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Is UAL's Plan to Acquire US Air Bad for Consumers?

Aired May 24, 2000 - 7:30 p.m. ET


MARY MATALIN, CO-HOST: Tonight, are the skies becoming not so friendly? Is it time for the government to do something about late flights, lost baggage and no leg room? Could United Airlines acquisition of US Airways make matters worse?

ANNOUNCER: Live from Atlanta, CROSSFIRE. On the left, Bill Press. On the right, Mary Matalin. In the CROSSFIRE, in Washington, Fred Smith, president of the Competitive Enterprise Institute, and Mark Silbergeld, co-director of the Consumers Union Washington Office.

MATALIN: Good evening, and welcome to CROSSFIRE. As the busy summer air travel season is about to take off, there's news in the sky. United, the world's largest airline, plans to buy US Airways, the biggest carrier in the lucrative Northeast for a cool $4.3 billion in cash, part of an almost $12 billion deal. If approve by stockholders and government regulators, the acquisition would mesh United's formidable route systems in the West and Midwest with the US Airways East Coast domination. The merger represents the first by major carriers since the early '80s heyday of deregulation and could spawn more consolidation to meet the competitive challenge of United's new strength.

Airlines issues have reached into the Supreme Court and Capital Hill. This week, the high court refused to hear a lost luggage case, but the Hill remains wary of the airline's promise of voluntary improvements.

Crisscrossing the country has gotten more complicated: Do we really need the government invading our personal airspace? Will the megamerger make for more customer friendly skies or reduced competition and raised consumer cost?

Bill and I are in Atlanta, stuck because of bad airlines -- Bill, hit it.

BILL PRESS, CO-HOST: Fred Smith, good evening. You are a brave man coming in to defend the airlines this evening, but we're grad you're there.

Fred, let's start with this merger, OK. I mean, the airlines probably already have the worst reputation in terms of service of any industry, but now if United gobbles up US Air, can't we expect service to get twice as bad and the prices to get twice as big? FRED SMITH, PRESIDENT, COMPETITIVE ENTERPRISE INSTITUTE: I don't think so. You have a high-priced airline operating at a loss, had a lot of problems with service quality, labor problems. It's being bought by an airline that's doing considerably better, an airline that has a higher quality operating ratio, one that just has expanded leg space for consumers. We've got a shot here of a really efficient airline that can join an East-West airline with a North-South, give us all a lot of advantages to our benefit.

PRESS: Well I admire your confidence, Fred. I'm not sure it's based in reality. In my experience, US Air is the worst to fly. In fact, in California, we don't call it US Air, we call it "Useless Air." My experience actually -- my own personal experience is United is the best. That's why I usually fly them.

But let's look the airline quality ratings, last year, 1999, actually little old Southwest Airlines comes in number one consistently. You can see US Airways down at six. I don't want to read them all. But look who's stuck at the bottom in terms of quality for most passengers, the most complaints, United Airlines. Fred, we're hooking up two losers. How can things get better?

SMITH: Those ratings -- as you know, there are a lot of different rating services out there. You pick the one that comes out good or bad. Most surveys that I've seen lately have rated United considerably higher not just on profits, but also on service quality.

But the point is, you've got an airline right now that is losing, might go out of business. It's been brought into operation again by ability again, by a potential restructuring. Restructuring reallocates assets. And as you point out, at least in your experience, has given you an opportunity for better quality service when you come back from Atlanta next time.

PRESS: Well, here's a man that I usually find little to agree with. The chairman of the House Judiciary Committee Henry Hide said -- conservative Republican, Fred, and a man who really believes in the free-enterprise system, like you. Henry Hyde said today -- quote -- "I'm deeply concerned that this merger may further lessen competition in the airline industry. At a minimum, the proposed merger requires very close antitrust and regulatory scrutiny." You can't disagree with that, can you?

SMITH: Well, not at a time when the antitrust authorities are breaking up one industry, trying to prevent the marriage of other industries. These guys don't like big industry or small industry. I don't' doubt that they'll give it careful scrutiny, and I certainly don't doubt that there are Republicans who love to rush in and try to get political mileage out of the potentially consumer-friendly restructurings of our industry. But that doesn't have anything do with the question about whether or not these activities -- companies are in a better position to decide how best to configure themselves, their labor problems, their airlines and their mix of price and service quality to decide how best to do it.

Deregulation has democratized air travel. Getting in the way of that process will cause further problems. There are difficulties. We ought to solve the airport problem. We ought to solve the air traffic control problem. But those are problems of monopolized, bureaucratic mismanagement, too much government, not too much private sector.

MATALIN: OK, Mark, now shouldn't the evaluation of this merger be predicated on the benefits or losses to consumers? Let's just take through today at some of the analysts suggestions of benefits for consumers, just to name a few. There's a promise of no price hikes for at least two years. There's more routes or smoother transfers. There's a merging of frequent flyers, that US Air can now join any of 18 airlines. It's expanded legroom, because United will want US Air to conform to its expanded legroom. And the new D.C. Air, which will be wonderful for us who travel on a daily basis, the new D.C. Air will probably offer low introductory rates. Shouldn't we measure benefits to the consumers before we start attacking this merger?

MARK SILBERGELD, CONSUMERS UNION: Absolutely. And we have not attacked the merger, in the sense that we have not said that the merger is necessarily bad for consumers. What we have said is that when number one merges with number six and becomes that much larger than numbers two, three, four and five, there is the potential for enormously larger market power, and the Justice Department needs to look at this a on a hub-by-hub route-by-route basis.

Those benefits that you mentioned are all important, but nothing is as important as the long-term competitive viability of the market.

MATALIN: But, Mark, still merging United and US Air makes them more competitive, makes US Air routes more competitive, because United will give the resources to US Air to provide better service, and also this megamerger company, this new company, will be in direct rival with Delta. There's still Delta, there's still American, and those companies may get stronger because of the strength in United competitiveness.

SILBERGELD: That may be the outcome of the analysis. What we're asking the Justice Department to do is to make sure that that's true. In every major merger that has taken place in the past few years, one condition of the merger has been that companies spinoff assets where there is some overlap in competition and where they have been competitors and would no longer be. So in addition to looking at the hubs and routes, we have to look at - -the Justice Department has to look at the question of whether the party that acquires those spun off assets is capable of being a long-term competitor of making those assets work competitively in the marketplace a rather than noncompetitively. There are many, many questions before we get to the bottom line of whether this is really good for consumers in the long run.

MATALIN: Well, we have questions, but we also have history, and the history of these mergers is that it has benefited consumers and it has not reduced competition, and in fact, it is has spawned a plethora of these smaller, upstart airlines, if you will, no frills, low cost. It hasn't stopped that, so we have that kind of travel. And we have this travel for long hauls for people that travel all the time. It's made it much better for us and much better for the airlines. SILBERGELD: On the contrary, this industry has a history of being noncompetitive since deregulation, of trying to make sure that every passenger pays the most that their computer can predict that passenger will be willing to pay, of keeping people from getting the bargain tickets, of keeping people from finding ways to cut their travel cost. And when low-priced competitors have come in, there have been numerous cases where the big carriers jumped in, engaged in short-term price cutting, driven them out, and then continued to maintain their stranglehold on the market. It could be a lot better.

PRESS: Fred Smith, I want to ask you about these mergers. Fred, I mean, I've seen a lot of these. I mean, these are airlines. Well, I've seen them merge with grocery companies. I've seen them merge with banks. I've seen them merge with oil companies. I can't think of one case, one single case, where bigger meant better for consumers, can you? I mean, what history? The history is all bad.

SMITH: No, well, maybe we're reading different history books, but the history books I read basically point out that supermarkets, for example, everybody was terrified, my goodness. A&P -- Atlantic and Pacific -- was going to sweep the nation, holding us hostage. Our bread would be at the mercy of the monopolist. It didn't happen. As a matter of fact, what happened was a handful of larger supermarkets offered vastly more competition, lower prices and all kinds of deals: frequent flyer in the airlines. I know (UNINTELLIGIBLE) a supermarket customer here. I go a lot to Safeway, have Safeway cards: 10 percent discount for frequent shoppers. .

PRESS: Well, let's go back to the airlines here, because the airlines are always saying, we got the message, we're going to give you more leg room, we're going to get more flights out on time, we're going to do a better job.

Oh yes? Look at passenger complaints, how they've grown over the last year, Fred. 1998...


PRESS: Let me just show you. 1998, 5,800 passenger complaints filed. 1999, 14,000. Things aren't getting better, Fred. They're getting worse.

SMITH: Absolutely, but let's not blame that on the airlines. Let's look at what's going on.


PRESS: Who do you blame it on?

SMITH: Well, let me tell you who to blame it on. When we deregulated one leg of the air travel industry, we left the other two legs, the other two gears, the airports and the air traffic control system, the highways in the sky, under the control of bureaucratic mismanagers.

Because of that, last year, delays in the United States were the greatest -- air travel delays -- were the greatest in history. Over $3 billion of cost to the airline industry in additional crew costs, in additional fuels costs, more pollution; $2 billion additional cost to you and I waiting in airports around the country because airlines can't control the airspace.

Canada, not exactly a leader in free-market thinking, has managed to shift their airspace management to a combined airport, air travel control, airline system. They're getting value out of their airspace. We've left the airspace of America under the control of the Post Office and we're making us late.

PRESS: Fred -- Fred, you are singing my song. I'm glad you went there. We're going to take a break.

When we come back, does this sound familiar? You rush through traffic, you get to the airport an hour early, and you find out your plane is delayed for two hours. I hate when that happens. Can we do anything about it? We'll pick that up when we come back.


PRESS: Welcome back to CROSSFIRE.

If Mark Twain were alive today, he might say there are only three things you can count on: death, taxes and delayed airline flights. Complaints against airlines, in fact, are flying so high there's even a Web site called and legislation in Congress to create a passengers' bill of rights.

Is there any relief in sight, or just more long lines, more crammed seats and more lost luggage?

Debating the state of the airlines tonight with us, Fred Smith, president of the Competitive Enterprise Institute, and Mark Silbergeld, co-director of the Washington office of the Consumers Union. Both of our guests are in Washington. Mary and I are in Atlanta -- Mary.

MATALIN: Mark, I'm glad, so glad that Bill brought up, this other -- also another complaint line called That's part of the reason for the increase in complaints. There is now a portal to capture them and funnel them.

But the reality of the record of the airlines is throughout the '90s service has improved on those -- in those areas that the airlines have control of. And Fred mentioned earlier that the parts that they don't have control over.

What they do, misplaced luggage has improved; on-time has improved. My own luggage just last week -- and I'm in the air three days out of five -- went from D.C. to L.A. to D.C. to Phoenix, back to D.C. I finally got it. It traveled the country without me.


I wish I would have gotten frequent flyers for that. But there's fewer bumps. My point is that the airlines are -- are doing a better job at what it is they can control, and that's the record of the '90s.

Do we need a passengers' bill of rights? Do we need the government trying to fix that, fix what they can't?

SILBERGELD: Well, on June 15th, when the Department of Transportation makes its interim report to the Congress we'll find out if they are doing better, because over the last year, the complaints have not gone down. They have gone up, and passengers are at an all- time high in their dislike of the quality of service they get.

The -- if there's any improvement, you can bet that it's because voluntary plans were adopted only under a threat of mandatory legislation, which caused the industry to say, OK, now we're going to do what we've been telling you for years we already do, we're going to do it seriously this time.

And if anything, the threat of legislation breathed new life into promises that have been on the table for years.

MATALIN: Well, Mark, you're making the point. If the threat works -- yes, I get it: It's business. It's profit. It costs money to make these improvements.

But if the threat works, why stick the long hand of government into something that will raise the cost for consumers? Because the airlines will pass along the cost of compliance, which is exponential when the government gets involved, to consumers. Why would you want to again reduce the benefits to consumers by sticking the government into a -- into a private market?

SILBERGELD: Because they've made these promises in the past. They have let the performance slip, and then they turn right back around after a few years, the performance slips, they do nothing, they wait for the next threat of legislation. Now, we can go through a scenario of every five or six years threatening a bill of rights and then seeing the service get worse. But in the meanwhile, it does get worse and people get very upset.

Why not do what we need to do to make sure that that level of improvement, if it should happen, stays there? And certainly I guarantee that Congress is going to do something next year if there is not an improvement as reflected in the DOT reports to the Congress in June and in the fall.

MATALIN: Let me just -- Mark, one more quick question, because the market force does work with the airlines. When one gets bad -- one has bad food, one has a bad on-time record -- then frequent flyers, which are the bread and butter of the airlines, will move to another airline, or we may move to an airline that offers us more services, like pedicures, manicures, massages, beds, showers, epicurean delights now, some celebrity chefs.

(CROSSTALK) No, seriously, the bread-and-butter flyers will move, by virtue of the market forces, to the airlines that provide better service for them or less encumbrances.

SILBERGELD: On certain routes where there is a choice, that may be true. I guarantee you that if you're going from Minot (ph) to Los Angeles that you don't have that kind of choice, or if you're going from any smaller community and between any number of large cities as well. Your city pairs are not that competitive. Even though you look at the market and you see 26, 28 carriers, the city pairs may not have anywhere near that and people don't always have the choice of switching.

SMITH: But...

PRESS: Fred, go ahead, Fred.

SMITH: Yes. Let's just go through -- some of you guys have been saying on television this last week this wonderful little piece about, your flight arrives on time or we pay you back, another service rushing out to provide these kinds of guarantees that we all want to see out there. The market is responding quickly either in the airline industry or now in the expanded information service industry.

We're having Legend Air, whose offering Mary's pedicures and so forth. We have Southwest, whose basically rushing in to provide us peanuts and nice attendants and low-cost service. We're getting essentially a range of service that has never before been offered, and it's happened because essentially we've created a more consumer- friendly airspace.

PRESS: Yes, Fred...

SMITH: Let's not stop it by giving this over to the guys who brought us the Post Office and the impeachment hearings.

PRESS: Fred, come on, you keep defending these guys, Fred. We're almost out of time.

Let me give you the example of lost luggage, OK. The Supreme Court last week refused to hear a case of a Maryland family, D.C. suburbs family. They were on their way to the Dominican Republic. They lost five bags. They said it was worth $15,000 in those bags. They were going off for a wedding, so they had gifts and all that kind of stuff.

The airlines offered to pay them $635 maximum, which is based on 1928 Warsaw convention agreement of $9.07 a pound.

Now, doesn't that prove that the airlines are never going to make any changes unless they're forced into it, and doesn't it prove why we need a passengers' bill of rights?

SMITH: Not exactly. Have you ever lost anything in the Postal Service? You basically have exactly you get -- if you want to pay -- if you want to have more coverage, you pay for it, you get more insurance on the product.

Not a good idea to put a lot of vulnerable products in something that does get lost. Mary's not the only one who's lost bags or had them travel across the United States.

PRESS: No, wait a minute, though, Fred...

SMITH: But what we're going to see -- what we're going to see, Bill, is we're going to see the same thing we've seen before. United is expanding leg room. Continental and Delta are expanding overspace -- bin overhead space. A lot of things are happening in response to the fact that you and I -- and I suspect Mary and Mark also -- are not only frequent flyers, we're frequent critics.

I write lots of letters complaining about these things, and I get responses. And I think that's what you want: a consumer-disciplined airline, not a politician-supported-and-manipulated airline.

MATALIN: Well, gentlemen, you've made this topic come alive. This means a lot to all of us frequent flyers and luggage losers.

Thank you, Fred Smith, and thank you so much, Mark Silbergeld.

Bill and I will be back telling more lost luggage stories when we return. Stay with us on CROSSFIRE.


PRESS: Mary, all I've got to tell you is you would never get a pedicure on the planes that I fly because you never find your feet. You know, your chewing on your knees, No. 1. No. 2, here's my big complaint. I love...

MATALIN: Oh, use those frequent points and upgrade, you cheapo.

PRESS: You're the queen of first-class, I know.

I love the fact there's no smoking on airlines. You know what I want now? No talking on airlines, and then a passengers' bill of rights so the airlines know what passengers ought to get. Then I'm happy.

MATALIN: Not too authoritative, are you? I love this, because my two airlines that I use the most -- United has the best peanuts and US Air has the best routes. Now, the merger of them, I'll be able to eat what I want on a better route.

PRESS: Unfortunately, you're easy to please. Look, I like United, too. That's what I said. And most of the time it's great service, they're great people. But it's always, with all these airlines, it's always a roll of the dice, and then they keep you in the dark and don't tell you why you're sitting on the runway for three hours.

MATALIN: It's the marketplace. Because often they don't know. It's the marketplace. If you don't -- if you have a disservice with United, you move to Delta, you move to American.

PRESS: Other industries give good service, so could the airlines. Better service.

From the left, I'm Bill Press. Good night for CROSSFIRE.

MATALIN: And from the right, I'm Mary Matalin. Join us again tomorrow for more CROSSFIRE.



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