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BTC Opposes Radical Airline Industry Consolidation

( Mid-Size Communities Would Be Harmed
Merger rationale deeply flawed

Business Travel Coalition (BTC) today presented to the U.S. House of Representatives, Transportation&Infrastructure Committee, the following summary-analysis of the proposed Delta Air Lines / Northwest Airlines merger. BTC’s complete written Statement, which includes proposed remedies for DOJ’s consideration, can be accessed at


BTC Verbal Testimony – U.S. House T&I – May 14, 2008

Mr. Chairman and Members of the Committee thank you for requesting that the Business Travel Coalition appear before you today.

Delta and Northwest are playing the “fuel card” in suggesting that their merger is an inevitable response to high fuel costs.

But does the Delta / Northwest merger math make any sense? Even if we give them the undeserved benefit of the doubt that they will achieve $1 billion in annualized synergies, many analysts believe 75% of that would be captured by a new, and well-deserved, pilot’s agreement — leaving just $250 million. The projected pro forma fuel bill for the combined carriers for 2008 will be $12 billion.

So, how is it possible that $250 million will materially help with fuel costs, especially given the $1 billion in projected upfront integration costs? The math simply does not work! What’s more, these mergers were planned when fuel prices were less than half of today's level. The idea that they are a necessary response to $125 fuel is absurd.

Importantly, many energy experts predict that oil prices will retreat to the $50 to $70 range in the relative near term, especially against a global economic slowdown. Building an irreversible national aviation policy around the current price of oil makes no sense.

Delta and Northwest would have you focus on just 12 overlapping non-stop markets when the real story, as far as domestic U.S. competition is concerned, is the 550 non-stop and one-stop city-pair markets where the combined carrier would have 50% market share, or higher. In 139 one-stop markets the market shares soar past 70%. These are the small and mid-size communities where capacity will surely be ripped out and fares increased.

However, there are many not-so-small communities that will be seriously harmed as well, like Nashville and Baltimore, where in numerous city-pair markets the standard DOJ measure for competitive concentration, HHI or the Herfindahl-Hirschman Index, is off the charts. DOJ merger guidelines say that a 100 HHI-point increase in highly concentrated markets, characterized as those with a score greater than 1,800, establishes a presumption that the merger is likely to create or enhance market power, or facilitate its exercise.

In Nashville, for example, there are numerous city-pair markets where the HHI skyrockets to 8,000, 9,000 and nearly 10,000! And make no mistake, these are the markets that matter. Delta and Northwest don’t want you to focus on these. All their promises about no layoffs, no hub closures, no service degradations will fly out the window faster than Ferris Bueller with a “stomach ache” on a sunny Spring school day.

Delta, however, realizes HHI is the valid tripwire. In its own presentations to Congress last year, in rebuking US Airways’ overture, with BTC’s assistance, the carrier stated, “Capacity reductions and fare increases cannot justify mergers:,” and quoted the DOJ Merger Guidelines as follows, “Cognizable efficiencies…do not arise from anticompetitive reductions in output or service.”

Delta now claims that “circumstances have changed” – “that was then and this is now.” Inevitable hub closures last year are inevitable no more. But in truth, Delta’s strong reaction to the unsolicited US Airways merger, that Delta found so abhorrent and anticompetitive, is a polygraph test for Congress and regulators to study in connection with Delta / Northwest.

Despite the Delta / Northwest spin machine, there are scenarios for airlines other than ill-considered mergers, and some could produce far better results. If the Delta / Northwest merger is the proverbial canary in the coal mine – as time passes, the canary is inhaling gas and gasping for air. It’s time for policymakers, regulators and airlines to look for alternatives to avert disaster. What are the choices?

Status Quo. In this scenario, airlines accelerate their own unilateral reductions of uneconomic capacity and continue to address cost and efficiency issues.

Robust Recovery. If oil prices should fall back to below $80.00, as many predict, because of the cost-cutting initiatives of the past few years, the major network carriers could come out on the other side of the current U.S. economic slowdown and experience a robust airline sector recovery.

Liquidations. If the proponents of “let the market work its will” truly believe what they say, then let major carriers fail instead of propping them up with government-sanctioned anticompetitive combinations. Antitrust law is not meant to be sympathetic to industries that cannot solve their own problems.

Perhaps the most authoritative voice about airline options, however, comes from Delta itself. I quote from an Associated Press story on February 29, 2008, “If Delta's consolidation talks with Northwest Airlines fall apart, the airline isn't committed to finding a replacement deal, said Chief Financial Officer Ed Bastian.”

“When asked if Delta had a “Plan B" ready if the Northwest deal fails, Bastian said, ‘It's not a Plan B, it's a Plan A - that's our standalone option.’ Bastian said the company expects solid growth for the year and that the airline has “a great standalone plan."

As you can see Members of the Committee, this proposed merger will neither help consumers nor the competitive structure of the airline industry, and there are other options.

Thank you Mr. Chairman.

About BTC
Founded in 1994, the mission of the Business Travel Coalition is to bring transparency to industry and government policies and practices so that customers can influence issues of strategic importance to them.

CONTACT BTC || Kevin Mitchell | 610-341-1850 |

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