The Hub is Key

To: Congressman Jim Oberstar, Chairman, U.S. House of Representatives

Dear Jim:

As a long-time supporter and admirer, I am writing to urge you to give careful consideration and approval to the proposed purchase of Northwest Airlines by Delta Air Lines. You are rightfully acknowledged as the congressional expert on transportation, and I know that you have devoted most of your professional life to transportation issues. For this reason, many of us have read your comments opposing this merger with great interest.

The relentless grind of economics has chewed up most of the domestic airline industry as we all used to know it. At first, we had regional consolidation, with our favorite red-tail fleet buying up (green-tail) Republic 20 years ago. With the continued impact of deregulation and globalization, the trend continues.

Nine domestic airlines have already gone out of business this year. All of the remaining legacy carriers have been in bankruptcy within the past three years. And of course, as anyone who drives to Duluth knows, the price of oil on the world markets has gone higher than your typical commercial jet flies. Other economic forces are also at play.

With the U.S. approval of the Open Skies Agreements between the United States and 91 different countries, restrictions on international routes, number of airlines, capacity, and other rules have been eliminated in order to open up markets. These rules allow additional foreign carriers access to United States markets, making it impossible for a U.S. airline to depend upon domestic carriage for the majority of its profits.

The most profitable (and often the only profitable) passengers on commercial aircraft are business travelers to international locations. In fact, according to industry experts like Michael Boyd, president of Evergreen, Colorado–based aviation consulting firm The Boyd Group, Northwest’s international routes to Asia probably represent more than half the value of the proposed merger with Delta. With more and more domestic flights being made by low-cost carriers—almost 20 percent of all flights in the United States—it is the international traveler who holds the key to airline profitability.

This die was probably cast in 1978, when economist Alfred Kahn persuaded President Jimmy Carter to deregulate the airlines. Since then, passenger traffic has more than doubled and average fares have fallen by more than 40 percent. Going back to the days of regulation (with higher consumer fares) or increased taxpayer subsidization of domestic carriers is not likely to happen. And so, reluctantly, most of us in the business community want to ask you to help us get the best deal we can get.

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