Wolf's speech to the House Committee...
Mr. Stephen M. Wolf
2345 Crystal Drive
Arlington, VA, 22227
Mr. Chairman, Ranking Member Towns, and Members of the Subcommittee, on behalf of all of us at US Airways, I appreciate the opportunity to address what effect our merger with United will have on consumers.
Fundamentally, as I have said in the opportunities I have had to testify since this deal was announced, the merger with United is a viable alternative to the difficult economic realities facing US Airways and the consumers we serve. As an amalgamation of pre-deregulation mid-sized regional carriers, US Airways is facing a perilous future. It is neither a low-cost, low-fare airline, nor a full scale, global network carrier. All other mid-sized, mature cost carriers have either disappeared completely or have gone through multiple bankruptcies. There are only two platforms for competitive success in commercial aviation and US Airways does not fit either. All of us are fully aware of what has happened to Braniff, Eastern, Pan Am, and now TWA which is facing the bankruptcy court -- not for the first time, not for the second time – but for the third time.
At US Airways, our situation is quite stark – and quite simple. The status quo is not an option for US Airways, our employees, and the communities we serve. In sharp contrast, the merger with United Airlines guarantees a secure future for US Airways’ employees, preserves service to cities that US Airways serves, and enhances competition.
US Airways in its current form is a combination of several small, pre-deregulation regional carriers such as Allegheny, Mohawk, and Piedmont. As a result, the airline has a route network that, like its regional airline predecessors, is largely confined to short-haul routes in the Eastern United States. Indeed, US Airways has the shortest average stage length of any major carrier. Combined with a route structure that is essentially confined to the East Coast corridor, this severely limits US Airways’ ability to mass enough presence in other areas to support any material expansion of its system.
As a consolidation of pre-deregulation carriers, US Airways also pays labor rates that are comparable or higher than those of American, Delta, Northwest, and United. The difference between US Airways and these other carriers, however, is that the other carriers have vastly larger route systems which permit them to spread their costs over a great number of more efficient, long-haul segments that are relatively less costly to operate.
Caught in the vice between its short-haul, high costs route system and its mature labor structure, US Airways is far and away the highest unit cost domestic airline. For the year 1999, US Airways’ average system cost per seat mile, the measure most commonly used to determine costs, was 14 cents. By comparison, the average system costs during the same period was approximately 9.5 cents per seat mile for the major carriers and 7.5 cents for low-cost competitors such as Southwest. In sum, when compared to Southwest, a carrier that is aggressively expanding throughout US Airways’ East Coast operating territory, US Airways has costs that are nearly twice as high.
When I joined what was then USAir a little over four years ago, I recognized the historical reality that placed US Airways in such an "in-between" position—one that could not be sustained over the long run. US Airways was neither a "national" carrier with an extensive nationwide network, nor a "regional" carrier with low costs and point-to-point routes. Accordingly, with the support of our employees, we committed to a strategic plan to restore financial stability to the company and establish the carrier’s competitiveness, despite our high costs and incomplete route structure. To this end, we have made enormous progress. We have made significant and sustained improvements in our operational performance, established harmonious labor agreements, begun fleet modernization, and expanded our international service.
However, the fundamental problems that constrain US Airways—high costs, short segments, and a limited network—remain in the face of increasingly intense competition. Unfortunately, US Airways does not have the financial reserves or the cost structure to support significant internal expansion. Because of our reliance on short-haul service, we have inherent difficulties earning unit revenues at the levels necessary to cover our high costs.
Meanwhile, competition from well-financed, well-managed low-cost carriers such as Southwest, JetBlue, AirTran and others has been increasing dramatically on US Airways’ most heavily traveled and most profitable routes. In 1995, for example, low-cost carriers had 618 departures per day in the eastern United States, US Airways ’ major service area. By 2000, that number had almost doubled to 1,098. The low-cost carrier share of capacity in the region has grown 158 percent. These carriers now offer more than one out of every four domestic seats up for sale in that region. At the same time, major carriers’ share of capacity actually fell one percent.
In the last year alone, Southwest, AirTran and Delta Express, as well as new entrants such as JetBlue and Spirit, have added 181 daily departures out of East Coast airports – a 25.5 percent increase over 1999. Since January 1, 1996, Southwest has increased its intra-East route system in terms of daily departures by 238% (157 to 531) and in terms of aircraft by 326% (19 to 81).
Facing ever more low-fare competition on its key eastern routes, with costs well above the industry average and no realistic way to alter that condition, US Airways is increasingly limited in its ability to support its route network and maintain profitability. Accordingly, as a stand-alone carrier, US Airways, which has sustained significant net losses over the past decade, will have no choice but to continuously downsize, cutting jobs and service in the process.
As Chairman of US Airways, I have worked hard to make serving our customers my top priority, yet, we face this reality for the entire US Airways family -- we cannot continue to provide the broad array of services we currently offer or employ the 45,000 people who work for us without this merger. Since the merger is the only viable option for preserving the services and jobs we offer, I hope you will join me in concluding that this deal is in the consumers’ best interest.
To evaluate this transaction on consumers, I believe we must first consider the services US Airways provides and would continue to provide to consumers as a result of the merger. US Airways has invested heavily in infrastructure, aircraft and personnel and we have spent many years building a network of services around the country. The result is convenient access from these cities to hundreds of destinations across the country and throughout the world. This has been not only a foundation of economic growth over the years, but a lifeline to consumers and businesses that require frequent and wide-ranging air service. If this lifeline is cut short, scores of communities could be left without service.
One of the key ways the merger will preserve the service US Airways customers have enjoyed is through the creation of a new airline, DC Air, which will be based out of Reagan National and owned by one of the Washington area’s top corporate citizens, Robert Johnson. Mr. Johnson has made a commitment that DC Air will take over most of US Airways’ flights in and out of Reagan National to 44 cities, preserving service to scores of small and medium-sized communities across America.
DC Air will also preserve competition by challenging existing airlines at one of Washington’s most convenient airports, thus bringing down the cost of air travel for consumers. Mr. Johnson has already committed to operating his airline as a highly competitive carrier, one that will clearly alter the competitive landscape in the greater Washington, D.C. area. United Airlines will have a hub at Dulles International Airport, DC Air will have a strong presence at Ronald Reagan National Airport, and Southwest Airlines will have a strong presence at Baltimore-Washington International Airport. All three airlines will be competing to provide service to the millions of people who travel to the nation’s capital and surrounding areas each year. In the absence of these mergers, the Washington area faces the prospect of one primary carrier, the loss of jobs and the loss of thousands of daily flights.
The entire US Airways family will also benefit from the job security this merger offers. With major companies announcing lay-offs on a daily basis, such as Daimler Chrysler, Lucent, AOL-Time Warner, Cisco, Intel, WorldCom and GE, and others like Bradlees, Montgomery Ward and TWA declaring bankruptcy, the job security this merger offers is especially important in this period of economic instability. It is critically important that our 45,000 US Airways employees are able to keep their jobs as part of this transaction – while so many other jobs in this economy are at risk.
The merger of US Airways with United provides a bright future for our employees, the communities we serve, and competition within the industry. I wholeheartedly believe that the merger will have tremendous benefits for consumers – both in terms of protecting services to small and mid-sized communities and saving thousands of high skilled, high paying jobs. In the interest of preserving these consumer benefits, I urge you to support this merger.