UA/US Merger....comments from inside Congress
Oct 28, 2000 | 11:52 am
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UA/US Merger....comments from inside Congress
I picked up a copy of this letter regarding the most recent thoughts on the proposed merger.....compromise?
October 27, 2000
Mr. Doug Melamed
Acting Assistant Attorney General
Antitrust Division
Justice Department
Washington, D.C.
Dear Mr. Melamed:
I have previously written to your predecessor, Mr. Klein, expressing my
opposition to the proposed merger of United Airlines and US Airways.
Recently, there has been speculation that your office is considering a
compromise, in which you would not object to the merger if the proposal was
revised to require divestitures of additional assets, and/or to impose
limitations on post merger operations. I strongly urge you not to take this approach. This type of compromise would not remove the basic problem with
the proposed merger: that the merger is likely to trigger other mergers and reduce the industry to three mega-carriers with worldwide networks. This would lead to reduced competition and higher fares throughout the country.
During my 26 years of Congressional service I have been a close observer of the airline industry. I feel confident that a United-US Air merger would trigger other mergers, even if some assets are divested from United or U.S. Air. It is conventional wisdom in the airline industry that a major carrier cannot let one of its competitors substantially increases the size of its network. Specifically, if the United-US Air merger was permitted, the merger would be perceived as a serious threat by American and Delta, who would feel impelled to expand their own networks by mergers. As was stated by Business Week:
"once United got the ball rolling, no other airline could afford not to
consider its own deal. If encountered, a United-US Airways merger could cost
American and Delta each $250 million to $400 million a year - as United's
stronger network drains traffic from its rivals, figures airline analyst Samuel C. Buttrick of Paine Webber, Inc. And American risks being crippled at its Chicago hub, where greater East Coast feed for United could leave American a distant No. 2."
In evaluating the threat which a United-US Air merger would present to other large carriers, I would note that United is already the nation's largest carrier with system revenues of almost $2 billion a year more than American. If US Air's substantial network were added to United's, the post-merger carrier would have 65% more revenue than American, $26 billion a year versus $16 billion. The post merger carrier would have nine hubs, more than any other carrier, and in seven they would have a market share of more than 50%.
In these circumstances, the motivations of American and Delta to merge would
not be changed by any conditions your office can impose. The main point of a
United-US Air merger is to permit United to expand its network substantially. The types of conditions which you could consider would still leave us with a substantially bigger United, and other major carriers would still seek to merge.
I continue to urge, as I have in prior letters, that you not consider the United-US Air merger in isolation, but also the merger's "downstream" effects, that is the effects of the merger on triggering other mergers. I urge you to heed the strictures of Alfred Kahn, the "father" of airline deregulation:
" The trouble with these mergers, says Kahn, is that you can make a plausible
case for each one. But the end result might be a cumulative process that
gives us too much concentration in the industry." (Minneapolis Star Tribune,
June 6, 2000)
I would also call your attention to the recent decision of the Surface Transportation Board in its recent Notice of Proposed Rule Making on railroad mergers. First, STB proposed to change its merger policies, to create, in effect, a presumption against further consolidation in the rail industry where mergers have already reduced the industry to seven major carriers.
"Although the Board cannot rule out the possibility that further consolidation of the few remaining Class I carriers could result in efficiency gains and improved service, the Board believes additional consolidation in the industry is also likely to result in a number of anticompetitive effects, such as loss of geographic competition, that are increasingly difficult to remedy directly or proportionately. Additional consolidation could also result in service disruptions during the system integration period."
STB further proposed to change its policy of considering each particular merger in isolation. STB stated that, "because there are few remaining Class I carriers and the railroad industry constitutes a network of competing and complementary components, the Board cannot evaluate the merits of a major transaction in isolation - the Board must also consider the cumulative impacts and crossover effects likely to occur as rival carriers react to the proposed combination. The Board expects applicants to anticipate with as much certainty as possible what additional Class I merger applications are likely to be filed in response to their own application and explain how these applications, taken together, could affect
the eventual structure of the industry and the public interest."
I urge you to follow the example of STB and take a stand against the United-US Air merger, which is likely to start a round of mergers and reduce the industry to three major carriers. This would be in the best tradition of the Department's long history of acting to preserve competition in the airline industry, beginning with your opposition to the Northwest-Republic and TWA-Ozark mergers in the 1980's, and continuing through your recent efforts to prevent Northwest from gaining a controlling share of Continental's stock, in a case which recently went to trial.
The United-US Air merger gives the Department of Justice an historic
opportunity to continue this tradition and prevent a further deterioration of competition in the airline industry. I urge you to do so, and thereby to permit the consumer benefits of deregulation to continue.
With best wishes.
Sincerely,
James L. Oberstar, M.C.
Ranking Democratic Member
[This message has been edited by Randy Petersen (edited 10-28-2000).]
[This message has been edited by Randy Petersen (edited 10-28-2000).]
October 27, 2000
Mr. Doug Melamed
Acting Assistant Attorney General
Antitrust Division
Justice Department
Washington, D.C.
Dear Mr. Melamed:
I have previously written to your predecessor, Mr. Klein, expressing my
opposition to the proposed merger of United Airlines and US Airways.
Recently, there has been speculation that your office is considering a
compromise, in which you would not object to the merger if the proposal was
revised to require divestitures of additional assets, and/or to impose
limitations on post merger operations. I strongly urge you not to take this approach. This type of compromise would not remove the basic problem with
the proposed merger: that the merger is likely to trigger other mergers and reduce the industry to three mega-carriers with worldwide networks. This would lead to reduced competition and higher fares throughout the country.
During my 26 years of Congressional service I have been a close observer of the airline industry. I feel confident that a United-US Air merger would trigger other mergers, even if some assets are divested from United or U.S. Air. It is conventional wisdom in the airline industry that a major carrier cannot let one of its competitors substantially increases the size of its network. Specifically, if the United-US Air merger was permitted, the merger would be perceived as a serious threat by American and Delta, who would feel impelled to expand their own networks by mergers. As was stated by Business Week:
"once United got the ball rolling, no other airline could afford not to
consider its own deal. If encountered, a United-US Airways merger could cost
American and Delta each $250 million to $400 million a year - as United's
stronger network drains traffic from its rivals, figures airline analyst Samuel C. Buttrick of Paine Webber, Inc. And American risks being crippled at its Chicago hub, where greater East Coast feed for United could leave American a distant No. 2."
In evaluating the threat which a United-US Air merger would present to other large carriers, I would note that United is already the nation's largest carrier with system revenues of almost $2 billion a year more than American. If US Air's substantial network were added to United's, the post-merger carrier would have 65% more revenue than American, $26 billion a year versus $16 billion. The post merger carrier would have nine hubs, more than any other carrier, and in seven they would have a market share of more than 50%.
In these circumstances, the motivations of American and Delta to merge would
not be changed by any conditions your office can impose. The main point of a
United-US Air merger is to permit United to expand its network substantially. The types of conditions which you could consider would still leave us with a substantially bigger United, and other major carriers would still seek to merge.
I continue to urge, as I have in prior letters, that you not consider the United-US Air merger in isolation, but also the merger's "downstream" effects, that is the effects of the merger on triggering other mergers. I urge you to heed the strictures of Alfred Kahn, the "father" of airline deregulation:
" The trouble with these mergers, says Kahn, is that you can make a plausible
case for each one. But the end result might be a cumulative process that
gives us too much concentration in the industry." (Minneapolis Star Tribune,
June 6, 2000)
I would also call your attention to the recent decision of the Surface Transportation Board in its recent Notice of Proposed Rule Making on railroad mergers. First, STB proposed to change its merger policies, to create, in effect, a presumption against further consolidation in the rail industry where mergers have already reduced the industry to seven major carriers.
"Although the Board cannot rule out the possibility that further consolidation of the few remaining Class I carriers could result in efficiency gains and improved service, the Board believes additional consolidation in the industry is also likely to result in a number of anticompetitive effects, such as loss of geographic competition, that are increasingly difficult to remedy directly or proportionately. Additional consolidation could also result in service disruptions during the system integration period."
STB further proposed to change its policy of considering each particular merger in isolation. STB stated that, "because there are few remaining Class I carriers and the railroad industry constitutes a network of competing and complementary components, the Board cannot evaluate the merits of a major transaction in isolation - the Board must also consider the cumulative impacts and crossover effects likely to occur as rival carriers react to the proposed combination. The Board expects applicants to anticipate with as much certainty as possible what additional Class I merger applications are likely to be filed in response to their own application and explain how these applications, taken together, could affect
the eventual structure of the industry and the public interest."
I urge you to follow the example of STB and take a stand against the United-US Air merger, which is likely to start a round of mergers and reduce the industry to three major carriers. This would be in the best tradition of the Department's long history of acting to preserve competition in the airline industry, beginning with your opposition to the Northwest-Republic and TWA-Ozark mergers in the 1980's, and continuing through your recent efforts to prevent Northwest from gaining a controlling share of Continental's stock, in a case which recently went to trial.
The United-US Air merger gives the Department of Justice an historic
opportunity to continue this tradition and prevent a further deterioration of competition in the airline industry. I urge you to do so, and thereby to permit the consumer benefits of deregulation to continue.
With best wishes.
Sincerely,
James L. Oberstar, M.C.
Ranking Democratic Member
[This message has been edited by Randy Petersen (edited 10-28-2000).]
[This message has been edited by Randy Petersen (edited 10-28-2000).]
Oct 28, 2000 | 12:42 pm
#3
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It is interesting that US Airways stock is up 7% over the last two weeks of a down market, whereas UAL is down in the same time frame. It seems that a merger of some sort is likely.