testimony

Before the U.S. House of Representatives Transportation and Infrastructure Committee

Regarding The United Airlines – US Airways Combination

June 15, 2000

Mr. Chairman and Members of the Committee, my name is Kevin Mitchell.  I am chairman of the Business Travel Coalition (BTC), which represents the business travel interests of major corporate buyers of air transport services, as well as 21,000 independent business travelers who are members of the Commercial Travelers Association.

BTC is opposed to the combination of United Airlines and US Airways.  Since the proposed transaction was announced on May 24, BTC has been surveying large buyers of airline services to secure their views regarding the potentially profound impact of this development on the long-term cost structure of business travel activities.  Attached is a supplemental BTC document that outlines forty-eight issues and questions raised by this monumental industry development.

Some corporate buyers perceive potential benefits associated with this transaction.  For example, buyers in the Boston market would have access to United’s large domestic network.  Likewise, smaller companies in the Northeast with travel volumes to the West Coast that are presently insufficient to qualify for a discount with United may now enjoy a discount with the combined airline.  Clearly, the expanded frequent flyer program will also be attractive to the individual traveler.

However, in a BTC survey this week of 172 veteran corporate buyers of air transportation services, only 17 percent supported the buyout.  Some 61 percent were opposed, and 22 percent said they needed additional information prior to taking a position. 

Members of the Committee, there are numerous potential short-term negative consequences associated with this buyout.  The huge costs of integrating these firms will likely be indirectly financed by business travelers in cities like Rochester, Pittsburgh, Charlotte and other captive markets where the new mega airline will be able to extract supra premium airfares. 

Moreover, customer service problems will likely be serious if experience from previous mergers such as Northwest and Republic, or US Air and Piedmont have taught us anything.  Finally, the resulting network will be over hubbed, and consequently, many mid-size communities will undoubtedly lose non-stop service, or find service degraded to important business centers.

As serious as the short-term implications are, customers who oppose this combination are most concerned with its potential long-term negative outcomes.  It is assumed by most experienced corporate purchasers, that as a consequence of fewer competitors, business airfares will climb above current record levels.  It is likewise believed by most industry observers that should the United Airlines–US Airways transaction be approved, that the industry’s top ten airlines will collapse to three superpower carriers, and Southwest Airlines. 

BTC disputes the last portion of this assumption.  Believing that Southwest is golden, that Southwest will continue to compete as an independent firm, and as the champion of deregulation, is a dangerous assumption that needs to be reconsidered in light of the potential collapse of the industry to a few superpower airlines.

It is true that heretofore major airlines have responded to Southwest’s entry into a market in a rational manner with respect to pricing and capacity.  Losing millions of dollars attempting to run Southwest from a market is an irrational strategy--as almost guaranteed failure prevents the investment in such a strategy from being recouped. 

Alternatively, major airlines have responded to Southwest with Shuttle By United, Delta Express and MetroJet further extending the reach and positive impact of Southwest Airlines in a deregulated industry.  These innovations, and attendant consumer benefits, are at risk of being scaled back in the short term and abandoned altogether in the long term, e.g. MetroJet at Baltimore Washington International Airport (BWI).

However, if major airlines were forced to respect Southwest in terms of pricing and capacity policies, they developed other fronts from which to mount attacks on Southwest.  For example, knowledgeable observers state that US Airways and other major airlines hold onto unused gates at BWI and other airports to prevent Southwest’s optimal expansion.  Similarly it has been charged that gates are often leased without an intended use to keep them out of the hands of Southwest.  Can there be positive outcomes with a much larger single airline controlling even greater assets at these airports?

Of deep concern is that a combined United–US Airways, along with the other resulting airline behemoths, will possess massive new resources of all manner--political, financial, airport facilities, network scale and scope, code sharing and strategically targeted frequent flyer, commission override and exclusive corporate discount programs--to attack Southwest on multiple fronts all at once. 

No longer might strategies to run Southwest from markets be considered irrational.  Such strategies of predation could succeed and greatly slow Southwest’s expansion-- even weakening the low-fare pioneer to a point where it is acquired, voluntarily or involuntarily.  What would happen to the legacy of deregulation in an industry controlled by three superpower airlines--without Southwest Airlines’ overarching disciplining presence?

Significantly, if three superpower network carriers could inflict this type of harm on Southwest, the survival of current and prospective low-fare new entrants must be seriously, seriously questioned.  Just at a time in the history of U.S. deregulation when new entry is needed more than ever, it will become exceedingly more difficult for startups to secure financial backing and to compete.  

Mr. Chairman the risks of an industry consolidation on this scale to competition, consumers, communities and corporations are indeed great.  However, a few industry participants justify the risks by questioning whether US Airways is financially viable as a standalone firm given its high costs.  But there are other relevant questions to be asked.

If the transaction is not approved, and if US Airways were to go out of business, how long would it likely take for existing competitors to replace it in the marketplace?  What is the probability of a US Airways business failure?  What would be the likely economic impact of a US Airways failure?

Indeed, Alfred Kahn, and other proponents of deregulation, argued that inefficient carriers would simply go out of business and their assets would be acquired by efficient carriers who could offer a better, less costly product to consumers. 

At issue with this proposed transaction is that one inefficient airline (United) is acquiring another ultra-inefficient airline (US Airways) to create a mega airline that will have high labor costs, huge overhead and multiple congested hubs, but that will also have overwhelming market and pricing power that can crush smaller more efficient competition.

BTC believes that consumers would be better off if US Airways would be required by the marketplace to either fix its cost problem or leave the field of play through liquidation or bankruptcy.  In other words, the “failing carrier doctrine” that leads to the approval of a merger on the basis that it would save a failing airline should be abandoned.  To save US Airways in the short run, only to lose Southwest in the long run, would represent the ultimate expression of unintended consequences in air transport public policy.

Likewise, this airline combination is justified by some with the argument that the airline industry is largely a network-based one, where in order to make the network viable, more and more revenue must be flowed through it.  Thus, it is posited that there is a “natural” tendency toward consolidation of traffic feeds and networks.  Well, by logical extension, it could then be argued that perhaps instead of three mega carriers the right number is two, or even one.  Indeed, the very discussion of an airline industry controlled by just a few firms seems so surreal that it suggests other United Airlines’ motives.

In January 1998 Northwest and Continental airlines announced an alliance, which DOJ is currently suing to undo.  That announcement quickly led to alliance proposals by United and Delta, and American and US Airways.  The atmosphere in Washington then regarding concerns over competition levels in U.S. commercial air transport effectively restricted ties among these latter airline partners to joint frequent flyer and airport club programs.

The prospect of virtually the entire U.S. airline market ultimately falling under the control of just three firms could make the alliance proposals of 1998 appear like an attractive compromise which could be advanced by United’s allies as a “breakthrough” solution.  For United such a result would represent a triumph, and one that it may indeed be attempting to engineer as evidenced by the very low breakup fee of some $50 million dollars. 1

Industry conditions and carrier behaviors that in 1998 made unacceptable a scenario in which three superpower network alliances would dominate the U.S. airline marketplace, have not changed.  In fact, that DOT has not transmitted its proposed Competition Guidelines to Congress has only deepened concerns over competition.  The collapse of the airline industry to three mega networks--either by out right acquisitions or by deeply integrated alliances--would be an outcome of ominous consequence. 

Major airlines often point to the aircraft manufacturing industry where just two firms dominate--Airbus and Boeing--to dispel concerns over competition levels resulting from fewer competitors.  However, either Airbus or Boeing can meet nearly all the needs of a customer seeking to purchase airplanes.  Consequently, there is robust price competition and price variation in the marketplace, and innovative contract terms and conditions in that industry. 

In contrast, no one airline can meet all the needs of its corporate customers, so, negotiating leverage is greatly diminished vis-à-vis customers of the aircraft manufacturing industry.  Indeed, in many cases there is only one real competitive airline choice for business travelers.  Thus, what is relevant is choice in individual city-pair markets.  Further industry consolidation will likely lead to many more monopolized city-pair markets.  In an industry already marching in near competitive lockstep with regard to pricing decisions, this would not represent a pro competitive result.

Mr. Chairman, and Members of the Committee, the United–US Airways development unequivocally confirms the intention of some airlines to radically consolidate the industry.  This should represent a clarion call--were one required--that new entry must become the number one public policy priority with respect to competition in air transport.  To this end, BTC urges this Committee to: 1) seek transmission from DOT of its finalized Competition Guidelines; and 2) request that DOT immediately implement the Guidelines, perhaps with Congressionally authorized increases to DOT’s authority.

Thank you for your interest in the views of the customer of the air transportation industry.