Carrier Chiefs, Senate Discuss Ramifications Of Mergers

<B>Carrier Chiefs, Senate Discuss Ramifications Of Mergers</B>

By Barbara Cook

Air industry consolidation took center stage in Washington earlier this month as members of the Senate Judiciary Committee's antitrust subcommittee questioned airline officials about what the impact of the pending United Airlines-US Airways merger and American Airlines-Trans World Airlines acquisition could have on competition.

The clear winner in airline consolidation seems to be one or two giant airlines, with the big loser being the U.S. consumer, said subcommittee chairman Sen. Mike Dewine (R-Ohio). Sen. Herb Kohl (D-Wis.), ranking Democrat on the antitrust subcommittee, echoed Dewine's comments: "These proposed mergers are dangerous. If we do not intervene to protect competition now, two or three airlines in a few years could dominate the skies--controlling numerous hubs, operating a vast, unavoidable network and gradually choking off oxygen to the remaining competitors."

Kohl expressed support for considering "legislative approaches to restore competitive balance to the airline industry"--a view that was shared by Sen. Harry Reid (D-Nev.), who recently introduced the Airline Competition Preservation Act of 2001. If enacted, Reid's legislation would give the U.S. Department of Transportation additional regulatory authority, if three or fewer air carriers control more than 70 percent of domestic revenue passenger miles or if there is consolidation between two or more of the top seven airlines.

Committee chairman John McCain (R-Ariz.) and a number of other senators voiced concern over the impact consolidation will have on service competition and airfares. According to McCain, the mergers will give a few airlines "the pricing power to slowly force out or severely constrict the growth of new entrants." He added, "The consumer is the one who will pay the price."

Continental chairman and CEO Gordon Bethune also urged the subcommittee to block the proposed mergers, saying they will harm customers, communities and airline employees. He added that if the mergers are approved, CO would require certain assets to continue to compete with United and American, including appropriate slots and facilities at capacity-constrained airports, international route transfers, access to needed capital and re-evaluation of antitrust immunity already granted to the mega carriers and their foreign partners.

A competitive equilibrium currently exists among major U.S. carriers, Bethune argued: "While each major airline has strengths in specific regions of the country, none is truly strong in every U.S. region. Thus, national competition has been balanced and effective. Clearly, United and American's plan is to build a cartel and carve up and dominate the U.S. air travel market." In the same way that United and American split Chicago O'Hare and London Heathrow, "They will split the rest of the United States and maybe even split global aviation," Bethune said. He stressed that his comments are not a call for reregulation, saying, "That is exactly the wrong way to go."

Other options available to rescue TWA include an open bidding process from competing companies, Bethune said. Regarding US Airways, he said it is "unclear" that any merger is necessary, since "US Airways has one of the richest pools of valuable assets in the industry. Their cache of lucrative slots and their Northeast strength cannot be matched." If Continental was able to turn itself around as it has since 1995, "There is no reason that US Airways, with the right incentives and appropriate management, using US Airways' crown jewels of assets, could not do the same," he said.

A few days later, however, Bethune acknowledged that Continental and Delta Air Lines have been talking about a possible deal as a necessary competitive response. While he said that combining the two carriers is not the best case scenario for either, he added that something would have to be done if the two mergers on the table were approved.

Delta chief Leo Mullin told panel members that approval of the transactions now pending "must be viewed as tacit approval for those that follow. Once mega carriers have been created, then a competitive marketplace is possible only if the remaining airlines are allowed to respond effectively."

On the other side of the issue, AirTran Airways chairman and CEO Joe Leonard said that, "Unchecked and unmodified, the pending agreements will stifle competition, raise fares and condemn hundreds of small and medium-size communities to limited and high-cost air service for years. Noone can seriously doubt that outcome."

For the cities affected by the merger that have been promised continued service, Leonard said, "I might start checking train schedules." The only way to cure monopolistic practices, he added, is by opening markets to low-fare carriers that will discipline the major airlines. This can't be achieved by handing out only a few slots, he said, adding that his carrier would need at least 100 slots to form a meaningful network to bring low-fare service to Reagan Washington National. In fact, on Feb. 21, AirTran filed formal complaints at DOT, asking the agency to prevent the United-American monopolization of Reagan National's slots. In its filing, AirTran proposed that DOT, regardless of the outcome of the pending megers, order the reallocation of slots at the airport.

US Airways chairman Stephen Wolf told the subcommittee that there are only two platforms on which to operate an airline successfully. "There is the low-cost, low-fare business model and the fully mature, full-service network carriers," he said. "US Airways is neither, and there is no place for a 'neither.' This is simply an economic reality."

With increasing competition from low-cost carriers and a high-cost structure of its own, the status quo is not an option for his company, Wolf argued. "There are two certainties," he said. "One, US Airways does not have the financial wherewithal to become a large network carrier. Two, you cannot shrink an airline into profitability."

Meanwhile, the General Accounting Office concluded that if the United-US Airways merger and American-TWA acquisition both are completed, the new United would hold 27 percent of the U.S. market, while the new American would have a 22.6 percent share. Further, each proposal would reduce competition in some 300 markets, affecting more than 10 million passengers, and would allow the new larger airline to dominate more than 100 new markets.

However, other bidders still may submit offers to a federal judge by Wednesday. One bidder is Jet Acquisitions Group, a Scottsdale, Ariz.-based investment group planning a $1 billion offer for TWA. Jet Acquisitions said it would maintain TWA as an independent, competitive carrier. Industry observers, however, scoffed at the offer, since the source of the money and other details about the group are not well known.