Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
July 10, 2000, Monday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2520 words
COMMITTEE:
SENATE JUDICIARY
SUBCOMMITTEE:
ANTITRUST, BUSINESS RIGHTS AND COMPETITION
HEADLINE:
TESTIMONY UNITED AIRLINES--U.S. AIRWAYS MERGER
TESTIMONY-BY: LOWELL J. TAYLOR , PROFESSOR OF ECONOMICS
AFFILIATION: H. JOHN HEINZ III SCHOOL OF PUBLIC AND
MANAGEMENT CARNEGIE MELLON UNIVERSITY
BODY:
July
10, 2000 Statement of LOWELL J. TAYLOR Professor of Economics H. John Heinz III
School of Public Policy and Management Carnegie Mellon University Before the
Judiciary Subcommittee on Antitrust, Business Rights, and Competition Chairman
Spector, Senator Santorum, and other distinguished Committee Members and
visitors, I am pleased to appear before you today to discuss implications of the
proposed merger of United and US Airways.
Officials from these two airlines have emphasized the potential value of this
merger for Pittsburgh's air travelers. US
Airways has a comprehensive north-south network in the East, with
Pittsburgh as a major hub anchoring this system. The proposed
merger would link this network to United's extensive system of
east-west routes, which features hubs in the Midwest and the West as well as
numerous transcontinental routes. The merger would also link
Pittsburgh to United's substantial international network. Air travelers from
Pittsburgh would enjoy, for example, single-carrier one-stop service to such
Asia/Pacific destinations as Shanghai, Osaka, Seoul and Sydney, and to such
Latin American cities as Caracas, Rio de Janeiro, Sao Paulo, and Buenos Aires.
Although there may indeed be considerable value to Pittsburgh in being a key hub
in such a nationally and internationally prominent airline, there are certain
aspects of the proposed merger that should make Pittsburgh
residents nervous. Indeed the merger might be a step in the
wrong direction for value-conscious consumers in Western Pennsylvania-consumers
who already on average pay considerably more for airfares than consumers in
other major cities. A little background is perhaps helpful. Prior to the
enactment of the Airline Deregulation Act of 1978, prices in the airline
industry were regulated by the Civil Aeronautics Board (CAB). Studies show that
deregulation caused a large decline in the fares paid by our nation's air
travelers, as well as an increase in the frequency of flights on many routes.
One unexpected consequence of deregulation was the emergence of an efficient new
business model, the "hub and spoke" system. Airlines typically consolidated
their operations at a relatively small number of airports, forming "hubs" which
serve a large number of "spo routes. A hub carrier transports local passengers
(those originating at the hub) along with connecting passengers (those
originating at spoke cities) on the same flights. This design allows airlines to
offer greater frequency of service with a given fleet of aircraft. The
efficiency of the hub and spoke system reduces the cost of air travel and
increases convenience. Passengers at hub cities like Pittsburgh particularly
benefit from being able to obtain nonstop service to many cities. A major
drawback of the spoke and hub system, however, is that when a hub carrier
dominates spoke routes it can use its market power to drive up prices. Travelers
who regularly fly out of Pittsburgh, for example, often complain that they seem
to pay higher fares than those who fly out of other airports. Recent evidence
provides some support to this perception. In the third quarter of 1999, the
passengers departing from Pittsburgh to a major US destination flew an average
of 882 miles, paying an average of $205 each way for their flights. Table 1
provides comparison prices for cities from which passengers flew similar average
distances (within 30 miles of Pittsburgh's average). The average fare on
Pittsburgh's flights stands out as the highest among the comparison cities.
Average Fares on Top Routes: Cities with Average Passenger Distance Similar to
Pittsburgh, Third Quarter 1999 All Charts and graphics are found on hard copy
only Data are for the third quarter 1999 for markets with 100,000 or more
passengers, and are restricted to city-pair markets in the top 1,000 in the 48
continental states. The cities listed include all cities within 30 miles of
Pittsburgh's average passenger distance. Source: US Department of
Transportation, "Domestic Airline Fares Consumer Report: Third Quarter 1999
Passenger and Fare Information," May 2000. Almost certainly the relatively high
fares to and from Pittsburgh are related to the extraordinarily high market
share that US Airways holds in our market. Studies of the US
airline industry show that for almost all route distances passengers pay higher
fares when the origin or destination is the carrier's major hub. Quite simply,
airlines charge higher fares on hub routes where they typically face less
competition. Additional evidence concerning prices Pittsburghers pay for air
travel can be found examining specific routes. Of the 1000 most heavily traveled
air routes in the continental US, 24 routes are in and out of Pittsburgh.
US Airways is the dominant carrier in 20 of those 24 routes,
and is a major player in the other four. Table 2 provides recent data on fares
for these routes. (It is important to note that these fares are averages that
include business travelers, economy class, etc.) The table so provides
comparison fares-the median of fares typically charged by the largest carrier on
similar-distance flights between major cities across the country. Market and
Fare Information for Top Pittsburgh Routes, Third Quarter 1999 All charts and
graphics are found on hard copy -Indicates that US Airways is
the largest carrier for this city- pair. The table includes all major city-pairs
(top 1000) that include Pittsburgh. The "median fare from comparable markets" is
e median fare for the largest carrier flying from city-pairs that are in the
same distance range as the listed flight. Source is the same as for Table 1. For
convenience of discussion, I have somewhat arbitrarily categorized the major
destinations by region: Eastern Destinations. US Airways
dominates air travel out of Pittsburgh on the busiest routes to Eastern
destinations, controlling 71 to 98 percent of the market to these destinations.
The average one-way fare paid by travelers for these relatively short-distance
flights were far higher than the median fares paid by consumers flying with the
dominant airline on similar-distance flights from other cities across the
country. Destinations in the Midwest and South. US Airways is
less dominant on flights to the Midwest and Atlanta. Still, US
Airways fares were higher than median on four of the five routes.
Importantly, though, US Airways fares were actually lower than
the major competition on three routes where another airline is the largest
carrier. Florida. The data listed are for the third quarter of the
year-off-season for the Florida tourist market. Over this period US
Airways fares were very competitive compared to similar-distance
routes. Southwest and West. US Airways fares were at or below
the median in five of the eight major routes to the Southwest and West. Although
US Airways generally has the highest market share to these
destinations, the carrier is not as dominant in these routes as in the East.
Here is an important question Pittsburghers should ask about the effects on
fares of the proposed United/US Airways merger: Will the new
larger airline, which will have far greater strength than (the current)
US Airways in routes to the Midwest and West, use that market
power to raise fares? Given evidence from careful studies of airline
pricing-that market power generally translates into higher prices-and given the
more anecdotal evidence presented here, price-conscious travelers should indeed
be concerned. The Antitrust Division of the Justice Department will no doubt be
carefully examining the effect of the proposed merger on the
competitiveness of routes across the country. I hope that is so doing they are
careful to focus on Pittsburgh specifically, where the new larger airline would
hold even greater market power than is currently held by US
Airways. The new airline would presumably continue to dominate major
Eastern routes to and from Pittsburgh- where fares are already appear high. In
addition, the new airline would have increased strength in other routes in and
out of Pittsburgh. James Goodwin, Chairman and CEO of United
Airlines has indicated that the merging airlines have "taken great care
to proactively identify and remedy what we thought might be an issue for
regulators"-the increased strength of operations at the highly visible Reagan
National Airport in our nation's capitol. In particular, the airlines are
"voluntarily divesting" some of US Airway's operations out of
Reagan National, selling these assets to a new carrier. Perhaps the airlines can
be persuaded to implement a similar plan to bring increased competition to air
travel in the somewhat less visible Pittsburgh. I would like to conclude by
reiterating that the proposed merger does hold potential
benefits to Western Pennsylvania's air travelers. If United and US
Airways merge, Pittsburgh will be a major hub in a large national and
international network, with an increase in convenient service to many
destinations. In general our nation's consumers gain when firms pursue efficient
business strategies. In the absence of pro-active steps to increase competition,
though, the merger is likely to increase market power in the
Pittsburgh market. And this would be a blow to price- conscious travelers who
already pay unusually higher fares.
LOAD-DATE: August
22, 2000, Tuesday 
