[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE PROPOSED
UNITED-CONTINENTAL MERGER:
POTENTIAL EFFECTS FOR CONSUMERS AND INDUSTRY
=======================================================================
(111-120)
HEARING
BEFORE THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
JUNE 16, 2010
----------
Printed for the use of the
Committee on Transportation and Infrastructure
THE PROPOSED
UNITED-CONTINENTAL MERGER:
POTENTIAL EFFECTS FOR CONSUMERS AND INDUSTRY
=======================================================================
(111-120)
HEARING
BEFORE THE
SUBCOMMITTEE ON
AVIATION
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
June 16, 2010
__________
Printed for the use of the
Committee on Transportation and Infrastructure
U.S. GOVERNMENT PRINTING OFFICE
57-059 PDF WASHINGTON : 2010
-----------------------------------------------------------------------
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia VERNON J. EHLERS, Michigan
JERROLD NADLER, New York FRANK A. LoBIONDO, New Jersey
CORRINE BROWN, Florida JERRY MORAN, Kansas
BOB FILNER, California GARY G. MILLER, California
EDDIE BERNICE JOHNSON, Texas HENRY E. BROWN, Jr., South
GENE TAYLOR, Mississippi Carolina
ELIJAH E. CUMMINGS, Maryland TIMOTHY V. JOHNSON, Illinois
LEONARD L. BOSWELL, Iowa TODD RUSSELL PLATTS, Pennsylvania
TIM HOLDEN, Pennsylvania SAM GRAVES, Missouri
BRIAN BAIRD, Washington BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington JOHN BOOZMAN, Arkansas
MICHAEL E. CAPUANO, Massachusetts SHELLEY MOORE CAPITO, West
TIMOTHY H. BISHOP, New York Virginia
MICHAEL H. MICHAUD, Maine JIM GERLACH, Pennsylvania
RUSS CARNAHAN, Missouri MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania JEAN SCHMIDT, Ohio
TIMOTHY J. WALZ, Minnesota CANDICE S. MILLER, Michigan
HEATH SHULER, North Carolina MARY FALLIN, Oklahoma
MICHAEL A. ARCURI, New York VERN BUCHANAN, Florida
HARRY E. MITCHELL, Arizona BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY, Pennsylvania ANH ``JOSEPH'' CAO, Louisiana
JOHN J. HALL, New York AARON SCHOCK, Illinois
STEVE KAGEN, Wisconsin PETE OLSON, Texas
STEVE COHEN, Tennessee TOM GRAVES, Georgia
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
SOLOMON P. ORTIZ, Texas
PHIL HARE, Illinois
JOHN A. BOCCIERI, Ohio
MARK H. SCHAUER, Michigan
BETSY MARKEY, Colorado
MICHAEL E. McMAHON, New York
THOMAS S. P. PERRIELLO, Virginia
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico
JOHN GARAMENDI, California
HANK JOHNSON, Georgia
(ii)
Subcommittee on Aviation
JERRY F. COSTELLO, Illinois, Chairman
RUSS CARNAHAN, Missouri THOMAS E. PETRI, Wisconsin
PARKER GRIFFITH, Alabama HOWARD COBLE, North Carolina
MICHAEL E. McMAHON, New York JOHN J. DUNCAN, Jr., Tennessee
PETER A. DeFAZIO, Oregon VERNON J. EHLERS, Michigan
ELEANOR HOLMES NORTON, District of FRANK A. LoBIONDO, New Jersey
Columbia JERRY MORAN, Kansas
BOB FILNER, California SAM GRAVES, Missouri
EDDIE BERNICE JOHNSON, Texas JOHN BOOZMAN, Arkansas
LEONARD L. BOSWELL, Iowa SHELLEY MOORE CAPITO, West
TIM HOLDEN, Pennsylvania Virginia
MICHAEL E. CAPUANO, Massachusetts JIM GERLACH, Pennsylvania
DANIEL LIPINSKI, Illinois CHARLES W. DENT, Pennsylvania
MAZIE K. HIRONO, Hawaii CONNIE MACK, Florida
HARRY E. MITCHELL, Arizona LYNN A. WESTMORELAND, Georgia
JOHN J. HALL, New York JEAN SCHMIDT, Ohio
STEVE COHEN, Tennessee MARY FALLIN, Oklahoma
LAURA A. RICHARDSON, California VERN BUCHANAN, Florida
JOHN A. BOCCIERI, Ohio, Vice Chair BRETT GUTHRIE, Kentucky
NICK J. RAHALL, II, West Virginia
CORRINE BROWN, Florida
ELIJAH E. CUMMINGS, Maryland
JASON ALTMIRE, Pennsylvania
SOLOMON P. ORTIZ, Texas
MARK H. SCHAUER, Michigan
JOHN GARAMENDI, California
JAMES L. OBERSTAR, Minnesota
(Ex Officio)
(iii)
CONTENTS
Page
Summary of Subject Matter........................................ vii
TESTIMONY
Foer, Albert A., President, The American Antitrust Institute..... 111
Friend, Patricia, International President, Association of Flight
Attendants-CWA................................................. 111
Gutierrez, Hon. Luis V., a Representative in Congress from the
State of Illinois.............................................. 33
Horan, Hubert, Aviation Analyst and Consultant................... 111
Kucinich, Hon. Dennis J., a Representative in Congress from the
State of Ohio.................................................. 36
Mcgee, William, Consultant on Travel and Aviation Issues,
Consumers Union................................................ 111
Morse, Captain Wendy, Chairman, United Master Executive Council,
Air Line Pilots Association.................................... 111
Payne, Hon. Donald M., a Representative in Congress from the
State of New Jersey............................................ 34
Pierce, Captain Jay, Chairman, Continental Master Executive
Council, Air Line Pilots Association........................... 111
Roach, Jr., Robert, General Vice President of Transportation,
International Association of Machinists and Aerospace Workers.. 111
Smisek, Jeffrey, Chairman, President, and Cheif Executive
Officer, Continental Airlines.................................. 39
Strine, David, Portfolio Manager, Impala Asset Management, LLC... 111
Tilton, Glenn F., Chairman, President, and Chief Executive
Officer, United Airlines Corporation........................... 39
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Carnahan, Hon. Russ, of Missouri................................. 140
Cohen, Hon. Steve, of Tennessee.................................. 141
Costello, Hon. Jerry F., of Illinois............................. 142
Johnson, Hon. Eddie Bernice, of Texas............................ 148
Mitchell, Hon. Harry, of Arizona................................. 152
Oberstar, Hon. James L., of Minnesota............................ 153
Petri, Hon. Thomas E., of Wisconsin.............................. 158
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Foer, Albert A................................................... 191
Friend, Patricia................................................. 201
Gutierrez, Hon. Luis V........................................... 216
Horan, Hubert.................................................... 217
Kucinich, Hon. Dennis J.......................................... 234
Mcgee, William................................................... 242
Morse, Captain Wendy............................................. 246
Payne, Hon. Donald M............................................. 248
Pierce, Captain Jay.............................................. 250
Roach, Jr., Robert............................................... 252
Smisek, Jeffrey and Tilton, Glenn F.............................. 270
Strine, David.................................................... 282
SUBMISSIONS FOR THE RECORD
Coble, Hon. Howard, a Representative in Congress from the State
of North Carolina:.............................................
Letters in support of the merger........................... 173
Table listing all received letters of support.............. 166
Costello, Hon. Jerry F., a Representative in Congress from the
State of Illinois:.............................................
Letter from the Department of Justice...................... 3
Letters in support of the merger........................... 6
Hirono, Hon. Mazie K., a Representative in Congress from the
State of Hawaii, letters in support of the merger.............. 83
LoBiondo, Hon. Frank A., a Representative in Congress from the
State of New Jersey, letters in support of the merger.......... 50
Petri, Hon. Thomas E., a Representative in Congress from the
State of Wisconsin, letters in support of the merger........... 29
Smisek, Jeffrey, Chairman, President, and Cheif Executive
Officer, Continental Airlines, response to request for
information from Hon. Garamendi, a Representative in Congress
from the State of California................................... 102
ADDITIONS TO THE RECORD
International Brotherhood of Teamsters, Airline Division, Captain
David Bourne, Director, written testimony...................... 290
Virgin America Inc., David Cush, Predsident and Cheif Executive
Officer, written testimony..................................... 294
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
THE PROPOSED UNITED-CONTINENTAL MERGER: POSSIBLE EFFECTS FOR CONSUMERS
AND THE INDUSTRY
----------
Wednesday, June 16, 2010
House of Representatives,
Subcommittee on Aviation,
Committee on Transportation and Infrastructure,
Washington, DC.
The Subcommittee met, pursuant to call, at 9:30 a.m., in
room 2167, Rayburn House Office Building, Hon. Jerry F.
Costello [Chairman of the Subcommittee] presiding.
Mr. Costello. The Subcommittee will come to order. The
Chair will ask that all Members, staff and everyone turn all
electronic devices off or on vibrate.
The Subcommittee is meeting today to receive testimony
regarding the proposed United-Continental merger and the
possible effects for consumers and the industry. I intend to
give a very brief opening statement and put the rest of my
statement in the record. And then I will call on Mr. Petri for
his opening statement. And then we will go immediately to our
first panel, the Members panel.
I welcome everyone today to the Aviation Subcommittee
hearing on the proposed merger between United Airlines and
Continental Airlines and its potential effects for consumers
and the industry. In particular, I want to welcome the families
of Colgan Flight 3407 for being with us today and for their
steadfast support to improve pilot training and safety in the
industry.
Given that we have several panels today, I will be brief
with my statement and ask Mr. Petri to do the same so that we
can go to our first panel.
Last month, United and Continental announced they would
merge to form an airline that by several measures will be the
largest airline in the world. United and Continental claim the
proposed merger will generate up to $1.2 billion in annual
revenue and will create cost synergies for more effective
aircraft utilization, a more comprehensive route network, and
improved operation efficiencies.
In 2008 this Subcommittee also held a hearing on the merger
of Delta Airlines and Northwest Airlines. At that time there
was speculation that other carriers within the industry would
merge to create a U.S. airline industry dominated by just a few
mega-carriers.
Just 2 years later, as many predicted, we are meeting here
again today to discuss another proposed combination that would
surpass Delta as the world's largest. This merger would leave
our U.S. Industry with only four legacy airlines. We all have a
shared interest in maintaining a safe, reliable, competitive,
and profitable air transportation system, and we must ask
critical questions on the long-term implications of continued
mergers for the future of the industry.
I am very concerned about how this merger, if approved,
will affect ticket prices for passengers, how the merger will
affect pilots, flight attendants, mechanics and employees of
both airlines, how many employees will lose their jobs or
receive reduced benefits and wages, and what will happen with
existing union contracts.
Less competition generally leads to higher prices, fewer
choices, and a loss of jobs. I sympathize with the thousands of
airline employees who have suffered as a result of airline
financial problems in the past. Many have seen their hard-
earned pensions drop during airline bankruptcies, seniority
rights disappear, labor disputes go unresolved, wages frozen or
cut, d jobs lost to outsourcing and consolidation.
This merger should not take place at the expense of
consumers or the workers who have already made tremendous
sacrifices. Unfortunately, past mergers have not always
demonstrated that consumers and employees will be better served
by consolidation.
Therefore, what I want to learn from this hearing is,
number one, how is this proposed merger different from past
mergers? And number two, how will this merger really affect
consumers and employees?
Currently, both the Department of Justice and the
Department of Transportation are in the process of reviewing
the merger. I understand that United and Continental are
hopeful a decision will be made by the end of the year.
Although we do not have a government panel testifying here
today, I trust that the appropriate Federal agencies will make
certain that this proposed merger receives a thorough review
and will ensure that it is consistent with the requirements of
the law.
Finally, I am interested in hearing from the analysts on
our second panel regarding the pros and cons of this merger,
the prospects for future mergers, and whether low-cost carriers
will be able to effectively keep airfares down in markets
affected by the merger.
Before I recognize Mr. Petri for his opening statement or
remarks, I ask unanimous consent to allow 2 weeks for all
Members to revise and extend their remarks and to permit the
submission of additional statements and materials by Members
and witnesses. Without objection, so ordered.
Additionally, at my request, the Department of Justice has
prepared a letter explaining its antitrust review process in
general. The letter does not deal with this specific merger,
but it may be helpful to Members of the Subcommittee in
understanding the process. In addition, we have received
letters from organizations concerning this specific merger. And
I will ask unanimous consent that these letters be placed into
the record. Without objection, so ordered.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Costello. The Chair now recognizes Mr. Petri for his
opening statement.
Mr. Petri. Mr. Chairman, thank you for holding this very
important hearing. It is important that the Subcommittee use
this hearing to fully explore the proposed United-Continental
merger in order to gauge not just its potential effects on both
companies, and their thousands of employees, but even, more
importantly, on consumers.
Since 2001 the airline industry has lost over 150,000 jobs
and seen over 35 bankruptcies. In today's economy airlines must
significantly cut costs and increase operating efficiency or
face closing their doors.
Over the past decade commercial aviation industry has faced
a variety of challenges, including terrorist attacks, volatile
fuel prices, and a massive decline in demand due to the global
recession. Unprecedented events such as SARS, H1N1 and the
volcanic ash plume also have added to the industry's woes.
In addition to these financial strains, U.S. carriers must
also compete in the world marketplace against financially
strong competitors; some, national champions. We cannot deny
that the airline industry is a global industry. Decisions to
merge over the last few years have in part been driven by the
need to improve U.S. Carriers' ability to compete on a global
basis.
Last month United Airlines and Continental Airlines
announced their intention to merge. Global competition, the
struggling economy, and a need to improve operating efficiency
are cited as the main reasons for this. Since the proposed
merger was announced, aviation experts, labor groups, consumer
advocates and other interested parties have commented both for
and against airline mergers in general and the United-
Continental merger specifically.
The proposed merger's impact on consumers, competition in
the marketplace, air service, airfares, and a combined 89,000
employees has been the subject of a great deal of speculation.
Today we have before us representatives of the interested
groups to testify about airline consolidations, focusing on the
United-Continental merger. We will also hear from the chief
executive officers of both airlines. It is important that the
Aviation Subcommittee hear from the interested parties to gain
a better understanding of the proposed merger of United and
Continental.
Procedurally, the merger cannot be completed, as our
Chairman has just pointed out, without approval from the
antitrust division of the Department of Justice. That review,
currently underway for the proposed merger, is a grueling and
thorough process that ensures that the proposal will not have
negative consequences on competition.
In the interest of fairness, I urge the Department to
continue their tradition of objectivity and impartiality as
they conduct their antitrust analysis.
I look forward to hearing from all of our witnesses. And
before I yield back the balance of my time, I would ask
unanimous consent that letters of support from various
Wisconsin interests be included in the hearing record.
Mr. Costello. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Costello. The Chair thanks the Ranking Member for his
opening statement, and now recognizes our first panel, our
colleagues: The Honorable Luis Gutierrez, who is a Member of
Congress from the Fourth District of Illinois; Mr. Donald
Payne, who is the Member of Congress representing the Tenth
District of New Jersey; and Congressman Dennis Kucinich, who is
on his way, who represents the Tenth District of Ohio.
Gentlemen, your full statements will appear in the record.
The Chair now recognizes Congressman Gutierrez.
TESTIMONY OF THE HON. LUIS V. GUTIERREZ, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Gutierrez. Thank you, Chairman Costello and Ranking
Member Petri and the distinguished colleagues of the Committee.
Thank you for inviting me to speak before the Committee on the
proposed merger of United and Continental Airlines.
While this merger has generally been greeted with
enthusiasm, I believe we should not overlook the potential
serious impact it could have on consumers and the employees.
For consumers, the issues of airline fees, which we all know
cover just about everything except the air you breathe on board
those airplanes, requires further scrutiny.
In 2009, United and Continental Airlines made $523 million
in baggage fees alone. Recently, United announced that its
passenger unit revenue was up almost 25 percent from a year ago
and topped pre-recession levels. Given this good news for
United, I believe it is a good time to review the fairness and
the necessity of excessive fees.
The airline industry reported $1.2 billion in 1 year in
extra fees last year. They are almost as out of whack as the
credit card industry is. I also want to ensure that lower
customers of frequent flyer programs have easy access to their
rewards without being misled by the airlines. After receiving
complaints from residents in my district, I began to look at
the fine print on these highly promoted programs, which are a
significant source of revenue for the airlines. Unfortunately,
I find they lack reliability, honesty, and fairness. If you
read the fine print you will find, as I did, airlines can deny
a ticket, change the terms of the awards, charge a fee, and
even eliminate the program at will. Congress must stand up for
consumers and protect their interests in the frequent flyer
mile program.
I am also deeply concerned with the impact this merger will
have on United and Continental employees. To keep these
airlines in business, workers have made serious concessions,
and their requests deserve consideration.
Last week I met with United and Continental employees in
Chicago, and I heard from Christie Shagel, a United Airlines
flight attendant. She shared with me the following, and I
quote, Today I am at work 33 percent more, but my savings
account is depleted. I am forced to sell my town home, I can't
afford a health-care deductible or meat at the grocery store.
My family has suffered so United Airlines could succeed, and
executives have awarded themselves with millions of dollars
every year that we have struggled for, unquote.
I also heard from Richard Petrowski, a union shop foreman
and a 40-year United Airlines employee. He shared with us,
quote, In the past few years, as so many airlines have cut
wages and benefits, they realized they could also save money by
cutting maintenance jobs and contracting out critical aircraft
maintenance to the lowest bidder. I am not talking about
changing a light bulb in the laboratory, I am talking about
critical maintenance, work that if not held to the highest
standard puts you, your family and my fellow United employees
at risk.
United Captain Herb Hunter told me, From an industry
perspective, perhaps the greatest concern of this Nation's
airline pilots is the continued outsourcing of pilots' jobs.
Nearly half the passengers in the United States are now
carried, most unknowingly, by subcontract airlines. The
subcontractors are in a continual churn to sell their services
to the major airlines at the lowest possible cost, violating,
many times, safety guidelines.
I think United and Continental have said far too little
about how this merger will actually affect their frontline
employees. We do know, however--and this is something that
causes me great consternation, Mr. Chairman, Members of the
Committee--we do know, however, that the merger might affect a
few employees like the chief marketing financial and operations
officer for Continental Airlines. They stand to receive a
severance package totaling $27 million if they choose not to
move to Chicago and join the new United.
To put this in perspective, $27 million would be a 10
percent pay raise for each of United's flight attendants, and
it would be well deserved.
Before Congress gives this merger a stamp of approval, I
strongly believe that United and Continental need to bring
their employees to the table and consider their request. In
addition, these airlines need to make a commitment to reduce
ancillary fees and better protect their loyal customers.
I thank you for allowing me to speak, and end by saying we
can stand up for the consumers, we can stand up for the 40,000
employees at United and Continental. They deserve us to stand
up for them today.
Thank you so much, Mr. Chairman.
Mr. Costello. The Chair thanks my friend from Illinois for
his thoughtful testimony.
The Chair now recognizes the gentleman from New Jersey, Mr.
Payne.
TESTIMONY OF THE HON. DONALD M. PAYNE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Payne. Thank you very much Mr. Chairman, Ranking Member
Petri, distinguished Members of the Committee. Thank you for
this opportunity for me to testify, and also it is great to be
with my colleague here. Generally we are 100 percent on the
same page. I think that this page might be a little tilted in
the other direction at this time.
However, we are certainly here today to discuss the
proposed merger of United and Continental Airlines. Continental
Airlines is the largest employer in my city of Newark. I am
here today to offer my support for this proposed merger. As a
general policy, though, I am generally concerned about mergers
because, in instances, it does mean significant reductions in
jobs, stifling competition, and some of the other situations
that we heard the previous speaker talk about. However, this
airline merger is different, in my opinion.
These two airlines have very complementary routes with very
little overlap. When there is very little overlap, there is no
need for significant reduction of employees. This is a fact
that Continental's CEO has confirmed to me and the other
Members of the New Jersey delegation. I know that Continental
has lost $1 billion since the 9/11 attack. And I know that the
employees have lost jobs and have been forced to accept wage
reductions and made other sacrifices during this time. This is
not good for the many Continental employees who live in my
district.
However, the airline industry has also struggled with the
high price of oil and with the impact of the 2008 recession. I
have met with Continental's CEO Jeff Smisek to discuss this
merger. And it has been made clear to me and Members of the New
Jersey delegation that without the merger, Continental cannot
be assured of a long and prosperous future. They may be able to
earn a modest profit for some years, but that is not a formula
for long-term success if they are losing money in the other
years. Continental seems determined to try to turn their
fortunes around through this merger. I have talked to Jeff and
we expect Continental to bring its more favorable labor-
management relations culture to the new airline, as I have
encouraged him to complete the necessary collective bargaining
agreements early in the process. I trust that he will conduct
those negotiations with all the unions with dignity and
respect.
The unions will be critical to the long-term success of
this merger. Employees' wages, retirement securities, and
health benefits must be a top priority for the new combined
carrier.
It is comforting to know that Continental has fully
respected the decisions of their employees to organize.
Although it was a hard fought battle, in February of 2010
Continental's ramp workers made history when ballots were
counted and the results showed that an overwhelming majority of
the workers voted to join the Teamsters Union. This was a
strong testament to the fact that fleet service workers at
Continental are working to help create an environment that will
sustain positive relationships between Continental and its
workers who choose to unionize.
I believe this merger is good for my city of Newark, and
for New Jersey, because it will allow for growth of jobs and
service. Continental's hub in Newark is a crown jewel. It is a
premier domestic and international gateway to the New York and
New Jersey region; the Nation's, of course, busiest financial
hub.
The Newark International Airport has been one of the
fastest growing airports during the past two decades, thanks to
Continental. Without a doubt, the city of Newark and the State
of New Jersey have benefited from the airline's presence. Over
the years Continental has not only made significant investments
in infrastructure at Newark International Airport, but the
airline's leadership has successfully worked with local
government to establish job creation programs and promote other
important growth initiatives in the State.
Just this summer, there are nearly 75 young people
benefiting from a summer internship program that allows them to
learn valuable customer service skills as they spend each day
working the crowds at the ticket counter.
I have a long history of supporting Continental because
they have a long history of supporting Newark and New Jersey.
Newark is on the verge of a renaissance, and Continental is
really one of the reasons for that. They have opened new routes
to South America, Europe, China and Japan. While I have served
in Congress, the additional new routes have really enhanced the
airport.
We have increased use of our airport by business to leisure
passengers from around the country and around the world. And
more importantly, we have increased jobs, jobs that come with
good benefits from both part-time and full-time employees.
As a Member of Congress and as a Member of the House
Foreign Relations Committee, I travel the world to carry out my
responsibilities, I see the other global carriers that
Continental must compete with. And as much as Continental has
changed and grown in the last decade, they need to be bigger if
they are going to compete with British airline Iberia and KLM,
combined with Air France.
I realize that Chairman Oberstar and some of my colleagues
may not agree about the benefits of this merger, but from my
vantage point, given the current challenging economic
landscape, the proposed merger between Continental and United
is the best way to ensure sustainability for the airline
industry for jobs in our region and to compete with the world
carriers.
So with that, Mr. Chairman, I appreciate the opportunity to
testify before this Subcommittee.
Mr. Costello. The Chair thanks our colleague and friend
from New Jersey.
The Chair now recognizes the gentleman from Ohio, Mr.
Kucinich.
TESTIMONY OF THE HON. DENNIS J. KUCINICH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Mr. Kucinich. Thank you very much, Chairman Costello and
Members of the Subcommittee. Thanks for this invitation to
testify on the proposed merger of United Airlines and
Continental Airlines.
In hindsight it is easy to see that the merger is a
culmination of Continental's efforts over the past 2 years to
integrate its operation with United. But a year ago,
Continental was insisting that it did not need to merge;
rather, the company pursued antitrust immunity to join United
and 20 other airlines in the far-reaching Star Marketing
Alliance, and United and other airlines in the Atlantic, plus a
joint venture for trans-Atlantic travel.
Over the strenuous objections of the Department of Justice
which speared substantial consumer harm, Continental received
antitrust immunity and now can engage in flight code sharing,
coordinate reservations and frequent flyer plans, and under the
joint venture can even share revenues. Now Continental and
United are back, pursuing a merger they said last year was not
necessary.
When last month the proposed merger was announced, and at
the request of the mayor of Cleveland, I directed staff of the
Domestic Policy Subcommittee of the House Oversight and
Government Reform Committee, which I chair, to investigate its
legal and policy implications. In addition to the significant
antitrust concerns, which I will briefly outline here, we found
the troubling possibility that Continental may not have been
completely forthright with Congress and regulators with respect
to its marketing alliance and joint venture last year or the
proposed merger before us today.
Yesterday I sent a document request to Continental that is
directly relevant to significant concerns produced by the
inquiry, and discussed below, regarding the legality of the
proposed merger under section 7 of the Clayton Act and the
Horizontal Merger Guidelines, the merger's advisability as a
matter of policy, and the veracity of Continental's and
United's representations regarding the merger's purposes and
likely effects.
When Continental pursued antitrust immunity for its
marketing alliance and joint venture, key stakeholders
concluded that the alliance was in lieu of a full-blown merger.
Senator John Cornyn stated last month at a Senate Judiciary
Subcommittee hearing that Continental officials informed him
that the alliance and joint venture was an attractive
alternative to Continental merging with United. Continental had
explained to Senator Cornyn that a merger ``wasn't in the best
interest of shareholders, employees or the communities
Continental serves''; antitrust immunity for the alliance and
joint venture ``would provide much of the benefit of a merger
without the labor integration and financial risk''; and,
``Houston and Cleveland would be some of the biggest losers in
terms of jobs'' in the event of a merger.
Senator Cornyn and others wrote the Department of
Transportation supporting antitrust immunity on the grounds
that it was preferable to a full-scale merger between
Continental and United that could lead to flight reduction and
job losses. Yet only one year later, after receiving government
support for its entry into a marketing alliance, Continental is
now pursuing a merger.
Is Continental's change in business strategy just a
coincidence? I find that hard to believe. It is more likely
that this was their plan all along. Their apparent willingness
to make whatever representations necessary to garner support
for its plan cast doubt on both Continental's stated
motivations for the present merger and its intended postmerger
conduct.
Continental and United have stated they have no present
plans to close hubs or reduce services but, instead, plan to
moderately decrease overhead costs and more substantially
realize between $800 million and $900 million of revenue gains
by more effectively routing network customers through hubs for
more profitable business and international flights and more
efficiently deploying New United's larger fleet. Not
surprisingly, Continental does not list cutting flights or
raising fares as a means to revenue growth.
Market observers, including some who support the merger,
take a different view. First, they doubt the magnitude of the
merger specific efficiencies. A substantial portion of the
claimed network efficiency may have already been realized by
Continental joining United in the Star ATI and the A++ joint
venture. Moreover, analysts point out that the purported cost
and revenue synergies of the past airline mergers have almost
never materialized. And, despite the theoretical ability of
low-cost and regional carriers to enter markets exited by
merging airlines, service cuts and loss of hubs have been a
common consequence. Most analysts flatly predict that my city,
Cleveland, would lose its hub and the communities formerly
served by hub will not be supplied either New United service
out of surviving hubs or low-cost carriers entering the market.
Perhaps more troubling is the way industry analysts believe
new United may increase its profitability by eliminating up to
10 percent of its post-merger capacity and in raising fares.
According to many merger supporters, the industry's tens of
billions of dollars of losses since deregulation are largely a
product of destructive competition among airlines that has led
to overcapacity and artificially low prices. The New United and
the industry in general would profit from the decreased number
of market participants in efforts to reduce capacity and raise
fares.
While sustained profitability for our domestic airline
industry is important, Mr. Chairman, I don't believe that
destructive competition is the cause of the industry's ills,
and fear that as a remedy consolidation may well be worse than
the disease.
First, increased fares and declines in service are
prototypical examples of the adverse competitive effects of
exercise of market power. Revenue gains based on these
practices are not merger-related efficiencies under the law.
Second, it is possible that if any efficiency gains do
materialize, they will be realized through the Star Alliance
and the A++ joint venture. DOJ should carefully analyze the
efficiencies from the alliance and joint venture and whether
its fears regarding the possible anticompetitive effect of
those immunized arrangements have materialized before it even
considers approval of a full-pledged merger.
In addition, there are a number of other possibilities for
anticompetitive behavior that could be exacerbated by further
industry consolidation, such as the merger of American Airlines
and U.S. Airways that is predicted to occur if United and
Continental merge. Others include increased market power
negotiations with bulk-buying business clients, increased
leverage to force concessions from vendors, travel agents, and
even localities which may feel more pressure to provide
publicly funded infrastructure and facilities.
Finally, the size of the new United could raise the
prospect of systemic importance if not systemic risk to the
economy. Even if the new United is not officially considered,
quote, too-big-to-fail, unquote, it would certainly be big
enough to exert increased power over regulators.
If the current financial crisis has taught us anything it
is the difficulty in predicting ex ante the myriad ways in
which immense and concentrated corporate entities can leverage
their corporate power to the detriment of citizens.
Mr. Chairman, Assistant Attorney General Christine Varney
has explained that the administration's pursuit of vigorous
antitrust enforcement in this challenging era will involve the
development of competition policy based not simply on the case
before it, but on consideration of, ``the overall state of
competition in the industries which we are reviewing''
including consideration of market trends and dynamics, and not
lose sight of the broader impact of antitrust enforcement. It
will be important, Mr. Chairman, for this Subcommittee to hold
the administration to that promise. While traditional antitrust
enforcement would examine the danger that the competition would
immediately be reduced between city pairs that have been served
by both incumbent airlines, such a limited analysis is not
sufficient because it does not adequately capture trends and
dynamics in the industry. DOJ should consider whether the new
United will exercise market power to the detriment of consumers
through the adoption of anticompetitive practices outlined here
and elsewhere.
I really thank the Chair for his indulgence and Members of
the Committee for the opportunity to testify, and thank you.
Mr. Costello. The Chair and Members of the Subcommittee
thank you for your testimony.
And, gentlemen, we thank all of you for taking time out of
your busy schedule to offer testimony to the Subcommittee this
morning.
We recognize that there are a number of other hearings
going on with other Committees, and out of respect for your
schedule and time commitment, we thank you and would ask that
the next panel come forward to offer their testimony. Thank you
again.
Mr. Costello. The next panel will consist of both of the
CEOs of United Airlines and Continental: Mr. Glenn F. Tilton,
who is the Chairman, President and CEO of the United Airlines
Corporation; and Mr. Jeffrey Smisek, who is the Chairman,
President and CEO of Continental Airlines.
Gentlemen, we appreciate you coming before the Subcommittee
today to offer your testimony. As you know, your entire
statement will appear in the record. We would ask you to
summarize your statement in approximately 5 minutes, and then
we will give you an opportunity for myself and other Members of
the Subcommittee to ask questions and to follow up.
TESTIMONY OF GLENN F. TILTON, CHAIRMAN, PRESIDENT AND CEO,
UNITED AIRLINES CORPORATION; AND JEFFREY SMISEK, CHAIRMAN,
PRESIDENT AND CEO, CONTINENTAL AIRLINES, INC.
Mr. Costello. So with that, the Chair now recognizes Mr.
Tilton.
Mr. Tilton. Good morning Chairman Costello, Ranking Member
Petri and Members of the Committee. We appreciate the
opportunity to offer our comments this morning.
Let me start by simply saying that the status quo for our
industry is clearly unacceptable. It is extraordinary and
insightful that this industry has lost some $60 billion and
150,000 jobs in the United States in the last ten years,
delivering the worst financial performance of any major
industry, along with 186 bankruptcies over the last 30 years.
Both before and after deregulation, this industry has been
systemically incapable of earning even a modest profit, let
alone a reasonable return, on the large investment that we have
made in aircraft, facilities, and technology.
It is ironic that this industry, unable to cover its cost
of borrowing, is expected to be and indeed must be a key
enabler of the country's economic recovery. As leaders, you all
know the critical role our industry plays nationally in the
communities that you individually represent, creating commerce,
tourism, jobs and contributing to the overall economy.
Regardless of one's personal perspective, we can likely all
agree serial bankruptcies and the asset distribution of failed
companies cannot be an acceptable industry strategy. We must
create economic sustainability through the business cycles.
And to that end, our objective at United has been very
consistent: to put our company on a path to sustained
profitability. Without profitability we cannot provide a stable
environment for the employees that Mr. Gutierrez mentioned. We
cannot maintain service to communities, large or small, or
invest in customer service, nor can we create value for our
shareholders. To be profitable, we must successfully compete in
the global market of today, a very different market than the
market of ten years ago or, indeed, the market of 30 years ago.
Today, low-cost carriers are very well established across
the United States. And Southwest Airlines will continue to be
our country's largest domestic airline in terms of number of
passengers carried after the United-Continental merger. Today,
in the marketplace of today, international competitors have
merged and powerful new entrants continue to gain ground across
the globe. Today, the world's largest airlines, measured by
revenue, are Lufthansa and Air France-KLM with more than half
of the trans-Atlantic capacity and more than two-thirds of the
trans-Pacific capacity provided by foreign carriers.
United and Continental have taken significant actions to
improve our performance, competing across both international
and domestic markets, and, at the same time, finding a way to
connect small U.S. communities into our combined route network.
In this dynamic, a highly competitive environment, these
actions have not been enough.
Our proposed merger is a very logical and essential next
step toward our objective of sustained profitability. Let me be
very clear: Without this merger we would not have the $1
billion to $1.2 billion in synergies to improve products and to
improve service for our customers, nor would we have the
financial means to create better career opportunities for our
employees. We would not be as successful a competitor as we
need to be to enable economic development across the country.
Our merger enhances and strengthens service for those who
rely on our network in nearly 148 small communities in
metropolitan areas, providing business lifelines and collateral
economic benefit to those communities that they otherwise would
not have. Carriers compete vigorously on both price and
service, and our merger will not in any way change that
reality. There is significant low-cost carrier competition at
every single one of our hubs, including the 15 nonstop routes
on which we overlap.
Over the last decade ticket prices across the United States
have declined by 30 percent, adjusted for inflation, with fares
to small communities also declining. Our expected revenue
synergies are derived from better service and expanded network;
they are not based on fare increases. This represents excellent
value in more destinations for consumers across the country.
Consumers will benefit from intense price competition across
the industry due to the prevalence today of low-cost carriers,
other network carriers, and fair transparency.
The competitive landscape has changed, and to be a company
that attracts and provides value for customers, shareholders,
and employees, our two companies also have to change. We are
creating the leading global airline with the platform for a
healthy company, a profitable company that can compete in the
realities of today's global marketplace, provide job
opportunities and provide vital connectivity for the many
customers and communities that together we serve.
Thank you very much, Mr. Chairman.
Mr. Costello. The Chair thanks you, Mr. Tilton.
The Chair now recognizes Mr. Smisek.
Mr. Smisek. Good morning. I want to thank the Chairman, the
Ranking Member, and the Members of this Committee for the
opportunity to be here today.
I want to make four basic points. This merger is good for
employees, it is good for communities, it is good for consumers
and it is good for competition.
Let me start with employees. The volatility and instability
of the airline industry have had harsh effects on employment.
Before 9/11, Continental had over 54,000 employees. Today,
despite being the only network carrier to grown since 9/11, we
have less than 41,000 employees and we have lost over $1
billion. Before 9/11, United had over 100,000 employees. Today
it has about 46,000.
After we merge, our employees will be part of a larger,
financially stronger, and more geographically diverse carrier.
This carrier will be better able to compete in the global
marketplace and better able to withstand the external shocks
that hit our industry with disappointing regularity. Because of
how little we overlap, the merger will have minimal effect on
the jobs of our frontline employees.
We are committed to continuing our cooperative labor
relations and integrating our workforces in a fair and
equitable manner, negotiating contracts with our unions that
are fair to the employees and fair to the company. United has
two union board members, and those union board seats will
continue after this merger.
The merger will also enable us to continue to provide
service to small communities, many of which you represent. The
turmoil in our industry has been devastating to many small- and
medium-size communities. As you know, low-cost carriers have
not and will not serve small communities, as such service is
inconsistent with their point-to-point business model that
relies largely on local traffic. As a result, over 200 small
communities are served only by network carriers.
As a merged carrier, we plan to continue service to all the
communities we serve, including 148 small communities. The
merger will be good for consumers as well. The combined airline
will offer consumers an unparalleled global, integrated
network, and the industry's leading frequent flyer program. It
will have the financial wherewithal to invest in technology,
acquire new aircraft, and invest in its people and its product.
We will have a young and fuel-efficient fleet, and our new
aircraft orders will permit us to retire our older, less fuel-
efficient aircraft.
Continental brings to the merger its working-together
culture of dignity and respect and direct, open, and honest
communication. This culture causes an environment where
employees enjoy coming to work every day, and as a result, give
great customer service. United brings to the merger talented
employees who are delivering industry-leading on-time
performance.
The merger will also enhance competition. Continental and
United have highly complementary route networks. Our networks
are so complementary that we have only minimal nonstop
overlaps, each of which faces significant competition after the
merger. Over 85 percent of our nonstop U.S. passengers have a
direct low-cost carrier alternative. Moreover, low-cost
carriers compete at all of our hubs and at airports adjacent to
our hubs.
As a result of the robust competition in the U.S., airfares
have declined by over 30 percent over the past decade on an
inflation-adjusted basis.
We also face significant competition from foreign carriers
which themselves have merged to create attractive global
networks, including Air France-KLM, the Lufthansa group of
companies, and British Airways Iberia. The merged Continental-
United will enable us as a U.S. carrier to compete effectively
against these large foreign carriers.
In sum, the merger will create a strong, financially viable
airline that can offer good-paying careers and secure
retirements to our co-workers; great customer service in an
unparalleled network to consumers; and reliable service to
communities. The merger will provide us with a platform for
sustained profitability and position us to succeed in the
highly competitive domestic and global aviation industry,
better positioned than either of us could be alone or together
in an alliance.
Thank you very much.
Mr. Costello. The Chair thanks you.
And let me start with a few questions. In my opening
statement, I expressed my concern, and you have heard from both
the Members who testified here before us today, and I think
every Member of this Subcommittee is concerned about the
employees at both airlines, what happens to them.
We know what has happened in past mergers. And we have
heard your testimony, Mr. Smisek, that there will be minimal
effect on the employees. And Mr. Tilton, you state in your
written testimony that you maintain that any necessary
reductions in frontline employees will come from retirements,
normal attrition, and voluntary programs.
Can you make a commitment to this Subcommittee that in fact
the combined workforce, if the merger does go through, that
there will not be layoffs, that people will not lose their jobs
as a result of the merger?
Mr. Tilton. I can speak, certainly, to the effect of the
merger despite all of the external shocks that this industry
has experienced that has resulted in the numbers that Jeff
shared with you, the decline in employment at his company and
the decline in employment at our company. This merger will not
have a negative effect on our level of frontline employment; in
fact, it should give us the opportunity to grow frontline
employment through the growth of the two companies themselves,
absolutely.
Mr. Costello. Mr. Smisek.
Mr. Smisek. Glenn is correct. Now, I will say that because
in any merger in headquarters jobs, overhead jobs, there is
only one CEO, there is only one CFO, there is only one general
counsel, et cetera. There will be reductions in headquarters
jobs, as there would in any merger. But the vast majority of
jobs at the combined airline are frontline jobs, and because we
are so complementary we do not expect any significant effect on
employment on frontline jobs.
Mr. Costello. In the Delta-Northwest merger in 2008, when
they announced the merger, they also indicated that the pilot
union had reached an agreement with the union prior to
announcing the proposed merger. Is there a reason why that this
wasn't done in this proposed merger with the pilot unions of
the respective airlines?
Mr. Smisek. Sure. Let me speak to that if I could. This
merger came together very quickly. We learned that United
Airlines, through pressure, of course, was in negotiations to
merge with another carrier, and United was the right strategic
partner for Continental. So we needed to move swiftly, and we
did so over about a 3-week period. That swiftness was such that
the processes for reaching agreements during collective
bargaining agreements with our pilots or other work groups
could not move that swiftly.
We are in the process, and you will be hearing from our
pilots on the next panel, we are in the process of working
together with the pilots' union and hope to reach a joint
collective bargaining agreement promptly. It is my strong
desire to reach joint collective bargaining agreements as
promptly as possible with all work groups.
Mr. Costello. It is my understanding that both United and
Continental units for the Airlines Pilots Association formed a
special committee to discuss potential merger issues in 2008.
And you just indicated basically that there wasn't enough time,
that this came about quickly. If they formed a committee in
2008, and this proposed merger comes, the announcement, 2 years
later, can you explain that?
Mr. Tilton. So, Mr. Chairman, it is probably fair to say
that the attention of our pilot union, the same as Jeff's, was
largely focused in the run-up to Jeff's reengagement with
myself on another transaction. So during that period of time we
didn't have any further conversations relative to a merger with
Continental. And as Jeff appropriately says, we were having a
discussion with another company. And our pilots' union had a
very distinct point of view about the difficulties associated
with that transaction potentially, and they were focused on, as
we were, the issues associated with that transaction rather
than this one. And that is just a reasonable thing to have had
happen.
Now, let me be very clear. They also made it clear to me
that they preferred this transaction rather than that one, but
we weren't preparing for it, Mr. Chairman.
Mr. Costello. Some United retirees and other stakeholders
have made note of the fact that both of you have indicated that
the merger would generate $1.2 billion in synergies. And since
United shed its obligation for employee pensions during
bankruptcy, they are wondering if, with this merger, if in fact
it takes place, is there any hope that employee pensions might
be restored with the merged carrier? And they want to know how
they are affected.
Mr. Tilton. So, Mr. Chairman, you may recall that during
the bankruptcy, the action taken relative to defined benefit
plans was actually taken by the PPGC itself, and that was at
their discretion. Along with the decision to guarantee at the
PPGC guaranteed level, the defined benefit plans that the PPGC
assumed responsibility for was a condition that a defined
benefit plan at United per se not be restored. We replaced
those pensions, those defined benefit plans, with defined
contribution plans.
We find ourselves in a situation where the two companies
have slightly different retirement plans. We will work very
hard together to make sure that the retirement plans that we
put together for all employees are the best that they can be.
Mr. Costello. So the short answer to those who lost their
pensions with the bankruptcy, how will they be affected?
Mr. Tilton. That will be unchanged. For the current
retirees, there is no provision in the merger that will affect
the retirement plans of current retirees.
Mr. Costello. So they should not hold out hope that they in
fact will see any of their----
Mr. Tilton. I don't see any reversal of the decision made
by the PPGC, Mr. Chairman.
Mr. Costello. The Chair now recognizes the Ranking Member,
Mr. Petri.
Mr. Petri. Thank you very much, Mr. Chairman. The Chairman
of our Full Committee often eloquently says the number one job
of our Committee is to ensure, first and foremost, that safety
in the traveling public is observed. And we have, as the
Chairman pointed out, some representatives here of the Colgan
flight from Newark to Buffalo. Sixty billion dollars of losses
since 2001 as an industry puts an awful lot of pressure on the
whole system. We have been fortunate, we have the most
remarkable safety record overall. And I know--or certainly hope
you are committed to maintaining that. But it has to be hard
and puts a lot of pressure on frontline employees and others,
as we saw with the Colgan crew and the difficulties that they
had to operate under as individuals flying long hours and so on
to make their work schedules and all the rest.
And I just wonder if you could comment on any effect this
would have or what--we have been having a lot of hearings, we
are working on legislation to try to put standards in place.
But of course, if the resources aren't there at the end of the
day, it is very difficult to maintain standards. And I just
wonder if you could talk about any implications this might have
for safety or for the traveling public, or for the safety of
employees as well.
Mr. Smisek. Sure. Safety is always the number one priority
of Continental Airlines, and will be the number one priority of
the combined United.
I would also like to, in honor of the Colgan families who
are here today, express my condolences for their loss. That was
a tragic accident and it saddened all of us throughout the
industry and at Continental.
This merger will not affect safety. Safety is important
before the merger, safety will be important after the merger.
Certainly, having a profitable carrier is something that one
would rather have than a carrier that consistently makes losses
and is eking out a hand-to-mouth existence. But no matter what
level of profitability or loss, we are always focused on safety
because that is the most important thing in the aviation
business.
Mr. Tilton. So, Congressman, let me simply add--echo what
Jeff said emphatically: Regardless of how few dollars there may
be, dollar one always goes to safety. But that having been
said, I think you make an excellent point. I don't think
anybody in the room would conclude that an economically fragile
and systemically unprofitable industry is a benefit to safety.
That can't be good. There is no way that anybody can suggest
that that is a good thing for safety and security.
So our view is that the more economically robust the new
company can be, obviously the more resources we can dedicate to
everything that is important to all of our constituents,
including safety. We have a relationship with our regional
carriers that is a partnership in safety. We share best
practice, we conduct safety audits, we hold them to a high
standard, and we value the fact that they appreciate that we
have available to them at United a standard of safety that is
of benefit to them as a learning. So we also are in a position
to be able to do that. We will be able to do that more so as a
new company.
Mr. Petri. One other question, I wonder--or area, I wonder,
if you could each expand on. You touched on it briefly. But
this is a global industry now, particularly for the major
carriers. And we face very robust international competition,
many of it in some ways with the more favorable environment
because of government support or whatever and less competitive
domestic markets and all the rest than we face in the United
States.
Could you discuss how we can prevent or how we can--what we
can do to become--or how this merger will affect our
international possibilities for competitiveness? I know we have
links and alliances with international competitors, but we
don't want those to end up being ultimately international
takeovers. We would like to see American, robust, global
competition.
Mr. Tilton. We couldn't agree with you more, Congressman.
And as Jeff said in his testimony in his prepared remarks, the
majority of our competition across the Atlantic and across the
Pacific is now foreign carrier. And we face competitors who
have usurped the traditional positions of the network carriers
in this country to become the number one and number two
carriers in global markets: Air France-KLM, Lufthansa, who have
already gone through significant consolidation. And, of course,
now we have the announced BA Iberia.
Our view is we have to have the same scope, scale, and
economic robustness that they have to be able to offer a
competitive response to the consolidation that has taken place
across the Pacific, across the Atlantic, and in fact in Latin
America as well. And we do think that this company will give us
the opportunity to do that.
Mr. Smisek. Congressman, that is correct. This is a global
business, and we need a global scope and global scale in order
to effectively compete. What we are finding is large carriers,
especially large foreign carriers, offer a greater scope, a
greater scale than we do. And they are picking off our
passengers one by one, particularly picking off our business
passengers.
And in Continental, we are principally a business-oriented
airline. We carry all passengers, leisure passengers and
business passengers, but where we make our money is business
travelers. We orient our product towards that. We orient our
service towards that. And these large foreign carriers are
being very successful in taking our passengers. And by
combining, we will be able to be in a position competitively to
compete effectively with them and to continue to compete in the
United States, of course, against the robust competition that
we find ourselves with today.
Mr. Costello. The Chair thanks the Ranking Member, and now
recognizes the gentlelady from Texas, Ms. Johnson.
Ms. Johnson of Texas. Thank you very much, Mr. Chairman. I
have not taken a position on this merger, but I am very
concerned about what most passengers are concerned about, and
that is the employees.
In your joint testimony you state that customers must have
access, will have access to 116 domestic destinations, and that
small communities will continue to be served.
Ms. Johnson. And that sounds good, but my question is, who
will be serving these communities? And do you intend to
subcontract out domestic groups that serve our smaller
communities.
And I would like to have both of you comment on that.
Mr. Smisek. Let me address that, Congresswoman.
This merger will be very good for our employees. It will
provide them with good jobs--careers, and not just jobs; and
retirements, secure retirements, and not just hope. It will
provide us with the synergies that will permit us to continue
to invest in our employees. And I have made it very clear that
the wealth creation of this merger, that I intend to share that
with all work groups, whether they are unionized or not.
In terms of service to communities, we allocate the
aircraft that we have at the mainline carrier, the larger jets,
depending upon the demand of the routes. And for smaller
markets, we often use regional affiliates that we contract
with, because those routes cannot bear a large mainline
aircraft, a 124-seat or a 160-seat aircraft, but rather a 50-
seat aircraft or, in United's case, say, a 70-seat aircraft.
And we will continue to do that.
But what matters the most is the air service, because those
regional carriers have employees, as well. And they will
benefit, our regional carrier affiliates will benefit, our own
employees will benefit from this merger.
Mr. Tilton. So, Congresswoman, said in a similar way, the
reason that the low-cost carriers do not serve those
communities that you refer to and the 148 that we spoke to is
because they don't have the flexibility of access to the
aircraft that Jeff mentioned. So 737s won't be flying to Minot,
North Dakota, to pick up passengers and connect them to Denver,
but our 50-seat regional jets will. And that is how they will
get to Denver and then get on to wherever they may be flying,
domestically or internationally. And that is the way that the
networks work.
So, for the most part, you know, the low-cost carriers will
not offer service to those communities if we weren't in a
position to economically do so.
Ms. Johnson. Thank you.
Mr. Tilton, I am much more familiar with Continental than I
am the other airline, United. And you have built a reputation
in the last 10 years of having a culture that is very
supportive of passengers, and the employees seem to be quite
pleased and happy.
When you combine the pilots and complete this merger, what
will be your position on the pilots' authority? Will they come
together prior? Or do you plan to----
Mr. Tilton. Congresswoman, I have only been in the industry
for fewer than 8 years, so some of that relative to 10 years
was probably--I was doing something else at the time.
But, as Jeff said a moment ago, our pilot leadership is
going to be given the opportunity to speak to their views of
this combination and the extent to which they perceive it to be
of benefit to the pilot profession and the two combined pilot
groups.
In answer to the questions that we had previously, although
it has been a relatively short period of time, Congresswoman,
they have had a good bit of opportunity to come together and to
discuss their ambitions for the combining of their work groups.
And I have to say on behalf of Jeff and myself, they have done
a very good bit of work in a very short period of time. And I
know they will share that with you when they come up here next.
So that is made easier by, Congresswoman, the fact that
they are represented by the same union. Across the other
spectrum of our work groups, the two companies have different
unions representing work groups, such as the flight attendants
and ground workers and mechanics.
So the first order of business there is going to be a
determination, or at least an important order of business there
is going to be a determination of which union ultimately is
going to represent those professions in the new company.
Because the workers are going to have to decide, they are going
to have to choose between the different unions. So that is
something that is going to have to be sorted out that,
obviously, the pilot group is not going to have to attend to,
because they are represented by ALPA, both.
Ms. Johnson. Thank you.
Now, I am basically a passenger, as you know, like the
majority of American people in this business. And when I get on
an airline, I want to be sure that the pilots are happy and
healthy, that the attendants are happy and healthy, and that
that plane has been serviced appropriately.
Where do you get those planes serviced and maintained?
Mr. Smisek. Congresswoman, you and me both. We are most
interested in safety and the professionalism of our crews.
Our aircraft are serviced by a combination of our own
employees and outside contractors. We use GE, we use Rolls
Royce, we use Goodrich, we use HAECO, we use AAR. We use a
number of very professional companies.
We are very focused on not only maintenance for safety but
maintenance for dispatch reliability, as well; making sure,
when you get on that aircraft, that there isn't a problem, that
it gets off on time, because we are a networked business and
all those flights connect.
So you and I share the same desires. And, as a result, we
are very focused on all the things that you have pointed out.
Mr. Tilton. Across the United States, Congresswoman, our
line maintenance organization is represented by the
International Brotherhood of Teamsters. We have a large
maintenance base in San Francisco, a significant maintenance
base in San Francisco, also represented by that labor union.
But, as Jeff said, we also have maintenance partners
worldwide. And because, as Jeff has also said, we are a global
carrier, we use the opportunity to have our maintenance
performed all across the world.
Ms. Johnson. Is there code sharing across the world with
the U.S.?
Mr. Tilton. Do we co-chair across the world?
Ms. Johnson. Code share.
Mr. Tilton. Yes, we do.
Ms. Johnson. Now, you also mentioned in your testimony that
there would probably not be any changes, most especially in the
front-line employees. What about the back-line?
Mr. Smisek. Well, Congresswoman, what you refer to are the
headquarters. In any merger, there are efficiencies as a result
of job redundancies in headquarters jobs. And we will have the
typical efficiencies in any merger when you have two
headquarters, two people doing the same job. There will be
reductions in jobs both in Houston and Chicago. And there will
be jobs, as well, that will move from Houston to Chicago, and
there will be jobs that remain in Houston.
But the vast majority of jobs will remain as they are today
because we are such complementary carriers and we have so
little overlap, that the front-line employees are largely
unaffected.
And the number of headquarters employees who are affected,
although we have not determined the precise number at this time
because we are early in the process of integration planning,
that will be a relatively small number as measured against the
total number of employees that the combined carrier will have.
Ms. Johnson. Will you use retirement? Or how would you
handle the people you have to cut?
Mr. Smisek. We always prefer if we have employees who
retire or through attrition or through voluntary programs. And,
also, for employees whose jobs are affected, we will assist
them in finding other jobs, hold job fairs, assist them in all
ways we can for them to find other employment.
Ms. Johnson. Thank you.
Thank you very much, Mr. Chairman.
Mr. Costello. The Chair thanks the gentlelady and now
recognizes the gentleman from New Jersey, Mr. LoBiondo.
Mr. LoBiondo. Thank you very much, Mr. Chairman, for
holding this hearing.
And, Mr. Tilton and Mr. Smisek, thank you for being here,
as well as the other panelists.
I want to say at the outset that I support this merger in
the strongest of possible terms. I think that my colleagues,
once they have the opportunity to review all the facts and the
situation, will also agree with me.
The merger of these two carriers will create a much
stronger, much more sustainable airline that will be better
able to survive in a struggling economy and succeed in an
increasingly competitive market. It will enable dramatically
needed new investment and products and services, and result in
much more efficient flight operations to more destinations--
something that I don't think anyone can dispute and something
that we all want to see.
And, finally, it will vastly improve passenger convenience.
I share the concern of some of my colleagues about the impact
of the mergers on the workforce. Mr. Tilton, Mr. Smisek, I
think you have answered that adequately and put it very well.
But with little overlap, there should only be a negligible
impact on this, as you have said.
The merger will have a tremendous benefit in my State, and
I think that is great. But, more importantly, I think it will
have a tremendous benefit for aviation in the United States of
America, which has been under assault, as we have heard the
numbers of declining employees, since September 11th.
And what do we want to see? Do we want to see our airlines
go under while British and Iberia and KLM and all the rest of
them suck up our passengers and people that could possibly work
for us? Do we want to see our employees go by the wayside so
foreign airlines can hire more of their people? And I think
that is exactly what we are facing if we don't understand the
consequences of this.
So, while it will have a big impact on New Jersey, the
bigger, more important, beneficial impact will be on the United
States of America. It will open up many more destinations
around the world and, I think, will allow for all kinds of
economic growth and job opportunities.
I have 23 letters from New Jersey businesses and
organizations in support of the merger. And, Mr. Chairman, I
ask unanimous consent that these letters be made a part of the
record.
Mr. Costello. Without objection.
Mr. LoBiondo. I thank you.
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Mr. LoBiondo. And, Mr. Smisek, you talked about this, as
did Mr. Tilton, but I would like you to touch on it a little
bit more, about the ability of Continental to, on its own,
effectively compete against large, combined European carriers.
And if this merger were not to take place, what are those
implications for you?
Mr. Smisek. Congressman, we are very proud at Continental
of the carrier that we have created. Our culture has permitted
us to work together and provide great customer service and a
great product for our customers.
However, we are simply too small to compete effectively on
the global stage that we find ourselves. We are finding greater
and greater difficulty attracting and retaining our business
customers and our other customers. We are facing increasing
competition, not only here in the United States but, as you
mentioned, abroad, with powerful foreign competitors who are
well-financed, sometimes subsidized by governments, and who are
profitable and can invest in their products and services,
outstripping our own.
It is very important for us to merge with United and put
ourselves in a position jointly to be able to compete
effectively on the global stage.
At Continental, although I am very proud of Continental, I
think we have done a very good job, candidly, Congressman, we
are eking out a hand-to-mouth existence. And that is not a
future that I want for my employees, it is not a future that I
want for my customers, it is not a future I want for the
communities we serve, it is not a future I want for aviation in
the United States.
Mr. LoBiondo. Thank you for that answer.
In closing, Mr. Chairman, I think it is right to be asking
all the tough questions from the Committee Members, those who
may be concerned. But I think if we have blinders on and are
very shortsighted about the opportunity that we have here to
create a stronger company, protecting jobs, protecting safety,
keeping jobs here, that some future aviation Subcommittee is
going to come back in the future and look at why United and
Continental, if a merger were declined, had to witness some
great demise. And I don't think that is an overstatement, based
on what has happened in the aviation industry.
I thank you both for being here. And I urge my colleagues
to look at the positive benefit that this is going to create.
Mr. Costello. The Chair thanks the gentleman and now
recognizes the distinguished Chairman of full Transportation
and Infrastructure Committee, Chairman Oberstar.
Mr. Oberstar. Thank you, Mr. Chairman, for a contrasting
view to that of my dear friend from New Jersey.
The airways are the common heritage of all Americans. They
are not the private estate of corporations engaged in airway
service, in passenger service. The purpose of the deregulation
act of 1978--and I was in this room, where it was voted on--was
not to consolidate aviation but to expand competition, to take
government out of the business of determining rates and market
entry.
In the first 5 years after deregulation, there were 22 new
entrants into airline competition. But by the end of 8 years,
there were only five of those new entrants left. Ten years, 12
years later, there was only one. And it, too, has been absorbed
by U.S. Airways.
What we saw just recently was a further step in that
consolidation, when the previous Justice Department looked the
other way, sort of brushed aside my objections that approval of
Delta at Northwest would result in a cascade of mergers. That
has happened. You have proposed one. You did not object to
Delta-Northwest because you were waiting in line with your own
hat in hand.
The third will be American Airlines and a domestic partner.
And the result will be, with your international co-chairing
partners, three global mega carriers that will dominate the
world airways. There will be little choice for passengers,
little choice for cities, little choice for competition.
You will concentrate on long-haul service, which you have
already said and which I have pointed out in my letter to the
Justice Department. I will quote from my letter, that, ``The
networks of United and Continental overlap on 13 routes between
some of America's largest markets: the New York Metropolitan
area; Washington, D.C.; San Francisco; Los Angeles; Denver;
Houston; Chicago; and Cleveland, among others. Two carriers
also compete in a number of international markets. That
competition will be gone.''
The Justice Department expressed its concerns over
reduction in competition between United and Continental. Last
year, you applied for antitrust immunity to collaborate on
service and fares in a large number of international markets.
The Justice Department's comments on the application concluded
that, ``Fares are likely to increase by roughly 15 percent on
routes where the number of nonstop competitors decreases from
two to one and roughly 6 percent on routes where the number of
nonstop competitors decreases from three to two. Competition
will be significantly diminished in limited-entry markets, such
as China, where United and Continental today present the best,
and in some cases the only, service alternatives. Domestic
competition between United and Continental may also be
affected.''
The purpose of deregulation was not to assure that you have
the gravitas in this or that market, but that there be
competition. And, instead, what has happened is sheer
avoidance, manic avoidance of competition. You have said it
already in your testimony: There is too much capacity in this
market.
You guys hate competition. You want to be the competitor
who dominates the market, each one of you, not just you--
Northwest, Delta, American, all the rest. I have seen it over
all the years of deregulation.
This is a blow to small-market service. It is a blow to air
travelers. It is going to result in increase in fares and
costs. And the purpose of deregulation is not to line the
pockets of the big carriers but to give Americans more choices,
lower cost, more opportunities. And what we have seen with the
consolidation in the airline business is less of everything:
less competition, higher fares, less service, $4 billion paid
in baggage fares last year, for goodness sake.
This is a terrible injustice to the purpose of the
deregulation act, and I will continue to vigorously oppose it.
Thank you, Mr. Chairman.
Mr. Costello. I thank the Chairman for his comments and
remarks, and I think he made his position very clear.
The Chair now recognizes the gentleman from North Carolina,
Mr. Coble.
Mr. Coble. Thank you, Mr. Chairman.
And thank you, gentlemen, for being with us.
Let me generously lace my first question with local
interests back home. I represent the area that includes the
Piedmont Triad International Airport, both having service
provided by Delta and Continental.
My question is, gentlemen, how will this merger affect
airports that have seen a decrease in passenger service as a
result of the current dismal economy? And, if approved, would
this merger provide the opportunity for communities such as the
one I represent to attract additional service?
Mr. Tilton. Congressman, as Jeff and I have both said, we
serve 148 small communities, and those 148 small communities
have already made their case for service. As the economy
improves, both of us are always mindful of opportunities that
new markets might provide. And here very recently, certainly
speaking on behalf of United, we have commenced service to
small communities that we had not previously served.
We are mindful, actually, of something quite different from
what Mr. Oberstar mentioned a moment ago. Low-cost carriers are
actually lowering their sites for new market entry to markets
that previously may have been right on the margin of interest
to them. So we are now finding ourselves in markets such as
Greenville, South Carolina, which is not a trivial market but
not a market that qualify as hub status. We are finding that
those markets are now beginning to be competed vigorously, as
well.
So, as the economy improves, I think markets such as that
you represent----
Mr. Coble. Greensboro, North Carolina.
Mr. Tilton. --Greensboro, North Carolina, are going to find
themselves the object of service and opportunities from both of
our companies, and certainly from the merged company.
Mr. Coble. Good. I thank you for that.
Mr. Tilton. You bet.
Mr. Coble. And you concur, I presume?
Mr. Smisek. I do. We are always responsive to market
demand, but, certainly, markets in all communities are better
served by healthy carriers that have a future than carriers
that are eking out hand-to-mouth existence.
Mr. Coble. Thank you for that.
Gentlemen, has the development of the three international
airline global alliances over the past 15 years had a positive
or a negative impact on competition, pricing, and customer
service?
And is it your opinion that--well, strike that. Let me ask
you a different way. Are three alliances enough or sufficient
to ensure future competition?
Mr. Tilton. As one of the founding members of the Star
Alliance, I think that the alliances certainly serve the
purpose of giving consumers the opportunity to fly across the
globe with a multitude of different carriers who happen to
belong to the same alliance, but able to do so seamlessly on
the basis of the entry of one carrier's ticketing into that
alliance.
So United can be your entry into the Star Alliance, and a
businessperson can make a multi-segment journey across the
world and travel on three of our partner carriers, return to
their place of business. I think that has been great for
business. I think it has been good for business productivity. I
think it has been good for consumers.
Whether or not ultimately there are going to be three I
think goes back to Jeff's point that it is a very, very dynamic
market and we see things constantly changing.
One of the phenomena that we are seeing here recently,
Congressman, is decisions made by companies such as Jeff's, by
Continental, to actually accept an invitation from United to
depart an alliance where Continental was perceived to be a
small participant in that alliance and come to the Star
Alliance. And 2 years ago, we made that invitation to
Continental. Continental accepted the invitation, left SkyTeam
and came to Star, to the benefit of Star.
But I think alliances are going to continue to be
intrinsically competitive themselves, trying to bring the best
carriers into the alliances.
Mr. Coble. I thank you for that.
Mr. Smisek, you concur?
Mr. Smisek. I do. Alliances have been very good. For my
business, entry into Star has been good.
Recognize that those within the alliances, those are
alliances of competitors. We compete with each other even
though we are inside an alliance. The alliance assists us in
offering destinations on a single ticket through carriage of
baggage that we ourselves could not offer.
They can be highly beneficial. For example, we recently
announced nonstop service from Houston to Auckland in New
Zealand. We did that in a couple of contexts: one, Star
Alliance, because their New Zealand is a member of the Star
Alliance and we are going into a hub even though we compete
with Air New Zealand; and, secondly, the traffic flows that we
expect from our merger gave us the confidence to launch that
nonstop route, which will be on a new 787 Boeing aircraft
manufactured here in the United States.
Mr. Coble. I thank you gentlemen.
Mr. Chairman, I was going ask about how it would affect the
employees of each company, but I think that has been adequately
addressed. And I yield back.
Thank you for being with us, gentlemen.
Mr. Costello. The Chair thanks the gentleman and now
recognizes the gentlelady from Hawaii, Mrs. Hirono.
Ms. Hirono. Thank you, Mr. Chairman.
This Committee is particularly concerned about the impact
of this merger on employees, on customers, and on competition.
And on the issue of competition, of course it is the Department
of Justice that has the major responsibility to determine in a
very complicated antitrust analysis as to the impact of this on
lowering of competition.
How long do you think the DOJ's review will be, regarding
your proposed merger?
Mr. Smisek. Congresswoman, we expect a very professional
and very thorough review from the Department of Justice, as one
would expect. They are a very professional organization. We are
being responsive to all of their requests for information. And
we would anticipate to be in a position to close this merger by
year end.
Ms. Hirono. Considering that this is going to be one of the
largest aviation mergers ever and the fact that when
Continental came in and requested an antitrust exemption and
apparently the Department of Justice had some concerns about
that, do you have any concerns about their approving this kind
of a large merger?
Mr. Smisek. Well, Congresswoman, I can't speak to the
Department of Justice's thought processes with regard to our
application for antitrust immunity for the Atlantic Plus-Plus
joint venture, which is, I believe, what you are referring to.
But I will recognize that joint ventures deliver some
degree of revenue benefits, some degree of cost savings, but
not the efficiencies of a merger. And, therefore, from the
Department of Justice's perspective, I would imagine that the
concern there had to do with the difference between a joint
venture and a merger, where you can obtain significant
efficiencies and consumer benefits from a merger that are not
obtainable from a joint venture.
Ms. Hirono. Well, that leads me to my next question, which
is that, when Continental came in for their antitrust
exemption, the testimony was that antitrust immunity would
provide much of the benefit of a merger without the labor
integration and financial risk. So that was your testimony only
a year ago. By ``your,'' I mean your company.
So what changed, that suddenly you are saying, well, all of
these risks aren't there?
Mr. Smisek. No, ma'am. The risks are there, Congresswoman.
The risks are there, without question. The risks are there in
any merger.
The joint venture and our entry into Star Alliance has been
very good for Continental and has provided additional revenue.
It has been necessary but not sufficient. We have continued to
lose money and we have continued to be in a position of being
concerned about our future.
The merger will add significant revenue benefits,
principally from our ability to improve the business mix
onboard our aircraft. There is nothing in the merger synergies
that is conditioned on fare increases, but rather improving the
business mix, creating a network that is more attractive to
business travelers and improving the mix of business travelers
onboard our aircraft, and also optimizing our two fleets across
the 10 hubs that we will have.
So the merger is additive to a joint venture. We were
hoping that Star Alliance would be sufficient to return us to
profitability. It clearly is not. Last year, we lost $282
million, after having lost money the year before that. And
since 9/11, we have lost a billion dollars. That is not a
future I want for my coworkers.
Ms. Hirono. Well, I appreciate the fact that both of you
have testified on the benefits of this kind of a merger. And
before I continue, I would like to ask the Chair's permission
to submit for the record four letters from Hawaii supporting
this merger, including one from the Governor of the State of
Hawaii.
Mr. Costello. Without objection.
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Ms. Hirono. I personally have not made a decision regarding
this merger. I do expect that the Department of Justice will be
very, very vigilant in its antitrust analysis.
I am reading the testimony of the American Antitrust
Institute, and they pose a very interesting possibility. And
that is that this Committee should hold some hearings,
retrospective hearings, on the Delta-Northwest merger. Because
when that merger was brought to this Committee, there were
various kinds of positive impacts, and we are not sure--I am
not sure whether these impacts have been realized.
So their suggestion is that we have such hearings and then,
perhaps, to hold off on going forward with this merger or
supporting this merger until we can find out what the Delta-
Northwest merger resulted in.
Do you have any comments about that kind of a suggestion?
Mr. Tilton. You know, I do, Congresswoman. I think every
transaction that you are asked to consider is considered in the
context of a particular time and place and in a particular
economic reality of the moment.
If you think about the concern, the appropriate concern of
all the Members who have asked us about the effect here of a
proposal that Jeff and I make that will bring some measure of
economic stability to the new company, as the new company has
to confront the extraordinary--the extraordinary--economic
shocks that this industry has had to confront, either post-
deregulation or post-9/11, making a commitment in the context
of an environment that is certain to change within 30 days of
your making any such commitment is a challenging proposition.
What Jeff and I are saying is that this combination will be
positive for consumers. It will be positive for communities. It
will be positive for employees. It will be positive for
shareholders.
What Jeff and I cannot tell you is what the next unexpected
event might be and what the next economic shock might be and
how our companies or the new company will respond to that. And
making no representations here, either Jeff or myself or our
colleagues at Delta, you would have to go over and say, what
else changed from the point that they were before you?
Ms. Hirono. Mr. Chairman, I know my time is up, but as to
that, yes, we realize that circumstances change, and that is
why your coming and reassuring us that everything will be
positive--I mean, circumstances can change. And I think that is
where our concerns rise. Thank you.
Mr. Tilton. And my point is, we will be better able to meet
those circumstances with this combination than we otherwise
would.
Mr. Costello. The Chair thanks the gentlelady and now
recognizes the gentleman from Tennessee, Mr. Duncan.
Mr. Duncan. Well, thank you, Mr. Chairman, and thank you
for calling this hearing on this very important matter.
I am sorry that I didn't get to hear your earlier
testimony. I was in another Committee. But I think almost
everyone agrees that the country would be better off with more
airlines instead of fewer and more competition instead of less.
On the other hand, if the refusal to grant this merger is going
to result in one or both of these airlines going out of
business, then that would certainly not be a good thing either.
But I have these concerns. We have two briefing papers. One
from the majority says, ``Concerns have been raised that a
merger of United and Continental could result in substantial
increases in fares.'' And the minority briefing says, ``The
Department of Justice's most recent antitrust analysis, with
the support of empirical data, economic studies, and precedent,
generally assumed that air fares increased by approximately 15
percent in markets where the number of nonstop competitors
decreases from two to one.''
Knoxville, where I am from, is fortunate to have probably
more airlines than any city anywhere close to our size, larger
or smaller. Though we don't have any low-cost carriers, so-
called low-cost carriers, so we get some extremely high prices,
particularly on the flights from Knoxville to Washington.
And I remember a few years ago, when I Chaired this
Subcommittee, we had a hearing in Wichita, and the staff told
me later that it cost $1,000 for me to fly round-trip from
Knoxville to Wichita coach. And that same weekend in The
Washington Post they had had an advertisement advertising a
round-trip ticket to Madrid, Spain, and two nights in a hotel
for $389.
And so, you know, people have a hard time understanding how
all these fares come about. And I was just wonder, maybe you
have already given some assurances about these fares, but I
would like to hear what you have to say about the lack of
competition in some of these smaller or medium-size cities.
But, also, several years ago, I was told that each one-
penny increase in jet fuel or aviation fuel costs the aviation
industry as a whole $200 million. Now, many people feel that
there is going to be such restrictions put on the offshore oil
production that the price of fuel is going to go way up. And I
am wondering, have you all given that any consideration? And
what effect would a doubling of jet fuel or aviation fuel have
on your companies?
Mr. Tilton. It is a rather multi-part question, I guess.
Mr. Duncan. Yes, sir.
Mr. Tilton. I will take the back end.
A dramatic escalation in the price of fuel would likely
eliminate the prospect of economic recovery for the industry
this year, which, as advertised now, and we agree, as the
incipient economic recovery in our markets, we are seeing the
return of business travelers.
But were that to happen, it would have such a collateral
effect on overall GDP that, in all probability, it will put the
cork in the bottle of economic recovery in business travel, and
we could be back into one of the challenges that I mentioned to
your colleague a moment ago that we systemically face that only
stronger economic enterprises can actually survive.
So that would be a very bad thing, irrespective of my hedge
book and my colleagues' hedge book, where we have tried to lock
in a price that even by historic standards is a high price. I
mean, if our average hedge price is a $70 barrel of crude oil,
that is not an inexpensive consideration for that most
important cost input.
You know, one way of thinking about that is, those bags
that we heard so much reference to here a little while ago
weighing, let's say for discussion's sake, 50 pounds apiece,
they consume a tremendous amount of jet fuel. And the idea that
they should be transported for free when they are transporting
that amount of jet fuel is debatable.
Mr. Smisek. We spend more on fuel at Continental than we do
for our employees worldwide, our airplanes worldwide, our
facilities worldwide. So a doubling of jet fuel would obviously
be devastating to Continental and to the entire industry.
As to pricing, first, let me be clear that this merger is
not predicated on fare increases. The synergies are not
predicated on fare increases. The merger is not predicated on
capacity reductions. This is a brutally competitive industry,
particularly in the United States, where low-cost carriers have
essentially 40 percent of the market and continue to grow. Air
fares have dropped 30 percent over the past decade on an
inflation-adjusted basis. We have lost, over at Continental,
over a billion dollars since 9/11.
So, certainly, we are currently charging amounts that are
clearly below our costs. We need to change the business mix at
Continental, bring more business travelers into our system, who
do pay a higher price because they consume inventory that we
hold open until the very last moment, and we run the risk of
that inventory spoiling--that is, the aircraft taking off
without someone in that seat.
And that is an expensive risk for us to take, and,
therefore, the business traveler who books at the last minute
and wants to be able to change at the last minute and take a
later flight or an earlier flight pays for that privilege,
compared to the leisure travelers who book far earlier than
that and pay a much lower fare. Because we, as a company, are
taking a much less business risk with respect to those people
than we are with holding the seats out until the last.
But I can assure you, this is a very competitive business.
We do not have a single market in the United States where we
overlap. And we only overlap on 15. There is not a single
market where the number of competitors is reduced to just one.
So that is not going to occur in this merger.
Mr. Duncan. All right. Well, thank you very much. There is
not an easy business out there, but I think your business has
to be one of the most difficult in the world, with so much that
is beyond your control--the natural resource problem, the
weather problem, and so forth. But thank you very much.
Mr. Lipinski. [Presiding.] Thank you, Mr. Duncan.
The Chair will now recognize himself for 5 minutes.
As Chicagoland's only Member of this Committee, a top
priority of mine is working to enhance and improve the region's
transportation network. And since Chicago is the transportation
hub for the Nation, what is good for Chicago in many ways is
good for the Nation. So I believe that this merger, if
implemented correctly, will benefit the Chicago region.
In addition, it has the potential to be good for O'Hare
Airport and the O'Hare Modernization Program, which is
definitely, without question, good for our Nation's air
traffic.
However, there are a number of critical issues that need to
be examined as this process moves forward. For instance, we
clearly need to consider the merger's impact on consumers,
including how the proposal would impact pricing and service.
Chairman Oberstar carefully went through these issues, and I am
sure that we will hear more about that. And we have spoken a
little bit--you have provided in your testimony some answers on
that.
We also need to look at the impact the merger would have on
jobs, especially with respect to job loss and to benefits. And,
finally, we also need to make sure, I believe, that there is a
commitment by the new United, the merged airline, to projects
that increase system capacity, especially the O'Hare
Modernization Program.
So I want to start on that last point. Right now, OMP,
O'Hare Modernization Program, most critically would provide
parallel runways and will reduce delays by 75 percent at
O'Hare. Two runways have already been completed. One runway
project is currently being worked on. And there are three more
runway projects remaining to be done.
So I want to ask Mr. Tilton, are you committed, if this
merger goes through with this new airline, or are you committed
in general, to moving this critical program forward,
specifically with respect to the three remaining runway
projects at O'Hare?
Mr. Tilton. Congressman, as you know, we have been
supporters from the beginning of the modernization and the
expansion of O'Hare. We are supportive of the runway
development, the two that have been developed and the
additional runway capacity.
It goes significantly to something that Jeff mentioned in
his remarks, that we are indeed and have been for quite some
time the number-one on-time carrier, network carrier in the
United States. Much of that has been enabled, Congressman, by
the modernization and the development of those new runways at
O'Hare.
Before we get to, perhaps, the follow-on question, there
are issues associated with the modernization of O'Hare that go
to facilities that we think are perhaps no longer necessary.
And those are terminal facilities and the expansion of terminal
facilities in the current economy. But as you also know, we are
at the table negotiating those issues with Mayor Daley and with
Ms. Andolino. And I think that those discussions are going to
be constructive and good for Chicago and good for O'Hare.
Mr. Lipinski. Well, you mentioned the terminal project, but
are you----
Mr. Tilton. Yes.
Mr. Lipinski. --committed to the three runway projects when
United----
Mr. Tilton. Yes. United, given the current economic
circumstances we face, thinks those runways are justified.
Mr. Lipinski. The other question that I wanted to get to is
the impact on employees. Because, certainly, you understand the
concern with the uncertainty that employees face at United and
Continental. We have seen other mergers, and sometimes the
impact on the employees certainly has not been what was
expected; it has been detrimental to the employees. United's
bankruptcy, the employees certainly paid a high price in that
for allowing United to continue to operate.
I want to focus specifically here on pensions, because I
understand--and this has been touched on a little bit already--
that the defined benefit plans no longer could exist at United
Airlines after the bankruptcy. Now, some Continental employees
do have defined benefit plans. There are going to be problems
with putting all of the employees together in a merged airline.
Will it be possible for the Continental employees to keep
their defined benefit plans, or is this forbidden by the
bankruptcy settlement?
Mr. Smisek. Congressman, let me speak to that.
Yes, Continental's defined benefit plans will continue
after the merger. And we have received confirmation from the
Pension Benefit Guaranty Corporation to that effect.
As we go forward, as we negotiate joint collective
bargaining agreements with each of our collectively bargained
units, we will obviously be discussing a broad range of wage
and benefit items, including the form of their pensions and
amounts of pensions. Those defined benefit plans could change.
For example, our own pilots union, in negotiations, determined
to freeze their plan and go to a defined contribution plan,
which we have been funding since that was negotiated.
Last year, we at Continental lost $282 million, but
nonetheless we put $283 million into our employees' retirement
plans.
Mr. Lipinski. Does this mean, then, that there is a
possibility that United--if the merger goes through, former
United and former Continental employees now in the merged
airline will have different pension plans? I just want a better
understanding of what this will mean.
Mr. Tilton. Well, it does, Congressman.
If you think about it--we were saying earlier on, for
example, our IAM-represented employees have a multi-employer
plan that it is supported by the IAM. It was a product of the
negotiations during the bankruptcy. The IAM represents
employees at both companies.
How the employees choose to be represented, just using
their multi-employer plan as an example, in a course of their
representation choices will determine whether or not more or
fewer employees are given the opportunity to be beneficiaries
of that plan. But that is a function of, at the end of the day,
which union represents which employees at the end of the
decisions made by the employees on that matter.
So there are significant differences across the two
employee groups. And the process, that will be made transparent
to employees when they make it their selections.
Mr. Lipinski. Well, I certainly believe, as we move forward
with this in consideration of the merger, that this is going to
be a critical piece of it. The more things, if possible, that
can be worked out with the employees, the better off we will be
and I think the, certainly, greater likelihood of this merger
moving forward. But I think that is something that we have to
continue to keep our eye on.
With that, the Chair will now recognize--the gentleman from
Arkansas is not there. We will go back over to the Democratic
side here. The Chair will recognize the Chair of the Surface
Transportation Subcommittee, Mr. DeFazio.
Mr. DeFazio. Thank you, Mr. Chairman.
Gentlemen, I will read you two quick statements, and then
you tell me how this merger I think is in reaction to this, but
how it is going to solve this problem.
Alfred Kahn: ``I must concede the industry has demonstrated
more severe and chronic susceptibility to destructive
competition than I, along with other enthusiastic proponents of
deregulation, was prepared to concede or predict.''
And then former American Airlines CEO Robert Crandall:
``Market-based approaches alone have not and will not produce
the aviation system our country needs and that some form of
government intervention is required.''
I think your merger reflects that. Is this going to solve
the problem once and for all of this cutthroat, deregulated,
race-to-the-bottom industry?
Mr. Smisek. Congressman, I am not sure it will solve all
the ills of the aviation industry. I don't hold it to such a
high standard.
What we are trying to do is to create an entity that can be
profitable, that can withstand the external shocks, that can
offer a future and some stability to our employees, that can
reverse the trend of the employment loss that this industry has
suffered, particularly since 9/11.
Mr. DeFazio. OK. Well, that is good.
Quick, Mr. Tilton, because I have several other questions.
Mr. Tilton. Congressman, I don't think that the merger is
going to be able to resolve many of the structural issues that
lead to the cutthroat competition that you mention, such as the
absence of apparent barrier to entry that allows a significant
number of new entrants to come into the business and fail
repeatedly but, in the process of so doing, destroy tremendous
value. And they destroy value collaterally--employee value,
shareholder value, and even, for that matter, community value,
because they come and they go.
Mr. DeFazio. OK. So there might be something in the
statement by Bob Crandall, some form of government intervention
might be required.
And I guess that gets to my second point--I am sorry to
interrupt, but I have very little time--Mr. Smisek, you said
safety would not be affected. And, actually, I didn't take that
as positively as you might think, because I would hope it would
be.
And I would reference both the chairs of your Master
Executive Council, when they are talking about, ``Passengers do
not want air travel that is provided by the lowest bidder. They
want and deserve safe and reliable transportation provided by
the network carrier of their choice.'' That was Captain Jay
Pierce. And then, ``When a passenger buys a ticket from United
Airlines, they deserve to have United pilots at the controls.
This merger presents the opportunity to put an end to
management's preoccupation with outsourcing.'' That was Captain
Wendy Morse.
Will this merger lead to any reduction in outsourcing or
any improvement in who you contract with?
Mr. Tilton. Congressman, we don't really perceive at United
that the regional carriers that are our partners and are really
the entry level into the industry for coworkers of our
employees as being outsourcing. You know, United is not going
to fly an A319 or a 320 to Minot, North Dakota, to collect
those passengers----
Mr. DeFazio. Right. But we are paying someone $18,000,
$20,000 a year with a low number of hours to be the pilot. I
mean, we tried to deal with that through government
intervention in the FAA bill and in the safety bill.
Mr. Tilton. Right. Right. All I am saying----
Mr. DeFazio. You are being pulled down by people who are--
you may well require a higher standard, but you have to compete
with these----
Mr. Tilton. Well, and, as I said, Congressman--I know you
are in a hurry--as I said, we spend a lot of time talking to
our regional partners about the very things that you just
mentioned a moment ago, and that is taking our safety
practices, sharing them with them, and expecting them to abide
by them.
Mr. DeFazio. OK.
Mr. Smisek, would we see, perhaps, we wouldn't go to the
lowest bidder for outsourcing in the future and require a
higher standard, or are we going to have to wait until we pass
legislation to require more hours, more experience, et cetera?
Mr. Smisek. We support all improvements in safety in this
business. Safety is incredibly important, as you know. However,
the combined carrier will not be flying mainline aircraft into
small cities----
Mr. DeFazio. No, I understand.
Mr. Smisek. --because demand won't be there. So that
service will always be provided by third parties.
Mr. DeFazio. Well, you could operate a subsidiary that
provided that service, or you can contract--there are different
levels of contracting.
Mr. Smisek. Sure, sure. I appreciate that. But our practice
at Continental and our practice at United and our practice as a
combined carrier would be to use third parties to do that. But
we are very committed to safety for ourselves, for our regional
carriers. And we, like United, share best practices with them.
Mr. DeFazio. OK. Well, I am out of time, Mr. Chairman, but
I just want to say I think there are a lot of people out there
trying to run airlines well and safely and with respect for
their employees, but what we have seen is this pattern of
destructive competition. And it may be a transient entrant who,
you know, goes away, or it may be other people who persevere
longer but they drag down the standards.
And I think the industry should wholly support setting a
much higher floor that everybody has to meet, and then there is
no competitive disadvantage among any of the industry for any
level of service out there. And I hope you would both support
that.
Thank you, Mr. Chairman.
Mr. Lipinski. Thank you, Mr. DeFazio.
Congressman Boswell has been called away, but he asked me
to express his serious concerns that contractual arrangements
with pilots, flight attendants, and other labor groups be
worked out in fairness and completely fulfilled.
At this point, the Chair will recognize the gentleman from
Ohio, Mr. Boccieri.
Mr. Boccieri. Thank you, Mr. Chairman.
Thank you both, gentlemen, for your testimony today.
While I may not be as long in tooth as some of the Members
here in the Committee who have experienced deregulation and
such, I know that, from my experience in the State legislature
and past airline mergers that have affected Ohio, to put it
mildly, it has not gone well. Dayton, Columbus, Wilmington,
Cincinnati have all experienced significant service and job
loss, and a movement, if not complete outsourcing, of these
jobs.
And I remain concerned, while I have not taken a position
on this, I remain concerned that this business model that is
now being proposed would put added strain on the hub in
Cleveland, especially after so many taxpayer dollars have been
funded to expand the facility, as well as corporate investment.
But I remain concerned about that.
I want to just hone in on one thing. I am really concerned,
and I have not been convinced by the testimony thus far, that
by reducing the number of competitors--both of you are
competitors currently--that we are going to increase
competition. And we may be setting up a scenario of too big to
fail.
Can you give a brief comment to that?
Mr. Smisek. Certainly, Congressman.
I think what we are creating is a carrier not too big to
fail but big enough to succeed. We compete on a global scale.
We compete with large foreign airlines. We compete with large
domestic airlines, for example like Delta or American. And we
are putting ourselves in a position through this merger to be
able to successfully compete.
I do not believe that competition is reduced by this merger
because this is a brutally competitive industry as it is. It is
today. It will be after this merger. There are essentially no
barriers to entry; there are high barriers to exit. This
industry does not earn anything on its invested capital. We
have lost billions of dollars.
Mr. Boccieri. Sure. Can you name one legacy carrier outside
of bankruptcy that have merged where they have actually
produced lower costs, lower operating costs, and have not had a
significant reduction.
Mr. Smisek. Well, let me speak to what Delta Airlines--and
we will leave the capacity reduction aside for the moment,
because that, I believe, was caused by the global recession,
not by the merger. But you will need to speak directly to Delta
executives about that.
But they have been on the public record saying that they
believe that the synergies from their merger will be
approximately double what they anticipated. And that gives me
great hope at Continental. I am not saying we will be able to
deliver that in this merger, but so far what they are claiming
publicly is their merger has been very successful, both in cost
efficiencies and in revenue generation.
Mr. Boccieri. Hubert Horan provided testimony here, and I
just want to read to you because I think it is pretty
prescient. He said, ``United's own public statements
acknowledge that the merger will not reduce costs to
disadvantaged versus low-cost carriers or more efficient legacy
competitors, and that the industry does have financial
problems, but those problems will not be solved by suspending
antitrust laws so business strategies that have moved into
obsolescence can exercise artificial market power.''
Again, he is suggesting that the costs are not going to be
reduced and that this is going to put an added strain on you to
cut corners down the line. How do you respond to that?
Mr. Tilton. By its very nature, Congressman, it is sort of
a contradictory statement. We have already established that
there are going to be the elimination of overhead redundancies
that are clearly going to reduce cost. So, on the one hand, we
have a question as to, are you going to be sympathetic to the
concerns of employees whose jobs are going to be eliminated
because there is only going to be one headquarters? On the
other hand, we have a statement that says that is going to be
insufficient in the context of cost reduction.
Whether or not the network hub-and-spoke model is obsolete
and redundant is yet to be established. And creating a company
that is going to have the hub structure that we have and the
ability to optimize the hub structure that we are going to
create from Newark to Washington to Cleveland to Houston to
Chicago to Denver to San Francisco and to Los Angeles, to
connect small communities into those hubs, is really the
premise upon which we think we are going to succeed.
Mr. Boccieri. Sure.
Mr. Tilton. But if somebody thinks that the business model
has failed, it actually doesn't go to the point of the
proposition of the merger.
Mr. Boccieri. Well, the big money is where the
international carriers are shuttling folks back from vacations
over in Europe.
Mr. Tilton. Right.
Mr. Boccieri. But, more specifically to your point, Mr.
Tilton, we talked about outsourcing jobs, and safety is a big
issue for me, after having lived through testimony from the
Colgan crash here, where the pilot, under the NTSB after-
actions report, showed that they weren't even trained in their
own safety equipment that that airplane was required to have
for saving the day.
And right now we have 1,400 pilots furloughed by United,
but you are flying routes from Washington, D.C., to Spain with
foreign pilots. Can you guarantee me that those pilots are
trained, educated, and have the same experience level, as well
as the other air crew members that are aboard that aircraft,
that our own domestic air carriers have?
Mr. Tilton. That relationship with Aer Lingus is analogous
to our offering our code on Aer Lingus as a code share partner,
if one thinks about it, and telling a passenger, ``You can book
on United, but you will fly on Aer Lingus,'' or, ``You can book
on United, sir, but you will fly on Lufthansa,'' or, ``You can
book on United, but you will fly on US Air.'' And that is a
function of the reciprocal agreements that this industry has.
It is a part of the joint venture that we have across the
Atlantic with four participants in it: Air Canada, Lufthansa,
Continental, and United. We share that.
I take for a given that my Aer Lingus partner is as
committed to safety as I am. And with Aer Lingus being the
operator of that flight and United being the marketer, it is a
relationship that is symbiotic between the two of us, and I
ensure that they are.
Mr. Boccieri. Well, I am glad you share that, but I don't
know if I share that, and I don't know if many other pilots
who----
Mr. Tilton. Well, but think of the interrelationships that
we have across the business, where all of that code is shared.
Mr. Boccieri. I am OK with that, but, you know, if you
asked your customers if they would prefer an American pilot
versus an international pilot flying them from the United
States over to Europe--because when you fly back from Europe,
those are mainly American pilots, correct?
Mr. Tilton. No, sir. If they are flying on Lufthansa, they
are German pilots. If they are flying on BA, they are British
pilots. If they are flying on ANA, they are Japanese pilots.
Mr. Boccieri. Are Aer Lingus pilots United pilots?
Mr. Tilton. No, they are Aer Lingus pilots.
Mr. Boccieri. OK. That is my point.
Thank you, sir.
Mr. Lipinski. Thank you, Mr. Boccieri.
The Chair now recognizes the gentleman from California Mr.
Garamendi.
Mr. Garamendi. Thank you for the testimony today. And also
let me congratulate you on a new way to describe job loss as
synergies. Very unique. Your PR folks should be congratulated.
I do have some questions that are specific to safety. The
San Francisco maintenance facility was discussed earlier today.
It is my understanding that you are, in fact, at United moving
jobs away from that maintenance facility to China, Singapore
and the Philippines; is that correct?
Mr. Tilton. So as I said in my response to a prior
question, we have long had----
Mr. Garamendi. No, no. Get directly to answer this. Are you
moving jobs out of San Francisco to foreign countries for
maintenance purposes?
Mr. Tilton. We have overseas maintenance facilities that do
maintenance work for the company and have for quite some time.
Mr. Garamendi. You did not answer my question. Please do
so.
Mr. Tilton. There are no plans to move any further jobs out
of San Francisco, if that is your question.
Mr. Garamendi. My question is very simple. Are you moving
jobs out of San Francisco to foreign facilities, yes or no; and
if so, how many?
Mr. Tilton. No, we are not moving jobs out of San Francisco
today to foreign facilities.
Mr. Garamendi. Did you do so yesterday?
Mr. Tilton. Yes.
Mr. Garamendi. How many?
Mr. Tilton. We have a maintenance facility in Beijing that
is the maintenance facility for our 777 facility--for our 777
fleet, and it is a joint venture between Lufthansa and Air
China.
Mr. Garamendi. Does the FAA regularly inspect that
facility?
Mr. Tilton. That is FAA's responsibility without a doubt.
Mr. Garamendi. That is not the answer to my--that is not
the question I asked.
Mr. Tilton. Well, that is a question better posed to the
FAA.
Mr. Garamendi. It is posed to you because it is your
responsibility.
Mr. Tilton. Well, my view is the FAA fulfills its
obligation and its responsibility with respect to such
facilities, yes.
Mr. Garamendi. Then you must be aware of earlier testimony
before this Subcommittee that the FAA doesn't regularly inspect
to the same degree that----
Mr. Tilton. No, I am not aware of that testimony.
Mr. Garamendi. We will get the testimony for you.
Mr. Tilton. I would appreciate that.
Mr. Garamendi. With regard to the question of continued
outsourcing, the question about pilots was asked. I want to
follow up on that question. Are foreign pilots in the left and
right seats of the United airline jets?
Mr. Tilton. Are foreign pilots----
Mr. Garamendi. Aer Lingus or any other foreign pilot?
Mr. Tilton. On our airplanes?
Mr. Garamendi. Yes.
Mr. Tilton. No.
Mr. Garamendi. Thank you.
One final question. Could you describe the personal
benefits that the two of you will receive as a result of this
merger, specifically golden parachutes and the like?
Mr. Tilton. So I think I know I have made the decision
already, I don't know that Jeff has, that anything that I might
receive is going to be converted into shares of the new company
and deferred until such time as I eventually retire from my
board seat.
Mr. Garamendi. And the estimated value of that?
Mr. Tilton. It will largely depend on how successful the
new company is and indeed whether the new company is formed,
Congressman.
Mr. Garamendi. I would like have specific information on
that, and I would not like to have to receive that from the SEC
filings. So if you could deliver it personally.
Mr. Tilton. I will do so. I have already filed it, as a
matter of fact.
Mr. Garamendi. Thank you. And you will be able to deliver
it to me. Thank you.
Mr. Smisek. Congressman, my compensation is set by my human
resources committee, which consist of independent directors. My
arrangements regarding becoming CEO of United have not yet been
negotiated. That is a process that is going to go through both
Continental's human resources committee and the compensation
committee of United Airlines. The amount of compensation that I
will receive thus has not been determined.
Mr. Garamendi. What is your present compensation?
Mr. Smisek. I receive no salary whatsoever, sir. I have
waived that until Continental is profitable. I am also not
eligible for a bonus as a result of my waiver of my salary.
Mr. Garamendi. And stock options?
Mr. Smisek. I have no stock options, sir.
Mr. Garamendi. And you are receiving any benefits?
Mr. Smisek. I am participating in long-term performance
programs, the pay-out of which is dependent on the amount of
profit sharing that we share with our employees, as well as the
stock price.
Mr. Garamendi. I thank you.
Thank you very much, Mr. Chairman.
Mr. Costello. [Presiding.] The Chair thanks the gentleman
and would ask any Members present if they have additional
questions. I understand that Mr. Boccieri does.
Mr. Boccieri. Thank you, Mr. Chairman.
One follow-up question that came to my mind. My synapses
aren't working as quickly as they used to at 41. But you had
suggested that Aer Lingus pilots are trained as well as
domestic aircraft commanders, pilots and captains on board our
aircraft. How can you make that assumption when your own
regional carriers aren't training to the same level as legacy
carriers? We found this in constant NTSB reports. We found this
over and over and over again. Explain to me how you draw that
connection when your own regional carriers cannot commit to the
same level of experience level that you have been training your
pilots.
Mr. Tilton. So back to the relationship between the network
carriers and our regional partners, as I have said, and Jeff
has echoed, our safety management organization works together
with our regional partner management organization to ensure
that the safety processes that we hold to best practice at
United share it with the regional carriers. We audit them; we
audit them together with the FAA. We share information with the
FAA relative to our work with the regional carriers. We are
mindful of the risks associated with new anything, new
employees of any type, so we are mindful of that, we understand
that. But as Jeff has said a moment ago, they are necessary,
they are important.
So just bear with me for a second. With respect to our
relationship with all of our foreign partners, you have to
think about it, all of them, All Nippon, Air China, Singapore
Air, Lufthansa, all of British Midland, Austrian Air, all the
carriers with whom we share code across the entire Star
Alliance, we, either from an IATA perspective, the global
international association carriers, all of the safety
authorities that exist in all of those countries, we have to
set a safety standard for the entire industry worldwide
regardless of the nationality of pilots. That is the essence of
the alliance structure. And we will fly a passenger across four
or five of those carriers. And we know we are making an implied
commitment to the training of all of those carriers, which is
why, Congressman, to get into the Star Alliance or to get into
a code-sharing agreement, you have to be approved across a
spectrum of safety considerations before you are approved.
Mr. Boccieri. Mr. Tilton, the after-actions report from the
NTSB for the Colgan crash showed that the regional air carrier
in part of their syllabus did not teach the pilots how to
recover from a full stall. They taught only stall recognition
through a stick shaker, not a stick pusher. What happens if the
aircraft goes into a full stall recovery and what were the
pilot's reaction, that was not part of the training syllabus.
When asked they said it wasn't part of the FAA's requirement.
So what we have seen--Colgan has said this wasn't part of the
FAA requirement, so what we have seen is now where airlines had
reached for the stars in terms of their training, they are now
reaching for the minimums in some of these regional carriers.
And I have grown very concerned about this over my term on
this Committee. But I want you to say to this Committee and for
the record that you know that those aircraft that are flying
out of Washington, D.C., while we have 1,400 grounded pilots in
your airline, if they are trained, and you know for certain
that they are trained to recover from a full stall.
Mr. Tilton. So all of our foreign carriers, all of the
foreign carriers with whom we do business, are trained to a
level that is satisfactory to both the FAA, to ourselves, to
ourselves, and to their respective safety jurisdictions in
their countries.
Mr. Boccieri. Mr. Smisek, was Colgan Air training to your
satisfaction?
Mr. Smisek. No, it was not.
Mr. Boccieri. And why did you keep them as one of your
carriers?
Mr. Smisek. We were not aware of that training deficiency.
That is the responsibility of the Federal Aviation
Administration. We expect all of our regional carriers----
Mr. Boccieri. That is your responsibility. That is your
responsibility.
Mr. Smisek. Let me tell you that we are very concerned with
safety. We did not train those pilots, we did not maintain
those aircraft, we did not operate the aircraft. We expect them
to be safe, we expect the Federal Aviation Administration to do
its job, we expect that you do your job----
Mr. Boccieri. Well, we expect you to do your job too, sir.
Mr. Smisek. And I expect me to do my job.
Mr. Boccieri. You need to make sure that your domestic
carriers in these international agreements that you are going
to be making, outsourcing jobs and outsourcing training and
doing all the other stuff that is going to move this type of
level of expertise off our coast, needs to be maintained. I
can't sit here and guarantee as a representative of the people
from Ohio who fly on your airline and fly on other airlines to
be certain that this level of training is going to be
maintained if we are going to be getting into these big
agreements, too big to fail, with other international carriers.
Mr. Smisek. We are very focused on safety. The training of
pilots across the globe is a responsibility too great for
Continental Airlines. We do not have the resources. Each
jurisdiction has its Federal regulators; each jurisdiction has
its regulation over safety. We participate and share our best
practices.
But if you take a look at Star Alliance, Star Alliance has
rigorous requirements for joining and rigorous requirements for
safety. And I am confident in the safety of all the Star
Alliance carriers.
What you point to was a problem. There is no question about
it. And everyone in the aviation business, and I personally and
everyone at Continental, regrets that training failure at
Colgan. That has been identified and will be, I am confident,
corrected. And we need to make sure we all share your concern
with safety. Safety is the most important thing that we have.
But we can't possibly be responsible with the limited resources
we have for the safety of every carrier in the globe and every
carrier that is out there. We can be responsible for our own
safety. We can certainly share our best practices, and we do
so. And we support all improvements in pilot training, and we
support regulatory reform within the Federal Aviation
Administration if that is what is required for oversight for
U.S. carriers.
Mr. Boccieri. We are going to get to that reauthorization
bill. We are going to make sure that it is mandatory that
pilots know how to recover from a full stall.
Mr. Smisek. And I would support that.
Mr. Boccieri. Thank you.
Mr. Costello. That Chair thanks the gentleman. And I was
going to make that very point that is the reason why we passed
legislation through both the Committee and out of the House,
that when we come out of conference, we are going to have a
reauthorization bill that has the Airline Safety and Pilot
Training Improvement Act, which will in course raise the
standards for pilots at the regional carriers as well. We
recognize that the both United and Continental and some of the
other major carriers do not hire at the lower standard even
though they can, but many of the regionals do. And that is what
we found with Colgan, and that is what we have found with other
regional carriers.
And I would just interject as well and agree with the
gentleman that while it is the FAA's responsibility, it is also
your responsibility as CEOs of airlines that contract with
regional carriers to make certain--not just rely on the FAA,
but to make certain that these regional carriers are hiring
pilots that have training in excess of the minimum requirements
as opposed to the minimum even after we increase the minimum
requirements in the conference report.
With that, the gentleman from California Mr. Garamendi is
recognized.
Mr. Garamendi. Mr. Chairman, thank you. And thank you for
bringing up that last point. You gave me an opportunity to cool
down a little bit.
I heard the most astounding testimony I have heard in my 34
years, that the chief executive officer of an airline that
contracts for services to provide services to that airline, in
this case Continental--and I did not hear this from United, and
pleased I didn't hear it--that it is not your responsibility to
ascertain the safety of the pilots with which you contract.
Mr. Smisek. Sir, I did not say that.
Mr. Garamendi. I am delighted to hear you did not say that.
Could you specifically tell me what your responsibility is with
regard to the qualifications of those pilots with whom you
contract on your flights?
Mr. Smisek. We do expect, we do require all of our regional
carriers to be safe carriers. Colgan in this instance had a
training failure. It resulted in a terrible accident, which we
regret tremendously.
We are as focused on safety as you are, sir. We expect
safety, we require safety. You have to understand, however,
that there are limitations on the resources. Since all airlines
contract with large numbers of other airlines, for example in
code shares, we do rely on the requirements and the safety
audits of IATA, on the Federal Aviation Administration, we have
our on-line safety audits, safety audits that Star Alliance
conducts with respect to its other carriers as well.
Mr. Garamendi. I am particularly concerned about the
domestic situation because that is where the accident occurred,
that is where the training was inadequate. I would like to have
you specifically in writing present to me and to the Committee
exactly what you and United do to ascertain the quality and the
safety record and training record of those pilots with whom you
contract in your hub-and-spoke situation.
Mr. Smisek. Sure, we will do so.
Mr. Tilton. And we will be delighted to do that. We will go
beyond that. We will actually give the Congressman a report on
the nature of our best practice transfer; on the nature of the
relationship between the two safety organizations, the regional
carrier safety organization and ours; the extent to which we
have on occasion found them wanting, and suggested that until
something was addressed, we would be suspending any contractual
services of a particular sort with them. So we will be glad to
do that.
Mr. Garamendi. And I would hope that would also include the
specific actions that your airlines take to verify individual
pilots.
Mr. Smisek. We will do so.
Mr. Tilton. We will be glad to do that.
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Mr. Garamendi. Thank you.
Mr. Costello. The Chair thanks the gentleman from
California and now recognizes the gentleman from Michigan Dr.
Ehlers.
Mr. Ehlers. Thank you, Mr. Chairman. And before I ask
questions, I will just comment on the Colgan situation.
I read the transcript, and I think beyond the training
issue was the issue of the lack of competence of the
individuals. It made me shudder to read the cockpit transcript
and observed the conversation back and forth. They were totally
preoccupied with personal issues and not with flying the plane.
And so I think it is not just a matter of training, it is a
matter of hiring responsible individuals. And I think anyone
who reads that transcript would realize that was a good share
of the problem.
I just want to comment. We have had some other airlines
coming together, and I understand all the advantages of
airlines combining and working together and the many different
ways they do that. But I am afraid what I have seen is that
there is something lost every time we get some airlines going
together.
A very recent case, I won't give specific names, but one
airline that I thought was operating very, very well, and I got
to tell you, everyone in the Congress is an expert on flying in
the airlines because we do it every week ad infinitum. There is
an airline that I thought was really operating very well was
combined with a very large airline which had not operated as
well, and now the combination of the two is not operating very
well in a number of cases, so I won't get into specifics.
I really caution you, make sure that you are improving
service for the public. And I know it is easy for you to say,
yes, yes, yes, of course, that is our business, that is what we
should do. That is not what happens in too many cases. And I
want to warn you about that. And I hope you will give
assurances that you will conduct frequent surveys of your
frequent flyers and of the general public as well to evaluate
how well you are doing in that of combining the two, because I
am just astounded that the number of what I call poor judgments
being made by executives who didn't even bother to understand
the culture of the company they were absorbing and have lost
some very good people, but above all have lost a lot of good
spirit, and the public is the worse for it.
I am not convinced that all this combining of airlines is
really that advantageous. It may reduce cost of the passengers
very slightly, it may result in you making more money, which is
your goal of course, but I am not sure the overall picture is
really all that great. And I just wanted to caution you on that
from my perspective, but also give you an opportunity to rebut
what I have just said.
Mr. Tilton. Well, what you just said may well present a
competitive opportunity for Jeff and myself.
Mr. Ehlers. It may well be. I know that Continental has had
a very good history in the last decade of being extremely well
run under the CEO that really renovated it. And I fly all the
airlines. Unfortunately, being in Grand Rapids, Michigan, we
have just about every airline under the sun flying in and out
of there, so we have a large choice, and we exercise that
choice depending on the service we get.
Do you have anything to say, Mr. Smisek.
Mr. Smisek. Sure, Congressman. You are right, we are well
known for our customer service. I have been in Continental
since the turnaround 15 years ago and have been part of all the
decisionmaking at Continental during that 15-year period. We
are very attuned to customers. We have corporate advisory
boards, we bring in frequent flyers, we participate in a flyer
talk forum. We are very attuned to our customers, and that is
how we get the reputation for customer service.
But largely, Congressman, our reputation for customer
service is built around the culture of Continental Airlines. We
work together very well. We may have disagreements. Working
together does not necessarily mean saying yes; what it means is
listening respectfully to someone's position, treating each
other and our customers with dignity and respect. And as a
result--and being honest and open and direct. And as a result
we do give very good customer service.
And I anticipate the combined carrier, that with our
combined cultures--United has very, very good people. They are
delivering tremendous operational performance today. They have
a fine product, they have great facilities, they have very good
people. We will combine that into a culture of dignity and
respect, which they have today, which we can bring together,
and we can have a carrier that will have wonderful customer
service.
The reason I am so confident that we can deliver on the
synergies is I am confident in the team that I will build, I am
confident in the culture that we will have, and I am confident
in the customer service that we will focus on.
Mr. Ehlers. Well, if you are so great, why are you even
doing this?
Mr. Smisek. Because alone we are too small. We compete on a
global stage, and we are too small. We are a global carrier,
but a small one, and we need to be big enough to succeed
against our large foreign and large domestic competitors.
Mr. Costello. The Chair thanks the gentleman from Michigan.
Mr. Ehlers. Well, Mr. Chairman, I just want to offer my
services to you at some point to go in the planes and just ask
people about what they think.
Mr. Smisek. That would be great.
Mr. Ehlers. I did this last week.
Mr. Tilton. I will take you up on that.
Mr. Ehlers. I didn't initiate it, but someone else in the
airplane did sitting in the front row of first. And, of course,
all the people in first were frequent flyers who said, this
airline used to be good, what happened to it?
Mr. Tilton. We appreciate both the competitive opportunity
that you have advised us of, and we certainly appreciate the
offer of your services.
Mr. Ehlers. OK. But at any rate, this one individual said
it, and the next person said, yeah, I agree with that, and
pretty soon the entire first class section was saying it has
really gotten lousy.
Mr. Smisek. We have a great competitive opportunity. I
appreciate the heads up.
Mr. Ehlers. That company has something to worry about.
Thank you. I yield back.
Mr. Costello. The Chair thanks the gentleman from Michigan.
And, gentlemen, thank you for your testimony today before
the Subcommittee. And with that we will dismiss this panel and
ask the next panel to come forward. Thank you.
Mr. Costello. I will begin to do the introductions for this
panel. Captain Wendy Morse is the chairman of the United Master
Executive Council, Air Line Pilots Association. Captain Jay
Pierce is the chairman of the Continental Master Executive
Council, Air Line Pilots Association. Ms. Patricia Friend, the
international president for the Association of Flight
Attendants, CWA. Mr. Robert Roach, Jr., general vice president
of the Transportation International Association of Machinists
and Aerospace Workers. Mr. Albert Foer is the president of the
American Antitrust Institute. Mr. Hubert Horan, who is the
aviation analyst and consultant. Mr. William McGee, consultant
on travel and aviation issues, Consumers Union. And Mr. David
Strine, who is the portfolio manager, Impala Asset Management,
LLC.
Ladies and gentlemen, as you know, we will put your entire
statement in the record. We would ask that you summarize your
testimony in a 5-minute period. And that will allow both
myself, Mr. Petri and other Members to ask questions.
With that, the Chair will recognize now Captain Wendy
Morse. Captain Morse.
TESTIMONY OF CAPTAIN WENDY MORSE, CHAIRMAN, UNITED MASTER
EXECUTIVE COUNCIL, AIR LINE PILOTS ASSOCIATION; CAPTAIN JAY
PIERCE, CHAIRMAN, CONTINENTAL MASTER EXECUTIVE COUNCIL, AIR
LINE PILOTS ASSOCIATION; PATRICIA FRIEND, INTERNATIONAL
PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS-CWA; ROBERT ROACH,
JR., GENERAL VICE PRESIDENT OF TRANSPORTATION, INTERNATIONAL
ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS; ALBERT A.
FOER, PRESIDENT, THE AMERICAN ANTITRUST INSTITUTE; HUBERT
HORAN, AVIATION ANALYST AND CONSULTANT; WILLIAM McGEE,
CONSULTANT ON TRAVEL AND AVIATION ISSUES, CONSUMERS UNION; AND
DAVID STRINE, PORTFOLIO MANAGER, IMPALA ASSET MANAGEMENT, LLC
Ms. Morse. Good morning, Chairman Costello and other
Members of the Subcommittee. I am Captain Wendy Morse, chairman
of the United Master Executive Council of the Air Line Pilots
International. We have more than 7,700 active and laid-off
pilots at United Airlines, and I appreciate the opportunity to
speak before the Subcommittee regarding the United-Continental
merger as proposed.
Over the past decade the airline industry has experienced
the worst economic storm in the history of commercial aviation.
An unprecedented series of financial shots have taken their
toll on airline service and on employees. Bankruptcies,
employee layoffs, contractual concessions and outsourcing have
all been well chronicled. The proposed merger between United
and Continental represents not only an opportunity for both
airlines, but a possible sea change in the economic direction
and customer satisfaction for the airline industry. How this
merger is handled will determine whether it has changed for the
better.
This choice could not be clearer, and a recent history of
airline mergers provides a vivid picture of which path to
choose. We are not traveling down uncharted territory. The
obvious path to success, should it be selected, has already
been established. The advantage of the knowledge of what has
worked and what hasn't worked must be recognized.
The Delta-Northwest merger in which the company worked out
a mutually satisfactory contract with the pilots has been a
resounding success. It has exceeded initial estimates for
financial synergies, leading to a more viable company that
provides greater service for the flying public and provides
greater employment certainty for its employees. The America
West-U.S. Airways merger in which management failed to
negotiate contract terms in advance is still run as two
separate companies. Mired in lawsuits, America West-U.S.
Airways has failed to realize the advertised synergies, even
though the merger took place more than 5 years ago, and
continues to have its share of unresolved labor issues, which
benefits neither the company nor the consumer.
One axiom in the service industry stands as a beacon of
truth: Take care of your employees, and ultimately they will
take care of the customers, and the business will take of
itself. It is imperative that the combined United-Continental
establish a management team not only capable of running the
airline well, but also that cultivates a culture where the
combined entity provides the revenue and capital generation for
a great product.
In order for this merger to be successful, there must be a
joint collective bargaining agreement with assurances for
wages, working conditions and job protections that are
commensurate with the professionalism that our pilots exhibit
each and every day. Thanks to the professionalism, commitment
and financial sacrifice of pilots and other employees, our
airline has weathered numerous challenges and now flourishes,
but there are still challenges ahead.
One of the biggest for the pilots of United and
Continental, and indeed for the airline piloting profession, is
the industry's continued drive to outsource as much flying as
possible to an ever-shifting collection of the low-cost
subcontractors. Last year United Airlines laid over 1,437
highly experienced pilots, their jobs outsourced to these low-
cost subcontractors. The average United Airlines passenger now
has a 50/50 chance that their flight is being operated by
United Airlines. This philosophy, which puts profits ahead of
safety and the traveling public, must come to an end.
While United Airlines has been on the Hill saying all the
right things, seeking approval, I speak for the United pilots
when I tell you that our contribution must be recognized in
order for this merger to be successful and the synergies to be
realized. We ask that as you consider the benefits this
transaction will have for the industry and for consumers, you
also measure whether managerial actions are consistent with
their words.
United and Continental managements now stand at the
threshold of what could be a great airline, one that sees
sustainable profits and will also provide unmatched service to
our customers. A combined United-Continental could establish a
new paradigm in commercial aviation, one where management and
labor work together to establish a solid, profitable airline,
where employees are properly compensated and where job security
is not a constant concern.
As key stakeholders, the United pilots stand ready to
embark on this new business opportunity. Our favorable
participation will lead to a stable, sustainable airline. This
in turn will produce an unprecedented level of success for
United stakeholders and an exemplary level of service for the
flying public. I thank you.
Mr. Costello. The Chair thanks you, Captain, and now
recognizes Captain Pierce.
Mr. Pierce. Good morning, Mr. Chairman, Ranking Member
Petri and Members of the Committee. I am Captain Jay Pierce,
chairman of the Continental Airlines Master Council of the Air
Line Pilots Association International. Thank you for the
opportunity to speak regarding the proposed Continental-United
merger. I am particularly thankful that you have taken the time
to consider the effect this proposed merger may have on labor.
I began my aviation career in the United States Army in the
late 1970's and have been a professional airline pilot for over
25 years. I am in my second term serving in the Continental
Pilot Group as its chairman. And as a Continental pilot I can
assure you that I have been trained to recover from a full
stall.
I tend to think in terms of opportunities, risks and
rewards. I believe that this merger will be an exercise in all
three. The questions that have to be answered are, will the
opportunities produce success; who will assume the risks; and
finally, who will reap the rewards?
To some, the initial value created by participating in the
merger will allow for claims of success. However, if creating a
story for Wall Street simply through participation is the goal,
that bar is set very low. None of us should accept the
philosophy of mediocrity as the standard for success. If done
correctly this merger can strengthen our airlines and help
resurrect a failing industry. This is the opportunity.
Our merger partner United's financial performance has been
in critical condition, and although ours is better, has been
in--could be considered somewhat anemic. Over the last decade
network carriers have reported over $60 billion in net losses.
Since deregulation there have been over 180 airline
bankruptcies. Historical greats, such as Pan American, CWA and
Eastern, have become extinct. Thousands of employees have lost
their jobs, shareholder value has been erased, and communities
have suffered. The industry is broken and is badly in need of
an overhaul.
Continuing down the well-traveled path of economic
irrationality does not bode well for the traveling public,
shareholders, or for the long-term interest of airline
employees. It is incumbent on us to find rational solutions. I
believe that a properly executed merger can be a better
solution for the industry than consolidation by failure.
Going third in this round of airline consolidation provides
us an opportunity to examine what has worked and what has
failed. It is clear to see that the difference between marginal
success and real success can be tied directly to labor, and
more specifically pilot labor. In a merger it is not the
executives, the bankers or the lawyers who assume the risk; it
is the employees, and it is labor. If we must carry the risk,
we must share in the rewards.
I cannot guarantee that this merger will be successful, but
I can with all certainty predict its downfall if our pilots do
not support the path our managements have chosen. The merger is
expected to produce over $1 billion in airline synergies. If
the merger is successful, that success will be determined by
the strength of the new entity, the value added to
shareholders, and, even more importantly, by the pride of the
airlines' labor force. This pride can only be regained by first
returning to labor what has been lost through years of
concessions. As irrational as it is to continue to foster a
failing industry, it is equally irrational to use the benefits
derived from a merger to simply enrich those who put the deal
together or to continue to throw good money after bad with ill-
conceived business plans that reward only those at the top.
It is also important that this merger provide benefits for
passengers. We should use this opportunity to reexamine
subcontracting and outsourcing. When a passenger books a trip
with Continental from Houston to Newark and then beyond, they
have an expectation that the entity they purchased the ticket
from is responsible for their travel experience. Network
carriers should be operational airlines, not merely ticket
agents.
Our passengers have a right to receive one level of service
and one level of safety from the beginning of their journey to
their final destination. To achieve that single platform
experience, flights must be operated under the operational
control of the network carrier and therefore be crewed by
pilots working under contract with that airline. As Continental
employees we bring an award-winning culture of customer service
to an industry marked with sharp declines in customer
satisfaction. We bring strong job protections that limit the
outsourcing of flying to its lowest bidder. If done in the
right fashion, this merger can bring the best of Continental to
the United name.
In closing, I would like to remind you that Continental
Pilot Group did not search out or solicit this merger. We are,
however, cognizant of the fact that if done correctly, this
could be an opportunity to create a great airline, one enriched
by Continental's culture, with a route structure capable of
transporting customers to almost anywhere in the world and a
pilot group unmatched in professionalism and experience. Thank
you for your time, and I look forward to your questions.
Mr. Costello. The Chair thanks you, Captain Pierce, and now
recognizes Ms. Friend.
Ms. Friend. Thank you, Chairman Costello, Ranking Member
Petri and the Members of this Committee, for giving AFA-CWA,
the world's largest flight attendant union, the opportunity to
testify on this proposed merger of United and Continental
Airlines.
The voices of the workers often take a back seat in these
hearings and in the public pronouncements about the benefits of
airline mergers. I am here today to give those workers a voice.
As a United flight attendant for 43 years and the president of
AFA-CWA for 15 years, I have had a unique perspective on the
dramatic changes that have reshaped the commercial aviation
industry and eliminated thousands of jobs.
Lately I have listened to airline CEOs testify before this
Congress about the need to consolidate the industry in order to
achieve a sustainable business model. After hundreds of airline
bankruptcies, thousands of employee furloughs, devastating pay
and benefit cuts, destruction of pensions and 32 years of
deregulation, it seems that airline management has figured it
out, albeit in the worst fashion, that our Nation needs a
stabilized and a rational aviation industry.
Mr. Chairman, the Nation's flight attendants and all
aviation workers also need a stable industry. The consumers are
rightfully concerned that airline mergers will lead to higher
fares and reduced service. We agree. But we also recognize the
reality that airline fares must increase in order to stabilize
this industry, provide a robust air transportation system, and
provide more stable employment for thousands of aviation
workers.
To strike this balance between a stable industry and
reliable air service, we assert today that the increase in
consolidation activity requires appropriate regulatory
oversight to protect the interest of employees and consumers.
But while some protections are in place today for consumers and
communities, since deregulation there are virtually no
protections for airline workers. Of all the well-developed,
prederegulation rules of the Allegheny-Mohawk Labor Protective
Provisions, only one exists today, a provision that establishes
basic seniority protections in the event of a merger.
After deregulation the Congress was concerned that massive
postderegulation restructuring of the airline industry would
displace large numbers of employees. So in order to assist
laid-off employees, they added the Airline Employee Protection
Program to the Deregulation Act of 1978. Unfortunately, the
almost 40,000 employees who lost their jobs in the immediate
wake of deregulation never received the benefits that Congress
promised since funding was never authorized for the benefits.
As Congress looks into the impact of mergers on employees,
it should definitely look at the failed EEP as a framework to
provide meaningful protections to workers in the future.
As we have testified in the past, we are not proposing to
reregulate the industry, but we do think that at a minimum
something needs to be done to shield workers from the harshest
effects of this merger and all future mergers.
So what can the workers at United and Continental expect as
they combine their workforce and route structure? While
management has provided information that is otherwise publicly
available, management has not been forthcoming about critical
and future business plans. I call on this Committee to compel
United and Continental management to provide the information on
their plans for current United and Continental employee-based
and hub operations.
In addition to the proposed merger, United is the architect
of a new global alliance revenue-sharing scheme. They have
contracted with Aer Lingus to operate an international route
for them using Aer Lingus aircraft, but employing flight
attendants from a third-party operator. We call on this
Congress to stop this type of so-called joint venture scheme by
enacting H.R. 4788. We call on you to not let United and
Continental management use this merger as a vehicle to
outsource more good middle-class jobs.
We also ask this Committee to consider the impact this
merger may have on the contract negotiations under way between
the Association of Flight Attendants, CWA and United Airlines.
For almost 6 years the flight attendants at United have been
working under a collective bargaining agreement that was
negotiated while the company was in bankruptcy. They sacrificed
nearly $2.7 billion in salary and benefit concessions in
addition to the loss of their pension. We are asking your help
to ensure that the current contract negotiations are
satisfactorily resolved before this merger is finalized.
We will not allow the negotiation process at United to be
delayed as a result of this merger. The employees at United
Airlines make deep sacrifices to keep the company flying, and
it is time for the workers to share in those rewards. While
much will be made over the coming months about the impact of
this merger on consumers and communities, I urge you to
remember the hundreds of thousands of airline employees across
this country. Keep us in mind as you review this merger and the
impact that it will have on our lives and our families. We are
the ones who have the most to lose, and we have the least
protection.
I thank you for your time, and I look forward to your
questions.
Mr. Costello. The Chair thanks you, Ms. Friend, and now
recognizes Mr. Roach.
Mr. Roach. Thank you, Chairman Costello, and Ranking Member
Petri, and Members of the Committee, for the opportunity to
speak to you today. My name is Robert Roach, Jr. I am the
general vice president of the International Association of
Machinists and Aerospace Workers, the largest airline union in
North America. The Machinists Union represents over 27,000
employees that could be adversely affected by this merger at
Continental Airlines; the flight attendants, Air Micronesia, a
subsidiary of Continental; the flight attendants, Express Jet,
a regional partner of United and Continental; and fleet and
passenger service, as well as other classifications at United
Airlines.
We echo Chairman Oberstar's statement when he wrote to the
Department of Justice, this merger will move the country far
down the path of an airline system dominated by three
megacarriers. If United and Continental merge, another domino
in a chain of merges will fall, and there will also be
additional consolidations to help them survive. Already the
president of U.S. Airways of the regional--of a low-cost
carrier has announced that if this merger goes through, that
his airline will soon follow suit.
We cannot look at the United-Continental transaction in
isolation. The airline industry has been in turmoil since the
passage of airline deregulation in 1978. The Machinists Union
argued against deregulation. Our predictions have come true.
Deregulation in this industry and others has had disastrous
effects. In 2007, the financial and housing meltdown was a
result of unregulated corporate greed in the banking and
mortgage industries. Looking daily at the news reports about
the catastrophe in Louisiana and the Gulf Coast, with oil
spilling out, ruining the lives of people down there, we can
tell that deregulated industries only operate in their own best
interest and not the interest of the consumers or their
employees.
The airline industry needs to be stabilized because it
drives $1.4 trillion in economic activity and contributes $692
billion per year to the gross national product. It is too vital
an industry to leave to its own destructive devices.
It is clear that the airline industry has failed to deliver
on the promises of a stable, profitable industry, and staying
the course will only continue the industry's downward spiral.
Albert Einstein, the great scientist, said, ``Insanity is to
continue to do the same thing over and over again and expect a
different result.''
Can we allow the airlines to continue to consolidate and
merge and continue to lose money, lose employees, destroy
cities and States with their supposed service without some sort
of regulation to protect those interests? Even Alfred Kahn, the
major architect of deregulation, said, ``I must concede that
the industry has demonstrated a more severe and chronic
susceptibility to destructive competition than I, along with
other enthusiastic proponents of deregulation, was prepared to
conceive.''
The industry is crying out for limited reregulation. Does
anyone really believe that having only a few major airlines in
operation, each with immense market control and offering
consumers fewer choices, will benefit the country? If one of
these megacarriers should fail, how will that impact the
country?
The Machinists Union has serious concerns not only about
the viability of a combined carrier, United-Continental, but
the industry in general. Although we have met both airlines
jointly and separately since the airline merger was announced,
IAM members still have many questions unanswered and concerns
that need to be addressed.
We estimate that United, the merger--the merger of United
with Continental carrier would start out with $13.8 billion in
debt. What is the business plan to deal with that debt
structure? Will the merged carrier have any choice but to
eliminate hubs in order to avoid competing with itself? Closing
hubs initiates a cascade of job loss that begins with airline
employees and continues throughout the communities to the firms
that provide services to the airline. Will the merging of these
two carriers and wholesale reshaping of the industry destroy
competition and harm consumers?
As details about the combined carrier business plan emerge,
it must be closely scrutinized to determine if the merge will
result in a successful airline or not. We ask Congress to help
determine if this transaction will be good for employees. The
carriers admitted that homogenizing pensions is a complex
issue, and although they have given it much thought, they do
not know how it will be resolved.
The Machinists Union will not allow a member's retirement
security to become a casualty of this merger. United Airlines
has passed billions in pension liabilities to the American
taxpayer already. The Machinists Union is currently in contract
negotiations. For all eight classifications we have members of
the two carriers. It is premature for anyone to talk about
combining the carriers' employees, and each airline must
recognize a responsibility to continue bargaining in good
faith.
I would like to say that all the past mergers--U.S. Airways
and America West, which is now being said we are going to
another carrier, has operated as a separate carrier for 5
years. Although your announcements that Delta is working fine,
Delta is working as a separate carrier in many of its
classifications.
And let me just say very quickly in closing that I am a
product of one of these mergers. I was at TWA. My seniority was
changed from 1975 to 2001. And we heard the same predictions,
the same predictions that we hear from all CSOs and CEOs, that
these airlines were not going to lay anybody off, that we were
going to continue to service. St. Louis is a ghost town. The
people in Kansas City have lost their jobs. As Mr. Tilton
testified, planes are going over to China to be maintained.
It is time to put a stop to this. Enough is enough. We need
to reregulate the airline and put a halt to this airline merger
until we have a stable airline industry.
Thank you, Mr. Chairman. I look forward to your questions.
Mr. Lipinski. [Presiding.] Thank you, Mr. Roach.
The Chair now recognizes Mr. Foer.
Mr. Foer. Thank you, Mr. Chairman, Members.
Since most of my analysis today closely resembles my
testimony before this Committee 2 years ago, my first
recommendation, as foreshadowed by the gentlewoman from Hawaii,
is that Congress ought to hold retrospective hearings on the
Delta-Northwest merger. Has it accomplished its stated
objectives? Were the projected efficiencies obtained? Has
competition been adequately protected? Is the American consumer
better off or worse off? I don't have the answers, but there is
no question that the answers would be invaluable in our efforts
to predict what the implications of the United-Continental
marriage are going to be. Indeed, it might make sense to
actually delay the consummation of this merger until a fully
credible study of the prior merger can be taken into account.
The essential points of my written statement are the
following. One, this is an industry in which there are
substantial network effects, but the incremental costs of
expanding an already large network may offset the network
benefits.
Two, the industry is already concentrated on a national
basis, but this generalization underestimates the market power
that is present at most hubs and on most routes.
Three, a merger of this magnitude will in all probability
lead to at least one more merger of similar size, and that will
leave the U.S. domestically with three national network
carriers, plus Southwest, and a fringe of other low-cost
carriers.
And four, this merger will itself likely lead to
rationalizing capacity by closing or scaling back hubs,
probably in the Midwest, which will harm a significant number
of consumers.
Now, these considerations require us to ask whether the
four, or more likely three, national networks that will emerge
from this process will be sufficient to provide a satisfactory
range of choice and service and sufficient competition to keep
prices close to cost. Standard antitrust analysis focuses on
horizontal overlaps between airport pairs and, in certain
markets, between city pairs. If an origin and destination route
is served by only a few airlines, and the merger will leave the
particular market more highly concentrated, then the DOJ will
likely and properly require a divestiture or some other
arrangement with respect to that route as a condition of
approving the transaction. This is necessary, but it is not
sufficient, especially if we look at competition among the
systems and not merely within specific route pairs.
Much has been made over the role of low-cost carriers in
preserving competition. Southwest clearly influences prices
wherever it competes, and there may be an effect even when
Southwest is perceived as a potential competitor. But Southwest
and the other low-cost carriers have found their success by
competing indirectly rather than directly with the networks.
They are called low-cost carriers in large part because they do
not bear the cost of large networks. They do not offer the same
type of one-stop shopping, frequent flyer benefits or airport
amenities as network carriers. So decisions about the future of
domestic air transportation should not rest on the concept that
Southwest will always play its current role. Its strategies
could change, its management could make mistakes. It could
choose to relax under the price umbrella of a tight oligopoly
of network carriers.
The ultimate question is whether the public will be
satisfied with three domestic and three global air
transportation systems. There is little, if any, empirical
knowledge that says how many systems are needed to provide a
workable degree of intersystem competition. There is
substantial data, both empirical and theoretical, that suggests
that competitive problems increase as the market becomes highly
concentrated. There is substantial experience with domestic air
mergers that suggest how difficult they are to execute
successfully, how few efficiencies have resulted from big
carrier mergers, and how minimal entry has been at the network
level.
To the extent there is doubt about the United-Continental
merger, it should be resolved as essentially a public policy
question: Are we willing to interfere with private business
decisions in order to preserve the few competing systems at the
possible expense of whatever efficiencies might realistically
be lost?
We suggest that the magnitude and certainty--and I am just
about finished--of these proclaimed efficiencies should be
analyzed with great skepticism, and must be laid against
inefficiencies due to other diseconomies of scale and scope,
the cost of consummating the merger, and the reduction of
competition arising from the merger. From a public perspective
there should be no reason to rush to a decision on whether to
allow United and Continental to merge, and it would make
particularly good sense to examine the effects of the most
recent similar merger, Delta and Northwest, before opting for
further consolidation.
Thank you very much.
Mr. Lipinski. Thank you, Mr. Foer.
Mr. Horan.
Mr. Horan. Mr. Chairman, the United-Continental merger and
the ongoing airline consolidation process creates four major
problems for consumer and industry efficiency. I believe all
four problems have a common cause the Committee needs to
address going forward.
Problem number one, as documented in Exhibit 1 of my
testimony, is the overwhelming evidence that anticompetitive
market power created by North Atlantic consolidation has
already created consumer welfare losses in excess of $5 billion
a year. These consumer welfare losses will be much worse in a
few years after the implementation of United-Continental and
American-British Airways.
Problem number two is that United-Continental is part of a
well-planned, three-phase process to consolidate the entire
legacy network business so that a permanent cartel of three
too-big-to-fail collusive alliances control 80 percent of the
overall U.S. aviation market, including 100 percent of the
transatlantic and transpacific. In the North Atlantic phase 1,
the DOT handed exclusive control of all intercontinental
traffic to and from the United States to three companies. In
phase 2 those three companies used that artificial market power
to force the other three domestic legacy airlines out of
business. Phase 3 began last year with the Japan ATI cases that
are designed to create the same type of multibillion-dollar
consumer welfare loss as we have already seen on the North
Atlantic. Continental-United is an integral part of all three
phases and can't be evaluated as an isolated event.
Problem three is the domestic market power threat. United-
Continental will not cause immediate price increases in the
local Chicago-Houston market, but broad categories of U.S.
consumers are at risk. Legacy network carriers cannot survive
without a strong, secure source of the international traffic
that is the heart of their business model. When DOT gave three
legacy companies exclusive control over all of this traffic,
the DOT issued a de facto death warrant for legacy companies 4,
5 and 6. The Delta-Northwest merger eliminated number 4; the
current merger eliminates number 5 and is designed to cripple
or kill U.S. Airways, number 6, who has no hope of independent
survival even though it is the most efficient of all the legacy
carriers.
The destruction of competitors in forced mergers where
companies can be acquired for pennies on the dollar are market
power abuses every bit as serious as the cartel pricing you see
in international markets.
Consumers also face the threat of oligopoly service
reduction in hundreds of smaller cities once this control of
the legacy 80 percent of the market shrinks from six to three
carriers, a threat that will not be addressed or mitigated by
low-cost carrier expansion.
Problem number four is that these mergers cannot be
justified on efficiency synergy grounds, the heart of the CEO's
arguments earlier, and are strictly motivated by the potential
for increased anticompetitive market power. No previous merger
between large airlines has ever produced a material reduction
in unit operating cost, no previous merger between large
airlines has ever produced large enough synergies to justify
the enormous implementation costs of these mergers, and the
vast majority of airline mergers since deregulation have been
dismal financial failures. There is no evidence that the PR
claims about the Delta-Northwest merger producing multibillion-
dollar synergies are true.
The single root cause of these four consumer inefficiency
problems is the DOT's willful refusal to obey or enforce
longstanding antitrust law. Antitrust law is not a barrier to
any airline consolidation that can demonstrate public benefits,
be they efficiency gain, service expansion, or lower prices,
and that does not create or enhance artificial market power.
But the evidence in this and in every previous case has been
either nonexistent or fraudulent.
The DOT refused to conduct the legally required Clayton Act
market power test in any previous case. The DOT has not only
willfully ignored the evidence of growing anticompetitive
pricing that I have documented in my testimony, but they failed
to collect any evidence on pricing or entry barriers
whatsoever. The DOT simply made the false assertion the North
Atlantic is a fully contestable market, even though there
hadn't been new entry in 23 years.
Every DOT ATI decision is based on completely fraudulent
public benefits evidence, directly violating the horizontal
merger guidelines requirements for verifiable, case-specific
evidence that is neither vague nor speculative. The public
benefits in each case rely on the completely false DOT claim
that eliminating competition actually reduces prices in certain
markets and does so automatically regardless of market or
competitive conditions. And the DOT has used this ``prices fall
whenever we reduce a competition'' rule to nullify the legal
requirement for verifiable, case-specific evidence of public
benefits in all future cases.
The Committee and Congress must address this core problem
that is DOT nullification of evidence-based antitrust
enforcement means that airline competition is no longer being
determined by consumers and investors in the marketplace in
accordance with the Airline Deregulation Act, it is being
determined by government bureaucrats working at the behest of
politically powerful incumbent companies. The Committee cannot
allow this merger review to proceed without full assurance
there will be rigorous, independent scrutiny of the core
synergy and market power claims, and, more importantly, the
review cannot proceed until the DOT's nullification of
evidence-based antitrust enforcement has been clearly rejected,
and the irreconcilable split that exists today between the DOT
and DOJ approaches to antitrust has been resolved.
Mr. Horan. And my last point, the Committee must intervene
in the current U.S.-Japan ATI case, where the DOT has clearly
signaled they have no intention of enforcing the law, plans to
rubber-stamp a massive reduction in trans-Pacific competition
that is going to weaken U.S. competitiveness and basically use
multibillion-dollar consumer price increases in order to
protect inefficient foreign carriers such as Japan Airlines.
Thank you, Mr. Chairman.
Mr. Lipinski. Thank you, Mr. Horan.
The Chair will now recognize Mr. McGee.
Mr. McGee. Thank you, Mr. Chairman and Members of the
Committee. Good afternoon. My name is William J. McGee, and I
appear before you today as a consultant on travel and aviation
issues for Consumers Union, the nonprofit publisher of Consumer
Reports. I thank you for the opportunity to express our deep
concerns about the proposed merger between United Airlines and
Continental Airlines.
Just as we have seen with banking and other businesses, we
are now seeing the airline industry evolving into an oligopoly,
and some carriers are rapidly approaching the too-big-to-fail
threshold. In this environment, those who previously decried
any form of assistance to financially struggling carriers would
reverse that argument, claiming a mega-carrier, such as United-
Continental, will be too big to fail. And they would be right;
a shutdown would have immediate and adverse effects throughout
the country.
When the U.S. Airline industry received a $5 billion
bailout in 2001, it was argued that airlines were essential to
America's economy, infrastructure, security, and defense.
Consumers Union agrees. Yet what we have been witnessing is an
incredibly shrinking airline industry. With this merger, in
less than 20 years we will have seen the demise of seven major
brands in the United States: Pan Am, Midway, Eastern, TWA,
America West, Northwest, and now Continental.
While others can speak to the adverse effects on labor, the
travel and tourism industries, and a host of suppliers, I will
focus my comments on the potentially adverse effects upon
passengers.
In February 2001, the General Accounting Office reported on
airline consolidation and identified several potential threats
to consumers. We can't predict with absolute certainty how the
United-Continental merger ultimately would affect consumers,
but we can examine the recent historical record to see how
passengers were affected by American's acquisition of TWA's
assets in 2001, US Airways' reverse merger with America West in
2005, and Delta's acquisition of Northwest in 2008.
Unfortunately, the record for consumers is not good. In
addition to the too-big-to-fail argument, we have identified
other key problems that emerged. More details are available in
my written testimony.
One, less choice and fewer flights: Historically, we have
not seen a merger among major carriers that has not led to
reductions in service. United-Continental states it will
maintain 10 hubs, eight of them in the continental United
States. What we do know is that other mergers between major
airlines eventually led to hub closures and flight reductions,
despite promises to the contrary.
Consider that TWA's former hub in St. Louis saw a reduction
in total passenger traffic from 23 million in 2002 to 12
million in 2009. America West's former hub in Las Vegas has
shrunk as well. And although the full effects of Delta-
Northwest have yet to be seen, Delta's hub in Cincinnati is
already experiencing cutbacks.
Meanwhile, consumers on many routes are losing the
opportunity that some airline executives suggest to ``vote with
their feet,'' where there is no effective competition.
Two, loss of service: It seems apparent the United-
Continental merger would mean some cities, particularly smaller
cities, would lose nonstop air service, if not all air service.
The more mega mergers that are approved, the higher the
probability that additional cities will lose service.
Three, higher fares: A July 2008 report from the GAO
concluded that mergers and acquisitions can be used to generate
greater revenues through fare increases. Some analysts argue
low-cost carriers will fill the void, but, one, there is no
guarantee they will do so, and, two, even when a low-cost
carrier enters a former hub, prices fall only on selected
routes, not on all routes.
Four, reductions in service: Airline mergers tend to be
contentious, and this case involves two mature companies.
United was founded in 1926, Continental in 1934. So, therefore,
a clash of corporate cultures is virtually guaranteed,
particularly after layoffs.
These sterile corporate terms--downsizing, right-sizing,
outsourcing, off-shoring, furloughing--really mean two
workforces will experience more trauma and jockeying for
position on blended seniority lists. Inevitably, this will lead
to employee morale issues and slowdowns due to melding of
policies, procedures, and technologies.
Five, fewer start-ups: Greater concentration of market
share has a negative effect, according to a 2001 DOT report. It
noted instances in which incumbent airlines drove new entrants
out by cutting fares and flooding the market with capacity,
only to later increase fares and reduce service.
Six, less resistance: Since deregulation in 1978, we have
repeatedly seen how one major carrier will initiate a fare
increase and then watch if rivals will match. If enough key
players resist, then the fare hike will be withdrawn. This same
principle has applied to introducing airline fees and even to
service initiatives. In a smaller industry, the likelihood of a
rival carrier resisting a new fee or airfare increase will
dissipate.
Seven, widespread disruptions: With greater concentration,
the United States faces a much greater threat of travel
disruptions. Imagine the nationwide effects of a labor action
or FAA grounding at a combined United-Continental, which
analysts estimate would control nearly a fifth of all domestic
airline seats. Even a 24-hour loss of service would have severe
consequences.
Eight, raising the stakes: Since the approval of the Delta-
Northwest merger, some proponents of the United-Continental
merger argue that ``fair is fair.'' That is why executives from
American Airlines may soon appear before this very Committee
seeking a merger with U.S. Airways, which, of course, just
merged with America West in 2007. Ironically, this sudden
leapfrogging in the airline ranks has not been due to genuine
growth, expanding service, and creating jobs, but to reductions
in service.
It seems only fair to ask what the end game is here. At
what point will this merger mania subside? Today we are told
the domestic airline industry can only support only three large
network airlines. How long before we are told that number has
been reduced to two or one? Before further consolidation is
approved, Consumers Union feels there should be more discussion
about the airline industry's ultimate goals and how those goals
affect U.S. consumers.
Thank you. And I look forward to your questions.
Mr. Lipinski. Thank you, Mr. McGee.
Mr. Strine?
Mr. Strine. Thank you, Mr. Chairman and Members of the
Committee.
Like you, investors in the capital markets have heard
different arguments about why or why not mergers should take
place in the U.S. airline industry. The balance of these
arguments and the resulting policy impact how the market prices
risk and sets the cost of capital for the airline industry.
To help you with your analysis, I will provide you with a
perspective from the financial markets. So long as the airlines
source their funding from the debt and equity capital markets,
the boards of directors and management teams have fiduciary
duties to their shareholders and creditors. In keeping with
that duty, it is incumbent upon them to manage risk and work to
enhance returns on invested capital.
While managing costs and delivering products that customers
value are important, making strategic structural decisions that
permit their companies to adapt to changing market conditions
are also critical. The airline industry is in dire need of
lowering its financial risk and its cost of capital, and
consolidation is one part of the solution.
By several objective measures, the performance of the
industry, including Continental and United, has been abysmal.
The regularity of loss and failure goes unrivaled in corporate
America. For example, looking at the performance over the past
decade, we can see that the industry has reported an aggregate
loss of about $68 billion, there have been 58 bankruptcies,
about 130,000 jobs lost, and defined benefit pension plans were
offloaded to the Pension Benefit Guaranty Corporation. In
addition, the average age of the fleet increased to about 11
years.
To cap it all off, the value of the XAL, which is the New
York Stock Exchange airline index, has dropped by about 77
percent since 2000. Taken as a whole, the body of evidence
supports the need for profound change. The leadership at United
and Continental are trying to address this need.
The poor financial performance of the industry through a
full business cycle can be attributed to its high fixed-cost
structure, overleveraged balance sheets, low barriers to entry,
higher barriers to exit, fragmentation, and fierce competition
from low-cost carriers and recently consolidated, well-funded
international carriers in Europe, the Middle East, Asia, and
Latin America. These factors contribute to the higher cost of
capital, which limits growth.
Over the past year, airline asset-backed debt has
frequently garnered yields over 10 percent. In one debt
transaction, United paid 17 percent. Further, in the autumn of
2009, every major network carrier except Delta issued equity at
steep discounts in transactions that were highly dilutive to
shareholders, which also raises the cost of capital. To this
day, the weighted average cost of capital remains well into the
double digits because of the significantly overleveraged
balance sheets.
Over the long term, value can only be created when the
return on capital exceeds its cost. This is a fundamental
financial goal the airline industry has never been able to
achieve through a full cycle.
Now, consolidation is certainly not a cure-all, but it is
self-help. While the United-Continental merger is far to small
to significantly change the competitive dynamics of the
industry, given that the two carriers combined only produce
about 18 percent of the available seat miles and they have de
minimis route overlap, their focus on improving efficiency and
creating synergy is a step in the right direction toward
financial stability.
Although labor costs are likely to rise, as they typically
do in mergers and after reductions and bankruptcy, the scale of
the combined entity should enhance purchasing power with
suppliers and the global network should be more attractive to
high-yielding corporate customers.
In addition, although United-Continental may gain
additional corporate customers, which should improve their
yield mix, it would be wrong to conclude that the merger would
stop the domestic yield deterioration, which has been going on
for the last 30 years due to the continued growth of low-cost-
carrier market share. Over the last 10 years, network-carrier
market share has dropped by 33 percent.
In conclusion, as you weigh policy objectives for the
airlines, you may want to consider the benefits from having
airlines in a better position to generate a return on invest
capital in excess of their cost of capital through a full
business cycle.
The balance of positions which seek to socialize aspects of
the airline industry without social funding versus those that
promote growth in the free market will contribute to how the
market prices airline capital risk and measures the required
rate of return to justify growth.
The ability to generate more consistent returns on equity
and free cash flow is the path to repairing balance sheets and
longer-term financial stability. Only then will there be a
solid foundation for increased capital expenditures, rising
wages, and increased service.
Thank you.
Mr. Lipinski. Thank you, Mr. Strine.
I would like to thank the witnesses for their testimony.
We will now move on to Members' questions. And I will begin
with the distinguished gentleman from Minnesota, the Chairman
of the Full Committee, Mr. Oberstar.
Mr. Oberstar. Thank you, Mr. Chairman.
And I want to join his compliments to the panel for their
splendid testimony.
Vice President Roach, your very personal witness to your
own experience, I remember it so well, of TWA. You are right,
it did hollow out. St. Louis, it did empty out--Kansas City.
The result of the acquisition meant the sale of their nonstop
service between St. Louis and London Heathrow, which Mr. Icahn
sold to American Airlines for $400 million. It should never,
never have acquired value in a marketplace. These are rights
given in the public interest for the public convenience and
necessity, not for the personal enrichment of the carrier.
And American made that money back in about a year. But St.
Louis lost its connection to the world beyond, and an awful lot
of people lost their jobs in the process. And, ultimately, TWA,
one of the great proud carriers of years and decades past, was
absorbed by American and now has to beg O'Hare for service to
the whole country. That is the encapsulated summary of mergers
and bigness.
Yeah, ``too big to fail.'' United-Continental, as one of
our witnesses just said, would control a fifth of the domestic
market share, 115 billion of available seat miles. That is
enormous capacity control.
I asked several years ago, and I think Mr. Foer may recall
this: Why would anyone, would any carrier spend $150 million on
a 747 when, for $50 million, you can buy a whole fleet? Do you
remember what I had referenced to, Mr. Foer? Checchi and Wilson
acquiring Northwest. For $50 million, they bought a whole fleet
of 747s. And it took an airline that had $2 billion in equity
and $1 billion in debt and turned it just the exact 180
degrees, $2 billion in debt and less than $1 billion in equity,
and put it on a path towards the brink of bankruptcy.
Now, this bigness and this merger mania, they spent 6
months looking for other carriers to acquire until they
realized they needed to manage an airline. And all of you who
have been captains, flight attendants, the maintenance
personnel, all have seen this happen in the industry. Bigness
leads to neglect and to difficult labor relations and to lower-
quality service.
Now, Mr. Foer, your testimony said, I predicted, along with
many others, that a merger for Delta-Northwest would lead to a
merger between United and Continental. I put it just the
opposite of your testimony, your exact words, but that is what
you meant. And that is what has happened.
Now, isn't it likely that the next shoe will drop if this
one is approved--that is, American, US Airways, BA, Iberia, and
Czech Airways, and JAL--and then have you three global mega
carriers, right?
Mr. Foer. Right. Basically, right now, on the international
scene, we have three airlines operating under a variety of
brand names. And I have been told by somebody in a position to
know that, in those alliances, once there is antitrust
exemption, the multiple companies can operate as if they are a
single company.
And so, why not face the reality? The reality is we are
down to three international, global companies, supposedly
competing against each other, but, you know, to the extent
possible, they avoid head-to-head competition, just as
domestically.
Mr. Oberstar. They are just carving up the international
pie, really, is what they are doing.
Mr. Foer. Right.
Mr. Oberstar. And with antitrust immunity, which they are
all desperately seeking, which I opposed for United, and which
they will want now with--and you have cited the U.S.-Japan
case. ANA wants antitrust immunity for their alliance with
United. Well, there is no competition in an antitrust-immuned
alliance. And you will see fares goes up, service go down, more
traffic concentrated on the most profitable routes, and the
medium- to small-size hubs, the non-hubs in the United States
get further downsized. That is really what happens.
You said, hold retrospective hearings on Delta-Northwest. I
will tell you what it has led to: baggage fees, $3.8 billion in
baggage fees by the carriers, half of which are attributable to
the Delta operation. You know, the next step is they are going
to figure out how to charge us for printing out our boarding
passes at home, how to charge us for our own paper that we use.
They are very good at this. They have little people who
work day and night, they are little gnomes, in their economics
and finance departments. And they work night and day, figuring
out how to squeeze more money out of this turnip they have in
their hand. And I am determined that won't happen.
Stable, profitable does not mean ever bigger and fewer. Who
was it that said that airlines are looking for stability and
profitability? That doesn't mean that there should be fewer of
them.
They are always talking about rationalizing capacity. Mr.
Horan, was that you who used that term? Rationalizing capacity,
consolidating, too much capacity in the market. That wasn't the
purpose of deregulation. We didn't say that they were going to
take the government out of deciding market entry and pricing so
that the airlines could consolidate and have more power. We
wanted more competition in that marketplace, right?
Mr. Roach, didn't your members, and, Ms. Friend, didn't
your members have more options, more choices in the previous
era? Have the machinists union and the AFA ever had to face
each other in a consolidation in an election?
Mr. Roach. Not yet.
Mr. Oberstar. Not yet. Well, if I have my way, you are
never going to do it. I am doing my darnedest to make sure that
that outcome doesn't happen.
In a hearing in this room in 1990--and I was Chair of that
Aviation Subcommittee, and Mr. Petri, Bill Clinger was the
ranking Republican on the Committee at the time. And I asked
Secretary Sam Skinner, the Secretary of Transportation--this
hearing was on airline finances and mergers and acquisitions.
And I said, how many carriers really constitute competition in
the marketplace? And the Secretary said, ``Well, I think two.''
Really? Then he stopped, ``Well, maybe three,'' he said. That
is where we are headed, and that is not good.
What I hear from the Uniteds and the Continentals and
American and the rest of them is, ``There is plenty of
competition. Just look at what Southwest does to the
marketplace. They drive the prices down. And legion are my
constituents lining up to use Southwest Airlines frequent flyer
miles to fly to London and Paris.'' They don't fly there. They
are not in the world competition. You are all right.
Thank you.
Mr. Lipinski. Thank you, Mr. Chairman.
The Chair will now recognize Mr. Petri.
Mr. Petri. Well, thank you.
Thank you all for your testimony. It is very helpful.
I guess I have a couple of questions. One for Mr. Strine:
You talked about--and I have heard about low barriers to entry
in the aviation industry because you can just lease a plane and
have access to an airport and get in business. But what are the
high barriers to exit that you refer to?
Mr. Strine. That references basically to the bankruptcy
laws. Through the Chapter 11 process, we see companies who have
pursued a path which was basically a failing business model
survive. And, you know, I think today you have heard a lot
about destructive competition. That law, in itself, is
something that keeps a company alive and keeps capacity in a
market that was failing capacity. So that is the high barrier
to exit.
Mr. Petri. And, second, you analyze the industry and its
competitiveness and so on for a living. When you stand back and
look at it, here is a very, very, very profitable industry for
a lot of--not for the airlines, but for the auto rental
companies, for the fixed-base operated airports, for the hotel
business, for all kinds of people who have figured out how to
make money from people traveling. But the airlines don't. And
probably the people leasing the planes to them are making a lot
of money.
But, for some reason, this center of loss seems to be among
the--if the $68 billion figure is at all accurate, it is on the
ones who are generating profit for everyone else on a systemic
basis.
What is different about that segment of the overall
aviation transportation business that causes it to lose when
everyone else is doing pretty well, or at least seems to be
doing a lot better?
Mr. Strine. Well, there are several factors that contribute
to the poor financial performance. One is that the industry has
a very high fixed-cost structure. So, as we inevitably move
through economic cycles, they cannot cover their costs with the
revenue they can generate, given the amount of supply and
demand in the market. It is as simple as that.
You know, if you look at the capital expenditures that are
required and the debt that is baked into these companies, they
have overleveraged themselves. And the interest expense that
they pay on the assets, the aircraft or the aircraft rental
fees that they pay, contribute to the high fixed-cost
structure.
So, to finance a business which is highly asset-intensive
is expensive. And when you have a structure that doesn't
generate enough revenue to cover the cost, the cost of capital,
meaning the interest expense, goes up, which is the irony of
all this.
I think everybody wants to see a stronger industry; it is
how you get there. One of the drivers will be the cost of
capital. The more financially stable the industry is, the lower
the cost of capital will be, which will then provide a lower
hurdle for growth.
Mr. Petri. Now, one last thing. You would assume, if there
had been a huge consolidation in industry and just a few big
global players, that they would have more pricing power, and
ticket prices would go up and they would make money. But what
seems to be happening is that prices have been steady or even
declining, and it is an increasingly better buy for the
traveling public.
So what is wrong, from the point of view of these people
trying to create monopolies? Or will there be a pot of gold at
the end, from their point of view? Will they eventually extract
monopoly profits?
Mr. Strine. To apply that specifically to this merger, I
think that the aim, if you listen to what the companies are
arguing, is that they think they will get a better share of the
corporate traveler, which is a higher-yielding customer, which
will improve their mix and improve their yield.
But I think when you look at the competitive structure, it
is really, from a financial standpoint, it is important to look
at it holistically and globally. I mean, certainly
domestically, there is low-cost competition, there are
companies that come and go. Internationally, we have seen
consolidation in Europe. There has been a lot of consolidation,
now Air France-KLM. British Airways and Iberia are merging.
Deutsche Lufthansa has purchased both Swiss and Austrian over
the past 2 years.
In Latin America, there is only one airline, outside of
Brazil, that basically controls the whole region; that is LAN
in Chile. And in Asia--in China, there are only three major
carriers in China. You have Air China in Beijing, China
Southern in Guangzhou, and China Eastern in Shanghai. And they
have been consolidating.
So part of the analysis has to be, the companies here are
going to be competing for international travelers against those
foreign entities. And I think that is something that we
shouldn't ignore.
Mr. Petri. Thank you.
Mr. Lipinski. Thank you, Mr. Petri.
The Chair will now recognize himself.
During the testimony of Mr. Tilton and Mr. Smisek, I had
raised the issue of what is going to happen with the employees.
And judging by the prior experience with airline mergers and
what has happened to employees--and Mr. Roach raised the
experience that he has been through--I understand that there is
a lot of uncertainty about the future of a merged airline, what
is going to happen to the employees.
And I had also raised the point that I think that, if there
were, as this moves forward, this consideration of the merger
moves forward, if there are agreements that can be worked out
with the unions, it certainly would make this a much smoother
path to the merger being approved.
So I wanted to know, thus far--I wanted to ask Captain
Morse, Captain Pierce, Ms. Friend, and Mr. Roach, have you been
at the table thus far, as the merger has been discussed? What
have you learned, if you have? If you have or if you hadn't,
what are the answers that you are waiting for?
So I just wanted to throw that general question out there,
and we will start with Captain Morse and go down the line. I
just want to know what has happened so far and what do you want
to see happen.
Ms. Morse. I would begin by saying we have started the
process. We have negotiated an expense reimbursement provision
that isn't quite enough but it is a step in the right
direction. We don't think the employees should have to pay for
the expenses of the merger. It is the CEOs that decided they
wanted to merge, not the pilots, not the employees. So that was
a step in the right direction, but just a very small step.
We see indications that the managements are interested in
doing the right things, but until we actually see what they
propose at the negotiating table, we are working on a
transition agreement. That transition agreement would be more
of a standstill type of agreement.
As we process down that path, our next step would be a
joint collective bargaining agreement. And whether we will get
to that quickly or not will be really the indication of how
well this merger will go. If we do not get to it quickly and,
to quote Captain Pierce, if management doesn't learn the word
``yes'' and learn it relatively quickly, then the merger will
be unsuccessful.
So, as we proceed down the path, we see great opportunity
here to lead, but we can't lead by ourselves. We must lead with
the managements of the company to make it a successful merger.
We see the right steps, but time will tell whether those steps
are really taken.
Mr. Pierce. And I would agree with Captain Morse that the
steps----
Mr. Lipinski. Would you pull the microphone closer?
Mr. Pierce. Yes, sir.
I would agree with Captain Morse that, so far, since May
3rd, when the announcement was made, we have seen steps by
management that would lead to cautious optimism, in terms of
information sharing, in terms of working toward a transition
agreement.
I will say that the two pilot groups, United MEC and the
Continental MEC, are working very well together. We have, I
would say, outstepped our management counterparts, in terms of
doing our due diligence and creating an environment for
success.
It has to be a sequential order. There has to be a certain
order of things to occur that we have agreed upon. We are going
to negotiate this transition agreement, and once that is
complete, we will move to the joint collective bargaining
agreement. And once that is complete, we will move to
finalization of the seniority list integration.
Each of those steps will be tests for our management groups
to ensure that they are participating, good-natured, in good
faith. And if they don't participate in good faith, then things
won't progress. And as things don't progress, then they don't
hit their synergies, they don't meet their obligations, they
don't meet their commitments. It is very much in the hands of
labor and our management counterparts, working together, if
this is going to succeed.
Mr. Lipinski. Thank you.
Ms. Friend?
Ms. Friend. Well, I am afraid we have no optimism at all.
We have been at the bargaining table with this management team
on an open and amendable agreement that was reached in
bankruptcy for well over a year now. We have made no progress.
The company has not moved on their opening concessionary
proposals.
Since they have announced the merger, they have been
unwilling to discuss with us the expense reimbursement for what
it will cost the employees to participate in putting this
merger together. They have been unwilling to talk to us about
what we refer to as a ``fence agreement,'' which allows for
separate operations while we work through these issues.
In fact, they have been unwilling to talk to us at all
about the merger, other than to provide us with information
that is publicly available that we could simply read in the
newspaper.
So, a very difficult labor-management relationship has not
improved, nor have the executives of United Airlines given us
any indication that they would like to improve it. So, any
synergies that they hope to get from a combined flight
attendant workforce are very, very far on the horizon and will
not happen unless there is a change in attitude.
Mr. Lipinski. Thank you, Ms. Friend.
And, Mr. Roach, I know you were shaking your head
immediately when I started asking questions. So I am afraid you
are going to have a similar response here to Ms. Friend.
Mr. Roach. Yeah, we have the unique--the machinists union
has the unique--we have bargaining relationships on both
carriers. And we have met separately and with both management
teams. We have asked a lot of questions, and they don't have
any answers. They have been willing to meet, and they continue
to say they will give us the answers.
Our concerns are obviously about pensions. We worked very
hard during the bankruptcy to maintain pensions, during the
bankruptcy, and getting the IAM National Pension Plan. We
worked very hard on Continental to maintain a single-employer
plan. And there is a lot of work. We have met with the PBGC,
and they have expressed that there is a lot of work in trying
to go through that process. And they haven't started, and they
said they have thought about it but they don't have any
answers.
We are concerned about the regional partner, ExpressJet, we
represent. They operate on United and Continental. What happens
to them? What happens to the subsidiary of Air Micronesia?
We are concerned about the overall business plan, that this
is not too big to succeed and that we create this monster
airline with two different, separate cultures that cannot be
put together.
Again, Northwest-Delta are not together. There are big
problems over there. And their morale is down, and the
employees are not happy. And there has been no integration.
Although it is portrayed in the public as it is, that is not
the case.
And so we want to see the business plan. We want to see
that this carrier can survive. We have asked for the
information. They said it is forthcoming, and we look forward
to it. But beyond the collective bargaining agreement, we want
to make sure the carrier can survive and be successful. Having
a good contract and no job means nothing.
And so, if they build this carrier and the carrier fails
because they are unable to pull it together, I guess there is
an old cliche, ``When the camel dies, we all walk.'' And we
don't intend to walk. We want to see the thing survive. So, we
need information.
Mr. Lipinski. Thank you.
And I can't emphasize enough how important it is that these
issues are worked out.
With that, I will yield back, and I will now recognize the
gentleman from Ohio, Mr. Boccieri.
Mr. Boccieri. Thank you, Mr. Chairman.
I just have a quick question for the two gentlemen who seem
to be on opposing sides with respect to their testimony. Mr.
Strine and Mr. Horan, just if you could balance this out with
your comments.
Mr. Strine, in your conclusion, you said that, ``The
ability to generate more consistent returns on equity and
increase free cash flow is a path to repairing balance sheets
and longer-term financial stability.''
However, Mr. Horan, from his testimony, has a very
different picture or world view, suggesting that any merger
between network airlines will produce modest connecting revenue
gains, but without major growth of their hubs, significant
sustainable revenue synergies are impossible.''
Can you guys balance those two comments out, please?
Mr. Strine?
Mr. Strine. Well, I think when you look at returns of a
company, you have to start with revenue, and you need to think
about what drives revenue. And what drives revenue is supply
and demand and price.
And what is clear to us all is that the revenue has not
been sufficient to cover the costs, the operating costs of the
business and the interest expense of the business. So there
have been losses, and the retained earnings have been negative.
So the companies, to keep going, have borrowed more and more
money over the years.
And, as those balance sheets become more laden with debt
and overleveraged, the cost of borrowing and the cost of equity
rises. And that constrains growth. So the hurdle rate for
growth becomes higher, so growth becomes more difficult.
Mr. Boccieri. Sir, I don't want to get into a theoretical
debate, but please explain to me how reducing the number of
competitors actually increases competition.
Mr. Strine. I am not arguing that, that it does.
Mr. Boccieri. OK.
Mr. Horan?
Mr. Horan. I think you have summarized my argument quite
well. The core claim that these companies are making is that
this is good for the public, this is good for consumers, this
is good for the long-term health of the industry, because it
will create measurable economic benefits in terms of network
synergies or cost reductions.
I believe both of those claims are fundamentally false. I
believe, if you look at historical record, there is no evidence
of anyone else having found this. I believe, if you look at the
historical record of how networks work, you can create network
synergies in a case where you build up a large hub--when TWA
and Ozark merged in 1983, there were huge network synergies.
You can create network synergies in an environment where the
merged carrier suddenly creates a new ability to expand, grow
into new markets, things like that.
I used to run these networks; I know where to look. And
what I am saying is, there is no evidence in this case or from
any public statement that they are going to do any of those
things that would enhance what are legitimate network
synergies.
And the cost side, the cost of putting these companies of
this size and these levels of complexity together runs into the
billions. We have already heard plenty of testimony on the
collective bargaining issues that need to be resolved. Those
are expensive. And, equally important, the integration of the
maintenance systems, core to all the safety concerns raised by
many people today; the integration of the reservation and other
financial infrastructure.
All of those costs are 100 percent certain. They occur
right away. Do you save because you don't need two general
counsels? Yes, but that is pretty trivial, and it is down the
line.
Mr. Boccieri. Do you think----
Mr. Horan. So I am just saying, if do you a simple cash
flow--you know, United claimed, after 3 weeks of negotiation,
their PR staff said, ``We will get cost reductions equal to 0.6
percent of our combined operating costs.'' And I am just saying
that any person with common sense would look at that and say,
that is what the PR guys are saying before the collective
bargaining process has started and before you have done the
hard, messy work of integrating maintenance systems and
reservation systems. Chances are the cost synergies will be a
big negative number.
Mr. Boccieri. Do you think that previous mergers with the
unintended consequences of these unforeseen costs that have
been added have led to, sort of, farming out of some of these
routes and some of the domestic routes to the low-cost
carriers?
Mr. Horan. Well, people were discussing American-TWA, which
was justified on the exact same kinds of synergies we are
talking about today. There were no new hubs created. There was
no expansion that was going to happen. It was just that somehow
one plus one was going to equal three. And no one in the
government scrutinized that.
And, again, that is my message for the Committee. You
pointed out the, sort of, difference in the arguments in what I
am saying versus what the CEO is saying. The issue for the
Committee is, you have to have absolute confidence that the DOJ
is going to run through those very critical synergy efficiency
claims.
And, by golly, if they are proven to be true and Mr. Tilton
and Mr. Smisek have found opportunities that every past airline
manager failed to find, and that Continental management, who
had been saying, you know, ``We don't want to do a merger
because it is too risky for our shareholders, and that is not
really where the benefits are, and it would be a bad thing,''
he has found things that his previous management couldn't
find--God bless him, if the synergies are honestly there, they
are verifiable, they ought to be able to proceed. Because then
what Mr. Strine is saying is those are legitimate things, that
would improve efficiency, that is self-help.
But if those efficiencies aren't there, it begs the basic
question, well, what about all these anticompetitive problems?
Isn't that what you are really going after, and isn't all the
synergy stuff just a smokescreen?
Mr. Strine. Can we take a simple example to maybe elaborate
on this?
Let's say you were running an airline and you were going to
purchase 50 aircraft from Boeing. And then you were a much
larger airline, and you were then going to purchase 100
aircraft from Boeing. Do you think you would get a lower price
if you were purchasing 100? Do you think you would get a better
deal on your service, your maintenance, et cetera? The scale,
in terms of their purchasing power with suppliers, should have
some benefits.
Mr. Boccieri. Too big to fail, right.
Mr. Horan. Could I just quickly reply to that, sir?
The idea that an airline the size of United Airlines isn't
big enough to compete and it needs to be bigger to be efficient
is one the more ludicrous claims that anyone has made in this
industry in the last half-century.
And the example I keep going to is that Mr. Tilton and Mr.
Smisek ought to fly to Moscow and sit down with the Russians,
and tell them what a terrible mistake they made when they broke
up Aeroflot. It had such scale economies, it not only did all
the commercial aviation, it did the military and the crop
dusting. But they broke it up with this silly notion that,
while you wouldn't have the scale economies on ordering pencils
and legal pads, benefits from competition and spurring
innovation would greatly offset the reduced scale with many
smaller companies.
And, again, it comes back to a factual point. If the scale
economies, which is the synergy claim that Mr. Smisek and Mr.
Tilton are making, are really there, which no one else has
found, great. If they are not--but this is a factual question
that objective people can sort through fairly easily.
Mr. Strine. The fact is, United already did go bankrupt,
and they are still here.
Mr. Horan. Yeah. Right. Look at the financial performance
of U.S. airlines in the last 15, 20 years. There is almost a
perfect negative correlation: Smaller airlines have earned the
kind of return for their shareholders that Mr. Strine is taking
about, and the big, entrenched ones do not.
Mr. Boccieri. Well, I appreciate that. And I know that did
receive some government taxpayer dollars right after September
11th.
Captain Pierce, I just want to comment. I know you talked
about that your training would have prevented--or would have
prepared you to recover from a full stall. And I concur that
the legacy carriers have done a great job with training and the
expertise that they have added.
I want to see that same level of commitment now with the
regional airlines. Not all, you know, have been deficient like
Colgan have. But we certainly want to see that higher standard
be maintained. And we are going to require the FAA, but we want
to make sure that the companies do so, as well, because they
are ultimately in charge of the training requirements.
Mr. Costello. [Presiding.] The Chair thanks the gentleman
and now recognizes the gentleman from California, Mr.
Garamendi.
Mr. Garamendi. Thank you very much, Mr. Chairman.
Chairman Oberstar has gone on and on about efficiencies at
Northwest and Delta. I have my own story, Chairman. Due to the
lateness of our session and the cancellation of the United
flight out of National, I had to jump on a Northwest-Delta
flight via Minneapolis on a through-flight presumably to
Sacramento. It was about $990, as I recall, for that one-way
ticket.
When I got to your part of the world, Mr. Chairman
Oberstar, I got off the plane and found out that it stopped, I
wasn't going to go any further, and I was dumped in
Minneapolis-St. Paul for the night. All well and good, they
handed me a ticket for the next flight out the next morning. I
went to pick up my ticket, I went to get on the flight, and I
wasn't booked, much to my surprise and angst.
Eventually, I was able to get on the very last seat, which
I suspect may have been a pilot seat that somehow would cause a
delay somewhere else. Anyway, the way in which the system
worked was a telephone call--the computers didn't work at all,
which should have been obvious since I didn't have a seat. But
the only way they did it was by telephone to somebody that they
found in, I guess, Atlanta. So much for the efficiency issue of
mergers.
But that is just a personal problem. My real concern is one
of safety all the way around. I was astounded by the
information given by the two CEOs about who is going to make
sure that the maintenance in China, Singapore, and the
Philippines was of quality, as though they had no
responsibility themselves for that; it was, in fact, an FAA
responsibility. No, that is not the case.
Similarly, with regard to the quality of the pilots and
other personnel on those regional airlines that contract, in
this case, with United or with Continental, it is the
responsibility of the management of both United and Continental
today, to say nothing going forward, it is their responsibility
to provide assurances that the highest quality maintenance,
wherever it may be, San Francisco or Shanghai or wherever, is
done.
Those are my comments. And I will do everything I can to
hold the management responsible for the quality of the pilots
as well as the quality of the maintenance facilities.
Finally, with regard to the issue going forward of the
financials on the merger and whether, in fact, the Justice
Department is looking at it, Mr. Chairman, I might recommend,
based upon what we just heard, the testimony, that we invite
the Justice Department to come and testify as to what they have
found with regard to the issue of synergies of all kinds. And
if they are not even looking at them, we might want to beat
them over the head and ask them to look at those, and, in fact,
are there real synergies or is it just one way to put smoke up
in the air.
I don't have any further questions. If any of the
participants would like to jump in with my remaining 1 minute
and 35 seconds, do so.
Ms. Morse. I think we both would.
With regard to the outsourcing of flying that you both
spoke so eloquently about earlier, we have a very good
mentoring program that has worked for certainly more than the
25 years, probably since our inception in 1926. And that
mentoring program is where a senior captain mentored the more
junior first officer.
Today, we have a different scenario, where we have 1,437
people on the street, highly experienced pilots that are not
working, when instead we have less experienced pilots. You
can't train for that. We have a mentoring program, and we
should have a flow down and a flow up.
As the CEOs indicated, we don't have those airplanes to put
on those routes. Well, last I checked, they have yokes and
ailerons and rudders. And there is no reason why we can't fly
those airplanes. We are very capable of flying those airplanes.
And to say that that is the solution to the problem, is ``we
don't have that size aircraft,'' is ludicrous.
The people that mentored us were the people whose very
pensions were taken away. And we are going to have to solve for
both the outsourcing problem and the disparity in the pensions
as we move forward.
Mr. Pierce. And I would add on top of Captain Morse that,
you know, the FARs, the Federal Aviation Regulations, for
training standards and for flight time and duty regulations
basically set a baseline of acceptability. For years and years
and years, ALPA contracts have increased those levels of
safety, those levels of training. And what we saw through the
concessionary period that began post-9/11 is that those were
areas that got degraded in our contracts.
Now, as we rebuild those contracts, we are going to have to
pay more attention to reparations, the training standards and
through flight time and duty time. And I hope we have your
support, as well, in pushing through the training standards
language that ALPA supports as well as the flight time and duty
time regulations that have been stalled for so long and, you
know, were born by Captain Babbitt over a year ago and do not
seem to be making much progress.
Mr. Garamendi. Mr. Chairman, just a very brief comment.
We had two CEOs here. I have been sitting on a dais like
this for some 35 years, and I can really recognize BS and being
shined on. And I know that I was shined on, if not inundated
with BS.
There is a very, very serious problem here, in my view,
about safety. And when they tell me that it is the FAA's
responsibility, and when they claim, and then backed away from
it, that it is not their responsibility to the quality of the
people they contract with--that is, the airlines and the people
that are then hired by those regional carriers--I know that
something is seriously wrong.
And I, for one, have been too long at this game, not in
this particular chair but in chairs in California, to listen to
that kind of thing and find it acceptable. And they have said
they are going to respond to me. They had better.
Thank you, Mr. Chairman.
Mr. Costello. The Chair thanks the gentleman.
And let me mention to the gentleman that we invited the
Justice Department to send representatives over to testify
today. It is their standard practice when they are reviewing a
case that they decline to testify. They have sent a letter to
us just explaining the procedure that they will follow in
reviewing the proposed merger.
And I will tell the gentleman that we will take your
comments from the record and write a letter to the Justice
Department, telling them that we specifically want them to
concentrate on the synergies that are claimed by the CEOs on
this proposed merger.
Mr. Garamendi. Thank you, Mr. Chairman.
Mr. Costello. The Chair would ask Members if they have any
other questions, comments.
And, if not, the Chair would recognize the Chairman of the
Full Committee, Chairman Oberstar, for closing comments.
Mr. Oberstar. Thank you, Mr. Chairman.
This has been a most enlightening and valuable hearing,
especially this panel, with some very specific issues involved
raised by mergers. And, of course, rather standard testimony we
expected, I almost could have written it, with the two CEOs.
But before I make a closing observation, Mr. Foer and Mr.
Horan--Mr. Foer, you said, ``Standard antitrust analysis
focuses on horizontal overlaps. It is necessary but should not
be considered sufficient.''
Mr. Horan, you observed, ``The Committee needs to address
the root cause of these problems: DOT's nullification of
longstanding antitrust law and evidentiary requirements.''
Both comments go to the heart of the issue that we are
dealing with here and in the Delta-Northwest merger,
acquisition, however you want to phrase it.
What are your suggestions for--just want your verbal
response and then put something in writing as you think about
it. How can we restructure the DOT role in the antitrust
proceedings to give it more weight, give it more force in the
calculations done on these antitrust proceedings?
Because the antitrust law is limited, as you say,
horizontal overlaps. I had to ask the Justice Department in the
Delta-Northwest situation whether they would consider the
domino effect, the downstream effect of a Delta-Northwest
merger on other possible mergers, and it was like pulling
teeth, but eventually they said, yes, we would give that
consideration. They didn't say it would be a factor, didn't say
it would be a decisive factor.
But the antitrust role is very--it is like a
straightjacket. It is very limited. The DOT has wider latitude
in these matters, but they, nonetheless, have gone on to
approve antitrust immunity, along with Justice, for
international alliances.
So what are your thoughts about how we can rephrase that
authority? What provisions could we include in future
legislation?
Mr. Foer. Mr. Chairman, I don't think the answer is with
giving DOT a larger role. DOT had the role all by itself after
deregulation, and it blew it. And Congress said, OK, let's let
the antitrust division handle these matters. DOT provides
information that is very important.
It is not that the law, the antitrust law, is necessarily
that narrow. It has been interpreted in a very narrow way for
30 years.
The Justice Department and the FTC have put forward for
public comment revised horizontal merger guidelines. And in
that, they recognize the role of incipiency, for instance.
Section 7 of the Clayton Act is an incipiency statute. It is
supposed to stop mergers before they become dangerously
anticompetitive. And that is a trend, it is a prediction.
I don't think that that has been the way either of the
agencies have been interpreting the law sufficiently in the
past, but the law is there. And pressure from Congress to
utilize the law to its fullest is what is needed.
And I think that the agencies are capable of looking at not
only the merger before it, but recognizing salami tactics and
recognizing that companies interact on a strategic basis, and
when one goes forward and changes the structure of the
industry, the others have to respond. I think that that can be
taken into account by antitrust, but it hasn't been.
Mr. Oberstar. And it should be.
Mr. Horan, do you think there is not much more we could do
with DOT?
Mr. Horan. I agree that the law as written is not the
problem. There are no obstacles in the law to considering the
actual economics of the applicant's proposed a merger, but they
refuse to do that.
The problem is that deregulation of the airline industry,
Mr. Chairman, you understand this as well as anyone, was
designed specifically on the concept that all other laws that
apply to all other deregulated industries designed to create a
level playing field and protect consumer interests--such as
antitrust laws, consumer protection laws, and labor laws--were
always intended to apply to the deregulated airline industry.
The problem is that the Department of Transportation has
been gutting the antitrust laws in response to the lobbying
efforts of companies like United, Delta, and Continental. Those
companies would like to distort competition to hurt the US
Airways, hurt the Northwests, hurt the Southwests, hurt the
JetBlues. And the Department of Transportation is a willing
participant.
And I am saying, consumers are already paying $5 billion a
year in higher fares solely attributable to artificial pricing
power, and the Department of Transportation's major objective
right now is to make sure those same kind of anticompetitive
pricing impacts hurl into the Pacific. They are doing
everything possible to stop scrutiny of those cases. They do
not want evidence presented.
I have had applications to examine the core claim of these
Japan cases--the network synergies. I used to run a hub, the
biggest hub in Tokyo, at Northwest. I was the person who
developed antitrust immunity networks. I can evaluate this
claim. If I am not the best-qualified person on the planet to
look at it, I am in the top five.
The Department of Transportation said, ``No, absolutely
not. We cannot have anyone evaluate trans-Pacific network
synergies. We are creating a new rule that says only lawyers
can do it. Mr. Horan, you may not evaluate this claim.'' So I
am saying they are going to any length to say, ``No, we don't
want any scrutiny of these clients.''
And so, just go back and allow verifiable scrutiny in
accordance with the Horizontal Merger Guidelines, and I think
you have solved two-thirds of the problem right there.
Unfortunately for DOT, you would also bring the airline
consolidation movement to a grinding, screeching halt. Because
without the suspension of those antitrust laws, none of this
would have happened.
Mr. Oberstar. Well, you are quite right. From down there
somewhere in the podium where I sat in 1978 and rubbed my worry
beads about this deregulation, now, what is going to be the
outcome here, we anticipated that the Carter Justice Department
would ride herd on any mergers that might result. We didn't
count on Carter losing the election, Reagan winning, and the
Reagan Justice Department never meeting a merger it didn't
like.
But the argument made today and 2 years ago by Delta-
Northwest was, ``We need to be big, we need to really be big in
the marketplace.'' And I think you have said, the notion that
United is not big enough to compete in the domestic and
international market is, I will concur, ludicrous.
But the language of the applicable provision of the
antitrust code is, ``Any activity affecting commerce in any
section of the country, the effect of such acquisition may be
substantially to lessen competition or tend to create a
monopoly.'' There is a large, how shall I say, judgmental
opportunity in those words that has not been used in so many
years by the Justice Department as to be flaccid. And it needs
to be--the people who are administering this law need to be
strengthened and need a backbone and need to be encouraged.
And that is why I am looking for something that we can--our
Committee doesn't have jurisdiction over the judiciary, but we
do have over DOT. And I am looking for some way that we can
strengthen the hand of DOT in this process.
Look, what it has led to, the bigness, bigness has led to
$2.7 billion in baggage fee collections for 2009. That is 10
carriers. Of those 10 carriers, Delta and Northwest combine for
one-third of the total, $766 million in baggage fee
collections.
That is what big business has given you: more market power
in the domestic marketplace, more suppression of passengers and
travelers and communities. It hasn't given you more choices.
Maybe it will give you a few more choices on United or Delta,
but not more choices for all travelers and consumers. It has
led to job loss, it has led to a shift of employment from one
city to another and downsizing and--well, I am now being
repetitive.
So I just want to say this is a terrible, awful, no-good
thing, and the Justice Department ought to turn it down. And I
will continue to do everything in my power to make that happen,
because I think this is the very antithesis of deregulation and
will lead to--the moment this thing is approved, I will draft
and introduce legislation to reestablish market regulation by
the government of airlines.
Mr. Costello. The Chair thanks the gentleman.
And I was going to----
Mr. Oberstar. Maybe you shouldn't. It is just going to give
you more headaches.
Mr. Costello. I was going to mention that maybe what
deregulation has led to because of the Justice Department is
possibly reregulation. And we have discussed that on more than
one occasion. And it may be something that we will have to move
forward on, depending on what the Justice Department does.
Ladies and gentlemen, thank you. We appreciate you offering
your testimony today. I think Chairman Oberstar and others have
summarized the issues. You heard in my opening statement, you
heard from many of the Members deep concerns concerning safety,
concerning the workforce, a number of other issues. And we will
urge the Justice Department to specifically look at those
issues in reviewing this proposed merger.
Again, we appreciate your testimony.
And the Subcommittee stands adjourned. Thank you.
[Whereupon, at 1:38 p.m., the Subcommittee was adjourned.]
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