I am delighted that Jeffrey Rosen is hosting today’s meeting.

United has already filed initial comments and plans to submit additional specific comments on regulations that are particularly outdated, burdensome and unnecessary.   Such regulations cost real money and distort behavior.  Among other distortions, ill-advised regulations slow the introduction of profitable codeshare relationships, imposing costs and delays with little or no public benefit. 

Regulation is a heavy tax on this industry.  This taxation is rarely debated and I welcome the department’s vision in considering how to reduce this tax.  Over-and ill-considered regulation – if left unaddressed – threatens the DOT’s mission of ensuring a transportation system that meets U.S. interests and enhances quality of life today and into the future.  For the U.S. industry that future is a very real question today.

While piecemeal changes in existing regulations would be a welcome contribution, the Department must go farther.  The Department showed vision several years ago by effectively eliminating longstanding CRS rules – that deregulation has saved the industry money, allowed for business innovation and has reverberated positively internationally.

While United welcomes this review, the DOT is unlikely to get to the right outcome if, in reviewing its rules, it starts from an incorrect view of current competitive conditions and the nature of global competition.   In our experience, the DOT is moving into the 21st century with its eye clearly focused on the past, rather than the future.  As a result its regulatory initiatives and policy objectives are frequently misguided and tend to hurt, rather than to promote, the interests of U.S. communities, carriers, consumers and the country. 

I urge the Department to take its thumb off the scale of competition, to recognize that the United States and its carriers must be able to respond to the challenges posed by the growth of international supercarriers and to regulate only reluctantly, first asking whether the government would properly regulate another industry in the same way.  It must also regulate with a firm grasp of market developments.  Let me review those developments from United’s perspective.

The U.S. Industry and United Today

• As you well know, for the past two years United has been steadily making its way through a difficult and complex restructuring under bankruptcy.  We have increased productivity, diversified our service offerings and shifted capacity from domestic to international services.  Other carriers in the United States and abroad have also achieved better productivity and innovated.
  
• The U.S. domestic industry is plagued by overcapacity, driving prices for all carriers below costs.  Standard and Poors’ testimony explained that airlines have failed to raise fares in response to high fuel costs because, “the problem comes back to a lack of pricing power in a very competitive market.” ¹
  
• Well-known factors (post 9/11 demand slump, pricing transparency, fuel costs, overcapacity and taxation among others) have contributed to a dismal financial picture in the U.S. industry: $23 billion in industry losses between 2001-2003, and an estimated $10 billion in losses in 2004 (ATA).   Even Southwest cannot earn its cost of capital and would be losing money without its fuel hedges. 

United is doing everything it can to emerge from bankruptcy rapidly and as a strong competitor.  We need a forward-looking U.S. government policy that focuses on the long-term health of the industry and the conditions necessary for U.S. carriers to compete globally.  To create such policies, the DOT will need to shift outdated paradigms.

DOT’s Preference for LCCs and Competition Paradigm Must Go

U.S. competition policy and the associated regulatory regime are driven by a “more is always better” philosophy without regard to actual competition conditions in the industry.   This approach takes as a given that network carriers (typically at their hubs) can easily exclude new entrants to the detriment of consumers and dismisses the concept of network-level competition.  It also wrongly ascribes greater value to new entrant/LCC service than to network carrier service.  DOT’s support for its preferred types of competitors has contributed to the existing hypercompetitive, and not coincidentally, unprofitable, U.S. industry. 

Despite abundant evidence of overcapacity and cutthroat domestic competition, most obvious in declining fares, the DOT continues to pursue the policy goals of ever more competitors and ever more competition with unabated vigor.

The Department’s unique conception of competition and the market ignores major developments: the strength of LCCs as actual or potential competitors, significantly diminished barriers to entry, pricing transparency and price sensitivity, changes in distribution methods and customer acceptance of alternative airports and routings.  The policy prescriptions that flow from this framework aim at injecting more service and competitors, favoring LCCs and new entrants, opposing mergers and fully-integrated alliances and discouraging the emergence of globally competitive U.S. carriers.  The cumulative effect of these preferences is an unhealthy fragmentation of the U.S. industry.

Several examples illustrate how the DOT fragments U.S. airlines:

• The DOJ’s dim view of mergers, combined with an overly complex and protracted process related to antitrust immunity, has impeded integrated rationalization of capacity.
  
• Pro-new entrant/LCC bias informs the DOT in apportioning scarce route rights among carriers on non-economic grounds and guarantees the suboptimal use of resources.
  
  • Department decisions across several years to distribute China route rights as broadly as possible among carriers ensure that no U.S. carrier can gain a leading position in the U.S.-China market.
    
• A similar bias underlies the  DOT and FAA’s approach to managing airport congestion where the DOT/FAA has consistently favored new entrants and smaller carriers, relying on incorrect assumptions about competition and the value of new entrant/LCC service versus the value of network service.
  
  • This bias is not a historical artifact; the recent FAA proposal to address O’Hare congestion goes beyond limiting operations to seek to manage competition in a way that blatantly favors new entrants and limited incumbents over carriers like United.  The FAA proposes to confiscate and reallocate rights without any evidence of market failure.
    
  • Apportioning DCA beyond-perimeter slot exemptions among a number of carriers, with an explicit preference for LCCs, dilutes these scarce slots’ value and harms consumers. 

For airlines, this government-encouraged industry fragmentation forces the inefficient deployment of assets, distorts competition and feeds overcapacity that exacerbates financial weakness.  From a broader perspective, the preference for fragmentation threatens U.S. leadership internationally and the U.S. economy by making it impossible for U.S. carriers to develop the scope and scale of operations needed to compete with emerging global supercarriers.

The United States Must Respond to the Emergence of Global Supercarriers

It is critical to get the U.S. government’s role in aviation right now.    The leadership this country has enjoyed in international aviation is under pressure from foreign carriers, bolstered by their governments’ supportive policies.  If U.S. carriers are to compete, the United States must develop a coherent aviation policy that, at a minimum, removes barriers to the emergence of strong global competitors here. 

The Air France/KLM merger is the first major effort to form a supercarrier based in Europe and creates the world’s largest carrier by revenue.   Lufthansa’s acquisition of Swiss and British Airways’ public expression of interest in Iberia are further evidence of consolidation on the Continent.  The EU supports these developments.  In U.S. –EU talks the EU seeks to eliminate nationality requirements and wants to permit EU carriers to merge with one another and with non-EU carriers to form genuinely global competitors.  Meanwhile in Asia, Cathay Pacific, Air China and Dragonair are negotiating with the intention of forming essentially a single carrier.

As global supercariers begin to emerge, the United States is failing to respond.   Archaic U.S. foreign ownership restrictions that halt the free flow of capital and prevent strategic mergers, limitations to antitrust immunity that prevent full integration of alliances and an array of policies that impede the creation of strong U.S.  carriers are anomalies that threaten U.S. carriers’ viability in the global marketplace and with it the broader health of the U.S economy.  The U.S. industry faces unique challenges that many of our foreign competitors avoid: a mature domestic market, financial fragility and perception of terrorism exposure.  United has responded to these challenges by making wrenching changes; I urge the Department to recognize the urgency of making complementary changes to its own ways of doing business.

United’s Request of the DOT

In the spirit of this review, United asks that the DOT recognize that now-strong LCCs do not need special favors and appreciate that the growth of international supercarriers demands a U.S. response.  The Department must ask hard questions about each area of regulation before implementing new regulations or keeping existing regulations in place.  It must  acknowledge the limits of the regulator’s knowledge, recognize the bias of underestimating costs and overstating benefits and account for the harm done by  distorting markets.

In considering when and how to regulate, the Department may wish to consider a simple standard, “would it be reasonable to regulate another industry this way?”   Would a U.S. regulatory agency request information from hotels about overbooking statistics and compensation to guests?  Would it require all hotel chains to accommodate guests of a bankrupt hotel for a small fee (as airlines must carry passengers of bankrupt carriers for an amount determined by the Department).  Would it forbid hotels from engaging in joint marketing arrangements without prior government approval, cause them to report the cost of inputs, like linens, file statistics on baggage handling or submit occupancy rates? 

The space created by clearing out dated regulations and concepts promises to allow for  broad thinking and action that are the only ways that the DOT can ensure a strong, competitive U.S. industry.  The Department must exert its influence with Congress and the rest of the Administration and with other actors such as airports to remove unnecessary constraints and allow the development of stronger, more financially secure global competitors to serve the long-term interests of consumers, U.S. communities and the national economy.  To this end, I urge that the Department consider as part of this regulatory review:

• Removing barriers that impede U.S. international network carriers from becoming globally competitive, reversing the regulatory bias against size and concentration.
  
• Cooperating with Congress to relax or eliminate archaic foreign ownership restrictions.
  
• Engaging fully with agencies and entities whose decisions affect airlines and the competitive landscape, including TSA and airport authorities.
  
• Actively seeking a role in coordinating policies across national barriers to eliminate redundant and conflicting national requirements, particularly security-related requirements.
  
• Revising the approach to airline competition and eliminating the bias toward new entrants and LCCs.
  
• Actively supporting U.S. leadership in international alliances, including by encouraging fuller integration of alliances through anti-trust immunity.
  
• Addressing carrier operation and business needs in setting policy on international security, taxes, local restrictions, visas and other U.S. and foreign government decisions that have an effect on airlines.
  

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