Source: Business Week
Author: James L. Oberstar

The chairman of the House Committee on Transportation & Infrastructure says a merged Delta-Northwest or United-Continental would hurt consumers

Mergers in the airline industry are nothing new. Most of the air carriers flying today are the products of one or more mergers over the past three decades or so. Yet this latest round of rumored mergers, which includes a United-Continental scenario, as well as a Delta-Northwest combination, is significant. It would mean further consolidation in the airline industry, further reductions in choice for consumers, and probably fewer flights, fewer jobs, and higher fares.

Congress deregulated the airline industry in 1978. Prior to that date, airlines had to get Federal approval for fares and routes from the Civil Aeronautics Board (CAB). Deregulation lifted those restrictions and allowed the marketplace, not the government, to determine where an airline flies and how much it charges to take you there.

Deregulation held out the promise of a market-driven industry that would give rise to a host of new entrants, bringing more competition, lower fares, and better service. The immediate aftermath of deregulation saw the expected flurry of airline startups and new market service. That activity, however, was short-lived.
Pan Am Is but a Memory

The mid-1980s experienced the first round of merger mania in the airline industry, as the bigger fish began devouring the smaller ones. Delta bought Western. Northwest swallowed Republic. Allegheny changed its name to US Air (LCC) and bought Piedmont. Frank Lorenzo merged Texas International and New York Air with Continental and People Express, then bought once-proud Eastern, which faded into bankruptcy.

Airlines that didn't grow, withered. Others tried to grow too fast and imploded. Pan Am, for so many years America's flagship international carrier, merged with National. TWA, another U.S. carrier with a strong overseas trade, bought Ozark. Pan Am sold its prime Pacific routes to United. Carl Icahn bought TWA and sold its prize asset, the London Heathrow route, to American (AMR). Now, TWA itself has been absorbed by American, and Pan Am is just a memory.

Meanwhile, the surviving carriers fattened up on the carrion of the failed and failing airlines. The Transportation Dept. did little to stop this rush toward market consolidation, or even slow it down. Former Transportation Secretary Elizabeth Dole and her successors never met an airline merger they didn't like. Samuel Skinner, Transportation Secretary under President George H. W. Bush, stated there would still be competition even if the industry consolidated down to three major carriers.

Fear of a Three-Airline Future

I was then, and still am, extremely fearful of a three-airline future. With only three major airlines, there would be enormous incentives for each carrier to refrain from competing with the others at their strong hubs and routes. This strategy would likely lead to the greatest mutual profitability, while strong competition across the board could prove suicidal to the airlines. Moreover, as each major carrier became larger and stronger, it would become increasingly difficult for new competition to gain a foothold in a market.

For example, let's take a look at a potential Northwest-Delta merger. Northwest operates major hubs at Detroit and Minneapolis-St. Paul. Not surprisingly, the airline's busiest route, in terms of passengers carried, is between those two markets.

Delta's home hub is Atlanta. Its most popular route is Atlanta-Orlando. Although Delta does not dominate service into and out of Orlando International Airport the way it does at Atlanta's Hartsfield-Jackson, the airline does dominate the Atlanta-Orlando route, and Atlanta is the most popular point of origin for flights to Orlando. Does anyone believe a merged Northwest-Delta airline would result in more competition, better service, and lower fares on such routes? I certainly do not.

Warning of Domino Effect

In 1998, we had the opportunity to preview airline consolidation when the General Accounting Office, now the Government Accountability Office, examined the impact of proposals by the six largest U.S. carriers to form three alliances. The GAO found that if all of the proposed alliances were implemented, competition could be reduced for about 100 million passengers each year. In response, Congress gave the DOT authority to review various aspects—such as frequent flyer programs—before an alliance could be implemented. By this action, Congress clearly expressed its interest in ensuring competition in the airline industry remains intact.

Two years later, United and US Airways announced plans to merge. I called on the Secretary of Transportation and the Assistant Attorney General to examine the merger vigorously, to look beyond the merger itself, and to consider the domino effect it would set in motion as other airlines sought to merge in order to compete. If the United-US Airways deal had been approved, the government would have been hard pressed to deny other airlines the same right to consolidate, and Sam Skinner's prediction of three major airlines would have come true.

Now, in anticipation of the current round of mergers, I have asked the GAO to conduct a new analysis of airline consolidation and its effects on competition, service, and fares. The report should be completed in the coming weeks. The House Committee on Transportation and Infrastructure stands ready to hold a hearing once a merger plan is announced, to shine a bright light on the consolidation proposal for all to see. I, and others in Congress, also intend to use any tools at our disposal to prevent further consolidation.

Long-Term Losses for Workers

The airline business is, without a doubt, a tough tiger to tame. Many have tried, and many have failed. The industry even fired Donald Trump.

Yet, I refuse to believe more mergers are the answer. Mergers may mean short-term profits for investors, but they inevitably mean long-term losses for workers and consumers. The merged carrier is never greater than the sum of its parts. It is always less, often much less. As the executives planning these mergers are polishing their golden parachutes, employees of the affected airlines are worrying about the potential loss of their pensions, their seniority, even their jobs.

This is not what we were promised when we deregulated the airline industry in 1978. If Transportation and Justice will not act to cool this merger mania, then Congress should.

We should just say no. Hell no!