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Report to the Subcommittee on Aviation Operations, Safety, and 
Security, Committee on Commerce, Science, and Transportation, U.S. 
Senate: 

United States Government Accountability Office: 
GAO: 

July 2008: 

Airline Industry: 

Potential Mergers and Acquisitions Driven by Financial and Competitive 
Pressures: 

GAO-08-845: 

GAO Highlights: 

Highlights of GAO-08-845, a report to the Subcommittee on Aviation 
Operations, Safety, and Security, Committee on Commerce, Science, and 
Transportation, U.S. Senate. 

Why GAO Did This Study: 

The airline industry is vital to the U.S. economy, generating operating 
revenues of nearly $172 billion in 2007, amounting to over 1 percent of 
the U.S. gross domestic product. It serves as an important engine for 
economic growth and a critical link in the nation’s transportation 
infrastructure, carrying more than 700 million passengers in 2007. 
Airline deregulation in 1978, led, at least in part, to increasingly 
volatile airline profitability, resulting in periods of significant 
losses and bankruptcies. In response, some airlines have proposed or 
are considering merging with or acquiring another airline. 

GAO was asked to help prepare Congress for possible airline mergers or 
acquisitions. This report describes (1) the financial condition of the 
U.S. passenger airline industry, (2) whether the industry is becoming 
more or less competitive, (3) why airlines seek to merge with or 
acquire other airlines, and (4) the role of federal authorities in 
reviewing proposed airline mergers and acquisitions. To answer these 
objectives, we analyzed Department of Transportation (DOT) financial 
and operating data; interviewed agency officials, airline managers, and 
industry experts; and reviewed Horizontal Merger Guidelines and spoke 
with antitrust experts. 

DOT and the Department of Justice (DOJ) provided technical comments, 
which were incorporated as appropriate. 

What GAO Found: 

The U.S. passenger airline industry was profitable in 2006 and 2007 for 
the first time since 2000, but this recovery appears short-lived 
because of rapidly increasing fuel costs. Legacy airlines (airlines 
that predate deregulation in 1978) generally returned to modest 
profitability in 2006 and 2007 by reducing domestic capacity, focusing 
on more profitable markets, and reducing long-term debt. Low-cost 
airlines (airlines that entered after deregulation), meanwhile, 
continued to be profitable. Airlines, particularly legacy airlines, 
were also able to reduce costs, especially through bankruptcy- and near-
bankruptcy-related employee contract, pay, and pension plan changes. 
Recent industry forecasts indicate that the industry is likely to incur 
substantial losses in 2008 owing to high fuel prices. 

Competition within the U.S. domestic airline industry increased from 
1998 through 2006, as reflected by an increase in the number of 
competitors in city-to-city (city-pair) markets, the presence of low-
cost airlines in more of those markets, lower air fares, fewer 
dominated markets, and a shrinking dominance by a single airline at 
some of the nation’s largest airports. The average number of 
competitors in the largest 5,000 city-pair markets rose to 3.3 in 2006 
from 2.9 in 1998. This growth is attributable to the increased presence 
of low-cost airlines, which increased nearly 60 percent. In addition, 
the number of largest 5,000 markets dominated by a single airline 
declined by 15 percent. 

Airlines seek to merge with or acquire other airlines with the 
intention of increasing their profitability and financial 
sustainability, but must weigh these potential benefits against 
operational and regulatory costs and challenges. The principal benefits 
airlines consider are cost reductions—by combining complementary 
assets, eliminating duplicate activities, and reducing capacity—and 
increased revenues from higher fares in existing markets and increased 
demand for more seamless travel to more destinations. Balanced against 
these potential benefits are operational costs of integrating 
workforces, aircraft fleets, and systems. In addition, because most 
airline mergers and acquisitions are reviewed by DOJ, the relevant 
antitrust enforcement agency, airlines must consider the risks of DOJ 
opposition. 

Both DOJ and DOT play a role in reviewing airline mergers and 
acquisitions, but DOJ’s determination as to whether a proposed merger 
is likely substantially to lessen competition is key. DOJ uses an 
integrated analytical framework set forth in the Horizontal Merger 
Guidelines to make its determination. Under that process, DOJ assesses 
the extent of likely anticompetitive effects in the relevant markets, 
in this case, airline city-pair markets. DOJ further considers the 
likelihood that airlines entering these markets would counteract any 
anticompetitive effects. It also considers any efficiencies that a 
merger or acquisition could bring—for example, consumer benefits from 
an expanded route network. Our analysis of changes in the airline 
industry, such as increased competition and the growth of low-cost 
airlines, indicates that airline entry may be more likely now than in 
the past provided recent increases in fuel costs do not reverse these 
conditions. Additionally, the Horizontal Merger Guidelines have evolved 
to provide clarity as to the consideration of efficiencies, an 
important factor in airline mergers. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-845] For more 
information, contact JayEtta Hecker at (202) 512-2834 or 
heckerj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

U.S. Airlines' Financial Condition Has Improved, but It Appears to Be 
Short-lived: 

Domestic Airline Competition Increased from 1998 through 2006, as Low- 
Cost Airlines Expanded: 

Airlines Seek to Combine to Increase Profits and Improve Financial 
Viability, but Challenges Exist: 

The Department of Justice's Antitrust Review Is a Critical Step in the 
Airline Merger and Acquisition Process: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: Delta and Northwest Merger: 

Appendix III: Number and Size of Dominated Markets by Airline in the 
Top 5,000 Markets, 2006: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Top Five Markets Where Competition Could Be Reduced from Two 
Airlines to One Airline, 2006: 

Table 2: Top Five Markets Where Competition Could Be Reduced from Three 
Airlines to Two Airlines, 2006: 

Table 3: Small Communities (Nonhub Airports) Where Delta and Northwest 
Have Service and Where Competition Could Be Reduced as of Third Quarter 
2007: 

Figures: 

Figure 1: Highlights of Domestic Airline Mergers and Acquisitions: 

Figure 2: Growth of Industry Capacity and Major Airline Mergers and 
Acquisitions, 1979-2006: 

Figure 3: Operating Profit or Loss for Legacy and Low-Cost Airlines, 
1998-2007: 

Figure 4: Revenue Passenger Miles among Legacy and Low-Cost Airlines, 
1998-2007: 

Figure 5: Domestic Available Seat Miles among Legacy and Low-Cost 
Airlines, 1998-2007: 

Figure 6: Unit Costs, Excluding Fuel, for Legacy and Low-Cost Airlines, 
1998-2007: 

Figure 7: Price of U.S. Jet Fuel, 2000--First Quarter 2008: 

Figure 8: Markets by Number of Competitors, 1998-2006: 

Figure 9: Average Number of Competitors by Distance (in miles), Top 
5,000 Markets, 1998-2006: 

Figure 10: Industry Share by Legacy and Low-Cost Airlines, 1998 and 
2006: 

Figure 11: Average Fares by Distance, 1998-2006: 

Figure 12: The Number of Dominated and Nondominated Markets, Top 5,000 
Markets, 1998-2006: 

Figure 13: Change in Passenger Share at Selected Dominated Airports by 
Dominant Airline, 1998 and 2006: 

Figure 14: Delta Air Lines and Northwest Airlines Domestic (lower 48) 
Route Map, February 2008 based on Official Airline Guide (OAG) Schedule 
Data: 

Figure 15: Delta Air Lines and Northwest Airlines International Route 
Map, February 2008 based on OAG Schedule Data: 

Figure 16: Number of Nonstop and One-Stop Markets Where Delta and 
Northwest Compete, Top 5,000 Markets, 2006: 

Abbreviations: 

ASM: available seat mile: 

BTC: Business Travel Coalition: 

CASM: cost per available seat mile: 

DOJ: Department of Justice: 

DOT: Department of Transportation: 

FAA: Federal Aviation Administration: 

GDP: gross domestic product: 

LCC: low-cost carrier: 

PBGC: Pension Benefit Guaranty Corporation: 

RPM: revenue per mile: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 31, 2008: 

The Honorable John D. Rockefeller, IV: 
Chairman: 
The Honorable Kay Bailey Hutchison: 
Ranking Member: 
Subcommittee on Aviation Operations, Safety, and Security: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The passenger airline industry is vital to the U.S. economy, with 
operating revenues of nearly $172 billion in 2007, equivalent to over 1 
percent of the U.S. gross domestic product. It also serves as an 
important engine for economic growth and a critical link in the 
nation's transportation infrastructure, carrying over 700 million 
passengers in 2007. The U.S. airline industry was deregulated in 1978, 
allowing market forces, rather than the federal government, to 
establish fares and service. Since 1978, the industry has experienced 
cyclical financial performance and numerous bankruptcies, mergers, and 
acquisitions, as the industry adjusted to an unregulated environment 
and changing market conditions.[Footnote 1] In recent years, the 
financial condition of legacy, or network, airlines--the largest 
segment of the passenger airline industry--deteriorated significantly 
even by historical standards.[Footnote 2] From 2001 to 2005, legacy 
airlines lost more than $33 billion, while four of them entered and 
exited bankruptcy. More recently, in 2006 and 2007 the airline industry 
returned to modest profitability only to confront rapidly increasing 
fuel costs and the expectation of renewed losses in 2008. These 
challenges and structural changes have spurred some airlines to explore 
mergers and acquisitions as a potential way to improve their 
competitive positions and financial viability--for example, Delta Air 
Lines and Northwest Airlines announced plans to merge on April 14, 
2008.[Footnote 3] Mergers and acquisitions, however, could also have 
anticompetitive effects, such as reduced competition and increased 
fares in some markets. Generally, before any airline merger or 
acquisition can be consummated, the Department of Justice (DOJ) carries 
out its antitrust enforcement responsibilities by evaluating whether 
the proposed merger is likely to substantially lessen competition and 
may challenge in court those that appear to be anticompetitive. 

US Airways' attempt to acquire Delta Air Lines in 2006, the merger 
announcement between Delta Air Lines and Northwest Airlines earlier 
this year, and the continued focus on potential airline mergers and 
acquisitions prompted interest in a broad assessment of the state of 
the industry, the factors that are driving continued interest in 
mergers and acquisitions, and the process the federal government uses 
to assess them. In order to assist Congress in understanding possible 
future airline mergers and acquisitions, GAO was asked to describe (1) 
the financial condition of the U.S. passenger airline industry, (2) 
whether the industry is becoming more or less competitive, (3) why 
airlines seek to merge with or acquire other airlines, and (4) the role 
of federal authorities in considering airline mergers and acquisitions. 

To address these objectives, we conducted analysis using Department of 
Transportation (DOT) financial and operating data, reviewed historical 
documents and past studies, and conducted interviews. Specifically, to 
evaluate the financial condition of the domestic airline industry, we 
analyzed airline financial metrics; reviewed financial studies; and 
conducted interviews with airline managers, trade associations, 
financial analysts, and other industry experts. Our financial analysis 
relied on airline financial data reported to DOT by airlines from 1998 
through 2007, as these were the most recent and complete annual data 
available. To evaluate changes in airline industry competition, we 
analyzed data from DOT's Origin and Destination Survey, which includes 
fare and itinerary information on every 10th airline ticket sold; 
reviewed studies assessing competition; and interviewed current and 
former DOT officials and aviation industry experts. Our analysis of DOT 
data focused on passenger ticket data for the largest 5,000 domestic 
airline markets from 1998 through 2006.[Footnote 4] We excluded tickets 
with international, Hawaiian, or Alaskan destinations or origins so 
that we could examine changes within contiguous domestic markets. To 
assess the reliability of all DOT data used by GAO, we reviewed the 
quality control procedures applied by DOT and subsequently determined 
that the data were sufficiently reliable for our purposes. To identify 
and evaluate the primary factors that airlines consider in deciding 
whether to merge with or acquire another airline, we reviewed studies 
and reports; assessed past airline mergers and acquisitions; and 
conducted interviews with DOT and DOJ officials, airline managers, 
financial analysts, academic researchers, and industry experts. In 
addition, to understand the government's role in evaluating a proposed 
merger or acquisition, we discussed the merger review processes with 
DOJ officials and antitrust experts and reviewed available 
documentation addressing past mergers and acquisitions. We conducted 
this performance audit from May 2007 through July 2008 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

Results in Brief: 

The U.S. passenger airline industry was profitable in 2006 and 2007 for 
the first time since 2000, but high fuel prices will likely result in 
industry losses in 2008. Legacy airlines, which currently account for 
two-thirds of industry market share, realized collective operating 
profits of $1.8 billion in 2007, as compared to collective operating 
losses of nearly $33 billion from 2001 through 2005 which forced four 
legacy airlines into bankruptcy.[Footnote 5] Legacy airlines generally 
improved their financial positions and returned to modest operating 
profitability in recent years by reducing operating costs and domestic 
capacity, while focusing on more profitable international markets. Low- 
cost airlines, meanwhile, have continued to maintain modest 
profitability since 1998. From 2003 through 2007, the airline industry 
experienced a relatively steady increase in passenger traffic--as 
measured by revenue passenger miles--growing 14 percent. At the same 
time, and unlike in past recoveries, industry capacity--as measured by 
available seat miles--increased 9 percent. Legacy airlines were also 
able to reduce costs, especially through bankruptcy, which triggered 
contract and pay concessions from labor unions and the termination and 
transfer of employee pension plans. Although the industry saw profits 
in 2007, according to first quarter 2008 financial results and updated 
industry forecasts for the rest of the year, the industry is expected 
to incur substantial losses in 2008. Rapidly increasing fuel prices are 
forcing airlines to cut capacity. 

From 1998 through 2006, the U.S. domestic airline industry became more 
competitive, as reflected by an increase in the number of competitors 
serving city-pair markets[Footnote 6] (e.g., New York-Los Angeles), the 
presence of low-cost airlines in more of those markets, lower average 
fares, fewer dominated markets, and a shrinking dominance by a single 
airline at some of the nation's largest airports. The largest 5,000 
city-pair markets--which account for more than 90 percent of passenger 
traffic--were serviced by more competitors on average in 2006 than in 
1998.[Footnote 7] Overall, average fares have declined 20 percent in 
real terms since 1998, and the average number of competitors in the top 
5,000 markets rose from 2.9 in 1998 to 3.3 in 2006.[Footnote 8] During 
the same period, there was tremendous growth of low-cost airlines. The 
number of top 5,000 markets serviced by at least one low-cost airline 
increased nearly 60 percent, from approximately 1,300 markets in 1998 
to over 2,000 markets in 2006. Further evidence of increased 
competition can be seen in the reduced number of dominated markets-- 
where a single airline carries 50 percent or more of passengers--in the 
top 5,000 markets. The number of markets dominated decreased from about 
3,500 in 1998 to about 3,000 in 2006. In addition, although legacy 
airlines continued to dominate many of the largest airports, carrying 
at least 50 percent of airport passenger traffic,[Footnote 9] most saw 
a decrease in their share of total passenger traffic as more 
competitors--mainly low-cost airlines--moved in or expanded. In 2006, 
of the 30 largest airports, 16 were dominated by a single airline, but 
at 8 of those airports, the dominant airline had lost some passenger 
traffic since 1998. 

Airlines consider mergers and acquisitions as a means to increase their 
profitability and financial viability, but must consider the 
operational and regulatory challenges to consummating a combination. 
Intended financial benefits stem from both cost reductions and 
increased revenues. Cost reductions may result from the elimination of 
duplicative operations--such as those at hubs or maintenance 
facilities--or by eliminating redundant city-pair service. On the 
revenue side, a merger or acquisition could generate additional 
revenues through increased fares on some routes as a result of capacity 
reductions or increased market share, although those fare increases may 
be transitory because other airlines could enter the affected markets 
and drive prices back down. Mergers or acquisitions could also attract 
more customers, and thus more revenue, by expanding airline networks to 
gain new city-pair combinations (domestically and internationally). 
Each merger or acquisition is different from others in terms of the 
extent to which cost reductions and revenue increases are factors. 
Balanced against these potential benefits are certain operational and 
regulatory challenges posed by mergers and acquisitions, which can be 
significant. For example, the integration of workforces is often 
particularly challenging and costly. New contracts must be negotiated, 
pilot seniority lists must be combined, and concessions may be required 
to gain labor support for mergers. Other significant operational 
challenges often involve the integration of aircraft fleets and 
information technology systems and processes. Demonstrating to DOJ, the 
relevant antitrust enforcement authority, that a merger or acquisition 
is not likely to be anticompetitive may also pose a significant 
challenge. 

Both DOJ and DOT play a role in reviewing potential mergers and 
acquisitions, but DOJ's determination of whether a merger or 
acquisition is likely substantially to lessen competition is key. If 
DOJ believes the transaction is anticompetitive and would harm 
consumers, it may petition a court to prohibit the transaction. For 
airlines, and many other industries, DOJ uses an analytical framework 
set forth in the Horizontal Merger Guidelines (the Guidelines) to 
evaluate merger proposals.[Footnote 10] As part of that framework, DOJ 
uses an integrated five-part process that assesses (1) the relevant 
market (city-pairs in the case of airlines); (2) the potential 
anticompetitive effects resulting from a merger or acquisition; (3) the 
likelihood and impact of other airlines possibly entering a market and 
counteracting any anticompetitive effects; (4) "efficiencies" 
(benefits) that a merger would bring--for example, consumer benefits 
from an expanded route network--and (5) whether one of the airlines 
proposing to merge would fail and its assets exit the market in the 
absence of a merger or acquisition. These considerations allow DOJ to 
determine whether it should challenge the merger because it would raise 
antitrust concerns. DOT also plays a role in the merger review process, 
providing competition data to DOJ, and if DOJ does not challenge the 
merger or acquisition, DOT may review the financial and safety standing 
of the new combined airline. Our analysis of changes in the airline 
industry, prior to the recent spike in fuel prices, indicates that the 
likelihood of airline entry increased. Additionally, the Guidelines 
have evolved to provide clarity as to the consideration of 
efficiencies, an important factor in airline mergers. 

We provided a draft of this report to DOT and DOJ for their review and 
comment. Both DOT and DOJ officials provided some clarifying and 
technical comments that we incorporated where appropriate. 

Background: 

The U.S. airline industry is principally composed of legacy, low-cost, 
and regional airlines, and while it is largely free of economic 
regulation, it remains regulated in other respects, most notably 
safety, security, and operating standards. Legacy airlines--sometimes 
called network airlines--are essentially those airlines that were in 
operation before the Airline Deregulation Act of 1978 and whose goal is 
to provide service from "anywhere to everywhere."[Footnote 11] 

To meet that goal, these airlines support large, complex hub-and-spoke 
operations with thousands of employees and hundreds of aircraft (of 
various types), with service at numerous fare levels to domestic 
communities of all sizes and to international destinations. To enhance 
revenues without expending capital, legacy airlines have entered into 
domestic (and international) alliances that give them access to some 
portion of each others' networks. Low-cost airlines generally entered 
the marketplace after deregulation and primarily operate less costly 
point-to-point service using fewer types of aircraft. Low-cost airlines 
typically offer simplified fare structures, which were originally aimed 
at leisure passengers but are increasingly attractive to business 
passengers because they typically do not have restrictive ticketing 
rules, which make it significantly more expensive to purchase tickets 
within 2 weeks of the flight or make changes to an existing itinerary. 
Regional airlines generally operate smaller aircraft--turboprops or 
regional jets with up to 100 seats--and provide service under code- 
sharing arrangements with larger legacy airlines on a cost-plus or fee- 
for-departure basis to smaller communities. Some regional airlines are 
owned by a legacy parent, while others are independent. For example, 
American Eagle is the regional partner for American Airlines, while 
independent Sky West Airlines operates on a fee-per-departure agreement 
with Delta Air Lines, United Airlines, and Midwest Airlines. [Footnote 
12] 

The airline industry has experienced considerable merger and 
acquisition activity since its early years, especially immediately 
following deregulation in 1978 (fig. 1 provides a timeline of mergers 
and acquisitions for the eight largest surviving airlines). There was a 
flurry of mergers and acquisitions during the 1980s, when Delta Air 
Lines and Western Airlines merged, United Airlines acquired Pan Am's 
Pacific routes, Northwest acquired Republic Airlines, and American and 
Air California merged. In 1988, merger and acquisition review authority 
was transferred from DOT to DOJ. Since 1998, and despite tumultuous 
financial periods, fewer mergers and acquisitions have occurred. In 
2001, American Airlines acquired the bankrupt airline TWA, and in 2005 
America West acquired US Airways while the latter was in bankruptcy. 
Certain other attempts at merging during that time period failed 
because of opposition from DOJ or employees and creditors. For example, 
in 2000, an agreement was reached that allowed Northwest Airlines to 
acquire a 50 percent stake in Continental Airlines (with limited voting 
power) to resolve the antitrust suit brought by DOJ against Northwest's 
proposed acquisition of a controlling interest in Continental.[Footnote 
13] A proposed merger of United Airlines and US Airways in 2000 also 
resulted in opposition from DOJ, which found that, in its view, the 
merger would violate antitrust laws by reducing competition, increasing 
air fares, and harming consumers on airline routes throughout the 
United States. Although DOJ expressed its intent to sue to block the 
transaction, the parties abandoned the transaction before a suit was 
filed. More recently, the 2006 proposed merger of US Airways and Delta 
Air Lines fell apart because of opposition from Delta's pilots and some 
of its creditors, as well as its senior management. 

Figure 1: Highlights of Domestic Airline Mergers and Acquisitions: 

[See PDF for image] 

This figure is an illustrated timeline depicting highlights of domestic 
airline mergers and acquisitions, as follows: 

Airline: Alaska; 
Other event: 1934, McGee Airways founded; 
Other event: 1937, renamed Star Airlines; 
Other event: 1942, renamed Alaska Airlines; 
Acquisition or merger: 1968, Alaska Coastal-Ellis, Cordova; 
Acquisition or merger: 1986, Horizon Air, Jet America Airlines. 

Airline: American; 
Other event: 1934, founded; 
Acquisition or merger: 1970, Trans Caribbean Airways; 
Acquisition or merger: 1986, Air California; 
Acquisition or merger: 1990, Eastern Airlines Latin American routes; 
Acquisition or merger: 1999, Reno Air; 
Acquisition or merger: 2001, TWA. 

Airline: Continental; 
Other event: 1934, Varney Speed Lines founded; 
Other event: 1937, renamed Continental; 
Acquisition or merger: 1953, Pioneer Airlines; 
Other event: 1968, Air Micronesia subsidiary formed; 
Acquisition or merger: 1982, acquired by Texas International Air; 
Acquisition or merger: 1986, People Express (Frontier); 
Acquisition or merger: 1987, New York Air. 

Airline: Delta; 
Other event: 1929, founded; 
Acquisition or merger: 1953, Chicago and Southern Air Lines; 
Acquisition or merger: 1972, Northeast Airlines; 
Acquisition or merger: 1987, Western Airlines; 
Acquisition or merger: 1991, Pan Am trans-atlantic routes and shuttle; 
Acquisition or merger: 2000, ASA and Comair. 

Airline: Northwest; 
Other event: 1926, founded; 
Acquisition or merger: 1986, Republic Airlines. 

Airline: Southwest; 
Other event: 1971, founded; 
Acquisition or merger: 1994, Morris Air. 

Airline: United; 
Other event: 1934, founded; 
Acquisition or merger: 1962, Capital Airlines; 
Acquisition or merger: 1986, Pan Am Pacific routes; 
Acquisition or merger: 1990, Pan Am London routes; 
Acquisition or merger: 1991, Pan Am Latin American routes. 

Airline: US Airways; 
Other event: 1937, All-American Airways founded; 
Other event: 1953, renamed Allegheny Airlines; 
Acquisition or merger: 1968, Lake Central Airlines; 
Acquisition or merger: 1972, Mohawk; 
Acquisition or merger: 1986, Empire Airlines acquired by Piedmont; 
Acquisition or merger: 1988, PSA; 
Acquisition or merger: 1988, Piedmont; 
Acquisition or merger: 2005, America West merger. 

Source: Cathay Financial and airline company documents. 

[End of figure] 

Since the airline industry was deregulated in 1978, its earnings have 
been extremely volatile. In fact, despite considerable periods of 
strong growth and increased earnings, airlines have at times suffered 
such substantial financial distress that the industry has experienced 
recurrent bankruptcies and has failed to earn sufficient returns to 
cover capital costs in the long run. Many analysts view the industry as 
inherently unstable due to key demand and cost characteristics. In 
particular, demand for air travel is highly cyclical, not only in 
relation to the state of the economy, but also with respect to 
political, international, and even health-related events. Yet the cost 
characteristics of the industry appear to make it difficult for firms 
to rapidly contract in the face of declining demand. In particular, 
aircraft are expensive, long-lived capital assets. And as demand 
declines, airlines cannot easily reduce flight schedules in the very 
near term because passengers are already booked on flights for months 
in advance, nor can they quickly change their aircraft fleets. That is, 
airplane costs are largely fixed and unavoidable in the near term. 
Moreover, even though labor is generally viewed as a variable cost, 
airline employees are mostly unionized, and airlines find that they 
cannot reduce employment costs very quickly when demand for air travel 
slows. These cost characteristics can thus lead to considerable excess 
capacity in the face of declining demand. Finally, the industry is also 
susceptible to certain external shocks--such as those caused by fuel 
price volatility. In 2006 and 2007, the airline industry generally 
regained profitability after several very difficult years. However, 
these underlying fundamental characteristics of the industry suggest 
that it will remain an industry susceptible to rapid swings in its 
financial health. 

Since deregulation in 1978, the financial stability of the airline 
industry has become a considerable concern for the federal government 
due to the level of financial assistance it has provided to the 
industry through assuming terminated pension plans and other forms of 
assistance. Since 1978 there have been over 160 airline bankruptcies. 
While most of these bankruptcies affected small airlines that were 
eventually liquidated, 4 of the more recent bankruptcies (Delta, 
Northwest, United, and US Airways) are among the largest corporate 
bankruptcies ever, excluding financial services firms. During these 
bankruptcies, United Airlines and US Airways terminated their pension 
plans and $9.7 billion in claims were shifted to the Pension Benefit 
Guarantee Corporation (PGBC).[Footnote 14] Further, to respond to the 
shock to the industry from the September 11, 2001, terrorist attacks, 
the federal government provided airlines with $7.4 billion in direct 
assistance and authorized $1.6 billion (of $10 billion available) in 
loan guarantees to six airlines.[Footnote 15] 

Although the airline industry has experienced numerous mergers and 
bankruptcies since deregulation, growth of existing airlines and the 
entry of new airlines have contributed to a steady increase in 
capacity.[Footnote 16] Previously, GAO reported that although one 
airline may reduce capacity or leave the market, capacity returns 
relatively quickly.[Footnote 17] Likewise, while past mergers and 
acquisitions have, at least in part, sought to reduce capacity, any 
resulting declines in industry capacity have been short-lived, as 
existing airlines have expanded or new airlines have expanded. Capacity 
growth has slowed or declined just before and during recessions, but 
not as a result of large airline liquidations. Figure 2 shows capacity 
trends since 1979 and the dates of major mergers and acquisitions. 

Figure 2: Growth of Industry Capacity and Major Airline Mergers and 
Acquisitions, 1979-2006: 

[See PDF for image] 

This figure is a line graph depicting growth of industry capacity and 
major airline mergers and acquisitions, 1979-2006, as follows: 

Year: 1979, Q1; 
Available seat miles (four-quarter moving average, in billions): 76.5. 

Year: 1979, Q2; 
Available seat miles (four-quarter moving average, in billions): 79. 

Year: 1979, Q3; 
Available seat miles (four-quarter moving average, in billions): 79.3. 

Year: 1979, Q4; 
Available seat miles (four-quarter moving average, in billions): 82.1. 

Year: 1980, Q1; 
Available seat miles (four-quarter moving average, in billions): 84. 

Year: 1980, Q2 (recession period); 
Available seat miles (four-quarter moving average, in billions): 85.2. 

Year: 1980, Q3 (recession period); 
Available seat miles (four-quarter moving average, in billions): 88.9. 

Year: 1980, Q4; 
Available seat miles (four-quarter moving average, in billions): 88.5. 
	
Year: 1981, Q1; 
Available seat miles (four-quarter moving average, in billions): 87.2. 

Year: 1981, Q2; 
Available seat miles (four-quarter moving average, in billions): 86.5. 

Year: 1981, Q3; 
Available seat miles (four-quarter moving average, in billions): 85.9. 

Year: 1981, Q4 (recession period); 
Available seat miles (four-quarter moving average, in billions): 85.2. 

Year: 1982, Q1 (recession period); 
Available seat miles (four-quarter moving average, in billions): 86. 

Year: 1982, Q2 (recession period); 
Available seat miles (four-quarter moving average, in billions): 86.4. 

Year: 1982, Q3 (recession period); 
Available seat miles (four-quarter moving average, in billions): 86.6. 

Year: 1982, Q4 (recession period); 
Available seat miles (four-quarter moving average, in billions): 88. 

Year: 1983, Q1; 
Available seat miles (four-quarter moving average, in billions): 89.5. 

Year: 1983, Q2; 
Available seat miles (four-quarter moving average, in billions): 90.7. 

Year: 1983, Q3; 
Available seat miles (four-quarter moving average, in billions): 92.8. 

Year: 1983, Q4; 
Available seat miles (four-quarter moving average, in billions): 94.9. 

Year: 1984, Q1; 
Available seat miles (four-quarter moving average, in billions): 96.3. 

Year: 1984, Q2; 
Available seat miles (four-quarter moving average, in billions): 99.1. 

Year: 1984, Q3; 
Available seat miles (four-quarter moving average, in billions): 101.6. 

Year: 1984, Q4; 
Available seat miles (four-quarter moving average, in billions): 104.5. 

Year: 1985, Q1; 
Available seat miles (four-quarter moving average, in billions): 107.8. 

Year: 1985, Q2; 
Available seat miles (four-quarter moving average, in billions): 109.3. 

Year: 1985, Q3; 
Available seat miles (four-quarter moving average, in billions): 109.8. 

Year: 1985, Q4; 
Available seat miles (four-quarter moving average, in billions): 111.4. 

Year: 1986; 
American Airlines acquires AirCal; 
Continental Airlines acquires People Express (Frontier); 
Northwest Airlines acquires Republic Airlines; 
TWA acquires Ozark Airlines. 

Year: 1986, Q1; 
Available seat miles (four-quarter moving average, in billions): 113.4. 

Year: 1986, Q2; 
Available seat miles (four-quarter moving average, in billions): 116.2. 

Year: 1986, Q3; 
Available seat miles (four-quarter moving average, in billions): 120.6. 

Year: 1986, Q4; 
Available seat miles (four-quarter moving average, in billions): 123.9. 

Year: 1987; 
Delta Airlines acquires Western Airlines. 

Year: 1987, Q1; 
Available seat miles (four-quarter moving average, in billions): 125.9. 

Year: 1987, Q2; 
Available seat miles (four-quarter moving average, in billions): 132. 

Year: 1987, Q3; 
Available seat miles (four-quarter moving average, in billions): 134.1. 

Year: 1987, Q4; 
Available seat miles (four-quarter moving average, in billions): 135. 

Year: 1988; 
UA Airways acquires PSA. 

Year: 1988, Q1; 
Available seat miles (four-quarter moving average, in billions): 139.8. 

Year: 1988, Q2; 
Available seat miles (four-quarter moving average, in billions): 137.5. 

Year: 1988, Q3; 
Available seat miles (four-quarter moving average, in billions): 137.8. 

Year: 1988, Q4; 
Available seat miles (four-quarter moving average, in billions): 138.4. 
	
Year: 1989; 
UA Airways acquires Piedmont and Empire airlines. 

Year: 1989, Q1; 
Available seat miles (four-quarter moving average, in billions): 136. 

Year: 1989, Q2; 
Available seat miles (four-quarter moving average, in billions): 135.5. 

Year: 1989, Q3; 
Available seat miles (four-quarter moving average, in billions): 134.5. 

Year: 1989, Q4; 
Available seat miles (four-quarter moving average, in billions): 134. 
	
Year: 1990, Q1; 
Available seat miles (four-quarter moving average, in billions): 134.2. 

Year: 1990, Q2; 
Available seat miles (four-quarter moving average, in billions): 135.7. 

Year: 1990, Q3; 
Available seat miles (four-quarter moving average, in billions): 138.7. 

Year: 1990, Q4 (recession period); 
Available seat miles (four-quarter moving average, in billions): 141.2. 

Year: 1991, Q1 (recession period); 
Available seat miles (four-quarter moving average, in billions): 142.8. 

Year: 1991, Q2; 
Available seat miles (four-quarter moving average, in billions): 141.2. 

Year: 1991, Q3; 
Available seat miles (four-quarter moving average, in billions): 139.8. 

Year: 1991, Q4; 
Available seat miles (four-quarter moving average, in billions): 138.6. 
	
Year: 1992, Q1; 
Available seat miles (four-quarter moving average, in billions): 137.3. 

Year: 1992, Q2; 
Available seat miles (four-quarter moving average, in billions): 138.6. 

Year: 1992, Q3; 
Available seat miles (four-quarter moving average, in billions): 139.2. 

Year: 1992, Q4; 
Available seat miles (four-quarter moving average, in billions): 140.4. 

Year: 1993, Q1; 
Available seat miles (four-quarter moving average, in billions): 141.6. 

Year: 1993, Q2; 
Available seat miles (four-quarter moving average, in billions): 142.6. 

Year: 1993, Q3; 
Available seat miles (four-quarter moving average, in billions): 143.9. 

Year: 1993, Q4; 
Available seat miles (four-quarter moving average, in billions): 144.7. 
	
Year: 1994, Q1; 
Available seat miles (four-quarter moving average, in billions): 145.3. 

Year: 1994, Q2; 
Available seat miles (four-quarter moving average, in billions): 145.7. 

Year: 1994, Q3; 
Available seat miles (four-quarter moving average, in billions): 146.4. 

Year: 1994, Q4; 
Available seat miles (four-quarter moving average, in billions): 147.6. 
	
Year: 1995, Q1; 
Available seat miles (four-quarter moving average, in billions): 149.6. 

Year: 1995, Q2; 
Available seat miles (four-quarter moving average, in billions): 151.7. 

Year: 1995, Q3; 
Available seat miles (four-quarter moving average, in billions): 152.9. 

Year: 1995, Q4; 
Available seat miles (four-quarter moving average, in billions): 153.6. 

Year: 1996, Q1; 
Available seat miles (four-quarter moving average, in billions): 153.8. 

Year: 1996, Q2; 
Available seat miles (four-quarter moving average, in billions): 155. 

Year: 1996, Q3; 
Available seat miles (four-quarter moving average, in billions): 156.8. 

Year: 1996, Q4; 
Available seat miles (four-quarter moving average, in billions): 158.5. 

Year: 1997, Q1; 
Available seat miles (four-quarter moving average, in billions): 160.2. 

Year: 1997, Q2; 
Available seat miles (four-quarter moving average, in billions): 161.3. 

Year: 1997, Q3; 
Available seat miles (four-quarter moving average, in billions): 162.1. 

Year: 1997, Q4; 
Available seat miles (four-quarter moving average, in billions): 162.7. 
	
Year: 1998, Q1; 
Available seat miles (four-quarter moving average, in billions): 163.4. 

Year: 1998, Q2; 
Available seat miles (four-quarter moving average, in billions): 163.6. 

Year: 1998, Q3; 
Available seat miles (four-quarter moving average, in billions): 163.7. 

Year: 1998, Q4; 
Available seat miles (four-quarter moving average, in billions): 164. 

Year: 1999; 
American Airlines acquires Reno Air. 
	
Year: 1999, Q1; 
Available seat miles (four-quarter moving average, in billions): 165.3. 

Year: 1999, Q2; 
Available seat miles (four-quarter moving average, in billions): 166.6. 

Year: 1999, Q3; 
Available seat miles (four-quarter moving average, in billions): 169. 

Year: 1999, Q4; 
Available seat miles (four-quarter moving average, in billions): 172.7. 
	
Year: 2000, Q1; 
Available seat miles (four-quarter moving average, in billions): 175.1. 

Year: 2000, Q2; 
Available seat miles (four-quarter moving average, in billions): 177.8. 

Year: 2000, Q3; 
Available seat miles (four-quarter moving average, in billions): 179.7. 

Year: 2000, Q4; 
Available seat miles (four-quarter moving average, in billions): 180.5. 

Year: 2001; 
American Airlines acquires TWA. 

Year: 2001, Q1 (recession period); 
Available seat miles (four-quarter moving average, in billions): 181.5. 

Year: 2001, Q2 (recession period); 
Available seat miles (four-quarter moving average, in billions): 182.6. 

Year: 2001, Q3 (recession period); 
Available seat miles (four-quarter moving average, in billions): 184. 

Year: 2001, Q4 (recession period); 
Available seat miles (four-quarter moving average, in billions): 182.8. 
	
Year: 2002, Q1; 
Available seat miles (four-quarter moving average, in billions): 176.9. 

Year: 2002, Q2; 
Available seat miles (four-quarter moving average, in billions): 172.1. 

Year: 2002, Q3; 
Available seat miles (four-quarter moving average, in billions): 168.7. 

Year: 2002, Q4; 
Available seat miles (four-quarter moving average, in billions): 167.5. 
	
Year: 2003, Q1; 
Available seat miles (four-quarter moving average, in billions): 170.9. 

Year: 2003, Q2; 
Available seat miles (four-quarter moving average, in billions): 172.5. 

Year: 2003, Q3; 
Available seat miles (four-quarter moving average, in billions): 171.9. 

Year: 2003, Q4; 
Available seat miles (four-quarter moving average, in billions): 172.7. 

Year: 2004, Q1; 
Available seat miles (four-quarter moving average, in billions): 173.9. 

Year: 2004, Q2; 
Available seat miles (four-quarter moving average, in billions): 177.3. 

Year: 2004, Q3; 
Available seat miles (four-quarter moving average, in billions): 181.5. 

Year: 2004, Q4; 
Available seat miles (four-quarter moving average, in billions): 184.3. 

Year: 2005; 
US Airways merges with America West. 

Year: 2005, Q1; 
Available seat miles (four-quarter moving average, in billions): 187.1. 

Year: 2005, Q2; 
Available seat miles (four-quarter moving average, in billions): 187.9. 

Year: 2005, Q3; 
Available seat miles (four-quarter moving average, in billions): 189.3. 

Year: 2005, Q4; 
Available seat miles (four-quarter moving average, in billions): 190.6. 
	
Year: 2006, Q1; 
Available seat miles (four-quarter moving average, in billions): 189.6. 

Year: 2006, Q2; 
Available seat miles (four-quarter moving average, in billions): 188.6. 

Year: 2006, Q3; 
Available seat miles (four-quarter moving average, in billions): 187.2. 

Year: 2006, Q4; 
Available seat miles (four-quarter moving average, in billions): 186.4. 

Sources: GAO analysis of Form 41 data, National Bureau of Economic 
Research, and DOT documents. 

[End of figure] 

U.S. Airlines' Financial Condition Has Improved, but It Appears to Be 
Short-lived: 

The U.S. passenger airline industry has generally improved its 
financial condition in recent years, but its recovery appears short- 
lived because of rapidly increasing fuel prices. The U.S. airline 
industry recorded a net operating profit of $2.2 billion and $2.8 
billion in 2006 and 2007, respectively,[Footnote 18] the first time 
since 2000 that it had earned a profit. Legacy airlines--which lost 
nearly $33 billion between 2001 and 2005--returned to profitability in 
2006 owing to increased passenger traffic, restrained capacity, and 
restructured costs. Meanwhile, low-cost airlines, which also saw 
increased passenger traffic, remained profitable overall by continuing 
to keep costs low, as compared to costs at the legacy airlines, and 
managing their growth. The airline industry's financial future remains 
uncertain and vulnerable to a number of internal and external events-- 
particularly the rapidly increasing costs of fuel. 

Both Legacy and Low-Cost Airlines Improved Their Financial Positions in 
2006 and 2007: 

The airline industry achieved modest profitability in 2006 and 
continued that trend through 2007. The seven legacy airlines had 
operating profits of $1.1 billion in 2006 and $1.8 billion in 2007, 
after losses totaling nearly $33 billion from 2001 through 2005. The 
seven low-cost airlines, after reaching an operating profit low of 
nearly $55 million in 2004, also saw improvement, posting operating 
profits of almost $958 million in 2006 and $1 billion in 2007. Figure 3 
shows U.S. airline operating profits since 1998. 

Figure 3: Operating Profit or Loss for Legacy and Low-Cost Airlines, 
1998-2007 (2007 dollars in billions): 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Operating profit/loss, legacy airlines: $7.34; 
Operating profit/loss, low-cost airlines: $1.23. 

Year: 1999; 
Operating profit/loss, legacy airlines: $5.78; 
Operating profit/loss, low-cost airlines: $1.47. 

Year: 2000; 
Operating profit/loss, legacy airlines: $4.33; 
Operating profit/loss, low-cost airlines: $1.37. 

Year: 2001; 
Operating profit/loss, legacy airlines: -$8.40; 
Operating profit/loss, low-cost airlines: $0.34. 

Year: 2002; 
Operating profit/loss, legacy airlines: -$9.22; 
Operating profit/loss, low-cost airlines: $0.35. 

Year: 2003; 
Operating profit/loss, legacy airlines: -$5.39; 
Operating profit/loss, low-cost airlines: $0.90. 

Year: 2004; 
Operating profit/loss, legacy airlines: -$5.75; 
Operating profit/loss, low-cost airlines: $0.05. 

Year: 2005; 
Operating profit/loss, legacy airlines: -$4.11; 
Operating profit/loss, low-cost airlines: $0.02. 

Year: 2006; 
Operating profit/loss, legacy airlines: $1.13; 
Operating profit/loss, low-cost airlines: $0.96. 

Year: 2007; 
Operating profit/loss, legacy airlines: $1.76; 
Operating profit/loss, low-cost airlines: $1.03. 

Source: GAO analysis of DOT data. 

Note: Following their merger in 2005, US Airways and America West 2006- 
2007 data are included with the legacy airlines. America West's data 
from 1998 to 2005 are included with the low-cost airlines. 

[End of figure] 

Increased Passenger Traffic and Capacity Restraint Have Improved 
Airline Revenues: 

An increase in passenger traffic since 2003 has helped improve airline 
revenues. Passenger traffic--as measured by revenue passenger miles 
(RPM)--increased for both legacy and low-cost airlines, as illustrated 
by figure 4.[Footnote 19] Legacy airlines' RPMs rose 11 percent from 
2003 through 2007, while low-cost airlines' RPMs grew 24 percent during 
the same period. 

Figure 4: Revenue Passenger Miles among Legacy and Low-Cost Airlines, 
1998-2007: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Billions of revenue passenger miles, legacy airlines: 59; 
Billions of revenue passenger miles, low-cost airlines: 354. 

Year: 1999; 
Billions of revenue passenger miles, legacy airlines: 69; 
Billions of revenue passenger miles, low-cost airlines: 365. 

Year: 2000; 
Billions of revenue passenger miles, legacy airlines: 80; 
Billions of revenue passenger miles, low-cost airlines: 375. 

Year: 2001; 
Billions of revenue passenger miles, legacy airlines: 86; 
Billions of revenue passenger miles, low-cost airlines: 346. 

Year: 2002; 
Billions of revenue passenger miles, legacy airlines: 95; 
Billions of revenue passenger miles, low-cost airlines: 347. 

Year: 2003; 
Billions of revenue passenger miles, legacy airlines: 108; 
Billions of revenue passenger miles, low-cost airlines: 339. 

Year: 2004; 
Billions of revenue passenger miles, legacy airlines: 123; 
Billions of revenue passenger miles, low-cost airlines: 361. 

Year: 2005; 
Billions of revenue passenger miles, legacy airlines: 132; 
Billions of revenue passenger miles, low-cost airlines: 366. 

Year: 2006; 
Billions of revenue passenger miles, legacy airlines: 120; 
Billions of revenue passenger miles, low-cost airlines: 379. 

Year: 2007; 
Billions of revenue passenger miles, legacy airlines: 134; 
Billions of revenue passenger miles, low-cost airlines: 375. 

Source: GAO analysis of DOT data. 

Note: Following their merger in 2005, US Airways and America West 2006- 
2007 data are included with the legacy airlines. America West's data 
from 1998 to 2005 are included with the low-cost airlines. 

[End of figure] 

Airline revenues have also improved owing to domestic capacity 
restraint. Some past airline industry recoveries have been stalled 
because airlines grew their capacity too quickly in an effort to gain 
market share, and too much capacity undermined their ability to charge 
profitable fares. Total domestic capacity, as measured by available 
seat miles (ASM), increased 9 percent, from 696 billion ASMs in 2003 to 
757 billion ASMs in 2007.[Footnote 20] However, legacy airlines' ASMs 
declined 18 percent, from 460 billion in 2003 to 375 billion in 2007, 
as illustrated by figure 5. Industry experts and airline officials told 
us that legacy airlines reduced their domestic capacity, in part, by 
shifting capacity to their regional airline partners and to 
international routes. Even the faster growing low-cost airline segment 
saw a decline in ASMs in 2006 and 2007. 

Figure 5: Domestic Available Seat Miles among Legacy and Low-Cost 
Airlines, 1998-2007: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Billions of available seat miles, legacy airlines: 90; 
Billions of available seat miles, low-cost airlines: 497. 

Year: 1999; 
Billions of available seat miles, legacy airlines: 100; 
Billions of available seat miles, low-cost airlines: 520. 

Year: 2000; 
Billions of available seat miles, legacy airlines: 114; 
Billions of available seat miles, low-cost airlines: 523. 

Year: 2001; 
Billions of available seat miles, legacy airlines: 124; 
Billions of available seat miles, low-cost airlines: 498. 

Year: 2002; 
Billions of available seat miles, legacy airlines: 137; 
Billions of available seat miles, low-cost airlines: 488. 

Year: 2003; 
Billions of available seat miles, legacy airlines: 152; 
Billions of available seat miles, low-cost airlines: 460. 

Year: 2004; 
Billions of available seat miles, legacy airlines: 168; 
Billions of available seat miles, low-cost airlines: 477. 

Year: 2005; 
Billions of available seat miles, legacy airlines: 177; 
Billions of available seat miles, low-cost airlines: 464. 

Year: 2006; 
Billions of available seat miles, legacy airlines: 160; 
Billions of available seat miles, low-cost airlines: 468. 

Year: 2007; 
Billions of available seat miles, legacy airlines: 135; 
Billions of available seat miles, low-cost airlines: 375. 

Source: GAO analysis of DOT data. 

Note: Following their merger in 2005, US Airways and America West 2006- 
2007 data are included with the legacy airlines. America West's data 
from 1998 to 2005 are included with the low-cost airlines. 

[End of figure] 

Since 2004, legacy airlines have shifted portions of their domestic 
capacity to more profitable international routes. From 1998 through 
2003, the legacy airlines maintained virtually the same 30/70 percent 
capacity allocation split between international and domestic capacity. 
However, during the period from 2004 to 2007, legacy airlines increased 
their international capacity by 7 percentage points to a 37/63 percent 
split between international and domestic capacities. International 
expansion has proven to be a source of substantial new revenues for the 
legacy airlines because they often face less competition on 
international routes. Moreover, international routes generate 
additional passenger flow (and revenues) through their domestic 
networks, helping to support service over routes where competition from 
low-cost airlines has otherwise reduced legacy airlines' domestic 
revenues. 

Cost Reduction and Bankruptcy Restructuring Efforts Have Also Improved 
Airline Financial Positions: 

The airlines have also undertaken cost reduction efforts--much of which 
occurred through the bankruptcy process--in an attempt to improve their 
financial positions and better insulate themselves from the cyclical 
nature of the industry. Excluding fuel, unit operating costs for the 
industry, typically measured by cost per available seat mile,[Footnote 
21] have decreased 16 percent since reaching peak levels around 2001. A 
number of experts have pointed out that the legacy airlines have likely 
made most of the cost reductions that can be made without affecting 
safety or service; however, as figure 6 illustrates, a significant gap 
remains between legacy and low-cost airlines' unit costs. A recent 
expert study examining industry trends in competition and financial 
condition found similar results, also noting that the cost gap between 
legacy and low-cost airlines still exists.[Footnote 22] 

Figure 6: Unit Costs, Excluding Fuel, for Legacy and Low-Cost Airlines, 
1998-2007 (costs in 2007 dollars): 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Cost per available seat mile, legacy airlines: 0.082; 
Cost per available seat mile, low-cost airlines: 0.117. 

Year: 1999; 
Cost per available seat mile, legacy airlines: 0.079; 
Cost per available seat mile, low-cost airlines: 0.117. 

Year: 2000; 
Cost per available seat mile, legacy airlines: 0.083; 
Cost per available seat mile, low-cost airlines: 0.117. 

Year: 2001; 
Cost per available seat mile, legacy airlines: 0.082; 
Cost per available seat mile, low-cost airlines: 0.125. 

Year: 2002; 
Cost per available seat mile, legacy airlines: 0.073; 
Cost per available seat mile, low-cost airlines: 0.121. 

Year: 2003; 
Cost per available seat mile, legacy airlines: 0.069; 
Cost per available seat mile, low-cost airlines: 0.121. 

Year: 2004; 
Cost per available seat mile, legacy airlines: 0.073; 
Cost per available seat mile, low-cost airlines: 0.124. 

Year: 2005; 
Cost per available seat mile, legacy airlines: 0.072; 
Cost per available seat mile, low-cost airlines: 0.121. 

Year: 2006; 
Cost per available seat mile, legacy airlines: 0.070; 
Cost per available seat mile, low-cost airlines: 0.115. 

Year: 2007; 
Cost per available seat mile, legacy airlines: 0.058; 
Cost per available seat mile, low-cost airlines: 0.115. 

Source: GAO analysis of DOT data. 

Note: Following their merger in 2005, US Airways and America West 2006- 
2007 data are included with the legacy airlines. America West's data 
from 1998 to 2005 are included with the low-cost airlines. 

[End of figure] 

Many airlines achieved dramatic cuts in their operational costs by 
negotiating contract and pay concessions from their labor unions and 
through bankruptcy restructuring and personnel reductions. For example, 
Northwest Airlines pilots agreed to two pay cuts--15 percent in 2004 
and an additional 23.9 percent in 2006, while in bankruptcy--to help 
the airline dramatically reduce operating expenses. Bankruptcy also 
allowed several airlines to significantly reduce their pension 
expenses, as some airlines terminated and shifted their pension 
obligations to PBGC. Legacy airlines in particular reduced personnel as 
another means of reducing costs. The average number of employees per 
legacy airline has decreased 26 percent, from 42,558 in 1998 to 31,346 
in 2006. Low-cost airlines, on the other hand, have added personnel; 
however, they have done so in keeping with their increases in capacity. 
In fact, although total low-cost airline labor costs (including 
salaries and benefits) steadily increased from 1998 through 2007--from 
$2.8 billion to $5.0 billion--labor costs have accounted for roughly 
the same percentage (33 percent) of total operating expenses (including 
fuel) throughout the time period. 

Although cost restructuring--achieved both through Chapter 11 
bankruptcy reorganizations and outside of that process--has enabled 
most legacy airlines to improve their balance sheets in recent years, 
it still leaves the industry highly leveraged. Legacy airlines have 
significantly increased their total cash reserves from $2.7 billion in 
1998 to $24 billion in 2007, thereby strengthening their cash and 
liquidity positions.[Footnote 23] Low-cost airlines also increased 
their total cash reserves. Industry experts we spoke with stated that 
this buildup of cash reserves is a strategic move to help the airlines 
withstand future industry shocks, as well as to pay down debts or 
return value to stockholders. Experts, however, also agreed that debt 
is still a problem within the industry, particularly for the legacy 
airlines. For example, legacy airlines' assets-to-liabilities ratio (a 
measure of a firm's long-term solvency) is still less than 1 (assets 
less than liabilities). In 1998, legacy airlines' average ratio was 
0.70, which improved only slightly to 0.74 in 2007. In contrast, while 
low-cost airlines have also added significant liabilities owing to 
their growth, their assets-to-liabilities ratio remains better than 
that of legacy airlines, increasing from 0.75 in 1998 to 1 in 2007. 

Airlines' Financial Turnaround May Be Short-lived: 

Because the financial condition of the airline industry remains 
vulnerable to external shocks--such as the rising cost of fuel, 
economic downturns, or terrorist attacks--the near-term and longer-term 
financial health of the industry remains uncertain. In light of 
increased fuel prices and softening passenger demand, the profit and 
earnings outlook has reversed itself, and airlines may incur record 
losses in 2008. Although the industry saw profits in 2007 and some were 
predicting even larger profits in 2008, experts and industry analysts 
now estimate that the industry could incur significant losses in 2008. 
In fact, although estimates vary, one analyst recently projected $2.8 
billion in industry losses, while another analyst put industrywide 
losses between $4 billion and $9 billion for the year, depending on 
demand trends. More recently, the airline trade association, the Air 
Transport Association, estimated losses of between $5 billion and $10 
billion this year, primarily due to escalating fuel prices. For the 
first quarter of 2008, airlines reported net operating losses of more 
than $1.4 billion. 

Fuel Costs Are Increasing and Other Costs May Increase: 

Many experts cite rising fuel costs as a key obstacle facing the 
airlines for the foreseeable future. The cost of jet fuel has become an 
ever-increasing challenge for airlines, as jet fuel climbed to over 
$2.85 per gallon in early 2008, and has continued to increase. By 
comparison, jet fuel was $1.11 per gallon in 2000, in 2008 dollars 
(Fig. 7 illustrates the increase in jet fuel prices since 2000). Some 
airlines, particularly Southwest Airlines, reduced the impact of rising 
fuel prices on their costs through fuel hedges;[Footnote 24] however, 
most of those airlines' hedges are limited or, in the case of 
Southwest, will expire within the next few years and may be replaced 
with new but more expensive hedges. In an attempt to curtail operating 
losses linked to higher fuel costs, most of the largest airlines have 
already announced plans to trim domestic capacity during 2008, and some 
have added baggage and other fees to their fares. Additionally, nine 
airlines have already filed for bankruptcy or ceased operations since 
December 2007, with many citing the significant increase in fuel costs 
as a contributing factor.[Footnote 25] 

Figure 7: Price of U.S. Jet Fuel, 2000--First Quarter 2008: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

Year: 2000; 
Cost per Gallon (in 2008 dollars): $1.11. 

Year: 2001; 
Cost per Gallon (in 2008 dollars): $0.89. 

Year: 2002; 
Cost per Gallon (in 2008 dollars): $0.86. 

Year: 2003; 
Cost per Gallon (in 2008 dollars): $0.99. 

Year: 2004; 
Cost per Gallon (in 2008 dollars): $1.36. 

Year: 2005; 
Cost per Gallon (in 2008 dollars): $1.88. 

Year: 2006; 
Cost per Gallon (in 2008 dollars): $2.07. 

Year: 2007; 
Cost per Gallon (in 2008 dollars): $2.22. 

Year: January-February 2008; 
Cost per Gallon (in 2008 dollars): $2.85. 

Source: AIr Transport Association data. 

[End of figure] 

In addition to rising fuel costs, other factors may strain airlines' 
financial health in the coming years. Labor contract issues are 
building at several of the legacy airlines, as labor groups seek to 
reverse some of the financial sacrifices that they made to help the 
airlines avoid or emerge from bankruptcy. Additionally, because 
bankruptcies required the airlines to reduce capital expenditures in 
order to bolster their balance sheets, needed investments in fleet 
renewal, new technologies, and product enhancements were delayed. 
Despite their generally sound financial condition as a group, some low- 
cost airlines may be facing cost increases as well. Airline analysts 
told us that some low-cost airline cost advantages may diminish as low- 
cost airlines begin to face cost pressures similar to those of the 
legacy airlines, including aging fleets--and their associated increased 
maintenance costs--and workforces with growing experience and seniority 
demanding higher pay. 

Industry Faces Challenging Revenue Environment from Economic Downturns 
and Consumer Fare Expectations: 

The recent economic downturn and the long-term downward trend in fares 
create a challenging environment for revenue generation. Macroeconomic 
troubles--such as the recent tightening credit market and housing 
slump--have generally served as early indicators of reduced airline 
passenger demand. Currently, airlines are anticipating reduced demand 
by the fall of 2008. Additionally, domestic expansion of low-cost 
airline operations, as well as an increased ability of consumers to 
shop for lower fares more easily in recent years, has not only led to 
lower fares in general, but has also contributed to fare "compression"-
-that is, fewer very high-priced tickets are sold today than in the 
past. The downward pressure on ticket prices created by the increase of 
low-cost airline offerings is pervasive, according to a recent study 
and DOT testimony. Experts we spoke with explained that the increased 
penetration of low-fare airlines, combined with much greater 
transparency in fare pricing, has increased consumer resistance to 
higher fares. 

Domestic Airline Competition Increased from 1998 through 2006, as Low- 
Cost Airlines Expanded: 

Competition within the U.S. domestic airline market increased from 1998 
through 2006 as reflected by an increase in the average number of 
competitors in the top 5,000 city-pair markets,[Footnote 26] the 
presence of low-cost airlines in more of these markets, lower fares, 
fewer dominated city-pair markets, and a shrinking dominance by a 
single airline at some of the nation's largest airports. The average 
number of competitors has increased in these markets from 2.9 in 1998 
to 3.3 in 2006.[Footnote 27] The number of these markets served by low- 
cost airlines increased by nearly 60 percent, from nearly 1,300 to 
approximately 2,000 from 1998 through 2006. Average round trip fares 
fell 20 percent, after adjusting for inflation, during the same period. 
Furthermore, approximately 500 fewer city-pair markets (15 percent) are 
dominated by a single airline. Similarly, competition has increased at 
the nation's 30 largest airports. 

Average Number of Competitors and Low-Cost Airline Penetration Has 
Increased in the Top 5,000 Markets: 

The average number of competitors in the largest 5,000 city-pair market 
has increased since 1998. Overall, the average number of effective 
competitors--any airline that carries at least 5 percent of the traffic 
in that market--in the top 5,000 markets rose from 2.9 in 1998 to 3.3 
in 2006. As figure 8 shows, the number of single airline (monopoly) 
markets decreased to less than 10 percent of the top 5,000 markets, 
while the number of markets with three or more airlines grew to almost 
70 percent in 2006. Monopoly markets are generally the smallest city- 
pair markets, which lack enough traffic to support more than one 
airline. 

Figure 8: Markets by Number of Competitors, 1998-2006: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Percentage of markets, 1 competitor: 13%; 
Percentage of markets, 2 competitors: 30%; 
Percentage of markets, 3 competitors: 56%. 

Year: 1999; 
Percentage of markets, 1 competitor: 12%; 
Percentage of markets, 2 competitors: 29%; 
Percentage of markets, 3 competitors: 60%. 

Year: 2000; 
Percentage of markets, 1 competitor: 12%; 
Percentage of markets, 2 competitors: 28%; 
Percentage of markets, 3 competitors: 60%. 

Year: 2001; 
Percentage of markets, 1 competitor: 10%; 
Percentage of markets, 2 competitors: 25%; 
Percentage of markets, 3 competitors: 65%. 

Year: 2002; 
Percentage of markets, 1 competitor: 11%; 
Percentage of markets, 2 competitors: 26%; 
Percentage of markets, 3 competitors: 64%. 

Year: 2003; 
Percentage of markets, 1 competitor: 11%; 
Percentage of markets, 2 competitors: 22%; 
Percentage of markets, 3 competitors: 68%. 

Year: 2004; 
Percentage of markets, 1 competitor: 9%; 
Percentage of markets, 2 competitors: 22%; 
Percentage of markets, 3 competitors: 69%. 

Year: 2005; 
Percentage of markets, 1 competitor: 9%; 
Percentage of markets, 2 competitors: 21%; 
Percentage of markets, 3 competitors: 69%. 

Year: 2006; 
Percentage of markets, 1 competitor: 9%; 
Percentage of markets, 2 competitors: 22%; 
Percentage of markets, 3 competitors: 69%. 

Source: GAO analysis of DOT data. 

Note: This figure includes only passengers carried by an airline with 
at least 5 percent of the passengers in a city-pair market; therefore 
an unknown number of passengers in each market were not counted. 

[End of figure] 

Longer-distance markets are more competitive than shorter-distance 
markets. For example, among the top 5,000 markets in 2006, longer- 
distance markets (greater than 1,000 miles) had on average 3.9 
competitors, while routes of less than 250 miles had on average only 
1.7 competitors (fig. 9). The difference exists in large part because 
longer-distance markets have more viable options for connecting over 
more hubs. For example, a passenger on a long-haul flight from 
Allentown, Pennsylvania, to Los Angeles, California--a distance of over 
2,300 miles--would have options of connecting through 10 different 
hubs, including Cincinnati, Chicago, and Detroit. By comparison, a 
passenger from Seattle to Portland, Oregon--a distance of just under 
300 miles--has no connection options, nor would connections be as 
attractive to passengers in short-haul markets. 

Figure 9: Average Number of Competitors by Distance (in miles), Top 
5,000 Markets, 1998-2006: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Average number of competitors, less than 250 miles: 1.5; 
Average number of competitors, less than 500 miles: 2.2; 
Average number of competitors, less than 750 miles: 2.7; 
Average number of competitors, less than 1,000 miles: 2.9; 
Average number of competitors, greater than 1,000 miles: 3.5. 

Year: 1999; 
Average number of competitors, less than 250 miles: 1.5; 
Average number of competitors, less than 500 miles: 2.2; 
Average number of competitors, less than 750 miles: 2.8; 
Average number of competitors, less than 1,000 miles: 3; 
Average number of competitors, greater than 1,000 miles: 3.7. 

Year: 2000; 
Average number of competitors, less than 250 miles: 1.5; 
Average number of competitors, less than 500 miles: 2.2; 
Average number of competitors, less than 750 miles: 2.8; 
Average number of competitors, less than 1,000 miles: 3; 
Average number of competitors, greater than 1,000 miles: 3.7. 

Year: 2001; 
Average number of competitors, less than 250 miles: 1.6; 
Average number of competitors, less than 500 miles: 2.3; 
Average number of competitors, less than 750 miles: 3; 
Average number of competitors, less than 1,000 miles: 3.2; 
Average number of competitors, greater than 1,000 miles: 3.9. 

Year: 2002; 
Average number of competitors, less than 250 miles: 1.6; 
Average number of competitors, less than 500 miles: 2.3; 
Average number of competitors, less than 750 miles: 2.9; 
Average number of competitors, less than 1,000 miles: 3.1; 
Average number of competitors, greater than 1,000 miles: 3.7. 

Year: 2003; 
Average number of competitors, less than 250 miles: 1.6; 
Average number of competitors, less than 500 miles: 2.4; 
Average number of competitors, less than 750 miles: 3; 
Average number of competitors, less than 1,000 miles: 3.2; 
Average number of competitors, greater than 1,000 miles: 3.8. 

Year: 2004; 
Average number of competitors, less than 250 miles: 1.7; 
Average number of competitors, less than 500 miles: 2.4; 
Average number of competitors, less than 750 miles: 3; 
Average number of competitors, less than 1,000 miles: 3.2; 
Average number of competitors, greater than 1,000 miles: 3.8. 

Year: 2005; 
Average number of competitors, less than 250 miles: 1.7; 
Average number of competitors, less than 500 miles: 2.4; 
Average number of competitors, less than 750 miles: 3.1; 
Average number of competitors, less than 1,000 miles: 3.3; 
Average number of competitors, greater than 1,000 miles: 3.9. 

Year: 2006; 
Average number of competitors, less than 250 miles: 1.7; 
Average number of competitors, less than 500 miles: 2.4; 
Average number of competitors, less than 750 miles: 3.1; 
Average number of competitors, less than 1,000 miles: 3.3; 
Average number of competitors, greater than 1,000 miles: 3.9. 

Source: GAO analysis of DOT data. 

Note: This figure includes only passengers carried by an airline with 
at least 5 percent of passengers in a city-pair market; therefore an 
unknown number of passengers in each market were not counted. 

[End of figure] 

Low-Cost Airlines Have Increased Their Presence among the Top 5,000 
Markets: 

Low-cost airlines have increased the number of markets and passengers 
served and their overall market share since 1998. The number of the top 
5,000 markets served by a low-cost airline jumped from approximately 
1,300 to over 2,000 from 1998 through 2006, an increase of nearly 60 
percent. Most of that increase is the result of low-cost airlines 
expanding their service into longer-haul markets than they typically 
served in 1998. Specifically, the number of markets served by low-cost 
airlines that were longer than 1,000 miles has increased by nearly 45 
percent since 1998. For example, in 1998 Southwest Airlines served 
about 360 markets over 1,000 miles, and by 2006 it served over 670 such 
markets. 

Low-cost airlines' expansion increased the extent to which they 
competed directly with legacy airlines. In 1998, low-cost airlines 
operated in 25 percent of the top 5,000 markets served by legacy 
airlines and provided a low-cost alternative to approximately 60 
percent of passengers.[Footnote 28] By 2006, low-cost airlines were 
competing directly with legacy airlines in 42 percent of the top 5,000 
markets (an additional 756 markets) and provided a low-cost alternative 
to approximately 80 percent of passengers. 

In all, the growth of low-cost airlines into more markets and providing 
service to more passengers contributed to the shift in passenger 
traffic between legacy and low-cost airlines. Overall, low-cost 
airlines' share of passenger traffic increased from 25 percent in 1998 
to 33 percent in 2006, while legacy airlines' domestic share of 
passenger traffic fell from 70 percent to 65 percent from 1998 through 
2006 (see fig. 10). Low-cost airlines carried 78 million passengers in 
1998 and 125 million in 2006--an increase of 59 percent.[Footnote 29] 

Figure 10: Industry Share by Legacy and Low-Cost Airlines, 1998 and 
2006: 

[See PDF for image] 

This figure contains two pie-charts depicting the following data: 

Industry Share by Legacy and Low-Cost Airlines, 1998: 
Legacy airlines: 70%; 
Low-cost airlines: 25%; 
Other: 5%. 

Industry Share by Legacy and Low-Cost Airlines, 2006: 
Legacy airlines: 65%; 
Low-cost airlines: 33%; 
Other: 2%. 

Source: GAO analysis of DOT data. 

Note: These figures include only passengers carried by airlines with at 
least 5 percent of passengers in a city-pair market; therefore an 
unknown number of passengers in each market were not counted. The 
legacy airline category also includes regional airline passengers. The 
category "other" includes airlines not classified as legacy or low-cost 
airlines such as Hawaiian Airlines, Aloha Airlines, and Allegiant Air. 

[End of figure] 

Average Fares Have Declined for Both Legacy and Low-Cost Airlines: 

Airfares in the top 5,000 markets, one of the key gauges of 
competition, have fallen in real terms since 1998. From 1998 through 
2006, the round-trip average airfare fell from $198 to $161 (in 2006 
dollars), a decrease of nearly 20 percent. As figure 11 shows, average 
fares have fallen across all distances. In 1998, average fares ranged 
from $257 for trips longer than 1,000 miles to $129 for trips of 250 
miles or less. Since that time, however, fares have fallen considerably 
on the longest trips, and as of 2006, averaged just $183, a drop of 29 
percent since 1998. Average fares for the shortest trips have not 
fallen as much. For trips of 250 miles or less, average fares as of 
2006 have fallen 6 percent, to $121. 

Figure 11: Average Fares by Distance, 1998-2006 (2006 dollars): 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Year: 1998; 
Average fare, less than 250 miles: $129; 
Average fare, less than 500 miles: $138.1; 
Average fare, less than 750 miles: $185; 
Average fare, less than 1,000 miles: $200.1; 
Average fare, greater than 1,000 miles: $256.9. 

Year: 1999; 
Average fare, less than 250 miles: $129; 
Average fare, less than 500 miles: $139; 
Average fare, less than 750 miles: $182.7; 
Average fare, less than 1,000 miles: $199.1; 
Average fare, greater than 1,000 miles: $250.4. 

Year: 2000; 
Average fare, less than 250 miles: $139; 
Average fare, less than 500 miles: $147.3; 
Average fare, less than 750 miles: $190.1; 
Average fare, less than 1,000 miles: $201.2; 
Average fare, greater than 1,000 miles: $251.9; 

Year: 2001; 
Average fare, less than 250 miles: $125.3; 
Average fare, less than 500 miles: $131.7; 
Average fare, less than 750 miles: $172.8; 
Average fare, less than 1,000 miles: $179.9; 
Average fare, greater than 1,000 miles: $217.9. 

Year: 2002; 
Average fare, less than 250 miles: $118.9; 
Average fare, less than 500 miles: $127.4; 
Average fare, less than 750 miles: $161.2; 
Average fare, less than 1,000 miles: $168.2; 
Average fare, greater than 1,000 miles: $201.3. 

Year: 2003; 
Average fare, less than 250 miles: $120.7; 
Average fare, less than 500 miles: $130.7; 
Average fare, less than 750 miles: $161.7; 
Average fare, less than 1,000 miles: $166.4; 
Average fare, greater than 1,000 miles: $195. 

Year: 2004; 
Average fare, less than 250 miles: $117.4; 
Average fare, less than 500 miles: $126.3; 
Average fare, less than 750 miles: $154.3; 
Average fare, less than 1,000 miles: $158.9; 
Average fare, greater than 1,000 miles: $180.6. 

Year: 2005; 
Average fare, less than 250 miles: $117.6; 
Average fare, less than 500 miles: $123.4; 
Average fare, less than 750 miles: $150.6; 
Average fare, less than 1,000 miles: $155; 
Average fare, greater than 1,000 miles: $180.2. 

Year: 2006; 
Average fare, less than 250 miles: $121; 
Average fare, less than 500 miles: $127.3; 
Average fare, less than 750 miles: $156.9; 
Average fare, less than 1,000 miles: $160.6; 
Average fare, greater than 1,000 miles: $183.2. 

Source: GAO analysis of DOT data. 

Note: This figure includes only passengers carried by an airline with 
at least 5 percent of passengers in a city-pair market, therefore an 
unknown number of passengers in each market were not counted. 

[End of figure] 

Average fares tend to be lower in markets where low-cost airlines are 
present. Prior studies have shown that the presence of low-cost 
airlines in a market is associated with lower fares for all passengers 
in that market. In 1998, over 1,300 of the top 5,000 markets had a low- 
cost airline present, with an average fare of $167, as opposed to the 
3,800 markets without low-cost competition, where the average fares 
averaged around $250. This same relationship was maintained in 2006, 
when low-cost airlines' presence grew to over 2,000 markets, and the 
average fare in these markets was $153, while the average fare in 2006 
legacy airline-only markets was $194.[Footnote 30] 

Fewer Markets Are Dominated by a Single Airline: 

The number of the top 5,000 markets dominated by a single airline has 
declined. Since 1998, the number of dominated markets--markets with one 
airline with more than 50 percent of passengers--declined as 
competitors expanded into more markets. The number of dominated markets 
declined by approximately 500 markets, from 3,500 to 3,000 (or 15 
percent) from 1998 through 2006, while the number of nondominated 
markets correspondingly rose by approximately 500, from approximately 
1,400 to 1,900 markets (or 37 percent). (See fig. 12.) 

Figure 12: The Number of Dominated and Nondominated Markets, Top 5,000 
Markets, 1998-2006: 

[See PDF for image] 

This figure is a combination vertical bar and line graph depicting the 
following data: 

Year: 1998; 
Nondominated markets: 1440; 
Dominated markets: 3559; 

Year: 1999; 
Nondominated markets: 1536; 
Dominated markets: 3463. 

Year: 2000; 
Nondominated markets: 1572; 
Dominated markets: 3428. 

Year: 2001; 
Nondominated markets: 1816; 
Dominated markets: 3184. 

Year: 2002; 
Nondominated markets: 1776; 
Dominated markets: 3224. 

Year: 2003; 
Nondominated markets: 1859; 
Dominated markets: 3141. 

Year: 2004; 
Nondominated markets: 1875; 
Dominated markets: 3125; 

Year: 2005; 	3035
Nondominated markets: 1965; 
Dominated markets: 3035. 

Year: 2006; 
Nondominated markets: 1985; 
Dominated markets: 3028. 

Source: GAO analysis of DOT data. 

Note: This figure includes only passengers carried by an airline with 
at least 5 percent of passengers in a city-pair market; therefore an 
unknown number of passengers in each market were not counted. 

[End of figure] 

Although there are fewer dominated markets among the top 5,000 markets, 
further analysis shows that low-cost airlines have increased their 
share of dominated markets while legacy airlines lost share. In 1998 
legacy airlines dominated approximately 3,000 of the top 5,000 markets, 
but in 2006 that number fell to approximately 2,400. At the same time, 
low-cost airlines increased their share of dominated markets from about 
300 markets in 1998 to approximately 500 markets. Appendix III shows 
the number of dominated markets by airline in 2006. Low-cost airlines 
tend to operate in larger dominated markets than legacy airlines. For 
example, in 2006, legacy airlines carried an average of 55,000 
passengers per dominated market, while low-cost airlines carried an 
average of 165,000 passengers per dominated market.[Footnote 31] This 
difference reflects the low-cost airlines' targeting of high-density 
markets and the nature of hub-and-spoke networks operated by legacy 
airlines. 

Competition Has Increased at the Nation's Largest Airports: 

Competition has generally increased at the nation's largest airports. 
Airline dominance at many of the largest domestic airports in the 
United States has decreased as competition has increased in the 
industry. Although legacy airlines have a dominant position--carrying 
at least 50 percent of passenger traffic--at 16 of the nation's 30 
largest airports.[Footnote 32] One-half of these 16 dominated airports 
saw a decline in passenger traffic from 1998 through 2006 (see app. 
III). Of the 16 airports dominated by a single airline, 14 were 
dominated by legacy airlines. At 9 of these airports, the second 
largest airline carried less than 10 percent of passenger traffic, 
while at the other 5 airports a low-cost airline carried 10 percent or 
more of passenger traffic. 

Figure 13: Change in Passenger Share at Selected Dominated Airports by 
Dominant Airline, 1998 and 2006: 

[See PDF for image] 

This figure contains a map of the continental United States with the 
following information depicted: 

Change in Passenger Share at Selected Dominated Airports by Dominant 
Airline, 1998 and 2006: 

Airport: Atlanta; 
Dominant airline: Delta; 
Change in Passenger Share, 1998 and 2006: 83% - 71%. 

Airport: Baltimore-Washington; 
Dominant airline: Southwest; 
Change in Passenger Share, 1998 and 2006: less than 50% - 55%. 

Airport: Charlotte; 
Dominant airline: US Airways; 
Change in Passenger Share, 1998 and 2006: 92% - 87%. 

Airport: Chicago-Midway; 
Dominant airline: Southwest; 
Change in Passenger Share, 1998 and 2006: 53% - 74%. 

Airport: Cincinnati; 
Dominant airline: Delta; 
Change in Passenger Share, 1998 and 2006: 95% - 93%. 

Airport: Dallas-Fort Worth; 
Dominant airline: American; 
Change in Passenger Share, 1998 and 2006: 70% - 85%. 

Airport: Denver; 
Dominant airline: United; 
Change in Passenger Share, 1998 and 2006: 71% - 54%. 

Airport: Detroit; 
Dominant airline: Northwest; 
Change in Passenger Share, 1998 and 2006: 71% - 76%. 

Airport: Houston-Intercontinental; 
Dominant airline: Continental; 
Change in Passenger Share, 1998 and 2006: 84% - 87%. 

Airport: Miami; 
Dominant airline: American; 
Change in Passenger Share, 1998 and 2006: 59% - 72%. 

Airport: Minneapolis; 
Dominant airline: Northwest; 
Change in Passenger Share, 1998 and 2006: 81% - 78%. 

Airport: Newark; 
Dominant airline: Continental; 
Change in Passenger Share, 1998 and 2006: 61% - 68%. 

Airport: Philadelphia; 
Dominant airline: US Airways; 
Change in Passenger Share, 1998 and 2006: 67% - 59%. 

Airport: Salt Lake City; 
Dominant airline: Delta; 
Change in Passenger Share, 1998 and 2006: 74% - 71%. 

Airport: San Francisco; 
Dominant airline: United; 
Change in Passenger Share, 1998 and 2006: 58% - 54%. 

Airport: Washington-Dulles; 
Dominant airline: United; 
Change in Passenger Share, 1998 and 2006: 51% - 57%. 

Source: GAO analysis of DOT data; map (MapInfo). 

[End of figure] 

Airlines Seek to Combine to Increase Profits and Improve Financial 
Viability, but Challenges Exist: 

Airlines seek mergers and acquisitions as a means to increase 
profitability and long-term financial viability, but must weigh those 
potential benefits against the operational and regulatory costs and 
challenges posed by combinations. A merger's or acquisition's potential 
to increase short-term profitability and long-term financial viability 
stems from both anticipated cost reductions and increased revenues. 
Cost reductions may be achieved through merger-generated operating 
efficiencies--for example, through the elimination of duplicative 
operations. Cost savings may also flow from adjusting or reducing the 
combined airline's capacity and adjusting its mix of aircraft. Airlines 
may also seek mergers and acquisitions as a means to increase their 
revenues through increased fares in some markets--stemming from 
capacity reductions and increased market share in existing markets--and 
an expanded network, which creates more market pairs both domestically 
and internationally. Nonetheless, increased fares in these markets may 
be temporary because other airlines could enter the affected markets 
and drive fares back down. Mergers and acquisitions also present 
several potential challenges to airline partners, including labor and 
other integration issues--which may not only delay (or even preclude) 
consolidation, but also offset intended gains. DOJ antitrust review is 
another potential challenge, and one that we discuss in greater detail 
in the next section. 

Airline Mergers and Acquisitions Aim to Increase Profitability by 
Reducing Costs and Increasing Revenues: 

A merger or acquisition may produce cost savings by enabling an airline 
to reduce or eliminate duplicative operating costs. Based on past 
mergers and acquisitions and experts we consulted, a range of potential 
cost reductions can result, such as the elimination of duplicative 
service, labor, and operations--including inefficient (or redundant) 
hubs or routes--and operational efficiencies from the integration of 
computer systems, and similar airline fleets. Other cost savings may 
stem from facility consolidation, procurement savings, and working 
capital and balance sheet restructuring, such as renegotiating aircraft 
leases. According to US Airways officials and analyst reports, for 
example, the merger of America West and US Airways generated $750 
million in cost savings through the integration of information 
technology, combined overhead operations, and facilities closings. 

Airlines may also pursue mergers or acquisitions to more efficiently 
manage capacity--both to reduce operating costs and to generate 
revenue--in their networks. A number of experts we spoke with stated 
that given recent economic pressures, particularly increased fuel 
costs, one motive for mergers and acquisitions is the opportunity to 
lower costs by reducing redundant capacity. Experts have said that 
industry mergers and acquisitions could lay the foundation for more 
rational capacity reductions in highly competitive domestic markets and 
could help mitigate the impact of economic cycles on airline cash flow. 
In addition, capacity reductions from a merger or acquisition could 
also serve to generate additional revenue through increased fares on 
some routes; over the long-term, however, those increased fares may be 
brought down because other airlines, especially low-cost airlines, 
could enter the affected markets and drive prices back down. In the 
absence of mergers and acquisitions and facing ongoing cost pressures, 
airlines have already begun to reduce their capacity in 2008. 

Airlines may also seek to merge with or acquire an airline as a way to 
generate greater revenues from an expanded network, which serves more 
city-pair markets, better serves passengers, and thus enhances 
competition. Mergers and acquisitions may generate additional demand by 
providing consumers more domestic and international city-pair 
destinations. Airlines with expansive domestic and international 
networks and frequent flier benefits particularly appeal to business 
traffic, especially corporate accounts. Results from a recent Business 
Traveler Coalition (BTC) survey indicate that about 53 percent of the 
respondents were likely to choose a particular airline based upon the 
extent of its route network.[Footnote 33] Therefore, airlines may use a 
merger or acquisition to enhance their networks and gain complementary 
routes, potentially giving the combined airline a stronger platform 
from which to compete in highly profitable markets. 

Mergers and acquisitions can also be used to generate greater revenues 
through increased market share and fares on some routes. For example, 
some studies of airline mergers and acquisitions during the 1980s 
showed that prices were higher on some routes from the airline's hubs 
after the combination was completed.[Footnote 34] At the same time, 
even if the combined airline is able to increase prices in some 
markets, the increase may be transitory if other airlines enter the 
markets with sufficient presence to counteract the price increase. In 
an empirical study of airline mergers and acquisitions up to 1992, 
Winston and Morrison suggest that being able to raise prices or stifle 
competition does not play a large role in airlines' merger and 
acquisition decisions.[Footnote 35] Numerous studies have shown, 
though, that increased airline dominance at an airport results in 
increased fare premiums, in part because of competitive barriers to 
entry.[Footnote 36] Several recent merger and acquisition attempts 
(United and US Airways in 2000, Northwest and Continental in 1998) were 
blocked because of opposition by DOJ because of concerns about 
anticompetitive impacts. Ultimately, however, each merger and 
acquisition differs in the extent to which cost reductions and revenue 
increases are factors. 

Cost reductions and the opportunity to obtain increased revenue could 
serve to bolster a merged airline's financial condition, enabling the 
airline to better compete in a highly competitive international 
environment. For example, officials from US Airways stated that as a 
result of its merger with America West, the airline achieved a 
significant financial transformation, and they cited this as a reason 
why airlines merge. Many industry experts believe that the United 
States will need larger, more economically stable airlines to be able 
to compete with the merging and larger foreign airlines that are 
emerging in the global economy. The airline industry is becoming 
increasingly global; for example, the Open Skies agreement between the 
United States and the European Union became effective in March 2008. 
[Footnote 37] Open Skies has eliminated previous government controls on 
these routes (especially to and from London's Heathrow Airport), 
presenting U.S. and European Union airlines with great opportunities as 
well as competition. In order to become better prepared to compete 
under Open Skies, global team antitrust immunity applications have 
already been filed with DOT.[Footnote 38] Antitrust immune alliances 
differ from current code-share agreements or alliance group 
partnerships because they allow partners not only to code-share but 
also to jointly plan and market their routes and schedules, share 
revenue, and possibly even jointly operate flights.[Footnote 39] 
According to one industry analyst, this close global cooperation may 
facilitate domestic consolidation as global alliance partners focus on 
maximizing synergies for both increasing revenues and reducing costs 
with their global alliance teams. 

Potential Challenges to Mergers and Acquisitions Include Integration 
Issues and Regulatory Challenges: 

We identified a number of potential barriers to consummating a 
combination, especially in terms of operational challenges that could 
offset a merger's or acquisition's intended gains. The most significant 
operational challenges involve the integration of workforces, 
organizational cultures, aircraft fleets, and information technology 
systems and processes. Indeed, past airline mergers and acquisitions 
have proven to be difficult, disruptive, and expensive, with costs in 
some cases increasing in the short term as the airlines integrate. 
Airlines also face potential challenges to mergers and acquisitions 
from DOJ's antitrust review, discussed in the next section. 

Workforce integration is often particularly challenging and expensive, 
and involves negotiation of new labor contracts. Labor groups-- 
including pilots, flight attendants, and mechanics--may be able to 
demand concessions from the merging airlines during these negotiations, 
several experts explained, because labor support would likely be 
required in order for a merger or acquisition to be successful. Some 
experts also note that labor has typically failed to support mergers, 
fearing employment or salary reductions. Obtaining agreement from each 
airline's pilots' union on an integrated pilot seniority list--which 
determines pilots' salaries, as well as what equipment they can fly-- 
may be particularly difficult. According to some experts, as a result 
of these labor integration issues and the challenges of merging two 
work cultures, airline mergers have generally been unsuccessful. For 
example, although the 2005 America West-US Airways merger has been 
termed a successful merger by many industry observers, labor 
disagreements regarding employee seniority, and especially pilot 
seniority, remain unresolved. More recently, labor integration issues 
derailed merger talks--albeit temporarily--between Northwest Airlines 
and Delta Air Lines in early 2008, when the airlines' labor unions were 
unable to agree on pilot seniority list integration. Recently, the 
Consolidated Appropriations Act of 2008 included a labor protective 
provision that applies to the integration of employees of covered air 
carriers, and could affect this issue.[Footnote 40] Furthermore, the 
existence of distinct corporate cultures can influence whether two 
firms will be able to merge their operations successfully. For example, 
merger discussions between United Airlines and US Airways broke down in 
1995 because the employee-owners of United feared that the airlines' 
corporate cultures would clash. 

The integration of two disparate aircraft fleets may also be costly. 
Combining two fleets may increase costs associated with pilot training, 
maintenance, and spare parts. For example, a merger between Northwest 
and Delta would result in an airline with 10 different aircraft types. 
These costs may, however, be reduced post-merger by phasing out certain 
aircraft from the fleet mix. Pioneered by Southwest and copied by other 
low-cost airlines, simplified fleets have enabled airlines to lower 
costs by streamlining maintenance operations and reducing training 
times. If an airline can establish a simplified fleet, or "fleet 
commonality"--particularly by achieving an efficient scale in a 
particular aircraft--then many of the cost efficiencies of a merger or 
acquisition may be set in motion by facilitating pilot training, crew 
scheduling, maintenance integration, and inventory rationalization. 

Finally, integrating information technology processes and systems can 
also be problematic and time-consuming for a merging airline. For 
example, officials at US Airways told us that while some cost 
reductions were achieved within 3 to 6 months of its merger with 
America West, the integration of information technology processes has 
taken nearly 2 ½ years. Systems integration issues are increasingly 
daunting as airlines attempt to integrate a complex mix of modern in- 
house systems, dated mainframe systems, and outsourced information 
technology. The US Airways-America West merger highlighted the 
potential challenges associated with combining reservations systems, as 
there were initial integration problems. 

The Department of Justice's Antitrust Review Is a Critical Step in the 
Airline Merger and Acquisition Process: 

The DOJ's review of airline mergers and acquisitions is a key step for 
airlines hoping to consummate a merger. The Guidelines provide a five- 
part integrated process under which mergers and acquisitions are 
assessed by DOJ. In addition, DOT plays an advisory role for DOJ and, 
if the combination is consummated, may conduct financial and safety 
reviews of the combined entity under its regulatory authority. Public 
statements by DOJ officials and a review of the few airline mergers and 
acquisitions evaluated by DOJ over the last 10 years also provide some 
insight into how DOJ applies the Guidelines to the airline industry. 
While each merger and acquisition review is case specific, our analysis 
shows that changes in the airline industry, such as increased 
competition in international and domestic markets, could lead to entry 
being more likely than in the past. Additionally, the Guidelines have 
evolved to provide clarity as to the consideration of efficiencies, an 
important factor in airline mergers. 

The Department of Justice Uses the Guidelines to Identify Antitrust 
Concerns: 

Most proposed mergers or acquisitions must be reviewed by DOJ. In 
particular, under the Hart-Scott-Rodino Act, an acquisition of voting 
securities and/or assets above a set monetary amount must be reported 
to DOJ (or the Federal Trade Commission for certain industries) so the 
department can determine whether the merger or acquisition poses any 
antitrust concerns.[Footnote 41] To analyze whether a proposed merger 
or acquisition raises antitrust concerns--whether the proposal will 
create or enhance market power or facilitate its exercise[Footnote 42]-
-DOJ follows an integrated five-part analytical process set forth in 
the Guidelines.[Footnote 43] First, DOJ defines the relevant product 
and geographic markets in which the companies operate and determines 
whether the merger is likely to significantly increase concentration in 
those markets. Second, DOJ examines potential adverse competitive 
effects of the merger, such as whether the merged airlines will be able 
to charge higher prices or restrict output for the product or service 
it sells. Third, DOJ considers whether other competitors are likely to 
enter the affected markets and whether they would counteract any 
potential anticompetitive effects that the merger might have posed. 
Fourth, DOJ examines the verified "merger specific" efficiencies or 
other competitive benefits that may be generated by the merger and that 
cannot be obtained through any other practical means. Fifth, DOJ 
considers whether, absent the merger or acquisition, one of the firms 
is likely to fail, causing its assets to exit the market. The 
commentary to the Guidelines makes clear that DOJ does not apply the 
Guidelines as a step-by-step progression, but rather as an integrated 
approach in deciding whether the proposed merger or acquisition would 
create antitrust concerns. 

DOJ first assesses competitive effects at a city-pair market level. In 
its review of past airline mergers and acquisitions, DOJ defined the 
relevant market as scheduled airline service between individual city- 
pair markets because, according to DOJ, that is the where airlines 
compete for passengers.[Footnote 44] 

Second, DOJ assesses likely potential adverse competitive effects--- 
specifically, whether a merged airline is likely to exert market power 
(maintain prices above competitive levels for a significant period of 
time) in particular city-pair markets. Generally, a merger or 
acquisition raises anticompetitive concerns to the extent it eliminates 
a competitor from the markets that both airlines competed in[Footnote 
45]. When United Airlines and US Airways proposed merging in 2000, DOJ 
concluded that the proposed merger would create monopolies or duopolies 
in 30 markets with $1.6 billion in revenues, lead to higher fares, and 
harm consumers on airline routes throughout the United States and on 
some international routes. The department was particularly concerned 
about reduced competition in certain markets--nonstop city-pair markets 
comprising the two airlines' hub airports, certain other nonstop 
markets on the East Coast that were served by both airlines, some 
markets served via connecting service by these airlines along the East 
Coast, and certain other markets previously dominated by one or both of 
these airlines. DOJ estimated that the merger would have resulted in 
higher air fares for businesses and millions of customers. Similarly, 
in 2000 DOJ sought divestiture by Northwest Airlines of shares in 
Continental Airlines after the airline had acquired more than 50 
percent of the voting interest in Continental. DOJ argued that the 
acquisition would particularly harm consumers in 7 city-pair markets 
that linked Northwest and Continental airport hubs, where the two 
airlines had a virtual duopoly. DOJ also pointed to potential 
systemwide effects of removing a large competitor. Although DOJ 
objected to the proposed merger of United and US Airways and the 
acquisition of Continental by Northwest, it did not challenge a merger 
between America West and US Airways in 2005 because it found little 
overlap between city-pair markets served by the two airlines. 

DOJ, under the Guidelines' third element, assesses whether new entry 
would counter the increased market power of a merged airline. If DOJ 
determines that the merger is likely to give the merging airlines the 
ability to raise prices or curtail service in a city-pair market, DOJ 
assesses whether a new entrant would likely begin serving the city-pair 
in response to a potential price increase to replace the lost 
competition and deter or counter the price increase. For such entry to 
resolve concerns about a market, the Guidelines require that it be 
"timely, likely, and sufficient" to counteract the likely 
anticompetitive effects presented by the merger. According to DOJ, the 
inquiry considers an entry time horizon of 2 years and is fact specific 
rather than based on theory.[Footnote 46] Some factors that may be 
considered in assessing likelihood of entry include whether a potential 
entrant has a hub in one of the cities in a city-pair market of concern 
so that the potential entrant is well placed to begin service, whether 
there are constraints (such as slot controls or shortage of gates) that 
could limit effective entry, and whether the potential entrant would be 
able to provide the frequency of service that would be required to 
counteract the merged firm's presence. For example, if the merging 
parties operate the only hubs at both end points of a market, it is 
unlikely that a new entrant airline would find it profitable to offer 
an effective level of service. In its complaint challenging Northwest 
Airlines' attempted acquisition of a controlling interest in 
Continental, DOJ alleged that significant entry barriers limited new 
competition for the specific city-pair markets of issue. For example, 
the complaint alleged that airlines without a hub at one of the end 
points of the affected hub-to-hub markets were unlikely to enter due to 
the cost advantages of the incumbents serving that market. In city-pair 
markets where the merging airlines would have a large share of 
passengers traveling on connecting flights, DOJ asserted that other 
airlines were unlikely to enter due to factors such as the light 
traffic on these routes and the proximity of Northwest's and 
Continental's hubs to the markets as compared to other airlines' more 
distant hubs. 

Fourth, DOJ considers whether merger-specific efficiencies are 
"cognizable," that is, whether they can be verified and do not arise 
from anticompetitive reductions in output or services. Cognizable 
efficiencies, while not specifically defined under the Guidelines, 
could include any consumer benefit resulting from a merger--including 
enhanced service through an expanded route network and more seamless 
travel--as well as cost savings accruing to the merged airline (for 
example, from reducing overhead or increased purchasing power that may 
ultimately benefit the consumer).[Footnote 47] Because efficiencies are 
difficult to quantify and verify, DOJ requires merger partners to 
substantiate merger benefits. DOJ considers only those efficiencies 
likely to be accomplished by the proposed merger and unlikely to be 
achieved through practical, less restrictive alternatives, such as code-
sharing agreements or alliances. For example, in its October 2000 
complaint against Northwest Airlines for its acquisition of a 
controlling interest in Continental, DOJ noted that Northwest had not 
adequately demonstrated that the efficiencies it claimed from the 
merger could not be gained from other, less anticompetitive means, 
particularly their marketing alliance, which DOJ did not challenge. 

Finally, DOJ considers the financial standing of merger partners--if 
one of the partners is likely to fail without the merger and its assets 
were to exit the market. According to the Guidelines, a merger isn't 
likely to create or enhance market power or facilitate its exercise if 
imminent failure of one of the merging firms would cause the assets of 
that firm to exit the relevant market. For instance, the acquisition of 
TWA by American Airlines in 2001 was cleared because TWA was not likely 
to emerge from its third bankruptcy and there was no less 
anticompetitive purchaser. 

In making its decision as to whether the proposed merger is likely 
anticompetitive--whether it is likely to create or enhance market power 
or facilitate its exercise--DOJ considers the particular circumstances 
of the merger as it relates to the Guidelines' five-part inquiry. The 
greater the potential anticompetitive effects, the greater must be the 
offsetting verifiable efficiencies for DOJ to clear a merger. However, 
according to the Guidelines, efficiencies almost never justify a merger 
if it would create a monopoly or near monopoly. If DOJ concludes that a 
merger threatens to deprive consumers of the benefits of competitive 
air service, then it will seek injunctive relief in a court proceeding 
to block the merger from being consummated. In some cases, the parties 
may agree to modify the proposal to address anticompetitive concerns 
identified by DOJ--for example, selling airport assets or giving up 
slots at congested airports--in which case DOJ ordinarily files a 
complaint along with a consent decree that embodies the agreed-upon 
changes. 

The Department of Transportation Also Reviews Proposed Mergers to 
Ensure That They Are in the Public Interest: 

DOT conducts its own analyses of airline mergers and acquisitions. 
While DOJ is responsible for upholding antitrust laws, DOT will conduct 
its own competitive analysis and provide it to DOJ in an advisory 
capacity. In addition, presuming the merger moves forward after DOJ 
review, DOT can undertake several other reviews if the situation 
warrants it. Before commencing operations, any new, acquired, or merged 
airlines must obtain separate authorizations from DOT--"economic" 
authority from the Office of the Secretary and "safety" authority from 
the Federal Aviation Administration (FAA). The Office of the Secretary 
is responsible for deciding whether applicants are fit, willing, and 
able to perform the service or provide transportation. To make this 
decision, the Secretary assesses whether the applicants have the 
managerial competence, disposition to comply with regulations, and 
financial resources necessary to operate a new airline. FAA is 
responsible for certifying that the aircraft and operations conform to 
the safety standards prescribed by the Administrator, for instance, 
that the applicants' manuals, aircraft, facilities, and personnel meet 
federal safety standards. Also, if a merger or other corporate 
transaction involves the transfer of international route authority, DOT 
is responsible for assessing and approving all transfers to ensure that 
they are consistent with the public interest. DOT is responsible for 
approving such matters to ensure that they are consistent with the 
public interest.[Footnote 48] Finally, DOT also reviews the merits of 
any airline merger or acquisition and submits its views and relevant 
information in its possession to the DOJ. DOT also provides some 
essential data that DOJ uses in its review. 

Changes in the Airline Industry and in the Guidelines May Affect the 
Factors Considered in DOJ's Merger Review Process: 

Changes in the airline industry's structure and in the Guidelines may 
affect the factors considered in DOJ's merger review process. DOJ's 
review is not static, as it considers both market conditions and 
current antitrust thinking at the time of the merger review. According 
to our own analysis and other studies, the industry has grown more 
competitive in recent years, and if that trend is not reversed by 
increased fuel prices, it will become more likely that market entry by 
other airlines, and possibly low-cost airlines, will bring fares back 
down in markets in which competition is initially reduced due to a 
merger. In addition, the ongoing liberalization of international 
markets and, in particular, cross-Atlantic routes under the U.S.- 
European Union Open Skies agreement, has led to increased competition 
on these routes. Finally, as DOJ and the Federal Trade Commission have 
evolved in their understanding of how to integrate merger-specific 
efficiencies into the evaluation process, the Guidelines have also 
changed. 

Increased Competition Indicates That Airline Entry May Be More Likely 
than in the Past: 

A variety of characteristics of the current airline marketplace 
indicate that airline entry into markets vacated by a merger partner 
may be more likely than in the past, unless higher fuel prices 
substantially alter recent competitive trends in the industry. First, 
as we have noted, competition on airline routes--spurred by the growth 
and penetration of low-cost airlines--has increased, while the 
dominance of legacy airlines has been mitigated in recent years. 
According to our study, about 80 percent of passengers are now flying 
routes on which at least one low-cost airline is present. Moreover, 
some academic studies suggest that low-cost carrier presence has become 
a key factor in competition and pricing in the industry in recent 
years. Two articles suggest that the presence of Southwest Airlines on 
routes leads to lower fares and that even their presence--or entry into 
end-point airports of a market pair--may be associated with lower 
prices on routes.[Footnote 49] Another recent study found that fare 
differentials between hub and nonhub airports--once measured to be 
quite substantial--are not as great as they used to be, which suggests 
a declining relevance of market power stemming from airline hub 
dominance.[Footnote 50] The study did find, however that when there is 
little presence of low-cost airlines at a major carrier's hub airport, 
the hub premium continues to remain substantial. However, our 
competition analysis and these studies predate the considerable 
increase in fuel prices that has occurred this year and, if permanent, 
could affect competition and airlines' willingness to expand into new 
markets. 

In some past cases, DOJ rejected the contention that new entry will be 
timely, likely, and sufficient to counter potential anticompetitive 
effects. For example, in 2000, when DOJ challenged Northwest Airline's 
proposed acquisition of a controlling interest in Continental Airlines, 
a DOJ official explained that the department considered it unrealistic 
to assume that the prospect of potential competition--meaning the 
possibility of entry into affected markets by other airlines--would 
fully address anticompetitive concerns, given network airline hub 
economics at the time.[Footnote 51] 

Merger Guidelines Have Evolved to Reflect Federal Antitrust 
Authorities' Greater Understanding of Efficiencies: 

The Guidelines have been revised several times over the years, and 
particularly the most recent revision, in 1997, reflects a greater 
understanding by federal antitrust authorities in how to assess and 
weigh efficiencies. In 1968, the consideration of efficiencies was 
allowed only as a defense in exceptional circumstances. In 1984, the 
Guidelines were revised to incorporate efficiencies as part of the 
competitive effects analysis, rather than as a defense. However, the 
1984 Guidelines also required "clear and convincing" evidence that a 
merger will achieve significant net efficiencies. In 1992, the 
Guidelines were revised again, eliminating the "clear and convincing" 
standard. The 1997 revision explains that efficiencies must be 
"cognizable," that is, merger-specific efficiencies that can be 
verified and are net of any costs and not resulting solely from a 
reduction in service or output. In considering the efficiencies, DOJ 
weighs whether the efficiencies may offset the anticompetitive effects 
in each market.[Footnote 52] According to the Guidelines, in some 
cases, merger efficiencies are not strictly in the relevant market, but 
are so inextricably linked with it that a partial divestiture or other 
remedy could not feasibly eliminate the anticompetitive effect in the 
relevant market without sacrificing the efficiencies in other 
markets.[Footnote 53] Under those circumstances, DOJ will take into 
account across-the-board efficiencies or efficiencies that are realized 
in markets other than those in which the harm occurs. According to DOJ 
and outside experts, the evolution of the Guidelines reflects an 
attempt to provide clarity as to the consideration of efficiencies, an 
important factor in the merger review process. 

Agency Comments: 

We provided a draft of this report to DOT and DOJ for their review and 
comment. Both DOT and DOJ officials provided some clarifying and 
technical comments that we incorporated where appropriate. 

We provided copies of this report to the Attorney General, the 
Secretary of Transportation, and other interested parties and will make 
copies available to others upon request. In addition, this report will 
be available at no charge on our Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions on matters discussed in this 
report, please contact me on (202) 512-2834 or at heckerj@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Key contributors 
to this report can be found in appendix IV. 

Signed by: 

JayEtta Z. Hecker: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To review the financial condition of the U.S. airline industry, we 
analyzed financial and operational data, reviewed relevant studies, and 
interviewed industry experts. We analyzed DOT Form 41 financial and 
operational data submitted to DOT by airlines between the years 1998 
through 2007. We obtained these data from BACK Aviation Solutions, a 
private contractor that provides online access to U.S. airline 
financial, operational, and passenger data with a query-based user 
interface. To assess the reliability of these data, we reviewed the 
quality control procedures used by BACK Aviation and DOT and 
subsequently determined that the data were sufficiently reliable for 
our purposes. We also reviewed government and expert data analyses, 
research, and studies, as well as our own previous studies. The expert 
research and studies, where applicable, were reviewed by a GAO 
economist or were corroborated with additional sources to determine 
that they were sufficiently reliable for our purposes. Finally, we 
conducted interviews with government officials, airlines and their 
trade associations, credit and equity analysts, industry experts, and 
academics. The analysts, experts, and academics were identified and 
selected based on literature review, prior GAO work, and 
recommendations from within the industry. 

To determine if and how the competitiveness of the U.S. airline 
industry has changed since 1998, we obtained and stratified DOT 
quarterly data on the 5,000 largest city-pair markets for calendar 
years 1998 through 2006. These data are collected by DOT based on a 10 
percent random sampling of tickets and identify the origin and 
destination airports. These markets accounted for about 90 percent of 
all passengers in 2006. We excluded tickets with interlined flights--a 
flight in which a passenger transfers from one to another unaffiliated 
airline--and tickets with international, Alaskan, or Hawaiian 
destinations. Since only the airline issuing the ticket is identified, 
regional airline traffic is counted under the legacy parent or partner 
airline. To assess the reliability of these data, we reviewed the 
quality control procedures DOT applies and subsequently determined that 
the data were sufficiently reliable for our purposes. To analyze 
changes in competition based on the size of the passenger markets, we 
divided the markets into four groupings. Each group is composed of one- 
quarter of the total passenger traffic in each year. To stratify these 
markets by the number of effective competitors operating in a market, 
we used the following categories: one, two, three, four, and five or 
more effective competitors, where a airline needed to have at least a 5 
percent share of the passengers in the city-pair market to be 
considered an effective competitor in that market. To stratify the data 
by market distance, we obtained the great circle distance for each 
market using the DOT ticket data via BACK Aviation and then grouped the 
markets into five distance categories: up to 250 miles, 251-500 miles, 
501-750 miles, 751-1,000 miles, and 1,001 miles and over. For the 
purposes of this study, we divided the airline industry into legacy and 
low-cost airlines. While there is variation in the size and financial 
condition of the airlines in each of these groups, there are more 
similarities than differences for airlines in each group. Each of the 
legacy airlines predate the airline deregulation of 1978, and all have 
adopted a hub-and-spoke network model, can be more expensive to operate 
than a simple point-to-point service model. Low-cost airlines have 
generally entered interstate competition since 1978,[Footnote 54] are 
smaller, and generally employ a less costly point-to-point service 
model. Furthermore, the seven low-cost airlines (Air Tran, America 
West, ATA, Frontier, JetBlue, Southwest, and Spirit)[Footnote 55] had 
consistently lower unit costs than the seven legacy airlines (Alaska, 
American, Continental, Delta, Northwest, United, and US Airways). For 
this analysis, we continued to categorize US Airways as a legacy 
airline following its merger with America West in 2005, and included 
the data for both airlines for 2006 and 2007 with the legacy airlines 
and between 1998 through 2005 we categorized America West as a low-cost 
airline. 

To determine if competition has changed at the 30 largest airports, we 
analyzed DOT T-100 enplanement data for 1998 and 2006 to examine the 
changes in passenger traffic among the airlines at each airport. The T- 
100 database includes traffic data (passenger and cargo), capacity 
data, and other operational data for U.S. airlines and foreign airlines 
operating to and from the United States. The T-100 and T-100(f) data 
files are not based on sampled data or data surveys, but represent a 
100 percent census of the data. To assess the reliability of these 
data, we reviewed the quality control procedures DOT applies and 
subsequently determined that the data were sufficiently reliable for 
our purposes. 

To determine the potential effects on competition between the merger of 
Delta Air Lines and Northwest Airlines explained in appendix II, we 
examined whether the merger might reduce competition within given 
airline markets. We defined an effective competitor as an airline that 
has a market share of at least 5 percent. To examine the potential loss 
of competition under the merger, we determined the extent to which each 
airline's routes overlap by analyzing 2006 data from DOT on the 5,000 
busiest domestic city-pair origin and destination markets. To determine 
the potential loss of competition in small communities, we analyzed 
origin and destination data (OD1B) for the third quarter of 2007 to 
determine the extent to which airlines' routes overlap. We defined 
small communities as those communities with airports that are defined 
as "nonhubs" by statute in 49 U.S.C. § 47102(13).[Footnote 56] 

To identify the key factors that airlines consider in deciding whether 
to merge with or acquire another airline, we reviewed relevant studies 
and interviewed industry experts. We reviewed relevant studies and 
documentation on past and prospective airline mergers in order to 
identify the factors contributing to (or inhibiting) those 
transactions. We also met with DOT and Department of Justice (DOJ) 
officials, airline executives, financial analysts, academic 
researchers, and industry consultants to discuss these factors and 
their relative importance. 

To understand the process and approach used by federal authorities in 
considering airline mergers and acquisitions, we reviewed past and 
present versions of the Guidelines, DOT statutes and regulations, and 
other relevant guidance. We also analyzed legal documents from past 
airline mergers and published statements by DOT and DOJ officials to 
provide additional insight into how DOJ and DOT evaluate merger 
transactions. Finally, we discussed the merger review process with DOJ 
and DOT officials and legal experts. We conducted this performance 
audit from May 2007 through July 2008 in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

[End of section] 

Appendix II Delta and Northwest Merger: 

Figure 14: Delta Air Lines and Northwest Airlines Domestic (lower 48) 
Route Map, February 2008 based on Official Airline Guide (OAG) Schedule 
Data: 

[See PDF for image] 

Illustration contains Delta Air Lines and Northwest Airlines routes. 

Source: GAO analysis of OAG data; may (MapInfo). 

Note: Route map excludes Alaska and Hawaii routes. 

[End of figure] 

Figure 15: Delta Air Lines and Northwest Airlines International Route 
Map, February 2008 based on OAG Schedule Data: 

[See PDF for image] 

Illustration contains Delta Air Lines and Northwest Airlines routes. 

Source: GAO analysis of DOT data; may (MapInfo). 

[End of figure] 

Figure 16: Number of Nonstop and One-Stop Markets Where Delta and 
Northwest Compete, Top 5,000 Markets, 2006: 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Change in competition: 2 to 1; 
Number of markets subject to a loss of competition due to merger: 34; 

Change in competition: 3 to 2; 
Number of markets subject to a loss of competition due to merger: 301; 

Change in competition: 4 to 3; 
Number of markets subject to a loss of competition due to merger: 513; 

Change in competition: 5 to 4; 
Number of markets subject to a loss of competition due to merger: 374; 

Change in competition: 6 to 5; 
Number of markets subject to a loss of competition due to merger: 158; 

Change in competition: 7 to 6; 
Number of markets subject to a loss of competition due to merger: 69; 

Change in competition: 8 to 7; 
Number of markets subject to a loss of competition due to merger: 6. 

Source: GAO analysis of DOT data. 

[End of figure] 

Table 1: Top Five Markets Where Competition Could Be Reduced from Two 
Airlines to One Airline, 2006: 

Market (city-pair): Cincinnati, OH-Minneapolis, MN; 
Passengers: 54,240; 
Percentage of total: 13.5%. 

Market (city-pair): Fort Walton Beach, FL-Washington, DC; 
Passengers: 31,050; 
Percentage of total: 7.8%. 

Market (city-pair): Cincinnati, OH-Detroit. MI; 
Passengers: 28,870; 
Percentage of total: 7.2%. 

Market (city-pair): Cincinnati, OH-Manchester, NH; 
Passengers: 23,070; 
Percentage of total: 5.8%. 

Market (city-pair): Panama City, FL-Washington, DC; 
Passengers: 17,480; 
Percentage of total: 4.3%. 

Market (city-pair): Subtotal top five; 
Passengers: 154,710; 
Percentage of total: 38%. 

Market (city-pair): Remaining 29 markets; 
Passengers: 247,230; 
Percentage of total: 62%. 

Source: GAO analysis of DOT data. 

Note: Passengers are included only if carried by an airline that was 
considered an effective competitor with at least 5 percent of the 
passengers in a city-pair market; therefore an unidentifiable number of 
passengers in each is not represented. 

[End of table] 

Table 2: Top Five Markets Where Competition Could Be Reduced from Three 
Airlines to Two Airlines, 2006: 

Market (city-pair): Atlanta, GA-Detroit, MI; 
Combined Market share: 78%; 
Second largest competitor: AirTran; 
Second largest competitor Market share: 20%. 

Market (city-pair): Atlanta, GA-Minneapolis, MN; 
Combined Market share: 79%; 
Second largest competitor: AirTran; 
Second largest competitor Market share: 18%. 

Market (city-pair): Atlanta, GA-Memphis, TN; 
Combined Market share: 67%; 
Second largest competitor: AirTran; 
Second largest competitor Market share: 33%. 

Market (city-pair): Memphis, TN-Orlando, FL; 
Combined Market share: 80%; 
Second largest competitor: AirTran; 
Second largest competitor Market share: 12%. 

Market (city-pair): Memphis, TN-Tampa, FL; 
Combined Market share: 82%; 
Second largest competitor: AirTran; 
Second largest competitor Market share: 10%. 

Source: GAO analysis of DOT data. 

Note: Passengers are included only if carried by an airline that was 
considered an effective competitor with at least 5 percent of the 
passengers in a city-pair market; therefore an unidentifiable number of 
passengers in each is not represented. 

[End of table] 

Table 3: Small Communities (Nonhub Airports) Where Delta and Northwest 
Have Service and Where Competition Could Be Reduced as of Third Quarter 
2007: 

Change in competition: 2 to 1; 
Panama City, FL; 
Tupelo, MS. 

Change in competition: 3 to 2; 
Alexandria, LA; 
Appleton, WI; 
Bloomington, IL; 
Casper, WY; 
Charlottesville, VA; 
Erie, PA; 
Evansville, IN; 
Fort Smith, AR; 
Lafayette, LA; 
Tri City, TN. 

Change in competition: 4 to 3; 

Asheville, NC; 
Binghamton, NY; 
Bozeman, MT 
Charleston, WV; 
Jackson, WY; 
Kalamazoo, MI; 
Monroe, LA; 
Montgomery, AL; 
Peoria, IL; 
Rapid City, SD; 
Roanoke, VA; 
Sioux Falls, SD; 
Traverse City, MI. 

Change in competition: 5 to 4; 
Great Falls, MT; 
Missoula, MT. 

Source: GAO analysis of DOT data. 

Note: Passengers are included only if carried by an airline that was 
considered an effective competitor with at least 5 percent of the 
passengers in a city-pair market; therefore an unidentifiable number of 
passengers in each are not represented. 

[End of table] 

[End of section] 

Appendix III: Number and Size of Dominated Markets by Airline in the 
Top 5,000 Markets, 2006: 

Airline: Southwest; 
Number of markets: 407; 
Passengers: 55,065,710. 

Airline: Delta; 
Number of markets: 643; 
Passengers: 21,433,770. 

Airline: American; 
Number of markets: 325; 
Passengers: 18,297,130. 

Airline: Northwest; 
Number of markets: 464; 
Passengers: 15,530,460. 

Airline: Continental; 
Number of markets: 201; 
Passengers: 11,211,870. 

Airline: US Airways; 
Number of markets: 444; 
Passengers: 11,133,960. 

Airline: United; 
Number of markets: 266; 
Passengers: 8,820,110. 

Airline: Alaska; 
Number of markets: 92; 
Passengers: 7,248,730. 

Airline: AirTran; 
Number of markets: 60; 
Passengers: 2,991,470. 

Airline: Midwest; 
Number of markets: 29; 
Passengers: 2,314,120. 

Airline: Allegiant; 
Number of markets: 52; 
Passengers: 1,817,930. 

Airline: jetBlue; 
Number of markets: 9; 
Passengers: 1,650,210. 

Airline: Frontier; 
Number of markets: 15; 
Passengers: 1,086,580. 

Airline: Spirit; 
Number of markets: 9; 
Passengers: 905,410. 

Airline: All; 
Number of markets: 3,028; 
Passengers: 159,916,720. 

Source: GAO analysis of DOT data. 

[End of table] 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

JayEtta Hecker (202) 512-2834 or heckerj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Paul Aussendorf, Assistant 
Director; Amy Abramowitz; Lauren Calhoun; Jessica Evans; Dave Hooper; 
Delwen Jones; Mitchell Karpman; Molly Laster; Sara Ann Moessbauer; Nick 
Nadarski; and Josh Ormond made key contributions to this report. 

[End of section] 

Related GAO Products: 

Airline Deregulation: Reregulating the Airline Industry Would Likely 
Reverse Consumer Benefits and Not Save Airline Pensions. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-630]. Washington, D.C.: June 
9, 2005. 

Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of 
Underlying Structural Issues. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-945]. Washington, D.C.: Sept. 30, 2005. 

Private Pensions: The Pension Benefit Guaranty Corporation and Long- 
Term Budgetary Challenges. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-772T]. Washington, D.C.: June 9, 2005. 

Private Pensions: Government Actions Could Improve the Timeliness and 
Content of Form 5500 Pension Information. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294]. Washington, D.C.: June 
3, 2005. 

Private Pensions: Recent Experiences of Large Defined Benefit Plans 
Illustrate Weaknesses in Funding Rules. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294]. Washington, D.C.: May 
31, 2005. 

Commercial Aviation: Legacy Airlines Must Further Reduce Costs to 
Restore Profitability. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-836]. Washington, D.C.: August 11, 2004. 

Private Pensions: Publicly Available Reports Provide Useful but Limited 
Information on Plans' Financial Condition. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-395]. Washington, D.C.: March 
31, 2004. 

Private Pensions: Multiemployer Plans Face Short-and Long-Term 
Challenges. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-423]. 
Washington, D.C.: March 26, 2004. 

Private Pensions: Timely and Accurate Information Is Needed to Identify 
and Track Frozen Defined Benefit Plans. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-200R]. Washington, D.C.: 
December 17, 2003. 

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 
Program Faces Significant Long-Term Risks. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-90]. Washington, D.C.: October 
29, 2003. 

Commercial Aviation: Air Service Trends at Small Communities since 
October 2000. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-
432]. Washington, D.C.: March 29, 2002. 

[End of section] 

Footnotes: 

[1] Mergers generally refer to the combination of two companies into 
one company by mutual consent, while acquisitions (also called 
takeovers) refer to one company's purchase of assets or equity in 
another company on friendly or hostile terms. 

[2] The seven legacy airlines (Alaska Airlines, American Airlines, 
Continental Airlines, Delta Air Lines, Northwest Airlines, United 
Airlines, and US Airways) all predated industry deregulation in 1978, 
while the seven low-cost airlines (AirTran Airways, America West 
Airlines, ATA, Frontier Airlines, JetBlue Airways, Southwest Airlines, 
and Spirit Airlines) entered interstate service after 1978. In 2005, 
America West and US Airways merged under the name US Airways. 

[3] See appendix II for information on the Delta Air Lines and 
Northwest Airlines merger. 

[4] These were the most recent data available at the time of our 
review. 

[5] Seven legacy airlines accounted for these losses from 2001 to 2005. 
The four airlines filing for bankruptcy were Delta Air Lines, Northwest 
Airlines, United Airlines, and US Airways. In general, the legacy 
airlines were unprofitable at this time as a result of reduced demand 
following the September 11, 2001, terrorist attacks (and other external 
shocks), increased competition from low-cost airlines, and high cost 
structures. 

[6] Air service markets are usually defined in terms of scheduled 
service between a point of origin and a point of destination. We refer 
to these markets as city-pair markets. The markets in our report 
include airlines providing both nonstop and connecting service. 

[7] We defined an effective competitor as an airline with at least 5 
percent of passengers within a city-pair market. 

[8] Fares were inflation adjusted in 2006 dollars. 

[9] Passenger traffic is measured by enplanements. 

[10] The Guidelines were jointly developed by DOJ's Antitrust Division 
and the Federal Trade Commission (FTC) and describe the inquiry process 
agencies follow in analyzing proposed mergers. The most current version 
of the Guidelines was issued in 1992; Section 4, relating to 
efficiencies, was revised in 1997. 

[11] Pub. L. No. 95-504, Oct. 24, 1978. 

[12] Both American Eagle and American Airlines are subsidiaries of AMR 
Corporation. 

[13] GAO, Aviation Competition: Issues Related to the Proposed United 
Airlines-US Airways Merger, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-212] (Washington, D.C.: Dec. 15, 2000) p. 10, 
footnote 6. 

[14] PBGC was established under the Employee Retirement Income Security 
Act of 1974 (ERISA) and set forth standards and requirements that apply 
to defined benefit plans. PBGC was established to encourage the 
continuation and maintenance of voluntary private pension plans and to 
insure the benefits of workers and retirees in defined benefit plans 
should plan sponsors fail to pay benefits. PGBC operations are 
financed, for example, by insurance premiums paid by sponsors of 
defined benefit plans, investment income, assets from pension plans 
trusted by PBGC, and recoveries from the companies formerly responsible 
for the plans. 

[15] The six airlines receiving loan guarantees were Aloha, World, 
Frontier, US Airways, ATA, and America West. 

[16] Capacity is defined as available scheduled airline seats. 

[17] GAO, Commercial Aviation: Bankruptcy and Pensions Problems Are 
Symptoms of Underlying Structural Issues, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-945] (Washington, D.C.: Sept. 
30, 2005). 

[18] Unless otherwise noted, all dollar amounts in this section have 
been adjusted to 2007 dollars. 

[19] Revenue passenger miles are the number of miles paying passengers 
are transported and are an indicator of passenger traffic. 

[20] Available seat miles are the number of seats offered by an airline 
multiplied by the number of scheduled miles flown. This is a typical 
measure of capacity in the airline industry. 

[21] Cost per available seat mile (CASM) is calculated as operating 
expenses divided by total available seat miles. Calculating CASM allows 
comparisons across different sizes of airlines. 

[22] See Randy Bennett, Patrick Murphy, and Jack Schmidt, "A 
Competitive Analysis of an Industry in Transition: The U.S. Scheduled 
Passenger Airline Industry." Gerchick-Murphy Associates (Washington, 
D.C.) July 2007. 

[23] Liquidity is a measure of a firm's ability to meet short-term 
liabilities with cash or marketable securities. 

[24] Fuel hedging allows an airline to lock in on fuel purchase prices 
in advance of future delivery, thus protecting against anticipated 
increases in the price of fuel. 

[25] The airlines recently filing for bankruptcy or ceasing operations 
include Air Midwest, Aloha Airlines, ATA Airlines, Big Sky Air, 
Champion Air, EOS Airlines, Frontier Airlines, MAXjet Airways, and 
Skybus Airlines. 

[26] The top 5,000 city-pair markets we analyzed accounted for 90 
percent of all domestic passenger traffic in 2006. 

[27] We defined an effective competitor to be an airline that carried 
at least 5 percent of passengers within a city-pair market. 

[28] These figures include only passengers carried by airlines with at 
least 5 percent of passengers in a city-pair market; therefore an 
unknown number of passengers in each market were not counted. 

[29] In 2006, Southwest Airlines accounted for two-thirds of the 
passengers carried by low-cost airlines. 

[30] Because the markets that had low-cost airlines differed in 1998 
and 2006, other factors that changed during that time frame, such as 
average distances flown, may also account for the price differences 
across the groupings of routes with and without low-cost competitors. 

[31] These figures include only passengers carried by an airline with 
at least 5 percent of passengers in a city-pair market; therefore an 
unknown number of passengers in each market were not counted. 

[32] Large hub airports are those defined in 49 U.S.C. § 40102 as 
commercial service airports having at least 1 percent of passenger 
boardings. See also 49 U.S.C. § 47102. 

[33] Respondents were travel managers responsible for negotiating and 
managing their firms' corporate accounts. 

[34] See Severin Borenstein, "Airline Mergers, Airport Dominance, and 
Market Power," American Economic Review, Vol 80, May 1990, and Steven 
A. Morrison, "Airline Mergers: A Longer View," Journal of Transport 
Economics and Policy, September 1996; and Gregory J. Werden, Andrew J. 
Joskow, and Richard L. Johnson, "The Effects of Mergers on Price and 
Output: Two Case Studies from the Airline Industry," Managerial and 
Decision Economics, Vol. 12, October 1991. 

[35] See Steven A. Morrison, and Clifford Winston, "The Remaining Role 
for Government Policy in the Deregulated Airline Industry." 
Deregulation of Network Industries: What's Next? Sam Peltzman and 
Clifford Winston, eds. Washington, D.C., Brookings Institution Press, 
2000. pp. 1-40. 

[36] See Severin Borenstein, 1989, "Hubs and High Fares: Dominance and 
Market Power in the U.S. Airline Industry," RAND Journal of Economics, 
20, 344-365; GAO, Airline Deregulation: Barriers to Entry Continue to 
Limit Competition in Several Key Markets, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-97-4] (Washington, D.C.: 
Oct. 18, 1996); GAO, Airline Competition: Effects of Airline and Market 
Concentration and Barriers to Entry on Airfares, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-91-101] (Washington, D.C.: 
Apr. 16, 1991). 

[37] Open Skies seeks to enable greater access of U.S. airlines to 
Europe, including expanded rights to pick up traffic in one country in 
Europe and carry it to another European or third country (referred to 
as fifth freedom rights). Additionally, the United States will expand 
EU airlines' rights to carry traffic from the United States to other 
countries. 

[38] Applications, filed in summer 2007 by SkyTeam members Air France, 
Alitalia, CSA Czech, Delta, KLM, and Northwest, were approved in 2008. 
In December 2006, DOT approved the addition of three members (Swiss 
International, LOT Polish, and TAP Air Portugal) to the Star Alliance's 
already approved immunized alliance team of Austrian, Lufthansa, 
German, Scandanavian, and United. 

[39] Code-sharing is a marketing arrangement in which an airline places 
its designator code on a flight operated by another airline and sells 
and issues tickets for that flight. 

[40] Pub. L. No. 110-161, Section 117, Dec. 26, 2007. 

[41] See 15 U.S.C. § 18a(d)(1). Both DOJ and the Federal Trade 
Commission have antitrust enforcement authority, including reviewing 
proposed mergers and acquisitions. DOJ is the antitrust enforcement 
authority charged with reviewing proposed mergers and acquisitions in 
the airline industry. Additionally, under the Hart-Scott-Rodino Act, 
DOJ has 30 days after the initial filing to notify companies that 
intend to merge whether DOJ requires additional information for its 
review. If DOJ does not request additional information, the firms can 
close their deal (15 U.S.C. § 18a(b)). If more information is required, 
however, the initial 30-day waiting period is followed by a second 30- 
day period, which starts to run after both companies have provided the 
requested information. Companies often attempt to resolve DOJ 
competitive concerns, if possible, prior to the expiration of the 
second waiting period. Any restructuring of a transaction--e.g., 
through a divestiture--is included in a consent decree entered by a 
court, unless the competitive problem is unilaterally fixed by the 
parties prior to the expiration of the waiting period (called a "fix-it 
first"). 

[42] Market power is the ability to maintain prices profitably above 
competitive levels for a significant period of time. 

[43] United States Department of Justice and Federal Trade Commission, 
Horizontal Merger Guidelines (Washington, D.C., rev. Apr. 8, 1997). 

[44] More specifically, the relevant market has been defined as 
scheduled airline service between a point of origin and a point of 
destination. This is often, but not always, defined as a city-pair, but 
in some cases involving cities with multiple airports, the relevant 
market has been defined as an airport pair. In addition, DOJ has 
recognized that nonstop service between cities may be an important 
market because business travelers are less likely than leisure 
travelers to regard connecting service as a reasonable alternative. 
Thus, DOJ may see a transaction as competitively problematic because of 
its impact in a nonstop city-pair market. 

[45] It is conceivable that a merger could also increase competition in 
some markets where both airlines had negligible presence before a 
merger, but combined the merged airlines created a stronger competitor 
in those markets. 

[46] Remarks by J. Bruce McDonald, Deputy Assistant Attorney General, 
Antitrust Division, Department of Justice, presented to the Regional 
Airline Association President's Council Meeting, Washington, D.C., 
November 3, 2005. 

[47] Cost savings cannot just be from a reduction in output or service. 

[48] 49 U.S.C. § 41105. DOT must specifically consider the transfer of 
certificate authority's impact on the financial viability of the 
parties to the transaction and on the trade position of the United 
States in the international air transportation market, as well as on 
competition in the domestic airline industry. 

[49] See Steven A. Morrison, "Actual, Adjacent, and Potential 
Competition: Estimating the Full Effects of Southwest Airlines," 
Journal of Transport Economics and Policy, Vol. 35, part 2, May 2001, 
and Austan Goolsbee and Chad Syverson, "How Do Incumbents Respond to 
the Threat of Entry? Evidence from the Major Airlines," Quarterly 
Journal of Economics, forthcoming. 

[50] See Severin Borenstein, "U.S. Domestic Airline Pricing, 1995- 
2004," University of California at Berkeley, Competition Policy Center 
Working Papers, working paper No. CPC05-48, January 2005. 

[51] Statement of John M. Nannes, Deputy Assistant Attorney General 
Antitrust Division, before the Committee on Judiciary,U.S. House of 
Representatives, Concerning Airline Hubs and Mergers, June 14, 2000. 

[52] The evolution in the Guidelines' consideration of efficiencies is 
thoroughly explained in a paper by two former DOJ officials in 2003, 
see William J. Kolasky and Andrew R. Dick, "The Merger Guidelines and 
the Integration of Efficiencies into Antitrust Review of Horizontal 
Mergers," Antitrust Law Journal 71, 1 (2003): 207-251. 

[53] See footnote 36, p. 31 of the Horizontal Merger Guidelines 
(Revised April 8, 1997). 

[54] Southwest operated within the state of Texas prior to 
deregulation. 

[55] Since 2008, ATA has filed for bankruptcy under Chapter 11 and 
plans to liquidate and Frontier has filed to reorganize under Chapter 
11. 

[56] A nonhub is a commercial service airport that has less than 0.05 
percent of the passenger boardings. 

[End of section] 

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