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Dividing the Skies

Industry experts discuss the sale of TWA to American Airlines and other proposed airline mergers.

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  • TOM BEARDEN:

    Today's deal brings four major airlines together in a transaction that could change the entire shape of the airline industry. It would also mean the end of TWA, an airline with a glorious past dating back to the 1920s, but a troubled present. TWA, the nation's eighth-largest carrier, failed to grow significantly in the deregulated era and went into bankruptcy twice in the 1990s. A series of management changes improved on-time operations and upgraded the aging fleet, but the airline lost money in the last nine months.

    American, in contrast, has been one of the success stories of the deregulated era, with the world's largest fleet — more than 700 planes — a good profit record, and a large route network anchored by hubs in Chicago, Dallas/Fort Worth, Miami, and San Juan, Puerto Rico. But the arithmetic of the merger isn't a simple case of addition. There's also a complex asset shuffle involving United's pending plan to take over U.S. Airways. That merger would make the nation's number one carrier, United, even bigger. When it was announced last spring, it set off fears that the new airline would dominate air travel in the U.S. So part of today's deal is designed to address that.

    American will acquire some assets from U.S. Air that otherwise would have gone to United. American will get 86 planes from U.S. Air, and gates at Boston, Newark, Philadelphia, Washington, Atlanta, and LaGuardia. In another part of the deal, American would acquire 49% of D.C. Air, a regional carrier being created to help the United-U.S. Air merger pass muster with regulators. They had expressed fears about D.C. Air's lack of independence as a sole creation of United.

    In addition, American would share with United what is now the U.S. Airways shuttle service between New York and Boston, and New York and Washington. The most important asset American gains from TWA itself is its efficient hub at St. Louis. It also gains nearly 200 TWA aircraft and some gates at Boston, Los Angeles, and Kennedy. That would give American a new hub to complement its existing hubs. American's CEO Donald Carty explained his company's thinking.

  • DONALD CARTY:

    What we're trying to do in consolidating is we're not trying to eliminate competitors, we're trying to build a network. Our desire is to be able to say to our customers, we can take you any place, any time in the world. And so we are looking for partners that provide our network with new destinations and new outlets. The size of the markets means that there can only be so many competitors — given that number of airplanes and that size of market and that many flights. We are being driven by trying to serve our customers, individuals and big corporate accounts to try to do as comprehensive a job for them as we can.

  • TOM BEARDEN:

    The deal must now be approved by the Justice Department.

  • JIM LEHRER:

    Ray Suarez takes it from there.

  • RAY SUAREZ:

    For more, I am joined by three people who watch the airline industry closely: Darryl Jenkins is director of the Aviation Institute at the George Washington University in Washington, D.C.; Richard Copland is president and CEO of the American Society of Travel Agents, which represents a worldwide group of travel professionals; and Michael Levine, is an adjunct professor of law at the Harvard Law School and former head of the Yale School of Management — he's worked as an executive at three of the nation's airlines.

    Richard Copland, if the deal goes through as it has been proposed today, what will the impact be?

  • RICHARD COPLAND:

    It will definitely be anti-consumer, it will be bad for consumers. The track record shows that prices will go up and services will go down. Right now, we consider airline service and oxymoron — there is none.

  • RAY SUAREZ:

    Well, how can you say that with such certainty when from the looks of things, one of the possible outcomes if this merger didn't go through was that TWA would continue to move toward bankruptcy?

  • RICHARD COPLAND:

    They told us the same story ten years ago when both TWA and Pan Am were ready to go out of business. They controlled most of the European market. Despite what they said, both of those companies went into bankruptcy, the European market has grown and the European market has value because there is competition. Someone will take up TWA's roots in the event that they are unfortunately required to continue this bankruptcy operation. So certainly their responses are very effective for them, but for the consumer, this is all negative. The consumer will be severely hurt if the government allows these mergers to go through as currently constructed.

  • RAY SUAREZ:

    Darryl Jenkins, all negative to the consumer?

  • DARRYL JENKINS:

    No. Not at all. There has only been one study ever conducted that I can remember about mergers and what happens to prices and anti-competitive effects. And, interestingly enough, that was done after the TWA-Ozark merger in the 1980s. It showed a small bump — a small increase in prices, but it was really not that significant and the authors could not determine that it had been due to the merger and it wasn't just general economic conditions. TWA is on its last breath. At stake here now in terms of the public policy implications are 20,000 jobs in St. Louis that will be gone. That is really the public policy consideration with TWA. TWA doesn't control any significant part of the market. In St. Louis where it has its one hub, it doesn't even have the majority of the originating traffic in that market. So, in terms of market power, TWA is not a player and hasn't been a player in a long time. So the public policy implications again are certainly the 20,000 jobs there.

  • RAY SUAREZ:

    If St. Louis becomes an American hub does it become, in effect, Chicago's fourth airport?

  • DARRYL JENKINS:

    Well, I guess it does in the short run. American Airlines really wants another hub in the Midwest. They need one to grow because Chicago O'Hare is maxed out. You can't get anything more into and out of there. So this gives American airlines a chance to grow in the Midwest that they currently don't have.

  • RAY SUAREZ:

    Professor Levine, in our report, American was called one of the successes of the deregulation era? What is the incentive for them to take over a failing airline?

  • MICHAEL LEVINE:

    Well, American — remembers that is in the regulated era it was one of the big four airlines with United, TWA and Eastern. Eastern is gone. TWA is a shadow of its former self and is likely to be gone. And since the mid-80s, United and American have each been jockeying on the one hand with each other to see if one of them can become bigger and more of a network — as you saw Don Carty say — and be able to offer more service to more customers and at the same time trying to figure out how to distance themselves from Delta and Continental and Northwest. United thought, with the USAir deal, that it had finally found a way to do that.

    Despite its very extensive political preparation, it is now looking like that deal will require substantial overhaul to get approval from the Justice Department. So what is clearly happened in my view is that American and United have decided that it's better to be a big two than to be running with the pack and having the pack kind of gaining on you. American is a good airline. It's a well-run airline, but it's trying it achieve a level of dominance that it can't possibly get in the current environment. I think the key to the deal is not TWA, excuse me, TWA.

    The key to this deal is the arrangement it has made with United to divide up USAir and the East Coast. The idea I believe is to develop a very strong position on the East Coast which will be buttressed by the fact that gates and slots and everything else are limited at the big East Coast airport and then to hope that the Justice Department will keep Delta Airlines or anyone else, any of the other larger airlines from combining to form an airline big enough to compete with United and American.

  • RAY SUAREZ:

    Is it unusual as we see in this proposal for American to in effect help its main competitor, United, become as you say, one of the big two? It looks like they are trying to help them clear some of those regulatory hurdles you mention?

  • MICHAEL LEVINE:

    Well, it's not an act of charity on either part. I think American and United have both decided that a world in which their principal competitor is the other and, which is an airline they understand how to compete with and don't use price competition with, is a better world than a world in which they have to compete with pesky Delta and Northwest and Continental who have been growing, and who have through forming alliances and so on become more effective competitors to the big two.

  • RAY SUAREZ:

    Richard Copland, you've heard our other two guests lay out a scenario for rationalizing the skies, the slots, the routes. When a consumer walks into a travel agency or logs on to the Web what is going to be different about the landscape they face?

  • RICHARD COPLAND:

    Well, basically speaking these two major airlines in my opinion have conspired together to divide up the pie. It's like kids going behind the school yard taking their marbles and you take four marbles and I'll take four marbles. Consumers will lose choice. These people will dominate and mandate what the traveling public does. The traveling public owns the airways. The airlines don't own those airways, and this will only make those airlines stronger. They will attempt to get rid of travel agents because travel agents are the only source of unbiased information. Without the travel agent there is no one out there to protect the consumer. That's basically the game plan. This merger makes them only bigger and stronger. It was my opinion at that the antitrust laws were made to protect the small businesses not make the big businesses supreme.

  • MICHAEL LEVINE:

    Could I add —

  • RAY SUAREZ:

    Yes, go ahead.

  • MICHAEL LEVINE:

    — one comment that I think has been overlooked in the way these mergers are being looked at. Right now we have seen that when a big airline like United or American experiences a labor disruption. The system has a great deal of difficulty absorbing the passengers who want to fly on that airline who can't because of the disruption. If this deal were to go through, I really believe that the traveling public would be enormously vulnerable to United's and American's unions because if either of those experienced a job action, there would be no possible way for the rest of the system to absorb the passengers who are inconvenienced.

  • RAY SUAREZ:

    Well, Darryl Jenkins, we just saw canceled flights and lack of overtime causing severe disruption. What do you think of Mr. Levine's point?

  • DARRYL JENKINS:

    Well, certainly what Mike says about labor disruptions is clearly true, but it is true with or without a merger. We have labor problems now and they do exist. They exist, have existed for the last ten years. These things exist whether or not we have mergers. Now, the only thing I would disagree with is who is pesky on the East Coast. Delta Airlines, Northwest and Continental are not the pesky players on the East Coast. Southwest and Jet Blue are the pesky players.

    That is what is going to be interesting to watch in the next five years. We know in this year alone, Southwest Airlines has ordered enough planes to double the size of its fleet in the next seven years. As a matter of fact, seven years from now its fleet will be almost as big as American Airlines in terms of what it is using domestically. Now, we know they are going to put some of those planes in Las Vegas and we know the rest of those are coming to the East Coast so the dynamics of the East Coast are going to change significantly because of the role of Southwest.

    At the same time in JFK, we have Jet Blue, which is a very pesky startup. It has a lot of financing. And instead of going out and buying old tired DC-9's, they brought brand new Airbus planes so the dynamics on the East Coast are going to be a lot different than they have been with or without mergers going on. That is what is going to be interesting. Now, if I were American and United on the East Coast, I would be more worried about Southwest and Jet Blue, what they are going to do to me than I would be about Delta, Continental and Northwest.

  • RAY SUAREZ:

    So you think that even in this era where we're putting together some huge, huge routes and airlines, that small players can still make a big difference?

  • DARRYL JENKINS:

    Yes, first of all Southwest Airlines is not a small player. In terms of passengers carried domestically they are second behind Delta. Delta carries the most passengers. United Airlines flies bigger planes, longer mileage. That is why they are the biggest right now. They are bigger in that sense. Right now in the United States, Delta carries the most passengers. Southwest is the second biggest and United is behind them.

    So we will never get to the situation where we have just three major players. We will probably, if we do go through and have consolidation, it's more likely that we'll end up with five very large airlines, one of which will be like Northwest, which will be in a inferior position. And they will be competing very strongly against the others because they don't want to give up any traffic. So whatever it is that will be different than we think it's going to be.

  • RAY SUAREZ:

    Darryl Jenkins, guests, thank you very much.