CEOs grilled on $3.7 billion airline deal

A proposed Delta-Northwest merger that would result in the world’s largest airline came under the congressional lens Thursday as skeptical lawmakers questioned the benefits of the $3.7 billion deal.

Members in both chambers grilled the airlines’ CEOs one week after the two carriers announced they intended to join forces and one day after both posted losses totaling $10.5 billion for the first quarter of the year.

{mosads}Democrats seized on how the merger would affect jobs and consumers, issues almost certain to be raised out on the campaign trail later this year, while Republicans seemed less concerned.

Yet it was the rising cost of oil and its impact on the industry that dominated the hearings before the House Judiciary Committee and later before the Senate Judiciary Committee’s antitrust subcommittee.

Delta CEO Richard Anderson and Northwest CEO Doug Steenland cited the price of fuel in an attempt to convince lawmakers not to sway public opinion against the merger. Since the executive branch holds sole authority over the proposal through the Justice Department, there is little Congress can do to block the deal besides wage a public campaign.

Anderson and Steenland both repeatedly emphasized that the rising price of oil was the single biggest factor facing their companies, along with lesser adverse effects of competition from discount and foreign companies.

“I don’t think people have a fundamental understanding of what fuel is going to do,” said Anderson. “Fares have got to reflect the price of oil. I don’t know how to run a business effectively if the main commodity needed for the business goes up. Ultimately, this industry has got to be able to recoup that to be successful. There’s just no other way to be able to do it.”

That was strongly challenged by two other committee witnesses, however: Kevin Mitchell, chairman of the Business Travel Coalition, which represents consumers, and Darren Bush, an associate law professor at the University of Houston.

Mitchell and Bush said the merger would have a domino effect on the other airlines, leading to more mergers, increased fares and decreased customer satisfaction and an overall collapse in the industry.

“I do not buy into the benefits of this merger at all,” Mitchell said. “The evidence has not been put forward in any meaningful way, and the structure of the industry would be forever changed, to the detriment of the consumer and our economy.”

Bush compared past airline mergers to failed marriages.

“It is difficult to see how two dysfunctional organizations combined make a better airline,” he said.

For senators, the hearing broke along predictable political lines, with Democratic senators sounding strong opposition and Republicans arguing for its benefits. Subcommittee member Orrin Hatch (R-Utah), for example, said the two companies appear to “complement” each other, while Saxby Chambliss (R-Ga.) defended Delta, which is based in his state’s crown city of Atlanta.

“It should not adversely affect consumers’ choices but will actually enhance them,” Chambliss said of the merger.

But senators from other affected states were more skeptical. Sen. Amy Klobuchar (D-Minn.) noted that Minnesota already bailed out Northwest back in 1992, which left agreements in place to ensure Northwest’s hub and accompanying jobs stay where they are. Minnesota is home to almost 12,000 Northwest employees, and Klobuchar said she wants assurances that federal regulators will examine the merger’s effect on the industry instead of taking an isolated view.

“I’m concerned about the staying power of those agreements,” she said. “What’s to prevent the companies from laying off employees in a year?”

Anderson pointed again to the cost of oil, combined with the U.S.’s shrinking refining capacity, wobbly financial markets and the still-weak U.S. dollar.

“But fuel is going to be the biggest determinant of what capacity is going to be in this country and what airplanes are going to fly where,” Anderson said. “That’s going to be the case before and after the merger. It’s going to depend on fuel prices.”

Merging Delta and Northwest can help, the CEOs argued, even though less than 1,000 employees would ultimately be adversely affected. That’s because the airlines can save on space at airports, combine equipment, boost their purchasing power and lower overhead costs to eventually save $1 billion. At the same time, they said their companies can offer more aircraft choices and serve more markets.

For Senate Democratic leaders, Thursday’s hearing fed into the party’s line of attack against Republicans over rising fuel prices. Majority Leader Harry Reid (D-Nev.), for one, criticized the Justice Department and the Federal Aviation Administration under the Bush administration for siding more with companies than consumers.

“This is something that needs to be looked at very closely by the Justice Department and another federal agency that has responsibility,” Reid said.

Democratic Senatorial Campaign Committee Chairman Charles Schumer (N.Y.) met with Delta officials Wednesday to discuss the deal, given Delta’s presence in New York, and said he was assured the merger wouldn’t adversely affect jobs or flight choices.

Yet Schumer said the Bush administration’s antitrust policy is “bankrupt” and implored the CEOS to speak out more forcefully to promote alternative energy research.