Swelblog.com: Taking Great Exception with Congressman Oberstar

Congressman Oberstar says: “Hell No”; I Say What’s Different

In today’s Aviation Daily, Correspondent Madhu Unnikrishnan published a story entitled “Oberstar Strongly Opposed to Airline Consolidation”. The full text of the story is included at the end of this post.

Congressman Oberstar, I grew up in your congressional district and am quite familiar with the “Socialist Republic of Minnesota” moniker that is sometimes used to describe politics there.

You speak often, and proudly, about deregulation and the consumer benefits derived from the Act. But wasn’t it also designed to allow the free market to work? Wasn’t it designed to force efficiency that would ultimately bestow lower prices on the consumer and to get them flying?

A Lot of Questions About Why “Hell No”

I am attaching a 1979 - 2005 chronology of actions between the State of Minnesota and Northwest Airlines that were compiled by Senate Majority Research. Certainly there are a number of actions included on the list that are anything but free market. As you reflect back on many of these actions that have your fingerprints all over them, how would you measure their success? Certainly you would not make the case that this was the free market at work. Parochial and protectionist -- yes. Free market -- no.

A big question for you today asks: is it more important to have an airline with its headquarters based in Minneapolis/St. Paul or a strong industry carrying the US flag around the globe?

Did the numerous financial aid packages you helped to author keep Northwest out of bankruptcy?: No. Have Northwest workers been subject to the same loss of income and benefits that have been suffered across the industry?: Yes. Northwest’s need to reduce cost and the resultant employee loss of income is a function of the free market that you were part of creating. Are you confident that the current environment ensures the success and staying power of Northwest as an independent entity that will forever employ all its workers that remain?

If there was ever an airline antitrust issue that was bound to impact Minnesota – Minneapolis/St. Paul and Duluth for that matter - it was the Northwest – Republic merger that was announced in 1986 when you were a member of Congress. Why was it OK then to remove a competitor in a hub market and any talk of consolidation today of a fragmented and hypercompetitive domestic market gets a “Hell No” from you?

The Darwinian struggle to survive initiated by Airline Deregulation Act drove Northwest to buy its primary competitor in Minneapolis -- Republic. That new competitive environment created by the ADA caused virtually all incumbent airlines to evaluate the relative size of their respective networks to that of the other domestic competitors in the market. When Northwest bought Republic, the industry was in its infancy and the focus was on the domestic market as network size could not be built organically in the face of deregulated pricing.

Today US airline competitiveness in the global marketplace is in its infancy. All that is different is that now we’re talking about network size relative to the global marketplace. Just like when Northwest bought Republic, today’s networks that are necessary to survive cannot be built organically. Certainly not when airlines lack critical pricing power that stems from a fragmented and hypercompetitive home market.

The size of the commercial aviation market is not confined to the eighth district of Minnesota, the borders around Minnesota or the 48 contiguous states. I know you are sent to Washington to represent your Minnesota district – and you do it well. But in your Chairmanship role, you represent the entire US. I thought that Congress was interested in the success of US industries, particularly those that are inextricably linked to the health of the US economy and assuring that US industry can be as competitive as it can be in the global economy.

That is not what I read and hear in your public statements. Am I wrong on this one: “Hell No”.

Aviation Daily, January 31, 2008

Oberstar Strongly Opposed To
Airline Consolidation

The House Transportation and Infrastructure Committee this week reinforced its opposition to airline consolidation.

Aviation subcommittee Chair Rep. Jerry Costello, D-Ill. said at a news conference that airline consolidation will be on the Transportation Committee’s radar screen this year. He noted the subcommittee will “examine and investigate” any mergers that “develop beyond rumor and discussion.”

But Committee Chairman Rep. James Oberstar, D-Minn., stepped
up the rhetoric on airline consolidation considerably, offering his opinion on the subject as “hell no!”

“Airline mergers do not serve the best public interest,” Oberstar said, arguing that consolidation can cause service to decline in remote areas and will almost certainly cause fares to rise.

The architects of deregulation didn’t predict the hub-and-spoke system would be a result of their actions, Oberstar noted, and he fears that further consolidation will cause the passengers “at the end of the spokes” to suffer cuts in service. Moreover, passengers are benefiting from the lowest fares, in real dollar terms, since deregulation, and this will end if consolidation reduces choice in carriers, he said.

Airlines will take defensive actions against a “mega-carrier,” Oberstar believes, and this will further reduce passenger choice.

The Justice Dept.’s oversight of airline mergers has been “sporadic,”
Oberstar said, but if a merger does happen this year, he said he will press the DOJ to examine it closely for antitrust violations. The U.S. Transportation Dept. also has a role to play in “defending the public
interest in aviation,” and Oberstar said he will “badger” DOT if necessary to prevent its approval of any airline merger.

If any airlines move closer to merging, Oberstar said the Transportation
Committee will hold hearings to “mobilize public opinion against airline mergers.” Consolidation only “benefits airline executives,” he warned.

Costello implored the Senate to move on the FAA reauthorization bill. The passage of the bill is crucial to the committee’s continued “aggressive” oversight of FAA and the airline industry, he said. Costello added that the committee will pay special attention to the issue of runway incursions this year.
-madhu_unnikrishnan@aviationweek.com

Dear US Government: I hope you are reading the newspaper

Thinking About Three Headlines from January 24, 2008

So much of the current discussion surrounding US airline industry consolidation scenarios involves only the Network Legacy Carrier (NLC) sector. In an earlier post this week, I wrote about the catalysts for consolidation. In that post the importance of economies of scope, scale and density is discussed and how they are a most important ingredient to a healthy industry structure. These economies are critical to all players – even the LCCs.

Three headlines in yesterday’s news underscore the negative effects of a highly fragmented and hypercompetitive US domestic industry structure – and those negative effects are not limited to the sector of the industry that is forever blamed for the industry’s woes – the NLCs. Yes, there is even bad news emanating from the Low Cost Carrier (LCC) sector. The very sector that many policymakers believe is solely responsible for the consumer benefits that the entire industry delivers each and every day - NOT.

First off, Holly Hegeman writing in her blog Planebuzz reports the first credit downgrade of the period. No it is not one of the NLCs, it is Southwest Airlines. Not that this is anywhere near the end of the world for the carrier with the industry’s best credit rating – even after the downgrade – but noteworthy in my view.

Second, Terry Maxon in his Airline Biz blog writes about additional stock sales by David Neeleman, founder and non-executive Chairman of jetBlue. Whereas there are always multiple reasons for stock sales, Neeleman has sold nearly 30% of his holdings since May of 2007. This particular announcement comes just days after jetBlue finalized a stock sale to Lufthansa that was designed primarily to address some near term liquidity concerns.

Third, last night Reuters reported out on Frontier’s earnings. The short article was entitled: Frontier reports wider loss, to sell four jets. Enough said.

For government regulators generally: the bad news regarding the industry’s financial performance is not limited to one sector. If you were right, and I was wrong, that the LCCs were/are the sector that will keep the US industry in a global leadership position, then it is time to step back and recognize that even this sector is beginning to show signs of troubled economics. And given that this sector is largely confined to the 48 contiguous states, that would be a good place to start your analysis of the industry’s structure.

For government officials in smaller US communities: the bad news is that the LCC sector of the industry is not your answer. The bad news is that industry economics do not support all of the service currently being provided. The good news is there is an opportunity to look at the current industry structure and allow it to make necessary commercial changes. Scrutinize the proposed changes for sure. But, changes that keep your airport market connected to the US air transportation system is much better than being the subject of attrition from the airline map.

For government officials in cities that serve as corporate headquarters: keeping your city as a critical dot on the global airline and trading map is much more important than housing a few thousand workers. It is simple economic impact math.

Much more to come,

Dear Mr. President (and Congress): These Short-term Solutions to Congestion Gives Me Indigestion

As I am doing my afternoon browse of aviation news, I find myself struck by another press release issued by the White House Press Office entitled “Statement by the President on Aviation Congestion” click here. Certainly, some of the short-term actions being undertaken make sense and are being applauded by industry click here. But the final suggestion offered is as follows:

“Finally, the Department of Transportation and the FAA are working on innovative ways to reduce congestion in the long run. While short-term improvements in flight operation and passenger treatment can help, they do not cure the underlying problem: In certain parts of our country, the demand for air service exceeds the available supply. As a result, airlines are scheduling more arrivals and departures than airports can possibly handle. And passengers are paying the price in backups and delays.

The key to solving this problem is managing the demand for flights at overloaded airports -- and there are a variety of tools to do this in a fair and efficient way. For example, fees could be higher at peak hours and at crowded airports, or takeoff and landing rights could be auctioned to the highest-value flights. Market-based incentives like these would encourage airlines to spread out their flights more evenly during the day, to make better use of neighboring airports, and to move the maximum number of passengers as quickly and efficiently as possible.

This concept is called "congestion pricing." It has shown results in other areas of our economy -- in other words, other parts of our economy use congestion pricing. Some states offer discounts to drivers who use EZ-Pass, which reduces long waits at the toll plaza. Phone and electricity companies balance supply and demand by adjusting their rates during peak usage hours. Applying congestion pricing to the aviation industry has the potential to make today's system more predictable, more reliable, and more convenient for the travelers. Over the past seven weeks, federal officials have raised this idea with airlines and airport representatives in the New York area. I've asked Secretary Peters and Acting Administrator Sturgell to report back to me about those discussions next month”.

Whereas I will never suggest that I am an expert on the air traffic system, I do understand the economic drivers of cost to the airline industry. The “Fathers of Deregulation” envisioned the masses flying at significantly lower prices. This industry has evolved and adapted and delivered on the economic experiment undertaken in the late 1970’s. Consumers have benefited through significantly lower prices while shareholders, employees, and other vital stakeholders in the industry have suffered to varying degrees.

Now, nearly 30 years later – because you did not keep your promise to provide an infrastructure that could accommodate the goals and objectives of government policy that was so important in 1978 – you are going to turn the tables on the consumer and make it more expensive for them and somehow - I am sure - will find a way to blame it on the industry that delivered consumer choice and lower prices. And while the consumer is certainly impacted by delays in the system, have you ever thought about the direct cost to the airline industry stemming from delays that are not of their own making?

Market-based incentives are not necessarily going to change the clock that dictates the demand by consumers for air travel at certain times of the day and I do not read that possibility in your release. Further, your inaction on this issue is yet another catalyst to consolidate an industry that destroys capital rather than creates it. But I am sure that when the industry is forced to discuss the very real need to consolidate, the costs imposed on it by government actions/inactions – both direct and indirect – will be forgotten by you and your friends on Capitol Hill.

And all of this discussion at a time when the US signs an open skies deal with the EU that offers promise to an industry struggling to find new (read profitable) flying opportunities. The industry has made it known that at $100 oil it will surely consider cutting capacity. When we cut capacity, the least profitable markets will suffer (read small community air service Congress and President Bush). When we cut capacity, labor is disenfranchised. We could go on.........

There is just not much adhesive left on this band aid.