Statement of John D. Rockefeller
Hearing: State of the Airline Industry: the Potential Impact of Airline Mergers and Industry Consolidation
Wednesday, January 24, 2007
--------------------------------------------------------------------------------
(AS PREPARED)
We are approaching the thirtieth year of airline deregulation. Airline deregulation changed the very nature of air travel in this country. For millions of Americans in large urban areas, it ushered in an era of affordable air travel, but for hundreds of small communities, including all of West Virginia’s, deregulation meant a loss of service and convenience, and often higher prices. It seemed to me that the big jets disappeared from West Virginia within days of deregulation.
Deregulation brought dramatic change to the airline industry. The only constants deregulation brought to the airline industry was brutal competition and financial instability. Legendary airlines such as Pan Am, Eastern Airlines, and TWA could not survive the competitive onslaught that deregulation brought nor could many others. However, deregulation allowed airlines like Southwest and other low-cost carriers to thrive and provide consumers, mostly in large markets, lower fares and more choices.
In the industry’s frequent periods of financial trouble, airlines either merged or went out of business. It comes as no surprise that after the last several years of serious financial difficulty that the industry is on the precipice of consolidation again. With the proposed merger of US Airways, the product of a recent combination of US Airways and America West Airlines itself, and Delta Airlines, all other legacy airlines would likely seek partnerships of their own.
However, the consolidation this time would be different and have far greater consequences. In previous rounds of consolidation, regional carriers merged to create larger airlines to allow them to compete or healthy carriers bought the assets of weak carriers. No one merger threatened the competitive balance of he industry. If the largest carriers in the industry decided to merge, our nation would have a dramatically different aviation market. We would go from having six major network carriers to three, which would have major policy implications for this country, especially in the area of small community air service.
There is no question that our airline industry is just emerging from one of the most difficult periods in its history. U.S. air carriers are beginning to see the results of ongoing cost reduction efforts and increased passenger flow. The Air Transport Association, the primary trade organization of the nation’s airlines, recently projected an aggregate net profit of $2 billion to $3 billion for 2006, and more than $4 billion aggregate net profit in 2007 on operating revenues exceeding $150 billion.
Despite this recent economic upturn in the industry, we must remember that between 2001 and 2005, the domestic U.S. airline industry posted $35 billion in cumulative net losses. The poor financial performance of air carriers over this period was heavily exacerbated by a number of external factors, beginning with the September 11, 2001, terrorist attacks, which precipitated a dramatic slowdown in air passenger traffic.
We must also remember that this return to profitability has not come without a price. The legacy carriers have aggressively sought to cut costs by reducing labor expenditures and by decreasing capacity through cuts to flight frequency, use of smaller aircraft, or the elimination of service to some communities. Airlines cut almost 140,000 jobs in the last five years. Those employees who kept their jobs did so by accepting billions of dollars in wage and benefit reductions. The airlines have used bankruptcy to terminate defined-benefit pension plans, costing the Pension Benefit Guarantee Corporation and airline employees billions of dollars.
There is clearly a strong probability that air fares will continue to go up in a number of markets. Consolidation may accelerate this trend. No one wants to advocate for higher air fares for consumers, but for too long, the competitive environment that carriers faced forced them to offer their services at an unrealistic cost. Financially weak carriers may produce benefits for consumers who have choices, but they are devastating for small communities.
As we all know, small and rural communities are the first to bear the brunt of bad economic times and the last to see the benefits of good times. The general economic downturn in the aviation industry over the last five years has placed exceptional burdens on air service to our most isolated communities. In West Virginia, Tri-State Airport in Huntington lost service to Pittsburgh and Atlanta, the Harrison-Marion Regional Airport in Clarksburg lost service to Cincinnati and Washington, DC.
As the General Accountability Office has noted, most small communities’ service levels remain far below their pre-September 11th levels despite the airlines increasing capacity levels. West Virginia has five communities that currently only have one air carrier. The proposed merger between US Airways and Delta would put 100% of West Virginia’s second largest airport, Tri-State, and over 60% of our largest airport, Yeager Airport, into the hands of into the hands of one company. Because of the lack of competition in many West Virginia markets, air service options are extremely limited and fares are high.
The airline industry’s restructuring has been brutal and it may not be over. Although there is a positive outlook for the immediate future, the long-term financial outlook for the industry is still uncertain at best. The industry has enormous debt levels, fuel prices are vulnerable to spiking upward, and newly found pricing power may collapse as competition increases.
Over the last two years, I have met with almost every major airline Chief Executive Officer (CEO). I have heard most of them advocate for consolidation within the industry. I am not unilaterally opposed to consolidation, but I believe that every transaction has to be considered on its own merits. I know that our nation needs a financially healthy airline industry. Air service to small communities in my state and across the country depends on network carriers who use hub-and-spoke operations. We do not have any other options. Low-cost carriers are not going to serve West Virginia’s communities because they are too small.
Our hearing today will allow to examine the potential impact another round of consolidation would have on the airline industry and the communities and consumers they serve. Given that this proposed merger between US Airways and Delta Airlines could set off a round of industry consolidation, this Committee needs to understand the effects consolidation would have on competition and small community air service.
My state needs healthy network carriers if we are to attract new air service. At present, low-cost carriers are not going to fill the service void in our markets. Congress and the Administration need to develop policies that promote competition but also make sure all communities have access to affordable air service. Balancing these competing values will not be easy.
As much as I believe that regulating the airline industry again is necessary, I recognize that we are not going back. The industry is far too changed and far too global for us to return to a completely regulated environment. However, I am becoming increasingly convinced that some regulation may become an option to make sure small communities are not harmed by consolidation.
I look forward to hearing from our witnesses today. I know that the future of the airline industry will be a continuing issue for this Committee.
###
Hearing: State of the Airline Industry: the Potential Impact of Airline Mergers and Industry Consolidation
Wednesday, January 24, 2007
--------------------------------------------------------------------------------
(AS PREPARED)
We are approaching the thirtieth year of airline deregulation. Airline deregulation changed the very nature of air travel in this country. For millions of Americans in large urban areas, it ushered in an era of affordable air travel, but for hundreds of small communities, including all of West Virginia’s, deregulation meant a loss of service and convenience, and often higher prices. It seemed to me that the big jets disappeared from West Virginia within days of deregulation.
Deregulation brought dramatic change to the airline industry. The only constants deregulation brought to the airline industry was brutal competition and financial instability. Legendary airlines such as Pan Am, Eastern Airlines, and TWA could not survive the competitive onslaught that deregulation brought nor could many others. However, deregulation allowed airlines like Southwest and other low-cost carriers to thrive and provide consumers, mostly in large markets, lower fares and more choices.
In the industry’s frequent periods of financial trouble, airlines either merged or went out of business. It comes as no surprise that after the last several years of serious financial difficulty that the industry is on the precipice of consolidation again. With the proposed merger of US Airways, the product of a recent combination of US Airways and America West Airlines itself, and Delta Airlines, all other legacy airlines would likely seek partnerships of their own.
However, the consolidation this time would be different and have far greater consequences. In previous rounds of consolidation, regional carriers merged to create larger airlines to allow them to compete or healthy carriers bought the assets of weak carriers. No one merger threatened the competitive balance of he industry. If the largest carriers in the industry decided to merge, our nation would have a dramatically different aviation market. We would go from having six major network carriers to three, which would have major policy implications for this country, especially in the area of small community air service.
There is no question that our airline industry is just emerging from one of the most difficult periods in its history. U.S. air carriers are beginning to see the results of ongoing cost reduction efforts and increased passenger flow. The Air Transport Association, the primary trade organization of the nation’s airlines, recently projected an aggregate net profit of $2 billion to $3 billion for 2006, and more than $4 billion aggregate net profit in 2007 on operating revenues exceeding $150 billion.
Despite this recent economic upturn in the industry, we must remember that between 2001 and 2005, the domestic U.S. airline industry posted $35 billion in cumulative net losses. The poor financial performance of air carriers over this period was heavily exacerbated by a number of external factors, beginning with the September 11, 2001, terrorist attacks, which precipitated a dramatic slowdown in air passenger traffic.
We must also remember that this return to profitability has not come without a price. The legacy carriers have aggressively sought to cut costs by reducing labor expenditures and by decreasing capacity through cuts to flight frequency, use of smaller aircraft, or the elimination of service to some communities. Airlines cut almost 140,000 jobs in the last five years. Those employees who kept their jobs did so by accepting billions of dollars in wage and benefit reductions. The airlines have used bankruptcy to terminate defined-benefit pension plans, costing the Pension Benefit Guarantee Corporation and airline employees billions of dollars.
There is clearly a strong probability that air fares will continue to go up in a number of markets. Consolidation may accelerate this trend. No one wants to advocate for higher air fares for consumers, but for too long, the competitive environment that carriers faced forced them to offer their services at an unrealistic cost. Financially weak carriers may produce benefits for consumers who have choices, but they are devastating for small communities.
As we all know, small and rural communities are the first to bear the brunt of bad economic times and the last to see the benefits of good times. The general economic downturn in the aviation industry over the last five years has placed exceptional burdens on air service to our most isolated communities. In West Virginia, Tri-State Airport in Huntington lost service to Pittsburgh and Atlanta, the Harrison-Marion Regional Airport in Clarksburg lost service to Cincinnati and Washington, DC.
As the General Accountability Office has noted, most small communities’ service levels remain far below their pre-September 11th levels despite the airlines increasing capacity levels. West Virginia has five communities that currently only have one air carrier. The proposed merger between US Airways and Delta would put 100% of West Virginia’s second largest airport, Tri-State, and over 60% of our largest airport, Yeager Airport, into the hands of into the hands of one company. Because of the lack of competition in many West Virginia markets, air service options are extremely limited and fares are high.
The airline industry’s restructuring has been brutal and it may not be over. Although there is a positive outlook for the immediate future, the long-term financial outlook for the industry is still uncertain at best. The industry has enormous debt levels, fuel prices are vulnerable to spiking upward, and newly found pricing power may collapse as competition increases.
Over the last two years, I have met with almost every major airline Chief Executive Officer (CEO). I have heard most of them advocate for consolidation within the industry. I am not unilaterally opposed to consolidation, but I believe that every transaction has to be considered on its own merits. I know that our nation needs a financially healthy airline industry. Air service to small communities in my state and across the country depends on network carriers who use hub-and-spoke operations. We do not have any other options. Low-cost carriers are not going to serve West Virginia’s communities because they are too small.
Our hearing today will allow to examine the potential impact another round of consolidation would have on the airline industry and the communities and consumers they serve. Given that this proposed merger between US Airways and Delta Airlines could set off a round of industry consolidation, this Committee needs to understand the effects consolidation would have on competition and small community air service.
My state needs healthy network carriers if we are to attract new air service. At present, low-cost carriers are not going to fill the service void in our markets. Congress and the Administration need to develop policies that promote competition but also make sure all communities have access to affordable air service. Balancing these competing values will not be easy.
As much as I believe that regulating the airline industry again is necessary, I recognize that we are not going back. The industry is far too changed and far too global for us to return to a completely regulated environment. However, I am becoming increasingly convinced that some regulation may become an option to make sure small communities are not harmed by consolidation.
I look forward to hearing from our witnesses today. I know that the future of the airline industry will be a continuing issue for this Committee.
###
