07-15-2000

TRANSPORTATION: Transportation: Giants on Land and in the Air

It's usually one of the last things passengers hear after their plane
touches down. "We realize you have a choice when selecting air
carriers, and we'd like to thank you for choosing our airline."
Indeed, the 1978 deregulation of the airline industry has spawned a wide
array of choices: United, American,


Continental, Delta, Northwest, Trans World, US Airways, America West,
Southwest, AirTran, Jet Blue, Legend, Midway, Alaska-and the list goes
on.


But because of today's corporate-merger mania, some observers predict that
the long list of airlines might be reduced to just three. There are
similar worries that further consolidation of the railroad industry might
result in just two jumbo rail companies. Call them the Big Three and the
Titanic Two. While members of Congress and other analysts express concerns
about ending up with only a handful of gigantic transportation companies,
the possibility doesn't trouble several transportation economists and
industry analysts. "Big by itself isn't necessarily bad," said
Steven Morrison, an economist at Northeastern University in Boston.
"Big can be good."


In May, United Airlines announced that it would purchase US Airways in a
deal costing more than $11 billion. The logic behind the merger is to give
United, a Chicago-based carrier, a stronger presence in the East. If
approved by regulators at the Justice Department, the merger would make
United-already the nation's largest airline-even bigger. It would have
145,000 employees; 6,500 flights a day to 560 worldwide destinations; and
estimated annual revenues of more than $25 billion.


Some members of Congress and advocates for increased airline competition
have expressed concerns about the merger. They argue that it would create
a behemoth of a company, one about twice the size of the next-largest
airline, American. They also say it could lead to higher fares and worse
service. In fact, in 1998, the Justice Department sued Northwest over the
airline's purchase of stock in Continental because of similar worries. To
answer these concerns, United has promised to freeze its airfares for two
years and to spin off a new airline, DC Air, which would compete with
United on the East Coast.


But perhaps the biggest worry about the United-US Airways merger is that
as carriers struggle to compete with the new giant, more consolidation
will become inevitable. Observers speculate that Delta might be forced to
combine with Continental, while American might be forced to merge with
Northwest-thus forming the new Big Three. Critics of the United-US Airways
merger point out that this scenario could produce a considerable amount of
turbulence for travelers. "Most of us would never have voted for
deregulation if we thought it would mean only three major carriers,"
said Rep. James L. Oberstar, D-Minn., the ranking member of the House
Transportation and Infrastructure Committee.


Over the past couple of years, Americans have complained about poor air
service, higher airfares (particularly in small and midsized communities),
airports dominated by one airline, and predatory practices against
low-fare upstarts. Congress has held numerous hearings and has considered
legislation to remedy these problems. Having only three major airlines
would exacerbate these troubles, argue opponents of the United-US Airways
merger. With less competition, they say, airlines would have more power to
set higher fares.


In addition, some merger opponents predict that consolidations in the
airline industry could lead to the demise of Southwest Airlines, which is
the nation's most successful low-fare carrier. Industry analysts say
Southwest is one of the reasons that airfares are lower in some cities
than in others. Whenever Southwest enters a market, ticket prices plummet.
Kevin P. Mitchell, chairman of the Business Travel Coalition, which
opposes the United-US Airways merger, contends that a Big Three could
conspire to destroy Southwest. "A combined United-US Airways, and the
other resulting mega-airlines, will possess massive new resources of all
manner ... to attack Southwest on all fronts at once," he said.
"What would happen to the legacy of deregulation in an industry
controlled by three superpowers-without Southwest Airlines' disciplining
presence?"


But others aren't so worried about the idea of a Big Three dominating air
travel. Kenneth J. Button, an economist at George Mason University, notes
that the major carriers have created regional monopolies by concentrating
their business at hub airports. Northwest has a chokehold on Minneapolis
and Detroit, American dominates much of the Southwest region, Delta
controls the Southeast, while United has a large presence in Chicago and
Denver. The Big Three, Button argues, would actually provide more
competition because the three colossal airlines would be competing against
one another across the entire United States, instead of staking claims to
regional territories.


Moreover, as Northeastern University's Morrison points out, the major
airlines really don't compete on price; rather, they compete for business
travelers who need reliable service and frequency. As a result, he says,
consolidation of the major airlines into the Big Three wouldn't
necessarily result in higher fares for consumers.


And it's hard to believe that the Big Three would drive Southwest Airlines
out of business, says David S. Stempler, president of the Air Travelers
Association. He explains that with the lowest cost structure in the
industry, excellent labor relations, and superb managerial decisions,
Southwest has been successful operating underneath the legs of the major
airlines. "Even if the giants get bigger, it's easier to run through
their legs."


Indeed, Stempler believes that if regulators approve the United-US Airways
merger, this country will end up with a two-tier airline industry: the Big
Three at the top (providing nationwide and international service) and
low-fare carriers such as Southwest Airlines at the bottom (catering to
those who want to fly inexpensively). "I think that would be fine if
we ended up with that," he said.


As with the United-US Airways merger, there are fears that a recently
proposed merger between the Burlington Northern Santa Fe Corp. and the
Canadian National Railway Co. could spur additional consolidation in the
railroad industry, and could possibly lead to the creation of two giant
transcontinental rail companies. According to Diane C. Duff, the executive
director of the Alliance for Rail Competition, the number of major
railroad companies has dwindled from 42 to four over the past 20 years.
Early on, Duff said, the mergers made the industry more efficient by
eliminating weaker companies and unnecessary routes. But she now believes
that the merger frenzy has gone too far, noting that at least 30 percent
of all shippers are held captive to service by just one railroad.


Duff also says that recent mergers have created inefficiencies. For
example, the 1996 merger between the Union Pacific Railroad Co. and the
Southern Pacific Railroad Co. caused a service meltdown. Congestion got
worse, trains slowed down, and cargo was lost. (Service has since been
restored to premerger levels.)


"The mergers are not helping the customers," said Ed Mortimer,
the director of government affairs at the Transportation Intermediaries
Association. "They have resulted in less competition, service that
has gone amok, and no price reliability anywhere."


For airline consumers, Mortimer contends, a Big Three is much more
appealing than the railroad version of the Titanic Two, because of the
availability of low-fare alternatives in the airline industry. "There
is still going to be Southwest Airlines out there. There is always going
to be a market for them." But in the rail industry, he says, there's
no equivalent to Southwest Airlines.


Realizing the significance that the latest proposed merger might have on
the industry, the Surface Transportation Board, which regulates the
railroads, announced in March a 15-month moratorium on mergers, including
the one involving the Burlington Northern Santa Fe. "What we have
seen in the past is one merger leads to another," said the STB's
chairwoman, Linda J. Morgan. "It is very possible that we are heading
in the direction of two transcontinental railroads, and so we need to have
rules in place to make sure that we assess [that] dynamic."


The Burlington Northern Santa Fe has filed a lawsuit in the D.C. Circuit
Court of Appeals against the STB's action, and Burlington officials argue
that its merger with the Canadian National Railway will benefit consumers
by giving shippers access to new markets and creating a more efficient use
of resources. To make this case, Burlington spokesman Richard Russack
notes that the merger between the Burlington Northern and the Santa Fe
railroads (approved in 1995) has lowered shipping prices. "Everybody
won," Russack says. "The shippers won because they end up with
access to markets they never had before."


Regulators at the Justice Department and the STB are certainly aware of
the possibility of a transportation industry with only three major
airlines and two railroads, and they're proceeding with caution.
"We're going into what could be the final round [of mergers],"
said the STB's Morgan. "That is a big step."


Mark Murray

National Journal