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Federal Document Clearing House
Congressional Testimony
June 14, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2787 words
HEADLINE:
TESTIMONY June 14, 2000 DR. MARK N. COOPER DIRECTOR OF RESEARCH CONSUMER
FEDERATION OF AMERICA SENATE JUDICIARY ANTITRUST, BUSINESS
RIGHTS AND COMPETITION AIRLINE MERGER
BODY:
TESTIMONY OF DR. MARK N. COOPER DIRECTOR OF
RESEARCH THE PROPOSED UNITED AIRLINES-US AIRWAYS MERGER
ANTITRUST COMMITTEE UNITED STATES SENATE June 14, 2000 Mr. Chairman and Members
of the Committee, My name is Dr. Mark N. Cooper. I am Director of Research for
the Consumer Federation of America (CFA). CFA is the nation s largest consumer
advocacy group. CFA is a non-profit association of some 260 pro-consumer groups,
with a combined membership of 50 million, which was founded in 1968 to advance
the consumer interest through advocacy and education. I greatly appreciate the
opportunity to appear before you today to offer our view of the proposed
United Airlines/US Airways merger. There are some
mergers to which policy makers and the Department of Justice
should just say no! This is one of them. This merger would
reduce competition in an industry that already suffers from a general lack of
competition. It would trigger a round of mergers that would
leave consumers with fewer and fewer choices across the nation. New airlines
would find it harder and harder to enter these more concentrated, integrated
markets that would result. There was a time when airline problems were largely
problems for business travelers, but that has changed. The rapid growth of
personal income over the past decade has made air travel much more common among
residential consumers, in spite of sharply rising ticket prices. As a result,
consumer groups such CFA have become more and more concerned about the failures
of the airline market - poor service and the abuse of market power in a highly
concentrated industry. HORIZONTAL CONCENTRATION WOULD INCREASE IN MANY AIRPORTS
On a market-by-market basis the merger violates the Department
of Justice Merger Guidelines in more than half-a-dozen major
airports including Philadelphia, Dulles, National, Baltimore, Boston, La
Guardia, San Francisco and Orlando. There are numerous other smaller airports
and routes from smaller airports that would also be affected. Whether they are
hubs or not, the loss of head-to-head competition imposes a burden on consumers
by reducing choices and ultimately increasing prices. The empirical evidence in
the airline industry shows that when airports become concentrated or when
competitors are removed from already concentrated airport, prices go up, by as
much as 20 to 40 percent. Econometric studies of market structure have
consistently shown that concentration on routes, at airports, and in the
industry at large are associated with higher fares (see Table 1). Analysis of
specific events -- entry, exit and mergers -- confirms these
findings. Similarly, estimates of the elimination or addition of one competitor
have been made. The average traveler has few, if any choices, and they would
become fewer if this merger and the ones in its wake are
approved. Generally, we find that most routes have fewer than four carriers.
National average concentration ratios (Hirshman- Herfindahl Index or HHI)
typically are in the very high range. Measured at airports the HHI is in the
range of 3300 -- the equivalent of three airlines per airport. Measured by city
pairs, the HHI is closer to 5000 -- the equivalent of two per route. Given such
a high level of concentration, we should not be surprised to find that
anti-competitive behavior and changes in market structure have a significant
impact on fares. Exercising market power is easy in such highly concentrated
markets. Market power is evidence both by higher prices wherever it exists and
miserable service. Since they do not face effective competition, they do not
feel compelled to improve quality. Flowing from this basic observation, we find
support for a number of traditional observations about public policy. Actual
competition is vastly more important than the threat of competition. Barriers to
entry play a critical role in determining the level and nature of competition.
Mergers tend to reduce competition, increase prices and lower
output. FORTRESS HUBS AND IMPENETRABLE NETWORKS The geographic extension that
United is seeking and the denser network that the merger would
create make it less and less likely that competitors will be able to attack
these markets. As all such airline networks do, it would lock travelers in by
concentrating their flow through fortress hubs, coordinating scheduling at those
hubs, and binding them with frequent flier and other promotional programs. As
travelers fall more and more under the control of one airline, the ability of
new entrants to crack markets is reduced, as it become harder and harder to
attract passengers to flight segments. The necessary scale of entry gets larger
and larger. The centerpiece of industry structure in the deregulated environment
-- the hub and spoke network -- is a constant source of public policy concern.
Part of the complexity of the analysis stems from the fact that the
characteristics of hubs that appear to confer market power are both positive and
negative. Just as competition can create efficiencies so too can hub and spoke
networks. Unfortunately, in practice, the positive economic advantages of hub
and spoke networks have been immediately leverage with and overwhelmed by
anti-competitive actions to increase and exploit market power by incumbents
dominating hubs. Incumbents create barriers to entry by locking in customers and
disadvantaging competitors in a variety of ways. Traffic is diverted to the
dominant incumbents through a number of marketing mechanisms that extends market
power over travelers. These include frequent flier programs, deals with travel
agents to divert traffic, manipulation of computerized reservation systems, code
sharing, and general policies of market segmentation. The ability of competitors
to enter hubs is undermined in a number of ways. Access to facilities is impeded
through a number of mechanisms that preclude or raise the cost of entry. These
mechanisms include denial of gate space, extraction of excess profits on
facilities, and the inability of entrants to attract adequate passengers to
establish a presence. Having gained this advantage, the incumbents can raise
price, without risking entry. Prices at hubs are higher. Profits at hubs are
higher. Studies that try to decompose the market power associated with specific
practices -- hubbing, manipulation of computerized reservations systems,
frequent flier programs -- also reach similar conclusions (see Table 1). A
CASCADE OF CONCENTRATION This merger will trigger a movement
from fortress hubs to fortress regions. We have already heard reports of
retaliatory mergers that would organize the country into core
regions where largely captive customers are funneled into national networks. The
inconvenience and, in many cases, the impossibility of inter- airline travel,
give the originating airline enhanced market power over the traveler. Industry
structure has become sufficiently concentrated to raise a fundamental question
about whether market forces are sufficient to prevent the abuse of market power.
Both at individual hubs and in the industry as a whole, markets have or would
become highly concentrated. Attorney s General from 25 states filed comments in
support of the Department of Transportation s anti-predation rule which
identified 15 airports at which the dominant firm had a market share in excess
of 70 percent (see Table 2). This is the standard generally applied to indicate
monopoly status. This is not a small airport problem. Six of the ten busiest
airports in the country are on the list. Over one-third of all passenger
enplanements took place at these airports. Moreover, the monopolized airports
are building blocks of potential national market power through concentration of
the national industry. For example, major pending
merger/alliances or those being discussed in the wake of the
proposed United/US Air merger include five of the nations
busiest airports and eleven fortress hubs. PROPOSED FIXES ARE INADEQUATE
Recognizing the severe problems that this merger faces, the
merging parties have offered a series of largely meaningless Band- Aids to try
to patch over the fundamental problem. First, the new giant airline promises not
to raise ticket prices for two years. This is largely useless, since the airline
can easily increase its yield by reducing the number of discounted seats
available. With the immense increase in market power up and down the East Coast
that will be a readily available strategy. Moreover, what happens after two
years. The damage to competition will be permanent, not temporary. Second, they
have proposed to carve out a new airline at National airport. This addresses
only one market and not in a very effective manner. The airline simply cannot
provide meaningful competition. The airline is largely a commuter airline, with
turboprops. Its jets will be leased from United, which will make it difficult,
if not impossible to compete on price. The airline s primary assets will be
valuable landing slots and gates that will be fungible in three years. What
happens after that? The damage to competition will be permanent, not temporary.
Third, we hear vague promises about extremely long haul, continental and
international routes that might support non-stop or direct flights if the merged
company could render the traveler captive. CONCLUSION The bottom line is clear.
Temporary freezes, feeble spin-offs and a few long distance flights cannot make
up for the massive increase in concentration that will result from this
merger. With two decades of econometric evidence about
competitive problems at the levels of structure, conduct and performance
reinforced by detailed analysis of recent events, one can only hope that the
public policy debate will not revert to the irrelevant question of whether
deregulation served the consumer interest. The trigger for public policy concern
is, as it has always should have been, whether anticompetitive practices are
hurting consumers. By every measure, the airlines are failing that test at
present. Allowing a merger wave to further concentrate the
industry would further diminish the competitive forces in the industry and is
not in the public interest.
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