[Senate Hearing 110-1228]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1228
THE STATE OF THE AIRLINE INDUSTRY
AND THE POTENTIAL IMPACT OF
A DELTA/NORTHWEST MERGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 7, 2008
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California GORDON H. SMITH, Oregon
BILL NELSON, Florida JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey JIM DeMINT, South Carolina
MARK PRYOR, Arkansas DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Paul Nagle, Republican Chief Counsel
------
SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY
JOHN D. ROCKEFELLER IV, West KAY BAILEY HUTCHISON, Texas,
Virginia, Chairman Ranking
JOHN F. KERRY, Massachusetts JOHN McCAIN, Arizona
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California GORDON H. SMITH, Oregon
BILL NELSON, Florida JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey JIM DeMINT, South Carolina
MARK PRYOR, Arkansas DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
C O N T E N T S
----------
Page
Hearing held on May 7, 2008...................................... 1
Statement of Senator Cantwell.................................... 66
Statement of Senator Dorgan...................................... 59
Statement of Senator Hutchison................................... 3
Prepared statement........................................... 3
Statement of Senator Klobuchar................................... 9
Statement of Senator Lautenberg.................................. 4
Prepared statement........................................... 4
Statement of Senator Rockefeller................................. 1
Prepared statement........................................... 2
Statement of Senator Snowe....................................... 64
Statement of Senator Thune....................................... 72
Witnesses
Anderson, Richard H., CEO, Delta Air Lines, Inc.................. 22
Prepared statement........................................... 24
Cooper, Dr. Mark, Director of Research, Consumer Federation of
America on behalf of the Consumer Federation of America and
Consumers Union................................................ 48
Prepared statement........................................... 50
Friend, Patricia A., International President, Association of
Flight Attendants--CWA, AFL-CIO................................ 33
Prepared statement........................................... 35
Isakson, Hon. Johnny, U.S. Senator from Georgia.................. 1
Murphy, Jr., Patrick V., Partner, Gerchick-Murphy Associates, LLC 5
Prepared statement........................................... 7
Neidl, Ray, Analyst, Calyon Securities Inc....................... 29
Prepared statement........................................... 31
Roach, Jr., Robert, General Vice President, International
Association of Machinists and Aerospace Workers................ 42
Prepared statement........................................... 44
Steenland, Douglas M., CEO, Northwest Air Lines, Inc............. 9
Prepared statement........................................... 11
Appendix
Aircraft Mechanics Fraternal Association, prepared statement..... 82
Detroit Regional Chamber, prepared statement..................... 88
Memphis Regional Chamber and the Memphis/Shelby County Airport
Authority, prepared statement.................................. 86
Minnesota Parties, prepared statement............................ 84
Moak, Captain Lee, Chairman, Delta Air Lines Master Executive
Council, Air Line Pilots Association, International, prepared
statement...................................................... 79
Response to written questions submitted by Hon. Amy Klobuchar to:
Richard H. Anderson.......................................... 102
Patricia A. Friend........................................... 105
Patrick V. Murphy, Jr........................................ 92
Ray Neidl.................................................... 104
Douglas M. Steenland......................................... 97
Response to written questions submitted by Hon. Mark Pryor to:
Richard H. Anderson.......................................... 98
Patricia A. Friend........................................... 104
Patrick V. Murphy, Jr........................................ 90
Ray Neidl.................................................... 103
Douglas M. Steenland......................................... 92
Stevens, Hon. Ted, U.S. Senator from Alaska, prepared statement.. 79
THE STATE OF THE AIRLINE INDUSTRY
AND THE POTENTIAL IMPACT OF
A DELTA/NORTHWEST MERGER
----------
WEDNESDAY, MAY 7, 2008
U.S. Senate,
Subcommittee on Aviation Operations, Safety, and
Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:30 p.m. in
room SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. This hearing will come to order. We
have a very large crowd and two of us at the table, but, that
is overwhelmed by the presence of Senator Isakson at the
witness table. Mr. Isakson is not going to make a statement. He
is going to make an introduction. He is my good friend, and I
welcome whatever he wishes to say.
STATEMENT OF HON. JOHNNY ISAKSON,
U.S. SENATOR FROM GEORGIA
Senator Isakson. I thank you very much, Mr. Chairman.
About 16 months ago, you gave me the privilege of coming to
this Committee room and introducing the then-CEO of Delta Air
Lines, Jerry Grinstein, which I was very proud to do. Delta was
in--had been in difficult straits and was going through
difficult times, and I was honored and privileged to be here to
introduce him to this Committee because with all the
difficulties they had, they were fighting to preserve the
pension plan of their loyal rank-and-file employees.
As a man who owned a business, one who appreciated the
value of my assets, which were my people, I was very proud to
represent him that day and introduce him. I also had the
occasion during then to meet Mr. Steenland as well with
Northwest, who also had equally the same commitment to their
employees and their workers.
Today, it is my privilege to introduce the new CEO of Delta
Air Lines who replaced Jerry Grinstein. His name is Richard
Anderson. He has 20 years experience in the aviation business
with both Northwest and Continental. And before coming to Delta
in 2007, he left United Healthcare as one of the leaders in
that great company.
And I know he shares the same commitment that Jerry
Grinstein did for the people of Delta, and I am here to speak
on behalf of them, welcome him to this Committee, thank the
Committee for offering him the chance to testify, and tell you
just how proud I am of Delta Air Lines and all of her people.
Senator Rockefeller. We are 12-14 at home, are we not,
Senator?
Senator Isakson. We are having a little trouble. John
Smoltz hurt his arm, and Glavine is getting old.
Senator Rockefeller. The Senator is out of order.
Senator Isakson. But Chipper Jones is hitting .435. So we
are doing all right.
[Laughter.]
Senator Isakson. Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, sir.
I am going to waive my statement because we have a very
full panel, and this is a very crowded day. We are going to be
working here very late.
And next to me, Senator Hutchison, who is my Vice Chair,
has to leave at 3 p.m., and she wants to just stay a couple of
minutes.
Then we are going to have the full panel come and begin the
testimony, and then we will start the questions.
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
Over the last 5 years, the commercial airline industry has
undergone a brutal restructuring that cost hundreds of thousands of
airline employees their jobs and their pensions, eliminated and or
reduced service to countless small and rural communities, and changed
the very nature of the industry.
Just last year, we thought the commercial airline industry had
rebounded sufficiently and had undertaken enough structural reforms to
weather the next economic downturn. We were wrong.
The impact of the rising cost of oil barrel threatens the very
viability of every airline in this country. Six carriers have already
been pushed into bankruptcy and more teeter on the edge of financial
collapse.
I know that many of my colleagues will want to focus exclusively on
the pending merger between Delta Air Lines and Northwest Airlines. But,
I do not want us to miss the primary point of this hearing--the
financial health of the U.S. aviation industry.
I spoke at great length last week on this issue. A healthy airline
industry is critical to our entire economic future. And, frankly, too
few of us seem not to care. We are losing our global leadership in
aviation--from aerospace research, to air traffic control system
development, to market share. U.S. airlines are fast becoming second
tier carriers in the global marketplace.
Over the last 2 years, I have heard a lot of airline CEOs tell me
that they believe the airlines must consolidate to achieve long-term
financial viability.
I am not unilaterally opposed to consolidation, as I understand
that some consolidation may be necessary to make sure the United States
has a financially stable commercial aviation industry.
Although consolidation may be necessary to make sure we have a
healthy airline industry, I am not convinced that consolidation is
sufficient to solve the long-term challenges of the airlines.
Our hearing today will allow us to examine the current financial
state of the industry, the steps that the industry and policymakers
must take to achieve financial stability in the industry, and the
potential impact another round of industry consolidation would have on
the industry and the communities and consumers they serve.
STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Well, thank you very much, Mr. Chairman.
Senator Rockefeller. And I beg my colleagues' forbearance
on that authoritarian act on my part, but I really am anxious
to get on with this hearing, we have a large group to hear.
Senator Hutchison. I appreciate that, and I will not read
my entire statement. I would like to put it in the record.
[The prepared statement of Senator Hutchison follows:]
Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from
Texas
Thank you, Chairman Rockefeller, for holding the hearing today. I
would also like to welcome our panel of witnesses, including the CEOs
of Delta and Northwest.
As I mentioned to the CEOs when I met with them last week, I don't
like the current trend of mergers and consolidation in the industry.
While I don't intend to block or impede the process--that is not the
role of Congress--I do have concerns about the downstream effects of
major consolidation.
I believe the promotion of competition and an emphasis on consumer
and passenger concerns should be heavily considered. A bigger airline
doesn't always mean a better airline, and the creation of monopolistic
hubs will do little to improve consumer choice.
However, as economic conditions become more uncertain in the short-
term, it is important we review the economy's impact on the aviation
sector. Also, airlines such as Delta and Northwest are competing in the
world market in many places against bigger airlines with lower fuel
costs because of the low dollar exchange and sometimes government
subsidies.
Since the year 2000, the U.S. airline industry has gone through its
most fundamental restructuring since Congress deregulated the industry
in the late 1970s. We all know so well the horrific impacts of the 9/11
terrorist attacks, but several other variables have led to where the
industry finds itself today, notably, record high fuel prices.
In addition, the advent of the Internet has made customers much
savvier and overall industry trends like aggressive low-cost carriers,
international agreement expansion, and bankruptcy restructuring have
had significant impacts on the face of the industry.
I am hopeful we can have a discussion today about not only domestic
competition and challenges, but also global competitiveness and what
lies ahead for the industry. It is important we understand the future
marketplace in order to make informed policy decisions.
Thank you, Chairman Rockefeller, I look forward to the testimony.
Senator Hutchison. But the bottom line is I appreciate that
you are calling the hearing. I know the public wants to hear
all of the points about this potential merger. I have been
privileged, really, to meet with both CEOs, and I appreciate
their coming to talk to me.
In the main, I don't like the idea of mergers because I
think the more competition we have, the better it will be for
our consumers. However, having said that, I don't think it is
the role of Congress to step in and actually try to impart our
policies on these airlines, at least not as it refers to
mergers.
And second, I realize that there are foreign carriers with
whom these carriers and others compete, that the foreign
carriers have much lower prices of gasoline because of the
dollar differential, and that some of them are subsidized by
their governments. And therefore, I do understand what I am
told about the need for a bigger consortia to be able to
compete with other foreign big airlines.
So I am anxious to hear and read your testimony, but just
as a policy for me, I'd like to have more American airlines
competing with each other and giving the consumer the best
service and price. So with that, let me say thank you for
calling the hearing, and I will submit the rest of my statement
for the record.
Senator Rockefeller. I thank the Honorable Senator from
Texas, who I think wanted to say more. And so, I appreciate her
forbearance.
If Mr. Patrick Murphy, Principal, Gerchick-Murphy
Associates, would you come forward along with Mr. Richard
Anderson, CEO of Delta Air Lines; Mr. Doug Steenland, CEO of
Northwest Airlines; Ray Neidl of Calyon Securities; Ms.
Patricia Friend, President of the Association of Flight
Attendants; Mr. Robert Roach, International Association of
Machinists; and Mr. Mark Cooper, Consumer Federation of
America. If you could all come forward.
Again, I apologize for the amplitude of people and the lack
of space.
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Mr. Chairman, before any of our
witnesses testify, I want to ask that a full statement of mine
be included in the record as if it was given. And I commend
you, Mr. Chairman, for holding this hearing. A very important
decision is about to be made, we want to make sure that we wind
up with a net improvement for the traveling public and express
our concern for the employees that will be affected by the
proposed merger.
Senator Rockefeller. I thank the Senator, and I put his
statement in the record.
[The prepared statement of Senator Lautenberg follows:]
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Mr. Chairman,
Each day, two million travelers depend on safe and reliable travel
options, including passenger rail, cars and trucks, and airplanes. Our
economy depends on the airline industry--and so do thousands of hard-
working pilots, flight attendants, air traffic controllers, and other
employees. The airline industry was on its way to earning a healthy
profit this year, but skyrocketing oil prices have turned their profits
into losses.
And with intense competition and record fuel costs, some airlines
are looking to merge to keep their business strong. As a former
businessman, I understand that merging is often appealing for a company
and its employees, especially in tough economic times. But through the
merger process, airlines must not neglect their customers. After all,
it's the customers that are keeping these airline companies in the sky.
Passengers deserve quality customer service. Yet from ticketing and
baggage problems to flight cancellations, it seems that customer
service has been left at the gate. To address these issues, we have
provided money this year to increase enforcement of airline consumer
rights. Airline companies cannot mistreat travelers without
consequences. We must also pass a passenger bill of rights. Travelers
deserve it.
Passengers are not the only ones with rights. Employees have
rights, too. Airline employees have made many sacrifices since 9/11 to
keep this industry in the air, and airlines must treat their workers
with respect. That's why some of my colleagues and I sent a letter to
these CEO's asking that they respect employee rights throughout the
merger process.
Lastly, there is more the Federal Government can be doing to help
both travelers and this industry. 2007 was one of the worst years on
record for flight delays: more than one in four flights was late. And
flights into Newark Liberty International Airport were among the most
delayed in the Nation.
Mr. Chairman, I regret to say that the Bush Administration's short-
sighted policies in overseeing airline scheduling practices, as well as
planning for the future of the air traffic control system, have helped
create the situation we are in. Air traffic controllers are being
overworked and understaffed, and not enough has been done to reduce
dangerous and unnecessary safety risks on our runways and in aircraft
inspections.
The Administration is not focused on the needs of the flying
public, and just yesterday we were blocked on the Senate floor from
moving forward on a critical FAA modernization bill.
Despite these challenges, I look forward to working with my
colleagues on this Subcommittee to continue our efforts to oversee the
problems at the FAA and improve our aviation system as we move forward.
Thank you, Mr. Chairman.
Senator Rockefeller. And so, Mr. Patrick Murphy, you have
the least comfortable seat.
STATEMENT OF PATRICK V. MURPHY, JR., PARTNER, GERCHICK-MURPHY
ASSOCIATES, LLC
Mr. Murphy. Thank you, Mr. Chairman and Ranking Member
Hutchison and Senator Lautenberg. Thank you for allowing me to
testify today.
I would like to take my few moments to discuss the results
of studies which I and my colleagues, Randy Bennett and Jack
Schmidt, have done on airline competition. We believe the
analysis we have done is the most comprehensive review of
competition that has been done since September 11, 2001.
Our fundamental finding is that the U.S. domestic airline
industry is more competitive than at any time in history. The
key to this increased competition is the emergence of two
distinct business models--network carriers and low-cost
carriers. Each of these two business models plays a vital role
in serving the public, and neither model alone could serve the
Nation's needs.
Today's unprecedented level of competitiveness is the
consequence of a sharp change in the industry economics that
can be traced to the year 2000. In late 2000, almost a full
year before 9/11, the industry's fortunes changed radically.
The airlines suffered the largest drop in profits ever recorded
at that time. At the same time, the network carriers' costs
were escalating rapidly, while at the very same moment their
unit revenues were plummeting.
This dramatic swing coincided with the dot-com collapse,
new fare transparency for consumers because of the Internet,
and accelerating growth of low-cost carriers. This
unprecedented change in the industry's fortunes started a 6-
year string of losses that--for the network carriers stretched
from 2001 to 2006 and totaled over $30 billion in red ink. At
the same time, the newer and faster-growing low-cost carriers
were profitable every single year.
The low-cost carriers have grown in size and in market
share and in numbers. Between 2000 and 2006, they grew 73
percent. At the same time, the network carriers and their
regional partners cut capacity 13 percent. This is a remarkable
development. The legacy airlines have shrunk not only in
relative terms, but in absolute terms. And they shrunk again in
2007, and they will shrink again in 2008.
By 2006, the low-cost carriers accounted for 30 percent of
all passengers in this country. Perhaps most importantly, the
LCCs now compete in markets that account for three quarters of
all U.S. passengers. This is an absolutely key development.
This means that U.S. travelers benefit by head-to-head
competition with low-cost carriers on three quarters of their
journeys whether they fly on the low-cost carriers or not.
Meanwhile, the network carriers have faced a sharp decline
in revenue derived from high-end fares. Until 2000, the network
carriers were able to segment their traffic into higher-end
fare buckets. That resulted in much of their revenue coming
from higher-paying passengers. That market segmentation
strategy has now collapsed. The network airlines have
permanently lost a $12 billion annual revenue stream, and it is
not coming back.
As for fares, inflation-adjusted fares in 2006 were 20
percent lower than in either 1995 or 2000. Also, the practice
of charging higher fares for local passengers dominated hub
city airports has largely been eliminated. The dominant
carriers at most large connecting hubs no longer can charge
fare premiums.
On the cost side, we were very surprised to learn that even
after all the massive cuts made by labor and management,
network carriers still have significantly higher costs than
low-cost carriers. The cost cap between network and low-cost
carriers remains where it was in 1999 at between 40 and 50
percent.
In response to this unrelenting low-cost competition,
network carriers have focused on their core strength, their
large connecting networks. They bundle traffic from all sizes
of markets onto connecting flights at their hubs. Low-cost
carriers, on the other hand, continue to expand. But they
stress large and medium-sized domestic markets over smaller
communities.
The legacy carriers have pressed their network advantage
largely in the international market, where there is little low-
cost competition. They have shifted away from intense head-to-
head domestic battles for market share.
The network carriers also face little low-cost competition
on flights to small U.S. cities. This explains the network
carriers' continued focus on serving smaller markets with their
regional partners. Network airlines serve more than 300 of the
Nation's 334 non-hub airports. Low-cost carriers are almost
nonexistent at small communities. Consequently, smaller cities
rely almost exclusively on network carriers, and it is fair to
state that network carriers and small communities are now co-
dependent on each other.
Conclusion, the network carriers returned to a modest
profit in 2007. However, they are once again bleeding red ink.
Their long-term prospects remain uncertain as they continue to
lose domestic market share and as foreign competitors grow in
size and strength. The network carriers are stuck in a
competitive vise between domestic pressure and emerging
international pressure.
For now, the network carriers are finding the international
sector friendly, but that could change. Meanwhile, the low-cost
carriers are scaling back their aggressive growth, but they are
still gaining market share.
As for the American public, fares and service levels are at
a very competitive level, although fuel costs are now reversing
the long-term decline in fare levels.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Murphy follows:]
Prepared Statement of Patrick V. Murphy, Jr., Partner,
Gerchick-Murphy Associates, LLC
Chairman Rockefeller, Ranking Member Hutchinson and Members of the
Subcommittee, thank you for the privilege of appearing before you
today. My name is Patrick Murphy and I am an aviation consultant with
over 36 years of aviation economic experience both inside and outside
of government.
I would like to present the results of a study on domestic airline
competition that was completed last year by myself and two colleagues,
Randy Bennett and Jack Schmidt. We are now updating that analysis. We
believe our study entitled, ``A Competitive Analysis of An Industry in
Transition'' is the most comprehensive review of the state of airline
competition that has been performed since the tragic events of
September 11, 2001.
We have presented the results of our findings in a series of
separate meetings with numerous organizations. Among the groups we have
briefed are: DOT (twice), DOJ Antitrust Division, DOS, FAA, GAO, ATA,
NACA, AAAE, ACI, House Aviation staff and Senate Aviation staff.
All three of us who prepared the study are former long-term
government aviation officials. We therefore prepared our study using
data and analytical techniques that we used while in the Federal
Government. We believe our results are objective, and the various
government agencies we have briefed seemed to agree.
Our fundamental finding is that the U.S. domestic airline industry
is today more competitive than at any time since 1995, the start of our
study period, and almost certainly more competitive than at any time in
history. The key to this increased competition is the emergence and
evolution since airline deregulation 30 years ago of two distinct
business models--network carriers (also known as the six legacy
airlines) and low-cost carriers (LCC's such as AirTran, Frontier,
JetBlue, Southwest and Spirit). Each of these two business models plays
a vital role in serving the public. Both business models are key to
providing a comprehensive and affordable air transport system, and
neither business model alone could serve the Nation's needs.
Today's unprecedented level of competitiveness is the consequence
of a sharp change in industry economics that can be traced to 2000.
Between 1993 and early 2000 the airlines earned record profits. However
in late 2000, almost a full year before 9/11, industry fortunes changed
radically the airlines suffered the largest drop in profits ever
recorded. This loss was largely attributable to the network airlines,
whose costs were escalating rapidly while at the same moment their unit
revenues were plummeting. This dramatic swing coincided with the
dot.com collapse, new fare transparency for consumers because of the
internet, accelerating growth of the LCC's, a new-found customer
resistance to high fares, and new more costly labor agreements.
This unprecedented change in the industry's fortunes started a 6-
year string of record losses for the network carriers that stretched
from the beginning of 2001 to 2006, and totaled over $30 billion in red
ink. At the same time, the newer and faster growing LCC's were
profitable every single year. This was in stark contrast to the six-
year period ended in 2000, when most LCCs struggled for survival while
the network airlines recorded record profits.
The LCC's have grown in size, in market share, and in numbers. They
have entered into both longer distance and lower density markets. Since
2000 the LCC's grew 73 percent. At the same time the network carriers
and their regional partners cut domestic capacity 13 percent. This is a
remarkable development. The legacy airlines shrunk, not only in
relative terms, but in absolute terms. They have continued to reduce
domestic capacity and are expected to further reduce capacity in 2008.
By 2006 LCC's accounted for 30 percent of all passengers. Perhaps most
importantly, LCC's compete in markets that account for \3/4\ of all
U.S. passengers. This is an absolutely key development. This means U.S.
travelers benefit by head-to-head LCC price competition on \3/4\ of
their journeys, whether they fly on an LCC or not.
When looked at by city-pairs, which is the matrix most frequently
used as the ``relevant market'' in antitrust reviews, the number of
competitors in city-pair markets has grown since 1995, and this healthy
trend accelerated in 2000.
Meanwhile the network carriers that 10 years ago dictated the terms
of domestic competition have faced a sharp decline in revenues due
mainly to greatly diminished demand for higher fares. Until 2000 the
network carriers were able to ``segment'' traffic into higher end
``fare buckets'' that resulted in much of their revenue coming from
higher paying passengers. That market segmentation strategy has
collapsed. Competition from low cost carriers that stress low fares and
consumer resistance to paying high fares means that the network
airlines have permanently lost a $12 billion annual revenue stream.
Market segmentation has even been substantially reduced in markets
where LCC's do not compete. The loss of market segmentation alone could
account for the legacy carriers' enormous losses through 2006.
Inflation adjusted fares in 2006 were 20 percent lower than in
either 1995 or 2000. Even without adjusting for inflation, fares
dropped from 1995 and from 2000. For example, non-adjusted fares in
2006 were just about 10 percent lower than 2000. Also, the practice of
charging higher fares for local passengers at hub city airports has
largely been eliminated. The dominant carriers at most large connecting
hub cities no longer can charge ``fare premiums''. There are still a
very small number of hubs with significantly higher fares for local
passengers, but that practice has almost been eliminated by ever
expanding competition.
On the cost side, we were surprised to learn that even after the
massive cost cuts made by labor and management, including a series of
painful bankruptcies, network carriers still have significantly higher
costs than LCC's. The cost gap between network and low cost carriers
remains about where it was in 1999 at between 40 percent and 50
percent. We have found no evidence of the ``cost convergence'' theory
that many had anticipated whereby network and LCC carriers would evolve
toward each other's cost levels.
In response to this unrelenting lower cost competition, network
carriers have devised new strategies. They have focused on their core
strength--their large connecting networks. They bundle traffic from all
sizes of markets, both domestic and international, onto connecting
flights at their hubs. LCC's, on the other hand, continue to expand but
they stress large and medium sized domestic markets over smaller
markets.
The legacy carriers have pressed their network advantage largely in
the international market. They have shifted away from intense head-to-
head domestic battles for market share with LCC's. They have found the
international sector to be more profitable. New foreign services not
only build profitable international traffic but they also build
domestic traffic that connects through hubs onto international flights.
Since 2000, the domestic portion of international flights has grown 20
percent for the network carriers, or $2.4 billion per year in added
domestic revenues.
Just as the network carriers face little LCC competition on
international routes, they also face little or no LCC competition on
flights to small, non-hub cities. This explains the network carriers'
continued focus on serving smaller markets with their regional
partners. Network airlines serve more than 300 of the Nation's 334 non-
hub airports. LCC's are almost non-existent at these communities as
they serve only 38. Consequently, smaller cities rely almost
exclusively on the network carriers. Network carriers now derive over
11 percent of their revenues from their small markets, and this share
is growing. It is fair to state that the network airlines and small
communities have become codependent on each other.
Conclusion
The network carriers returned to very modest profitability in 2007.
However, they are again losing money and their long-term prospects
remain uncertain as they continue to lose domestic market share; and as
foreign competitors grow in size and strength. To some extent the
network carriers are stuck in a competitive vise between intense
domestic pressure and emerging international pressure. For now the
network carriers are finding the international sector friendly, but
that could change.
Meanwhile the LCC's that have enjoyed significant growth and profit
opportunities at home are scaling back their aggressive growth, but are
still gaining market share. The LCC's are now the dominant force in the
domestic industry, and they are the drivers of both growth and price.
For them the key to success is to prudently manage their growth and not
expand beyond their managerial capability.
As for the American public, fares and service levels are at very
competitive levels, although fuel costs are now reversing the long-term
decline in fare levels.
Mr. Chairman, this concludes my statement. I would be honored to
answer any questions that you or Members of the Subcommittee may have.
Senator Rockefeller. Thank you very much, sir.
Senator Klobuchar will now introduce Mr. Richard Anderson,
Chief Executive Officer of Delta Air Lines.
Senator Klobuchar. Actually, Mr. Chairman, I am going to
introduce the head of Northwest Airlines.
Senator Rockefeller. Yes. That is true.
[Laughter.]
Senator Rockefeller. I was offering you a multiplicity of
opportunities.
Senator Klobuchar. That is OK. One is enough.
Senator Rockefeller. So then we will just do Mr. Richard
Anderson without introduction.
Senator Klobuchar. Do you want me to wait until Mr.
Steenland?
Senator Rockefeller. No, you go ahead.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. I just wanted to welcome Mr. Steenland,
the head of Northwest Airlines, but also all of the employees
that are here from Northwest Airlines.
Northwest Airlines, as you know, was founded in Minnesota,
in 1926 to carry mail for the U.S. Post Office and began the
first mail service between Minneapolis and Chicago. During
World War II, it joined the war effort by flying military
personnel and equipment to Alaska. And after the war, it was
designated by the Federal Government as the United States main
carrier over the North Pacific.
And I would also add that I am not just saying this for
nostalgia, but to describe the important role Northwest
Airlines has played in our state and continues to play in the
economy of Minnesota. We are ranked number 9 nationally for
headquarters of Fortune 500 corporations and home to major
research university facilities.
Northwest provides nearly 12,000 high-skilled jobs in my
home state, including trade in mechanics, pilots, flight
attendants, and the many workers who support its airports and
headquarters. And I welcome Mr. Steenland today.
Senator Rockefeller. All right. Mr. Steenland, you better
go ahead.
STATEMENT OF DOUGLAS M. STEENLAND, CEO,
NORTHWEST AIR LINES, INC.
Mr. Steenland. All right. I will.
Senator Rockefeller. My order of introduction is not the
same as the order which is at the table, which caused me to
embarrass myself more than Senator Klobuchar.
Mr. Steenland. Thank you, Chairman Rockefeller. Thank you,
Senators.
I am Doug Steenland, Chief Executive Officer of Northwest.
I appreciate the opportunity to appear here this afternoon and
explain the benefits of the recently announced merger between
Northwest and Delta and, most importantly, the fact that this
merger will not lessen competition.
I would like to acknowledge and thank Senator Klobuchar.
Obviously, we are very proud to be the hub airline of
Minneapolis/St. Paul, and we look forward to continuing to be
the region's most important air carrier, major employer, and a
good corporate citizen after the merger is completed.
The U.S. airline industry is at a crossroads, creating two
choices for Northwest. One is to continue on the road now
traveled as a standalone airline, being whipsawed by rising oil
prices and I would note that oil closed yesterday at $122 a
barrel, which will cost Northwest over $1.5 billion more this
year than last year in fuel facing competition from discount
carriers that have now captured one-third of the U.S. domestic
market, and heightened international competition from large,
well-funded foreign airlines that have been allowed to
consolidate and are increasing service to the United States
under Open Skies agreements.
The other choice is to merge with Delta to create a
stronger single airline better able to face these challenges.
By combining the complementary end-to-end networks of two great
airlines, we will achieve substantial benefits and build a more
comprehensive and global network.
Most importantly, the merged airline will be more
financially resilient and stable, better positioned to meet
customers' needs, better able to meet competition at home and
abroad, and better able to provide secure jobs and benefits.
In this merger, importantly, no hubs will be closed. I
would like to just emphasize that for a second. In the United
States, Northwest hubs in Minneapolis/St. Paul, Detroit, and
Memphis will remain in full operation. In recognition of the
service we provide and the value we create and the commitments
we have made, we have received strong civic support in
Michigan, Memphis, and in Minneapolis/St. Paul.
The merger will create over a billion dollars in annual
benefits that will help the merged carrier withstand volatile
fuel prices and cyclical downturns. All of these benefits will
be achieved without harming competition. The existing domestic
and international routes of Northwest and Delta are
complementary. So the two carriers compete only to a minimum
extent today.
Let us start with international markets. The question with
competition internationally has been asked and answered already
by the U.S. Government. Recently, the United States Department
of Transportation tentatively granted antitrust immunity to
Northwest, Delta, Air France, and KLM and, in doing so, found
that there would be no reduction in competition over the
transatlantic from the combination of Delta and Northwest.
Northwest doesn't serve Latin America, a Delta stronghold, and
Delta has only minimal service to Asia, which, as Senator
Klobuchar pointed out, Northwest has served well since 1947.
Domestically, Northwest routes are focused on the upper
Midwest while Delta is strong in the South, in the East, and
the Mountain West. A very important fact to remember from
today's hearing on competition is that of the 800 domestic
nonstop routes that Northwest and Delta today collectively fly,
there are only 12 overlapped nonstop city pair markets. And on
the vast majority of those 12, there exists robust competition.
The domestic airline industry, as Mr. Murphy pointed out,
has undergone a competitive sea change over the past several
years. Low-cost carriers have grown at an average annual rate
of 11 percent since 2000. Southwest is the largest domestic
airline in the United States and carries more domestic
passengers than any other airline. And that will continue to be
the case after this merger.
With this merger, we have achieved our goal of crafting a
transaction that achieves a significant value for all of our
stakeholders, and we have done so without impacting
competition.
Thanks very much.
[The prepared statement of Mr. Steenland follows:]
Prepared Statement of Douglas M. Steenland, CEO,
Northwest Air Lines, Inc.
Introduction
I am Doug Steenland, the Chief Executive Officer of Northwest
Airlines. I appreciate the opportunity to appear here today to explain
the benefits of the recently announced merger between Northwest
Airlines and Delta Air Lines.
The U.S. airline industry is at a crossroads, creating two choices
for Northwest. One choice is to continue on the road now traveled:
being whipsawed by the high price of oil; facing nationwide competition
from discount carriers while unable unilaterally to achieve the cost
and revenue synergies that the merger will produce; and struggling to
remain competitive in the face of heightened competition from large,
well-funded foreign airlines that are increasing service to the United
States following implementation of Open Skies agreements that have
liberalized aviation markets around the world.
The other choice is to merge with Delta to create a single global
network by combining the complementary end-to-end networks of two great
airlines. By achieving substantial cost savings and building a more
comprehensive and balanced network, the combined company will be more
financially resilient, better positioned to satisfy customers' demands,
and better able to meet the challenges of the future at home and
abroad.
From the outset, we have promised that we would consider a
transaction only if it benefits all of our key stakeholders. We are
confident that we have met this objective. Our customers and the
communities we serve will benefit because this is a merger of addition,
not subtraction. Combining the end-to-end networks of two great
airlines means that Delta/Northwest will serve more U.S. communities
and connect to more worldwide destinations than any global airline. Our
passengers will benefit from direct service from the United States to
all of the world's major business centers in Asia, Latin America,
Europe, Africa, and North America. Because the networks of the carriers
are complementary, no hubs will be closed. Delta and Northwest are
committed to maintaining service to all points on the combined network
In fact, in an environment of rising oil prices, the new carrier will
be able to capitalize on combined traffic flows to preserve some routes
that otherwise might have been cut as economically unsustainable.
All stakeholders, and our employees in particular, will benefit
from the improved financial resiliency and better competitive
positioning of the combined carrier. The merger will create over $1
billion in annual synergies that will help the new carrier withstand
volatile fuel prices and cyclical downturns. The proposed combination
also will allow us better to use Northwest's valuable Pacific
franchise, better develop both carriers' domestic hubs, and better
match the right planes with the right routes. Northwest has already
integrated many aspects of its technology with Delta through the
SkyTeam alliance, paving the way for a smooth integration process.
All of these benefits will be achieved without a substantial
lessening of competition. The existing domestic and international route
networks of Northwest and Delta are complementary, so the two carriers
compete only to a minimal extent today. Of the more than 800 domestic
non-stop routes that NW and DL collectively fly, there are only 12 non-
stop city-pair overlaps. The vast majority of these non-stop overlaps
enjoy substantial competition from other carriers, and all consumers
will benefit from the significant cost savings that the transaction
will create.
We did not come easily to the decision to merge with Delta.
Northwest is proud of its long and distinguished history as a stand-
alone carrier, and the company has made Herculean efforts in recent
years to preserve its ability to continue operating independently. As
you know, Northwest filed for Chapter 11 protection in September 2005.
As part of the Chapter 11 reorganization process, employees at every
level of the organization made substantial sacrifices to insure that
Northwest could emerge successfully from bankruptcy. We saw the success
of this reorganization effort in 2007 when Northwest earned $760
million in profit, $125 million of which went to our employees as
profit sharing and incentive payments. Yet, with fuel prices at record
highs and amidst an economic slowdown, we remain financially
challenged. The bottom line is that we have achieved our goal of
crafting a transaction that creates significant value for all
stakeholders. The combined company will be more stable and better
positioned to meet the challenges of the future, both at home and
abroad.
Small communities are among those that stand to gain the most from
the merger. This merger is particularly beneficial for states such as
West Virginia and Minnesota that have a large number of small
communities that need better access to the global marketplace. In many
such cities, only one carrier currently provides service. But each
carrier individually lacks the ability to provide customers the full
range of international destinations. Consequently, a passenger in
Hibbing, MN wanting to visit Panama--or a Huntington, WV passenger with
business in Nagoya--would have to travel on two different carriers to
reach the desired destination. After the merger, passengers flying
these itineraries will benefit from seamless service on a single
carrier. Together, we can provide better service to all customers
across a broad, worldwide network, and these benefits will be delivered
with no hub or station closings.
The testimony proceeds as follows: Section I of the testimony
discusses why the merger of Delta and Northwest is procompetitive and
consistent with regulatory requirements. The domestic airline market
today is highly fragmented and will remain so post-merger. Furthermore,
because this merger will combine complementary end-to-end networks, it
will result in only 12 domestic non-stop overlaps, none of which will
cause competitive problems. In addition, the merger presents no
international competitive issues. Section I also examines how
competition in the airline industry has been transformed since 2000.
Low-cost carriers have changed the industry, and technology has created
a transparency revolution that enables customers to compare airline
fares quickly and easily. These factors will assure that a combination
between Delta and Northwest will not reduce competition or harm
consumers.
Section II of the testimony discusses market conditions in the
airline industry, particularly the effect on network carriers of the
dramatic increase in oil prices, the slowdown in the economy, the Open
Skies treaty, and the consolidation of foreign flag carriers. These
conditions require that Delta and Northwest respond proactively, and
the merger accomplishes that goal.
Section III of the testimony explains how the Delta/Northwest
merger benefits U.S. customers. The combined carrier will offer access
to more worldwide destinations, accelerate investments to enhance the
flying experience, and create the world's largest frequent flyer
program. Section II also discusses how Delta and Northwest are uniquely
positioned for a smooth integration process given their past
coordination as part of the SkyTeam alliance.
Finally, Section IV explains how the combined carrier will continue
to deliver exceptional service to U.S. communities by bringing
increased single-carrier connectivity to smaller communities across the
Nation. In addition, this section discusses our commitment to
maintaining all current hubs.
I. This Merger Is Procompetitive and Consistent with Regulatory
Requirements
The domestic airline market is highly fragmented and there is
little overlap between the networks of Delta and Northwest, proving
that a merger of the two carriers will not substantially lessen
competition. The fundamental characteristics of the airline business
will continue to constrain any hypothetical anticompetitive effects of
the merger. Most notably, low-cost carriers have achieved rapid growth
in this decade, changing the competitive dynamics of the industry. In
addition, new Internet search tools have created a transparency
revolution in airline fares to enable customers to access low fares
easily. Finally, customers will benefit from enhanced competition in
the industry as the combined company becomes a stronger airline, better
able to compete with discount carriers and growing international
airlines that are now serving more markets in the United States.
The Domestic Airline Market Is Highly Fragmented
The domestic airline market is not concentrated; no airline
currently has greater than a 20 percent domestic passenger share. Even
post-merger, a combined Delta/Northwest would capture less than 20
percent of the domestic passenger share, and Southwest would continue
to have the highest domestic passenger share. (See Figure 1).
Figure 1: Domestic Passenger Share (3rd Quarter 2007)
There Is Very Little Domestic Overlap Between Delta's and Northwest's
Networks
There is very little overlap between the route systems of Delta and
Northwest. Delta has a strong presence in the East and Mountain West,
whereas Northwest's domestic route network is focused in the Midwest.
As Figure 2 demonstrates, Delta and Northwest operate very different
domestic route structures.
Figure 2: Delta and Northwest Carry Distinct Passenger Bases
The domestic overlap between the two airlines that exists is
minimal and raises no competitive concerns. Because Delta and Northwest
have complementary networks, the two carriers provide overlapping non-
stop service on only 12 of the more than 800 domestic non-stop city-
pairs that they collectively fly.
Table 1.--Delta/Northwest Non-stop Overlaps
------------------------------------------------------------------------
Other Competitors (non-stop competitors
Route in italics)
------------------------------------------------------------------------
Atlanta-Detroit AirTran offers 8 daily non-stop round
trips and has a 32% share
------------------------------------------------------------------------
Atlanta-Memphis AirTran offers 5 daily non-stop round
trips and has a 36% share, with one-
year growth of 9%
------------------------------------------------------------------------
Atlanta-Minneapolis AirTran offers 4 daily non-stop round
trips and has a 22% share, with one-
year growth of 10%
------------------------------------------------------------------------
Cincinnati-Minneapolis/St. Paul American and United offer connecting
service; Midwest and AirTran both
serve Dayton (only 57 miles from
downtown Cincinnati) and Minneapolis
------------------------------------------------------------------------
Cincinnati-Detroit Competitors offer connecting service
through Chicago and Cleveland; AirTran
already serves both Detroit and Dayton
(only 57 miles from downtown
Cincinnati), and Southwest already
serves Detroit; driving is an option,
as the trip takes little more than 4
hours by car; non-stop entry can
easily occur on this route with gate
availability at both airports
------------------------------------------------------------------------
Detroit-New York American, Continental, Spirit
------------------------------------------------------------------------
Detroit-Salt Lake City \1\ American, Frontier, Southwest, United,
and U.S. Airways offer connecting
service with a collective share of 40%
------------------------------------------------------------------------
Honolulu-Los Angeles United, American, Continental, and
Hawaiian
------------------------------------------------------------------------
Indianapolis-New York Continental and US Airways
------------------------------------------------------------------------
Los Angeles-Las Vegas United, American, Southwest, U.S.
Airways, and JetBlue
------------------------------------------------------------------------
Minneapolis/St. Paul-New York Continental and SunCountry
\2\
------------------------------------------------------------------------
Minneapolis/St. Paul-Salt Lake American, Frontier, United, and U.S.
City Airways offer connecting service;
Southwest and JetBlue serve SLC and
AirTran serves MSP
------------------------------------------------------------------------
Notes: \1\ Northwest will launch service on Detroit-Salt Lake City in
June 2008; \2\ Delta will launch non-stop service on New York-
Minneapolis in June 2008.
As Table 1 demonstrates, Northwest and Delta currently face
significant competition from other non-stop and connecting competitors
on most of these routes. In addition, other factors lessen potential
antitrust concerns. Both discount carriers and legacy carriers can
easily enter routes and provide competing service, and nearby airports
provide competitive alternatives. Moreover, relatively few passengers
travel on these non-stop routes; overall, passengers will derive
benefits from the merger far greater than any potential competitive
concerns raised by these few overlaps.
Delta/Northwest Presents No International Competitive Issues
Finally, in the international markets, there are no significant
competitive concerns. In fact, the U.S. Department of Transportation,
in tentatively approving the joint application from Air France,
Alitalia, Czech, Delta KLM, and Northwest for authority to operate an
immunized alliance in transatlantic markets, found no basis to deny the
request on competition grounds. In issuing its Show Cause Order on
April 9, 2008, the Department stated ``that the proposed alliance will
not substantially reduce or eliminate competition, provided that
transatlantic markets remain governed by a regional open skies
agreement that promotes new entry regardless of national borders.'' The
Department further noted, ``We see no basis upon which the Joint
Applicants could, as a result of this transaction, impose and sustain
supra competitive prices or reduce service levels below competitive
levels.'' (U.S. Department of Transportation, Show Cause Order, Docket
OST-2007-28644, Apr. 9, 2008, at 13.)
Indeed, on an operating carrier basis, New York-Amsterdam is the
only international non-stop overlap, and recently granted antitrust
immunity permits Northwest and Delta to coordinate their service on
this route even in the absence of a merger. Post-merger, the global
aviation marketplace will remain intensely competitive; no global
carrier--including Delta/Northwest--will have more than a 7 percent
share of available seat miles.
Figure 3: No Significant Concerns in International Markets
The combination of Delta and Northwest increases competition in all
international regions. The combined carrier will have a broader network
closer in scope and depth to that which foreign flag carriers already
possess, as well as a significant presence in all key international
business markets, making it a stronger competitor against the foreign
flag airlines.
This Merger Should be Evaluated on its Own Merit
Each merger needs to be evaluated on its own merits. Delta/
Northwest is a procompetitive combination and that fact remains true
regardless of what else may happen down the road with respect to
industry consolidation. Our merger illustrates the fact that
consolidation can result in more cost-efficient carriers with lower
unit costs and greater financial stability. To the extent that any
further consolidation involves an end-to-end combination like ours and
is not predicated on hub closures or ``rationalization,'' it could
enhance competition in the industry. In contrast, a merger of carriers
with overlapping networks would raise competitive concerns that do not
arise in the Delta/Northwest transaction. The competitive impacts of
each individual major carrier combination are vastly different--and it
does not follow that if the Department of Justice approved one
combination that it should, or would, necessarily approve others. The
Department of Justice will evaluate the competitive effects of each
merger on its own merits and has the authority either to block any
merger that would harm consumers or to fashion remedies to address
specific competitive concerns.
Competition in the Airline Industry Has Been Transformed Since 2000
Since 2000, low-cost carriers (LCCs) have grown at a rate of more
than 10 percent annually. Southwest Airlines, an LCC, now carries the
largest number of domestic passengers. At the same time, Internet
pricing engines and online travel agencies have created unprecedented
price transparency, enabling passengers easily to find the lowest fares
for a given itinerary. Compounding this phenomenon, LCC advertising has
conditioned passengers to expect ultra-low fares.
Low-Cost Carriers Have Changed the Industry
In July 2005, the General Accounting Office reported that ``[t]he
low cost carriers are really the price setters and have transformed the
competitive environment in the airline industry.'' LCCs are strong
competitors and have experienced explosive growth. Since 2000, LCC
weekly departures and the number of cities served by LCCs have
increased by 60 percent. (See Figure 4.)
Figure 4: The Rapid Growth of LCCs
LCCs have grown at an average annual rate of 11 percent since 2000
and in 2007 carried one-third of domestic passengers. The rapid growth
of low-cost carriers domestically has created new competition that
offsets historical regulatory concerns. Furthermore, LCCs are
increasingly targeting business passengers: ``Faced with slowing growth
and higher costs, discount carriers like Southwest and JetBlue Airways
Corp. are making a new push for business travelers, adding flights in
heavily traveled business routes and even quietly offering companies
special deals.'' (``Discount Airlines Woo Business Set,'' Wall Street
Journal, February 19, 2008.). Led by Southwest, LCCs will continue
exerting pricing pressure on legacy carriers.
Over the past several years, the major LCCs have been more
financially stable than their legacy peers. Indeed, Southwest is the
only domestic airline whose corporate debt is rated as ``investment
grade'' by Standard and Poors, a fact that speaks both to the financial
challenges facing the domestic airline industry generally and to the
viability of the large LCCs. During the last decade, substantial
discount carrier growth has resulted in a more competitive and
fragmented industry. Today, LCCs serve all major cities, including all
legacy carrier hubs, and are expanding into smaller cities.
Southwest Airlines has continued to experience dramatic growth over
the past several years. Since 2000, Southwest has grown at an average
annual rate of 9 percent. Today, Southwest carries more domestic
passengers than any other airline. Southwest also has been the most
successful domestic airline at hedging against rising fuel prices and
will continue to benefit from its 70 percent fuel hedge for 2008, and
its 55 percent fuel hedge for 2009.
Southwest and other LCCs also command significant market share as a
result of recent competitive successes:
Southwest: continues to have the strongest balance sheet in
the industry, with a business model built on growth and
expansion; added new non-stop service on 23 routes in 2007;
initiated service at San Francisco International and now offers
25 daily non-stop flights to four cities and connecting flights
to 49 other destinations.
JetBlue: added new non-stop service on 24 routes in 2007;
experienced a 15 percent increase in passengers; and received a
$300 million cash infusion from Lufthansa.
AirTran: set record traffic levels in 2007, and enjoyed
increased load factors and enplanements; added new non-stop
service on 35 routes; ordered 15 new Boeing 737s; has added
four new domestic destinations since May 2007.
As Figure 5 shows, LCCs have accomplished this dramatic growth
during the same period in which legacy carriers have shrunk.
Figure 5: Year-over-year Change in Domestic Scheduled ASMs
LCCs will continue to provide pricing discipline across the board.
Entry in this business is wide open. There are plenty of airport gates
available, and airplane manufacturers have always been ready to finance
airplane deliveries.
In recent weeks, some smaller LCCs have gone out of business and
Frontier Airlines recently filed for Chapter 11 protection.
Nonetheless, competition from the large LCCs remains strong. In an
April 11, 2008 report, Credit Suisse rated AirTran, JetBlue, and
Southwest as ``outperform.''
Technology Has Created a Transparency Revolution
Over the past several years, online sites such as Orbitz, Expedia,
and Travelocity have been created to enable customers to compare
airline offerings directly. (See Figure 6, depicting flight options
from Cincinnati to Detroit as listed on Orbitz.com). These tools have
provided enormous benefits to consumers and have increased the price-
competitiveness of the airline industry. In fact, there are few
businesses in which there is as much pricing transparency.
Figure 6: Orbitz.com Search Screen
A consumer can log on to the Internet and, at the push of a button,
review choices available across a wide variety of carriers. That same
customer easily can sort those choices to find the lowest available
fare and view extraordinarily competitive prices for both non-stop and
connecting flights. For example, the Orbitz.com screen in Figure 6
displays competing one-stop connections on U.S. Airways, Continental,
United Airlines, and American for the Cincinnati-Detroit route.
Over the last several years, online travel sites have developed
advanced search functions such as flexible-date airfare searching and
route-specific e-mail fare alerts. Furthermore, sites such as Expedia,
Orbitz, Travelocity, and numerous others provide their advanced pricing
information and functionality to customers free of charge. Even
business travelers now seek discount fares and travel sites such as
Expedia Corporate Travel and Travelocity Business have evolved to
target business customers.
In sum, customers have become far more sophisticated at comparing
the offerings of competing carriers, and airline consumers have more
tools at their disposal than do consumers in the vast majority of
industries in the United States. As The Economist stated in June 2007,
``[t]he web has made it possible for passengers to be their own travel
agents by comparing fares and schedules and booking flights--and at
prices much lower than a decade ago.'' (``Fear of Flying,'' The
Economist, June 14, 2007.) As online technology continues to evolve,
airfare transparency will continue to be enhanced.
II. Market Conditions Require Change in the Airline Industry
Significant economic pressures from record fuel prices and intense
competition, particularly from discount carriers and foreign airlines
based in Europe, the Middle East, and Asia, have fundamentally changed
the airline industry. This new environment has resulted in diminished
profits, restructurings, more than 150,000 lost jobs, and financial
losses of over $29 billion among U.S. network carriers since 2001.
Oil Prices Have Increased Dramatically And Continue to Rise
Record fuel prices have fundamentally changed our economics,
forcing airlines to cut routes and reduce capacity and jobs. Over the
last 5 years, the price of oil has increased at an annualized rate of
28 percent, now exceeding $115/barrel. (See Figure 7.) And the price of
crude oil has risen by nearly 75 percent over the past 12 months alone.
In addition, the crack spread for jet fuel has risen to $29.06 in April
2008--the highest level ever, even compared to the post-Katrina crack
spread spike.
Figure 7: Daily Oil Prices ($ per Barrel)
Through the restructuring efforts of the past few years, Delta and
Northwest have achieved the lowest mainline non-fuel cost of the full-
service network carriers. Restructuring required substantial sacrifices
by our employees in terms of lost positions, reduced pay, and reduced
benefits. Our employees have made those sacrifices to give Northwest a
chance to survive and grow.
Yet, given the rapid fuel increases over the past few years, we
remain financially challenged. During the first quarter of 2008 alone,
we spent $445 million more on fuel to operate virtually the same planes
flying the same routes. We anticipate having to spend over $1.4 billion
more for fuel this Fiscal Year than we did during the previous Fiscal
Year due to price effects alone. And while it may seem that airlines
are continuously raising fares to share these increased costs with
consumers, the reality is that, thus far, consumers have covered
significantly less than our incremental fuel cost increases. Today,
fuel is the single highest expense of Delta and Northwest,
significantly eroding the benefits of restructuring. Northwest recently
reported a net first quarter 2008 loss of $191 million (excluding
impairment charges and losses related to marking-to-market fuel
contracts that settle in future periods) compared to a $73 million
profit for the quarter last year. This difference represents a swing of
$264 million from a year ago.
Because Delta and Northwest have already gone through bankruptcy
and dramatically lowered costs, both carriers face fewer opportunities
for further cost-cutting on a stand-alone basis. For example, we have
assured our employees that we will not ask them for any additional pay
cuts. The significant synergies of this transaction enable Delta and
Northwest to offset more effectively the dramatic increase in fuel
costs in a way we could not achieve individually. In short, the
combination of Delta and Northwest creates a company with a more
resilient business model that can withstand volatile fuel prices more
effectively than either could on a stand-alone basis.
Open Skies and Consolidation in the Global Market Have Substantially
Strengthened the Competitive Position of Foreign Flag Carriers
Competition is growing from foreign airlines based in Europe, the
Middle East, and Asia as Open Skies agreements and mergers are making
foreign airlines stronger competitors. The Open Skies agreement between
the United States and the European Union, effective last month, has
expanded aviation markets around the world. Now any European or U.S.
airline can fly between any city in the European Union and any city in
the United States, giving European carriers greater access to U.S.
markets. Open Skies increases competition between European carriers and
highly fragmented U.S. legacy carriers. Foreign flag carriers have been
able to invest in new aircraft and improved service offerings and
amenities because they have not been confronted with the same economic
challenges facing U.S. carriers and because they pay their fuel bills
with stronger currencies.
Delta/Northwest creates a global carrier with a first-rate
international network, positioning the new carrier to compete
effectively against foreign airlines. This international expansion
could not be undertaken organically. Northwest could not establish a
European and Latin American presence to rival Delta's without
substantial fleet expenditures and the renegotiation of restrictive
bilateral agreements in Latin America. A Delta/Northwest merger permits
Northwest customers to access Delta's extensive European and Latin
American networks in a cost-efficient way.
Similarly, Delta could not unilaterally recreate Northwest's
significant Asian presence because of restrictive bilateral agreements,
slot constraints, and the need for substantial fleet expansions.
Northwest and United, alone among U.S. carriers, possess grandfathered
rights under the 1952 U.S.-Japan bilateral that afford extensive access
to Japanese markets and the ability to connect passengers through Japan
to other markets in Asia. A Delta/Northwest merger will allow Delta's
customers to benefit from greater access to Northwest's three Japanese
markets and eleven other Asia/Pacific markets.
Combining the complementary international networks of Delta and
Northwest creates the comprehensive global network that customers
value. By consolidating, Delta and Northwest will be able to compete
more vigorously and effectively with foreign competition.
III. Delta/Northwest: A Win for American Customers
Combining Delta and Northwest will offer customers greater choice,
more competitive fares, and a superior travel experience. The combined
airline will provide convenient connections between more destinations
in the United States and around the world than any other airline. As a
stronger, more financially stable company, the combined airline will be
more able to reinvest in upgrading its fleet and enhancing the services
that make flying more convenient and enjoyable for customers.
The Combined Carrier Will Offer More Choices Worldwide Than Ever Before
The combined carrier will offer a true global network. The new
carrier will offer service to over 390 worldwide destinations in 67
countries, including more than 140 small communities across America.
Customers also will have access to 840 destinations in 162 countries
through the SkyTeam Alliance.
Combining the networks of Delta and Northwest also paves the way
for new route offerings. For example, Northwest Airlines is the
preeminent U.S. airline serving routes between the United States and
Asia, particularly Japan. However, our Asian network would be better
utilized if it were connected to a domestic network of larger scale.
For example, several years ago, Northwest discontinued service from
Tokyo to New York because we did not have enough of a presence in New
York to sustain that route. Delta, in contrast, has a strong presence
in New York. The combined passenger volume of the two carriers will
support re-entering the non-stop JFK-Tokyo route.
Delta/Northwest Will Create the World's Largest Frequent Flyer Program
The merger will create the world's largest frequent flyer program.
Because customers will be able to fly to more destinations and enjoy
enhanced schedule options, they will have more opportunities to earn
and redeem frequent flyer miles. Members of the existing frequent flyer
programs of both Delta and Northwest will keep their current mileage
and customer status post-merger.
Delta and Northwest Are Uniquely Positioned for a Smooth Integration
Process
Delta's and Northwest's complementary networks and common
membership in the SkyTeam alliance will minimize the integration risk
that has complicated some airline mergers. The carriers' frequent flyer
programs, customer lounges, airline partner networks, and IT platforms
already have been partially integrated through the SkyTeam alliance in
which both Delta and Northwest participate. Thus, the carriers'
previous investments in integration will allow for a more efficient and
seamless integration process.
Heightened cooperation scheduled to occur in the transatlantic will
further enhance the integration process. Last month, the Department of
Transportation preliminarily granted antitrust immunity for a four-way
joint venture among Northwest, Delta, Air France, and KLM. The
combination of Delta and Northwest will facilitate an accelerated
implementation of this joint venture, creating significant benefits for
consumers.
We have already commenced a transition planning process to ensure a
smooth integration. A task force has been established including senior
leadership from all of the key operational departments of both
companies. The task force has as its mandate to identify the best
systems and best processes--so that immediately after closing we will
be in a position to proceed with integrating the companies.
IV. Delta/Northwest Will Continue to Deliver Exceptional Service to
American Communities
Because Delta and Northwest bring together complementary route
networks with only minimal service overlaps, the combined company will
preserve all of its hubs and serve more domestic and international
destinations than any other airline. The new carrier will continue
Delta's and Northwest's proud traditions of providing extensive service
to small and rural destinations across the country. By combining, we
will build on this decades-long history by providing small communities
with service to hubs from which they will be able to directly connect
to an even wider array of destinations on a single airline.
In the first half of 2008 alone, record fuel prices have forced the
industry to reduce by more than 1.6 million the number of seats
available to passengers. By the end of the year, Delta will have cut
capacity by 10 percent, and Northwest by 5 percent. The merger, by
producing a stronger competitor, will make service cutbacks less likely
than if Delta and Northwest were to remain separate.
The Combined Carrier Will Make Service to Smaller Communities More
Secure
We take our commitment to serve customers in small communities very
seriously. Together, Delta and Northwest will serve over 140 small
communities, nearly double the amount of our next largest competitor.
By aligning our network strengths, we can enhance service from
small communities to new international destinations. Indeed, 48
Northwest small communities will gain better access to 83 Delta
international destinations. Post-merger, over 390 global destinations
will be available on a single airline to each small community we serve,
up from 250 on Northwest alone and 327 on Delta alone. Businesses in
the upper Midwest will gain access to South America and expanded access
to Europe, while businesses in the Southeast will gain better
connectivity to Asian markets. Potential new economic development,
trade, and tourism benefits from enhanced global access to and from
cities and towns across the United States will arise due to the merged
company's unprecedented international network.
Furthermore, the cost savings achieved by the merger will enable
the new carrier to continue serving routes that the stand-alone
carriers would have had to cut. Thus, the merger creates a more stable
and secure platform for service in an airline environment plagued by
volatility. By combining, Delta and Northwest will make existing
service to small communities more secure.
All Hubs Will Be Maintained
The Delta/Northwest network formed by our seven geographically
balanced U.S. hubs is the combined carrier's greatest asset. We have no
intention of dismantling any hubs, and have committed to maintaining
Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-
JFK, and Salt Lake City. These hubs do not exist because they were
selected at random by an airline planner throwing darts at a map. They
exist because there was a strong local market that justified the
development of hub service, and an air carrier with the resources to
develop it.
Delta and Northwest made different--but sound--business decisions
in developing hubs in the cities where they exist today. Furthermore,
each hub has unique service points, which add value to the hub and to
the network. (See Figure 8).
Figure 8: Unique Regional Service Points
The merger provides the opportunity for Delta and Northwest to make
better use of their hub infrastructure investments by generating
additional traffic flows throughout the broader combined network.
Because this is an end-to-end merger and because sound economics
underlie our hub operations today, there is no need for hub closures.
Detroit (DTW)
Detroit is Northwest's largest hub and will continue to serve as
Delta's premier hub in the Great Lakes region with connections across
the globe. The state-of-the-art McNamara terminal, combined with vast
airside capacity, provides an efficient connecting complex that has won
high acclaim with consumers. Detroit's northern tier geography (which
is shared by Minneapolis) places it along the optimal great circle path
for service from many U.S. cities to points in both Asia and Europe.
Even though Detroit is a large hub with extensive service
throughout the heartland region, Detroit has relatively few flights to
the Southeastern United States, where Delta provides comprehensive
network coverage, and Detroit has no service to South America, where
Delta is a major player. Customers in Detroit, and especially the
unique cities served in Detroit's large Midwest catchment area, will
benefit from access to the Delta network. In terms of domestic ASM's,
Northwest devotes 49 percent of its capacity to the North Central
region, and just 17 percent to the Southeast. Conversely, Delta offers
only 10 percent of its capacity in the North Central region, and 39
percent in the Southeast. Combined, the respective hubs of Delta and
Northwest form a better balanced nation-wide network.
Minneapolis/St. Paul (MSP)
The added traffic from Delta's larger U.S. domestic network will
help to strengthen and promote the development of Northwest's
Minneapolis/St. Paul hub, including its international services.
Northwest recently added non-stop service from MSP to London Heathrow
and Paris. Delta is a major player in Europe, and the deepening
partnership with our common SkyTeam partners Air France and KLM will
contribute to the long-term success and development of non-stop
international services from MSP. We are committed to retaining
significant airline jobs, operations, and facilities in the Twin
Cities, and the combined carrier will continue to be an important part
of the Minneapolis/St. Paul community.
Memphis (MEM)
Memphis will continue to play an important role for the combined
carrier. Memphis is a smaller but efficient and well-performing hub.
The demand for air travel to and from Memphis--which has sustained a
major airline hub for more than three decades--is not going to
disappear simply because there is a neighboring Delta hub 330 miles to
the East at Atlanta (ATL). Northwest's Memphis hub has existed
alongside Delta's Atlanta hub since its inception, and the merger is
not cause for its elimination. By coordinating and optimizing schedules
across the complementary multi-hub network, the new carrier can improve
operating results and offer greater frequency and better routing
choices for its customers. Memphis provides an important opportunity
for future growth when economic circumstances permit. Even with its
fifth runway, Atlanta is operating at capacity. Memphis is a flexible
and less congested alternative hub.
Conclusion
Northwest Airlines has carefully considered the effect of this
transaction on our shareholders, our employees, our customers, and the
communities we serve. We have concluded that the merger is a win for
each of these stakeholders in our company. This merger is about paying
employees fair wages, reinvesting in new products and services for
customers, earning a return for shareholders who have committed their
capital, and being a good corporate citizen. An unprofitable airline
cannot do any of these things.
The combination of Delta and Northwest will offer customers greater
choice, competitive fares, and a superior travel experience. It will
maintain all of Delta's and Northwest's hubs and serve more domestic
and international destinations than any other airline, including
service to more than 140 small communities in the United States.
At this time, I would be pleased to answer any questions you may
have.
Senator Rockefeller. Thank you, Mr. Steenland, very much.
Mr. Anderson, you have already been introduced, and we
welcome your comments.
STATEMENT OF RICHARD H. ANDERSON, CEO,
DELTA AIR LINES, INC.
Mr. Anderson. Thank you, Mr. Chairman and Senators of the
Committee.
I appreciate the opportunity to be here on behalf of the
50,000 people of Delta Air Lines and the 60 or so Delta
employees that are here with us today, including Captain Lee
Moak, Chairman of the Airline Pilots Association and a Delta
767 captain and, I might add, a Marine aviator, who is here in
support and has given a statement to be included in the record.
Also, we have included for the record submissions from over
100 different entities in 27 different states representing
entities in each of the communities that each of the Senators
here today represent.
Senator Rockefeller. All will be included.
[The information previously referred to is retained in the
Committee files.]
Mr. Anderson. Thank you.
This is really the opportunity for the U.S. airline
industry to compete on a global basis. When you think about
what is going on in the world today and where commerce is today
with the various free trade agreements and all of the Open
Skies agreements that have been signed, we really--it is not
just about competition in the United States. It is about having
strong U.S. airlines to compete around the world.
When we look at the traffic in the United States today, the
majority of the traffic carried to and from Asia, Europe, the
Middle East, and Africa is carried on foreign-flag carriers.
Only 5 percent of the wide body international orders worldwide
are held by U.S. airlines. And most of those are held by these
two airlines.
So when you look at our competitive position versus
foreign-flag airlines and the fact that so much of our commerce
as a country depends upon our ability to compete
internationally, it is very important that we have a strong,
viable, competitive airline business, and this combination is
about placing the U.S. airline industry at the front of
international competition.
When we look out at the other challenges that we face, in
addition to global competition, you cannot ignore the effect
that oil has on this business. Oil today is actually at $123 a
barrel with crack spreads at $30. So the industry is paying on
an unhedged basis over $150 a barrel for fuel, which represents
40 cents of every dollar we collect.
In order for us, for these two carriers to be able to do
right by our employees, right by our shareholders, right by the
communities we serve, we should be given the opportunity to act
on our own. We aren't here asking you for aid or any other sort
of support. We are here telling you that we want to combine
these two great airlines so that we can be much stronger and
much more durable so that we won't relive what has happened
over the past 7 years, which is reduction of over 150,000
employees and losses totaling $30 billion.
The oil prices alone, when I testified last before the
Senate 2 weeks ago, there had been five carriers that had
entered Chapter 11. There are now six carriers that have
entered Chapter 11. And what this really does for these two
carriers, these are the two strongest carriers from a balance
sheet perspective, a cost perspective among the network
carriers.
We have both been through reorganization. We have both
scrubbed our fleets. We scrubbed our cost structure. We fixed
our balance sheets. We have solid strategies, and the
opportunity we have together by putting these two airlines
together with little, if no overlap is to build a worldwide
network that can compete on any basis with foreign-flag
carriers.
The merger, most importantly, provides more stability for
our employees. When we look at what our standalone plans are
versus what the combination creates, the combination creates
over a billion dollars in value. The only true stability in
this business for our employees is for us to have a winning
strategy as an enterprise.
So we had that in mind when we put this combination
together. So we are not--this is end-to-end, so there are no
hub closures. We have committed to no layoffs of frontline
employees. We have set aside a significant amount of ownership,
straight stock ownership for the employees on closing. We have
seniority protection in the merger agreement. But more
importantly, the Congress passed legislation supporting it, and
our board of directors at Delta has adopted it as an
enforceable policy.
Small and large communities benefit. Hub and spoke carriers
are built to serve small communities. We have invested hundreds
of millions of dollars in the airplanes and the facilities and
the schedules to provide that service. Discount carriers do not
serve small communities.
A stronger network carrier will do a better job serving
small communities. We will create new service to over 3,000
markets and over 6,000 new international markets. We appreciate
the opportunity to be here today and look forward to answering
your questions.
Thank you.
[The prepared statement of Mr. Anderson follows:]
Prepared Statement of Richard H. Anderson, CEO, Delta Air Lines, Inc.
Introduction
Mr. Chairman and members of the Subcommittee, I want to thank you
for providing me with the opportunity to address the Subcommittee about
a topic that is critical to the future of every employee of Delta Air
Lines, and Northwest Airlines. On April 14, we announced the merger of
Delta and Northwest; a transaction that will create America's premiere
global airline. This transaction comes at a unique and important time
in the history of the airline industry and our two companies. The world
is changing rapidly; business is conducted across all parts of the
globe and people around the world have unprecedented freedom and
opportunity to travel abroad. The question facing the domestic airline
industry is whether we will have companies with the global network and
financial stability to compete in this new world against foreign
carriers. Make no mistake about it; we face formidable competitors from
overseas. Today foreign flag carriers carry more passengers to and from
the U.S., Europe and Asia than U.S. flag carriers. They are frequently
funded by their governments and benefit from regulatory policies that
promote consolidation into a handful of strong competitors. The Open
Skies agreements that recently have gone into effect offer domestic
carriers excellent opportunities and daunting challenges as
transatlantic competition will increase dramatically. The current order
book for wide body Boeing and Airbus aircraft shows that U.S. carriers
make up only about 5 percent of the buyers. We do not come here today
looking for financial support, but we are looking for an opportunity to
build a more financially stable U.S. airline with the global presence
to compete with foreign carriers.
Our ability to remain strong financially and to compete
internationally is severely impacted by the unprecedented rise in the
price of oil. Continued prices of $115-$120 per barrel of oil will
result in bankruptcy for some carriers and deny even the most
financially sound carriers of profitability. In the last few weeks
alone we have seen five U.S. carriers go into bankruptcy directly as a
result of fuel prices, with four of them shutting down completely.
Passenger airlines reported first quarter results and the industry
reported a $1.74 billion loss for the quarter compared to profits for
the first quarter of 2007, with the swing almost exclusively the result
of increased fuel costs. We have seen the impact of bankruptcies on
airline employees and customers. Since 2001, U.S. network carriers have
shed more than 150,000 jobs and lost more than $29 billion. The
management of Delta and Northwest believe that this merger will create
a financially stronger airline, with a broad and diversified global
route network that will help it weather the impact of fuel prices and
the volatility of the domestic and world economies.
The Delta-Northwest Combination Will Be a Strong, U.S. Based Global
Competitor
The combination of Delta and Northwest will create a stronger
company with route systems that complement each other and will provide
an opportunity to offer travelers a global network that neither airline
independently could offer. Northwest for decades has been America's
premiere carrier to Asia; in fact it is the only U.S. carrier with a
hub in Japan that provides a convenient point to connect to the most
important destinations in Asia. As a result of restrictions in bi
lateral agreements between the U.S. and Japan, there is little chance
that Delta would ever be able to offer comparable service. Conversely,
Delta has invested substantially in building the leading service to
Europe, the Middle East and Africa from the U.S., as well as a strong
presence in Latin America. It is virtually impossible for Northwest to
devote the capital necessary to acquire the planes to build such a
franchise. As I indicated, the recent Open Skies agreements will permit
any U.S. or European Union carrier to fly between the U.S. and the 27
EU member states. Already, British Airways, Virgin Atlantic and Ryanair
have indicated that they will add or start new service between the U.S.
and Europe, and Lufthansa is a growing presence in the U.S. The
combined Delta/Northwest will generate approximately $ 1 billion a year
in synergies and will have about $7 billion of liquidity together with
the global route network that will allow us to compete in this new
environment.
The Merger Has Been Structured to Provide Stability and Benefits for
Employees
Delta has a uniquely cooperative relationship with its employees,
and in planning this merger the impact on employees was uppermost in
our minds. I have worked at many companies, in many different jobs, in
both the public and private sectors and I have never seen an employer
that respects and cares about its employees more than Delta Air Lines.
Delta historically has had a culture that always tries to do what is
best for its people. That is particularly important in view of the
immense challenges that Delta and the rest of the airline industry have
faced in recent years. Given these industry challenges, I believe it is
even more important that we work collaboratively with all of our people
so that we can fight and overcome them together. As we are beginning to
see, companies and employees that fail to work together are at greater
risk of failure. We believe it is important that any transaction we
undertake will benefit the people of both companies, together with our
customers and other stakeholders. We believe that if we take care of
our people, they will take care of our customers, and we will all
benefit.
Here are just some examples of how this merger will benefit our
people:
a. We will set aside sufficient equity so that all employees
can have an unprecedented equity stake in the merged company.
b. We will move all employees, over time, up to industry
standard pay and benefits.
c. We will honor our commitment to all U.S.-based, frontline
employees to provide a process for the integration of seniority
in a fair and equitable manner.
d. We will maintain the existing pension plans of both
companies, both for current employees and for those already
retired.
e. We will maintain our top tier profit-sharing plan and
operational rewards program.
f. We have assured our frontline people that there will not be
any involuntary furloughs as a consequence of the merger.
g. And particularly important in view of the impact on our
industry of record fuel prices and economic uncertainty, we
will strengthen our airline financially and provide
opportunities for our people to benefit from our planned growth
and future success.
With respect to whether there will be union representation in the
various crafts or classes of employees after the merger of Delta and
Northwest, we have pledged to respect our employees' preferences on
that issue. The Railway Labor Act, as administered by the National
Mediation Board, provides a time-tested process for determining
employee choices regarding representation following an airline merger.
We of course will respect that process and those choices. In the
meantime, we have provided a written commitment to honor the existing
Northwest collective bargaining agreements until any post-merger
representation issues are resolved.
Regarding seniority protection for the frontline employees of Delta
and Northwest, Delta took the initiative last year when our Board of
Directors adopted a policy to provide a process for fair and equitable
seniority integration for employees of both companies in any Delta
merger. We pledged to use the seniority integration provisions from the
former Civil Aeronautics Board's ruling in the Allegheny-Mohawk merger.
Delta and many other carriers have used the Allegheny-Mohawk provisions
in prior mergers, and they are also provided for in many collective
bargaining agreements in the industry. Last December, Congress passed
legislation that required the use of the Allegheny-Mohawk seniority
integration provisions in airline mergers. Delta successfully fought to
assure that the law as passed protected all employees, whether union or
non-union. We carried these principles through our negotiations with
Northwest and have provisions in our merger agreement that provide for
seniority protection.
Small Communities Will Benefit from the Merger
I would like to address another issue that I know is very important
to this Committee and our customers: service to small communities.
Both Delta and Northwest are very proud of their long history of
serving small communities. Northwest has often been the only way for
people in small towns in the upper mid-west to connect with the rest of
the country and the world. Similarly, Delta was founded in a small
southern city and for years its focus was serving small southern
communities. We know and understand the importance of air service to
the economic health of these communities. The phenomenal growth of
Atlanta and the southeast in general is directly related to the
superior service offered from Hartsfield Jackson Airport in Atlanta,
largely by Delta. We intend to continue with these traditions and to
remain the airline providing the most service to small communities from
strategically located hubs in Atlanta, Minneapolis, Detroit, New York,
Memphis, Cincinnati and Salt Lake City. This is not just customer
service, it is good business--we have committed publicly that we will
not close any hub as a result of this merger. To keep these hubs
profitable, we need the traffic from small communities around the
country. A robust hub system is critical to the services desired by
small communities. It is the most effective model to serve these
communities since it allows us to use smaller aircraft to bring
passengers from many small communities to the hub and offer broad
connecting opportunities for these passengers. The combined Delta/
Northwest will serve over 140 small communities, nearly twice the
number served by our next closest competitor. The merged airline will
offer new service to nearly 3,000 domestic origin and destination
markets and over 6,000 new international markets, greatly expanding the
ability of customers from small communities to reach every part of the
country and the world on one airline.
As the economies of the world become linked more closely, we
recognize the importance of air travel to the ability of small
communities to compete and thrive in a world economy. This merger will
open up a new range of options for our customers in small communities
and it will bring them in closer contact with the rest of the world.
For example, the combined Delta/Northwest will provide customers in 48
small communities served by Northwest better access to 83 additional
international destinations served by Delta today, while passengers in
51 small communities served by Delta will gain greater access to 20
Northwest international destinations.
The combined airline will offer passengers over 390 global
destinations on a single airline up from 250 on Northwest alone and 327
on Delta alone. Customers in small towns in the south will be able to
fly to Japan and much of Asia with one easy connection on the same
airline. That is not the case today. Similarly, customers in the upper
mid-west will have many more options to fly on one airline network to
more destinations in Europe and Latin American than they do today.
Since Delta and Northwest have focused their attention on different
regions, there are few overlap routes and customers will gain the
benefits of a larger combined network without any material reduction in
services. However, providing service to any city, whether small or
large, must make economic sense and the high cost of fuel for Delta and
Northwest is far more likely to result in a reduction or elimination of
service than this merger.
The Unprecedented Rise in the Price of Fuel Has Created Serious Risks
for the Airline Industry
No discussion about the current state of the airline industry would
be complete without mentioning the devastating impact of the
unprecedented rise in the price of oil. Every day we read that the
price of a barrel of oil has hit new records. Over the last 5 years we
have experienced a 28 percent annualized increase in oil prices and in
the last 12 months alone, the price of a barrel has nearly doubled.
Most analysts do not foresee the price of a barrel of oil going below
$100 any time in the near future. What is less widely publicized is the
equally dramatic rise in the cost of jet fuel extracted from oil. Since
2001, the cost of a gallon of jet fuel has increased over 500 percent
and nearly doubled since December 2006.
The airline industry is somewhat unique. When the price of oil
rises and you go to fill your car up with gasoline, you pay more at the
pump; there is little choice. In the airline industry, we are lucky if
we can recover through fare increases even 50 percent of fuel price
increases. The costs have to be made up somewhere else. Despite
becoming more and more fuel efficient and obtaining more and more
productivity from our employees and operations--Delta and Northwest
have two of the lowest cost structures of the mainline carriers--the
impact is dramatic. In 2003 fuel costs consumed 17 cents of every
dollar of passenger revenue we received; in 2008 that number will be
43 cents. Every $1 increase in the price of a barrel of oil costs Delta
about $60 million. The increase from $110 to $115 per barrel in the
last couple of weeks alone will cost Delta over $300 million on an
annual basis. As a result, there are fewer dollars left to improve
passenger amenities, acquire new aircraft and provide better
compensation and benefits to employees. The employees in this industry
have sacrificed time and time again. The dramatic rise in fuel costs
has resulted in much of the cost savings our employees have generated
through productivity and benefit losses being used to pay for fuel
rather than to improve the product. In effect, it has eroded most of
the sacrifices they have made to make their company viable and
sustainable in the future. Merging Delta and Northwest will create a
much more financially stable company with approximately $7 billion in
liquidity and $1 billion in annual synergies. The combined airline will
be able to withstand an 80 percent greater increase in fuel price than
either airline standing alone, and still maintain profitability. This
financial strength and flexibility, much greater than either airline
standing alone, will provide additional resources to help weather this
unprecedented fuel cost environment and a softening domestic market.
This Merger Will Be Beneficial to Customers
I have already touched on some of the key benefits our customers
can expect such as a significant expansion in the number of domestic
and foreign locations that will be available from the merged airline.
There will be other benefits such as a common frequent flyer program
that will provide more opportunities to earn miles, more schedule
options, and more efficient routes for connecting passengers as we
optimize the combined hub structure. Of equal importance, the financial
stability and flexibility of the combined carrier will allow us to re-
invest in our products such as planes, in-flight services and
reservation systems. For example, we have publicly stated our intention
to exercise options to purchase up to 20 new wide body jets between
2010 and 2013 to upgrade our fleet for international flying.
We are mindful of the difficulties in combining the complex
operations of two airlines and that other airline mergers have
encountered problems that have inconvenienced customers. Delta and
Northwest are committed to making this merger seamless and trouble free
for our passengers. Both Delta and Northwest are members of the SkyTeam
alliance and have gained experience in working cooperatively on
passenger service issues. Our frequent flyer programs, customer lounges
and IT systems are already partially integrated. In addition, we will
be able to build on the decades long partnership between Northwest and
KLM (now a part of Air France) and the long standing relationship
between Delta and Air France. All of these factors will help smooth the
integration process for our customers.
The Merger Does Not Harm Competition
Doug Steenland's written submission will deal extensively with the
pro-competitive impact of this proposed merger and I will not repeat
all of those points. I will simply say that these two airlines have
complementary networks; Delta's domestic focus is in the east and
mountain west while Northwest focuses on the upper mid-west. There are
only twelve domestic nonstop overlapping markets. Even these nonstop
overlaps do not cause competitive problems, as Doug's statement
indicates. Similarly, on connecting route overlaps, potential
competitive effects are mitigated by the presence of low cost carriers,
the relatively small market shares of Delta and Northwest, the
availability of alternative airports and the likelihood that legacy
carriers will expand into these markets. In addition, the transaction
will generate significant efficiencies through such factors as more
efficient matching of aircraft to routes that will enable the combined
carrier to be financially stable and to offer a better product to
customers, such as a broad global network and enhanced airport
presence.
Conclusion
In closing, I would like to acknowledge the support we have
received from Delta people throughout the company. It has been 3 weeks
since we announced the merger. We have been traveling our system from
Atlanta to Cincinnati to New York to Salt Lake City and I am happy to
say that Delta people are very excited about what this means to them. I
believe that Doug will report the same about Northwest's employees.
Two weeks ago we had a meeting in Atlanta attended by almost 2000
employees. Some of our people have traveled here today to show their
support. Our people appreciate the fact that we are taking proactive
steps to provide a more secure, financially stronger company in these
times of increased foreign competition, record-setting fuel prices and
a weakening economy. They do not want us standing still. We look
forward to welcoming Northwest employees to join with their Delta
counterparts to create and enjoy the benefits of being part of
America's premier global airline.
Senator Rockefeller. Thank you very much, Mr. Anderson.
And now, Mr. Neidl, would you please give us your
testimony?
STATEMENT OF RAY NEIDL, ANALYST,
CALYON SECURITIES INC.
Mr. Neidl. I want to thank the Committee for inviting me to
speak today.
Senator Rockefeller. Could you pull that microphone a bit
closer, please? Thank you.
Mr. Neidl. OK. Is that better?
I want to thank the Committee for inviting me here today.
As a long-time student of the industry, I have great interest
in the airlines, their cultures, and their history. But as a
Wall Street stock and bond analyst, right now I am more
concerned with the financial ability of the airlines.
The industry is changing rapidly both in the U.S. and
worldwide, and the industry is moving more and more toward
globalization. We can see trans-border mergers happening
already overseas, particularly in Europe. These carriers are
becoming bigger and financially stronger and will give greater
competition to the fragmented U.S. network carriers out there.
Domestically, the network carriers continue to face more
competition from startup carriers. To go back a decade, startup
carriers was Southwest. Today, we have got a number of startup
carriers, a few less than we had a few weeks ago, but we still
have a number of startup carriers that are out there pricing
the market and domestically probably have over a third of the
market share now, offering very tough competition for network
carriers.
Now, looking at the industry since 9/11, airline management
from across the board in the network sector, in my opinion,
have done just about everything they can to cut nonfuel costs.
I don't think they can do much more.
The employees have given everything they can. They can't go
to the employees any longer. They have revised their
structures, and basically, they are trying to provide complete
service on a shoestring type of budget. So there is not a lot
more they can do, and they are facing these tremendously high
fuel costs, which just a year ago nobody believed it would be
this high.
Exit barriers for those carriers are strong, though we are
seeing a few of the smaller, less capitalized airlines exit
right now. But the bankruptcy laws allow airlines to stay
around almost forever. It took years for a very weak Pan Am and
Eastern Airlines to finally shut the doors, and in the
meantime, they were doing damage to the industry as they priced
for cash flow.
However, entry barriers remain pretty open. It seems like
there is never a shortage of capital for people wanting to
start airlines or people finding niches that they want to get
in and grab a certain part of the market share from the big
carriers. It is slowing down a little bit now with high fuel
prices and a slowing economy. But that will change. Recessions
come and go. And I am sure a whole host of new startup carriers
will be coming into the market over the next couple of years.
Now, excess capacity, we have that in the system right now
with high fuel prices. They have led to weak operating margins
on the part of the airlines and has weakened them. And with too
many seats being offered, the airlines are not pricing to meet
their costs, particularly an uncontrollable cost like runaway
fuel costs.
The industry--this industry is going to have to restructure
one way or the other. It is either going to restructure through
the guidance of politicians and regulators through mergers,
orderly mergers, or the bankruptcy courts will take care of it.
I believe that a number of carriers, the next time they go into
bankruptcy, if they do, this will be for real.
Airlines like Delta and Northwest have done everything they
could in bankruptcy to restructure themselves. If they are
forced to go in again, it will be for liquidation this time,
and that will take care of excess seats in the market, but in a
way that would be tough on their employees and tough on the
marketplace.
Industry consolidation, if properly overseen by the
regulators, I think, would be a benefit to the employees, to
the investors that supply capital to the industry, and to the
traveling public. It would give them greater market mass. It
will allow them to have greater ability to generate revenues,
and most importantly, it will give them the ability to cut
costs. Maybe a little bit more than some people would like to
see, but it would provide the opportunity for elimination of
duplicate services.
Now, there is one major risk, in my opinion, with multiple
mergers going on at the same time. If you look at the history,
mergers have always proved to be messy, time consuming, and in
many cases disruptive of services. If we have a number of
mergers going on at the same time among major U.S. carriers, it
could create, if it is not done properly, panic among the
traveling public and you, the politicians, would hear about it
very rapidly. So that is my main concern about big airline
mergers, multiple ones happening at the same time.
But bottom line and summary, the airlines are not meeting
their cost of capital or their operating costs. Fuel, which is
large and uncontrollable, is knocking out all of the hard-won
cost cutting that has been done by the airlines, and I think an
answer to that is to have sensible end-on-end type of mergers.
Thank you.
[The prepared statement of Mr. Neidl follows:]
Prepared Statement of Ray Neidl, Analyst, Calyon Securities Inc.
USA Airlines
The commercial aviation industry is becoming more global,
whereby larger and financially stronger players will eventually
dominate. This is already happening in the European Union (EU)
which is treating the area as one market enabling its airlines
to consolidate and become more efficient. The rapidly growing
Asian economies welcome outside investment to help support and
drive growth for their airlines.
U.S. network airlines will find it tougher to compete in a
more global and efficiently run industry unless they are
allowed to gain market mass, obtain further cost efficiencies
and increase their ability to enhance revenue generation so
that they will attract capital investment. Although foreign
carriers are not able to compete in the U.S. domestic market,
network carriers are facing increasingly aggressive competition
from low-cost carriers in this sector, thereby effectively
squeezing network carriers from both sides.
Mergers will not solve all of the industry problems. In
fact, airline mergers in the past have proved to be relatively
expensive and inefficient in the initial years. There is a
major risk that there could be widespread disruptions in
service if more than one merger is being implemented at the
same time.
However, properly planned and implemented, especially with
the cooperation of the employees, mergers could produce
stronger and more competitive entities long-term. Stronger
airlines would not only be beneficial but are a necessity to
properly serve travelers and give job assurance to employees,
to say nothing of attracting strategic investors.
The industry has done a commendable job in rationalizing capacity
and reducing non-fuel costs since 9/11. Employees have contributed by
easing work rules and accepting reduced compensation while airline
managements have thoroughly reviewed their systems to increase
efficiencies. More can be done but there are limitations. As oil prices
exceed $110 a barrel, something has to be done to further rationalize
the overall structure of the industry. Without a major rationalization
of capacity, slim profit margins will disappear, which will make it
difficult for U.S. network carriers to modernize their fleets to stay
competitive with foreign airlines that have been rapidly upgrading
their fleets with new technology-driven, cost-efficient aircraft. This
will hurt U.S. network carriers in the long run and ultimately have a
negative effect on aircraft manufacturers and their many suppliers
across the U.S. and worldwide.
As the industry moves toward globalization through trans-border
mergers, foreign carriers will become tougher competitors for U.S.
based network airlines. They are gaining market mass and are
structuring themselves to gain in financial strength. Size in many
cases also can mean stronger pricing ability since a broader scope of
services can be offered in the international arena.
Domestic markets are currently closed to these growing foreign
giants but the U.S. network carriers are facing pressure in these
markets from start-up low-cost airlines that have newer more efficient
fleets, a lower wage cost structure and greater flexibility in
adjusting their operations. They can cherry pick the best routes.
Since 9/11, the U.S. network airlines have done a commendable job
in restructuring themselves to be more competitive but in light of
$110+ a barrel oil prices, future progress will now be limited. The
workers have given all they can and though further restructuring can be
done, all the easy fruit has been picked.
With exit barriers high as a result of U.S. bankruptcy law and
entry relatively easy through deregulation, the U.S. airline industry
has reached the point where we have too many airlines offering too many
seat miles where the costs cannot be recovered through pricing as the
multitude of airlines fight for market share to preserve their systems
and obtain a certain market mass and service footprint. Because of
strict antitrust laws, airlines cannot coordinate operations or pricing
even through their partnership agreements.
Excess capacity and competition has led to weak operating margins
and profitability even in the upper part of the economic cycle. With
fuel costs skyrocketing, the industry is now due for a major fall again
as we enter the down part of the cycle, whether it is this year or
sometime further down the road. Weak profitability and balance sheets
will lead to a crisis at some point.
The industry will have to restructure one way or the other, either
through the relatively organized regulatory oversight of mergers or in
the more risky and disorganized guise of bankruptcy, which may lead to
certain airlines having to liquidate. It probably would be better for
all parties concerned, the consumer, employees and investors to go with
the former rather than the latter.
Industry consolidation that leads to larger carriers will not solve
the industry problems by itself and mergers pose their own set of
challenges and problems, particularly in the labor area. However, to
remain competitive in an industry that is becoming more international
and globalized, greater market mass and financial strength will be
needed by the U.S. network airlines. Part of the market mass
requirement is being met currently through worldwide alliances but that
is not the same as the same airline being able to control the passenger
for the whole trip.
Besides greater market mass, the two other benefits of
consolidation would be cost cutting and revenue enhancement. To cut
costs, marginal operations and smaller expensive hub operations would
have to be evaluated as to their viability which will have an affect on
communities they currently serve. However, if service is justified,
other airlines or niche carriers would move in if the hub was
abandoned. If not economical to serve certain small communities but
service was deemed essential, it would be up to public entities such as
local, state or national government to subsidize the service and not
the airlines and their investors. These situations should be rare,
however, since a host of lower cost airlines could probably profitably
service these areas. The other benefit would be revenue enhancement.
The first thing that comes to mind is higher ticket prices if there are
fewer competitors. Higher ticket prices are needed and justified. With
over $110 a barrel oil, the consumer is not paying their way and
airlines cannot continue to subsidize them. However, revenue
enhancement would also include the additional revenues that larger
carriers could generate through a greater scope of services offered.
A major risk with multiple consolidations going on at the same time
is that there could be widespread service problems initially as
integration takes place. It has been demonstrated in past mergers that
major service disruptions are possible, if not probable, in the initial
stages of the complex integration process. If there were two major
mergers taking place at the same time, the problem would be compounded
over the Nation's commercial aviation system.
Bottom line, as much as we do not want to hear this, airlines are
not meeting their cost of capital or in fact their operating costs
despite the major efforts by the carriers to control costs and increase
efficiencies. Fuel, largely noncontrollable in the short-term, is
knocking out hard-won benefits and at some point fresh capital going
into money-losing propositions will dry up.
Conclusion
There are major doubts if the industry can remain viable over the
economic cycle with oil over $110 a barrel if there are not major
structural changes. The industry in its current fragmented form cannot
sustain profitability under these circumstances. Through consolidation,
the industry will be in a better position to rationalize capacity,
further cut costs and enhance revenues since they will better be able
to price their product at economical levels to earn a return on
capital. Without profits the industry will ultimately have to shrink. A
more efficient industry will be beneficial not only to investors and
attract capital but will give employees job security and ultimately be
beneficial to customers since profitable airlines will better be able
to serve the consumer.
Important Disclosures--Analyst Certification
I, Ray Neidl, hereby certify that the views expressed in this
research report accurately reflect my own personal views about the
securities and/or the issuers and that no part of my compensation was,
is, or will be directly or indirectly related to the specific
recommendation or views contained in this research report. In addition,
the analysts included herein attest that they were not in possession of
any material, non-public information regarding the subject company at
the time of publication of the report.
Senator Rockefeller. Thank you, sir.
And now, Ms. Patricia Friend, who is the International
President, Association of Flight Attendants. We welcome you.
STATEMENT OF PATRICIA A. FRIEND, INTERNATIONAL
PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS--CWA, AFL-CIO
Ms. Friend. Thank you very much, Chairman Rockefeller, and
thank you for holding this very important hearing on our
aviation industry.
We believe that Congress must take a hard and very serious
look at where this industry is headed and that we must begin a
serious dialogue on forming a rational aviation policy for this
country.
As you witness this merger and reports of other mergers and
the fact that in April, four airlines ceased operations in a
two-week period, you must agree that our aviation industry is
failing employees, consumers, and communities. This country has
lacked a sound and rational aviation policy since deregulation.
Prior to deregulation, the airline industry was nurtured
and developed by Federal policy, crafted to ensure that the
industry was stable and able to promote economic development.
In the post deregulation environment, the industry was thrown
into a massive, market-driven restructuring--hundreds of
bankruptcies and defunct airlines, thousands of displaced and
unemployed airline workers, the worst consumer rankings and on-
time performances in history, an outdated air traffic control
system that cannot handle the demand.
We have seen hundreds of communities across every single
region of this country lose crucial air service, and we have
heard the excuses repeatedly from the airline executives. They
have blamed everything from the national economy to low-cost
startup airlines and then to their favorite excuse, labor
costs. It is interesting to me that the one thing that remains
constant in this industry is the outrageous sums collected in
pay and benefits by airline management, regardless of the
economic performance of their carrier.
Now some may interpret my comments today as a call for re-
regulation, but I am not convinced that is the answer. What I
am saying is we need a serious national dialogue so that we can
agree on a sound and rational aviation policy that works for
everyone--employees, consumers, and communities. Everything
should be on the table in this discussion, including the
possibility of re-regulation or at least re-regulating part of
the market.
Our future, if something isn't done to develop a sound
aviation policy, is not promising. The forces of globalization
are now poised to bring sweeping changes to our industry. The
Open Skies agreement between the United States and the European
Union includes a provision for so-called second stage
negotiations.
If those second-stage negotiations result in a repeal of
current foreign ownership restrictions, the U.S. aviation
industry could be outsourced. This is a future that will lead
to reduced jobs for U.S. citizens and will open the door for
widespread outsourcing of aviation jobs, an idea already
broached by Northwest management.
The solution advanced by the industry today is for greater
consolidation, but I am not sure that we should rush into
supporting this call for greater consolidation without taking a
very serious pause. We are standing at the edge of great change
in this industry, and it is important that we begin the debate,
discussion, and dialogue on what kind of national air system we
want.
I am very glad that this merger between Northwest and Delta
has drawn significant attention. We should use it as an
opportunity to begin that national discussion. Very troubling
to us in this specific merger, this Northwest/Delta merger, is
the serious jeopardy in which it places the collective
bargaining rights of all of the Northwest employees who have
fought for and won the legal right to have union
representation.
Virtually all of the employees at Northwest have chosen to
join a union. Delta, on the other hand, has only one major
workgroup that is unionized, its pilots. The nearly 14,000
Delta flight attendants are now the closest to securing their
future by forming a union through AFA-CWA. They are currently
engaged in a representational election.
These flight attendants are fighting against tremendous
odds and against a company that is determined to do anything
and everything possible to prevent their flight attendants from
forming a union. Just since the NMB mailed its voting
instructions to the Delta flight attendants on April 23, Delta
management has flooded the flight attendant crew lounges with
supervisors and wallpapered its facilities with anti-AFA
posters, urging their flight attendants not to vote.
No merger should be permitted to become a vehicle for union
busting. These airline executives have seized the opportunity
they see in this merger, not only a chance to prevent thousands
of non-union employees from gaining a union, but a chance to
eliminate the unions that already provide protection for their
members at Northwest.
These Delta executives have not been shy about their
efforts to prevent the employees from forming unions. In fact,
in a recent meeting with AFA-CWA Northwest leadership,
Northwest management stated flatly that there would not be a
seat at the table for the flight attendants in these merger
discussions.
He went on to say that the current Delta was a non-union
company and that the new Delta had every intention of remaining
a non-union company. Delta plans to defeat the union and to
prevent the flight attendants from having or keeping the
bargaining rights that are essential in the face of any merger.
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.
And please, don't let them destroy the one thing that we have
protecting us--our unions.
Thank you.
[The prepared statement of Ms. Friend follows:]
Prepared Statement of Patricia A. Friend, International President,
Association of Flight Attendants--CWA, AFL-CIO
Thank you, Chairman Rockefeller, for holding this vital and timely
hearing on the state of the airline industry and the proposed merger of
Northwest and Delta Airlines. My name is Patricia Friend and I am the
International President of the Association of Flight Attendants--CWA,
AFL-CIO. AFA-CWA represents over 55,000 flight attendants at 20 U.S.
airlines and is the largest union in the world representing flight
attendants. We especially want to thank the Committee for inviting us
to testify today and giving voice to views and concerns of the working
women and men that have kept these our Nation's airlines flying during
the good times . . . and through some very difficult times.
As a front line employee that has worked in the airline industry
for over 40 years, I have had a unique perspective on the cyclical yet
dramatic changes that have reshaped the industry and impacted jobs. As
the President of a union representing employees from a broad cross
section of the industry from legacy carriers like United, U.S. Airways
and Northwest; to low cost carriers like AirTran and Spirit; and to
regional carriers like American Eagle, Mesa and Mesaba, I am here to
testify that I believe we are at a major turning point in this
industry. I and our members have seen the seismic changes brought on by
deregulation and have born the brunt of bankruptcies that saw major and
historic airlines like Pan Am, Eastern and TWA disappear forever. We
braved through the tragic events of 9/11, reported for duty during the
SARS panic and navigated through bankruptcies where corporate greed and
judicial neglect battered our profession and sought to destroy good
paying jobs with benefits. Mr. Chairman, the assault on the great
American middle class was and is front and center in the airline
industry.
We now face record jet fuel prices and the forces of globalization
that threaten to remake this industry into something that I, nor none
of my early flying partners, could have foreseen when I first put on my
uniform in 1966.
I will not engage this Committee with a trip down memory lane and a
recitation of exactly how much this industry has changed. As
policymakers that have witnessed most of this change first hand and in
many cases have played a role in the direction of this industry, you
are as familiar with those changes as I am. But I can tell you that we
are at point where it is absolutely vital that Congress must take a
hard and serious look at where this industry is headed and begin a
serious dialogue on forming a rational aviation policy for this
country. Each and every one of you must ask yourselves what kind of
aviation system do you envision for our country? As you witness this
merger and reports of other mergers and the fact that four airlines
ceased operations in a two-week period in April, you must agree that
our aviation industry is failing employees, consumers and communities.
You have the ability and responsibility to determine the course for the
airline industry. This industry, under this administration, has been
handed over to management teams--some with little to no airline
experience--who have destroyed middle class jobs and created the
quagmire we are in today.
This country has lacked a sound and rational aviation policy since
deregulation. Prior to deregulation, the airline industry was nurtured
and developed by Federal policy crafted to ensure that the industry was
stable and was able to promote economic development in communities it
served. In the post-deregulation environment, the industry was thrown
into a massive market driven restructuring. So what have the results
been? Hundreds of bankruptcies and defunct airlines, thousands of
displaced and unemployed airline workers and their families, the worst
consumer rankings and on-time performance in history and a out-dated
air traffic control system that cannot handle the demand. We have seen
hundreds of communities across every single region of this country lose
vital and crucial air service as airlines cut routes and scheduled
service and move those assets to serve large communities along with
every other airline. Despite the promises of deregulation, the industry
still struggles to make a profit even when the price of a barrel of oil
was half its current value. We've heard the excuses repeatedly from
airline executives. They've blamed everything from the national
economy, to low cost, startup airlines and to their favorite excuse--
labor costs. It's interesting to me, that the one thing that has
remained constant in the industry is the outrageous sums collected in
pay and benefits by airline management regardless of the economic
performance of their carrier. Corporate greed is the one thing that has
remained constant during my career. If anything in that category has
changed, it's that the amounts they reward themselves every year grows
more and more excessive while employees earn less.
What we have today is an industry and aviation system that
literally seems to be at the brink of collapse. Besides the urgently
needed upgrades to the technology of our air traffic control system and
the investment in the workforce to run that technology, we are seeing a
business model that seems to leave out of its equation the impact for
employees, communities and consumers. The only thing that seems to be
driving this industry today is how big the bottom line return is for a
select few. It doesn't matter that our aviation system is a vital part
of our national infrastructure and one that has made this country the
powerful economic, cultural and military power that it is today. It is
now a commodity that simply must be maximized to generate a profit for
a select few.
Since deregulation, our aviation policy has been dictated and
driven entirely by the marketplace. Is this a wise policy for an
aviation system that is as important and vital to our country? I could
not find any better words to describe my own feelings about this policy
than those used by Senator Dorgan at a hearing of this Committee last
year. Senator Dorgan, when discussing the state of the aviation system,
stated that he believed in the marketplace and that it often resulted
in good things. But that the marketplace needed an umpire to make sure
that it worked for everyone. I could not agree more. Deregulation has
resulted in some positive developments. The marketplace has indeed
increased competition and reduced fares for consumers in some markets.
But the unfettered marketplace has also led to the loss of air service
to struggling communities, the increasing difficulty for airline
employees to make a decent living, calls for a passenger bill of rights
and, most troubling, life saving safety initiatives that are the first
casualty of the cost cutting knife.
Some may interpret my comments as a call for deregulation. I'm not
convinced that is the answer. What I am saying is that we need a
serious national dialogue to start now, so that we can determine a
sound and rational aviation policy that works for everyone in this
country--employees, consumers and communities. And we cannot afford to
wait. Everything should be on the table in this discussion, including
the possibility of re-regulation--or at least re-regulating part of the
market.
Today, I and my members--indeed all aviation employees--look around
at an industry where the days of an airline job leading to a secure,
stable and exciting career is slipping away. The market forces have
squeezed us to the point where some regional airlines are offering to
start paying their employees $13,000 a year with virtually no benefits
to speak of. Pensions are gone or frozen. Job prospects in the industry
are bleak and everyone is in fear that their job is the next to be
eliminated. Airline management keeps telling us that they cannot afford
to go on with the current price of fuel and that something must be
done.
We've had an interesting past of growth, change and turmoil. We are
in a present that is uncertain and bleak. Our future, if something
isn't done to develop a sound aviation policy, is even less promising.
The forces of globalization are now poised to bring sweeping changes to
the airline industry yet again. The Open Skies Agreement between the
United States and European Union, which went into effect this spring,
includes a provision for so-called second stage negotiations that seeks
to eliminate long-standing U.S. aviation law that ensures U.S. carriers
are owned and controlled by U.S. citizens. If those negotiations result
in a repeal of these laws, the U.S. aviation industry could be
outsourced. The opening of markets across the Atlantic will create
greater competition for our already struggling domestic aviation
industry, which has recently relied on international flights to
generate profits. While many of the U.S. airlines did nothing to oppose
the agreement last year, they are now citing the Open Skies Agreement
and the increased competition it is unleashing as yet another factor in
the need for consolidation and their worsening bottom line. As this
competition increases over the coming years, no doubt greater pressure
will be placed on the U.S. Government to lift the cap on foreign
ownership and control restrictions on U.S. airlines. This pressure will
undoubtedly come from foreign governments eager to help their own flag
carriers gain control of the domestic U.S. market. This is a future
that will only lead to reduced jobs for U.S. citizens on flights
overseas and opens the door for the widespread outsourcing of aviation
jobs--an idea already broached by Northwest management.
The solution advanced by the industry today, and which seems to
daily become almost accepted fact by many, is for greater
consolidation. They tell us that in order to survive a world of
dramatically high fuel prices and increased foreign competition,
mergers and consolidation are necessary. I'm not so sure that we should
rush headlong into supporting this call for greater consolidation
without taking a very serious pause. With us standing at the edge of
great change in this industry, it is important that we begin the
debate, discussion and dialogue on what kind of national aviation
policy we want.
That is why I am so glad that this merger between Northwest and
Delta has drawn significant attention from the media, communities
served by both carriers and here on Capitol Hill. The attention being
paid to what will create the largest airline in the world is
appropriate . . . and necessary. We must use it as an opportunity to
begin that national discussion on our aviation policy.
In light of this proposed merger, I believe that it is important to
note that while some protections are in place for consumers and
communities, there are virtually no protections for airline workers in
this merger. There has been little attention paid to the extreme
upheaval that mergers create for the thousands of airline employees who
find themselves unemployed or whose lives are disrupted.
This has not always been the plight of airline workers. There were
many important protections in place for airline workers prior to the
Airline Deregulation Act of 1978; the Allegheny-Mohawk Labor Protective
Provisions (commonly know as the LPPs) were made a condition of
government approval of virtually every airline merger. The LPPs
contained extensive and specific protections--like displacement and
relocation allowances, wage protections, transfer and seniority
protections, layoff protection, and others--as part of a standardized
set of provisions designed to shield workers from an unfair share of
the burden resulting from corporate mergers.
But no real protections from our Federal Government exist today to
cushion airline workers involved in mergers. After Deregulation
employers successfully lobbied for an end to the LPPs because, as they
argued at the time, these matters are `better left to the collective
bargaining process.' Union contracts provide a level of protection for
those employees covered by the agreement, but there is little to no
protection for non-union airline employees.
Those same employers who wanted to leave these protections to the
bargaining process now spend millions of dollars on union busting,
trying to prevent their employees from attaining the right to bargain,
or to strip that right from those who have had it for decades. And
today, many of those same employers who hold press conferences to
trumpet the fact that their mergers will not cause any layoffs often
refuse to agree in writing to such guarantees.
Mr. Chairman, there is a distinct and vast difference between a
commitment and a contract. Union employees have commitments in writing,
non-union employees rely on a commitment that can change instantly.
Of all the well-developed rules referred to prior to Deregulation
as the Allegheny-Mohawk Labor Protective Provisions, only one exits
today--the provision establishing basic seniority protections in the
event of a merger. And, that provision was only recently resurrected
and included in last December's Omnibus Appropriations bill after the
advocacy of AFA-CWA and the strong leadership of Senator Claire
McCaskill and this Congress.
Earlier attempts by Congress to provide protections for airline
employees during mergers provides us with an instructive history in the
current context. We continue to feel the effects of the Airline
Deregulation Act. The proposed Delta--Northwest merger is just the
latest manifestation of the impact of Deregulation. But an attempt by
Congress to cushion the clearly anticipated effects of the start of
Deregulation proved to be a complete failure.
Congress included the Airline Employee Protection Program (EPP) in
the Deregulation Act to assist adversely affected employees. At least
40,000 employees lost their jobs in the wake of Deregulation. The EPP
was supposed to provide for both monthly compensation and first-hire
rights at other airlines. However, displaced employees never received
the benefits Congress promised and funding was never authorized for the
benefits, turning the whole program into a cruel joke for airline
employees in desperate need of a life line. So while Congress has
recognized the need to assist airline employees facing the traumatic
effects of industry consolidation in the past, a fully-funded Federal
effort is desperately needed now in what is shaping up to be another
significant era of airline consolidation.
Executives at the airlines have, to date, promised that there will
be no layoffs, but they refuse to put that commitment in writing. We
all know that the minute the ink is dry on the merger agreement,
executives will be looking for cost saving `synergies' that will make
the new airline ever more profitable. Many of the synergies that the
executives will likely turn to first are precisely the steps that will
harm the interests of the workers, such as furloughs, base closures,
fleet reductions and, perhaps worst of all, outsourcing.
Workers cannot, and should not, be left to fend for themselves in
this situation; we did not bring these problems on ourselves. The
Federal Government set this chain of events in motion with the passage
of the Deregulation Act and its subsequent neglect in forming a
rational aviation policy for our country. The airlines themselves have
compounded the problems for workers with an almost endless string of
cutbacks, bankruptcies, mergers and layoffs. Government and the
airlines, then, bear the responsibility. And, either the Federal
Government or the airlines must pay to offset what is otherwise the
unfair burden placed on the workers resulting from Deregulation and its
current aftermath.
As we look for solutions to cushion the enormous negative impact
this latest merger will have on workers at Northwest and Delta, perhaps
it's time to revisit the concept of employee protection from the
Deregulation Act. No, we are not proposing to re-regulate the industry
today; that's a worthy discussion for a different hearing that we
welcome and we would encourage Congress to hold. But we do think that--
at a minimum--something needs to be done to shield workers from the
harshest effects of this merger and any future mergers.
The Deregulation Act provided monthly compensation and first-hire
rights to protect displaced airline workers. Those same protections are
needed and appropriate today on the eve of the Delta--Northwest merger
and potential mergers to come. Congress could adopt and fund those
protections, or it could require the employer, as a condition of
approval of this merger, to fund those protections. We must stop
shifting these costs on employees who are least able to shoulder that
burden.
Most troubling to us, this merger also seriously jeopardizes the
collective bargaining rights of all the Northwest employees who have
fought for and won the legal right to have union representation.
Virtually all employees at Northwest have chosen to join a union.
Delta, on the other hand, has only one major workgroup that is
unionized--its pilots. I am proud to say today that the approximately
13,500 Delta flight attendants are now the closest to securing their
future by forming a union through AFA-CWA as they are currently engaged
in a representation election.
Delta flight attendants have been working diligently to secure a
better future through joining AFA-CWA and eventually securing a legally
binding contract. Their hard work paid off when they filed cards from
over 50 percent of all the Delta flight attendants requesting an
election to join AFA-CWA. Late last month the National Mediation Board
(NMB) mailed voting instructions to Delta flight attendants and the
voting will end on May 28th. We remain confident that this dedicated
group of Delta flight attendants will come together and choose union
representation and a strong voice to protect themselves and the future
of their profession, but the anti-union tactics of management have put
that outcome in jeopardy while at the same time threatening the future
collective bargaining rights of the Northwest flight attendants.
These flight attendants are fighting against tremendous odds and a
company that is determined to do anything and everything possible to
prevent flight attendants from joining a union. I am testifying for
AFA-CWA today to express our outrage over Delta Air Lines' ubiquitous
and coercive campaign to interfere with its flight attendants' right to
freely select a bargaining representative under the Railway Labor Act.
Since the NMB mailed its voting instructions to the Delta flight
attendants on April 23, Delta management has flooded the flight
attendant crew lounges with supervisors, and wallpapered its facilities
with anti-AFA posters urging flight attendants to not vote. Or as Delta
puts it: ``Give a Rip--Don't Click, Don't Dial.''
At the same time Delta's CEO was testifying before the House
subcommittee in April, a letter over his signature, along with an anti-
union video, was already in the mail to flight attendants' homes. The
first of what AFA-CWA expects will be many Delta-produced anti-union
DVDs, was mailed out probably no later than the day after the NMB
election commenced. The DVD, titled ``Important Information for Delta
Flight Attendants,'' was included in a slick package featuring a
personal message from Mr. Anderson outlining the reasons why a vote for
AFA would have the effect of ``negatively changing a great
relationship.'' Anderson goes on to reminisce about his days at
unionized carrier Northwest by stating several blatant falsehoods:
``When I unilaterally gave pay raises and domestic partner
benefits to flight attendants at Northwest, I received loud
objections from the union because those benefits were paid
directly because it was the right thing to do. The union often
would criticize and vilify management in order to promote their
own value.''
Perhaps Mr. Anderson's memory is clouded, or he knowingly made
these untrue statements. In any event they are false. Danny Campbell
the former President of the Northwest flight attendants when they were
represented by the International Brotherhood of Teamsters, has
submitted a sworn affidavit to the NMB stating that Mr. Anderson was
not the CEO at Northwest when he ``gave pay raises and domestic partner
benefits to flight attendants'' and further, Anderson never granted a
pay raise to the Northwest flight attendants during his tenure as CEO.
In fact, Anderson demanded pay cuts and benefit concessions beginning
in 2002 and continuing with the successor Union to the Teamsters, the
Professional Flight Attendants Association, through 2006.
The major push in Delta's anti-union offensive is taking place at
the flight attendant airport crew lounges located at Delta facilities
across the system. Because crew lounges are the one, if not the only,
central location for flight attendants to interact while at work, AFA-
CWA has set up information tables manned by AFA-CWA activists as means
to communicate the union's message and to encourage flight attendants
to vote. Delta has responded by flooding the crew lounges with Inflight
supervisors, some of whom are wearing T-shirts with the message ``How
was your flight'' on the back. Those supervisors are actively
interfering with the ability of AFA-CWA supporters to speak to their
co-workers.
On April 26, at Delta's Atlanta crew lounge, a supervisor started
shouting that AFA-CWA was ``scum'' as union activists were speaking to
a flight attendant at their table. Later that same day, the
International Base Manager told AFA-CWA activists to take down a small
sign that said ``STEP UP'' even though the issue signs had been
resolved by other Delta management personnel. Delta has also set up
information tables and huge banners in the crew lounge with large
posters imploring flight attendants to ``Give a Rip--Don't Click, Don't
Dial.'' In other words--don't vote. Delta's information tables contain
multiple signs and leaflets next to a continuous running video of CEO
Richard Anderson imploring the flight attendants to reject
unionization.
The increased presence of Inflight supervisors in the crew lounge
coupled with the overwhelming amount of literature and posters urging
flight attendants to reject AFA-CWA has created a hostile, coercive
environment that has destroyed the ``laboratory conditions'' the NMB is
supposed to protect during a representation election. There is no basis
for Delta to excuse this interference as simply ``informational,'' much
less that it represents Delta's ``neutrality'' during the election. The
company clearly is pulling out all the stops to destroy any chance that
its flight attendants will be able to select a representative freely
and without interference.
On May 2, Delta executives attempted a coup de grace, announcing a
pay raise for all ``non-contract'' employees scheduled to take effect
on July 1, after the flight attendants election is scheduled to be
completed. The wording of Delta's announcement makes it clear to all
flight attendants that the raise will not be provided if they vote for
the union. For obvious reasons, this is a textbook example of
interference. AFA-CWA wants to make it clear: we support the pay raise
for flight attendants. Like their colleagues at other airlines, the
Delta flight attendants have suffered drastic cuts in pay and benefits
as a result of the airline's recent bankruptcy. But, this Committee
should ask Mr. Anderson to state, on the record and under oath, if the
raise will be given to flight attendants whether or not they vote for
the union. If he refuses, and insists on maintaining the right to deny
the raise to flight attendants if they vote for the union, then the
coercive effect of the raise will be clear. If, on the other hand, he
agrees to grant the raise regardless of the election outcome, AFA-CWA
will waive its right to object to the raise as interference.
The incidents of Delta interference I have discussed are, in AFA-
CWA's view, only a sample of the coercive acts Delta executives will
unleash on its flight attendants in the weeks preceding the May 28,
ballot count. Indeed, Delta's conduct in the past week reflects its
utter contempt and indifference to the election rules the NMB is
responsible for enforcing. AFA-CWA has urged the NMB to fulfill its
statutory obligation to supervise this election in a manner that
prevents Delta from blithely poisoning the laboratory conditions
necessary for a lawful election. To that end, AFA-CWA has argued that
``extraordinary circumstances'' exist in this election process and
demand an immediate Board investigation under Rule 17.0 of the NMB
Representation Manual. We have requested that, while the investigation
is ongoing, the Board should order Delta to:
immediately cease its interference and coercion with respect
to AFA-CWA's communication activities in the flight attendant
crew lounges;
cease its deliberate misstatements regarding voter
eligibility;
cease its intrusive and false communication to flight
attendants, and
send a notice to all flight attendants on the eligibility
list to report all incidents of interference and coercion to
the NMB.
Failure to stem Delta's unlawful activities will irrevocably taint
the laboratory conditions needed for a legitimate election. This
Board's track record on interference leaves AFA-CWA with grave doubts
that any action will be taken by the NMB.
In the context of this merger, the company's anti-union tactics
take on added urgency; the merger should not be permitted to become a
vehicle for union busting. Airline executives have realized the
opportunity that this merger presents: not just a chance to prevent
thousands of non-union employees from gaining a union, but also a
chance to eliminate the unions that already provide protection for
their members at Northwest.
While Delta flight attendants vote on whether to join the union,
the Northwest flight attendants face a very real threat to their
collective bargaining rights. Northwest flight attendants have been
union members for 60 years. Their proud tradition of union
representation is threatened by management's use of this merger process
to attempt to eliminate the Northwest flight attendants collective
bargaining agreement which, in turn, poses a real threat to the job
security for thousands of flight attendants.
In fact, we view the current representation election among the
Delta flight attendants as not just an opportunity for them to gain a
voice on the job and a seat at the table, but as the ``first line of
defense'' to protect the over 60 years of collective bargaining rights
for the Northwest flight attendants. This is due to the unique way that
representation elections are governed by the National Mediation Board.
Although the Railway Labor Act (RLA) makes no mention of such an
extraordinary requirement, the NMB rules state that in order for a
representation election to be considered valid, a majority of all
eligible voters must turn out to vote in the election. If 95 percent of
flight attendants who cast a vote want to join AFA-CWA but only 49.9
percent of all the eligible flight attendants cast a vote, then the
election is invalid.
In effect, a person who chooses not to cast a vote in an NMB
election is counted as a ``no'' vote, encouraging management to focus
their efforts on voter suppression in every election. I ask the members
of the Committee to consider if they, or most of their colleagues,
would be sitting here today if our Congressional elections were
governed under the same onerous rules, where turnout is more important
than the votes cast.
Based on the number of Delta flight attendants who have signed AFA
authorization cards, and the number of Northwest flight attendants who
are already union members, AFA has the support of a solid majority of
the combined work force. Since at least 1926, national labor policy as
defined by this Congress has been to encourage unionization of workers.
Congress could further that goal, and prevent airline mergers from
becoming an occasion for union busting, simply by defining victory
under the RLA organizing rules as a majority of the votes cast.
It is our hope, and the hope of thousands of Delta flight
attendants, that they will overcome these difficult election procedures
and decide next month to join AFA-CWA. They will then have the right to
bargain for improved work rules through a legally binding contract and
the historic collective bargaining rights of the Northwest flight
attendants will have been protected in the newly merged Delta Airlines.
Delta and Northwest flight attendants, working under the umbrella of
AFA-CWA's constitution and bylaws, can move forward on integrating
their two groups and negotiating for an improved contract for what will
be the largest flight attendant workgroup in the United States. This
does not require new legislation; all we ask is that the Committee urge
these employers to remain neutral so, as originally envisioned by
Congress when it adopted the Railway Labor Act, the employees can
decide the issue of union representation for themselves, without
coercion, interference or influence by the employer.
Bargaining rights are paramount if the flight attendants are to
have an opportunity to negotiate over the impact this merger will have
on their work lives. Our primary concern is that Delta executives will
use the merger to eliminate the rights of employees to have a seat at
the table when the airline is fully merged with Northwest.
Delta executives have not been shy about their efforts to prevent
the employees from forming unions. In fact, in a meeting with AFA-CWA
Northwest leadership, Northwest management stated flatly that there
would not be a seat at the table for the flight attendants in the
merger discussions. He went on to state that the current Delta was a
non-union company and that the ``New Delta'' had every intention of
remaining a non-union company; Delta planned to defeat the union and
prevent the flight attendants from having, or keeping, the bargaining
rights that are essential in the face of this merger. Delta has already
demonstrated that they will again continue to spread disinformation and
make every effort to prevent Delta flight attendants from casting
ballots in the upcoming election. Is this what we've come to in this
country? I would ask this Committee: what is wrong with our system when
the majority of these flight attendants want union representation and
yet face such great barriers to achieve that goal?
Using this merger as an opportunity to destroy unions provides
these airlines, and all who would follow, with an opportunity to drive
down wages, work rules and benefits for all airline employees. It can
create a domino effect that will force even unionized carriers to match
those drastic cuts in order to compete. They will set industry
standards back to levels we have not seen in decades. If Delta is a
non-union carrier, as well as the largest carrier, they will be poised
to set in motion an unprecedented remaking of the entire airline
industry that will destroy airline jobs as a stable and secure middle
class career once and for all.
Flight attendants face one other devastating threat in this merger,
one that no other work group is likely to encounter. This merger may
resurrect efforts by Northwest executives to outsource our best jobs to
flight attendants based outside the U.S. Such outsourcing of flight
attendant jobs on international routes to foreign nationals will
resurface and become a standard industry practice. When Northwest first
proposed doing just this during bankruptcy, a bipartisan group of House
and Senate members rose up to decry such a move as jeopardizing
aviation safety and especially security. With a union fighting to
protect the Northwest flight attendants jobs, and support from Members
of Congress, Northwest management backed off such a proposal and
thousands of good paying jobs remained for Northwest flight attendants.
Only if the union retains its bargaining rights following the merger
will the flight attendants have the legal standing to continue the
fight against such outrageous ideas as outsourcing flight attendant
jobs; such an idea is just the tip of the iceberg. Many of the current
Delta executives were involved in earlier outsourcing attempts when
they were at Northwest Airlines.
I urge the members of this Committee to send a strong and clear
signal to Northwest, and especially to Delta executives, that they must
not use this merger as a means to destroy the collective bargaining
rights of the employees. I would urge this Committee to use its good
offices to monitor Delta management as this representation election
progresses over the next 5 weeks so that they do not engage in election
activities similar to those of 5 years ago--actions that violated the
spirit of the Railway Labor Act, even if the NMB ruled they did not
violate the letter of the law. And finally, I hope that you will use
your influence to persuade Delta management to remain neutral in this
representation election. If they are successful in their goal to keep
the ``new Delta'' non-union, we could see this merger as the beginning
of the end for the airline industry as a source of decent and
respectable jobs.
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. Most importantly, don't let them
destroy the one thing we have protecting us--our unions.
Senator Rockefeller. Thank you very much, Ms. Friend.
And our next witness is Mr. Robert Roach, who is the
General Vice President--Transportation, The International
Association of Machinists and Aerospace Workers. Please.
STATEMENT OF ROBERT ROACH, JR., GENERAL VICE
PRESIDENT, INTERNATIONAL ASSOCIATION OF MACHINISTS
AND AEROSPACE WORKERS
Mr. Roach. Thank you, Mr. Chairman and the Members of the
Committee, for the opportunity to speak to you today concerning
the transportation industry in our country.
Let me say from the outset I believe I am the only one at
this table who has been part of a merger, along with tens of
thousands of people from TWA. We lost our jobs. We lost our
pensions. We lost our health insurance. In addition, the once
thriving hub of St. Louis, which was promised would always be a
thriving hub, and other locations within that structure would
be there. We were promised jobs, just as jobs would be a
promise today. And all of these promises were never kept.
So I come here to speak to you in terms of the overall
industry. And the overall industry, it must be noted, as we are
talking about massive losses, airlines going into bankruptcy.
All of the airlines are not going into bankruptcy. Southwest
Airlines, Continental Airlines, and American Airlines have done
pretty good over the last 7 years, and in the process of
turmoil, during turmoil, they have been able to navigate
through the system.
Now we have airlines that consistently have come before
Committees like this, before the Congress, asking for relief,
Pension Protection Act, in which there is now $7 billion of
underfunded liabilities between Delta and Northwest Airlines.
Mountains of debt between these two carriers, and they come
once again, always asking for relief.
Since 9/11, airlines have received $6.3 billion worth of
relief from the Federal Government, and employees have lost
billions of dollars in wages and pensions and benefits. Cities
that used to be served are no longer served. Small communities
are no longer served.
And so, we must ask ourselves, is this a problem of the
industry, or is it a problem of some who have not managed
properly through this turbulent time? We believe that with
proper management, and we believe that coming to the table with
management, labor, and the Government to find solutions to the
problems that we do confront within this industry. We have
sought that type of meeting across the table from management.
Not to discuss collective bargaining, but issues that are of
concern to all of us so that we can jointly come before
Congress or before the Department of Transportation with
solutions to the problems.
Creating a smaller amount of airlines we do not believe
solves the problems. Eastern Airlines is gone. Braniff Airlines
is gone. TWA is gone. Ozark Airlines is gone. People's Express
has come and gone, and still they cry for more consolidation.
Now we hear one rep at this table that all the planes are
going to fly, all the hubs are going to remain in place. And
then we hear an analyst say we must reduce seat capacity. You
can't have it both ways. And if you put these airlines
together, it is not going to drop the price of oil one nickel.
Yes, there is a need for fuel, fuel price relief. And
somewhere, we need to work on that particular situation. But
there are some problems that we have sought--that we have
sought across the table with others to find solutions. Again,
we have asked for meetings with management, the CEOs of the
various major airlines through the ATA, and they fell on deaf
ears.
We have now contacted, at the request of Mr. Lou Dobbs of
CNN, a former CEO, Robert Crandall. And while we do not agree
with everything Mr. Crandall has to say, we believe he has some
interesting views on the industry today. And we hope to work as
a partner with Mr. Crandall and consumer advocates and people
who are concerned about pensions and the money that is owed to
the Federal Government concerning pensions to find solutions to
these problems without destroying an industry that some of us
have come to work in for well over 30 and 40 years and we have
come to love.
And so, as our remarks are in the--will be placed in the
full record, we wanted to say that our conversation with Mr.
Crandall, referring to an article, and I just want to briefly
read from that New York Times article, April 21, 2008.
Consolidation will not resolve the woes of individual
carriers nor will it fix the Nation's aviation
problems. Delta and Northwest Airlines agreed to a
merger last week, and that deal is likely to be
followed by other proposals. But the case for mergers
is unpersuasive. Mergers would not lower fuel prices.
It would not increase the economies of scale for these
already sizable major airlines.
It will create large costs related to consolidation,
and it will anger airline employees who will perceive
themselves be hurt by the merger. Although the system
could conceivably be operated by a single efficient
carrier, consumers clearly benefit from the existence
of multiple carriers. The absence of competition never
forces better consumer service.
Again, Mr. Chairman, we would ask that this panel or other
members of Government would try to help us with a format to sit
down and really try to fix some of the problems that confront
this industry. But we want to remind people every airline is
not coming before you asking for mergers. Some of them are.
Some of them have lost focus on what is the true job of
management, and that is to run the core business.
And every time I come here, year after year, it is always
for a short-term fix, some relief, some billions of dollars to
go back to the airlines, which never are passed on to the
employees. We have poor customer service. It is time that we
fix the problems instead of trying to have a short-term fix
that only provides millions and millions of dollars to the
people at the top of these airlines.
So, again, we call for a meeting, a summit, a
transportation summit. We will work with anybody. Again, we are
working with Mr. Crandall. Hopefully, we can come to some
format so we can find resolutions to these problems.
I thank you, Mr. Chairman, for the opportunity to come
before you.
[The prepared statement of Mr. Roach follows:]
Prepared Statement of Robert Roach, Jr., General Vice President,
International Association of Machinists and Aerospace Workers
Thank you, Chairman Rockefeller, and Members of this Committee, for
the opportunity to submit this testimony on behalf of airline workers
throughout North America. My name is Robert Roach, Jr., General Vice
President of Transportation for the International Association of
Machinists and Aerospace Workers (IAM), the largest airline union in
North America. I am submitting this testimony on behalf of
International President R. Thomas Buffenbarger. The IAM represents more
than 110,000 airline workers in almost every job classification,
including flight attendants, ramp service workers, mechanics, customer
service, reservation agents and office employees.
It is my firm belief, and the belief of many others, that airline
executives are using a crisis of their own making to justify the
establishment of what can only be called a monopoly.
Regulation
Airline CEOs regularly complain about overcapacity, but they are
the ones responsible for creating the problem, not passengers, not fuel
prices and certainly not employees.
The need to address overcapacity has been a favorite battle cry for
airline management for decades and won't be resolved by mergers.
Braniff, Eastern, Pan Am, TWA, Peoples Express, Aloha Airlines and
others have all disappeared from the scene. Reducing capacity will not
overcome management's failure to run a profitable business.
The Machinists Union is not advocating that we maintain the status
quo in the airline industry. When something is so clearly broken, it
must not be merely bandaged, but completely repaired. Immediately after
9/11, airlines demanded more than $6.3 billion in government aid.
Carriers then sought and won pension relief legislation, but still
abandoned their pension obligations.
Airlines also used the bankruptcy law to force employees and
shareholders to make sacrifices to save the carriers. IAM members alone
at Northwest Airlines, U.S. Airways, United Airlines, Comair, Hawaiian
Airlines and Aloha Airlines gave up nearly $9 billion in bankruptcy to
help their airlines.
Even with all this aid, this troubled industry still lost $30
billion from 2001 to 2006.\1\ Airlines are constantly asking the
government for relief, begging the courts to abrogate contracts and
forcing the government to absorb its pension obligations. History has
shown that airlines cannot operate without government assistance.
Airlines repeatedly appeal to the government for bailouts because the
free market has failed to nurture a competitive and profitable
industry. The government must step in and put an end to the charade
that this industry, left to its own ridiculous pattern of suicidal
business practices, can ever prosper.
---------------------------------------------------------------------------
\1\ The New York Times, Did Ending Regulation Help Fliers? By
Micheline Maynard, April 17, 2008.
---------------------------------------------------------------------------
In 1993, the Clinton Administration recognized the problems facing
the air transportation industry. President Clinton empanelled a
National Commission to Ensure a Strong Competitive Airline Industry,
and one of my predecessors, IAM General Vice President John Peterpaul,
served on the Commission. The Commissioners were charged with
investigating and devising recommendations that would resolve the
crisis in the airline industry and return it to financial health and
stability.
The Committee essentially recommended no substantial regulatory
changes and believed that market forces would stabilize the industry.
The IAM's representative on the Commission was the only dissenter,
arguing that deregulation destabilized the industry and government
intervention was necessary.
The Machinists Union's assertion that deregulation had failed to
deliver on its promises were ignored in 1993 in favor of supporting
airline industry executives who advocated staying the course. Congress
now has a second chance to make effective changes to this industry. If
that opportunity is squandered again, bankruptcies will increase, more
proud airlines will disappear, employees will continue suffering and
passengers will be even further alienated. We can close our eyes and
ignore millions of consumers, employees and investors, or we can have
an efficient air transportation industry. More than 150 carriers have
gone bankrupt since deregulation.\2\
---------------------------------------------------------------------------
\2\The New York Times, Did Ending Regulation Help Fliers? By
Micheline Maynard, April 17, 2008.
---------------------------------------------------------------------------
Instead of temporary fixes, long term solutions are required.
Airlines today compete by cutting standards, eliminating services and
reducing ticket prices to the bone, which make a profitable industry
impossible. The GAO estimates that median ticket prices have dropped
nearly 40 percent since 1980, although the costs of aircraft, airport
leases and fuel have increased dramatically.\3\ No business can survive
if they sell their product for less than what it costs to deliver their
goods.
---------------------------------------------------------------------------
\3\ Government Accountability Office, ``Airline Deregulation'' GAO-
06-630.
---------------------------------------------------------------------------
The long-term cost of under pricing tickets is too extreme. Pan Am,
TWA, Eastern, and Aloha Airlines all survived for more than half a
century, but could not endure the insanity of deregulation. This
industry is crying out for sane regulation that includes limiting
capacity, setting fares or both.
Effective Management
Even with limited re-regulation, more competent management is
needed to save the industry, not consolidation.
If airline executives spent as much time running their airline as
they do looking for bailouts or mergers, this industry and our
country's transportation system would be much better off.
Mergers prevent airlines from running effective operations. United
Airlines emerged from bankruptcy with a plan to pay its executives
undeserved multi-million dollar bonuses, but with no intention of
operating the airline. Instead of finding ways to conserve cash and
operate United Airlines in times of record-high fuel prices, the
airline paid out an unnecessary $250 million dividend to shareholders
in December 2007, against the objections from employees who warned
against such reckless actions. This demonstrates that United's only
plan is to plunder the airline and market it for acquisition, to the
detriment of passengers and employees.
This industry is in disarray and the executives in charge are only
making things worse.
Airlines can't police their own maintenance programs, small
communities are under-served, passengers are treated like cattle and
employees are continually being steamrolled.
There is too much at stake to let executives and their legacy of
failure try and solve the industry's problems. It is time for airline
passengers, employees and the government to finally say ``NO'' to
airline executives.
Some form of limited re-regulation is necessary if this country has
any chance for a safe, reliable, profitable and competitive air
transportation industry. And I'm not the only one calling for re-
regulation.
Although I do not agree with everything former American Airlines
CEO Robert Crandall says about the airline industry, I share his
opinion that, ``market-base approaches alone have not and will not
produce the aviation system our country needs'' and that ``some form of
government intervention is required.'' \4\
---------------------------------------------------------------------------
\4\ The New York Times Op-Ed, April 21, 2008.
---------------------------------------------------------------------------
Northwest-Delta
Re-regulation is the only long-term solution. Today, however, we
must deal with immediate issues.
One factor the airlines will not admit publicly is that they expect
this merger to eliminate the union representation rights of Northwest
Airlines workers. They want to use this merger as a weapon to eliminate
the jobs and rights of thousands of workers. The Machinists Union will
not allow this to happen.
An issue that neither Northwest nor Delta have addressed is how
they will deal with current pensions. IAM members at Northwest Airlines
still have a secure defined benefit pension plan, the IAM National
Pension Plan. Our members are the only employees at either carrier
still earning a traditional pension benefit, but that will be lost if
our members lose IAM representation in a merger. Delta has not
guaranteed that our members will not lose the security of a defined
benefit pension plan in the merger.
Additionally, both Delta and Northwest have frozen or terminated
their pension plans. If a merger takes place, and the combined carrier
ultimately fails, the pensions will be forced onto the Pension Benefit
Guaranty Corporation (PBGC).
This will burden the PBGC with more than $7 billion in combined
liabilities. The PBGC has already expressed concerns about such a
scenario.
Delta and Northwest have made commitments to employees, but these
commitments are unenforceable and subject to change. If the combined
airline wants to make a true commitment, then they should stop
interfering with Delta employees' right to organize, and make their
commitments part of collective bargaining agreements that protect
employees at the combined carrier.
Northwest and Delta say that no frontline workers will lose their
jobs. Don't believe them. If Northwest headquarters is downsized, 930
IAM-represented clerical workers, are at risk. The frontline employees,
not the high level management employees, which Northwest has said are
the only jobs at risk in a merger.
Northwest has a history of broken promises. The State of Minnesota
bailed out Northwest to the tune of $761 million in 1992. In return,
Northwest Airlines promised to continue employing at least 1,000
workers in Duluth, Minnesota, and committed to building an engine
maintenance facility in Duluth with a minimum of 500 new jobs. Instead,
they never opened the engine shop and closed their operation in Duluth
entirely in 2005. Additionally, Northwest committed to keeping
employment levels in the state to a minimum of 18,000 employees. They
are already down to about 12,000. Northwest Airlines has left a trail
of broken promises throughout Minnesota that will multiply and expand
throughout the country if this merger is approved.
Delta also is not averse to making promises it doesn't keep. Over
the last 10 years the airline offered employees early retirement
packages based principally on very attractive free or minimal cost
health care programs.
According to the Delta Air Lines Retirement Committee, retirees'
health care deductibles and co-pays were increased dramatically after
accepting the packages and retiring.
If the airlines truly cared about their employees they would have
engaged all their unions when they first contemplated a merger.
Instead, they rebuffed our efforts to cooperate and have ensured labor
turmoil for years to come, even if a merger is not completed.
Faced with inadequate or indifferent responses from airline
management, the IAM has contacted Governors, Senators and
Representatives as part of our efforts to protect the thousands of
employees and dozens of communities that will be negatively impacted by
these proposed mergers.
Seniority
Delta has said that it will integrate seniority fairly, and that
they are required to do so under the law. But what does ``fairly''
mean? There are no less than five recognized methods for ``fair and
equitable'' integration of airline seniority lists.
1. The surviving group principle, where the acquiring company's
employees receive seniority preference over the acquired
employees;
2. The follow-the-work-principle, were seniority is allocated
by a ratio of what assets each individual airline contributed
to the combined company;
3. The absolute rank principle, where employees retain their
respective rank on the newly merged seniority list;
4. The ratio-rank principle, where a ratio of the employees of
each group to be merged are assigned places on the combined
seniority list according to a ratio of total employees; and
5. The length of service principle, where all employees are
combined by their current seniority date, regardless of which
airline they came from.\5\
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\5\ How Arbitration Works, Sixth Edition Elkouri, Elkouri, Reuban;
BNA Books, p.868-870.
Fairness is in the eye of the beholder, and what Richard Anderson
deems fair is not important. We need to focus on what employees
consider to be fair.
Northwest and Delta employees sacrificed wages, pensions and, in
too many cases, their jobs to help their airlines survive bankruptcy.
Mergers are another avenue for airlines to cut even more jobs.
I realize this hearing was prompted by the Northwest Airlines--
Delta Air Lines merger announcement. However, we must recognize this
announcement will lead to additional merger attempts.
Continental Airlines, United Airlines, American Airlines and U.S.
Airways have all discussed various pairings and alliances in response
to the Delta-Northwest action. This will lead to other mergers, likely
cutting the number of major national carriers in half, from six to
three.
Financial Health
Both Northwest and Delta have seen their stock prices sink since
exiting bankruptcy, and more so since the merger was announced.
Passengers, employees and investors, three groups with different
concerns, all think this merger is a bad idea.
If the two airline CEOs testifying today can't independently
provide their customers and shareholders with value for their dollar,
what will happen under a merged company that is saddled with debt and
even harder to manage?
If allowed to proceed, Northwest and Delta will form the world's
largest airline, creating the world's biggest corporate headache.
According to the most recent Securities and Exchange Commission (SEC)
filings, the combined carrier would have $15.7 billion in long-term
debt, plus $11.3 billion in current liabilities and $14.23 billion in
non-current liabilities, including pension liabilities. This non-
current liabilities figure includes $7.51 billion in pension and
retiree benefit liabilities. The total liabilities of the combined
company would be $40.55 billion. It is not in this country's best
interest to approve the creation of an enormously debt-ridden company.
Consumer Impact
The wholesale reshaping of the industry will destroy competition
and harm consumers on routes throughout the United States.
It would be difficult to find anyone outside of a small group of
airline executives who expect to benefit from additional airline
consolidation.
Passengers, employees and shareholders have suffered enough by
senseless management decisions. In the last month, four airlines have
declared bankruptcy.
We have seen how airlines fail to comply with FAA-mandated safety
compliance directives. Do we really need more instability in this
chaotic industry?
Both Northwest and Delta operate a hub and spoke system. Combining
the two will create redundancies, which, if the airlines keep their
promise not to close hubs, will create regional dominance.
The new Delta will control the Southeast and Upper Midwest with two
hubs in each region.
Atlanta and Memphis, less than 400 miles apart, will both be Delta
hubs.
Delta will also have two major hubs in Detroit and Cincinnati, less
than 300 miles apart. If these two airlines merge, the frequency of
flights between cities they both serve will be diminished.
It is both insulting and a testament to these airlines' arrogance
that they think anyone believes they can combine these two companies
without eliminating service and purging employees.
Passengers originating or traveling to Memphis, Detroit,
Cincinnati, Minneapolis and the smaller communities served by airports
in these cities will lose service frequencies and pay higher fares.
Experience has shown us that commitments made by airlines in
bankruptcy are absolutely worthless.
When American Airlines purchased TWA out of bankruptcy in 2001,
promises were made to TWA employees. American's then-CEO Donald Carty
testified before the Senate Commerce Committee saying, ``We look
forward to adding TWA's 20,000 employees to the American Airlines
family,'' and that American was willing to make ``commitments to the
20,000 TWA employees and their families that no one else would make.''
\6\
---------------------------------------------------------------------------
\6\ Testimony of Don Carty, http://judiciary.senate.gov/oldsite/
te020701dc.htm.
---------------------------------------------------------------------------
In spite of these assurances, the overwhelming majority of former
TWA employees are no longer employed by American Airlines.
Thousands of mechanics, ramp workers, customer service agents,
flight attendants and pilots who were promised careers with American
are no longer working in the industry.
We also cannot count on Delta's promise not to further reduce
capacity beyond already announced service cuts. American Airlines
promised the City of St. Louis that it would maintain TWA's hub
operation at Lambert Field after the TWA merger.
That once bustling hub had over 474,000 flights in 2000, TWA's last
full year of operation. In 2007 that number was reduced to a little
more than 254,000. Passengers flown have been reduced nearly in half,
from 30.5 million to 15.4 million in the same period.\7\
---------------------------------------------------------------------------
\7\ http://www.lambert-stlouis.com/.
---------------------------------------------------------------------------
With the loss of passengers came the loss of tax revenue to the
City of St. Louis and income for the businesses that support the
airport and service the airlines.
Just over a year, ago Delta Air Lines was making the rounds in
Washington trying to block a merger proposal with U.S. Airways.
Delta said then that ``the competitive impact of the U.S. Airways
proposal deal is that if the merger were to go forward, it would
trigger broad industry consolidation.'' \8\ Delta was right then, and
wrong now.
---------------------------------------------------------------------------
\8\ Delta Air Lines press release, http://news.delta.com/
print_doc.cfm?article_id=10533.
---------------------------------------------------------------------------
Both Northwest and Delta entered bankruptcy on the same day in 2005
to make their companies leaner and more competitive.
Since they are here today saying that they must merge to become
profitable, their bankruptcy restructurings must have failed.
So why should we believe them when they say this merger will be a
positive step for employees, consumers and shareholders? Too much is at
stake to take these airlines at their word.
Who Benefits?
One final point, Mr. Chairman.
Since employees, passengers and shareholders will lose in this
merger, who benefits?
Doug Steenland stands to gain as much as $19 million due to the
ending of his employment at Northwest.
Richard Anderson has said he would wave the $15 million in merger-
related compensation he could receive due to change in control, but he
could still realize tremendous benefits through a new employment
contract as the CEO of a much larger company.
If employees lose their right to collectively bargain, if IAM
members lose the new pensions they negotiated in bankruptcy, if
employees are going to be sacrificed to grow executives' personal bank
accounts, then this merger will fail.
A Delta-Northwest merger will eliminate jobs, reduce choices for
passengers, further deteriorate customer service, trigger additional
senseless mergers, make millionaires even richer, and most importantly,
do nothing to address the problems of a failing industry.
While the status quo is unacceptable, we believe that consolidation
will not produce a stable, profitable industry. Instead, consolidation
and the ensuing reduction in service, coupled with insanely low
barriers to entry, will simply produce a variant of competition that is
less reliable, less safe and more unstable.
This merger and the ones that will follow should not be allowed to
proceed.
Thank you for the opportunity to appear before the Committee. I
welcome any questions.
Senator Rockefeller. Thank you, Mr. Roach.
And our final witness will be Mr. Cooper, who is the
Director of Research from the Consumer Federation of America.
We look forward to your testimony.
STATEMENT OF DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA ON BEHALF OF THE CONSUMER FEDERATION OF
AMERICA AND CONSUMERS UNION
Mr. Cooper. Thank you, Mr. Chairman, Members of the
Committee.
The pending merger and those that are likely to follow it
are an admission of failure, a clear signal that the industry
cannot support financially healthy airlines while remaining
vigorously competitive across the Nation. This is an industry
that truly pleases no one.
Consumers are frustrated by lousy service and pricing that
is at best erratic because competition is at best erratic.
Investors are buffeted by a boom and bust cycle and a low rate
of return over the long term. Labor has been at war with the
airlines for 30 years since deregulation. Unfortunately, there
are no simple solutions to such a pervasive market failure.
Delta and Northwest tell us that the merger won't harm
competition because they don't compete. But that is because
they either never chose to compete or, worse still, have
recently withdrawn from competing with each other. The bottom
line is simple, however. Consumers do not have competition
without which they get abused. And if they are telling you we
are benefiting from their competition, you just listen to what
your constituents say about the service they get.
Without vastly improved regulation, the mergers will do the
public no good. All the promises they make today will be broken
in short order, and the consumer will have fewer choices,
higher prices, and crummier service. If the mergers are
blocked, without vastly improved regulation, the consumers will
have fewer choices, higher prices, and crummier service.
As airlines, and I quote, ``eliminate duplicate service,
shift away from competition, and scale back growth,'' that is
the future, and it is not very pretty.
Emerging from another wave of bankruptcies, the worst on-
time performance in history, low-cost carriers going bankrupt,
a proposal for a merger wave among network industries, it is
time for Congress to consider the proposition that this
industry just does not work as an unregulated market, to
recognize that it is an infrastructure industry that supplies
essential inputs for growth and vibrancy in our economy and one
that must provide high-quality service to all corners of the
Nation.
Finally, an industry that relies on public resources for
its existence, public airways and facilities that are supported
by public dollars like airports and air traffic control. The
public interest is not being served by the current model.
Now we are not suggesting that we go back to price and
quantity controls of the early history of the industry, but it
is time to establish consumer rights and reform the incentive
structure that exists in the industry to give airlines an
economic incentive to serve the public.
In many cases, individual abuses by individual airlines are
not the problem. It is a collective problem, a shared problem,
a structural problem. Overscheduling and imprisoned passengers,
for example, are perfect examples. The airlines share the
blame, but they cannot solve the problem because they are
unwilling to adjust their schedules to reduce congestion at
airports. They would just prefer to publish schedules that they
cannot meet, fraudulently advertising their product to the
public.
The problem of passengers imprisoned on airplanes for long
hours will not be solved as long as standing in line is the way
you allocate takeoff slots. They will sit there for hours for
fear that they won't lose their chance when it is time to go.
We need some ground traffic control. We need end-to-end traffic
control. In an industry that can load and embark an airplane in
an hour, why are people being held captive for 7 hours on the
tarmac? It is an outrage.
Obviously, there are individual problems for airlines--
overbooking, lost baggage--which need to be responded to with
protection for consumers. Fines that make it really painful to
deliver crummy service. There is no discipline in this industry
for poor service. These are just a few of the examples of the
pervasive problem that I urge you to confront.
Whether or not these mergers are approved, unless there is
a substantial improvement in regulatory oversight, the industry
will continue to abuse the public because the competitive
market forces are just too weak in many, many parts of the
industry.
So, instead of holding hearings on mergers, I urge you to
commence a series of hearings on each of the problems that
afflicts all aspects of the industry--operations, congestion,
slot allocation, landing fees, customer service, delays and
schedule, tarmac holding time, lost bagging, overbooking and
bumping, tickets on bankrupt airlines. There are consumers out
there who get stuck when they go bankrupt. And market
structure, abandonment of routes, essential service, and the
real nature of competition. Yes, there is some, but it is
really not benefiting the vast majority of the traveling
public.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Dr. Mark Cooper, Director of Research, Consumer
Federation of America on Behalf of The Consumer Federation of America
and Consumers Union
Mr. Chairman and Members of the Committee,
My name is Dr. Mark Cooper. I am Director of Research at the
Consumer Federation of America. I greatly appreciate the opportunity to
testify yet again on the serious consumer problems with the airline
industry and commend the Committee for holding a hearing that
investigates the general condition of the industry. I appear today on
behalf of the Consumer Federation of America \1\ and Consumers
Union.\2\
---------------------------------------------------------------------------
\1\ The Consumer Federation of America is an advocacy, research,
education and service organization established in 1968. CFA has as its
members some 300 nonprofit organizations from throughout the Nation
with a combined membership exceeding 50 million people. As an advocacy
group, CFA works to advance pro-consumer policy on a variety of issues
before Congress, the White House, Federal and state regulatory
agencies, state legislatures, and the courts.
\2\ Consumers Union, the publisher of Consumer Reports, is an
independent, nonprofit testing and information organization serving
only consumers. CU does advocacy work from four offices in New York,
Washington, San Francisco, and Austin. CU's public policy staff
addresses a broad range of telecommunications, media and other policy
issues affecting consumers at the regional, national and international
level. CU staff members frequently testify before Federal and state
legislative and regulatory bodies and participate in rulemaking
activities at the Commission and elsewhere.
---------------------------------------------------------------------------
This is truly an industry that makes no one happy, as the opening
paragraph in a New York Times column put it recently
What a time for airlines. Delays and cancellations. Oil more
than $100 a barrel. Customers are furious and flight crews are
bedraggled. And that's before the economic slowdown in the
United States brings its won misery. Warren E. Buffett once
famously said of his fellow investors in the airline industry,
``If we knew then what we know now, we'd have shot the Wright
Brothers down.'' (``A Profitable 18 Hours That's All
Business,'' Tuesday March 11, 2008, C-6)
Consumers are frustrated by lousy service and pricing that is, at
best erratic. Investors are buffeted by boom and bust cycles. Emerging
from another wave of bankruptcies, the worst on time performance record
in history, and confronted with a likely merger wave that would reduce
the number of major carries from a handful to a precious few, it is
time for Congress to consider the proposition that this industry just
does not work as an unregulated market. In my remarks today I will lay
out the basic causes of the problem and give some initial thoughts
about the solution, but my primary goal is to convince Congress to
begin asking the right questions regarding endemic problems in the
industry that must be addressed. The occasional hearings, triggered by
this or that merger, are not enough to solve these problems because
they do not provide a proper context for the thorough policy rethinking
that the industry needs and the public demands.
From a policy point of view, the key factor is that competition is
at best sporadic in the industry, limited to a small subset of routes
and metropolitan areas, primarily on the on the coasts. Left to its own
devises, the industry will over schedule take-offs and landings at the
most competitive airports to drag customers to the airport under a
false claim about when they will leave or arrive. They get away with it
because there are only a few of them and they tend to do it en mass.
There is too little competition to punish the abusers.
The middle of the country is dominated by fortress hubs, that force
consumers into additional take-offs and landings and provide the
trigger points for cascading delays. Consumers not only have longer
travel times, but those who are captive to these hubs pay a heavy price
in terms of higher fares on the many routes with little competition.
The most famous of the cut-rate competitors has just been hit with
the largest fine in the history of the industry for failing to properly
inspect its aging fleet--aging because that is the best way to squeeze
a little profit out of the skies. The most prominent of the recent new
entrants into the industry has had repeated melt downs of service,
keeping consumers prisoner on planes for hours on end. In fact, they
all keep consumers captive on planes for long periods, rather than risk
losing a take-off slot, or a body in a seat. They get away with it
because they tend to do it en mass and there is too little competition
to punish the abusers.
It is time to rethink public policy toward the airline industry. To
say that the thirty- year experiment in deregulation has been a wild
ride would be a gross understatement. When a market performs this
badly, this consistently, from every point of view--consumer, investor
and labor--it is time to consider major changes. More and more, it
appears that the original public policy judgment about the industry by
policymakers in the 1930s, that it is destructively competitive,
subject to vicious boom and bust cycles, and prone to exploitation of
the consumer, was correct.
Moreover, this is not just an industry that manufactures widgets.
It is infrastructure that supplies an essential input to other
industries that has an effect on the growth and vibrancy of regional
and national economies.
The industry is also fundamentally dependent on public resources
for its existence. It relies on the public airways, and facilities that
are supported by public dollars, airports and air traffic control,
which reinforces the justification for more direct intervention to
protect the public from the abuse it suffers at the hands of the
industry.
The pending mergers and those that are likely to follow are an
admission of failure. The industry cannot support financially healthy
airlines with vigorous competition. Delta and Northwest tell us that
the merger won't harm competition because they don't compete, in some
cases they have withdrawn from competition with each other over the
past few years. If other mergers are proposed, and rejected, the
airlines will reduce their overlap and propose mergers down the road.
In the end, consumers have less and less competition. Without vigorous
competition the abuse of consumers will continue and become worse.
Nobody wants to go back to price and quantity controls, but the
industry has lost it right to be unregulated by consistently abusing
the traveling public. A consumer bill of rights would be helpful, but
if we do not change the incentive structure and back it up with
energetic enforcement by public authorities, it will not lead to long-
term solutions to the vast problems I have detailed. In many cases,
individual abuses by individual airlines are not the problem; it is the
overall structure that is.
Dealing with delays and cancellations--weather, mechanical or
economic--is a delicate problem. We never want an unsafe plane to take
off or a safe one to take off in unsafe conditions. However, there are
a number of practices that abuse the public that have nothing to do
with the difficult question of safety versus service.
Over-scheduling is a perfect example, where all airlines share the
blame and the solution is a reduction of all schedules proportionate to
the number of flights. They will not voluntarily solve the problem and
they certainly should not be allowed to publish schedules that they
cannot meet. The FAA should respond quickly and aggressively to over-
scheduling. A landing slot is a perishable commodity whose value varies
widely between airports and over the course of a day. The allocation of
those slots to users should reflect their value. The public will
benefit much more from a systematic approach to the problem, than the
sporadic, after the fact fixes that have been applied in the past. The
airlines would initially be free to set schedules as they like, but if
they behaving badly and produce situations of chronic over-scheduling,
then the regulator would shape the traffic curve adjusting the fee
structure and/or administratively reducing the number of flights at
congested airports/times. The reductions in flight should be spread
across all airlines that have shown chronic delays.
Imprisoned passengers are a similar collective problem that demands
a collective solution. The problem of passengers imprisoned on
airplanes for long hours will not be solved as long as standing in line
is the way we allocate take-off slots. An industry that manages
thousands of planes moving hundreds of miles an hour in the air at one
time ought to be able to manage dozens of planes standing still on the
ground at an airport better. When it takes half an hour to load and
embark a plane, it is absurd that people should be forced to sit on
runways for hours because the airline does not want to lose its place
in the queue. The regulator should institute queuing policies that do
not reward, perhaps even punish, airlines for keeping people sitting on
the tarmac for excessive periods of time.
Overbooking and lost baggage are individual airline issues that can
be dealt with by improving consumer rights. If the penalties are
stiffened, the individual airlines will have more incentive to do a
better job.
In the long run, expanding capacity will enable the airlines to
better serve the public, but if we expand capacity without reforming
the incentive structure, the industry will, soon enough, recreate
existing problems. Capacity or the lack thereof is not the cause of the
current problem. The irresponsibility of the airline industry is the
problem. It is the failure of the industry to offer service to the
public that fits within the capacity of the current system--air traffic
control and airport landing slots--that harms the public. If you build
it, without setting new rules, they will come and come and come until
it is overburdened.
Again I thank you for the opportunity to express the consumers'
frustration with the airline industry and urge you to undertake a top-
to-bottom review of its market failure. The Consumer Federation of
America looks forward to assisting you in any way we can in that
important endeavor.
Senator Rockefeller. Thank you very much, Mr. Cooper.
I guess I would put aside a couple of the questions I was
going to ask and say that this doesn't sound to me
automatically like a group full of comity that wishes to
exchange views to work on an airline--aviation policy.
As Chair, I wish to point out that this hearing was called
for the purpose of looking at the overall situation of the
aviation industry. Obviously, we have people representing
different parts of that industry, and they have every right to
express their views. But the point of this hearing is to figure
out what needs to be done to make the aviation system work.
Senator Hutchison and I spent the better part of the last
week or 10 days giving endless speeches about the failure of
airlines to hold on to their operating margins and, therefore,
go into Chapter 11, merge, or go into Chapter 7.
I can remember when I started off in Charleston, West
Virginia, we had jets from American Airlines, United Airlines,
and Eastern Airlines. We deregulated the industry, and within 4
days, that was the end of all the jets to Charleston. So I
don't, frankly, discount myself entirely from the consideration
of re-regulation of the airline industry. I am very sincere in
that.
I also am very sincere in my understanding that the folks
that run these airlines, who I know pretty well, in addition to
those who work for the airlines, are doing everything they can
to try and make it work. It has been said by a number of people
that at least 40 percent of all of the cost for an airline is
fuel, and that is a pretty hard number to bear.
Ms. Friend, I noticed that when you were giving your
testimony, you referred to making things work for the
customers, for the communities, and for the workers. You didn't
mention the airlines. We had a discussion once before, and it
strikes me as not uncommon to think that unless the airlines
are working or unless all of the money that you indicate that
is being paid to senior executives is the cause for these
mergers or failures or droppings off and trouble in the
marketplace, but that troubles me.
That troubles me because the question is, are you here
because you really want to look at new aviation policy--which
Mr. Neidl referred to, or are you here to express your
complaints? And you are totally free to do that. You came on
your own, and you are free to say whatever you want. But I
really would like to figure out how we can make this aviation
industry work and complaints do not help with that.
We have failed over the last week in being able to pass the
Federal aviation bill. I won't go into the reasons for that,
but they are fairly stark. And so, I would just wonder if you
agree that discussing aviation policy means that, in fact, we
somehow have to get ourselves to the table, maybe some of us in
the Federal Government and aviation experts need to be
involved, and take some of these things head on.
I am always fascinating by the charge, because it is so
enticing, that you take what somebody is being paid, and then
whatever is going wrong with the aviation system, that is the
answer. If we just stop doing that, everything would sort of
clear up.
So, I am not going to ask a question right now. I have many
I want to ask. But I am perplexed a little bit by the nature of
what I heard, and I am very sincere. I cherish this
Subcommittee. I cherish the whole concept of aviation.
I cherish the concept of when it was working well, and I am
in agony these days, coming from a small state like West
Virginia, when it isn't working as well and when people are
having to do things which bring out in some ways the worst in
them and turn them into competitors, although they are all
working, I think, sincerely toward making the aviation system
work.
But that was not my first impression, I guess, from the
first round of statements, and I will simply say that and then
call on Senator Lautenberg.
Senator Lautenberg. Thanks, Mr. Chairman.
Ms. Friend, what needs to be done to ensure workers' rights
to unionize after this merger is done?
Ms. Friend. Well, what we would like to see is a level
playing field where the flight attendants, the Delta flight
attendants that are currently voting are allowed to do so
without influence by management, that they are allowed to
freely make a decision, that they are not flooded with
information, with flashy folders and DVDs that explain to them
how evil AFA is and how they deceive them and tell them lies.
Quite frankly, Senator, our ideal would be that the
National Mediation Board revise their archaic rules that set a
threshold that 50 percent plus 1 of the eligible unit must
participate in order for them to form a union. It is my belief
that if we applied that same arbitrary standard to our Federal
laws, that this building would be mostly empty and that we
should have a simple--in choosing whether or not to form a
union, we should have a simple yes/no ballot. And those who
choose to participate would make that decision just as they
make the decision in our Federal elections.
Senator Lautenberg. Mr. Anderson, just a question. You have
heard the response that Ms. Friend gave us. Now, some part of
Delta is unionized. I believe the pilots, if I am not mistaken.
Mr. Anderson. And the dispatchers.
Senator Lautenberg. And the dispatchers. There is a
significant part of the workforce that is not?
Mr. Anderson. That is correct, Senator.
Senator Lautenberg. What do you see the outcome of a merger
here in terms of the evidence or whatever that Ms. Friend has?
I say ``whatever.'' Is that a piece that is put out by Delta?
Mr. Anderson. The company--the way we approach it, Delta is
a very unique place. If you look at its history--if you look at
its history, it has long had a very good relationship with its
employees, and that is important to Delta. It has very high
service standards and very high ratings in terms of its
service, J.D. Powers ratings.
And so, we respect the NMB process, and the NMB process
essentially lays out through the course of a merger, it has
happened many times in the industry. Oftentimes the process is
between two different unions. And the employees go through a
selection process after the National Mediation Board makes the
determination of a single carrier. And we are respectful of
that process.
At the same time, if you look at what Delta has done,
Delta, as an airline, has never had a single strike. It has
never had--the first time it had a layoff in 80 years was at 9/
11. So it has a special relationship, and we respect both the
employees at the company that have decided they are going to be
a member of the union, ALPA or the dispatchers union, or have
decided that they are going to be non-union.
And we think that the National Mediation Board process lays
out very clear ways for what they call the laboratory
conditions for selecting whether or not a group of employees
wants to be represented by a union.
Senator Lautenberg. Have you seen the material that Ms.
Friend----
Mr. Anderson. I am sure I have seen some of it, yes.
Senator Lautenberg. Is that a Delta product? Is it
something that Delta----
Mr. Anderson. It is both. There are employee grassroots
campaigns on both sides of this issue, and there are very many
employees at the company that feel very strongly both ways.
And the NMB, we respect the NMB process to be certain that
we have the laboratory conditions and that we respect that
process. So the collective bargaining agreements that are in
place for both the Delta employees and the Northwest employees
will be honored after the merger closes.
And then we go through the regular process of determining
whether there will be representation or not among the different
classes and crafts of employees.
Senator Lautenberg. Well, if there was an attempt to
unionize the non-union portion of your work force, would Delta
resist that?
Mr. Anderson. We would--we would put information out to be
certain that there is a fair and open election between the two
groups. And we have respected that in the past, and we will
respect it in the future. We have tried very hard to create a
positive work environment at Delta.
If you look across the board, pretty much the Delta
employees have always been among the higher paid, with better
work rules and better work benefits. And we are committed to
continuing to do that whether we are unionized or not unionized
because, in the end, if you take care of your employees--and
that has always been the philosophy, going back to the founder
of Delta, Mr. Woolman. If you take care of your employees, they
will take care of your customers.
And the employees of Delta have been through a lot.
Employees at Northwest have been through a lot, and what we are
trying to do here is create something positive for the
employees that creates a more durable franchise so that we
don't have to come back to them for concessions. These
employees have been through enough of that. And what our hope
is is that by providing equity and seniority protection and
making this an end-to-end transaction, that it can be positive
for both of the employee groups.
Senator Lautenberg. Is it not likely that some redundancy
would follow a merger? There are always reasons that, say,
redundancy is one of the things typically the companies talk
about when they merge. You know, I came from the business
background.
Mr. Anderson. Right. A very successful business, I might
add. There are. But what we have really tried to do and the
reason why this works is we are end-to-end. We don't have very
much overlap. So when you look at the places that Delta serves
and the places that Northwest serves, for the frontline
employees, we can put a transaction together that protects
them.
The redundancies come in the overheard of the company and
the corporate headquarters and in what you will remember as
SG&A. It is those redundancies that we have to work through in
a respectful way to create the synergies that allow us to be a
stronger airline.
Senator Lautenberg. Thanks very much.
Mr. Chairman, thank you.
Senator Rockefeller. Thank you, Senator Lautenberg.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Mr. Chair.
I described earlier about how Northwest Airlines has been
such a vital part of our state. I will also say that if
Northwest has been good to Minnesota, our State has been good
in return. In 1992, when Northwest was threatened by rising
fuel costs and an economic recession, our State leaders
approved a loan package worth more than $300 million in
exchange for Northwest's promise to build new facilities in
Minnesota.
And more recently, when Northwest faced financial
difficulties, our Metropolitan Airports Commission granted it
millions of dollars in rent reductions. I would also add that
after these efforts, they came on top of a $15 billion
financial rescue package that Congress created in 2001 to help
the airline industry after 9/11.
So I think it is fair to say that the people of my state
and this country have been good partners with the airline
industry, as have their employees who have taken a number of
concessions, many times great reductions in their salaries in
the last few years. So one of the things that I want to focus
on today just is some of the promises that have been made to
the employees and to the people of my state about this merger.
Earlier, at a Judiciary Committee hearing that I sat in on,
I focused more globally on my concerns that Ms. Friend raised
that this merger not be looked at in isolation by the Justice
Department, that they look at this as a whole and not look at
it in a vacuum. But today, with the first round of questions
here, I wanted to focus on some of the promises and statements
that have been made about how this will be I think the quote
was ``a merger of addition and not subtraction'' from Mr.
Anderson and Mr. Steenland.
So my first question was about, again, a Minnesota-specific
question. There are at least 450 Northwest employees who work
in the Chisholm, Minnesota, reservation center and around 400
employees who work in the Bloomington, Minnesota, reservation
center. And I was hoping you could make a commitment to
maintain both the Chisholm and the Bloomington reservation
centers. Can you do that?
Mr. Anderson. I actually built the Chisholm reservation
center. So it has a certain fondness. So, yes, both of those
res centers will stay open.
Senator Klobuchar. And can you commit to the current level
of staffing at the Chisholm and the Bloomington centers?
Mr. Anderson. I think the commitment we have made, it may
go higher. But if it has to go lower at any time, it won't be
because of involuntary. But I think we are pretty comfortable
in saying that the current levels that we have there in those
two facilities will remain the same.
Senator Klobuchar. And how long can you make that
commitment for with these two facilities?
Mr. Anderson. Well, I know that with the Chisholm facility,
there is actually a specific covenant that runs out, but I
would use the term indefinite. I mean, I think the great--going
back, there is an area where we all do agree here, which is the
industry has been under real distress, and the great unknown
that really makes it very difficult to plan and to run an
airline is when fuel prices go up.
Senator Klobuchar. Although we did discuss at the last
hearing how the fuel prices right now are high. They may go
higher, but that the combined airline is not going to be able
to negotiate better fuel prices.
Mr. Anderson. That is correct.
Senator Klobuchar. OK. I just want to make that point.
Mr. Anderson. You also made some good points about the need
for an energy policy, which we----
Senator Klobuchar. We did. That was a good discussion. We
can have it again maybe in a few hours, but the thing that I am
trying to get at now--so it is an indefinite commitment?
Mr. Anderson. Yes, there is no plans. Let me just run
through the different facilities that we have talked about at
different points in time with you and with the Governor and I
think that we have been pretty open about. One is the
reservation facility in Chisholm and the reservation facility
in Minneapolis. Second is the pilot base. Third is the flight
attendant--or I guess, fourth is the flight attendant base.
Senator Klobuchar. Right. And there are 2,200 flight
attendants based in the Twin Cities.
Mr. Anderson. Right.
Senator Klobuchar. And 1,000 aviation mechanics, and then
the pilot training facility.
Mr. Anderson. At NATCO. And then the simulator technicians
that support those. Those, plus the data center in Eagan,
Minnesota, are all included in what we intend on keeping in
Minnesota.
Senator Klobuchar. So the 1,000 aviation mechanics, 2,200
flight attendants, the pilot training facility in Eagan, the
employees working at Northwest cargo facilities?
Mr. Anderson. The cargo facility at the airport, the
building at the cargo facility.
Senator Klobuchar. And the information services, the data
center or customer service operation--and customer service? So
those are all the same answer?
Mr. Anderson. Correct. Correct.
Senator Klobuchar. OK. And then, how about the 1,100
employees who work at Northwest Airlines headquarters in Eagan?
Mr. Anderson. We have not--we have just kicked off the
integration effort of putting together the two--the two
headquarters staff. Actually, we had our first session. So
there will be reductions there. We have been clear about that
because the headquarters is moving to Atlanta. But we haven't
done a bottoms-up and really analyzed what makes sense to move
and what makes sense not to move.
Senator Klobuchar. I think you said at the Judiciary
Committee hearing that the cuts could be made to both the Twin
Cities headquarters and the Atlanta headquarters?
Mr. Anderson. Yes, because what you really have to do, as
hard as it is and as much as you don't like to do it and as
much as we are going to try to mitigate it with early out
programs and the like, in order to get the economies of scale
that it takes to develop the benefits, you really have to sort
of move to one overhead structure, and we have really committed
to do a best in breed process to doing that.
Senator Klobuchar. I think, Mr. Steenland, do you want to?
Mr. Steenland. I think if I could just make one point with
respect to this, and that is the only thing that we know is the
world that we see today. And obviously, we can make judgments
and we can make observations based on that world. But, for
example, yesterday Goldman Sachs, one of the leading sort of
oil trading firms in the world, came out with a prediction that
said, in their judgment, oil was going to rise to $200 a
barrel.
Now, if that happens, clearly, airfares are going to have
to go up in a very significant way. If airfares go up in a very
significant way, by definition of the laws of supply and
demand, we are going to have fewer passengers. If we have fewer
passengers, we probably need fewer reservation agents to take
calls. We are going to need to have fewer flights because we
have fewer people to carry.
So in terms of making commitments as to numbers of people,
we have to recognize that there are variables out there that
are completely outside of our control that could well change
that dynamic, and it doesn't mean that we were misleading. It
doesn't mean that we were sort of not truthfully stating what
we saw today. It means that there has been a sea change, a
change in the external world that changes how this business
needs to be run if it is going to stay in business, and we will
have to make adjustments accordingly.
Senator Klobuchar. But at this point, you are committing to
keep these groups--the 1,000 aviation mechanics, the 2
reservation centers, the 2,200 flight attendants--this is like
the partridge in the pear tree--the pilot training facility in
Eagan, Northwest cargo facilities, the information services
data center, customer service operations, and then you are
looking, but you are not committing to the corporate
headquarters employees?
Mr. Anderson. And a partridge in a pear tree.
Senator Klobuchar. Well, we hope we can get more than that
as I look at our employees.
Would you mind, Chairman, if Mr. Roach just responded for 1
minute? Thank you.
Mr. Roach. I have been in this industry 33 years, and I
have never seen--I have heard a lot of these promises, and as
Mr. Steenland was saying, I think we need to hear them loud and
clear. In the transportation industry, there is nothing
constant but change.
And so, commitments that are made today will mean nothing
tomorrow. And clearly, I have been through a number of them.
And I have seen we are going to keep this facility. We are
going to do this, that, that, and that. Maybe they put it in
writing to you, so you have a piece of paper that may mean
something. But it really don't hold water down the road the
same way like TWA and Ozark Airlines and those type of mergers.
But I would like to go back to something Senator
Rockefeller said about we need a format to talk about this
issue, but to talk about the overall industry. That is what we
need to be doing because the overall industry does have some
problems.
And what is happening here is that people are focusing on
Northwest/Delta, which we think is a problem, but the industry
needs to sit down--management, labor, and Government to sit
down talk about what is needed to fix the problems because we
have passenger problems. We have employee problems. We have
airlines that cannot make money, and there are serious problems
within the industry.
And we have since 2001, I have the letters here, we have
attached them to our other testimony, in attempting to have
that type of format in order to fix the problem so that we
don't wind up with ourselves in these constant consolidation,
band-aid, borrow money from the Government type situation.
I just want to say that is a good idea, and we need to work
on that and getting that format together. And the machinists
union will be certainly in the forefront of working with any
Government official or company officials to get that done.
Senator Klobuchar. Well, Mr. Anderson could maybe respond
the next time I ask questions. I know I have gone way over my
time here.
Senator Rockefeller. I think you have done pretty well,
Senator Klobuchar.
Senator Klobuchar. Well, I will continue on. This is a very
important thing for our State and for our employees and the hub
as well.
Mr. Anderson. And we agree with you.
Senator Klobuchar. Thank you, Mr. Chairman.
Senator Rockefeller. I mean, that is kind of a record-
breaking list of commitments.
Senator Klobuchar. Well, it is. And as we know and have
acknowledged, things can change. But it is good to get those
commitments right now. But we have other questions to ask as we
go forward, Mr. Chairman. Thank you.
Senator Rockefeller. And you will have a chance to ask
them. I simply was impressed by your tenacity.
Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
First of all, I am skeptical of mergers. That is not a
surprise. I don't think we solve the problems of the airlines
by getting bigger. And I think, generally speaking, it is
axiomatic that more concentration means less competition.
I want to just make a couple of comments and ask a couple
of questions. Mr. Murphy, you indicated that your study shows
more competition that at any time in history. Maybe not in some
parts of the country. I will show some charts that respond to
that in a moment.
Mr. Neidl, you said that in Europe there is much greater
consolidation, and therefore, we need to merge in this country
or allow mergers in this country so that we can compete. As I
was thinking about that, we have, I think, six network carriers
in this country. If that is the urge and the issue, maybe we
should not take a half a dose of medicine. Instead of going
from six to five, maybe we should go from six to three?
Because I think there are a couple pairs of other mergers
out there, and so I don't think we look at this in just a
vacuum. And I am not prepared to accept your notion that
because there is more concentration in Europe, we must have
more concentration here at home. But that is what I heard you
say.
The question for me is either post merger or even today,
what is the service level? We need commercial air service in
this country. It is critical to this country's economy,
essential to our economy. We need good airline service. So what
is the service level, and how is it priced? Those are the
questions for me.
And so, I came to work this morning. I met with Mr.
Steenland yesterday. I met with Mr. Anderson and Mr. Steenland
previously, and I appreciate your being open to visit with all
of us, and we are going to visit again. But I came to work
early this morning, and I went on Orbitz--I think both of you
probably own a part of Orbitz. I know Northwest does.
Mr. Anderson. Use to.
Senator Dorgan. Use to. All right. Well, I went on Orbitz,
and I decided I was going to check and see what it is going to
cost me to fly. So I plugged in three dates. I just want to
show you the result.
I said let us go from D.C. to Bismarck on June 16. I just
plugged in these dates just for the heck of it. That is a
Monday, coming back Thursday. D.C. to Bismarck, $860. D.C. to
Grand Forks, North Dakota, $860. Same days I would like to go
to Los Angeles, $380--twice as far and half as much. I want to
go to San Francisco, $568. I want to go to Seattle, $440. So
fly twice as far, you get to pay half the cost.
Senator Dorgan. So then I thought, well, let us just go
into September. I mean, this is way down the road. This is way
in advance, and same thing, Monday come back on a Thursday,
about the same thing. D.C. to Bismarck, $888. Grand Forks,
about the same. D.C. to Los Angeles, $343. Seattle, $314.
Senator Dorgan. So I said, well, maybe it has to have a
Saturday night stay because we've got to keep the hotels full.
And so, I put in September 15 through 22 so I am out there 7
days. And here is what it looks like, a little better actually.
But you still pay $538 roundtrip to Bismarck, $481 roundtrip to
Grand Forks. And then go twice as far, you get to pay less
money.
Senator Dorgan. And my point with showing you those graphs
is very simply some of us in some regions of this country, Mr.
Murphy, don't believe for a minute--don't believe for a
minute--that this has really been nirvana for us. What a
wonderful thing. What robust competition. That is not the case.
And when I say that, I understand the hub and spoke system
is an essential system for getting people from a Bismarck or a
Sioux Falls to a hub, to move one stop to anywhere else in the
world. I understand that. But I also believe that the pricing
has upset a lot of folks in some parts of this country that no
one at this table speaks of. You just speak of the larger
picture. If you live in Chicago, Los Angeles, New York, good
for them. They have got a lot of choices, and they have got low
prices. Good for them.
The fact is in many areas of the country, we don't. I don't
have an airline name up here, but I used this example this
morning to figure out what is it going to cost to fly to these
areas? And you know, all of you know that you will find the
same thing if you go to Orbitz.
My time must be close to up, but let me just mention
additionally, I sat in this room hearing United wanting to take
over U.S. Air. I sat in this room listening to U.S. Air wanting
to take over Delta. We had Delta employees in the room then. I
was visited by Delta later thanking me very much for opposing
the merger. That wasn't too long ago.
And I heard all four of those carriers--I heard all four of
those carriers say that this will be complementary, end-to-end,
and they used a word you all didn't use. They used and overused
the word ``synergy.'' You didn't use that, and so I think you
can make that case, perhaps either more or less, with most
mergers, proposals between the top six.
But having said all that, so I can explain to you why I am
a bit skeptical and where I come from, I want to ask you ask
you about oil prices. Oil prices are killing you, and I don't
think this is going to solve an oil price issue, no. You are
still going to run fuel through your planes.
What have you done about oil prices? When you have set the
labor costs, I watched. And you go at them and you have got to
deal with labor costs, you cut labor costs and so on. But you
have got to buy oil. So what kind of pressure are you putting
on those that are taking your money to the bank and depositing
that in the name of Exxon or Saudi Arabia?
And there are things, it seems to me, as an industry you
could do. For example, we are putting 70,000 barrels of oil
underground every day in the Strategic Petroleum Reserve that
is sweet light crude. That is the most valuable subset of oil.
Seventy thousand barrels a day right now, yet the SPR is 90
percent full.
How do the airlines look at that? Do you think it is as
dumb as I think it is to put that oil underground?
Mr. Steenland. I think as companies and as an industry, we
would support stopping filling the Strategic Petroleum Reserve
right now. Certainly with the prices at this level and given
the demand out there, we don't need to be filling that reserve
at $122 a barrel.
Second, we ought to look at addressing margin requirements
for people who play in the oil markets, who aren't there are as
real consumers of the good, but instead are simply trading it
as a paper instrument to make a profit. Margin requirements for
oil trading are 5 percent. Margin requirement for stock trading
are around 50. Things like that I think are policies that we
need to look at and address and deal with that.
One of the problems that we face is that we buy oil in
dollars. The dollar is a very weak currency. Our European
competitors pay for oil in euros. So their piece of paper is
worth $1.60, and ours is worth a dollar. And those kind of
issues, I think, are fully appropriate for the Congress to
address and to take on. And we would support that.
Senator Dorgan. Mr. Anderson, both of your companies have
these travel planning systems, companies around the country. In
fact, I think Northwest has a fairly large one in Minot, North
Dakota.
Mr. Anderson. Yes, it does. Three hundred jobs.
Senator Dorgan. Three hundred jobs. I kind of like the
precedent that Senator Klobuchar set.
[Laughter.]
Mr. Anderson. I built that one, too.
Senator Dorgan. You built that one, too. So you will give
us the same guarantee that----
Mr. Anderson. Sure.
[Laughter.]
Senator Dorgan. I think you came to this hearing with one
word available, ``sure.'' But let me be serious about the issue
of price and service.
Assuming that your companies merge, tell me about the
commitment of a much larger airline with management perhaps
living in Atlanta, Georgia, or much of management in Atlanta,
Georgia, servicing the Northern Great Plains routes that I just
described. But tell me about attention to smaller communities,
smaller markets.
Mr. Anderson. Well, first, as to that specific one, as you
know, Delta does not fly--this gets to the point about not
being overlapping. Delta does not fly to North Dakota.
Senator Dorgan. Well, you did.
Mr. Anderson. We did. But it gives you an idea about why
this is end-to-end. We didn't have enough presence in that
marketplace to be able to sustain one flight a day from Fargo
to Salt Lake City.
But let us talk about small communities, and I think you
made a very good point. Hub and spoke systems are critical to
service in small communities. Low-cost carriers and discount
carriers do not make investments in small communities. They
don't buy the airplanes to serve small communities, and that is
really left to the hub and spoke carriers.
And the hub and spoke system is particularly well adapted
because we can send one airplane to Fargo and pick up everyone
that wants to go to every other destination on a network. So
you have indivisibilities on that same airplane.
We have invested hundreds of millions of dollars in fleets,
if not billions of dollars in fleets, this combination will
serve 140 communities, and a stronger hub and spoke carrier
will be better for small communities. And this will be the
major airline that serves small communities.
I would just add that the DOT and the Government--it is
probably appropriate that Mr. Murphy is here because he was in
charge of it for quite a long time. We should revamp the EAS
program in this country. We should get very serious about what
it is going to take to run a real Essential Air Service
Program, particularly with fuel prices at these levels.
And I am not talking about just taking the current EAS
formulas. I am talking about to the point that some have made
here about how you get an industry and Government and all the
constituents together to figure out how a real EAS program
should work.
Senator Dorgan. Mr. Chairman, my time has expired. I have
to go to the floor on an amendment that I have pending. So I
would like to submit some additional questions to the
witnesses. And I think all of the witnesses have made some
really interesting observations today. I appreciate them being
here.
Thank you.
Senator Rockefeller. Thank you, Senator Dorgan.
Senator Snowe?
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman.
I am hearing mixed messages here today. I mean, there is no
question that spiraling oil prices have put the airline
industry in a precarious position. And what I am hearing is
that it necessitates expanding the market into the
international arena because you can't compete with low-cost
carriers in this country.
Mr. Neidl, you are saying that there is excess capacity,
that seats are going to have to come out of the sky. And I read
your testimony and heard it here today, Mr. Steenland, Mr.
Anderson, that smaller communities stand to gain the most. You
are going to be, in fact, doubling the number of small
communities served.
So, which is it in the final analysis? How do we know if
the merits of this international expansion, it is probably
going to come at the expense of domestic service and certainly
to small communities. I think we have seen at the non-hub
airports, in my state and across this country and the ones to
which Senator Dorgan referred to in his chart, we are seeing
either prices gone up or we have lost seats.
So if Mr. Neidl is saying seats are going to have to come
out of capacity, and you are suggesting that even in the good
times, as I understand it from your testimony, Mr. Neidl. Then
here we are in this troubling period and chapter in the history
of the aviation industry, and you are somehow saying it is not
going to come at the expense of domestic service. What I am
hearing is global, global, global.
And we don't disparage the fact that you should be involved
in the international arena, but we heard that with free trade
agreements, and we have lost jobs. What I am concerned about is
the lost service that is going to occur here in this country as
well.
So how do we know that what we stand to gain or lose in
this post merger period, since Mr. Neidl is saying that we are
going to have to reduce excess capacity? He said, in fact, in
reading your testimony, it says besides greater market mass as
a result of the expansion, the two other benefits of
consolidation would be cost cutting and revenue enhancement. To
cut costs, marginal operation, small expensive hub operations
have to be evaluated as to their viability, which will have an
effect on the communities they currently serve.
So Mr. Steenland, Mr. Anderson, how do you respond to that?
Mr. Steenland. Let me take a first shot at it, Senator.
First, I think we have to do the difficult exercise of
distinguishing what might be created or caused by the merger
transaction and what might be caused by the price of fuel.
Because the price of fuel pressures are going to exist whether
this transaction occurs or not, and the same, the merged entity
will be better able to withstand it because we will be able to
drive some benefits that on a stand-alone basis we couldn't
reach.
But whether we have a merger transaction or we don't, we
are going to be impacted and the industry as a whole is going
to be impacted vis-a-vis the price of fuel. Now as to small
communities, Delta and Northwest serve more small communities
than any other two airlines in the U.S. today. And we have
invested, Northwest--I will just speak about Northwest. We have
invested tens of millions of dollars in fleet and
infrastructure in order to be able to provide that service.
Senator Dorgan, we fly to numerous places in North Dakota.
We have five different airplane types from 34 seats to 125
seats that basically provide service to North Dakota, and that
allows us to provide a pattern and level of service that only a
hub and spoke carrier can provide. So we have designed a
network, and we have built a structural business that is
capable of serving small communities.
It is not done as a charitable act. It is done as an act
that can benefit a hub and that where we can provide service on
a profitable, sustainable basis. We have done it in the past,
and by consummating this transaction, we will be better able to
continue in the future.
Senator Snowe. Mr. Anderson?
Mr. Anderson. I will speak to the point you made about
international, and this really proves up the point Doug made
about small community service. We did a look at Bangor to JFK,
and a quarter of all the passengers that we carry from Bangor
to JFK are international passengers.
And in fact, if we look at our passenger loads at JFK,
where we operate a large gateway to many destinations in
Europe, Africa, and the Middle East, 25 percent of the
passengers that we connect through JFK come from small
communities. The opportunity that we have ahead of us together
is to continue to expand in a global environment, where
business is being conducted all around the world, where our
large customer, our largest customer is Procter & Gamble.
Northwest's largest customer is probably----
Mr. Steenland. General Motors.
Mr. Anderson. General Motors. And those companies and
companies like them--Coca-Cola, IBM--those companies are
conducting business all around the world. And we want to be
positioned where we can provide to them a single network
whether it is a large community or a small community. So the
opportunity we have ahead of us is to be able to expand
internationally to really compete for the business traveler.
Senator Snowe. But you can't dismiss the value and the
importance of domestic service and smaller communities. Because
albeit there are people leaving from Bangor and going to JFK to
go internationally, they still depend mightily on the service
that your two carriers provide to that small community because
low-cost carriers will not go to Bangor. You know, they are
point-to-point. They go to one community in Maine, and they
don't serve anything beyond that, and that is going to be the
problem.
Mr. Anderson. Well, I mean, if you look at the history of
these two airlines, these two airlines have had long and deep
histories serving small communities around the United States,
and we have made significant investments in long-term gate
leases, in aircraft leases, and in hub facilities to be able to
support small communities. We rely--our business model for
decades has relied very heavily on collecting traffic from
small communities.
And that is why the hub system works because when you send
an airplane to Bangor into your hub, you can carry everyone in
Bangor without five different airplanes. You can put everyone
on one, and that indivisibility gives you an economic model
that works.
Senator Snowe. Well, I hope that continues to be
sustained----
Mr. Anderson. I do, too.
Senator Snowe.--if the merger is completed because that is
going to be ultimately the issue. We have heard that, and I
certainly agree with Ms. Friend with respect to the fact that
we have not had a rational aviation policy since deregulation.
We have all experienced it since deregulation the last 30 years
on a weekly basis, and I understand the struggles within the
industry. But clearly, there remain to be challenges.
And I agree with the Chairman. We need to have an
overarching plan because it is in our security interest in this
country, frankly, from a number of standpoints and
perspectives. And I think that that needs to happen rather than
just predicated on conjecture and speculation about what the
future will look like.
So I thank all of you. Thank you, Mr. Chairman.
Senator Rockefeller. Senator Cantwell?
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman.
And thank you for holding this hearing. I am sorry I had to
step out for a few minutes, but I did hear most of the
testimony and I want to say that I am very sympathetic to the
points that Ms. Friend and Mr. Roach made. It is very
frustrating that during this time period that people really
have lost their jobs and really have lost their pensions.
And I am not sure that the Federal Pension Board has done
its job, oftentimes drawing this into bankruptcy and allowing
the individuals to basically be parceled out on pensions and
things of that nature in bankruptcy proceedings.
But I am concerned in the sense that when I look at this
issue that fuel costs have got to have played a very large role
in the challenges that we are seeing in aviation today. It is
amazing to me that anybody is still in business at the level of
fuel price spikes that we have seen. And we are not exactly
seeing any relief today. I hope that this Committee will have
oversight hearings on the FTC's new responsibility in reining
in market manipulation and making sure that we do police oil
markets effectively.
But I was wondering, Mr. Anderson or Mr. Steenland, if any
of you have comments about how you look at oil prices moving
forward, and what do we do about it in protecting all of us?
Because it really does impact everybody, it impacts people's
jobs and livelihood.
Mr. Anderson. Well, I will go out a little bit on a limb
here. I mean, we have had not an energy policy in this
company--in this country. Well, we have one in the company.
Particularly, it is pay the fuel bill. But in this country, we
have not had an energy policy over the last 8 years, and that
is a real problem not just for this industry, but for all
industries.
And it seems to me that when you think about what is the
most important thing that Congress can do or that our
Government can do for this industry and all industries is to
get our arms around what the energy policy needs to be.
There are things in the short run that we can do. Stop
filling the Strategic Petroleum Reserve. Take steps to be
certain that paper trading in oil commodities is stopped
because a lot of the people that buy and sell oil never use the
oil. It is--the futures market doesn't require much in the way
of margin accounts.
But further than that, we have to have conservation. We
have to have alternative sources. I can tell you that the
airline industry in the past 20 years has had over 100 percent
efficiency because of the good work at Boeing, General
Electric, and Pratt in terms of the advances in technology. But
our advances in technology and our investments in new
technology is not keeping up.
You know, a dollar a barrel of oil is $80 million a year.
So when it moves $5 in a day, on an annual basis, Delta just
spent $400 million more. And we can't build engines more
efficiently fast enough to keep up with the fact that we do not
have a national energy policy.
Senator Cantwell. Thank you. I understand, Mr. Steenland, I
might have been out of the hearing when you said about margin
rates as well.
Mr. Steenland. Right. I think that is clearly worth looking
at. And I would completely concur with what you have said. I
don't think we can underestimate the incredible impact that
this radical spike in oil prices is driving.
If you just look at last year, Northwest made over $750
million, and we were able to pay to our employees $125 million
in profit sharing and other incentives. In the first quarter of
this year, we lost $191 million versus earning $73 million in
the first quarter of the prior year. And our fuel bill for
flying the exact same size airline was $450 million higher, and
that is going to continue through the rest of this year. And
unabated, these kinds of increased oil prices are going to have
a significant impact on not just the airline industry, but on
other industries and on society as a whole.
Senator Cantwell. And as an industry that I would assume
because you are very big and intense users, what is it, second
highest cost of your expenses, I would----
Mr. Steenland. Highest. Forty percent of every dollar we
collect goes to the crude--goes to our jet fuel prices.
Senator Cantwell. So do you think this is a rational market
that we are seeing?
Mr. Steenland. No. No.
Senator Cantwell. Mr. Anderson?
Mr. Anderson. No. It is not a rational market. Rational
markets don't move this way.
Mr. Cooper. Senator, could I offer one other suggestion? I
think the margin requirements. We have to scare some money out
of this market. It has just been outrageous. The other one is
closing the Enron loophole. If you go back and look, Congress
allowed oil to be less regulated than onions. And----
Senator Cantwell. I like to say hamburger, but you know
what? Onions work as well.
Mr. Cooper. Onions are neat because they are a perishable
commodity, and we actually have a lot of regulation of onions
because it is easy to manipulate a market when they go bad
fast.
Since that decision was made in 2002, there has been an
exponential increase in the number of contracts and value
traded in that market. In 2006, the Senate Committee on
Oversight and Investigations concluded that one third of the
price of oil was due to speculation. At today's prices, that is
$30 a barrel or more.
And so, the Congress has voted once to close the Enron
loophole. The President vetoed it in the ag bill. I understand
it is back in the bill. And with all the talk about how we want
to lower the price of gasoline--I just came from a House
hearing on gasoline--that is the single-most important thing
you can do. Because if you require people to identify who they
are and how much they are trading, they will run from this
market, and that will be a good thing.
Senator Cantwell. Well, I thank you for that answer.
And Mr. Chairman, I don't know how this is all going to
work out here. But I definitely think that this issue and the
passion that the witnesses just showed as it relates to this
and the numbers that they revealed show that we have to pay
much more attention to policing of these markets.
So I thank the Chair.
Senator Rockefeller. Thank you.
I have some questions, but I am anxious to have Senator
Klobuchar go ahead.
Senator Klobuchar. I am sure you are. I just wanted to
follow up on Senator Cantwell's questions and just say that we
introduced today--Senator Cantwell was involved, I was
involved--the Consumer First Energy Act. And I think one of the
things that would be very helpful for us is if we got some
business support for these types of efforts.
We have a lot of consumer support, but it basically rolls
back some of the tax breaks for the oil companies, puts them
into the development of renewable energy, asks big oil to pay
their fair share through a windfall profit tax, halts the
Government purchase of oil for the Strategic Petroleum Reserve
that you mentioned, protects consumers from price gouging, and
does work on the market speculation that we were talking about,
closes the Enron loophole that is actually in the farm bill,
and then standing up to OPEC. We would really like to push the
administration to push OPEC since we have business dealings
with some of their countries, that they not keep their
production artificially low.
And I am not going to spend my time right now asking
questions on your views of every one of those. But I do ask you
to look at those because it is very difficult for us to be on
our own when we need the help of business, but you have just
described it is 40 percent of your costs.
The questions I want to ask, first of all, some of the
employee issues, and specifically first the pilot issues. And I
understand the carriers have only reached a contract with the
Delta pilots and not the Northwest pilots. Don't you need a
joint contract with both Northwest and Delta pilots before you
close on the merger to get the synergies that you have talked
about in this deal?
Mr. Anderson. Well, first, what we tried to do had never
been tried before in this industry. Typically, what has
happened in every other consolidation during regulation or
deregulation is the deal gets announced, and then after it
closes, the parties begin a process under the ALPA merger
policy of beginning to combine the collective bargaining
agreements.
So what we wanted to do was bring the two together in
advance. We made good progress. We didn't get it done. We are
still hopeful that we are going to be able to get it done. And
in fact, I think we have had a very conciliatory statement
issued by both Captain Moak and Captain Stevens, who runs the
ALPA unit at Northwest.
In terms of the synergies we can capture with the
collective bargaining agreement amendments that we entered into
with the Delta pilots and the existing collective bargaining
agreement with the Northwest pilots that was negotiated during
the bankruptcy, we can capture a significant portion of the
synergies on day one.
And that is the result of the fact that this is a little
bit different merger. Northwest and Delta have had a domestic
alliance arrangement for 5 years. And in the course of that and
getting approval from the Department of Transportation for that
back in 2003, our computer systems, our yield management,
scheduling, pricing, we sell each other's products and manage
each other's inventory and code share today. And we have a
joint frequent flyer program, joint club problem.
So we have the ability under the two collective bargaining
agreements to do system code share, day one, and will jointly
manage the product or manage the product and manage the yield
management systems so we can capture a significant amount of
the synergies from day one.
Mr. Steenland. I think it would be fair to say that the
goal clearly remains to look to attain a single collective
bargaining agreement with the pilot groups prior to the
closing, and there will be meetings set up and discussions to
look to attain that result.
Senator Klobuchar. I am just concerned based on what we
have seen with other mergers when we didn't have that kind of
agreement and didn't seem to result in good things.
The other question I had was at the Judiciary Committee
hearing, Mr. Anderson, you said that the combined carrier has
``made a commitment to the frontline employees that there would
be no furloughs as a result of the transaction.'' Do you still
stand by that commitment and for how long?
Mr. Anderson. Yes. Well, indefinite. But go back to what
Doug had said, I mean, and even what Mr. Roach had said. If
fuel is at--and it is this difficulty in sort of divining
between this transaction and what happens if oil prices do go
to the level that the CEO of Exxon and the head of Goldman
Sachs say. That will be an independent effect.
But as a result of this merger, where we sit today, both of
these airlines are very lean in terms of having gone through
bankruptcy. And we are really confident that because they are
end-to-end, we won't be faced with that prospect.
Senator Klobuchar. And I understand that both Delta and
Northwest have employees on involuntary furlough. Delta is
having something like 800, and Northwest has 500. What will
happen to these employees as a result of the merger?
Mr. Anderson. Well, we obviously want--I don't know the
specifics of the Northwest. I can tell you about the Delta
situation are principally we have recalled all the flight
attendants, we have recalled all the pilots, and those are
principally mechanics. And we are going through an early out
program right now and an early retirement program that our
employees have asked us for repeatedly. Well, we put one in
place, and we are hopeful that it is going to give us the
opportunity to get the furloughed mechanics back on quickly as
we build our maintenance business.
Senator Klobuchar. And then to follow up on some of Senator
Dorgan's questions. Back in January, I sent a letter, you sent
a response back, about the service to some of the rural areas.
And in that letter, you wrote to me that the merger between
your two carriers ``would deliver significant benefit to
consumers by, among other things, increasing service to
smaller, more thinly traveled routes.''
Could you describe what you mean by that commitment?
Mr. Anderson. Well, I think it is just generally the point
that a stronger hub and spoke carrier that would emanate from
this combination would allow us to go into cities where--take,
for instance, Fargo. And we don't have antitrust--or we are not
a single entity. So we haven't--we have got to operate
separately and still compete.
But the kinds of things you think about are we had one
flight a day, Fargo-Salt Lake City. We just didn't have--Great
Plains Software in Fargo was not going to sign a corporate
agreement with Delta because we only had one flight a day,
whereas Northwest has been in Fargo since the 1930s. And when
you take that network and combine it with the Delta network,
now we have the opportunity to go into cities that either of us
maybe served alone, but because we have enough presence, we
will be able to connect that city to another hub.
Senator Klobuchar. You know, there is about 140 combined
communities that you both serve, smaller communities?
Mr. Anderson. Yes.
Senator Klobuchar. And I guess Minnesota--we have our
picture here of our state with the service to the communities.
Sioux Falls, South Dakota, right across the border. Fargo, as
you mentioned. Grand Forks, Thief River Falls, Bemidji,
International Falls, Chisholm and Hibbing, Duluth, Brainerd,
St. Cloud, Rochester.
Senator Klobuchar. Do you envision that the service to
those areas is going to change as a result of the merger?
Mr. Steenland. No. And we have provided service to those
communities for a long time. Several of them are EAS
communities, and I think we have said that is another program
that probably, for the Congress, is worth looking at because
when you sign EAS, make EAS commitments, you make them for 2
years. And when you think about what has impact--what has
changed in the world of fuel prices during that 2-year period,
that clearly has some impact on willingness to make that
commitment.
But having said that, we are--have no intention to
eliminate service to any of those cities. And what the evidence
shows is that when you are able to offer service on the same
airline with the same brand, the same policies, the same
frequent flyer program and the like, that provides more
incentives for customers to fly on that airline.
So somebody coming out of International Falls or Thief
River Falls or Bemidji or Duluth, when they are looking at
flying on the post merger airline, there is going to be a lot
more destinations that they are going to be able to get to that
will be online single carrier points than what they previously
could do just out of Northwest.
And that is going to make flying over the Minneapolis hub
more attractive, and we think it will allow us to be better
able to justify and to continue the level of service that we
provide to those small communities.
Senator Klobuchar. Thank you very much.
Senator Rockefeller. Thank you.
Senator Thune?
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman. And I want to thank
you for holding the hearing. I think this is an important
discussion to have not only with respect to the merger in front
of us, which is awfully important to those of us who represent
States that are going to be most impacted by this, but I think
generally speaking as well the entire aviation industry. I
expect we are going to see a lot more of this.
And something has to give, and I can understand why
Northwest and Delta, from an economic standpoint, want to do
this. It, in many respects, becomes a matter of survival in the
airline business today.
But there are many of us who are very concerned about the
future of the industry, the impacts of this merger and
potential mergers that we might be reviewing in the future. But
I guess I would just like to follow up on a couple of the
questions that have perhaps already been asked and get at the--
some of the service and cost issues, particularly with regard
to smaller communities in the network.
But the first question I wanted to ask has to do, though,
with--my understanding is that the rationale for the combined
airline is about a billion dollars in savings, and the losses
in the first quarter were like $10 billion. It seems to me like
if you are going to save a billion dollars and you are losing
$10 billion in a quarter, that the economics of that in the
long run are going to be awfully difficult to make work.
So I understand why you are doing it. I understand that the
necessity of trying to find some synergies and the end-to-end
concept and that many of your routes don't overlap, but expand
you--create expansion opportunities into other areas. But could
you just kind of elaborate a little bit on how these savings in
the long run are going to be useful in terms of the viability
of the company when you have got those types of--declaring
those types of losses?
Mr. Steenland. Well, first, as to the first quarter losses,
the real, true economic loss that Northwest experienced was
$191 million, and Delta, I believe, was about $275 million.
Our accountants required us to basically write down the net
worth that was on our balance sheet because of, in part, what
oil was doing, and so we both took very large noncash
accounting write-offs that helped produce that very large
number. So they were legitimate write-offs from a GAAP
accounting perspective, but they weren't real economic losses
to reflect how the business was otherwise performing.
Now, obviously, the bottom line results are going to be
impacted by the price of oil. From our perspective, these
benefits, which we think are conservative at a little bit north
of $1 billion, are going to be there whether the price of oil
is $100, whether the price of oil is $110, $120. So the merged
carrier will always be better off in terms of being
economically more viable.
But obviously, as the price of oil, if it continues to
increase, the economic challenges that the merged carrier will
face will be increasingly difficult, although it will always be
at least a billion dollars better off because of this
transaction.
Senator Thune. And maybe you answered this question
already. But did that billion dollars in savings assume an
agreement with the pilots? Did that billion, that is assuming
that, OK, which hasn't been reached yet.
If, in fact, gas prices, fuel prices continue to do what
they are doing today--and I think, Mr. Anderson, you have
mentioned somebody that had projected $200 a barrel at some
point? I mean, I don't know how any airline is going to be able
to survive under those economic circumstances.
But let us just say, for example, that fuel costs continue
to go up. How would service to rural states like South Dakota
be impacted? And do you see reductions occurring on those
routes to areas like the ones that were on the map that Senator
Klobuchar put up just now?
Some of those cities are--in my state are EAS cities, but
there are some that aren't. And already, we are seeing I don't
think there has been a lot in terms of announcements with
regard to summer service. I think there is an aircraft change
going into Rapid City this summer. But clearly, one of the main
concerns of those of us who represent that part of the country
have is in a post merger airline, what the service is going to
be like? Are we going to continue to have frequency of flights?
And then, second follow up to that is what about
affordability and cost? Are you going to see the types of cost
and prices that we are seeing in some of our communities today
continue to go up, fares?
Mr. Steenland. Well, I think, Senator, the--we are in a
reality where we both have restructured. We have committed we
are not going to go back to our employees. We are going to
continue to meet our pension obligations. Our aircraft cost
have basically been marked-to-market so there is no more
savings to be had there.
We have gone after our vendors with a passion to try to be
sure we get the best prices from them. And as our fuel costs go
up, we really have no choice but to pass them on. And as they
get passed on and fares increase, simple economics would say
that there will be fewer passengers that travel at higher
prices.
Now one of the things--the benefits and one of the ways
that we can address that is that we serve rural communities
with multiple aircraft types. So if you just think about what
we do in South Dakota, we operate several airplanes that seat
150 passengers. We operate several Saab propeller airplanes
that seat 34 passengers. So maybe in a higher fuel price world,
the 150-passenger airplane becomes a 125-passenger airplane or
maybe becomes a 100-passenger airplane.
And we adjust for that decrease in demand that higher
prices drive by taking the investments that we have made in
having a varied fleet and being able to preserve the service,
but perhaps with fewer seats. And we also want to try to
preserve frequency because the South Dakota flights come into
Minneapolis. We operate multiple banks during the day, and it
is in our interest as well as your constituents and our
customer interests to try to provide as many multiple times of
day when they can depart Aberdeen or Rapid City or Sioux Falls.
Today at Sioux Falls, we fly seven times a day to
Minneapolis. And that helps our hub. It also helps the people
destined for Sioux Falls. And to the extent that we can, maybe
seven becomes six. Or maybe, as I said, the airplane size
becomes a little smaller. I think that is how we adjust for
this potential new world.
Senator Thune. I think I have asked this question of you
previously. But from an operational standpoint, I have been
told that it was more costly to operate RJs because you had
fewer seats to help pay for the cost of the fuel increase. And
you had indicated that is not necessarily an issue. Because a
lot of the premise for service into smaller communities is
smaller planes, fewer seats, higher loads. But that some of
those types of flights might be in jeopardy because of higher
fuel costs--from an operations standpoint, an RJ relative to
one of your more standard widebody.
Mr. Steenland. Sure. On a seat basis, the larger airplane
is going to be more efficient to operate. But if you think
about comparing the 50-seat CRJ with the 100-seat DC-9, if you
were going to operate the 50-seat CRJ, you would end up putting
on that airplane your 50 highest-paying passengers. And so, in
essence, your unit revenues that you would collect on that
flight would be higher as well compared to what you would
collect on the bigger airplane because you would have a bigger
dispersion of what fares would be.
Senator Thune. Well, Mr. Chairman, the industry is a lot
like we have described agriculture in past years. We have had
some commodity price improvement here in the last year or so,
but for a lot of years, farmers would lose a little bit on each
sale and make up for it in volume. And it seems to me that is
kind of what maybe characterizes or describes the airline
industry today.
And if we see these continued increases in fuel costs, I
don't know where this is headed. But it seems to me we are
going to have to take a very hard look at where the industry is
headed. And these types of--I think we are going to see a lot
more of this in the future, and like I said, from an economic
standpoint, I don't fault you at all for trying to figure out
how you survive in an environment that is going to be very
difficult.
But I thank you for your answers to the questions and look
forward to continuing the dialogue as the process moves
forward. Thank you all.
Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, Senator Thune.
I am going to have to close this now, much to my regret,
due to a specific timing of a phone call that I have to make to
the Director of National Intelligence. He is waiting on a phone
call.
But let me close with these thoughts. When you have
hearings--this has been very interesting to me. People say if
they are in an operational situation what their problems are.
People say if they are in a worker situation what their
problems are. And often some of it is said with a particular
passion because, after all, they are there at the witness
table, and it needs to be said.
I also have a feeling that just looking at all of you, that
the stakes are so enormous for each one of you to make all of
this work. And we have failed in the Congress, for reasons
which I will not go into, to pass a Federal aviation bill in
this past week. We have moved to reconsider so that we can
still do work in the future, and I believe that we will.
The interplay of personalities works in the Senate just as
it does anywhere else. But I come out of this hearing, frankly,
somewhat optimistic simply because the whole concept of the
United States of America without a viable aviation industry is
not only repugnant, but it sort of defines national security
and the ability for people to move from here to there and to do
business.
I understand companies go overseas and they can do better
over there. I am not against the merger. I want very, very
strong scrutiny of it by the Department of Justice and others
and with great detail. But I am not convinced that anybody here
is operating out of ill faith. I think people are angry or
frustrated simply because of, one, the times, the price of oil,
the unpredictability.
Senator Klobuchar had this whole series of commitments, and
I admire you enormously, Mr. Anderson, for accepting most of
them. But I don't think that morally or in the real world that
you know what is going to happen 2 years from now, or Mr.
Steenland, or Ms. Friend, or Mr. Cooper, Mr. Roach. None of us
know.
The trends are all strictly downhill now, and there is
nothing that is particularly hopeful at the present time. So I
think we need each other a lot more than we are willing to
admit and that it is good to get emotions out and to get plans
out and to get analysis out. But at the end of the day, we are
going to have to fix this system.
And I have said that I am not against re-regulation. I
don't think I want to go back to that day. But if I get
desperate enough, count on me to be that kind of a vote because
I represent a rural constituency with no possible way of
developing its potential without the essential Air Service
Program, the Airport Improvement Program and the hub and spoke
system working.
We have had to make substantial adjustments since U.S. Air
moved out of Pittsburgh and with United to go to Dulles. And it
is working, but we are always holding on by our fingertips. And
you know that. You all know that. And you are all holding on by
your fingertips. I mean, not to be schmaltzy, but we are all in
this together.
And so, rather than say that this has been an unuseful
session, I think it has been very useful. I think there have
been people who have been absolutely candid. You have been very
forthcoming. Mr. Anderson, I have never heard such a commitment
in my entire life from any corporate executive.
[Laughter.]
Senator Rockefeller. And I think that is wonderful, and I
hope that it all works out. But everything is changing all the
time. The war on terror has not finished its business in this
country or elsewhere, and it will continue to change the way we
have to do our aviation system.
I had an all labor group come in to see me a couple of
weeks ago and say let us get that FAA bill passed, and we did
try. And I would be delighted to talk with you why it didn't
work. But it is not over yet. It is not over yet.
One thing around here, and I will just say this for the
record and then I will stop. I am not an enormous fan of
railroads. When I came here, there were 50 Class A railroads,
24 years ago, there were 50 Class A railroads. And they all
competed with each other, and then the Staggers Act passed. And
the Staggers Act made a very simple declaration.
It said that 80 percent of wherever there are two railroads
competing for a market, and this takes place over the entire
country--that means it is all 50 states--then the market will
set the price. Where there is only one railroad operating, then
the railroad will not the set the price, but the Surface
Transportation Board will set the price.
Now that has been conveniently forgotten by every single
chairman of the Commerce Committee over the past 20 years. So
the law has been broken consistently. The American Railroad
Association stays under the radar. So nobody ever says that
much or they would make special arrangements with people to
keep them calm. But it is no way to run a transportation
system.
I am thrilled to chair the aviation system. I admire its
challenges. I admire the way all of its people are trying to
cope with the difficulties that emerge out of this, and I
simply pledge to you that this, from my point of view, will be
the first of a very serious effort to try and get an aviation
system that works. Not just through congressional legislation,
but, in fact, in the practice of it. Easily said, hard to do,
but time to start.
Senator Klobuchar. Mr. Chairman, could I say one more
thing?
I just want to make one point as part of this. I am glad
that they were willing to commit in current situations to this,
but remember there were promises that was made to our state in
exchange for our state giving the money, basically, so that
they wouldn't go financially under. And so, there was more than
just asking these questions in the course of a hearing and
trying to get commitments. There were actual promises made to
the state of Minnesota at a time when the airlines were having
financial problems, and there is actual fiscal penalties that
attach if those promises aren't met.
So I wanted to clarify that for the record and also that I
would be submitting some questions in writing about what I was
thinking at the end here, as the commitments are triggered by
if the price of oil goes up more, maybe we won't have the
commitment for the employees. But perhaps there could be some
way to estimate at what point those commitments would change,
given where the price of oil could be?
And I can do that in writing since I know that you have to
go to something else. But I wanted to thank the witnesses
today.
Senator Rockefeller. This hearing is adjourned.
[Whereupon, at 4:35 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
Chairman Rockefeller, thank you for scheduling our hearing today on
the financial state of the airline industry. I would also like to thank
our witnesses for their participation.
In the past 10 years, this Committee has witnessed dramatic ``ups
and downs'' in the airline industry. For a state like Alaska, which
depends on aviation more than any other mode of transportation, the
seemingly constant state of turmoil and uncertainty is very concerning.
Over the last week and a half Congress has debated the need to
modernize the Nation's aviation infrastructure. This modernization has
important implications for both our busiest cities and rural areas,
like Alaska. Unfortunately, other issues made this impossible. I hope
that Congress will continue to work to modernize our aviation
infrastructure.
Today, we turn to the financial state of the airlines. On Monday of
this week, crude oil rose to over $120 a barrel. Already, many of the
airlines and their employees have gone through difficult bankruptcy
proceedings and restructuring. If the price of oil continues to
increase, or even remains stagnant at over $100 a barrel,
sustainability of U.S. air carriers is going to be significantly
impacted and we may see consolidation through elimination instead of
mergers.
Obviously, one solution to the crude oil problem is increased
domestic production, but that is an issue for another hearing.
Thank you Chairman Rockefeller, I look forward to the testimony.
______
Prepared Statement of Captain Lee Moak, Chairman, Delta Air Lines
Master Executive Council, Air Line Pilots Association, International
Mr. Chairman, Ranking Member Hutchison, Members of the Committee,
thank you for providing me the opportunity to submit testimony for
today's ``Hearing on The State of the Airline Industry and the
Potential Impact of a Delta/Northwest Merger.''
My name is Lee Moak, and I am a Captain with Delta Air Lines. I am
also the Chairman of the Delta Master Executive Council of the Air Line
Pilots Association (ALPA), the union that represents over 7,300 pilots
of Delta Air Lines. I have flown for Delta for over 20 years. Prior to
my career at Delta, I served this Nation as a United States Marine
Corps fighter pilot, and as I joined Delta, I transitioned to the Naval
Air Reserve Force to finish my military career as a U.S. Navy fighter
pilot.
I mention my military credentials because as I continue, I want to
emphasize that I am proud of my service in defense of our American way
of life, including a free market economy.
Our Nation's aviation industry is unique, and careful government
scrutiny and oversight must ensure that any potential industry
consolidation is in the best interests of the traveling public. It is
for this reason that I welcome the opportunity to testify in support of
the proposed merger between Delta Air Lines and Northwest Airlines.
Fifteen months ago, I submitted written testimony to the U.S.
Senate Committee on Commerce, Science and Transportation. The Committee
was holding a hearing entitled ``State of the Airline Industry: The
Potential Impact of Airline Mergers and Industry Consolidation.'' As
you may recall, at that time, Delta Air Lines was the target of a
hostile takeover attempt by U.S. Airways, an attempt which ultimately
failed due in large part to the extreme opposition demonstrated by
Delta's employees. At that time, I submitted my testimony on behalf of
the pilots of Delta Air Lines, who stood solidly opposed to the hostile
takeover attempt of our company.
Today, I am submitting testimony on a distinctly different matter,
the proposed merger between Delta Air Lines and Northwest Airlines, and
I am testifying in support of the proposed merger.
While you may ask whether I have changed my position on industry
consolidation since I testified last year, nothing could he further
from the truth. In fact, the position of the Delta pilots' union has
been clear and consistent over time. Last year, in opposition to U.S.
Airways' hostile takeover attempt, I wrote:
Many leading industry experts suggest, and we recognize, that
eventually, industry consolidation is not only likely, but
probable and perhaps even inevitable. With that in mind, I want
to make the following point:
We support a free market solution that includes rational
industry consolidation; consolidation that does not lead to
reduced service, increased fares and other problems for the
industry's constituents.
In the future, sensible airline consolidation opportunities may
occur. If faced with such an opportunity, the pilots of Delta
Air Lines are interested in participating in the ``right''
consolidation effort, a consensual merger with a rational mix
of routes, employees and resources, and with the absence of
major antitrust and other detrimental issues. The ``right''
merger opportunity could draw our support and result in a
successful merger that benefits everyone involved--the
traveling public, the corporations, the employees, and the
communities we serve.
The hostile attempt by U.S. Airways to takeover Delta Air Lines was
not that merger. In contrast, the proposed merger between Delta Air
Lines and Northwest Airlines is that ``right'' merger.
On September 11, 2001, terrorists used commercial airliners as
weapons of mass destruction to attack the United States of America.
Those horrific events changed our lives forever and also marked the
beginning of drastic change for America's aviation industry. In the
years that followed the airline industry was rocked by record financial
losses, skyrocketing oil prices (which are a bargain in comparison to
today's prices), increased security costs, and numerous airline
bankruptcies and liquidations. In response Congress approved, and
several airlines took advantage of government backed loans through the
Air Transportation Stabilization Board (ATSB).
Delta and Northwest were not immune from the pressures of the post-
9/11 environment, and on the same day in September 2005, both
corporations filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. At the time, the industry was still hemorrhaging, and
many familiar with the economics of the industry believed that neither
Delta nor Northwest would survive.
But fueled in large part by substantial concessions from the pilots
and our fellow employees, both companies were able to successfully
reorganize and exit bankruptcy just less than 1 year ago. The employees
of both carriers were able to take pride in the part they played in the
emergence of new, healthier, airlines--airlines poised for long-term
success. In the months that followed, things seemed to go as planned,
but due to factors beyond the control of any airline management team or
labor group, the industry soon faced increasing economic challenges on
several fronts.
When Delta and Northwest exited bankruptcy in the spring of 2007,
crude oil traded in the mid-sixty dollar per barrel range. This week,
the price of crude set another new record as it broke through $122 per
barrel, an increase of approximately 85 percent in less than 1 year.
Additionally, the Nation's economy is suffering, and many economists
assert that we are entering a recession; others argue we may already be
in recession. The credit markets have become increasingly difficult if
not impossible to access. Just last month, due largely to the
unavailability of debtor-in-possession financing, Aloha, ATA and Skybus
ceased operations, and Champion Air will shut its doors on May 31.
Frontier Airlines recently filed for Chapter 11 protection. Legitimate
concerns exist about the long-term financial viability of several other
carriers.
In short, for the second time since the terrorist attacks of
September 11, 2001, the industry's long-term future--in fact, its
survival--is in peril. If our nation's airline industry is to survive,
the economics of that industry overwhelmingly suggest that the time for
long- anticipated industry consolidation has arrived.
In the months leading up to the proposed merger, the Delta pilots
worked closely with our company's senior management team as we
considered what was best for our company, its employees, our passengers
and the communities we serve. As the union representing the Delta
pilots, we made clear that we were not interested in a transaction for
transaction's sake. We insisted that if a merger were to draw our
support, several conditions would have to be met, and the most
important of these was that the combination would produce an even
stronger and growing airline that would vigorously and successfully
compete in the domestic and international marketplaces for years to
come.
The proposed merger between Delta Air Lines and Northwest Airlines
not only meets but exceeds the conditions necessary to draw our
support.
The proposed merger between Delta and Northwest is far different
from the one that would have resulted had U.S. Airways been successful
in its attempt to take over Delta. Delta and U.S. Airways are strong
competitors in many markets, with large overlapping route structures
and several hub city pairs located in close geographic proximity. Had
that takeover attempt succeeded, it would have cost thousands of jobs,
created monopolization in key business markets, resulted in huh
closures and eliminated customer choice, all in the name of a short-
term financial gain for a few.
In contrast, the proposed merger between Delta and Northwest
represents an ``end to end'' merger with far different dynamics. Delta
and Northwest have very little route overlap both domestically and
internationally, and in fact have complementary route structures that
will expand opportunities to the traveling public. Further, as the
surviving management team, Delta's senior executives have committed to
preserving frontline employee jobs and that hubs will remain open. Over
the weeks and months leading up to the merger announcement, Delta
management shared its financial projections and merger analyses with
the Air Line Pilots Association, and we were able to validate the
results with our own independent analysis which showed very similar
results. The value in the proposed merger will manifest itself not at
the expense of employees, passengers and communities served, but by the
synergies of the combined strength of both carriers. As a result, the
merger will serve the interests of the corporation, the approximately
78,000 employees of the merged company, the communities we serve and
most importantly, the lifeblood of our company, our passengers.
Finally, you are all aware that one of the most difficult tasks of
any merger is that of workforce integration. As the probability of
consolidation increased, the Delta pilots' union recognized that the
traditional approach to labor integration is flawed, if not completely
broken. That is why we made the decision last fall to provide our pilot
membership with an alternative to the traditional process. Our goal was
to reach an agreement with the Northwest pilots on the most contentious
of labor issues in advance of a merger announcement. The task was
extremely difficult and Herculean efforts were made by representatives
from both pilots groups. While significant progress was made in many
areas, we were unable to reach agreement on an integrated seniority
list in advance of the merger announcement. However, with the
probability of a merger announcement on the horizon and the timeline
shrinking, the Delta pilots' union leadership was able to reach an
agreement with Delta management designed to facilitate the merger while
providing financial returns for the value we would bring to the
transaction. That agreement is currently before our pilot membership
for ratification.
An important part of that agreement was a unanimous commitment on
the part of Delta's pilot union leaders that ``the Delta [union
leadership] welcomes the Northwest pilots as partners in the building
of the new merged airline and looks forward to working with the
Northwest [union leadership] to bring about the rapid completion of a
new joint agreement to take effect on the closing of the corporate
transaction providing immediate parity in rates of pay and further
providing for a rapid completion of a fair and equitable integrated
seniority list to take effect on the effective date of the new joint
agreement.''
The Delta pilots have a long and proud history of treating each
other fairly and acting with the best interests of our fellow pilots,
as demonstrated by our successful integrations of the pilots of
Northeast Air Lines in the 1970s, Western Airlines in the 1980s, and
Pan Am in the 1990s. Make no mistake, once the corporate transaction
closes, the Delta and Northwest pilots will all be Delta pilots. Our
ethics, our integrity and our record of fairness and professionalism
will not be compromised as we transition to a group over 12,000 strong.
Conclusion
In the years following the September 11 attacks, the American
aviation industry experienced its worst period in history up to that
point. After numerous corporate restructurings, both in and out of
bankruptcy, there were strong indications of an industry on the
rebound. Due to factors beyond the control of any management team or
labor group, that rebound was short-lived. The health and viability of
America's iconic aviation industry, an industry that helps drive our
nation's economy, is in serious jeopardy, and while it may seem
inconceivable, it is quite possible--even probable--that circumstances
will get much worse before they get better.
In my opening remarks, I acknowledged that careful government
scrutiny and oversight must ensure that any potential industry
consolidation is in the best interests of the traveling public. I
submit that the proposed merger between Delta Air Lines and Northwest
Airlines is not only in the best interests of the traveling public, but
also our Nation's aviation industry and economy.
On behalf of the over 7,300 professional pilots of Delta Air Lines,
thank you for the opportunity to testify before the Committee.
______
Prepared Statement of the Aircraft Mechanics Fraternal Association
I am Steve MacFarlane, National Director of the Aircraft Mechanics
Fraternal Association (AMFA), a craft union representing 4,200 aviation
mechanics and related at Alaska, ATA, Southwest, Northwest (NWA),
Mesaba, and Horizon. AMFA represents over 900 mechanics at NWA, and
over 200 at Mesaba--one of NWA's regional subsidiaries. I am writing to
share my organization's concerns regarding mergers and consolidation
within the airline industry, specifically the proposed deal between
Delta and Northwest. Having worked in the airline industry for twenty-
five years and lived through two mergers, Hughes Airwest/Republic and
Republic/Northwest, I can attest first hand to the harm that can befall
workers caught up in airline mergers.
AMFA understands that consolidation within the industry is likely,
and we are not necessarily opposed to consolidation per se, however,
AMFA believes there are facts surrounding the Delta- NWA pairing that
need to be addressed. These issues include, but are not limited to:
The 500 NWA mechanics currently on furlough, whose last
opportunity to return to work will expire on November 6, 2008.
Current and potential future union representation at the
combined carrier.
Billions of dollars in outstanding pension obligations.
The potential wave of mergers stemming from the approval of
the Delta-NWA deal.
Promises made by management teams to garner political favor
for deals that turn out to cause great harm, such as pledges to
keep all hubs, employees, and small community air service.
Having endured devastating job losses and drastic reductions in pay
and benefits coerced from airline workers throughout the industry over
the past 5 years, we can't help but flinch at the prospect of another
corporate tactic that has the potential of delivering yet another blow
to the livelihoods of airline workers. Prior to the attacks of 9/11,
AMFA represented nearly 10,000 mechanics and related at NWA.
Immediately after the attacks, tens of thousands of frontline airline
employees at numerous carriers were laid off, including about half of
AMFA's NWA population. Today, the number stands at 910. AMFA members in
Minnesota numbered over 6,000 during the late 90s alone. These workers
earned above average wages, owned homes, and contributed significantly
to the economy of Minnesota and the Nation as a whole. There are now
615 AMFA NWA mechanics at MSP and 300 in Detroit (DTW). Most of them
own homes in other states.
AMFA currently has approximately 400 Technicians and a little less
than 100 cleaners on nonvoluntary furlough. In order for us to support
the merger NWA needs to insure these employees are given the
opportunity to return to work for the ``New Delta''. Many of these
furloughed employees were working for NWA long before Mr. Steenland or
Mr. Anderson joined NWA; some of these men and women have 20 plus years
at NWA. NWA and Delta have been unwilling to even sit down with AMFA to
discuss our concerns. It seems they feel the only group they need to
get buy-in from is the pilot group. Thousands of other employees and
their representatives have needs and concerns that need to be addressed
as well.
On November 6, 2008 the approximate 500 employees on non-voluntary
furlough will be terminated as a result of the expiration of their
recall rights. NWA arbitrarily reduced the recall period from 5 years
to 2 years in our strike settlement agreement. The ``New Delta'' could
show some good faith to support their claims that they intend to
protect jobs by:
Reestablishing the original five-year recall rights which
would extend by 3 years the November 6, 2008 termination
deadline currently looming over the heads of hundreds of NWA
employees. Unless this action is taken approximately 500 NWA
mechanic and related employees will be terminated in November
of this year. By taking this action these long time NWA
employees would simply be given the opportunity to bid for a
job as they became available.
Offer the furloughed employees that have recently reached
the age of 55 the opportunity to return to work for one day in
order to retire active, which would increase their pension
payments by hundreds of dollars per month. NWA has been given a
freeze on benefit accruals and many years of relief from the
government to fund their pension obligations. The ``New Delta''
should be required to at least live up to their end of the
agreement by paying the full value of the pension and not
receive yet another opportunity to short change their
retirement eligible employees by terminating them.
Offer the rule-of-60 flight benefits to those currently on
furlough (age + yrs of service = 60). This action would result
in lifetime retired employee flight benefits, something offered
to all employees that chose to resign but not those who chose
the furlough.
Former mechanics have, in many cases, moved on to lower-paying jobs
and turned to refinancing homes or other forms of debt to sustain their
families. This scenario shows that for all the numbers thrown around
about how vital an airline is to an economy--both micro and macro--the
benefits must be more than residents with proximity to a certain
airport being able to fly to Mexico City via Salt Lake City. With no
economic base to support leisure travel, and the forecasted ``15-20
percent rise in ticket prices'' \1\ needed to offset soaring fuel
prices, the current crisis in the industry will, by this logic, expand
to the point where no one will be able to fly.
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\1\ Delta CEO Richard Anderson quoted by Associated Press. USA
Today April 22, 2008.
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The government has provided great assistance to the airline
industry after 911 and during difficult times, in the form of the ATSB,
whereby $5B in taxpayer dollars was given to the industry without any
guidance as to how the airlines were to spend the money. Another $10B
was made available for loans to assist the ailing industry. While this
is laudable, no help was forthcoming to the tens of thousands of
workers who lost their jobs.
Additionally, Federal bankruptcy laws, never intended to be used as
a strategic tool for competitive purposes, were turned against workers
as Federal judges aided executive management teams in extracting
severe, painful, and permanent concessions from American airline
workers. Pensions were defaulted, work rules changed, work forces
reduced by thousands, wages slashed, and on and on. We acknowledge the
value and benefit of having a viable airline industry that provides
great mobility and swift commerce for our nation; however, the other
part of the equation is a stable and productive middle class that
contributes to the economic vibrance and tax base of the American
economy.
Now, as we enter the era of Open Skies and mega-carriers, the need
for scrutiny grows. NWA and Delta claim that employees will be given a
4 percent stake in the merged company. Employees at United Airlines can
attest to the perks of ESOP programs, where $125,000 in stock yielded a
$1,800 payout. This merger does nothing to allay concerns of future
bankruptcy filings, and future financial distress. In fact, the cost of
merging has been reported to be somewhere near $1 billion. Given the
combined $10 billion in losses by NWA and Delta in the first quarter of
2008, it seems the carriers need all the money they can get. Even
without ``one-time'' costs of $6 billion for Delta and $4 Billion for
NWA, the two combined to lose just short of $500 million in the
quarter--largely due to $115/bbl oil.
Oil and refined fuel commodity prices will not decrease with the
formation of the largest airline in the world. With this merger, the
company will have a fleet of over 800 aircraft, with the only overlap
in aircraft type being the Boeing 757-200 (Delta--131; NWA--71).\2\
This means the combined carrier will have 19 different and unique
aircraft, and a fleet that will be one of the oldest in the industry.
The companies have said that the carrier will be able to right size
aircraft to specific routes, and park older airplanes, but both
airlines have stated their individual intentions to do this in the next
year anyway, as well announcing cuts in mainline capacity. The costs of
the merger procedure fly in the face of the actions the companies are
taking independently.
---------------------------------------------------------------------------
\2\ Aviation Week & Space Technology Aerospace Sourcebook 2008. Pgs
364 and 372.
---------------------------------------------------------------------------
Earlier in the month, Delta, NWA, Air France-KLM, CSA Czech
Airlines and Alitalia were granted antitrust immunity for their
international code-share alliance operations as part of the SkyTeam
Alliance. This, combined with Stage I of the US-EU Open Skies Agreement
(OSA), appears to be leading to the creation of global mega-carriers,
and with it, the gradual erosion of the traditional airline employee.
If not for U.S. ownership and ``actual control'' restrictions, perhaps
trans-Atlantic consolidation would have been realized already. In fact,
Stage I of the OSA stipulates that if the U.S. does not liberalize its
ownership requirements for a Stage II agreement, Stage I will be
negated and withdrawn.
While many employees would likely welcome being part of the world's
largest air carrier, that endorsement cannot come without some tangible
benefits. Airlines have lost $29 billion since 2001, defaulted or
deferred over $20 billion in pension obligations, and laid off over
150,000 employees. These facts show that something fundamental must
change. But, how does this merger, and the likely wave of mergers to
follow afterward, change anything? It seems more likely a continuation
down the same pothole-laden path.
Again, AMFA is not against Delta and Northwest merging, but we are
hard pressed to see how this betters the industry and provides
stability to its employees. At a minimum, Delta's mechanics must be
given a fair chance to vote on representation. AMFA has received a
significant number of NMB cards, and stands to vie for representation
in the event that this merger is approved. If the workers of the merged
carrier choose no representation through a vote, then so be it. But, we
feel that in the current environment, the mechanics at a combined Delta
will see that as at-will employees, they will have little recourse in
the event of another severe industry downturn.
We hope that all the promises made by Mr. Steenland and Mr.
Anderson come to fruition and this merger works well for everyone
involved. But sadly, rank and file airline employees have been down
this road before, and historically it has ended with thousands of
layoffs for airline workers and a few golden parachutes at the top for
executives.
______
Prepared Statement on Behalf of the Minnesota Parties \1\
---------------------------------------------------------------------------
\1\ This testimony is offered on behalf of the Minnesota Chamber of
Commerce, Minneapolis Regional Chamber of Commerce, Saint Paul Area
Chamber of Commerce and the Metropolitan Coalition of Chambers,
representing thousands of businesses throughout the State of Minnesota.
---------------------------------------------------------------------------
Introduction
Chairman Rockefeller, Senator Hutchison, Members of the Committee,
we submit this testimony on behalf of the Minnesota Chamber of
Commerce, the Minneapolis Regional Chamber of Commerce, the Saint Paul
Area Chamber of Commerce and the Metropolitan Coalition of Chambers
representing thousands of businesses throughout the state of Minnesota.
Thank you for the opportunity to file testimony on a matter of great
importance to all of the residents of the Twin Cities and Minnesota.
The Twin Cities business community was a driving force behind the
growth and development of Northwest Airlines. The carrier took flight
in 1927 thanks to the determined efforts of civic leaders who
recognized the importance of good air service for the progress of the
Twin Cities and the development of its economy. From its first flights
as a mail carrier and over the next 82 years, Northwest has contributed
to the Twin Cities' and Minnesota's economy far beyond even the bold
visions of its founders. Today, Northwest operates 475 daily flights
from Minneapolis/St. Paul International Airport to more than 150
destinations, including nonstop international service to Tokyo,
Amsterdam, London, and beginning this month, Paris.
It's impossible for proud Minnesotans like us to not have mixed
emotions about last week's merger announcement. Northwest is as much a
part of our state as our lakes, our winters and our hockey. Even so,
Minnesota businesses recognize that this merger is an economic
necessity for both airlines in an era of unprecedented pressures from
record oil prices, economic distress and competition.
We also recognize and expect that, while the Northwest name may
cease, the air service that drives billions of dollars of economic
activity will go forward under the Delta banner. Minneapolis/St. Paul
will continue as a major, primary and growing airline hub, providing
economic benefits to the Twin Cities and the entire upper Midwest
region. Both Delta and Northwest have pledged to grow--and strengthen--
our hub, to maintain substantial management and line operations in
Minnesota and to continue to be one of our largest employers. The new
Delta has the opportunity to use its financial strength and the
superior network to serve Minnesota better; to provide greater job
security for its employees; and, to catalyze economic activity
statewide.
The MSP hub has been and will continue to be critical to the
ongoing development of our economy. The benefits of the hub--frequent,
non-stop service to a wide range of domestic and international
destinations--makes it easy for our citizens to travel for business and
leisure and--even more importantly--for the world to come to Minnesota
to do business with us and to experience our natural and cultural
beauty.
The numbers, Mr. Chairman and Members of the Committee, are
compelling.
In 2004, the most recent data available, our airport generated
153,000 jobs, $6.0 billion in personal income, $10.7 billion in
business revenue, $1.3 billion in sales, and $626 million in local/
state taxes.\2\ In 2000, 2001, 2002, and again in 2004, the
International Air Transport Association named MSP ``the Best Large
Airport in North America'', as measured by overall consumer
satisfaction. In 2004, J.D. Power and Associates ranked MSP as the 3rd
best large airport in the world, after Frankfurt and Denver.
---------------------------------------------------------------------------
\2\ Minneapolis-St. Paul Metropolitan Airports Commission, Economic
Impact Statement, March 7, 2005.
---------------------------------------------------------------------------
According to the U.S. Census Statistical Abstracts (2007),
Minnesota's compound annual growth rate (in terms of Gross State
Product) ranked 9th among the 20 largest states, ahead of states with
much larger gross state products like New York, Illinois, and
Pennsylvania. Minnesota is also home to large, world-class companies,
including the headquarters of 19 Fortune 500 public companies (2007)
and 12 Forbes 500 private corporations (2007) representing a broad
spectrum of industries. 3M, U.S. Bancorp, Target, General Mills, United
Health Group, Cargill, and Medtronic each call Minnesota home, and many
of these large companies have business interests or operations in
foreign countries--in part because of the ease of travel across the
Northwest network. Not surprisingly, the strong metropolitan,
statewide, and regional fundamentals--the product of a well-diversified
economy and an economic base of world-class corporations--generate
substantial demand for air service.
There are, of course, many factors that make our state's economy
what it is, but a necessary ingredient for our success is the hub and
particularly its health and continued growth. Its current status and
future growth are secured by the commitments of the merged airline's
board of directors and management.
Implementation of this promise will rest with thousands of front-
line employees who work on the ground and in the air. These employees
are protected by a promise of no involuntary furloughs and a commitment
that any employee who wants to stay with the combined airline will have
a job. Bankruptcies and high oil prices present a much greater threat
to airline employees than mergers. In fact, the airline industry has
lost over 150,000 jobs since 2001 (USDOT Form 41 data) through
bankruptcy and recession. Five U.S. airlines have failed so far this
year due to high fuel prices and a struggling economy. The combined
airline will be better able to meet those challenges.
The Merged Airline Will Provide Minneapolis/st. Paul and the Upper
Midwest with a Superior Global Network
The new Delta will be America's premier global airline with service
to more destinations around the world than any other carrier. Combining
Northwest's heritage in Canada and Asia with Delta's network throughout
the Caribbean, Latin America, Europe, the Middle East and Africa
creates a larger, more attractive network than either airline can offer
alone. This ``network effect'' as it's called makes it easier for the
new airline to enter new and underserved markets and attracts new
customers who want the convenience and familiarity of a single global
airline. The expanded Delta network will strengthen and preserve the
primacy of our Twin Cities hub by making it economical to serve more
destinations and provide more schedule options.
Hubs are particularly valuable because of the international service
they support. Nonstop international air service is very important to
our state and region, and the combination of Northwest's and Delta's
global networks will enhance its ability to sustain and--we expect--
expand those services. It's worth noting--and it certainly hasn't
escaped the notice of both Northwest's and Delta's leadership--that MSP
is the northernmost hub airport in the eastern half of the United
States, making it geographically desirable for non-stop service to
Asia.
Delta/Northwest Will Not Change the Competitive Landscape in
Minneapolis/St. Paul
Northwest has 475 daily departures, whereas Delta has about 17
daily departures from Minneapolis/St. Paul. The disparity in service at
MSP illustrates the overall complementary nature of these route
networks, which have very little overlap. Minneapolis/St. Paul is
served by three discount carriers and by the four other major legacy
carriers. Accordingly, we do not believe that the combination of Delta
and Northwest will have any appreciable effect on customers.
The Minneapolis-St. Paul Metropolitan Area and the State of Minnesota
Are a Large, Prosperous, and Growing Community That Depends on
Air Travel Service
Minneapolis-St. Paul is a large, dynamic, and prosperous
metropolitan area with a long history as a major transportation hub.
Our rivers and railroads were the transportation networks of their
times and the forerunners of today's global air travel network.
Minnesota is home to hundreds of international companies, to a long
list of distinguished colleges and universities--including one of the
most productive research universities in the world in the University of
Minnesota--and is an important center for tourism with attractions
ranging from Mall of America to the region's extraordinary wilderness
and natural grandeur. Our community has enjoyed substantial growth and
economic prosperity in recent times largely because our means of
``making a living'' has evolved constantly. A key ingredient to that
evolution has been the hub at MSP. For our economic evolution and
success to continue, we must be able to reach the world and the world
must be able to reach us--reliably and at a competitive price. We
believe this merger increases our chances of being able to do just that
well into the future.
Conclusion
We know that much of our good fortune over the years has been the
product of being a transportation hub. We believe our future is best
guaranteed by continuing to play that role for our businesses and
citizens who call Minnesota home, for those who want to do business
with us; for those who want to visit; and, for those who simply want an
efficient and convenient waypoint on their journeys. We will miss and
remember the Northwest name as it gives way to Delta; we will credit it
for creating and sustaining the hub at MSP; and we will benefit from
its legacy every time we board a Delta flight for a nonstop domestic or
international destination. For these reasons, we believe a merger
between Delta and Northwest can create the synergies to help fuel the
development and growth of our economy.
Thank you.
David C. Olson,
President, Minnesota Chamber of Commerce.
Todd Klingel,
President, Minneapolis Regional Chamber of Commerce.
Kristofer Johnson,
President, Saint Paul Area Chamber of Commerce.
Daron Van Helden,
Chair, Metropolitan Coalition of Chambers.
______
Prepared Statement of the Memphis Regional Chamber
and the Memphis/Shelby County Airport Authority
Introduction
The Memphis Regional Chamber and the Memphis/Shelby County Airport
Authority firmly believe that approval of the proposed merger of
Northwest and Delta is the best way to secure and promote Memphis's
status as a major airline passenger hub. The combination of the two
carriers will create America's premier global airline. The new airline
will have the financial strength and a better network to serve the
Memphis community, provide greater job security and growth, make the
aviation industry more stable, and benefit the U.S. economy overall.
It is no coincidence that two major airlines have established hubs
in Memphis. Northwest and its Airlink carriers operate more than 230
daily passenger flights, and FedEx has developed Memphis into the
world's busiest air cargo hub. Memphis is ideally located in the south
central United States--near the center of the U.S. population base.
Moreover, Memphis has a strong regional economy and skilled work force,
which contributes to the success of our two airline hub operations.
Northwest is our hometown passenger carrier, and has served the
Memphis community well for over two decades. It is important to
remember, however, that Memphis became a Northwest hub by virtue of
Northwest's merger with Republic Airlines in 1986. And, before that,
Republic was created when Southern and North Central merged in 1979.
Simply put, mergers, acquisitions (and airline failures) have been a
prominent feature of the airline industry since deregulation. Yet,
Memphis has endured as a hub. Based on the ``business case'' of MEM as
a proven and successful hub--as well as the specific assurances we have
received from Delta and Northwest that there will be no hub closures--
we fully expect Memphis to continue to play an important role to the
combined carrier after the merger.
With mounting pressures from low cost carriers, as well as sky-high
oil prices, many believe that consolidation among the major legacy
carriers is inevitable. From Memphis's perspective, the end-to-end
combination of Northwest and Delta creates the greatest opportunity for
stability and growth, with the least amount of overlap. The merger will
allow for more efficient use of the companies' combined strategic
assets and thereby strengthen the economies of the communities served
by the two airlines. The scale and strength of the new global airline
will make jobs more secure and provide a better quality of life for
employees.
The Proposed Merger Will Help to Secure Jobs and Airline Activity at
the Memphis Hub
Together, Northwest and Delta employ about 4,000 people in
Tennessee, the vast majority of whom are frontline employees working in
Memphis. According to the two airlines, these employees of both
airlines are protected by a promise of no involuntary furloughs and a
commitment that any employee who wants to stay with the combined
airline will have a job.
The biggest threats to airline jobs are not mergers but
bankruptcies and high oil prices. Since 2001, the airline industry has
lost over 150,000 jobs through bankruptcy and recession; and, in the
first half of this year, fuel prices have permanently grounded five
U.S. airlines. The proposed merger helps mitigate those threats.
The Merged Airline Will Connect Memphis and the Mid-South Region to the
World
The combined company will offer service to more destinations around
the world than any other U.S. carrier. By combining Northwest's leading
positions in Canada and Asia with Delta's strength across the
Caribbean, Latin America, Europe, the Middle East and Africa, customers
and communities will benefit from enhanced access to destinations
worldwide. Even with its new runway, Atlanta is operating at capacity.
Memphis provides the combined carrier with a flexible and less
congested alternative to transport connecting passengers throughout the
Southeastern United States. Moreover, the expanded network of the
combined carrier will provide Memphis and the surrounding areas with
potential opportunities for economic development, new investment and
increased tourism.
Northwest provides Memphis with its only nonstop passenger service
to Europe (Memphis-Amsterdam). We are very pleased that the Department
of Transportation recently approved antitrust immunity to Delta,
Northwest, and their respective European partners, Air France and KLM.
By creating a merger with the SkyTeam Alliance, the potential for
service disruptions is minimized.
Competition Among Carriers in Memphis Will Continue to Thrive
The combination of Delta and Northwest will not change the
competitive environment for customers in Memphis. Delta has 14 daily
departures from Memphis, while Northwest has 233, demonstrating that
the companies have complementary route networks and very little
overlap. Two discount carriers, AirTran and Frontier serve Memphis, and
the only overlap route between Northwest and Delta (Memphis-Atlanta)
has competitive low cost service on AirTran.
Memphis Is a Diverse and Growing Community That Is Highly Dependent on
Air Service.
Memphis is one of the most significant cities in the central United
States for several fundamental reasons. It is large, with a current
metro population of more than 1.2 million which is forecast to exceed
1.3 million by the end of this decade. It has a vibrant and growing
economy on many levels. Average personal income for residents of the
Memphis Metropolitan Statistical Area (``MSA'') is expected to continue
its strong annual growth of 4.0 percent, reaching $42,017 by 2010.
Memphis experienced $16.5 billion in retail sales for 2005, and those
sales are expected to surpass $20.5 billion by 2010 based on the
continuation of its impressive decade-long growth rate of 4.4 percent
per year.
Given its central location at the intersection of Interstates U.S.
40 and U.S. 55 (two of the principal highways in the central United
States), Memphis International Airport, service by five of the six U.S.
class-one railroads and the Mississippi River, Memphis has become one
of the world's leading intermodal transportation hubs--often being
described as ``America's Distribution Center.'' Specifically, Memphis
provides water-to/from-rail, water-to/from-truck, rail-to/from-truck,
and air-to/from-truck linkages. More than 300 motor freight companies
operate in the Memphis MSA, from which 152 markets are served
overnight, more than from any other city in the U.S., while 45 states
can be reached with two-day truck service. More than twenty container
depots are located in Memphis, and there are two Foreign Trade Zones
with multiple sites. More than $10 billion in goods clear customs in
Memphis each year through twelve full-service customs brokers.
Passenger access enables so much of Memphis's economic vitality
from Fortune 500 companies to NBA basketball to curing childhood
diseases. Memphis is home to the world headquarters of FedEx, AutoZone,
International Paper, and ServiceMaster. Memphis's St. Jude Children's
Research Hospital is internationally recognized for its pioneering work
in finding cures and saving children with cancer and other catastrophic
diseases. Memphis is the Nation's second-largest center for the
manufacturing of orthopaedic devices. The Downtown Memphis area is
enjoying a rebirth, with growth in businesses, restaurants, and
commercial and residential properties to complement its diverse arts
and cultural communities. Its historical and ongoing contributions to
the music industry--Home of the Blues, Birthplace of Rock & Roll, and
Graceland--are world-renowned. Memphis is home to NBA basketball's
Memphis Grizzlies.
In addition, our community has embarked on a major economic
development initiative to ensure Memphis has a strong and diverse
economy, fosters innovation and entrepreneurship, and advances the
region's global leadership in the bioscience, music/film and logistics
industries. This will ensure the strength of our growing economy and
citizenry.
The Memphis International Airport has played a vitally important
role in making Memphis the economically vibrant and attractive
community it is. In the 2006 Fiscal Year, Memphis International Airport
handled 10,853,934 passengers and an unsurpassed 4,009,413 tons of
cargo making it the largest air cargo hub in the world. Given this
commercial and trade activity, it is not surprising that the Memphis
International Airport's contribution to the local economy is
substantial. Cargo operations alone generated a total impact of more
than $19.5 billion in 2004 and supported a total of 155,872 jobs with
total earnings of nearly $5.6 billion.\1\ The direct and indirect
economic impact of passenger services was almost $1.2 billion,
supporting almost 10,000 jobs with total earnings in excess of $340
million. In total, in 2004, the Memphis International Airport generated
over $10 billion in direct expenditures and created an economic impact
output of more than $20.7 billion and 165,500 jobs.\2\ Community
leaders are determined to continue the strength of the airport by
amplifying Memphis's position as America's Aerotropolis.
---------------------------------------------------------------------------
\1\ ``The Economic Impact of Memphis International Airport,''
prepared by Sparks Bureau of Business, University of Tennessee, May
2005, at 7.
\2\ Id., at 12.
---------------------------------------------------------------------------
Conclusion
The Memphis Regional Chamber and the Memphis/Shelby County Airport
Authority welcomed the news of the Delta/Northwest merger announcement.
This is, as the carriers have said, ``a merger of addition, not
subtraction.'' Memphis has a strong economy, a skilled labor force, and
the airport infrastructure to attract and sustain air service. We look
forward to continuing to play a vital role as a hub city for the new
Delta.
John W. Moore,
President and CEO, Memphis Regional Chamber.
Larry D. Cox,
President, Memphis/Shelby County Airport Authority.
______
Prepared Statement of the Detroit Regional Chamber
Chairman Rockefeller, Senator Hutchison, Members of the Committee,
thank you for the opportunity to appear before you today.
With 23,000 members, the Detroit Regional Chamber is the largest
local chamber of commerce in the country. Our mission is carried out by
attracting new business to our community, through public policy
advocacy, strategic partnerships and by providing quality products and
services for our members.
Northwest Airlines has been--and remains--a very positive force for
economic development in the Detroit area. The presence of a Northwest
hub since 1986 and their leadership in constructing the world-class Ed
McNamara terminal at the Detroit Metropolitan Airport is a testament to
their commitment to our region. Northwest Airlines is a respected and
admired member of the Detroit regional business community.
The Chamber believes the Delta and Northwest merger will enhance
the Detroit Region's ability to compete for new business development,
for tourism and as both a destination and waypoint for travelers. The
prospects for this merger are very complementary to the logistics hub
and aerotropolis initiatives being aggressively pursued by our business
community. These plans envision leveraging the region's air, land and
sea resources to establish a major transportation center for moving
people and goods around the globe. Being a strong hub for a true global
carrier will better help the region realize this goal.
Detroit Metropolitan Airport is one of our region's strongest
economic development assets. We believe the Northwest-Delta merger will
position us to serve as the centerpiece of Delta's Midwest network
and--through that expanded network--improve our access to destinations
throughout the globe. The combined airline will reach more cities than
any other airline and will be better positioned to compete for
travelers on a global basis. Those travelers, in turn, will enjoy a
greater exposure to the business and leisure benefits our region can
offer.
Delta and Northwest currently generate more than $11.5 billion in
combined annual economic benefit and employ approximately 9,150 people
in Michigan. Since this is a merger of addition (not subtraction) it is
our belief that the economic impact on our region will grow.
Current non-stop service to Japan, Gatwick airport in London and
planned direct service to Heathrow airport in London and Shanghai,
China provide needed service for our region's automotive industry.
Northwest's new nonstop service to Shanghai will benefit key
Midwest manufacturing interests with growing trade and growing ties to
China. Michigan and Northern Ohio are home to 25 Fortune 500 companies
and there are 23 Chinese firms doing business in Metro Detroit. The
U.S. auto industry is in the process of reinventing itself to become
more competitive and more efficient in the global marketplace, and
Detroit auto manufactures have been investing in China. This burgeoning
trade relationship creates substantial China passenger and cargo demand
in Detroit and throughout the Midwest Heartland.
The Wayne County Airport Authority estimates the benefit of new
Shanghai service to the Michigan economy to exceed $160 million, and
nonstop Beijing service to produce an additional $105 million in
benefits, for a combined total of $265 million.
We are pleased that the combined airline is committed to
maintaining Detroit as a hub airport and we believe that its larger
network will make additional international routes possible. We look
forward to an expansion of direct service to destinations in great
demand by our business community as a result of the merger. We expect
the combination to eventually open up opportunities for direct
connections from Detroit to Latin America and South America--areas of
great interest to businesses throughout our region.
The merger combines Delta's strengths in the South, Mountain West,
Northeast, Europe and Latin America with Northwest's leading positions
in the Midwest, Canada and Asia. At the same time, we agree with the
observation that competition will be preserved and enhanced. Detroit
Metro Airport is currently served by 17 domestic and international
airlines, including five discount carriers; that situation will not
change appreciably as a result of this merger. In addition, Northwest
and Delta currently operate complementary networks with relatively
little overlap.
Building on both airlines' long history of serving small
communities, the new Delta will improve worldwide connections to small
towns and cities across the U.S., enhancing their access to the global
marketplace. Following the merger, Delta will serve more than 140 small
communities in the United States--more than any other airline. In
Michigan, the airline will serve Detroit, Lansing, Kalamazoo, Flint,
Grand Rapids, Muskegon, Saginaw, Traverse City, Alpena, Pellston, Sault
Ste. Marie, Marquette, Escanaba, Iron Mountain, and Hancock. Many of
our smaller cities in Michigan are dependent on the continued strength
and growth of Northwest Airlines; we believe the merger is good for
these communities and for all of Michigan.
The merger will strengthen the combined airline and our community
by giving it a greater ability to withstand the crushing effect of high
oil prices. As oil continues to set new all-time highs practically on a
daily basis, American companies must find creative management
strategies to remain competitive internationally. The merger will make
the cost of fuel a smaller percentage of the over-all cost structure of
the firm and will allow them to participate in greater long-term price
hedging strategies.
Again, thank you for this opportunity to comment on the proposed
merger of Delta and Northwest Airlines. We fully support the merger and
would hope that the members of the Committee will join us in that
position.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Patrick V. Murphy, Jr.
Question 1. A merged Delta/Northwest airline is expected to have a
total of 20 percent market share in the domestic marketplace. What
impact will additional mergers that are currently anticipated have on
nationwide market share domestically and internationally?
Answer. The Delta/Northwest merger now appears to be the only major
airline merger on the horizon for 2008. The macroeconomic pressures
from a slowing economy and soaring fuel prices have caused other
carriers to forego additional mergers for the time being as they look
to hunker down and attempt to ride out the current economic storm
without the added cost burden of undertaking a merger. Nevertheless,
should one or two additional network airline mergers be completed in
the mid-term future, the impact will be to reduce the number of
airlines but not necessarily competition at the national level. There
have been 15 to 17 airlines with a 1 percent or greater U.S. domestic
market share during each of the past 20 years. New entry continues, and
the industry is very competitive. In fact, it is the low-cost carriers
like Southwest, Jet Blue and AirTran that are driving much of the price
competition and growth in the domestic market. Mergers by network
carriers would not necessarily change that situation, although airline
concentration levels would rise in the short to medium term. In the
long term, low cost carriers' growth could return concentration levels
to 2008 levels.
In the international arena the expected network airline merger
partners often have complementary route systems, e.g., Delta strong
over the Atlantic and Northwest strong over the Pacific. Again, mergers
could raise concentration measures, but competition should not be
seriously affected internationally. U.S. airlines are only half the
story for international markets. Foreign airlines have been growing
faster, earning greater profits, enjoying better customer relations and
in some cases consolidating more than U.S. carriers. U.S. airlines
could find that mergers improve their ability to compete in the global
market against their strengthening foreign competitors.
In summary, a wave of mergers could increase measures of
concentration, but the industry should remain competitive at the
national and international levels.
Question 2. Some proponents of consolidation in the aviation
industry argue that consolidation is necessary for air carriers to
remain financially stable, deal with rising fuel costs, keep consumer
prices relatively low, reduce duplicative capacity, and creating
stronger route structures that will help U.S. carriers better compete
in a global market. Do you think you could explain how consolidation in
this case will achieve some of these goals? What do you view as the
major benefits and major drawbacks?
Answer. The mergers being discussed almost always involve the six
large network carriers. Those firms are under enormous competitive
pressure from the low cost carriers that continue to enjoy lower costs,
high growth rates and more stable profits. The low cost carriers have
gained significant market share and now pressure prices downward for
\3/4\ of all U.S. passengers. Network carriers find it difficult to
compete head-to-head with a Southwest Airlines and often withdraw in
the face of large service increases by them. (See for example U.S.
Airways' situation at Pittsburgh or the recent withdrawal of network
airlines from Oakland.) Consequently, network airlines are looking to
their core market advantage--large hub-and-spoke networks--to collect
traffic. These networks are ideal for feeding international markets
where low cost carriers have not yet ventured.
Mergers increase the scope of network carrier systems and give them
a greater ability to collect traffic both for domestic and
international competition. This advantage is needed because
international competitors are growing through their own mergers (e.g.,
Air France/KLM and Lufthansa/Swiss) or higher market growth rates
(e.g., Emirates Air, Singapore Airlines, Chinese and Indian airlines).
The benefits of these kinds of network airline mergers are that they
could make U.S. network airlines bigger, stronger and internationally
more competitive. The primary risks are that a merger proves too
expensive or disruptive. Another threat is that the international
markets may eventually face competition from U.S. and foreign low cost
carriers that have so far been considered unlikely to be effective
competitors for long-haul international routes. That may not
necessarily prove to be correct as international markets continue to
deregulate and low cost carriers look for new ways to enter faster
growing international markets either through partnerships or new
services of their own.
Question 3. The U.S. airline industry has experienced a major
transformation over the past decade. LCCs have grown to represent
approximately a quarter of the Nation's market share, up from about 15
percent in 2000. What led to this LCC increase in market share? What
impact do you think consolidation will have on LCC market share within
the domestic marketplace? Will it be easier or more difficult for LCCs
to grow in a consolidated industry?
Answer. LCC's have grown rapidly since 2000 for several reasons.
First their costs, and therefore their fares, are lower. Second, the
Internet has given consumers a powerful tool for comparison shopping
thereby pressuring fares downward. Third, the dot.com collapse
contributed to the demise of a large portion of high-end business fares
that the network carriers specialized in offering. This fare collapse
has cost the network carriers at least $12 billion per year in lost
revenue. Surprisingly, even after multiple bankruptcy reorganizations,
the network carriers still suffer from higher costs and that propels
the increasing LCC market shares.
Network airline mergers seem likely to provide LCC's with more
market opportunities in the short to medium term as merged network
carriers consolidate services. In the longer run, if a merger is
successful the new airline should be a more effective competitor and
better able to compete with LCC's. This could slow the steady stream of
LCC gains in market shares since 2000. To the extent LCC managers have
commented on network airline mergers, they have tended to favor the new
market opportunities that they anticipate being created for them, and
they do not seem overly concerned with the formation of larger
competitors.
Question 4. We are all aware of the poor quarterly financial
reports that were recently announced by the domestic legacy carriers.
What do you attribute the cause to be? Has the industry fully felt the
economic impact of the economic slowdown and the increased fuel prices?
What are you expecting for the upcoming quarters for airlines?
Answer. Airlines have historically been one of the least profitable
and most cyclical of all industries. The current weakening economy and
fuel price spike have thrown the airlines from a profit position to a
large loss situation. The airlines have been unable to shrink their
systems, lower their costs and raise fares fast enough to remain
profitable. I anticipate that the network airlines will continue to cut
capacity and attempt to raise fares for the remainder of the year. The
impact of these changes will be felt more directly beginning in the
fall of 2008 when the already scheduled and already sold peak summer
season is completed. The large airlines appear to have enough cash to
carry them into 2009, even with large losses for 2008. Whether they all
survive 2009, or several liquidate as has happened in earlier
downturns, will be a function of fuel prices and the economy.
Liquidation, of course, could result in industry consolidation without
mergers.
Question 5. If DOJ is to approve this merger, it is almost certain
that they will require divestiture of key assets as a condition of
approving the consolidation in order to ensure viable competition. What
do you anticipate as being necessary or potential divestiture
requirements resulting from this merger? Do the airlines have plans to
divest under the current agreement?
Answer. I anticipate that DOJ will have few divestiture
requirements for the Delta/Northwest merger because the two carriers do
no compete head-to-head on many routes. The merger is more end-to-end
than overlapping. To the extent DOJ requires remedies, those conditions
usually revolve around the hub cities of the applicants. Delta and
Northwest operate a combined total of seven hubs, and there are a few
routes between those hubs where there are no nonstop competitors (e.g.,
Cincinnati--Detroit or Minneapolis--Salt Lake City). DOJ might want to
ensure that airport facilities are readily available to competitors on
those routes. In addition, at some hub cities low cost carriers might
seek DOJ's intervention to ensure that airport facilities' are readily
available. DOJ can be expected to interview competitors to determine if
any intervention/divestiture would be necessary to approve the
transaction. Such assets typically have been gates and slots at busy
airports.
Question 6. Will a consolidated aviation industry focus more
heavily on their hubs for providing air service across the nation, or
are there more plans to provide point-to-point service?
Answer. Network carriers appear far more likely to focus on their
hubs, either with or without consolidation. Competitive and
macroeconomic pressures make the advantages of hub traffic flow more
important than ever. Low cost carriers should continue to be
significantly less focused on hub systems, although not completely
independent of hubbing.
______
Response to Written Question Submitted by Hon. Amy Klobuchar to
Patrick V. Murphy, Jr.
Question. I am concerned that the DOJ will evaluate this merger in
isolation and not take into consideration its larger effects on the
airline industry as a whole and the American flying public, in
particular. Should Congress consider strengthening the DOJ airline
merger review process, and require DOJ to consider the impact of such
mergers on employees, communities and the industry at-large?
Answer. DOJ will review the Delta/Northwest merger in the context
of a Sherman Act, Clayton Act, and Hart, Scott Rodino Act antitrust
review. That analysis considers the merger's impact on the industry,
employees and the public primarily as a function of maintaining a
competitive market structure. Should Congress determine that a broader
review of the impact of airline mergers on employees, communities and
the industry at large is necessary, that role would not be optimally
performed in the DOJ Antitrust Division. The Department of
Transportation might be better suited to conduct that broader public
interest analysis as it does on an ongoing basis for numerous airline
issues and as it did for 5 years before all airline merger functions
shifted to DOJ in 1989. That broad public interest analysis of airline
mergers by DOT from 1985 to 1989 was a vestige of airline economic
regulation carried out for almost 40 years by the Civil Aeronautics
Board. To some degree, once again subjecting the airlines to a special
merger review would take the oversight of the industry back in the
direction of economic regulation distinct from other industries. There
is no evidence that the public would be better served by such a policy
shift, since deregulation of the airlines has generally been found to
have greatly benefited the American traveling public. Broad public
interest reviews of mergers would ultimately bring greater political
and regional pressures on government decisionmakers, thereby further
limiting the ability of airline managers to restructure a financially
weak industry that is already handicapped by special airline investment
laws that prohibit substantial cross-border investments or
international mergers.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Douglas M. Steenland
Question 1. I would appreciate you providing me in writing details
of current service for Arkansas passengers on your airlines, and what
your specific plans are for the future service for Arkansas passengers.
Some things I am concerned about include: Will the Memphis hub remain
open? Are there plans to expand or reduce current flight operations at
Memphis?
Answer. Currently, Memphis is a small but efficient and well-
performing hub. We have no present intention of dismantling Memphis or
any other hubs as a result of the merger. We see the Delta/Northwest
network as benefiting from its seven geographically balanced U.S. hubs.
The demand for air travel to and from Memphis--which has sustained
a major airline hub for more than three decades--is not going to
disappear simply because there is a neighboring Delta hub 330 miles to
the East at Atlanta. Northwest's Memphis hub has existed alongside
Delta's Atlanta hub since its inception, and, in and of itself, the
merger is not cause for its elimination. By coordinating and optimizing
schedules across the complementary multi-hub network, the new carrier
should be able to improve operating results and offer greater frequency
and better routing choices for its customers. Memphis provides an
important opportunity for future growth when economic circumstances
permit. Even with its fifth runway, Atlanta is operating at or near
capacity. Memphis is a flexible and less congested alternative hub.
That said, no one can predict the future price of oil and consumer
demand, which will impact the service levels and operations of all
carriers irrespective of the merger. When the Delta-Northwest merger
was announced on April 14, oil was at $112 barrel. Today, oil is at
$143, an over $1 billion annual cost increase to Northwest alone. We do
think that the merger provides the best opportunity for Delta and
Northwest to preserve and expand on their hub infrastructure
investments by generating additional traffic flows throughout the
broader combined network.
Another key consideration in maintaining our hub at Memphis is the
business relationships and important corporate customers we have
developed. FedEx is headquartered in Memphis and is one of Northwest's
top five customers in the world. We carry their sales people, their
executives, their pilots, and other of their employees throughout our
global network. The existence of Northwest's hub in Memphis actually
has helped FedEx to grow and to expand. And, they have helped us by
sharing costs at the airport, which makes the Memphis airport a very
attractive place for us to do business. FedEx is a critical customer
and a great partner of Northwest. And they'll be a great partner of the
merged airline going forward. Simply stated, the combined carrier has
strong incentives to maintain service at all of the hubs.
Question 1a. Will access to all current hubs currently served by
Delta and Northwest from Little Rock National, Northwest Arkansas
Regional, and Fort Smith Regional remain available?
Answer. We expect Arkansas customers and the airports you have
noted to benefit from the merger because the combined carrier can
provide better service to customers across a broader, world-wide
network. The new carrier's pattern of service will be optimized to
provide the best and most efficient connecting opportunities, as well
as serving hubs that have significant local market demand. Today's
schedule from the spoke cities in Arkansas to Delta's hubs and
Northwest's hubs is what is optimal for each carrier operating
separately. Once the merger takes place, a combined schedule will be
developed that optimizes for the entire combined network, so changes
will take place.
Question 1b. Will the same frequencies of flights continue? Will
the same number of seats from and into each airport remain available?
Answer. In the face of staggering fuel prices and a slowing
economy, the entire domestic airline industry is shrinking. However, a
combined Delta and Northwest will be much better able to meet these
challenges and mitigate against loss of flights and jobs that are
afflicting the industry as a whole. For example, last month United
announced that it will reduce its mainline fleet by 100 aircraft and
cut domestic capacity by 17 percent. Continental will retire 67
mainline aircraft and reduce domestic capacity by 11 percent. American
will retire at least 75 aircraft and cut domestic mainline capacity by
12 percent.
We expect the merger will enable Delta and Northwest to preserve
more service and capacity together than would be possible by either
carrier on a stand-alone basis. Together, Northwest and Delta can make
more efficient use of their resources. However, with fuel prices
continuing to climb, no one can predict whether the number of
frequencies and seats will remain the same at any given airport.
As noted above, today's schedule from the spoke cities in Arkansas
to Delta's hubs and Northwest's hubs is what is optimal for each
carrier operating separately. Once the merger takes place, a combined
schedule will be developed that optimizes for the entire combined
network, so changes will take place.
Question 1c. Can consumers count on adequate service at airports?
How many cuts to employees at our airports will you make?
Answer. The Arkansas airports are important to the new carrier's
network and customers will have access to an improved global single
carrier network. However, the level of service is subject to the
economic fundamentals of supply and demand. Fuel prices continue to
wreak havoc on the airlines, and all major legacy carriers have had to
cut back on capacity, because fewer people want to fly at the higher
prices that are necessary to cover today's increased costs. The merger
better positions Northwest and Delta to remain a strong and viable
carrier in the face of $143/bbl oil and a $30 crack spread.
Northwest currently employs about 40 people in Arkansas, and Delta
about 90. While some overall reduction in force will occur, it is too
early to specify the precise number.
Question 1d. Will prices be reasonable and competitive? Who will be
your competitors in these airports?
Answer. All Arkansas airports will have competitive air service at
fair and reasonable prices, taking into account the cost pressures
facing the airline industry today. It is inevitable, however, that the
increased price of fuel must be reflected in air fares. Our desire is
to develop a sustainable, dependable carrier that is less vulnerable to
the boom-and-bust cycle that has typified the industry. This is in the
best interest of our customers, employees, and the communities that
depend on our services. We don't know our competitors plans for future
service; we do know that they are feeling the impact of exorbitant and
unexpected fuel price increases. Based on published schedules, the
following are the competitors at the three Arkansas airports----
Little Rock is served by every major legacy carrier, plus Southwest
Airlines, the largest U.S. domestic carrier, which is know for its LCC
(Low Cost Carrier) business model. Specifically, the carriers at Little
Rock are: American, Continental, Delta, Northwest, Southwest, United
and U.S. Airways.
Northwest Arkansas Regional is served by American, Continental,
Delta, Northwest, United, and U.S. Airways.
Fort Smith is served by American, Delta, and Northwest. Notably,
Delta began service to Fort Smith just last year with regional jet
service to Atlanta. Fort Smith will continue to have competitive
service by American.
The domestic U.S. airline business is highly competitive and
expected to stay that way.
Question 1e. What metrics do you use to determine comparative hub
performance and will you please provide me with your latest hub
performance data?
Answer. Comparative hub performance is measured by the P&L of the
various hubs. This is confidential, proprietary, and competitively
sensitive data. However, as noted above, we consider MEM to be an
efficient and well-performing hub.
Question 1f. Can you provide revenue per passenger miles data for
flights originating in Little Rock National, Northwest Arkansas
Regional, Fort Smith Regional Airport?
Answer. The table below contains outbound revenue passenger miles
for flights operated by Northwest and its regional affiliates, for the
year ended February 2008, from each of the three airports:
Fort Smith 6,243,924
Little Rock 31,675,102
Northwest Arkansas 28,839,570
Question 1g. Can you please provide me with current yields in the
Little Rock National, Northwest Arkansas Regional, Fort Smith Regional
markets? How do those yields compare to other similarly situation
markets?
Answer. The yields the three Arkansas airports are comparable to
those in similarly situated markets. Below are the current yields for
each of the three subject airports, together with representative
counterparts, based on 4th Quarter 2007 DOT industry data.
1. Little Rock:
Birmingham, BHM $0.170
Alabama
Little Rock, LIT $0.170
Arkansas
Des Moines, DSM $0.169
Iowa
2. Northwest
Arkansas
Regional:
Northwest XNA $0.212
Arkansas
Regional
Airport,
Arkansas
Tallahassee, TLH $0.212
Florida
Greenville/ GSP $0.200
Spartanburg,
South Carolina
3. Fort Smith
Regional:
Beaumont/Port BPT $0.211
Arthur, Texas
Fort Smith, FSM $0.210
Arkansas
Jacksonville, OAJ $0.209
North Carolina
Question 2. While one of the main arguments you make in support of
your merger is a lack of route overlap, I see many NWA/DAL hub or
``connection'' overlap concerns for Arkansans traveling from Arkansas
to destinations in the eastern U.S. and other regions of the country.
For instance, when I travel from Little Rock to Washington, I
traditionally look at both Northwest Airlines and Delta Airlines to
compare schedules and prices (that is because they are the most
sensible connections, and currently they offer many options). Under a
merged airline, I will essentially only be looking at one airline. I am
concerned that the connection competition in this case will likely be
reduced or eliminated under a single airline. How can you assure me
that this will not occur? How can you guarantee the current competition
that exists will continue and prices will remain competitive in these
types of instances?
Answer. The industry will continue to have competition from a host
of legacy and LCC carriers in both nonstop and connecting markets. Due
to skyrocketing fuel prices which carriers must pass on to customers to
cover their costs, air fares have increased in markets nationwide.
However, the industry will remain competitive and there is no reason to
conclude that fares will increase as a result of the merger. Post
merger, no carrier will have greater than 20 percent domestic market
share. Southwest is and will remain the largest U.S. domestic carrier.
Based on published schedules, it is clear that service between
Little Rock and Washington will remain competitive after the merger.
Indeed, today Southwest operates nonstop service between Little Rock
and BWI. U.S. Airways offers one-stop service via Charlotte to all
three Washington Airports, and American serves Washington Reagan and
BWI via O'Hare. Furthermore, in addition to serving Little Rock itself,
Southwest operates substantial regional connecting complexes at
Nashville, St. Louis, and Birmingham.
There is ample competition in the Little Rock-Washington market,
and other similar city-pairs serviced by Delta and Northwest on a
connecting basis.
Question 2a. What is the current status of your discussions with
flight attendants, machinists, other administrative employees and
``front-line'' employees?
Answer. We are pleased that the NW-ALPA pilot leadership, together
with Delta management and DALPA, were able to reach a tentative
agreement this month concerning a labor contract. Because there are no
common unions (like ALPA) within the other employee groups, Delta must
await the results of the representation elections after the close of
the merger to commence discussions with other employee groups.
Question 3. I understand that you estimate savings of a merged
airline to be approximately $1 billion. I assume you will attain some
of these savings through both revenue increases and cost reductions.
Could you be more specific as to where you anticipate having new
revenue under the merger and where you anticipate reducing costs
through such a merger?
Answer. The synergies we project are as follows:
Revenue Benefits
First, by having access to a larger inventory of aircraft, we
will create a balanced and more flexible fleet and be able to
better match capacity to demand. For example, we fly a 747 with
403 seats from Minneapolis/St. Paul to Tokyo, whereas Delta
flies a 275 seat 777 from their much larger hub at Atlanta.
Both cities can sustain nonstop service, but it may make more
sense to fly the larger aircraft at the larger hub. Delta has
no aircraft over 285 seats; whereas Northwest has 37 planes in
this category. In addition, Delta has no aircraft in the 100
seat range, where Northwest's DC-9s have 100-125 seats. This
provides an opportunity to upgauge some regional jet routes to
larger, more efficient aircraft. All together, we estimate that
the fleet optimization benefits will total $400-$500 million.
Second, we will offer customers a better and more attractive
network. We will have the best frequent flyer program in the
industry and will also be able to compete more effectively for
corporate contracts. The expanded schedule and marketing
benefits created by bringing the two airlines together are
anticipated to attract $200-$300 million in additional revenue.
Lower Costs
We also expect to realize substantial savings on the cost side.
We have identified more than $700 million in annual cost
synergies that can be realized from moving to a common
information technology platform, reducing sales and
distribution costs, improving productivity, and reducing
duplicative facilities and overhead.
Total Synergies
The $700-800 million in revenue benefits along with $700
million in cost synergies produces over $1 billion in annual
synergies.
Question 4. Domestic airlines have reduced their total labor costs
by about 13 percent from 2000 through 2006 while also increasing
employee productivity. Could you please discuss how your airlines
achieved some of these efficiencies? Could you please explain how the
merged airline will achieve additional efficiencies? Do you anticipate
consumers to benefit from these reduced services and expenditures?
Answer. Northwest's restructuring, completed in 2007, achieved
substantial annual cost reductions, including: $1.4 billion in labor
cost reductions, $400 million in annual fleet ownership cost savings
and a $150 million reduction in annual interest expense related to
unsecured debt. Unfortunately, these important efficiency
achievements--and employee sacrifices--have been largely consumed by
skyrocketing fuel prices. In 2003, 17 cents of every passenger dollar
went to fuel. Today, fuel consumes over 40 percent of every revenue
dollar.
As detailed above, the merger creates cost and revenue synergies
valued at more than $1 billion. The success of the merger depends on
using our aircraft and hubs more efficiently, attracting additional
customers, and lowering costs. Hub-andspoke systems depend on
collecting traffic from across a broad network and taking passengers
where they want to go. Together, Northwest and Delta can offer their
customers a better and more efficient network through the end-to-end
combination of complementary hubs.
Question 5. It is my understanding that fuel costs now exceed labor
as the primary cost for air carriers. It is also my understanding that
air carriers are paying more than $140 per barrel due to refinery
issues to produce jet fuel. On an international route competitive stage
are U.S. carriers at a competitive disadvantage to foreign
international carriers due to oil prices (value of dollar)?
Answer. European carriers, which receive the bulk of their revenues
in Euros are paying for oil in stronger currency, whereas U.S. carriers
are paying in weaker dollars.
Question 5a. What measures are you currently taking to counter
recent spikes in fuel prices (luggage fees, seat preference fees,
etc.)? What are you doing to increase fuel efficiencies in aircraft?
Answer. Northwest is trying to price its services to recoup as much
of its expenses as possible. In 2008, U.S. airlines are forecast to
spend $61.2 billion on jet fuel, $20 billion more than in 2007, and are
projected to incur losses totaling close to $10 billion. If the current
pricing dynamic does not change, our industry will be severely
challenged and will continue shrinking. There have been a number of
rounds of general fare increases, as well as additional service fees
imposed for consumer discretionary items such as checked baggage. At
the moment, Northwest charges some domestic customers $25 for the
second checked bag, but does not charge for the first bag. Moreover,
Northwest has announced that it will be 8.5-9.5 percent smaller in Q4
2008 versus Q4 2007.
Since 2000, Northwest has reduced its annual fuel usage by 575
million gallons (while also reducing CO2 emissions by 5.5
million metric tons). NWA has accomplished this substantial improvement
in fuel efficiency through a number of different initiatives, the
cornerstone of which is our $6 billion fleet renewal program. Northwest
operates thirty-two (32) Airbus 330s. The A330s are approximately 30
percent more fuel efficient than the similarly-sized McDonnell Douglas
DC-10s, which were retired from the NWA fleet in 2007. In 2007,
Northwest ordered seventy-two (72) new regional jets. These 76-seat
aircraft are approximately 30 percent more fuel efficient than the
similarly-sized McDonnell Douglas DC-9. Since 2003, NWA has operated a
fleet of over one-hundred and thirty (130) Airbus A319s and A320s. The
A319s and A320s replaced the less fuel efficient Boeing 727-200s and
DC-9s and are 30 percent more fuel efficient. In 2007, the average fuel
efficiency of Northwest's fleet was fifty-three (53) passenger-miles
per gallon.
NWA is the North American launch customer for the new Boeing 787.
We anticipate delivery of eighteen 787 aircraft beginning in 2009,
thereby replacing some of NWA's Boeing 747-400s. The 787s are
anticipated to perform with a greater than 20 percent fuel efficiency
improvement over the 747-400s.
NWA has also instituted a number of fuel-savings initiatives where
operationally feasible including:
single engine taxiing and no engine taxiing (high speed
tractor towing);
engine washing;
conversion from mobile to stationary fueling vehicles;
addition of aircraft winglets;
adjusting aircraft speed and altitude; and
removal of excess weight from planes.
According to 2007 DOT data, Northwest ranks second among U.S.
network carriers in terms of revenue passenger miles per gallon:
Question 5b. What would a combined Delta/Northwest plan for dealing
with high fuel prices look like?
Answer. Delta and Northwest cannot change the price they pay for
fuel. However, as explained above, the combined carrier will realize
over $1 billion in cost and revenue benefits. The stronger and
financially more resilient carrier will be better able to cope with the
challenges of high fuel prices.
Question 6. I note that without a merger, you believe you may be at
a competitive disadvantage to other foreign carriers in international
carriers under the upcoming, new ``Open Skies'' agreement between the
United States and European Union. Could you explain these disadvantages
and why a merger will benefit you and consumers on international
service? What are the benefits and drawbacks of the agreement?
Answer. European carriers are stronger and better financed. For
example, the current market capitalization of Lufthansa is greater than
that of all the U.S. legacy carriers combined. Moreover, as noted
above, European carriers enjoy a cost advantage in paying for fuel in
Euros versus dollars. Northwest and Delta need to be able to meet this
growing foreign flag challenge by combining into a stronger and more
robust international carrier.
7. What is the current state of your aircraft fleets as far as age
and fuel economy? What does the merged airline plan on doing with aging
aircraft and less efficient aircraft in your fleet?
Answer. The Age of Northwest/Northwest Airlink fleet is set forth
in the following table:
----------------------------------------------------------------------------------------------------------------
747 A330 757 A320 A319 DC9 CRJ900 CRJ200 E175 Saab 340 Total
----------------------------------------------------------------------------------------------------------------
up to 1994 25 0 32 45 0 88 0 0 0 0 190
1994-2002 6 0 20 26 45 0 0 48 0 48 193
2003-2006 0 25 19 2 12 0 0 89 0 0 147
2007 or newer 0 7 0 0 0 0 19 0 11 0 37
----------------------------------------------------------------------------------------------------------------
Total 31 32 71 73 57 88 19 137 11 48 567
----------------------------------------------------------------------------------------------------------------
The fuel economy of the Northwest/Northwest Airlink fleet with
respect to revenue passenger miles and available seat miles (based on
2007 DOT data) is set forth in the following table:
The merged company would seek to optimize fuel efficiency of the
combined fleet by matching capacity to demand, and using the largest
and most fuel efficient aircraft practical for a given market. For
aircraft of a given size class, the oldest and least fuel efficient
will be considered for retirement, subject to the capacity requirements
of the network. The combined company also hopes to invest in newer,
more fuel efficient aircraft, including up to 20 new Boeing widebody
jets, as permitted by economic circumstances.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Douglas M. Steenland
Question 1. What will happen to the around 1,100 employees who work
at Northwest Airlines headquarters in Eagan? The press release
announcing the merger noted that the combined carrier intends to keep
``executive offices'' in the Twin Cities. But you also indicated at
both the House and Senate Judiciary Committee hearings in April 2008
that there would be job cuts--of around 1,000 employees--at both
Delta's Atlanta headquarters as well as Northwest's Eagan headquarters?
Of the approximately 1100 employees who work in the Eagan headquarters,
how many of these employees will lose their jobs?
Answer. The number of jobs that will remain in Eagan has not been
determined.
Question 1a. Do you plan to eliminate these headquarters jobs
through natural attrition, or do you plan to actually layoff employees?
Answer. There will be natural attrition, retirements and
potentially other opportunities in the system. There will likely be
layoffs associated with headquarters jobs.
Question 1b. Will you offer any of these Eagan headquarters-based
employees who are slated to be laid-off the opportunity to move to
Atlanta or will these jobs be eliminated outright?
Answer. Some employees will be offered the opportunity to move to
Atlanta, some will be asked to continue with the merged carrier in
Minnesota, and some will not have an opportunity with the merged
airline.
Question 1c. In an effort to streamline the combined carriers'
headquarters operations, will you offer the effected employees
voluntary ``buy out'' packages?
Answer. Severance packages will be offered to employees who do not
have a job opportunity with the merged airline.
Question 2. At the Senate Antitrust Subcommittee hearing in April
2008, I asked about the ``staying power'' of the combined carriers'
commitments to maintain jobs, service and hubs. Mr. Anderson's response
was: ``The issue is going to be fuel. Tell me where fuel will be.''
What if the cost of jet fuel remains around where it is today? Are your
commitments premised on the current environment of high fuel prices or
are your commitments--to maintain jobs, service and hubs--based on a
more favorable fuel environment?
Answer. Under any scenario, Delta and Northwest will be more
resilient and better able to maintain jobs, services, and hubs
together, as a combined company, than they can on a stand-alone basis.
On the date of our merger hearing on April 24, oil was at $116 per
barrel. As of July 1, oil stood at over $140--$24 more. Each $10 per
barrel increase adds $420 million to Northwest's annual costs--over $1
billion since April. So, today, we can't do as much flying as we
thought we could in April. It is imperative that the merger be approved
and approved quickly so that we can realize the benefits and
efficiencies and mitigate against the challenges that are afflicting
the industry.
In the time since the hearing in April, all six U.S. network
carriers have announced significant capacity cuts and service
reductions, as well as difficult headcount reductions, to take effect
after the summer travel season. American Airlines intends to reduce
fourth quarter domestic capacity 11-12 percent, retire at least 75
mainline and regional aircraft and may eliminate thousands of jobs.
United Airlines said it will ground at least 100 airplanes and is
looking at shrinking staff including 950 pilots. Delta is reducing
domestic capacity by 13 percent in the second half of 2008, eliminating
4,000 positions and shedding aircraft. Continental Airlines announced
that it would reduce fourth quarter domestic mainline capacity by 11
percent, will eliminate 44 routes and cut 3,000 jobs. U.S. Airways will
shrink domestic capacity in the fourth quarter by 6-8 percent.
Northwest plans to reduce fourth quarter capacity by 8.5 percent to 9.5
percent.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Richard H. Anderson
Question 1. I would appreciate you providing me in writing details
of current service for Arkansas passengers on your airlines, and what
your specific plans are for the future service for Arkansas passengers.
Some things I am concerned about include: Will the Memphis hub remain
open? Are there plans to expand or reduce current flight operations at
Memphis?
Answer. Yes, the Memphis hub will remain open and an important part
of the new Delta's network. The Delta/Northwest network formed by our
seven geographically balanced U.S. hubs is the combined carrier's
greatest asset. We have no intention of dismantling any hubs as a
result of the merger, and have committed to maintaining Atlanta,
Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, and
Salt Lake City. These hubs exist because there was a strong local
market that justified the development of hub service, and an air
carrier with the resources to develop it. Delta and Northwest made
different--but sound--business decisions in developing hubs in the
cities where they exist today. Furthermore, each hub has unique service
points, which add value to the hub and to the network. The merger
provides the opportunity for Delta and Northwest to make better use of
their hub infrastructure investments by generating additional traffic
flows throughout the broader combined network. Because this is an end-
to-end merger and because sound economics underlie our hub operations
today, there is no need for hub closures as a result of the merger.
Memphis will continue to play an important role for the combined
carrier, as will both the Cincinnati-Northern Kentucky International
and Detroit Airports.
Question 1a. Will access to all current hubs currently served by
Delta and Northwest from Little Rock National, Northwest Arkansas
Regional, and Fort Smith Regional remain available?
Answer. The combined carrier will not eliminate service to any city
in Arkansas as a result of the merger. While there may be some
adjustments to frequency and equipment (capacity) in certain markets,
we believe the overall effect of the merger will be favorable relative
to service levels in Arkansas. There may well be some reductions in
service as a result of the meteoric rise in fuel prices but those
decisions are unrelated to the specific effects of this merger. It is
our hope that we will be able to increase service to Arkansas
communities in the future as we connect the two networks to take
advantage of the growth and revenue synergies that we expect from this
merger.
Question 1b. Will the same frequencies of flights continue? Will
the same number of seats from and into each airport remain available?
Answer. While there may be some adjustments to frequency and
equipment (capacity) in certain markets, we believe the overall effect
of the merger will be favorable relative to service levels in Arkansas
as the combination of Delta and Northwest will create a stronger
company with route systems that complement each other and provide
opportunities to offer travelers a global network that neither airline
could offer independently. There may well be some reductions in service
as a result of the meteoric rise in fuel prices but those decisions are
unrelated to the specific effects of this merger.
Question 1c. Can consumers count on adequate service at airports?
How many cuts to employees at our airports will you make?
Answer. We believe the overall effect of the merger will be
favorable relative to service levels in Arkansas, and we do not plan to
eliminate any front-line employee positions as a result of the merger.
As a result of the meteoric increase in the cost of fuel, we have
announced a voluntary early-out and early-retirement program that we
anticipate will result in a reduction of approximately 3,000 employees
across the entire Delta system, both front-line and administrative/
management positions. Any additional changes to our employee counts
will result from fuel-cost driven changes to service levels, not the
merger.
Question 1d. Will prices be reasonable and competitive? Who will be
your competitors in these airports?
Answer. We believe the overall effect of the merger will be
favorable relative to service levels in Arkansas, permitting the
combined company to offer customers greater choice, more competitive
fares, and a superior travel experience. Of the more than 800 domestic
non-stop routes that NW and DL collectively fly, there are only 12 non-
stop city-pair overlaps. The vast majority of these non-stop overlaps
enjoy substantial competition from other carriers, and all consumers
will benefit from the significant cost savings that the transaction
will create. Little Rock is served by every major legacy carrier, plus
Southwest Airlines, the largest U.S. domestic carrier, which is know
for its LCC (Low Cost Carrier) business model. Specifically, the
carriers at Little Rock are: American, Continental, Delta, Northwest,
Southwest, United and U.S. Airways. Northwest Arkansas Regional is
served by American, Continental, Delta, Northwest, United, and U.S.
Airways. Fort Smith is served by American, Delta, and Northwest.
Notably, Delta began service to Fort Smith just last year with regional
jet service to Atlanta. Fort Smith will likely continue to have
competitive service by American.
Question 1e. What metrics do you use to determine comparative hub
performance and will you please provide me with your latest hub
performance data?
Answer. Comparative hub performance is measured by profit and loss
at each hub. We believe hubs in the Delta system to be performing very
well.
Question 1f. Can you provide revenue per passenger miles data for
flights originating in Little Rock National, Northwest Arkansas
Regional, Fort Smith Regional Airport?
U.S. DOT O&D Dynamic Table Report for all Airlines for flights from
Arkansas to ALL for YE 4Q07 (Directional)
------------------------------------------------------------------------
Domestic Carrier RPMs FSM LIT XNA Total
------------------------------------------------------------------------
American Airlines 163,201 743,847 700,005 1,675,136
Aloha Airlines 101 101
Alaska Airlines 367 7,480 1,628 9,827
Continental Airlines 413 276,735 152,824 448,983
Delta Air Lines 34,026 614,968 278,932 929,329
Frontier Airlines 32 141,523 189 142,223
Hawaiian Airlines 98 1,416 294 1,809
America West Airlines, 1,228 58 1,429
Inc.
Northwest Airlines 53,658 293,103 145,847 492,936
Horizon Air 87 87
Sun Country Airlines 370 665
ATA Airlines 127 2,124 678 2,975
United Airlines 1,260 45,938 143,008 191,747
US Airways 548 145,911 79,197 226,468
Southwest Airlines 759,939 759,981
Mesa Airlines 16,502
Midwest Airlines 16 121 84 274
Unknown Carrier 168 168
------------------------------------------------------------------------
Total 259,381 3,108,838 1,563,713 5,042,018
------------------------------------------------------------------------
Notes: ``https://www.apgdat.com/apgDat/reports/OandD/hlpOandDTaxes.jsp''
for Airfare taxes and fees calculation overview.
Question 1g. Can you please provide me with current yields in the
Little Rock National, Northwest Arkansas Regional, Fort Smith Regional
markets? How do those yields compare to other similarly situation
markets?
U.S. DOT O&D Dynamic Table Report for all Airlines for flights from
Arkansas to ALL for YE 4Q07 (Directional)
------------------------------------------------------------------------
Domestic Carrier Yields FSM LIT XNA Average
------------------------------------------------------------------------
American Airlines 0.20 0.17 0.22 0.20
Aloha Airlines 0.13 0.13
Alaska Airlines 0.06 0.11 0.07 0.10
Continental Airlines 0.17 0.17 0.20 0.18
Delta Air Lines 0.21 0.19 0.24 0.21
Frontier Airlines 0.23 0.14 0.25 0.14
Hawaiian Airlines 0.14 0.10 0.11 0.10
America West Airlines, Inc. 0.14 0.15 0.14
Northwest Airlines 0.27 0.18 0.23 0.20
Horizon Air 0.10 0.10
Sun Country Airlines 0.12 0.11
ATA Airlines 0.29 0.09 0.10 0.11
United Airlines 0.19 0.14 0.21 0.20
US Airways 0.29 0.21 0.25 0.23
Southwest Airlines 0.16 0.16
Mesa Airlines 0.43
Midwest Airlines 0.00 0.42 0.40 0.34
Unknown Carrier 0.00 0.00
------------------------------------------------------------------------
Total 0.21 0.17 0.22 0.19
------------------------------------------------------------------------
Notes: ``https://www.apgdat.com/apgDat/reports/OandD/hlpOandDTaxes.jsp''
for Airfare taxes and fees calculation overview.
Question 2. While one of the main arguments you make in support of
your merger is a lack of route overlap, I see many NWA/DAL hub or
``connection'' overlap concerns for Arkansans traveling from Arkansas
to destinations in the eastern U.S. and other regions of the country.
For instance, when I travel from Little Rock to Washington, I
traditionally look at both Northwest Airlines and Delta Airlines to
compare schedules and prices (that is because they are the most
sensible connections, and currently they offer many options). Under a
merged airline, I will essentially only be looking at one airline. I am
concerned that the connection competition in this case will likely be
reduced or eliminated under a single airline. How can you assure me
that this will not occur? How can you guarantee the current competition
that exists will continue and prices will remain competitive in these
types of instances?
Answer. Since Delta and Northwest have focused their attention on
different regions, there are few overlap routes and customers will gain
the benefits of a larger combined network without any material
reduction in services. Similarly, on connecting route overlaps,
potential competitive effects are mitigated by the presence of low cost
carriers, the relatively small market shares of Delta and Northwest,
the availability of alternative airports and the likelihood that legacy
carriers will expand into these markets. In addition, the transaction
will generate significant efficiencies through such factors as more
efficient matching of aircraft to routes that will enable the combined
carrier to be financially stable and to offer a better product to
customers, such as a broad global network and enhanced airport
presence.
Question 2a. What is the current status of your discussions with
flight attendants, machinists, other administrative employees and
``front-line'' employees?
Answer. Delta and Northwest took the unprecedented step early on in
our merger discussions of asking the two pilot groups, who were
represented by the same union, to try to reach agreement on a common
contract and operational integration plan before the merger transaction
was completed. The two pilot groups have undertaken discussions to
reach agreement on those issues. Upon completion of the merger, the
status of the union representation of the various Delta work groups,
along with the status of the various Northwest groups, will be resolved
through a fair and equitable process under procedures administered by
the National Mediation Board based on the requirements of the Railway
Labor Act.
Question 3. I understand that you estimate savings of a merged
airline to be approximately $1 billion. I assume you will attain some
of these savings through both revenue increases and cost reductions.
Could you be more specific as to where you anticipate having new
revenue under the merger and where you anticipate reducing costs
through such a merger?
Answer. The $1 billion in benefits is derived from separate costs
and revenue synergies. The revenue benefits are created by expanded
schedule opportunities, broader networks and an expanded fleet that
better optimizes capacity to demand. These benefits are estimated at
$700-$800 million. The cost synergies are also estimated at $700
million and are attained from common information technology platforms,
reduced overhead, improved productivity and efficiencies gained from
increased scale.
Question 4. Domestic airlines have reduced their total labor costs
by about 13 percent from 2000 through 2006 while also increasing
employee productivity. Could you please discuss how your airlines
achieved some of these efficiencies? Could you please explain how the
merged airline will achieve additional efficiencies? Do you anticipate
consumers to benefit from these reduced services and expenditures?
Answer. Employees in the airline industry have sacrificed time and
time again. The dramatic rise in fuel costs has resulted in much of the
cost savings our employees have generated through productivity
improvements and benefit losses being used to pay for fuel rather than
to improve the product. In effect, it has eroded most of the sacrifices
they have made to make their company viable and sustainable in the
future. Merging Delta and Northwest will create a much more financially
stable company with approximately $7 billion in liquidity and $1
billion in annual synergies. The combined airline will be able to
withstand an 80 percent greater increase in fuel price than either
airline standing alone, and still maintain profitability. This
financial strength and flexibility, much greater than either airline
standing alone, will provide additional resources to help weather this
unprecedented fuel cost environment and a softening domestic market,
and equip us better to invest back in our people, our fleet and our
customers.
Question 5. It is my understanding that fuel costs now exceed labor
as the primary cost for air carriers. It is also my understanding that
air carriers are paying more than $140 per barrel due to refinery
issues to produce jet fuel. On an international route competitive stage
are U.S. carriers at a competitive disadvantage to foreign
international carriers due to oil prices (value of dollar)?
Answer. Because of the relative weakness of the dollar, U.S.
Carriers pay between $55 and $63 more per gallon of jet fuel than most
of our European competitors.
Question 5a. What measures are you currently taking to counter
recent spikes in fuel prices (luggage fees, seat preference fees,
etc.)? What are you doing to increase fuel efficiencies in aircraft?
Answer. Delta has responded to the meteoric rise in the price of
fuel by, among other measures, reducing approximately 10 percent of our
domestic capacity, offering an early retirement or early-out package we
anticipate approximately 3,000 employees (front-line and management/
administrative) will elect to take, and initiating certain new fees
related to the cost of providing commercial air service. We have been
improving our fuel efficiency steadily over the last few years with
initiatives like developing satellite based approach and departure
procedures single-engine taxi in Atlanta, procedures to reduce fuel
consumption on the ground, repositioning of aircraft with ground
equipment, a cabin refurbishment program that reduces weight, and
adding blended winglets to more than 60 aircraft.
Question 5b. What would a combined Delta/Northwest plan for dealing
with high fuel prices look like?
Answer. The merged carrier will see a much stronger balance sheet
resulting from revenue and cost synergies that should enable us to
withstand additional increases in the cost of fuel.
Question 6. I note that without a merger, you believe you may be at
a competitive disadvantage to other foreign carriers in international
carriers under the upcoming, new ``Open Skies'' agreement between the
United States and European Union. Could you explain these disadvantages
and why a merger will benefit you and consumers on international
service? What are the benefits and drawbacks of the agreement?
Answer. Today foreign flag carriers carry more passengers to and
from the U.S., Europe and Asia than U.S. flag carriers. They are
frequently funded by their governments and benefit from regulatory
policies that promote consolidation into a handful of strong
competitors. The Open Skies agreements recently transacted offer U.S.
domestic carriers excellent opportunities but also pose new challenges
in that these strong foreign airlines will be able to fly new routes
to, from and beyond the United States in head-to-head competition with
U.S. carriers. In that this merger will result in the new company's
having a strong presence throughout the globe--combining Northwest's
comprehensive Asian network with Delta's strong transatlantic and
south/central American international networks--it will position the new
company to be a very strong competitor to such foreign carriers.
Question 7. What is the current state of your aircraft fleets as
far as age and fuel economy? What does the merged airline plan on doing
with aging aircraft and less efficient aircraft in your fleet?
Answer. During Delta's bankruptcy restructuring process we reduced
the number of aircraft types we fly, including eliminating the most
fuel inefficient older aircraft from our fleet. With the stronger
balance-sheet we anticipate will result from the merger we anticipate
being able to exercise existing Delta options on purchase of
approximately 20 new widebody aircraft, and will consider investments
in other new, more fuel efficient aircraft to replace older, less fuel-
efficient aircraft as capacity needs warrant. In addition, the merged
company would maximize use of combined fleets by matching capacity with
demand more effectively than the two carriers can do separately, using
the largest and most fuel efficient aircraft practical for a given
market.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Richard H. Anderson
Question 1. What will happen to the around 1,100 employees who work
at Northwest Airlines headquarters in Eagan? The press release
announcing the merger noted that the combined carrier intends to keep
``executive offices'' in the Twin Cities. But you also indicated at
both the House and Senate Judiciary Committee hearings in April 2008
that there would be job cuts--of around 1,000 employees--at both
Delta's Atlanta headquarters as well as Northwest's Eagan headquarters?
Of the approximately 1,100 employees who work in the Eagan
headquarters, how many of these employees will lose their jobs?
Answer. It is too early to determine.
Question 1a. Do you plan to eliminate these headquarters jobs
through natural attrition, or do you plan to actually layoff employees?
Answer. There will likely be a combination of attrition,
retirements and other opportunities in the merged company, in addition
to some layoffs associated with headquarters.
Question 1b. Will you offer any of these Eagan headquarters-based
employees who are slated to be laid off the opportunity to move to
Atlanta or will these jobs be eliminated outright?
Answer. We anticipate that there will be opportunities for some
employees in Minnesota to move to Atlanta, and for some to stay in
Minnesota.
Question 1c. In an effort to streamline the combined carriers'
headquarters operations, will you offer the effected employees
voluntary ``buy out'' packages?
Answer. Delta has actually already offered employees in our system
an early retirement or early-out program. After that process has
concluded, severance packages will be offered to headquarters employees
not asked to stay on with the combined company.
Question 2. At the Senate Antitrust Subcommittee hearing in April
2008, I asked about the ``staying power'' of the combined carriers'
commitments to maintain jobs, service and hubs. Mr. Anderson's response
was: ``The issue is going to be fuel. Tell me where fuel will be.''
What if the cost of jet fuel remains around where it is today? Are your
commitments premised on the current environment of high fuel prices or
are your commitments--to maintain jobs, service and hubs--based on a
more favorable fuel environment?
Answer. Our commitment is that the merger transaction itself will
not result in elimination of service, front-line jobs or hubs. We will
take the steps necessary to provide service levels commensurate with
economic conditions, but believe that the enhanced network and stronger
balance sheet of the combined carriers will enable the combined company
to withstand increases in the cost of fuel better than the two stand-
alone companies, including providing service, jobs and maintaining
hubs.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Ray Neidl
Question 1. A merged Delta/Northwest airline is expected to have a
total of 20 percent market share in the domestic marketplace. What
impact will additional mergers that are currently anticipated have on
nationwide market share domestically and internationally?
Answer. Because of the high price of oil we do not believe that
there will be any additional major airline mergers at this time. With
merger costs to be incurred up front and benefits accrued at a later
date, airline management believes that it is too risky at this time to
proceed. Airlines are now trying to conserve cash to face the current
fuel cost crisis. Bankruptcies and possible liquidations of certain
airlines as a result of the oil price crisis may cure the problem of
too many airlines and relieve future pressure on mergers. We believe
that three large full service network airlines supplemented by a few
large low cost airlines would provide adequate competition and service.
Once things settle down, we believe new entries will once again spring
up even at permanently higher fuel costs but will remain niche in
nature.
Question 2. Some proponents of consolidation in the aviation
industry argue that consolidation is necessary for air carriers to
remain financially stable, deal with rising fuel costs, keep consumer
prices relatively low, reduce duplicative capacity, and creating
stronger route structures that will help U.S. carriers better compete
in a global market. Do you think you could explain how consolidation in
this case will achieve some of these goals? What do you view as the
major benefits and major drawbacks?
Answer. Consolidation may not be the answer; the answer is that we
have too many airlines with too many expensive hub operations offering
too many seats in a high fuel cost environment and this is what has to
be addressed. This problem would be fixed by reducing the number of
airlines and this can be done either through consolidation or letting
some carriers go out of business. The former is probably the more
humane way of handling the situation from an employee, passenger and
investor viewpoint. In consolidation, more market mass resulting from
mergers could actually generate additional incremental revenues through
enabling the carrier to offer a broader market line and possibly
through stealing revenue from smaller competitors. A larger airline
should also be able to reduce cost overhead and operate more
efficiently if structured correctly.
Question 3. The U.S. airline industry has experienced a major
transformation over the past decade. LCCs have grown to represent
approximately a quarter of the Nation's market share, up from about 15
percent in 2000. What led to this LCC increase in market share? What
impact do you think consolidation will have on LCC market share within
the domestic marketplace? Will it be easier or more difficult for LCCs
to grow in a consolidated industry?
Answer. The LCC's were able to gain market share after 9/11 when
the network carriers cut back their capacity by about 10 percent. The
LCC's rushed in to fill the vacuum. If there is consolidation by the
network airlines we believe that LCC's will move in to fill the vacuum
if it can be done profitably with their lower cost structure. However
in the current high fuel cost environment, we do not expect as rapid an
expansion as there was after 9/11.
Question 4. We are all aware of the poor quarterly financial
reports that were recently announced by the domestic legacy carriers.
What do you attribute the cause to be? Has the industry fully felt the
economic impact of the economic slowdown and the increased fuel prices?
What are you expecting for the upcoming quarters for airlines?
Answer. The industry financial crisis and large losses is due
primarily to run away fuel costs. Airline ticket prices cannot be
increased fast enough to meet the skyrocketing fuel price increases. We
do not believe that the industry as yet has felt the full impact of
increased fuel prices and the economic slowdown. Upcoming quarters will
produce large losses for the industry which we expect will lose over $5
billion this year.
Question 5. If DOJ is to approve this merger, it is almost certain
that they will require divestiture of key assets as a condition of
approving the consolidation in order to ensure viable competition. What
do you anticipate as being necessary or potential divestiture
requirements resulting from this merger? Do the airlines have plans to
divest under the current agreement?
Answer. Since there is little overlap between the Delta and
Northwest systems, we do not expect the DOJ to mandate any significant
divestiture of assets.
Question 6. Will a consolidated aviation industry focus more
heavily on their hubs for providing air service across the nation, or
are there more plans to provide point-to-point service?
Answer. We expect the network carriers to continue to increase
their concentration on their key hub cities to flow traffic between
domestic cities and onto their international routes in the most
efficient and cost conscious manner. At current high fuel costs, it
makes it difficult to do much point-to-point service except between
major business centers.
______
Response to Written Question Submitted by Hon. Amy Klobuchar to
Ray Neidl
Question. I am concerned that the DOJ will evaluate this merger in
isolation and not take into consideration its larger effects on the
airline industry as a whole and the American flying public, in
particular. Should Congress consider strengthening the DOJ airline
merger review process, and require DOJ to consider the impact of such
mergers on employees, communities and the industry at-large?
Answer. In theory I believe each proposed merger should be looked
at individually by the DOJ. It is more in the realm of the DOT to look
at the big picture affects of mergers since that department is more
aware of developments in the industry and worldwide trends. Any review
process concerning merger effects on employees, communities or the
industry at large should be done by the DOT. Primarily airline mergers
have to be looked on as a business proposal unless we want to re-
regulate the industry and be prepared to have the tax payer subsidize
it (AmAir?). Investors should not be forced to subsidize losing
business propositions and if other social factors are put in the
equation we should be prepared to have the taxpayer subsidize it.
______
Response to Written Question Submitted by Hon. Mark Pryor to
Patricia A. Friend
Question. I appreciate hearing of your concerns about management
within the aviation industry. From your testimony you state that the
aviation industry is currently failing employees, consumers, and
communities. You state that the industry in recent years has been
handed over to management teams with little or no understanding of the
interest and are focused primarily on pay and benefits rather than
company performance, customer service, or employee morale. Could you
please explain your thoughts in more detail and cite specific examples
of where such corporate management decisions have led to a weakened
airline industry? What is your current view of this proposed merger?
Please list your top 5 concerns with regard to employees affected by
this merger.
Answer. With only a couple of exceptions (Continental and
Southwest) management in the airline industry failed to prepare and
execute a business plan that would have protected against the severe
economic results of the events of September 11, 2001. They didn't hedge
fuel and they didn't make any effort to preserve cash reserves. As a
result they were totally unprepared for the severe economic hardship of
a post September 11 industry and the uncertainty of the market.
A number of airlines--United and Northwest are the most well known
examples--used the bankruptcy courts to reorganize and renegotiate
contracts with workers, vendors and airports. However none of the
bankrupt or near bankrupt carrier CEOs took any less of a salary or any
fewer bonuses or stock options. In fact many of them used the
bankruptcy process to manipulate their salaries and bonuses.
The most blatantly obvious CEO is Glen Tilton of United. While
eliminating employee pensions and slashing wages in bankruptcy, he
managed to keep his $4.5 million pension and has handsomely rewarded
himself with numerous bonuses since emerging from bankruptcy. He came
directly to United from the oil industry, took the Company through
bankruptcy and instead of focusing on keeping the company profitable
and planning for the long term, he has since then hung out the For Sale
sign and focused on nothing but selling the airline or merging with
another airline. This shortsightedness has prevented the airline from
focusing on surviving this downturn.
In regards to your questions around the current Delta/Northwest
merger, the merger as it has been proposed has no protections for
employees and certainly no guarantees for the communities currently
served by the 2 separate airlines.
Our top 5 concerns for employees are----
1. Job Loss
2. Forced Relocation
3.No provision for severance package, retraining or relocation
expenses
4. Places the collective bargaining rights of the Northwest
flight attendants in serious jeopardy
5. Delta management using the merger to destroy union
representation at Northwest Airlines
______
Response to Written Question Submitted by Hon. Amy Klobuchar to
Patricia A. Friend
Question. I am concerned that the DOJ will evaluate this merger in
isolation and not take into consideration its larger effects on the
airline industry as a whole and the American flying public, in
particular. Should Congress consider strengthening the DOJ airline
merger review process, and require DOJ to consider the impact of such
mergers on employees, communities and the industry at-large?
Answer. We too share your concerns about the DOJ's review process.
We agree that Congress should definitely strengthen the DOJ airline
merger review process and require that the impact of mergers on
employees, communities and the industry as a whole must be considered.
Just as the repercussions of this merger will not take place in a
vacuum, the DOJ should not review the merger in a vacuum.