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Flying High
Tomorrow's Titan of the Skies
Is Today's Overlooked Discounter:
Southwest Airlines
An Informal Examination
By Darryl Jenkins
Director, The Aviation Institute
The George Washington University
Washington, D.C.
Phone: (202) 994-6308
E-mail: airjenkins@aol.com
August 23, 2000
Contents
Executive Summary 3
1. Introduction 5
2. Scenarios from A to Z 6
3. Southwest Rules the Skies 14
Map - the 'Southwest Effect' 15
4. Conclusion 18Appendix A (Sample Media Coverage) 19
Appendix B (Airline Passenger Share, 1999) 26
Appendix C (Airline Market Share, Projected, 2005) 27
Appendix D (Southwest Aircraft Orders, Deliveries) 28
Executive Summary
This paper looks at the future of the airline industry by examining different scenarios that might develop. While forecasting is a risky business, issues will be raised in this paper that should not be ignored either by lawmakers or regulators, especially as they consider competition issues.In May of 2000, United Airlines and US Airways announced plans to merge, triggering extensive public and regulatory comment about the future of the industry - much of it revolving around fears of less competition, higher prices and reduced service (fewer flights to fewer cities). The most-commonly voiced concern is that the merger and subsequent consolidation eventually will result in three airlines dominating the skies, reducing competition and raising prices.
This paper examines the airline industry from an economic perspective: the current competitive state of affairs, the likely consequences of industry consolidation, and the potential future of U.S. commercial aviation, whether or not the merger takes place.
It reaches the following conclusions:
Given these conclusions, airline competition in the new millennium will take on different characteristics than in the previous decades of deregulation. Furthermore, doom-and-gloom predictions about the future of the industry are almost certainly wrong, because the marketplace is so diverse -- and the state of competition so healthy -- that there are few scenarios that would result in less competition for passengers over the next five to 10 years.
1. Introduction
The proposed merger of United Airlines and US Airways, announced in May 2000, has prompted widespread debate about the future of the airline industry.
In many quarters, the merger has been seen as the first stage of an end game that will result in more mergers, creating three giant carriers that will dominate the nation's airways.
Reaction to the merger from local officials, federal regulators and members of Congress has been skeptical. And the general - though not unanimous - media consensus is that the merger would not be in the best interest of the traveling public. The most-commonly voiced fears are that the merger would eventually result in less competition, fewer flights and higher prices.
Since the future of the airlines is indeed a matter of national interest, these assumptions deserve closer examination - especially if they are likely to produce regulatory or enforcement action from Congress or the Departments of Transportation and Justice.
Predicting the future of flight has always been a risky business. When the nation's civil aviation industry was deregulated 22 years ago, some analysts predicted there would be hundreds of different airlines, each serving only a few cities. Obviously, they were wrong.
In the early 1990s, a cover story by Fortune magazine confidently predicted the demise of the major air carriers. Obviously, it was wrong.
This paper will take a different approach and propose many possible scenarios that could develop in the airline industry. The list I propose is neither exhaustive nor inclusive. I am interested in what other people believe the future holds in store for the airline industry and believe that we will all be better off for looking forward. I personally prefer this method as the future has ways of teaching us humility. One thing is certain: the future will surprise us. However, it is also clear that, going into this exercise, many people are overlooking important elements about the present state of the airline industry.
2. Scenarios from A to Z
Scenario 1: Three large major airlines develop, and other competition disappears. Conventional wisdom suggests this scenario will result from the United-US Airways merger; however, I consider this the least likely outcome.
Under this scenario, Southwest and other low-fare contenders cease to exist for unexplained reasons (one fanciful possibility: NASA melts down the defunct carriers' aircraft, because the aluminum is needed for the Space Station). The remaining airlines are delighted (or so they think), the mergers go through, and we have what Congress supposedly fears most: three large carriers with no low-cost competition.
Each of these carriers has a large network, and they compete against each other for virtually every city pair. Under today's robust economic conditions, the planes are full and the carriers are fat and happy. If the economy remains at 3-4% real growth, then prices will remain constant. If it is in the 5 and above range, this will put additional disposable income in consumers. pockets, which will increase load factors even further, putting pressure on the airlines to increase prices. These are the economic pressures that could raise prices.
But what happens when the economy slips from outstanding to merely good? Load factors drop back to the high 60 percent range, meaning that seats are available on virtually every airline on every flight (except peak routes during peak hours).
Each airline has more planes than ever, each airline has hefty debt service, and each airline sees its empty seats and starts lowering fares to attract marginal travelers - the people who fly only when fares are "low."
The result, confounding the pundits, is a battle of the giants (something we are already seeing in the commercial aircraft industry, with Boeing and Airbus fighting for market share in every corner of the globe. Interestingly, their competition has become more intense, not less, since the number of participants dropped from three to two).
For the airlines, back-of-the-plane one-way fares drop to the low $100's range, with round-trip transcontinental fares around $400. Frequent flyer programs become more competitive. To further differentiate products, the airlines begin offering - gasp - amenities to coach-class customers, such as real food and more legroom.
Likelihood:
Low, primarily because there is no foreseeable reason for Southwest to disappear. But if it did, this battle-of-the-giants scenario, with carriers fighting for virtually every passenger, is the most likely scenario. The only chance I see of fares rising considerably is if the economy continues to grow at a superheated 5-plus percent year after year and the Federal Reserve Bank ignores the trend.Scenario 2: Mergers produce three network airlines (United/US Airways, American/Northwest and Delta/Continental). But other airlines continue to thrive.
As politicians, pundits and analysts look toward the future of airlines during the summer of 2000, the prediction of a Big Three airline market is the flavor du jour. I think this scenario is more likely than the first - but it doesn't go far enough.
If the United-US Airways merger is approved, the theory goes, then American will merge with Northwest and Continental will merge with Delta - both for defensive reasons and for certain other economies.
United needs US Airways to become a truly national carrier. American wants Northwest to obtain the Asia-Pacific presence that it desperately needs.
And if Delta merges with Continental, it gains a strong New York metro presence with Continental's hub in Newark. That also would help feed its flights to Europe from JFK airport. A strengthened New York operation would help Delta compete with the combination of US Airways (currently its most direct competitor) and United.
So far, this scenario is proceeding along the lines of conventional wisdom. But then comes something different: as the three network carriers emerge and stimulate traffic in small and mid-size communities, new competitors begin to discover new sources of growth.
Among these entrants is a familiar name, Southwest, which already has over 400 current flight connections from almost 60 cities. Because Southwest has the most immediately-available resources, it moves into these markets rapidly. Southwest's crowns in the Midwest become Minneapolis-St. Paul and St. Louis.
Most people do not realize that Southwest is already the number-two carrier of domestic air passengers (behind Delta). It uses its St. Louis and Chicago-Midway hubs for East-West connecting routes and its new quasi-hub in Allentown, PA, to capture a large share of short-haul traffic on the East Coast. It becomes possible to reach virtually any metropolitan area in the United States on Southwest with only one connection - and, lo and behold, Southwest has become the fourth network carrier.
This creates enormous competitive pressures as the Big Three fight to protect their existing territories on one hand, and to fend off low-cost Southwest -- the Big One -- on the other.
At the same time Southwest is expanding on the East Coast, a full-fledged fare war emerges between the other three big network carriers and lasts for three months (by coincidence, the length of the last all-out fare war, back in 1991). The fare wars break out originally in Atlanta between Delta and United as United increases feed traffic into Charlotte, taking customers from Delta. Soon the fare war is system-wide.
After each airline has lost millions, fares finally stabilize at a lower level, providing some profits, and an uneasy cease-fire takes hold.
The fare war is bad news for some small airlines. Those with high costs like Vanguard and Pro Air (which had little chance of long-term survival anyway) fade into the sunset. Frontier, AirTran, ATA, Midwest Express, Spirit, DC Air and some others survive because their costs are low enough to operate in a low-fare environment. DC Air - created as a spinoff to serve Washington Reagan National Airport after the United/US Airways merger - begins to expand. DC Air buys a new fleet of planes and uses its gates at Washington Reagan National to fly all over the East Coast.
Nonetheless, these smaller carriers begin their own consolidation, primarily for defensive purposes. They begin pressuring politicians and regulators for greater access to gates and takeoff/landing slots, which will require expansion of airports. This triggers "talk wars" across the nation, as "not in my backyard" citizens try to block construction.
Once the dust settles (literally and metaphorically) the result is more competition from big airlines and once-small airlines that have metamorphosed into larger airlines.
Assumptions
This scenario of cutthroat competition is a direct result of the mergers being approved. History tells us that when the major airlines enter new markets against other majors, there is always bloodletting. For unexplained reasons, neither regulators nor politicians currently consider Southwest to be a "major" airline, and regularly ignore its plans for growth and the subsequent effect on the industry. This is one of the most amusing non-events in Washington.Scenario 3: United and US Airways merge, and immediately try to drive Southwest out of business by lowering prices.
This scenario is irresistible to the media because of its "David vs. Goliath" implications. Unfortunately for Hollywood, it's highly unlikely (among other reasons, Southwest and United have fought it out once already, in California, and show no desire to repeat the experience).
Let us assume, however, that United decides to take on Southwest, matching routes and cutting fares. The idea seems like a good one for the first 24 hours, but problems develop quickly:
But disregarding these details, and heeding the advice of armchair pilots, United plunges ahead and cuts fares. As the battle continues, United loses a lot of money.
The results, for United, are disastrous. Its domestic earnings disappear (and domestic earnings accounted for 70 percent of the company's total profits in 1999), prompting immediate pressure from Wall Street to abandon the fight.
Assumptions: If this were a Hollywood movie, its title would be "Death Wish." Unless one believes that United's managers, employees and stockholders want their jobs, profits and equity to fly away, this scenario seems unlikely.
Scenario 4: The same three major network carriers emerge, joined by two major low-cost carriers: Southwest, and a fresh face: JetBlue.
Spurred on by the competitive thrust of Southwest into areas where it had previously planned its own expansion, startup carrier JetBlue uses creative financing to buy more new planes from Airbus (which is more than willing to offer generous terms because that pressures other startups to buy new planes). The result: on the East Coast, JetBlue and Southwest fight for every available passenger, and at the end of five years, those airlines carry a big chunk of domestic short-haul traffic.
The Big Three carriers hang on to their profitable shuttles between major business markets on the East Coast. But Southwest and JetBlue grab most leisure passengers, as well as other short-haul travelers willing to make the short drive to the less-convenient airports served by those airlines.
What does this do to the major airlines? The length of their average flight segment increases and they concentrate on longer-haul and international traffic.
As demand for air travel grows, the East Coast runs into capacity constraints. Baltimore-Washington International and Dulles airports become the dominant low-cost carrier hubs. Newark and the other New York airports also exceed capacity, leaving Southwest's outpost on Long Island as the only area network with room to expand.
Southwest begins to look for additional cities on the East Coast to serve, such as Allentown, PA. Southwest also decides to use some of its fleet for international traffic, beginning with Canada and Mexico, including prime leisure spots like Cancun.
Consequently, cities like Hartford emerge as new mini-hubs because they are the only airports with the ability to add flights. Atlantic Coast Airlines, with its existing connections to two major airlines and a fleet of regional jets, takes advantage of the situation and begins flying into more communities. The result is a low-cost competitor offering high levels of convenience, especially for travelers who live in suburban areas.
Assumptions: The advantage of this scenario, in the realism department, is that it doesn't matter whether the big network airlines do, or don't, merge. Southwest and JetBlue are likely to expand on the East Coast regardless of what the other carriers do, and those airlines will change the face of competition. In addition, the capacity problem will be the defining problem on the East Coast.
Scenario 5: An economic downturn reduces passenger traffic at the same time OPEC hikes oil prices, making jet fuel more expensive.
It is the early 1990's all over again: a slumping economy combined with a spike in oil prices. The effects on the nation's karma are profound as members of Generations X and Y - who have never seen a recession - encounter layoffs for the first time.
Recreational travel and four-day ski weekends disappear, and the airlines (whether the Big 7, the Big 4, the Big 3 or the Little 15, depending on merger outcomes) cut fares desperately to attract passengers, losing money on every ticket.
Older, gas-guzzling planes like 727s are retired. So are turboprops, which are fuel-efficient but otherwise costly to operate, resulting in a loss of service to smaller cities. The big network carriers are hurt, but survive, because they have large cash reserves. JetBlue and Southwest suffer less because their costs are so low; at worst, they postpone delivery of a few planes.
US Airways - with its high costs, old planes and lack of regional jets - is hit hardest and begins to cut back on service. Fortune magazine, inevitably, runs a cover photo of a three-engine propeller airplane under the headline: "Will The Big Three Survive?"
Assumptions: Events that could produce this scenario include a) OPEC jacks-up oil prices, and makes them stick; b) the Middle East peace process ends in war; c) an overextended stock market triggers a recession; or d) the Federal Reserve cranks up interest rates again to fight inflation, but goes too far. For those of us who have observed the airline business for many years, this is potentially a very real scenario.
Scenario 6: Independent regional airlines begin using "collection centers" to serve thin routes in addition to feeding hubs.
Without fanfare, Atlantic Coast Airlines expands its routes and begins flying connecting passengers cross-country using its fleet of regional jets. The company asks civic leaders in smaller cities to accept the loss of service at some smaller airports in return for frequent, competitively-priced small-jet service to remaining airports where passenger traffic can be consolidated.
At first, the going is difficult as politicians scramble to save their local airports. But, guided by some members of Congress, a bus system is created to carry rural travelers to these regional hubs. When travelers realize that their longest bus trip to one of these airports is less than one hour, the system gains acceptance. As traffic begins to consolidate at these small-airport collection centers, competitive airline service begins to be created outside the major hubs.
States like Iowa join this approach, creating a regional collection center in Waterloo. Other airlines such as Skywest begin using the same concept on the West Coast. The majors still rely on the regional airlines to feed their long-haul routes with passengers from small cities, but at the same time, the regionals become more independent from the majors . and create a new growth industry. "New-launch regionals" become the hot stocks on NASDAQ.
(A prototype of this approach would be the new Ozark Airlines, which began operating with a few Fairchild Dornier 328 jets and has very low-break-even levels).
Assumptions: Possible, though it relies on good sense by local elected officials, which is always a risky proposition.
Scenario 7: Smaller national airlines emerge - and merge - to join the fray.
Phoenix-based America West improves maintenance and operations to become a player, and then merges with Alaska to provide a competitive West Coast presence. It also gains a small, if profitable, toehold on the East Coast by merging with DC Air (the spin-off airline created in the United-US Airways merger).
When long-suffering TWA goes out of business, America West takes over its assets and uses the St. Louis hub to expand into the East. Because it has years of experience competing and co-existing with Southwest, America West begins to prosper. It also begins using TWA's old route authority to fly international routes.
In the meantime, Frontier Airlines starts buying-up many smaller airlines, including Spirit and Legend. America West ends up with 10 percent of the domestic market, Frontier with 5 percent. ATA and National Airlines join in the mix and merge. Both operate modern Boeing 757's and could have a good, common fleet.
Assumptions: I believe, and so do many other observers, that this rise-of-the-small-airlines scenario will happen sooner or later (it should be noted that Frontier and Western Pacific were in merger talks not long ago). The big question in this particular scenario is when is America West going to grow up and begin to act as an adult airline?
Scenario 8: The merger does not go through, leaving US Airways on its own.
US Airways continues to limp along with its hubs in Philadelphia and Charlotte, NC and its trans-Atlantic flights. However:
Inexorably, US Airways loses market share, especially with Southwest's steady advance into Baltimore-Washington, Raleigh-Durham, Albany and other traditional US Airways strongholds. JetBlue makes matters even worse, invading from the Northeast with its sparkling new Airbus planes and low fares.
The result: a weakened US Airways. It limps along (much like TWA does today, as a regional carrier that flies a couple of international routes) or runs into a cash crunch in the next recession and closes its doors.
Assumptions: The invasion of Southwest and JetBlue will lower fares. But as US Airways retreats, city-by-city and market-by-market, some cities will lose service from the network carriers. And some smaller communities that currently receive air service solely because they feed US Airways hubs are likely to lose service entirely. This gloomy scenario for a stand-alone US Airways is highly realistic.
Scenario 9: The merger does not go through, and US Airways eventually goes out of business.
With no viable market niches and high costs, the next economic downturn is more than US Airways can stand. A Chapter 11 reorganization buys it some time, and emergency labor negotiations reduce its costs, but with its markets absorbed by others, the comeback is too little, too late. US Airways becomes the new Pan Am, surviving on asset sales.
Likelihood: US Airways has been fortunate to have survived this long. The robust economy has saved it for the time being, and the airline is sitting on a pile of cash. However, US Airways still lacks a long-term viable strategy and its costs are very high. At 13.41 cents per available seat-mile, it will have a difficult time fighting off long-term competition. As in the previous scenario, the demise of US Airways would lower fares in some cities where low-cost competitors took over, but would reduce access to network carriers in some markets and would probably eliminate air service entirely to some cities.
Scenario 10: Any and all mergers are approved, but Congress decides to let overseas airlines join the fray by entering the U.S. marketplace.
Disturbed by the merger trend, Congress passes legislation permitting full foreign ownership of domestic airlines (currently regulated) and allowing foreign airlines to fly on U.S. routes (currently prohibited). The State Department uses the lure of the U.S. marketplace as a tool to obtain "open skies" agreements with other nations. The result is that U.S. and foreign airlines operate freely in all countries.
U.S. airlines thrive in Europe because they are much more efficient. And a few foreign carriers also find happiness in U.S. markets, including Virgin (short hauls everywhere), British Airways (long hauls), Air Canada and TACA. However, most foreign carriers choose not to compete in U.S. markets because the competition is far too difficult. According to a report issued by the Committee of the Wise, in Europe, American carriers are at least one-third more efficient in carrying passengers than the European carriers. Thus, American carriers are to world competition what Southwest is to domestic competition.
The major U.S. carriers, on the other hand, become true international airlines. Northwest moves its headquarters to Tokyo.
Assumptions: This scenario is unlikely because of opposition from U.S. unions, the State Department and European governments who don't like the idea of seeing United and American logos on planes flying the Paris-London shuttle. Still, an intriguing idea.
3. Southwest Rules the Skies
Scenario 11: Southwest becomes the largest carrier of domestic traffic
.I believe this scenario is the most likely outcome for America's airline industry in the next decade - no matter the state of the economy, the status of the big network airlines (merged or not), or the fate of the second-tier carriers.
In this scenario, which virtually nobody is considering right now, Southwest quite simply becomes the nation's dominant air carrier.
It is at, or close to, that status already. By using the Department of Transportation's Origin and Destination Database, we can obtain the following totals for domestic passengers:
1. Delta 58,062,000
2. Southwest 57,508,000
3. United 48,674,000
4. American 41,809,000
5. US Airways 40,809,000
6. Northwest 28,614,000
7. Continental 27,202,000
Southwest is either No. 1 or a close No. 2 right now in terms of domestic passenger volume. But for some reason, most observers and analysts do not realize how big Southwest really is.
The 'Southwest Effect'
Beyond the raw numbers, the discounter's operations also have resulted in what has become known, in airline circles, as the "Southwest effect." In many markets, people are willing to drive to an airport up to two hours away to save money on a Southwest flight, compared to a more convenient network flight. Automobiles, in effect, become a "feeder" for Southwest, allowing it to create virtual hubs.
The following map shows the cities served by Southwest as of August 2000, surrounded by circles with a radius of 120 miles - roughly two hours. of driving time. It can be easily seen that Southwest serves, in essence, over 90 percent of the domestic population.
Southwest's revenues and profits are steadily increasing. Its operating margin of 21.5 percent in the second quarter of 2000 was its best since 1980, according to Merrill Lynch. The company raised its fares four times since the second quarter of 1999 and still achieved a load factor of almost 75 percent in the most recent quarter.
Southwest's planned growth of 8 to 12 percent annually is likely to continue, given its recent plane purchases (in the next 10 years, the size of Southwest's fleet will double, with up to 290 new planes on order, 35 of them to be delivered this year). As its network expands to include more major metropolitan areas, the ability of long-haul passengers to fly on Southwest for their entire trip will increase.
Southwest will enter one or more new major markets annually for the next five years. Logical targets include somewhere around the Philadelphia area such as Allentown, PA. Soon, Southwest will dominate short-haul traffic on the East Coast, with plenty of feeder traffic into the Midwest and West Coast.
How will Southwest. s success affect the rest of the airline industry? Given current rates of growth, by 2005 it will overtake Delta as the leading carrier of domestic traffic by the year - if indeed it hasn't already.
By 2005, I predict the following airline rankings, in terms of domestic passenger volume:
1. Southwest 71,805,000
2. Delta 69,698,000
3. United 56,439,000
4. American 51,588,000
5. US Airways 42,982,000
6. Northwest 35,035,000
7. Continental 29,398,000
Southwest appears to be virtually invulnerable as long as its management remains solid, its operations remain smooth, its employees remain satisfied with their pay, and nothing happens that generates major negative publicity (i.e. a series of serious plane crashes).
The major network carriers may not like this vision of a triumphant Southwest, but it is unlikely they can do much about it, for several reasons:
As if competition from Southwest were not enough, the majors also must look over their shoulders at JetBlue. Although this is a new startup, it has the advantages of adequate gate space at New York's JFK and a pipeline to brand-new planes from Airbus. If JetBlue can avoid the pitfalls that often plague startup airlines, it could quickly become a factor along the East Coast and beyond.
JetBlue seems to be doing a good job of selecting routes and filling planes and is in the strongest financial shape of any start-up airline. It also is flying into regions that will result in head-to-head competition with US Airways - ominous news for that airline if its merger with United is not approved.
In the next five years, air fares on the East Coast will almost certainly drop as Southwest and JetBlue take away traffic away from the majors, especially US Airways. East Coast competition will be greater than ever. And the West Coast has no shortage of competition.
Scenario 12: Gridlock
If the nation's airways and skies become so crowded that we cannot put enough planes in the air to satisfy demand, the result will be gridlock. In the last decade, several presidential and congressional commissions have warned of this possibility.
If gridlock occurs, the only mechanism that can reduce demand to match the available supply will be pricing - in other words, higher fares.
This scenario will be explored fully in a subsequent paper. But its implications should be kept in mind by lawmakers and regulators - because it offers the greatest risk of limiting competition.
4. Conclusion
A minor mystery in the current discussion of the aviation industry is why the media, Congress and most regulators all refuse to classify Southwest as a major airline. As this paper has shown, Southwest is a major by virtually any definition: size of domestic fleet, number of passengers and market capitalization. The only thing it does not do is fly long-haul domestic nonstops or international-service routes.
But that is no reason for the role of Southwest to be disregarded when it comes to making decisions about the future of the airline industry. A decade from now, it is Southwest - not one or more of today's "major" airlines - that is most likely to rule the skies.
Appendix A
A sampling of commentary regarding the United-US Airways merger.
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Reuters |
5/24 |
"I think it's bad for consumers. It's bad all around. US Airways and United equals ugly. This will lead to higher prices. Probably the only good thing from a consumer standpoint is if you like United, you will now be able to earn Mileage Plus points on the East Coast." |
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Buffalo News |
5/25 |
"They'll have the ability to raise prices and make it stick," said James Kling, a Niagara University professor who studies the industry. "And there will be one less competitor that might buck a proposed price increase or start a fare war." |
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Times Union Albany, NY |
5/26 |
But it might not be good at all for upstate New York, which already is stuck with some of the highest airfares in the country. The Justice Department should not approve United's purchase of US Airways unless it is convinced that the deal wouldn't hurt this region further. Advocates of this deal will point to studies that show such mergers don't always lead to higher fares. But even stable fares aren't good enough for upstate. It needs lowers fares. |
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CNN Evans, Novak, Hunt & Shields |
5/27 |
"But I do believe there has been too much consolidation in the industry. I think when you look at hub concentrations by major airlines, and where there are major airlines -- one airline predominates a hub, the GAO has shown us that fares are higher. And it's just a matter of monopolistic practices. This consolidation will give United/US Air hub domination in a lot of places. Now perhaps the spinoff airline may be of some help. But I think it's an issue of... I think it's of great concern. There are many people in retrospect that believe that the last couple of mergers should not have been approved. So I think we ought to look at it very carefully, because, obviously, I'm also reluctant to interfere in the business of business." |
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Chicago Tribune |
5/28 |
"The fewer the airlines, the higher the prices. When giant companies merge, the consumer pays more and innovation suffers." |
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Crain's Chicago Business |
5/29 |
"When you take away a major carrier, you do reduce competition," says Michael Boyd, president of Colorado-based aviation consultancy Boyd Group/ASRC Inc. "At a time when they're screaming, `We need more competition,' United is proposing eliminating it." |
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Buffalo News |
5/30 |
Clearly, the main concern for transportation and government officials should be finding ways to maintain competition and prevent both higher air fares and poorer service if the merger passes union and anti-trust muster. The airlines' pledge not to raise fares for two years addresses part of that problem. Sen. Charles E. Schumer, who has made himself a champion of upstate interests, has an even better idea. Both the Department of Justice and the Department of Transportation should give careful consideration to his suggestion that some of the merged airlines' coveted takeoff and landing "slots," especially at such airports as LaGuardia in New York and Reagan National in Washington, be given to airlines that promise to serve this region. Clearly, the main concern for transportation and government officials should be finding ways to maintain competition and prevent both higher air fares and poorer service if the merger passes union and anti-trust muster. The airlines' pledge not to raise fares for two years addresses part of that problem. Sen. Charles E. Schumer, who has made himself a champion of upstate interests, has an even better idea. Both the Department of Justice and the Department of |
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Transportation should give careful consideration to his suggestion that some of the merged airlines' coveted takeoff and landing "slots," especially at such airports as LaGuardia in New York and Reagan National in Washington, be given to airlines that promise to serve this region. |
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Tennessean |
5/31 |
A proposal that would initially reduce nonstop service to Washington, DC's main airport threatens to create a flap with Nashville International Airport officials. "It's a reduction in capacity for us. We would not be happy with that." "We're firm supporters of the regional jet, but Washington is an important market for us. I don't think we'd be very pleased with that at all." Willis said if current service levels to Reagan National are threatened, the Airport Authority would meet with the Tennessee congressional delegation to express its concern over the proposed US Airways purchase. Airport managers also want to talk to United, hoping to avoid cuts or even add other routes. "This will be a big decision. This is something it would make sense for us and United to be working on." |
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Pittsburgh Post-Gazette |
6/1 |
While United has guaranteed all jobs for two years, Roddey said he is worried about what happens after that. He said neither airline has said workers would retain the same jobs in the same cities in which they currently are employed. Although Roddey believes most flight crew jobs are safe, he feared there could be cuts in "back room" operations such as reservations and administration. "Anyone who's ever been involved in a merger of this magnitude understands that you don't put airlines or any kind of businesses together like this and expect to keep the same number of jobs," he said. |
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Philadelphia Business Journal |
6/2 |
"[The merger] is not good for anyone except the stockbrokers peddling it and lobbyists. The attorney general should stand up and say this is wrong." |
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Fort Worth Star-Telegram |
6/3 |
Boyd opposes an American acquisition of Northwest, United's purchase of US Airways and similar mega-mergers. He says such mergers are bad financial deals and face insurmountable hurdles. |
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Business Week |
6/5 |
``The spin-off will actually be managed by United,'' grouses Representative Louise M. Slaughter (D-N.Y.). ``This plan would reduce competition in the skies.'' |
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Newsday |
6/7 |
"When you are talking about a merger between two of the largest players, it has to result in higher fares, poorer service, or both," said Ed Perkins, of the American Society of Travel Agents, "Its anti-competitive in its face," he said. "As a matter of public policy, we should say no mergers among the big six airlines for any reason, under any circumstance." |
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CNN The World Today 20:20 |
6/9 |
MARK SILBEWRGELD, CONSUMERS UNION: And we will be paying monopoly prices not set by competition, but set by the airlines' desire to optimize its profits |
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National Public Radio |
6/10 |
Mr. MIKE HATCH (Minnesota Attorney General): United Airlines, that's 50 percent or almost double the size of its largest competitors, will certainly have a wherewithal to be able to use that cross subsidy, subsidize those competitive routes with the non-competitive ones and then drive out competition. |
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Tribune Business News |
6/11 |
. "We find it borderline lunacy to even suggest that three mega-carrier networks will provide more competition than six independent competitors. Remember the simple maxim -- more competitors means more supply, (which) means more choice at better prices." The Justice Department is full of lawyers and economists who are smart enough to realize that. "Approval of three mega-mergers without astounding remedies would amount to a total abrogation of professional responsibilities by the DOJ -- pretty inconceivable" Buttrick said. (Remedies refer to significant divestitures of key airline routes and airline assets.) "It is very, very difficult for us to reconcile the ongoing DOJ challenge of the Northwest-Continental structure -- a smaller network with no more direct overlap -- with outright approval of the United-US Airways deal." |
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Airline Financial News |
6/12 |
"In this sense, we are indeed concerned that industry mergers will result in higher total labor costs as contract provisions of buyers and sellers are cherry-picked for the most desirable attributes and managements buy labor peace," he says. "In short, it seems more likely to us that total industry unit costs will rise as the fruits of consolidation are shared by labor." |
|
USA Today |
6/13 |
"I think this is a terrible deal for shareholders and a terrible deal for consumers," says Scott Hamilton, industry analyst and former editor of Commercial Aviation Report. |
|
Congressional Testimony - T&I Committee |
6/14 |
"If a labor strike occurs and that portion of our economy is grounded, we would have real trouble. This is like trucking having a general strike across the country, we would be in real trouble." |
|
Dayton Daily News |
6/15 |
Jackson said the airlines have created a
monopolistic system with their hub airports, which he said represents a
blatant violation of federal antitrust laws. |
|
Sacramento Bee |
6/16 |
"The merger would almost certainly reduce the competition in many markets, thereby raising antitrust concerns," said Clinton Oster Jr., a professor at Indiana University |
|
Aviation Week & Space Technology |
6/19 |
''The economics of the merger proposal is based on a rosy outlook,'' said Rick Dubinsky, chairman of United's Master Executive Council (MEC) of the Air Line Pilots Assn. ''They are hoping against hope that the world doesn't change.'' |
|
Morning Star- Wilmington, N.C. |
6/21 |
Aside from letting passengers fly more places without switching airlines, it's hard to see how they would benefit. Skepticism is coming from both political parties, as well as from consumer groups, independent analysts and local officials. The skepticism is well founded. This merger might be good for those two airlines. It's doubtful it would be good for most of the rest of us. |
|
New York Times |
6/22 |
. "I think the flying public is in for some real, real horror stories, worse than they have ever experienced," he said, adding that Congress does not have the power to stop the merger. |
|
Chicago Tribune |
6/23 |
"I think that the law today is sufficiently flexible, that if there's a will to stop this merger and there are good arguments to stopping it, then it will be stopped," Foer said. "And, sort of my presumption is that it ought to be stopped, but I'm still open- minded enough to see what develops." |
|
BNA Daily Report |
6/26 |
[The antitrust division's resources are severely strained by their other obligations, including other proceedings specifically involving the airlines,'' Kahn told McCain. ''[I]f they lack the resources to look at this latest proposed merger with great care, it seems to me that would be a case of the government being penny-wise and pound-foolish.'' |
|
Philadelphia Inquirer |
6/27 |
"We have to look if there needs to be a new national policy regarding aviation," Fisher said. "Only Congress and the President can do that, but I'm not sure we want to see an airline oligopoly in this country, and I'm concerned this merger is a first step toward an oligopoly." |
|
Chicago Tribune |
6/28 |
"In the short run, merging air carriers may
encounter many of the same service difficulties experienced by the
railroad industry in recent mergers between large railroads with extensive
route networks," the report says, alluding to the meltdown that occurred
after the Union Pacific Railroad merger with the Southern Pacific Railway.
In the long run, fewer competitors could result in less competitive |
|
Knight Ridder Tribune Business News |
6/29 |
"The fathers of deregulation believed that uncompetitive airlines would fail, and more competitive ones would take over those assets," says Mitchell, president of the Business Travel Coalition, which represents the interests of corporate travelers. "What we have here is the `failing-airline doctrine' at work - that you agree to a merger because, if you don't, an airline will fail. It's not supposed to be the way deregulation works." |
|
The Business Journal; Serving the Trinagle's Business Communities |
6/30 |
In a letter to the U.S. Department of justice, Hatch writes, "It is clear that the proposed merger .... would result in reduced competition and ultimately higher prices, and would harm business and leisure air travelers, localities and the country as a whole." |
|
The Business Journal; Serving the Trinagle's Business Communities |
6/30 |
In a letter to the U.S. Department of justice, Hatch writes, "It is clear that the proposed merger .... would result in reduced competition and ultimately higher prices, and would harm business and leisure air travelers, localities and the country as a whole." |
|
Mergers and Acquisitions Journal |
7/1 |
, "Even though the pilots of both U.S. Air and United are represented by the ALPA National union, and ALPA has a merger policy in place, in my experience, the policy's application has been fraught with peril." |
|
Washington Times |
7/4 |
"This relationship is way too cozy," said Terry Trippler, airline expert for 1travel.com. "There's going to be a connection.""It's a nice little package of support," Mr. Trippler said. "It's United operating under an assumed name." |
|
Business First of Buffalo |
7/5 |
Fans of airline deregulation continue to cling to the concept of an industry unencumbered by-government intervention. In a perfect world that might work, but the reality of UAL's bid for US Airways is that cities like Buffalo stand to lose a lot a more than they would gain if the takeover is allowed to go through. |
|
Chicago Tribune |
7/7 |
"What we've been shown here is a situation that when we allow any one airline to get so big in one area, anything other than norm can disrupt operations so badly," Trippler said. "The fact that United is having a problem right now means we have to ask what this could mean for the future." |
|
Pittsburgh Post-Gazette |
7/8 |
Michael Boyd, president of the Boyd Group, a Colorado-based aviation consulting firm, said mergers historically have resulted in less competition, less employment and less service. He believes this merger will mean less competition for Pittsburgh and may result in cutbacks in service to smaller cities now served by both airlines. He also questioned the no-layoff vow."Does that mean they will need two accounting departments, two marketing departments, two ramp crews at Buffalo? If that's the case, how is it going to make the system more efficient?"Pittsburgh's future as a hub is an "open question," he said, though he added "it would be a great place to flow people rather than Chicago. |
|
Chicago Tribune |
7/9 |
Many passengers fear, with justification, higher fares, fewer frequent flier rewards and wider consequences from job actions by unions. Nor does United's woeful performance in on-time flights and customer satisfaction build much confidence in this deal. What's the advantage of flying on the biggest if the biggest consistently gets you there two hours late and hands you half your bags when you arrive? |
|
Tribune Review |
7/11 |
Lowell Taylor, an economics professor at Carnegie Mellon University, even told the senators he planned to use his comparative analysis of US Airways fares in his fall classes "as an example of a monopoly." |
|
U.S. Newswire |
7/12 |
The domestic airline industry has already been increasing prices more than double the rate of inflation. Air fares now average about 1/3 higher than before deregulation, while complaints on services, delays and overcrowding have reached record levels. Unless Congress acts to preserve and protect passengers, this latest round of mega mergers will mark the end of an era, and free market competition and the beginning of an era of cartels, oligopoly and monopoly in the nation's air transportation system. |
|
Chicago Tribune |
7/13 |
"So by the end of the summer the probability is that the [Justice Department] will be staring down three major airline deals," Buttrick said. "Unless DOJ completely loses their senses it's difficult to see how one could defend three megamergers as being remotely in the best interests of the typical consumer." |
|
Charlotte Observer |
7/14 |
"Good Lord," Hollings said. "Can you imagine that? To come before the committee and say that the only way to be competitive is to be monopolistic?" |
|
National Journal |
7/15 |
Kevin P. Mitchell, chairman of the Business Travel
Coalition, which opposes the United-US Airways merger, contends that a Big
Three could conspire to destroy Southwest. "A combined United-US Airways,
and the other resulting mega-airlines, will possess |
|
Crain's Detroit Business |
7/17 |
If government regulators or other stumbling blocks kill an American-Northwest deal, Detroit Metropolitan Airport Director Lester Robinson won't be sorry. Robinson said last week that he's against the idea. ''I can understand their business reasons, and they are valid. But overall, it would reduce competition, and I don't think that's what people want to see these days,'' Robinson said. ''You'd create three mega-carriers that each have 25 percent of the market. That's not good for service.'' But he said he doubts American and Northwest are talking because they want to merge. Robinson thinks it's a strategic move to get regulators at the U.S. departments of Justice and Transportation to kill the United-US Airways merger. |
|
Saint Paul Pioneer Press |
7/18 |
Ash said these proposed mergers are unlikely because it's difficult for the airlines to resolve complex labor and financial issues. Any merger also would require the blessing of the U.S. Department of Justice, which is deciding whether the consolidation violates anti-trust laws. However, if United merges with US Airways , MAC officials said the board may revise its anti-merger position so as not to jeopardize Northwest's merger plans. |
|
Financial Times |
7/19 |
"Given the recent history, you'd expect the answer to be 'no' (to future mergers) but you never know with these guys," he said, adding that airline mergers tended to precipitate labour unrest and customer complaints. |
|
USA Today |
7/20 |
"These marketing devices are incredibly powerful," says Severin Borenstein, a University of California at Berkeley business professor. A former Civil Aeronautics Board economist, he argued the 1987 USAir-Piedmont merger was anti-competitive, but the DOT approved it. |
|
USA Today |
7/24 |
"If a non-unionized group is part of an acquiring airline, their interests probably would be protected by their company," says Robert Harris, an arbitrator and former member of the National Mediation Board, which mediates airline labor disputes. "If they work for the acquired company, it's less likely their interests would be protected by an acquiring airline." |
|
Express-Times |
7/25 |
George Doughty, executive director of the Lehigh Northampton Airport Authority, said he opposes the merger because it would create a near-monopoly at airports around the country, with one airline serving most of the flights."There needs to be a moratorium on mergers for a period of time -- maybe for years rather than months," Doughty said. "We think Congress needs time to review the various issues in the airline business that we believe are anti-competitive." |
|
|
7/26 |
Airlines are the same way. It's an amazement to me that the United Airlines-US Airways merger has not caused mobs to descend on Washington. Here are two airlines who consider it a good day if they get several airplanes off the ground. United is dead last in customer satisfaction. US Airways dropped from first place to sixth last year. Nevertheless, they both promise that if No. 10 is allowed to merge with No. 6 somehow they will wind up No. 1. The government should cancel this merger - and blame it on the weather. |
|
BNA Daily Report |
7/27 |
Rep. James Oberstar (D-Minn.), a leading critic of the proposed merger of United Airlines and US Airways, said his bill would give DOT the authority to protect consumers from any ''airline monopolies'' that might be coming down the road, including those that might follow in the wake of the United-US Airways deal if it is allowed to go through by DOT and the Justice Department. Oberstar, who would be in line to assume the chairmanship of the Transportation Committee if the Democrats take control of the House next year, said he opposes the immediate deal before the agencies as well as others under discussion. However, Oberstar said if the mergers are allowed to take place, he plans to push ahead with legislation that would permit DOT to intervene when airline practices result in reduced competition and unreasonably high ticket prices. ''I believe we need to begin thinking about the steps we would need to take to protect consumers if competition in the industry is reduced to a point where it is no longer an effective check on monopolistic behavior,'' Oberstar said. ''I emphasize that this type of legislation is not my preferred approach--I would greatly prefer to continue to have consumers protected by adequate competition in a free market.'' Among other things, the bill would allow DOT to order airlines to roll back fares or take other actions in markets where it might find fares to be unreasonably high. But Oberstar, anticipating airline industry opposition, said this is not a ''reregulation'' bill. ''Airlines will remain free to set prices and provide service without prior government approval,'' Oberstar said. ''However, the bill will give DOT authority to intervene if the airlines take unfair advantage of the absence of sufficient competition.'' |
|
|
|
continue to have consumers protected by adequate competition in a free market.'' Among other things, the bill would allow DOT to order airlines to roll back fares or take other actions in markets where it might find fares to be unreasonably high. But Oberstar, anticipating airline industry opposition, said this is not a ''reregulation'' bill. ''Airlines will remain free to set prices and provide service without prior government approval,'' Oberstar said. ''However, the bill will give DOT authority to intervene if the airlines take unfair advantage of the absence of sufficient competition.'' |
|
Daily Deal |
7/28 |
" The consumer will ultimately be the loser in this situation," Byran said. |
|
Houston Chronicle |
7/31 |
For example, there are United Airlines , US Airways, Microsoft and American Water Works Co. Microsoft is donating $1 million each to the Republican Convention in Philadelphia and the Democratic Convention in Los Angeles. Microsoft wants the government's antitrust case to go away before the company is cleft in twain. United Airlines is giving $500,000 to the Democratic meeting. US Airways has donated $500,000 to the Republican convention. These two monsters want to merge. They want to create a dominant regional subsidiary, DC Air, that will keep all of upstate New York's air travelers paying through the nose, and putting up with impromptu flight cancellations. Remember these two huge, well-targeted gifts when you hear your congressman making grand speeches against the airline merger. |
|
Philadelphia Inquirer |
8/2 |
"There is so much wrong with this merger that anything that United would be willing to give up now is only going to be window dressing," said Kevin P. Mitchell, chairman of the Business Travel Coalition, which represents a group of corporate air-travel customers. |
|
Travel Agent Magazine |
8/3 |
"ASTA's message is this: no more mergers, no more alliances and no more airline joint ventures should be permitted as long as passengers are screaming for relief from airline arrogance and indifference resulting from this ever-growing oligopoly in the skies." Galloway says if airlines deliver customer service first, only then should the government "consider the rest." |
|
Business Week |
8/7 |
If the proposed merger of United Airlines Inc. and US Airways Group Inc. goes through, other rivals will defensively combine, leaving just three major airlines and even less head-to-head competition. That can't be good for consumers. Antitrust regulation is largely omitted from the paeans to markets by deregulation advocates. |
|
Chicago Tribune |
8/8 |
Here's a memo to both sides: Your customers aren't interested in your labor dispute. Your customers want to be able to trust United to fly when it says it's going to fly, and right now they can't. If they can't trust United, they will learn to trust another airline. |
|
Chicago Tribune |
8/9 |
Mayor Daley predicted that the pain being inflicted on United ticketholders will plague the company for some time.I think they are gong to have a real difficult time with their customers. People go on vacation. They save their hard-earned money to get a week, two weeks with their children, and now it is cancelled," the Mayor said. "Let's not camouflage it. This is going to hurt United Airlines ." |
|
Crain's Chicago Business |
8/14 |
With all of its troubles, United doesn't deserve to be rewarded with approval of the merger, says U.S. Rep. Jesse Jackson Jr., D-Chicago. "United should try to address its own serious problems before taking over the operations of another airline," he says. |
|
The Record (Bergen County, NJ) |
8/15 |
And if the merger of UAL and US Airways is
approved, we can only imagine the creation of a carrier with even greater
power to dominate the industry and to impose 1 standards |
|
Los Angeles Times |
8/18 |
"I believe this issue with United is being viewed by government as a much broader industry issue, and with respect to that proposed merger, I have to believe it's another nail in the coffin" that will stop that deal, said Kevin Mitchell, chairman of the Business Travel Coalition. |
Appendix B
Appendix C
Appendix D
News release: New plane orders, delivery schedule, for Southwest
Exclusive 29-Year Relationship Continues
DALLAS, TX - June 29, 2000 - The 29-year relationship between Southwest Airlines and The Boeing Company continues as Southwest announces an order for up to 290 "Next Generation" Boeing 737-700 aircraft. This is the single largest aircraft order made by Southwest Airlines and the largest order ever for Boeing's Next Generation family of aircraft. The aircraft will be powered by CFM56-7 engines manufactured by CFM International, a 50/50 joint company between Snecma Moteurs and General Electric of the United States.
"We have the utmost confidence in the future of Southwest Airlines predicated upon the strength of the public's desire for more low fares with exceptional Customer Service," said Herb Kelleher, Southwest's chairman, president, and CEO. "This should reassure America that Southwest Airlines will continue to expand its low-fare influence across the country, giving more Customers the Freedom to Fly."
The deal includes firm orders for 94 new aircraft, in addition to the 74 Southwest currently has on order with The Boeing Company through 2004. Deliveries under the new order begin in 2002, adding 10 aircraft to the 21 currently scheduled for delivery that year. Firm orders will extend through 2007, with options for 25 additional aircraft in 2008, and purchase rights for another 171 aircraft from 2009 through 2012. Southwest currently has 323 Boeing 737 aircraft in its fleet.
"The 737 has served us well over the past 29 years, providing our Customers with safe, reliable, cost-effective transportation," Kelleher said. "The superior partnership Southwest enjoys with The Boeing Company and CFMI, and the dedication of each of our superb Employees, makes it possible for us to take advantage of the many opportunities for growth that currently exist."
"It's no wonder that the Boeing 737s have carried more than six billion passengers - the equivalent of today's world population. We are proud that the Next-Generation 737s are, once again, Southwest's equipment of choice for their future success and passenger satisfaction," said Alan Mulally, Boeing Commercial Airplanes Group president.
Southwest Airlines recently announced it will inaugurate service to its 57th city on October 8, 2000. Residents of the Buffalo, NY, area will be the latest to benefit from the "Southwest Effect," a term coined by the U.S. Department of Transportation to describe the increase in airline travel stimulated by low Southwest Airlines fares.
According to testimony before the United States Senate, Professor Steven Morrison of Northeastern University said that competition from Southwest Airlines accounted for $9.7 billion in airfare savings since 1978. He also said that Southwest Airlines lowers airfares on routes that account for 94 percent of U.S. domestic passenger miles.*
"This is a very important time in commercial aviation and the need has never been greater for Southwest Airlines to maintain its vigilant post as the low fare policeman on the beat," Kelleher said. "Our balance sheet is strong and demand for our product has never been greater. The duration and terms of this contract with The Boeing Company echo the confidence we have in our continued success."
Southwest's existing and future firm orders and options break down as follows (not including 171 new purchase rights and 46 existing purchase rights):
|
Year |
Current Firm Orders |
Current Options |
New Firm Orders |
New |
|
2000** |
20 |
0 |
0 |
0 |
|
2001 |
23 |
0 |
0 |
0 |
|
2002 |
21 |
0 |
10 |
0 |
|
2003 |
5 |
13 |
8 |
0 |
|
2004 |
5 |
13 |
24 |
0 |
|
2005 |
0 |
18 |
5 |
0 |
|
2006 |
0 |
18 |
22 |
0 |
|
2007 |
0 |
0 |
25 |
0 |
|
2008 |
0 |
0 |
0 |
25 |
|
Total |
74 |
62 |
94 |
25 |
-- GW --