Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
June 21, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 5374 words
HEADLINE:
TESTIMONY June 21, 2000 NANCY MCFADDEN GENERAL COUNSEL US DEPARTMENT OF
TRANSPORTATION SENATE COMMERCE, SCIENCE AND TRANSPORTATION
UNITED ARLINES - US AIRWAY MERGER
BODY:
June 21, 2000 STATEMENT OF NANCY E. McFADDEN
GENERAL COUNSEL U.S. DEPARTMENT OF TRANSPORTATION before the COMMITTEE ON
COMMERCE, SCIENCE, AND TRANSPORTATION Mr. Chairman, Ranking Member Hollings, and
Members of the Committee: I appreciate the opportunity to come before the
Committee to discuss the state of airline competition and to describe the
Department of Transportation's role in reviewing airline
mergers and acquisitions. The hearing today is precipitated by
the announcement by United Airlines and US Airways of a major
merger proposal. On behalf of Secretary Slater, I want to
assure the Committee that we will maintain our commitment to preserving airline
competition in order to ensure that consumers through the United States continue
to benefit from airline deregulation, and that this proposed transaction, indeed
any major transaction, will be thoroughly examined by the Department of
Transportation with the goal of preserving competition in the airline industry.
We cannot, of course, discuss the specifics of any individual transaction.
However, we understand the Committee's great interest in this matter, and so I
would like to describe generally how the Department examines any such
transaction. My testimony today will cover three subjects: some background to
the current state of competition in the airline industry, the Department's role
in reviewing airline mergers and acquisitions, and the factors
that we will look at in analyzing a merger or acquisition. The
structure of the airline business today reflects Congress' decision to
deregulate the industry in 1978. Congress correctly determined that the public
would obtain better service and fares if airlines had to respond to consumer
demands and competition. Congress therefore phased out the economic regulatory
regime that had long authorized the Civil Aeronautics Board to dictate where
airlines could fly and what they could charge. In responding to market demands
and the need to improve their efficiency, airlines literally reshaped their
point-to-point route systems into hub-and-spoke systems. Hub-and-spoke systems
enable airlines to serve the maximum number of city-pair markets with a minimum
number of airplanes and to maximize traffic flow by consolidating connecting
passengers with different destinations on each flight. Operating at a hub
creates service advantages for many travelers, since it gives travelers at hub
cities many more flights and enables airlines to offer more service in markets
that do not have enough traffic to sustain non- stop service. On the other hand,
an airline operating a hub gains such great competitive advantages on the spoke
routes at its hub that other airlines without a hub at one end point of such a
spoke route find it hard to compete with the hubbing airline. The resulting lack
of competition in many hub routes usually causes fares in hub markets to be
higher than fares in comparable non- hub markets. Another development in the
first years after deregulation was new entry--quite a few firms entered the
airline business (or began interstate service for the first time). Relatively
few survived the 1980's, but one of those that did--Southwest, Airlines--has
since expanded its low-fare operating strategy throughout most of the country .
Two other entrants of that era-America West and Midwest Express--are also
operating successfully today. The 1980's saw a wave of airline
mergers. At that time, federal law still required all such
transactions to obtain the prior approval of the Department of Transportation.
The Department approved almost all of the merger proposals
submitted to it before the complete phasing-in of deregulation ended the
Department's approval authority over airline mergers and
acquisitions. Since the end of 1988, the Department of justice has been
responsible for determining whether mergers and acquisitions in
the airline business should be challenged as anticompetitive. In the 1990's,
airlines developed new strategies for delivering their services. They viewed the
ability to offer a broader network of services as critical. This led to the
creation of alliances in both domestic and international markets that included
code-sharing arrangements and frequent flyer program reciprocity. The
development of international alliances has been part of the larger process of
globalization. Responding to this increasing globalization, the Clinton-Gore
Administration has worked hard to open up international markets to competition
and entry by U.S. airlines. In the last seven and one-half years, the United
States has reached open skies agreements with forty-six countries that allow any
U.S. airline to serve points in those countries from any U.S. point and to set
fares free of government regulation. As a result of these successful efforts, we
have seen the development of global airline alliances that have promoted
competition in thousands of city-pair markets throughout the world. More
recently, major U.S. airlines began forming alliances with one another. In 1998,
United planned an alliance with Delta, Northwest with Continental, and American
with US Airways. These domestic alliances were different from
the international alliances. The latter usually created new networks by linking
route systems of U.S. and foreign airlines on an end-to-end basis and involved
airlines that could not enter each other's domestic markets due to the
constraints of bilateral aviation agreements. The alliances between U.S.
airlines, on the other hand, involved airlines that already had the authority to
enter any domestic market. These alliances were potentially more problematic. In
the face of these proposed domestic alliances, Congress enacted legislation
requiring the major airlines to submit to the Department of Transportation any
joint venture agreements between them that covered frequent flyer programs,
code-sharing, and wet leases. The Department has used that authority to obtain
modifications that eliminated potentially anticompetitive features in joint
venture agreements. In addition, the Justice Department filed suit against
Northwest's acquisition of the major block of Continental stock. The other two
alliances - the United/ Delta and American/ US Airways
alliances - have not gone beyond frequent flyer reciprocity arrangements and
provisions for the reciprocal access to airport executive lounges. In the
1990's, we also saw increased focus on the value of new airline entrants,
especially their presence in dominated-hub markets, and the difficulties faced
by those new entrant carriers. This Committee has spent much time over the past
few years looking into airline competition and impediments to new entry. You
have addressed this issue most recently in several pro- competition provisions
in AIR-21, the FAA reauthorization act signed into law in April of this year. As
you know, for example, the bill included a provision that airports dominated by
one or two carriers must file a competition plan with the Department before
raising passenger facility charges. And the DOT has taken a number of steps to
promote competition and protect against anticompetitive practices. For example,
the Department has focused on the possibility that the joint travel website
being created by five major airlines might operate in a way that may reduce
competition in the airline industry and the airline distribution business. The
Committee has also had questions about the website and intends to hold a hearing
on the subject. The Department has begun a study of the website firm, Orbitz,
originally called T2, and recently asked Orbitz to provide detailed information
on its organizational and operational plans and to provide copies of relevant
documents. As a result of all these developments, we have an industry that, for
the most part, has proven deregulation to be a success. But deregulation can
only be successful for the consumers it was meant to benefit if there is
adequate competition in the airline industry. That is why close scrutiny of the
proposed merger between United and US Airways
is critical for the country's airline travelers. I paint this backdrop to give a
sense of the state of airline competition, but also to make two points. First,
we have learned a lot about the airline industry over the past 15 years from
these developments. We simply have a greater understanding of how airlines act
and react in a deregulated environment. And second, the Justice Department and
the Department of Transportation, particularly over the past seven and a half
years, have shown the ability and will to work to preserve airline competition,
often working hand in hand with Congress. We will bring to bear, as we closely
scrutinize any proposed merger, the experience and expertise we
have honed over the past 15-20 years, as well as the will and ability to act to
preserve competition. Let me now address the role the Department of
Transportation plays in the review of airline mergers and
acquisitions. Both the Department of justice and the Department of
Transportation have responsibilities for reviewing the proposed transaction
between United and US Airways. The Justice Department is
responsible for enforcing the antitrust laws and determining whether
mergers and acquisitions in the airline industry should be
challenged on competitive grounds. The statute now governing airline
mergers, section 7 of the Clayton Act, prohibits
mergers and acquisitions that may substantially lessen
competition in any relevant market or tend to create a monopoly. The Department
of Transportation will conduct its own analysis of the merger
and submit its views and any relevant information in its possession to the
Justice Department, as we have done in past cases. This process is confidential.
We have asked United and US Airways to provide us all the
information necessary to thoroughly analyze the transaction. In doing that
analysis, we will also rely on the fare and traffic data periodically reported
to us by the airlines. In addition, the Department has separate regulatory
authority and must grant its approval before some parts of the transaction may
go forward. First, the parties have announced plans to spin off most of
US Airways' operations at Washington Reagan National Airport to
a new airline. This new airline must obtain economic operating authority from
the Department as well as safety authority from the FAA. In determining whether
to grant economic operating authority, we will determine whether the firm is
"fit, willing, and able" to perform air transportation and comply with
applicable legal requirements. In making fitness determinations, we review an
airline's financial resources, managerial capabilities, and compliance
disposition. The FAA, under its safety authority, conducts a separate,
comprehensive safety fitness analysis of the new carrier before issuing the Air
Carrier Certificate and Operations Specifications. Second, the proposed
acquisition will also involve the transfer of US Airways'
international route authority in some limited- entry markets. Here too, the
Department must first approve the transfer of US Airways'
certificate authority, under 49 U.S.C. 41105. We may approve a transfer only if
we find that it is consistent with the public interest. The Department by
statute must specifically consider the transfer's impact on the viability of the
parties to the transaction, on competition in the domestic airline industry, and
on the trade position of the United States in the international air
transportation market. The Department will also examine any other public
interest issue raised by the transfer. The Department will only decide whether
to approve the transfer of the international route authority after it has
established a formal record and given all interested persons the opportunity to
comment on the proposed transfer. The Department's discussions with the Justice
Department on the overall merger will include a discussion of
the competitive effects of the transfer of US Airways'
international routes. If the Department determines that the transfer would be
contrary to the public interest on competitive grounds or for another reason,
the Department may disapprove the transfer in whole or part. Alternatively, the
Department may condition its approval on requirements that would protect the
public interest. Third, the Department additionally has the obligation to
protect consumers from unfair and deceptive practices by airlines. In carrying
out that responsibility, we will review the merger's
arrangements to protect the rights of consumers. For example, the
merger may well affect the existing reciprocity benefits
available to members of the United and US Airways frequent
flyer programs. We will look at whether the airlines will give consumers
reasonable notice and an opportunity to adjust to any changes in such programs.
If we find that the provisions in their frequent flyer agreements fail to
provide adequate notice and an opportunity to obtain award travel, we will ask
the airlines to modify the agreements. Accordingly, we have asked United and
US Airways to provide us with their relevant frequent flyer
program reciprocity agreements, and their plans for accommodating their members
concerning any potential changes-, Finally, I would like to outline the factors
we will consider in our competitive analysis of the proposed United/ US
Airways merger. We will be looking at the merger's
likely impact on competition in all relevant markets. We will examine such
issues as whether the acquisition will substantially reduce competition in
relevant markets because other airlines either do not offer effective
competition now or will be unlikely to enter if United raises fares or reduces
service. A key question will be whether the proposed spin-off of US
Airways' operations at Reagan National to DC Air will create an
effective competitor in the Washington, D.C. markets affected by the
merger. The relevant markets include city-pair markets, both
those served by the parties with nonstop flights and those served with
connecting flights. In examining the markets affected by the
merger, we may well consider flights operated by United from
one airport in the same metropolitan area as competing with flights operated by
US Airways from a different airport in the same area. If a
significant number of travelers strongly prefer to use one airport, the relevant
markets may also include routes between specific airports. In analyzing whether
entry by other airlines into markets served by the combined airlines is likely,
the Department will examine whether the combined market share of the merging
airlines will become large enough at individual cities to discourage entry by
other airlines. We must also consider whether airport facilities will be
available to airlines wishing to enter markets served by United and US
Airways. We will additionally investigate whether the relatively large
size of the airline created by combining United and US Airways
will make entry into the industry by new airlines more difficult. We will also
examine the potential competitive reactions of other airlines. Looking at the
merger's competitive effects will carry out Congress' judgment
that market forces, not government regulators, should determine the routes flown
by airlines and the fares charged by airlines. But market forces will enable
consumers to obtain the best service at the best price only as long as the
airline industry is competitive. Members of Congress and local communities have
understandably expressed concern about whether the service now provided by
US Airways win be maintained after its acquisition by United.
For example, some communities have questioned whether they will continue to have
access to nonstop flights to Reagan National. We cannot directly answer these
questions, since we cannot predict United's long-term plans for operating the
combined business, and we have no way to guarantee that United or DC Air would
maintain existing levels of service. Nor can we know whether other
airlines--existing or new--might choose to inaugurate new services to these
communities. Under deregulation, each airline decides for itself which routes it
will fly and what fares it will charge. However, together with the Justice
Department, we will seek to ensure that the proposed merger
does not diminish competition and prevent other airlines from entering and
competing in markets where United may reduce service or raise fares. The key
question in determining whether the United/ US Airways
acquisition will lead to better or worse service and fares for consumers is
whether the combined airline will face competition and therefore must meet the
demands of consumers. The Justice Department will address that question by
applying the antitrust laws. We at the Department of Transportation will provide
the Justice Department with the results of our own analysis of that question.
Because of the Committee's long-standing interest in airline consumer protection
issues, I would like to provide a brief status report on some of the actions the
Department has already taken to implement the passenger rights provisions
contained in AIR-21, the Wendell H. Ford Aviation Investment and Reform Act for
the 21st Century. For example - - We have notified foreign carriers of their new
obligations under the law to comply with the Air Carrier Access Act. - We issued
rules to implement the new smoking prohibitions that apply, for the first time,
to foreign carriers flying to and from the U.S. - We have notified all U.S. and
foreign carriers of their new statutory obligations to add additional assurances
for survivors and families of victims of aircraft accidents in airline family
assistance plans on file with DOT and the NTSB. - We have implemented procedures
to enable us to investigate each Air Carrier Access Act complaint received by
DOT. We will be meeting shortly with the Justice Department, National Council on
Disability, and the Access Board to develop an outreach plan to provide
information and technical assistance to air carriers and members of the
disability community regarding Air Carrier Access Act requirements. - An
advisory committee will soon be established to assist us in complying with the
AIR-21 provision requiring the reporting of the nature and causes of flight
delays. - In the next month or two, we will begin to report complaints regarding
the death, injury and loss of animals in air transportation as a separate
category in our monthly Air Travel Consumer Report. -We have already reported to
Congress on the filing of voluntary customer service plans by the Air Transport
Association carriers. I would also note that, before AIR-21 was signed into law,
we had doubled the minimum baggage liability limit imposed on domestic carriers
and had begun to list Air Carrier Access Act complaints separately in our Air
Travel Consumer Report. We will continue to treat airline consumer protection
issues, in general, and the implementation of the AIR-21 mandated passenger
rights provisions, in particular, with the highest priority. I must point out to
the Committee, however, that without the additional funding provided by AIR-21
for consumer protection compliance and enforcement activities, the benefits to
passengers of AIR-21 will largely be lost. Notably, the Senate-passed
appropriations bill for the Department contains no additional funds for airline
consumer protection activities, and the House-passed bill contains only an
additional $300,000 for this purpose, far short of the $1.4 million requested by
the Administration. We hope that this Committee will work to ensure the needed
funding in the upcoming fiscal year. In conclusion, I wish to reaffirm our
commitment to ensuring that consumers throughout the United States continue to
benefit from airline deregulation. That will require us to continue our efforts
to promote airline competition. The need to ensure competition will both guide
our review of the United/US Airways transaction and guarantee
that we will carefully examine its potential impact, and it will underpin the
use of our other economic regulatory authority over the airline industry. Thank
you Mr. Chairman. This completes my prepared statement, and I would be pleased
to respond to your questions and those of the Committee.
LOAD-DATE: July 3, 2000, Monday
