Promise of deregulation unfulfilled

“Those who cannot remember the past are condemned to repeat it.” 

Two years ago, at a hearing before the Subcommittee on Aviation, I closed my remarks with the above often-repeated quote from philosopher-poet George Santayana. 

The subject of that hearing was the then-pending merger of Delta Air Lines and Northwest Airlines and the purpose of my admonition was to warn of more mergers to follow should the Delta-Northwest deal be approved.

Despite my warning, the deal was approved. Now, two years later, the subcommittee met again last week to receive evidence on the pending merger between United Airlines and Continental Airlines, a merger that will probably reduce competition, reduce choice and increase airfares. Moreover, this merger will place the future welfare of our delicate airline industry — a necessary and indispensable industry — in the hands of three mega-carriers. United and Continental are repeating a strategic move that many airlines before them have made but that has brought sustained success to none. 

I concluded last week’s hearing with a different warning: Continuing airline consolidation is the antithesis of deregulation and might force Congress to rethink the Airline Deregulation Act of 1978.

Mega-carriers build concentrations of market share and levy air fare increases with impunity. Mega-carriers do not serve the public interest. The larger an airline becomes, the greater its ability to wield its market share to the detriment of passengers. United and Continental combined would hold approximately 20 percent of the U.S. domestic market share. That share would be more than the share of any other carrier, by most measures.  The way airline competition works today, when established carriers control markets, those carriers follow their competitors’ fare changes so that the fares are identical and passenger choice is limited. 

This phenomenon is worse in a market dominated by only a few major airlines with no incentive to compete. As the Department of Transportation (DOT) aptly stated, “[e]conomic theory teaches that the competitive outcome of a duopoly is indeterminate: the result could be either intense rivalry or comfortable accommodation, if not collusion, between the duopolists.” 

The existing relationship between United and Continental has already eroded competition in international markets, and a merger will serve only to worsen the situation. United and Continental enjoy an extraordinary privilege: immunity from enforcement of clearly established antitrust law. Under cover of that immunity, United, Continental and their foreign Star Alliance partners collude on pricing and schedules in ways that, without immunity, would amount to violations of federal law. After this merger, the combined airline and its Star Alliance partners would be able to divide up transatlantic traffic with their counterparts in the other two international alliances, SkyTeam and oneworld. A real danger exists that mega-carriers enjoying such antitrust privileges will engage in cartel pricing; consumers traveling across the North Atlantic — and indeed around the globe — will be at their mercy. 

When I voted for airline deregulation in 1978, I did not vote for an industry of mega-carriers. I voted for vibrant competition among airlines, competition that would encourage innovation in schedules, pricing, and services. I voted for the promise of an industry in which carriers would have every incentive to create value through intense competition. When I cast my vote, I expected the antitrust laws to be vigorously enforced. 

This merger’s consequences for consumers and employees are practically certain. It will reduce consumer choice and increase airfares — significantly, in some cases — among major U.S. and world markets from Washington, D.C., to Beijing.  The Department of Justice has found airfares probably will increase significantly when the number of competitors in any given market is reduced from three to two or from two to one. 

To those who say low-cost carriers provide a buffer, I say, show me how to fly Southwest to London, or JetBlue to Duluth, or AirTran to Lubbock. In many markets, low-cost carriers will not offset the fare increases that will result from this merger.

This merger will have consequences for employees, as well. United and Continental employ roughly 89,000 people in hubs and at small airports across the country. We must ensure this merger does not come at the expense of those employees or jeopardize any jobs during these delicate economic times. 

Mergers might or might not create value for airlines and their shareholders. History suggests they do not. But whatever the motivation of this merger, we must keep a focus on its effects for consumers and employees. The American traveling public deserves nothing less than a vibrant, competitive, profitable, and safe air transportation system. 

If United and Continental are allowed to merge, if U.S. airlines continue to consolidate, if choice in air service continues to shrink, Congress will have no alternative but to revisit, and possibly undo, its decision to deregulate this industry.

Rep. Oberstar is the chairman of the Committee on Transportation and Infrastructure.