Congress examines giant airline merger

Airline officials and industry experts testified before Congress on the effects of the proposed Delta-Northwest merger.

NEW YORK -- Congress Wednesday examined a proposed $3.1 billion merger that would create the world's largest carrier as critics of the deal warned it could drive up the price of air travel.

In his opening statement, committee Chairman James Oberstar, D-Minn., said that the merger would have far-reaching ramifications for the global airline industry.

"This should not be and must not be considered as a standalone, individual transaction but rather as the trigger of what will surely be a cascade of subsequent mergers that will consolidate aviation in the United States and around the world into global, mega carriers," he said.

Oberstar said the Delta-Northwest merger would discourage competition at major hubs, reduce service to customers and result in higher fares.

Executive testimony: Delta Chief Executive Officer Richard Anderson said that the merger would not limit competition because the carriers primarily serve different geographic regions. Delta focuses domestically on the East and the "mountain" West and internationally on Europe and Latin America, while Northwest's domestic strengths are in the Midwest and internationally in Asia. The companies only have 12 overlapping markets.

Anderson and Northwest Chief Executive Officer Douglas Steenland testified under direct questioning that they would not be surprised if other airlines considered a merger to compete with their merged airline.

The executives said they would not close any hubs following the proposed merger and would not eliminate any frontline positions, instead realizing savings by trimming management, corporate staff and overhead costs.

"We think it's procompetitive," Anderson said. "It's good for small communities and it will be good for our employees."

Witnesses on tap: About a dozen witnesses scheduled to testify before the House Subcommittee on Transportation and Infrastructure were likely to focus on whether a merger between Delta Air Lines (DAL, Fortune 500) and Northwest Airlines (NWA, Fortune 500) would benefit consumers by lowering prices through cost savings, or harm them by reducing competition.

"The ... dirty little secret of these megamergers is the permanent end to meaningful competition between the United States and Continental Europe," Kevin Mitchell, chairman of the Business Travel Coalition, said in prepared testimony.

Delta announced its plans to acquire Northwest on April 14. The combined carrier, which would operate under the Delta name, would have $35 billion in combined sales, operate more than 800 airplanes and employ 75,000 workers, according to Delta.

After the merger, Delta would still be headquartered in Atlanta and operate the nine hubs of both airlines in the United States, Europe and Asia, serving 390 destinations in 67 countries.

The airline executives claimed that record fuel prices and increased competition from discount carriers and foreign airlines necessitate the merger, which will create a more profitable combined company that will offer greater choice and competitive fares to travelers.

Monopoly fears: Critics decry such arguments.

"It is my firm belief, and the belief of many others, that airline executives are using a crisis of their own making to justify the establishment of what can only be called a monopoly," Robert Roach, general vice president of the International Association of Machinists and Aerospace Workers, said in a prepared statement.

Figures from the U.S. Department of Transportation show that the airline industry was profitable in 2007, with an overall net income of $3.8 billion, up from $1.7 billion in 2006. Record fuel prices in 2008, however, led to a total loss of about $1.7 billion in the first quarter of 2008.

Aviation industry outlook: "Going forward, the outlook for airlines has certainly become cloudy," said Michael Reynolds, acting assistant secretary for aviation and international affairs at the U.S. Department of Transportation. Reynolds did not comment specifically on Delta or Northwest.

Reynolds said fuel prices, a potentially weaker economy and labor-cost pressures pose significant challenges to the aviation industry in 2008.

"Our consideration of aviation economic policy must focus on what is best for both a healthy and competitive industry," Reynolds said. "Our goal must be to strike what is admittedly a very difficult balance in the face of a complex and dynamically changing industry. It must also embrace not just a short-term view of the impact on a particular group of stakeholders, but must consider the longer term, collective impact on all stakeholders."

James O'Connell Jr., deputy assistant attorney general in the Antitrust Vision of the U.S. Department of Justice, said his division takes a special interest in trust issues in the airline industry. The merger will need approval from the Department of Justice in order to proceed. O'Connell declined to comment specifically on the Delta-Northwest merger because of the ongoing evaluation.