGS: And I worked as an attorney. I served 47 years ago with Captain Eddie Rickenbacker and helped him before the old Civil Aeronautics Board got the carrying rights from Charleston to Bermuda, and so I have had oversight of those airlines here for the last 33, almost 34 years, and the public convenience and necessity that we used to have where the community provided the facilities.

They went out and got an airport, put up the towers, the runways, everything else, and then they got a Steve Wolf or a Mr. Goodwin and said, now we need service into Washington, D.C., and you all would come before the Civil Aeronautics Board on the basis of public convenience and necessity to that particular community.

One of the barest things, in addition to the hubs, is you all have thrown public convenience and necessity out the window, and now, for example, the airlines act like they own the slots, and they bargain around and sell them for hundreds of millions of dollars. They really were promoted and paid for by the communities.

That is another problem for me to solve, but when you come and say for nominally competitive, Mr. Wolf, that does not reconcile with the statement that the distinguished chairman gave, reading your letter to the Secretary of Transportation here earlier this year about predatory pricing, and as I remember -- I am astounded at that answer.

You said, well, yes, United is still competitive as a high cost carrier, or Mr. Leonard would be competitive as a low cost carrier, because US Air has the highest per-unit cost, and so all of it is competition to you, is that correct?

MR. WOLF: That is effectively correct.

SEN. HOLLINGS: And so the way to solve that is to become -- you said bigger.

MR. WOLF: I said what?

SEN. HOLLINGS: Bigger. In other words, more monopolistic. Good Lord, can you imagine that, to come here before the committee and say, now, the only way I can get competitive is to get monopolistic. Did I hear you correct? That is what I understand you to say.

MR. WOLF: I am not quite sure that I wove that word in, Senator.

SEN. HOLLINGS: Well, now you have got 85 percent of Charlotte, North Carolina. You see, I started in there when we had Delta, Eastern, National, and Piedmont. In fact, what you say for Governor Hunt, I got that 15 years ahead of time, ahead of when you got it, because I helped you get it. I brought as much pressure as I possibly could, threatening all these Secretaries on their confirmation and everything else like that, because I studied my humility under Mendel Rivers.

[Laughter.]

SEN. HOLLINGS: So I happened to go before the CAB and help them get, Piedmont get years ahead of any kind of acquisition by US Air. Piedmont had that carrying right, and then you all lost it.

So you now are going to be come competitive by becoming monopolistic.

MR. WOLF: I do not think I would characterize it that way, but you are absolutely correct in saying there has been a massive economic paradigm shift from being a social state --

SEN. HOLLINGS: Oh, my Lord, we do not understand large words like paradigm.

[Laughter.]

SEN. HOLLINGS: Let me just ask outright, if you have got a high price problem, would you consider selling Mr. Johnson, DC Air, all of those small carrying rights and not have the merger? Is there some way we could get that approved, because I am like Senator Rockefeller, anything would improve the service of US Air that we are receiving now, so I do not want it competitive.

I want Mr. Johnson to get it, because I know him, and I do not know what the competitor would get. Would you just sell it to him? Would US Air just go ahead and just sell him those rights, those slots, the maintenance, the planes, the equipment, everything?

MR. WOLF: Senator, the overriding problem US Airways has is that it is not a low cost carrier and never will be.

SEN. HOLLINGS: Never will be?

MR. WOLF: Never will be, unless we file for bankruptcy.

Never will be.

SEN. HOLLINGS: That is astounding.

MR. WOLF: And thus we have to become larger in order to average our costs down to compete with the larger competitors in the country. We are the only pony left. All the rest of them died or have gone through bankruptcy, and I do not find either of those two attractive. By becoming larger, we can spread our cost over a larger base and average down our unit cost rather dramatically.

SEN. HOLLINGS: So your reason, then, that you are selling this to Mr. Johnson is that you are recognizing the original instance that the requested merger is anticompetitive without it? In other words, you could foresee that both the FAA and, of course, the Justice Department would not approve it unless you did divest DC Air?

MR. WOLF: The answer to that is effectively yes, although United and US Airways has very, very little route overlap. We do have large concentration in the Washington Metropolitan Area.

United is the largest at Dulles, we are the largest at National, and we thought the intelligent way to address that would be to carve out a substantial portion of the US Airways existing pattern of service at National and sell it to another operator, as long as that operator would assure us that it would continue to serve small communities. That is what we are doing.

SEN. HOLLINGS: Well, you are known as a very successful operator, and I have to take the statement for what it says. You are either going bankrupt or you are going to get monopolistic, one of the two, so you have chosen the monopoly route, and let me, by the way, tell your staff to get on the ball.

I mean, when you say that you have got eight flights from Charleston, South Carolina to Charlotte, North Carolina a day, and 34 people wanting that flight, or an average of four per flight, that is outrageously, really ridiculously inaccurate. I mean, they are standing in line to get on that thing, and they are full flights. I can guarantee you that. You do not have a plane that is flying with four going to Charlotte. That thing is crowded every time.

And just to the point, I thought the computers -- I wanted to get Mr. Chairman, these computers sort of have a lock-in. Like, I had last Friday, 3:00 flight, Washington to Charleston, seat 10A, and so when I got to seat 10A this charming lady was already seated in 10A, and I said, here is my ticket. I have got 10A, and she said, well, I have got 10A.

Can't we get some kind of computer that once it is assigned, it cannot be reassigned or duplicated like that? I mean, that is the kind of thing that we passengers who have been in it for 50 years are worried about.

MR. WOLF: On the former point, in fact there are 34 human beings on the face of the earth who want to fly between Charleston, South Carolina and Charlotte daily. There are a large number of others who fly from Charleston --

SEN. HOLLINGS: Not human beings?

[Laughter.]

MR. WOLF: There are a substantial number --

SEN. HOLLINGS: You have got 34 human beings, and then you have got what? Look, I fly down there every week.

MR. WOLF: -- who want to fly between those two cities. We have a substantially larger number of folks in that glorious city and State of Charleston, South Carolina who go to Charlotte who connect and go beyond.

The point is --

SEN. HOLLINGS: Sure. The only way to get anywhere is to go to Charlotte, which is a hub. You are now testifying to the monopolistic control of 85 percent of the flights through Charlotte.

MR. WOLF: Well, I guess I could cut the flights in half and only have a 50-percent monopoly, but I do not think that is what the people of Charleston, South Carolina want us to do.

SEN. HOLLINGS: Now, I want to help. Mr. Johnson, how do you get those costs down? You had the gentleman himself say it is the highest cost, per-unit cost, and you are taking the planes and you are taking the pilots. What are you going to do that Mr. Wolf has failed to do to bring those costs down?

MR. JOHNSON: I am only taking the planes and the pilots under lease for a transition period.

SEN. HOLLINGS: And then you take those pilots with the same agreement that they have?

MR. JOHNSON: No. I have completely negotiated a different agreement with the pilots, because they are flying different equipment. We will negotiate completely.

SEN. HOLLINGS: Wait a minute, different equipment? I thought you were taking the same equipment and leasing it.

MR. JOHNSON: I am leasing 10 737 200's from United, I am leasing 19 regional jets from Mesa, and I am getting eight turbo props as part of the acquisition, so the goal is, is to move out of the 737 200's into another jet type configuration, lower cost, and at the same time to take the 19 leases from Mesa, turn those into DC owned aircraft that we will acquire as we go out and talk to the airplane manufacturers.

We have already started talking to Boeing. Boeing makes a 717 that seats approximately 100 passengers, and we are looking at the configuration. We have not made any decisions, but our goal, Senator Hollings, is to get out of those mature costs of US Air-United into lower cost DC Air operations, focused airline, focused only on serving the 43 communities, and employing a staff that is DC Air staff with terms and contractual agreements with the unions based on DC Air's operational cost and not on US Air or United.

SEN. HOLLINGS: But you are saying as soon as you take that over you will immediately -- you have got the equipment. You are going to give at least the same service. That is your testimony, and with that same service you are going to immediately lower costs.

MR. JOHNSON: What I am saying, Senator, is that with the same service we are going to have the cost associated with the leases, but we will have a lower cost --

SEN. HOLLINGS: I want to talk about the costs associated with the passenger. Am I going to get the same service at a lower cost immediately?

MR. JOHNSON: In some cities, we believe, and I am not an expert in cost analysis.

SEN. HOLLINGS: Wait a minute now, come on. You told us you are worth $1.6 billion and you knew how to get costs down. I mean, you know all about money. I am not worried about that.

MR. JOHNSON: I am not an expert in airline cost tweaking, but I can assure you that our goal is, our goal is to get the cost of the flying public, who flies from South Carolina to D.C., Reagan National Airport -- that is the only place we fly. We are not going to try to fly to other places.

SEN. HOLLINGS: You said you are going to fly the same routes, but I am concerned about the cost.

MR. JOHNSON: I believe that in a short time from transition we will get those costs down, absolutely.

SEN. HOLLINGS: Finally, one question Mr. Chairman. In a short time, what do you mean, in a year?

MR. JOHNSON: I think within a year some of those prices will definitely come down, Senator, yes, because what we are going from, we needed to go from 66 percent jet aircraft to 75 percent jet aircraft.

Our load factors will go up. Our costs will go down.

SEN. HOLLINGS: Thank you, Mr. Chairman.

SEN. MCCAIN: Senator Gorton.

SEN. SLADE GORTON (R-WA): Mr. Chairman, first I would just like to put a written opening statement in the record.

SEN. MCCAIN: Without objection.

SEN. GORTON: Secondly, I would like to say that it seems to me, as it does to the chairman, that the duty of, the goal of the people up there is to enable the private sector to run an air transportation system that is safe and fast and frequent, and low cost, through the ability to create competitive markets and provide incentives to do what each of you is talking about doing, run highly competitive, efficient airlines.

I believe that the deregulation of air transportation was one of the great steps ever taken in the transportation system of the United States, and is fundamentally the reason you are here, and that clearly in a competitive world means that change is a constant, and our comfort with the status quo is illusory.

Having said all of that, with those goals I can also say that I do not have a tremendous number of parochial concerns as the Senator from the State of Washington. I do not think that this proposed merger is likely to have a profound effect on the way that people get back and forth to cities that I represent.

But I also have to say publicly, as I have to two of you at least privately, that in the proper definition of that term I am a skeptic. I do not believe that we here should be considering this merger in isolation.

I am strongly inclined to believe that it will force other large competitors into similar mergers, and it is counterintuitive to believe that where there are now six major airlines in the United States, in one sense that when that turns into three major airlines, that that will increase competition. Maybe it will, but it is certainly counterintuitive.

I listened with great interest and with a certain degree of optimism to what Mr. Johnson has said about running a low cost airline out of Reagan National, but it is counterintuitive at least to think that someone making a purchase from what Mr. Wolf delightfully describes as a mid-size mature cost carrier, which to me means a high cost inefficient carrier, that within a relatively short period of time its successor in a market like this is going to be a highly efficient low cost carrier.

It may be so, but it is clearly counterintuitive to come to that kind of conclusion, so it seems to me that while you have made a good case, you have an extremely high burden of proof in this connection, and our considerations have got to go beyond this merger and say, well, what happens when the next four in line, the Continentals and Northwests and Americans and Deltas respond, as they must, to this proposal, to the way in which air transportation is highly competitive and highly passenger-oriented in the United States?

I leave that with you, because it is a matter of concern that you have obviously attempted to deal with here but have not dealt with successfully to this point.

Now, I would really like to ask a few questions and be silent enough for long enough to get the answer, and I will start with you, Mr. Goodwin. Your testimony says that you have relatively little East Coast North-South traffic, and that it would not be practical to grow incrementally. Why not?

MR. GOODWIN: Senator, when you look at a mature network carrier, as United is, we have a lot of opportunities to continue to fill out our franchise. When you start looking at incrementally growing in a marketplace where you have less than 1 percent of the traffic in a market, it is going to take a horrifically long time, an horrifically large amount of money to be able to make a commitment to provide any meaningful competition into a market like that.

400 airplanes that US Airways is currently operating to replicate their East Coast operations would be in excess of $12 billion in today's marketplace. Then we would have to go find people, facilities, and infrastructure which we all know is the subject of great concern in this industry, and I do not believe that you are going to be able to realistically look at that as a way to make a significant --

SEN. GORTON: But from the point of view of your customers, at least, and their convenience, wouldn't you do just as good a job by a code-sharing arrangement? You would get your passengers where they want to go.

MR. GOODWIN: A code-sharing arrangement with US Airways would perhaps provide display opportunities so that the customer would be able to see service in purchasing. That is a seamless product, but it still suffers from the problems of any code-share operation, with separate terminals, separate computer systems, separate personnel, in many cases separate policies that are not consistent from air carrier to air carrier.

And Senator, despite all of our efforts over the last 3 years, from the Star Alliance to try to be able to build consistency for our customers worldwide in a code-sharing environment, we still struggle with the inconsistencies because of the unique requirements.

SEN. GORTON: You tell me you are going to be more efficient, but you also say you are not going to lay off any employees and you are going to operate all of the hubs. How are you going to become lower cost doing that?

MR. WOLF: Senator, it is our commitment that we are not going to have any employees impacted by this transaction. We believe that is a very positive part of this merger, because all the waiver agreements will be honored, all the employees will be ensured a job.

The ability to lower costs in the current US Air network comes from being able to blend their route network with ours. A lot of the overhead, the significant costs that go with that are going to be spread over a worldwide network versus a North-South network that US Airways currently has to distribute their cost over.

SEN. GORTON: Finally, and I have more -- as the chairman said we will submit some of these questions in writing -- you said the acquisition of US Airways will provide, I think it is 93 destinations and one carrier service for 540 or 560 new city pairs. Are those destinations and pairs a matter of public record? Are you going to submit them to us?

MR. GOODWIN: Yes, Senator, they are a matter of public record. They have been in all of the materials we have used. There are 64 domestic markets that we are adding, including some to the City of Seattle, as well as international locations.

SEN. GORTON: Do we have them here for this committee?

MR. GOODWIN: Senator, we will make sure you have a copy before the day is out.

SEN. GORTON: Thank you. Mr. Wolf, what if DOJ turns you down? What is the future of US Airways?

MR. WOLF: We will continue to manage the business as aggressively as we can and try to find the answers some place else.

Senator Gorton, I might add that selling our company and watching the name disappear was a big decision for our board. Before we ever got to that decision, quite frankly, we looked at buying every airline in the western world ourselves in order to increase our size, and for one reason or another, not being able to get the financing, not being realistic, not being able to buy United's 55 percent employee-owned, et cetera, et cetera, we never found a fit that we could legitimately hope that we could finance and conclude.

When I met with Mr. Goodwin some number of months ago, it was a conversation dealing with our participating, US Airways participating in the Star Alliance, and he brought the subject up, and the more we looked at it, and the more we wrung our hands about it, the more we finally concluded, it works for our three constituencies.

That is why we are going forward and doing it, but if it is not allowed, we will tend to our knitting and try to run the best airline in the world and try to find the answer some place else.

SEN. GORTON: Well, now I do have a parochial question for you, Mr. Wolf. What happens to your Airbus Industries orders if this purchase goes through?

MR. WOLF: United Airlines would be obligated, and in fact has agreed to honor all of our contractual commitments, be it airport leases or gates or aircraft purchases, et cetera.

SEN. GORTON: That is not much of an advertisement for me.

MR. WOLF: It is a free market, Senator.

SEN. GORTON: Yes, it is. One other question for you.

You stated in a document submitted to the Department of Transportation with 519 current daily departures at Pittsburgh, 483 at Charlotte, 402 at Philadelphia, we operate the most pervasive route network in the Northeast and Mid-Atlantic regions of the United States, where almost 40 percent of all Transatlantic passengers begin or end their international journey. US Airways ranks first in 44 of the 56 major airports in the Eastern United States, end quote.

Now, you will be combined with United, and it dominates Dulles as the largest domestic carrier. If US Airways had the most pervasive network before the merger, what would your description be after the merger?

MR. WOLF: I think we will have a network that we will now be able to serve, because we are not doing that today. We are going to provide an array of services to folks on the East Coast of the United States. What was the old US Airways System, now the new United System, that will far exceed anything that we could do.

SEN. GORTON: Will it be more or less pervasive?

MR. WOLF: It is going to be patterns of service we could never get to. I think I should add one other point. If you look at all of the international passengers US Airways carried last year and United Airlines carried last year, that is 13 million international passengers. In the global marketplace we are not even scratching the surface. British Airways carried over 30 million, Lufthansa 27, Air France 24, American Airlines carried 17-1/2 million international passengers last year.

We are going to put a very strong football team onto the field to compete globally and succeed, in my opinion, significantly, and by having United's backing of US Airways. As we effectively disappear and become them, we are going to have international patterns of service that are going to dwarf anything we ever thought about before.

I mean, out of Philadelphia alone they are going to add Brussels and Amsterdam immediately. We recently started flying from Pittsburgh to Frankfurt. They are going to add another trip immediately. Our three trips are going out of Charlotte, which we are exceedingly proud of, to Paris, Frankfurt, and London. We upgraded to bigger aircraft almost immediately. This is going to be a very vibrant network, bringing all sorts of consumer benefits to all of those communities up and down the East Coast of the United States.

SEN. GORTON: One more question, if I may be indulged, for Mr. Johnson. If you add up DC Air's proposed schedule and plans to operate 22 jet round-trips to eight markets, how can a carrier operate a low fare operation with this many destinations with so few round trips?

Southwest, as I understand, does six or seven round trips in each of its markets. How is DC going to be low fare with two round trips per market?

MR. JOHNSON: Well, Senator, I think the advantage of DC Air, it flies to a very desirable close-in airport, Reagan National Airport. It is a slot-restrained airport, and people choose to fly there because they like the convenience of it. The way we will be able to lower our cost is that we will be operating lower cost aircraft and will have lower cost personnel, and those costs will be passed on to the customer.

SEN. GORTON: Well, why? If it is all this good a deal, and you are low cost, don't you want to maximize your profits?

MR. JOHNSON: Well, Senator, I think we have a very profitable airline now, and I think the objective is to keep it profitable by being competitive, and we will be flying against other competitive carriers, so we will not be able to maximize profits, so to speak, when you have got Southwest Airlines flying into Dulles Airport or BWI. There will be some pressures. We will be flying in competition against United, so there will be competition to keep our costs down, and we will do that.

SEN. GORTON: Fritz, is Southwest flying to Charleston?

SEN. HOLLINGS: No. We would love to get them.

MR. JOHNSON: They are certainly free to do so. There is no restriction on them doing so.

Our position is from day 1, we will get out of many of the high costs of US Air, for example, leasing jets from a company like Mesa or others at a lower cost than the operational cost of US Air and United, and moving away from having the costs associated with what Mr. Wolf was talking about, flying to Europe and marketing costs associated with trying to get people to fly to Europe on US Air.

Even, I dare say, changing the compensation structure of this company is going to have a huge impact on our ability to lower costs, so I am confident that we, with the desirable close-in Reagan National Airport, continuing to focus on serving these 3 million passengers with better service and lower cost service -- the routes are profitable today, Senator. They are profitable today. Under lower cost they will be more profitable, but we also believe we can pass some of this on to the customer in the form of competitive prices.

SEN. GORTON: Thank you, Mr. Chairman.

SEN. MCCAIN: Senator Rockefeller.

SEN. ROCKEFELLER: Thank you, Mr. Chairman. I just want to get one little thing out of the way here that has kind of been nagging at me a little bit.

Comments are made from time to time that if you have not been in the airline business as a chief executive, then therefore somehow you are not going to be able to do a decent job, and I would kind of suggest that we have got four CEO's before us, and I think that probably Bob Johnson has been by far the most successful in terms of running his business, and has made the most money in terms of running his business, and has the most experience in terms of running his business.

Now, you can argue, if you want, that, well, he has not been in the airline business, and Senator Kerry and I were just talking, and it is an extremely competitive business. It is very hard to compete and make a lot of money in the airline business because of all that is going on, but somehow this concept that because you have not been in the airline business, that you cannot make a success of it when you are dealing with somebody who has been so absolutely and totally successful is slightly bothersome to me

So we do not have two CEO's here today. We have four CEO's, and my guess is that Mr. Johnson has probably been the most successful of them, and I wanted to make that point.

Secondly, a question to Jim Goodwin and Bob Johnson. You promised to carry your service on to every market you are servicing now, and that is very reassuring.

On the other hand, when you put forward a merger proposition, that is the kind of thing you say.

It is like, not laying people off, and I have talked with you, Jim Goodwin, and I believe that you mean that, but often circumstances are just such that it becomes very difficult not to do that in the reality of the marketplace as opposed to the rhetoric of a committee hearing room, and I would just like to -- although you said it, I would like to hear it again -- I guess this is more to you than to Mr. Johnson, that you do not plan to do that, and that your rationale for not doing that is sound and sufficient.

MR. GOODWIN: Senator, as I said to you several weeks ago, we view this transaction as very consumer friendly. We believe it brings a lot of connecting benefits to small and midsize cities, to a global network that today they do not have access to.

I also firmly believe that providing that access is a great economic development engine. We have seen it in a lot of places. We have seen more and more of our customers, our important business customers, moving to smaller cities. They are demanding more air service. They are demanding more access to a global network. We are committed to that.

That is the foundation of the hub-and-spoke carrier, the ability to bring small numbers of people to a collecting point and disperse them onto a larger network is what provides access to global businesses, global travelers, global leisure travelers, shippers, et cetera.

Our company has demonstrated that commitment, and we are committed to it in this transaction, Senator.

MR. JOHNSON: Senator, if I could add to the question of serving the 43 cities, I can state without equivocation that my goal is to provide service to these 43 cities and these 43 cities only. With DC Air that is my purpose of making the acquisition.

And to the question about people who are coming into the airline industry from the outside, I think I am correct in pointing out that the current CEO of Delta did not have an airline background, and Jerry Greenwald, who formerly ran United Airlines, came out of Chrysler Corporation, I believe, and of course everybody knows Richard Branson, who has given competitive fits to British Airways all across the Atlantic, came from Virgin Records, the entertainment business.

And so, Senator, you are absolutely right, I think what it takes to be a successful CEO in any business is the ability to have a vision about your business, to motivate people to pursue that vision, to provide quality customer service to your customers, and to run an operation that reflects the values that you have in that business, and that is what I have done with my company, and that is what I would do with DC Air, and I do not see any impediment at all to hiring good talent.

Now, Mr. Leonard mentioned that I hired Bruce Ashby to serve as my acting president, and he comes from United and US Air. I mean, you cannot have it both ways. On the one hand, gee, the guy has no experience. He goes out and hires somebody with experience. Well, the experienced guy comes from -- Bruce also worked for United, US Air, and Delta. Bruce is a very experienced airline executive, and I am going to hire a lot of other airline executives. I may try to hire a couple from Mr. Leonard. I can sort of dip into my pocketbook and be competitive.

So my point is, I am going to hire the best and brightest talent to run this airline, with my vision and with my commitment to service.

SEN. ROCKEFELLER: Mr. Johnson, I appreciate that is not one of the point has been made about you providing lower cost service, and I am not sure that the point has been adequately made that one of the reasons that you would be able to do that were the merger to be successful is that your desire is to have a so-called unit fleet, planes all the same, maintenance all the same, training all the same, and that, rather than having a whole series of different kinds of airplanes, and therefore requirements for fixing them and all the rest of it, that that in and of itself becomes a fairly major cost advantage.

MR. JOHNSON: Senator, you are absolutely correct. Among the things I have learned by serving as a director of US Airways is understanding the cost structure of airlines, and those costs come in about three or four categories. The first one is obviously the cost of acquiring aircraft. The second is the cost of personnel, union costs. The third is fuel costs, and then the others are the overall operations in particular markets that you operate in.

I believe the most important thing to do in DC Air is to rationalize the fleet, to get a fleet rationalization that will allow you to have pilots who fly the same plane whether they are flying from Portland, Maine, or whether they are flying to West Virginia. They will move from one plane to another without any scope clauses or any restrictions.

I think the other thing to do is to get union agreements that reflect your goal of being a low cost carrier and I believe we can do that on the personnel.

Fuel cost, we will do like everybody else. We will be able to buy fuel as part of a consortium of independent airlines, and we will be able to buy fuel at other kinds of market costs, and so I think on the areas that we can be competitive where the costs are, we can absolutely become competitive right away.

But in addition to that, I think US Air and United will have huge cost, overhead cost, just in terms of senior executives, just in terms of facilities, and just in terms of marketing costs that we will not have, and as a result of that we believe we will be able to pass those reduced costs along to the customer in the form of competitive prices and better service.

SEN. ROCKEFELLER: Thank you, Mr. Johnson.

SEN. MCCAIN: May I just make one brief announcement? Members will be leaving because of the time, and I do not think that if we went to panel 2 at this time, that they would get the attention they deserve, and so therefore I am going to ask Hon. Nancy McFadden and Mr. Bert Foer to come tomorrow morning at 9:30, and we will reconvene this hearing at that time, rather than have them speak to an empty committee.

So we will complete the questioning from Senator Kerry and Senator Wyden with this panel, and we will reconvene tomorrow morning at 9:30 with panel number 2, and I apologize to Ms. McFadden and to Mr. Foer because of the length of this hearing, and I want to get their input, and so we will reschedule the rest of the hearing for tomorrow morning, after the completion of the questioning of this panel.

Senator Rockefeller.

SEN. ROCKEFELLER: I will forego my final question.

SEN. MCCAIN: No, there is no reason to do that.

SEN. ROCKEFELLER: I choose to do so.

SEN. MCCAIN: Thank you. Senator Kerry.

SEN. KERRY: I thank my colleague for his courtesy. It is an interesting discussion.

Let met begin by saying, Mr. Goodwin, I am surprised at your statement about inability to "predict" what might happen here with respect to consolidation merger down the road. I was in business privately for a very short period of time when I was also practicing law.

And I have learned enough about business in the 16 years I have been here and particularly this industry to say to a virtual certainty virtual certainty -- that there is no way that Delta, American and others are not going to be pursuing very rapidly for the very reasons that were contained in your letter, Mr. Wolf.

You cannot write a letter like that to the CEO of U.S. Air and then sort of come in with a new posture as a seller to United that suddenly erases that market pressure on anybody to be competitive. I think Mr. Leonard would agree. I mean, they are already talking. We all know this.

So our obligation is not just to look at sort of the impact of your merger, but to look at the impact of what we know is going to happen here, what happens to the marketplace.

Now, you raised a very good point. We also have an obligation, not just to look domestically, but we cannot talk about globalization and the impact of the global arena without also making some judgments about that. And the capacity of single state airlines, what began as single state airlines and are now pretty much dominant. British Air, Lufthansa, for instance, they carry a lot more. And that has a global impact, et cetera. So I think we need to think about that. I just want to put that on the table.

Secondly, with respect to Mr. Johnson and the discussion that my good friend Fritz had, without becoming rhetorical about it, I understand completely where Mr. Johnson is coming from. I think it is a great deal for him. He would be crazy not to look at it and to want to try to do it. It has been a very profitable arena, those particular slots and that network. And there are rational reasons for you folks to divest of that in the context of this overall possibility.

And I completely understand the differential and the slots. It makes sense to keep it as a package. We have a public interest in making sure that those particular areas currently served continue to be served. That is an important guarantee that that would happen.

And clearly, there is a variation in value on those slots according to time, size of carrier, type of carrier, market served. Whether your assessment as the seller is -- and in this particular circumstances -- is the definitive of price, I do not know the answer to that question.

But I would assume answering to your board as a public transaction, that is going to be highly scrutinized, you have a serious interest in making certain that that does meet market value.

So, I think we can look at that carefully. And I am not as disturbed by that. I also see the transitional aspects of this. And I think there are great virtues to that in terms of the new aircraft that will be purchased, the new network setup. And there is a transitional capacity.

Here is what I am more concerned about still. And I am trying to figure it out. Mr. Goodwin, I know this is a very tough business, nothing easy about it. And the profits are not enormous at all. Your profits -- what is the profit margin of United currently?

MR. GOODWIN: Oh, about seven percent, Senator.

SEN. KERRY: And U.S. Air is more hard pressed at this point in time. Would you share with us what are these current -- you have labeled them mature -- what are the structural difficulties that make life so difficult for U.S. Air particularly?

MR. WOLF: Sure. I would be happy to do so. We had for a goodly number of years labor agreements that were woefully uncompetitive. And that is not because anybody was dumb or inattentive.

It really goes back to the days of Allegheny. In the regulated environment, you would settle a labor contract on terms that you knew were not necessarily justifiable economically, but what difference did it make? You flew to Washington the next day. You saw the Civil Aeronautics Board. You proved to them your costs went up -- and they surely did -- and they let you raise fares.

And you knew in your heart of hearts that labor agreement was going to be the floor for your competitors some six months later. And we had this sort of a spiral.

We then, Allegheny got into a merger sort of a syndrome with Piedmont and PSA. And as we did that and we put the labor agreements together, they became substantially more attractive quite frankly.

And then we got into the early part of the 1990s. We had a difficult economy. Fuel prices were going up, et cetera. And we started encountering staggering losses. In the end of the end, last year, starting with our pileups two years ago, and last year, we negotiated all new labor agreements with our labor unions and all of our employees. Not below competitive levels, but at precisely competitive levels. We were not asking them to give us a concessionaire agreement. We wanted competitive levels. We now have those.

But in order to take advantage of them, we have got to substantially increase the size of our company. Because our unit costs, which are the highest in the industry, it is because on average we fly a small airplane on a short stage length and we have to get substantially bigger. We need big airplanes flying international missions, transcon missions and that will average down our unit cost.

Now, the question is can we do it? Do we have the time to do it?

SEN. KERRY: So the principal component of your current structural difficulty is the labor contracts that are the hangover from the regulated era?

MR. WOLF: No, no. Because we have now concluded competitive labor agreements with all of our employees. Our remaining principle difficulty is that we are a mature cost carrier and the only one left that does not have a large operational base. United has mature cost. American has Northwest, Delta. But they are airlines that are substantially larger than us and they spread their cost over a much bigger base and then average them down.

SEN. KERRY: Now, the theory is then that with this merger by virtue of the economies of scale, you are going to produce that cost.

MR. WOLF: Yes.

SEN. KERRY: But United is essentially going to assume the larger I mean, they are going to be subsuming that maturity premium into their current profit which reduces your margin I assume, unless you raise prices.

MR. GOODWIN: Senator, if I may, our labor cost structure today is quite comparable to the labor cost structure of U.S. Airways. The ability to leverage their cost structure into our cost structure comes in the form of a lot of other things besides labor costs, facility utilization, maintenance facilities, parts opportunities, which in our industry add up to a significant amount of dollars.

Because of the quantity of fuel we buy, we buy fuel cheaper. Our underwritten liability insurance is lower because of our claims records. So his cost structure gets leveraged over a much larger global base. It is not going to show up as a labor cost savings per se.

SEN. KERRY: No, I did not insinuate it would show up as a labor cost savings. But what I am saying is that you will be -- if he is complaining of costs that make it difficult for him to compete and you are assuming those costs, you are going to have additional costs above and beyond what you have today. It is just that you are going to spread them around in a bigger network and hopefully have some economies that come through that, correct? And the benefits of having your larger route connectedness and so forth. And so big is better.

MR. GOODWIN: In terms of absorbing the U.S. Airways transaction, we are going to be able to spread his cost over a larger network. And too, by providing additional service and connectivity to his customer base, we are going to bring additional customers to the party as well. And at the end of the day, we believe our company will be as well off, but hopefully better off.

SEN. KERRY: And you are going to do that you say for two years without raising fares?

MR. GOODWIN: We have committed as part of this transaction that during two years following the completion of the transaction, we will not increase structured fares. That is correct.

SEN. KERRY: Structured fares. There is a big difference between saying we will not increase structured fares and we will not increase fares. You could wipe out all the discount fares and leave people at the high level and not have increased fares under that statement.

MR. GOODWIN: I do not believe we could do that, sir. First of all, structured fares include some discount fares.

Structured fares are not only the standard first class coach fare structure, but they are also 14 day, 21 day advance purchase some markets, seven day advance purchase markets, that consumers buy.

SEN. KERRY: The vast majority of your fares are outside that. They are in the discount, are they not? I mean, you talked about 8,000 changes yesterday. None of those are structured. Those are discounts.

MR. WOLF: We had 8,000 yesterday. The industry had 68,000 yesterday.

SEN. KERRY: Those are not structured fares.

MR. WOLF: I would suspect some of them are. As a result of Southwest announcing they are going to Buffalo, I would anticipate that had an effect on structured fares.

SEN. KERRY: What I am saying is the vast majority are not.

MR. WOLF: I do not know the answer.

SEN. KERRY: Let us face it. The greater flexibility here is that you are going to have this huge arena up there that you have more opportunity not to change.

MR. GOODWIN: The base fare structure is used also to price off for all the sales that go on in this industry. So if there were 8,000 sale fares out there yesterday, they were all based off of that 21 day fare.

SEN. KERRY: Well, let me get to the heart of this. Obviously, Mr. Leonard has been a little bit left out of the discussion. I thought he made some very important and provocative comments which are also contained in your letter, Steve. I think that it is important to explain that.

The heart of your letter is this assertion that in the domestic arena, the threat to unobstructed competition continues to grow. And you talk about sort of a predatory practice by United's quick expansion effectively sort of trying to target you.

Now, if all of a sudden, you have got 6,400 plus routes and AirTran and Southwest and all these others are struggling to kind of get in the market and Delta -- just take Delta and American, the closest competitor is going to be around 3,000 at that point, 2,700 routes.

I mean, that is a fairly dominant imbalance is it not? And I just want to put that into context. I am just trying to work through this. I do not have a conclusion. I just want to work through it. Mr. Leonard mentioned predatory practices, dominant problems already existent for people to be able to get in and compete. And in fairness, most of the entrants you talked about; Jet Blue, Southwest, et cetera, are not competing in the major terminals. Do you want to comment on that, Mr. Leonard? And then you guys respond.

MR. LEONARD: We have an example, literally as we speak, we had planned on going from Atlanta to Minneapolis. Very large market. Very, very high prices in that marketplace. We were going to add four trips, a fifth one later on. Northwest got wind of that fact. And two days, three days before we announced or were intending to announce that service, they added 40 percent capacity that took our route from about a half a million, two, three quarters of a million dollar profit, to a $3.5 to $4 million loss.

Now, for Northwest, that is nothing. That is a very, very small rounding error at the end of their profitability. For us, it is an enormous amount. And has significant impact on our ability.

So as a result, we announced that instead of the fact that we were coming to Minneapolis, that we were not coming to Minneapolis. We subsequently reviewed that and added service through Midway which we think is a safer way for us to go. But we have run into that at Richmond against Delta and Mobile. We have documented six cases with the DOT of Delta's behavior. We announce we are going into a market. They add 28, 30, 35 percent capacity.

SEN. KERRY: Why does that not qualify just as good old-fashioned American competition?

MR. LEONARD: I think it goes to intent. We certainly expect people to match our fares. And we expect people to compete with us. But they do not compete. If they competed that way with each other, you would say it is good old-fashioned competition. They do not compete that way when Northwest moves into United's routes or American moves into Delta's route. But when a low cost carrier comes in and they do it because they know they have the market clout to take us out of the market and they view it as an investment to eliminate the competition. They are not looking to compete fairly. They are looking to eliminate it.

SEN. KERRY: Steve, that was essentially your argument when you were fending only for the competitive interests of U.S. Air, not the merged interest. How do you respond to the notion that in several markets where you have this kind of competition from Southwest, AirTran, Jet Blue, et cetera, you have got a 40-60 percent reduction in the air fares in that particular market.

MR. WOLF: A two point question I want to clarify a quote in my letter. What I said in the letter was that United's significant expansion at Dulles Airport to feed their transcontinental and international flights. But these are routes that we fly out of National or to a smaller degree out of Dulles was categorically not in U.S. Airways' best interest. I mean sort of simply stated, we got more competition. We did not want that at all. We wanted not more competition.

It is, however, absolutely logical for United to do that and two it certainly is in the best interest of the consumer. It was not little old U.S. Airways' best interest.

Let me go to the second point. There is no question what Southwest has done and continues to do in carriers like AirTran and other low cost carriers do as a result of their startup cost.

Southwest provides point to point service. It now carries only four airlines and it will not carry more passengers. It is a very low cost carrier and it sells one thing. It sells price. I mean, it certainly has a safety orientation and it does a very good job. But it takes those low costs and turns them into low fares. That is what they do.

The rest of us do sorts of other things if you will. And quite frankly, we are saddled with costs that go back some number of multiple decades which we are never going to shake. But we can put into place network patterns of service that are also very much in the consumer's best interest, carriers like AirTran and Jet Blue and Southwest and National and others are going to continue to come and will continue to police the big guys. They will simply do it because the consumer does want low fare. And no one will allow themselves to pay more. Kodak will not allow its controller to pay more than travel budget. And the consumer does not want to pay more either.

It is a nice mix. A big carrier with the big networks can serve the entire globe. And the low cost carrier is pushing them all the time in terms of price. I mean, it is a very nice mix. I think it works.

MR. GOODWIN: Senator, just one other comment on Southwest. I think there are two points I would like to make that have not already been made. Number one, Southwest has built a network today that gives them access to 90 percent of the United States population base as a point-to-point carrier which is how they have started their business and have grown their business.

They now realize that in order to continue to sustain the service they are creating and to reach into new communities that did not have the mass, they are now becoming a connecting airline. And in fact, they have 13 connecting complexes on their airline today. Now they do not call them hubs. They call them focus cities. But 31 percent of their traffic today is now connecting online on Southwest which is a new phenomenon for them.

The other thing they do is Southwest has chosen to avoid the bigger airports, not necessarily because they do not want to be there. It gives them better operational reliability which they need in their low cost, high frequency turn around business. They cannot afford to have an airplane sit on a taxiway for 40 minutes to get in the air, when they have 20 minute turn arounds.

MR. LEONARD: May I comment on that? Southwest reported yesterday that they cannot go to Minneapolis because they cannot get gates.

That was in the newspaper yesterday. The Southwest took 27 years to build. And it was highly protected in its early days at Love Field to give it a starting point. We could not start AirTran today. It would be virtually impossible for us to start AirTran.

If we start, we are starting today. Because we ended up with 22 gates in Atlanta as a result of Eastern's demise. Had we not had that gate position in Atlanta, we were trying to start today in Atlanta. I can assure you there would not be one gate available for us. Or if there was one gate, it would only be one. You could not build a 22 level complex like we have today.

I was told yesterday that the carriers had just gotten slots at Chicago O'Hare. New entrants that are going into Chicago O'Hare. They got the slots as a result of Air-21. But they cannot get any gates. The only gates they can get are at the international terminal where they have to pay 17 dollars a passenger.

So the barriers to entry are significant for new carriers. And it is gates, slots, predatory behavior.

SEN. KERRY: Well, that is a difficult balance for us. I mean, we need to -- obviously I need to end up here. But the infrastructure is way behind. We all know that. But we have to be careful not to penalize some of these larger issues as we think about -- as we take the time to build out in the way that most airports, most states, most capital cities and others are now investing seriously to do. And that was the purpose of the move we made with Air 21. So I think we have to balance that. I do not want to abuse my time. Yes, Mr. Goodwin? You wanted to respond.

MR. GOODWIN: Senator Kerry, just to followup on one of your opening comments about what will happen consolidation wise and that you find it difficult that I cannot state for a fact that American or Delta or Northwest will do something.

I also read the papers. I know they are talking to each other. At least, that is what I read. But I do not know whether there is a transaction that can be put together that does what this transaction does. This transaction puts together two networks that are highly complementary. It protects labor. It has got a lot of common benefits that most other combinations do not have.

And while there may be a lot of discussion going on and a lot of gnashing of the teeth, at the end of the day, I do not know whether they will be able to bring a product to the table that provides the consumer benefits that we have identified in this transaction.

SEN. KERRY: Well, that is an interesting observation obviously. That is part of what has peaked our curiosity as we met with you. And I have sort of been agnostic about it and trying to understand it better. But still I think -- I mean, it is hard to imagine that they are not going to be able to find a way to be able to do that, one or the other.

SEN. ROCKEFELLER: Senator Wyden.

SEN. WYDEN: Thank you. I thank my colleague. Mr. Wolf, on April 11th -- and you are not going to be able to see the headline. But the Washington Post ran a story that said airline service dips in three of four categories. And they go on in this article to single out one airline in this country for poor service and deteriorating service, and that is your airline.

The article states -- and I want to quote here -- that with respect to Arlington-based U.S. Airways, and I quote, your airline "showed poor performance in all service categories," every single one. And your spokesman, and I will quote here again, was Richard Weintraub. And he said, "We've acknowledged the issues. The numbers speak for themselves."

So this was the article on April 11th. And I listened very carefully to your statement this morning where you said there were not any real problems with service. In fact, you said essentially your service is terrific, that you move enormous numbers of people constantly. I think I would like to begin by asking you what happened between April 11th when your airline was singled out for deteriorating service, acknowledged by your spokesman in that article in the Washington Post. And this day just several months later where you say the service is so good.

MR. WOLF: Clearly, an insightful observation which needs a distinct answer. I believe we are in the service business. We do not have a hard product. We do not have a television set or a refrigerator or a widget. We are in the service business. It has been my long held view that if you lose a passenger's bag, he or she only remembers it for the balance of the natural life and tells everybody about it in the world and it is the last thing you want to do.

In 1997 and 1998, having joined the company in the early part of '96, we talked to all of our employees about what we wanted to do going forward. We had a five point business plan amongst that business plan leading to was we were going to become the carrier of choice.

And in 1998 and in 1999 -- excuse me, in 1997 and 1998, we contrasted ourselves monthly to the big four: United, American, Delta and Northwest. And for the entire years of '97 and '98, our composite ranking was number one.

In 1999, we had two significant external events. One, we cut over to an entirely new information technology system. It was the largest one day cutover in the history of the world. And you could not do it piecemeal. It is like going from the left lane to the right lane in the U.K. You cannot do half the cars today and half of them tomorrow.

As much as we put months and months in planning it, it was disruptive. And it was disruptive for some period of time. It effected our departure dependability and other key measurements.

And, two, in 1999, we negotiated ten labor agreements which were significant. And the sum of those two things had a fairly significant impact on our service for calendar year 1999 and in our eyes it was abysmal. Not the worst in the industry, but abysmal.

We are back on track this year. In March of this year, we had the best arrival dependability performance in the history of the company. And our quality this year is back to where it was in 1997 and 1998, but the article is correct. 1999 was most unsatisfactory.

SEN. WYDEN: But, excuse me, sir. In April, your spokesman is acknowledging that you had problems. You just said you corrected it in March.

MR. WOLF: Oh, no, no. I think he is talking about the period of time in which the merger took place we did have. We had significant problems. We had tremendous problems. And we got through it.

SEN. WYDEN: Well, again, I am mystified by so much of what you all in this industry say. And I think this is why passengers are gnashing their teeth at airports across the country. I mean, here I pointed out in April that you are singled out for deteriorating service.

You have given me this explanation about how somehow between April and June, everything seemed to get better. This question about structured fares that Senator Kerry asked, I can tell you passengers are not going to be able to make any sense out of that answer at all. And as you know, there is enormous anger on this fare question.

And I can tell you when the Inspector General puts out his report in a couple of weeks, we are going to see that this industry once again is not being straight with the public on the question of making available the lowest information fare at a time that they have the information.

So I think you heard me say at the beginning I am going to do everything I can to keep Congress from voicing approval for this particular merger until we have looked at all of the implications of this for airline service, heard about copycat mergers and my colleagues talked about that.

I have just a couple of other questions, again reflecting my interest in trying to turn this customer service matter around. Let me begin on this, Mr. Wolf, by saying that if the industry does consolidate further, what does that do to the incentives to put real resources into improving customer service? I mean, with fewer competitors and less competition, where is the pressure to improve service in order to retain customers? You have got them.

MR. WOLF: Senator, I think the industry has a history of making huge capital investments on an annualized basis.

I mean, little U.S. Airways is going to take 58 new aircraft this year. The sticker price on these things are $48 million to $110 million apiece. We pay less than that because we buy in quantity.

We are adding gates in Boston. We are adding gates in Philadelphia. We are doing all the things that we can do to make the shoebox a little tiny bit bigger. Are we doing an adequate job comprehensively? We are doing an absolutely terrible job. During our natural life, the United States of America has built one new airport. And in doing that, it took one out of service simultaneously.

We had a few runways now and then. A little taxiway improvement. And we put some money into ATC. Does any of us think that the air traffic control system is what it should be? And I am not throwing any rocks at them. I am not sure they are even adequately funded.

We were talking a minute ago about some additional gates. I mean, we have to make a massive expenditure in infrastructure to accommodate the traveling public who is going to be knocking on 700 million trips taken by Americans this year. You have the same box that it was ten years ago.

SEN. WYDEN: But if you will excuse me, that is saying it is somebody else's problem. Senator Rockefeller in my view has done extraordinary work in terms of trying to get the funds to improve air traffic control. He has been out on the Senate floor again and again.

My concern is that you all in the private sector are not doing your share and are not following through, particularly in areas like these customer service commitments. We are going to see that when the Inspector General comes in with his reports. I will wait for that.

And I will wrap up by asking you to outline what exactly are the customer service commitments that you all are making as part of this merger? As far as I can tell, we have got something on the table involving fares. Although it is going to take me a while to decipher what your analysis of structured fares mean.

But tell me, if you would, what customer service commitments are being made on this merger specifically.

MR. WOLF: We are making, in the personage of United, the surviving carrier, are making two large commitments. One is not to raise structured fares for a two year period of time. And by the way, if they do that, it means the industry cannot raise structured fares for a two year period of time also. Because no one is going to give us an advantage of a lower fare.

The complexity comes into being, well, what do you do about the sales fares of which there are thousands of them on a daily basis? Well, logically I think it says they are going to continue because we want to fill our seats. And even though we run stronger load factors today than we have in the past, 25 percent of the seats are empty on average every single day. And we want to put somebody in those seats. So we are going to have sales that go on into the indefinite future.

In terms of service, which is your question, we are going to be left with United's service levels, their established corporate levels as to how many seconds you answer telephone reservations, as to whether or not the aircraft did push back within five minutes or not, how many bags are delayed per 100,000 passengers on an annualized basis. How many consumer complaints do you get and continue to report those things to the Department of Transportation?

It is going to be in many ways the consumers from the small cities that we serve rather than connecting the bag onto another airline with two different employee groups involved it will be on one airline.

SEN. WYDEN: I am pretty sure the Inspector General is going to find that delays are increasing and that we have got a serious problem with delays. Are you all making any commitment with respect to delays?

MR. WOLF: If you look at this week, Senator, I mean, our cancellation rate over the past four or five days has been horrendous for air traffic control delays. Our delays are absolutely outrageous which is true of the industry. But it is our responsibility to get the airplane out on time. I am not saying it is anybody else's. The biggest thing we could to correct delays --

SEN. WYDEN: So what are you committing, as part of this merger, to do about it? I mean, I thank you for your candor and I appreciate it.

MR. WOLF: Thank you.

SEN. WYDEN: But I would like to know what is being done to turn this around. I mean, I sat in this committee about a year ago and I got my head handed to me. We had a vote on the passenger bill of rights. It was 19 to 1. And I had all these colleagues that I respect tremendously say that we ought to have some more time. And I got shellacked. I respect all their wisdom and their seniority. But I would like to know what exactly is going to be different. You are acknowledging there is a problem and I appreciate it. But what I am looking for is to actually see something that commits you to doing something about the problems of delays. I think the Inspector General is going to come in again to illustrate the problem of overbooking. He is going to say that people are not being told and we are now finding a new legal distinction between what constitutes something that is overbooked and what is oversold. I am sort of trying to figure out what that means as well. And people still are having trouble figuring out what the lowest fare is. And I do not get the feeling they would be able to understand what was told Senator Kerry about structured fares.

So I am going to let my friend Senator Cleland get his questions. But I wanted to give you one last chance to tell me on any of these areas like delays, like the over booking, are you all making any commitments to deal with what you have even acknowledged this morning is a serious problem. Either of you gentlemen.

MR. GOODWIN: Senator, there are probably no two people, maybe the three of us for sure, that are in the airline industry today that are frustrated by the delays that this industry is now experiencing and putting their customers through. And since deregulation, we have had 125 percent increase in consumers using the domestic air transportation system, 125 percent. As Chairman Wolf just said a minute ago, there has been one new airport constructed in this country.

Secondly, there are 70 percent more departures in the air today than there was 20 years ago, 70 percent. I do not know specifically how many air traffic controllers there are in towers today, but I would suspect that it is nowhere near 70 percent more than there was back in 1980. And I suspect it might even be less in that timeframe.

We are trying in the service business to provide more service in more crowded terminals and more crowded airplanes with an infrastructure that we have neglected for a long time. This Congress, this Committee, the House Transportation Committee worked hard to get Air-21 passed. And for that, this industry is extremely grateful. Those funds are vital for us to begin the process of putting in place an infrastructure that we can even hope to improve our lot in life.

In the interim, what we are faced with is reducing service in order to avoid delays which today is being forced upon us by the system itself. United Airlines has had a thousand flights canceled this year over and above what was canceled last year in the first five months as a result of air traffic delays and weather -- 1,000 more. In the first five months, we have canceled almost three full days of productive product in the marketplace as a result of air traffic and weather. That is a significant impact.

The other thing we as an industry have to do is we need to build more gates. Chairman Leonard mentioned the problem in Minneapolis. That problem exists all over the country. But when we tried to build more gates, we are continually faced with the challenges of getting local communities and local governmental agencies to support those initiatives. People do not necessarily want more gates at airports. They view more gates at airports as more flights, more flights meaning more traffic congestion on the highway, more noise in the sky. But it also brings more competition and better service.

So there are a lot of things we want to do to help. But we are all going to have to work together in order to really truly improve the level of service that our customers deserve in this business.

SEN. WYDEN: I am going to wrap up. I would only say that I do not question for a minute how important it is to deal with these infrastructure issues. And that is why I single out Senator Rockefeller who has been out there on air traffic control and funding kinds of questions.

But I will tell you and you still have not dealt with it today. It is why you fought the passenger bill of rights is that your industry will not commit in an enforceable way to give the consumer objective, straight forward information that you have in your possession and it would simplify their lives and improve their travel choices.

We are not calling for a constitutional right to a fluffy pillow here. We are saying that folks ought to get good objective information. And I hope after the Inspector General gives us this new report your industry will commit to doing your share on this customer service question. And that is to support an enforceable set of protections for the passengers on customer service. And I thank you, Senator.

SEN. ROCKEFELLER: Thank you. Senator Cleland.

SEN. MAX CLELAND (D-GA): I am lobbying for the fluffy pillow. I do not know about anybody else. But let me just thank you gentlemen for coming down and being here. Mr. Goodwin, I appreciate your statement. Just for the record, the solution in terms of infrastructure improvements is to build gates, not Bill Gates.

MR. GOODWIN: Thank you for correct the record, Senator.

SEN. CLELAND: Thank you all for coming. Mr. Leonard.

MR. LEONARD: Yes, sir.

SEN. CLELAND: AirTran has had a very positive impact on air traffic for the consumer in Georgia and Atlanta and the Southeast. I understand you have saved some several hundred million dollars for consumers there and lower air fares in Atlanta.

MR. LEONARD: Yes, sir.

SEN. CLELAND: Would you like to tell us a little bit about that story?

MR. LEONARD: Well, we run a 22 gate complex in Atlanta. We are running about 140 flights a day. We think we will get that up to about 200. But if you take a look at the markets that we go into, fares typically drop 40 to 60 percent. The band increases by 50 percent. So we take people out of cars and off trains and buses and actually provide affordable transportation to people who otherwise would not be able to do it. The net effect of that is about $700 million in savings to the consumer in the Atlanta marketplace.

SEN. CLELAND: That is a powerful impact. Now, tell me a little bit about your belief about the proposed merger of United and U.S. Airways. How would that effect price competition in your opinion?

MR. LEONARD: We believe that the United and U.S. Air merger, the impact will not be significant. We believe there will be slight increase in pricing. But it will not be significant because the top six airlines behave like the top three today and they do not compete on pricing in any event. We believe that if we were able to provide a network system at Washington National, we could bring $600 million of savings to the consumer in that marketplace as well in the first year.

SEN. CLELAND: And that, of course, is what -- and you have testified that the slots being given to D.C. Air under this merger should instead -- the option should be given to other carriers that such a relocation of the slots would have actually far more impact on passengers and fares than the merger itself. Favorably if other carriers were allowed into D.C. National, is that correct?

MR. LEONARD: Yes, sir. We would respectfully disagree with D.C. Air's cost estimates. When we look at a carrier like Com Air, who is the largest regional jet carrier, I believe, in the country, if not the largest, one of the largest, their costs, unit costs, are considerably higher than ours. And they have a huge network.

So -- I cannot explain how somebody would be operating a small number of jets could have cost advantages better than Com Air's. And even if they had costs equal to Com Air's, they would certainly be nowhere close to ours.

We have done an analysis on a 500 mile flight of the $75 fare which is about our average fare. A regional jet would lose about $164 a flight. And we would make about $548 a flight. And that is all wrapped around the size of the airplane and the cost of operating smaller airplanes versus larger ones.

SEN. CLELAND: And you have estimated you can save consumers an additional $600 million with a network at Reagan National. Is that correct?

MR. LEONARD: That is correct.

SEN. CLELAND: Is that because you are using the smaller -- what is it? Boeing 717?

MR. LEONARD: Boeing 717 which is the cleanest airplane in the sky today and also the quietest airplane in the sky today.

SEN. CLELAND: Of course, noise is a big concern at National. Of course, in any neighborhood in America. But you feel that your flying the 717 into National could not only save money, but deal with the noise problem there?

MR. LEONARD: Absolutely. As I said, today it meets all the noise requirements. It is really the quietest airplane on both takeoff and landing certified today, much, much quieter than a CRJ.

SEN. CLELAND: Thank you, very much for those observations. And I thank you very much for your service to Georgia and other parts of the country. Thank you, Mr. Chairman.

MR. LEONARD: Thank you, Senator.

SEN. ROCKEFELLER: I wish to thank all of our panelists for their patience and courtesy. And this hearing is adjourned.

END

LOAD-DATE: June 24, 2000

Document 36 of 110.


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