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** S M A A C **

House Commerce Committee Hearings on the NWA/Delta merger April 29, 2008

Remarks by James R. Spensley

TESTIMONY OF THE SOUTH METRO AIRPORT ACTION COUNCIL

The Legislature is to be congratulated for taking up the proposed merger of Northwest Airlines and Delta Airlines. We are here representing ordinary citizens in the deal.
Both Delta and Northwest operate busy hubs. A hub airline's gate dominance effectively prevents its competitors from serving connecting passengers and the government allows airlines to refuse out-of-town reservations. At issue now is how the newly expanded hub at MSP might be used after this merger.
Without either regulation or commitment, Delta has stated that its hubs will be “consolidated” after the merger, with Memphis and Cincinnati operations steeply decreased. Minnesota needs to be interested in how and when changes will be made here, at MSP

If the MSP hub is “moved” to Detroit or elsewhere, almost certainly there will be a decade or more of financial crisis at MSP. Airline service sufficient for Minnesota economic needs is threatened just by uncertainty as to the “new Delta” plans and schedules.
No doubt the airports commission testified that MSP costs per enplaned passenger are lower than at many airports, and they anticipate “demand” would attract other airlines to increase operations here. However, because of debt and over-expansion of gates, this ratio is misleading. If MSP enplanements are reduced, capital costs and debt will remain. Over-built MSP terminal facilities will be more available, but less used. Unless debt repayment is extended or airline operations are further subsidized, other airlines would not realize a comparatively better per-passenger cost at MSP. If they come, it will be because local business demand persists and high fuel and other costs remain universal. We still pay the cost.
Instead, big oil profits might completely stifle demand. Obtaining additional airline service with so much debt outstanding from expansion would then be very difficult. MSP revenues would decline precipitously.
Northwest, as the dominant airline at MSP, made various representations to and through the Metropolitan Airports Commission about supporting public-benefit programs to reduce airport noise and control air and water pollution from air operations. But this support is primarily after-the-fact mitigation, subject to withdrawal depending on merger details.

We believe that neighborhoods near MSP would not get noise and pollution relief. The programs’ funds depend on airline landing fees and gate leases as well as passenger fees, and could be lost or indefinitely delayed in a merger. Various representations made by Northwest to secure gate leases and landing rights at MSP are again in doubt, including court-ordered schedules.

We believe the Legislature should not allow MAC to terminate more than a few gate leases without substantial prepayments, and that payments should be at the original rates, which included amortization of capital costs. In the event MAC intended to allow contracts to be terminated in a merger, the State must hold that MAC lacked the authority to make such contracts favoring a Corporation against public interests. The merged airline rightfully should either honor Northwest’s lease terms and tenure or fully compensate MAC and the State of Minnesota.
Neither ball clubs nor airlines ought to profit from public facilities and leave us taxpayers holding the bag for, in this case, billions of dollars in bond financing!

If the MSP hub is kept pretty much intact, there are also major problems.
By expanding MSP, the State planned to retain airline jobs in Minnesota (not necessarily Northwest jobs), to increase airline competition, to provide lower fares and better service for Minnesota travelers, and to maintain aviation safety and security. It hasn’t happened. Expanding Northwest’s hub is not the same.

The State of Minnesota, through MAC, is culpable. The Dual-track process addressed sustainable growth and economic impacts of aviation objectively, but as implemented, MSP expansion favored a larger hub mainly benefitting Northwest Airlines and financed it based on false assurances by Northwest Airlines' management. MAC in fact built Northwest more gates immediately after 9/11.

If Delta/Northwest schedules, especially hub flights, are maintained, fares and fees will remain very high for Minnesota businesses and travelers. The upshot is that a few less flights per day at a hub do not necessarily reduce peak-hour rates or increase safety. Busy, congested hubs complicate operational safety and security. We can expect steeply increased public costs for safety and security during operational peaks, particularly on a per passenger basis, if the hub is not reduced.

Consider the costs of a crash or a terrorist incident and how either would affect flight demand.

The best, but most unlikely, third alternative is more balanced use of MSP. By a 40% reduction in the hub (not abandonment or continuation), Northwest/Delta can reduce costs significantly by leasing fewer gates, balancing staff, and decreasing flight delays. Peak-hour rates of 100 to 110 operations per hour would be substantially safer, and if 20 or 30 of these slots were used by competing airlines, the hub could operate from as few as 45 or 50 gates (rather than 90). MSP could still have about the same number of daily flights overall. This plan is more likely to result in lower local fares and a shallower dip in airport revenues. There may be no other way to attract competing airlines. Work for it.

More than hand-wringing and deploring our unfortunate economic outlook will be required. Minnesota will suffer more than most States from airline mergers, even if Delta and Northwest are able to continue operating for awhile afterward. The State should actively oppose the merger as anti-competitive and inappropriate for public financing at best, and disastrous at worst.

A return to fair-pricing rules and better enforcement of existing trade regulations (such as predatory temporary fare reductions) would be better market economics. High fuel costs make the hub-and-spoke system uneconomical because connecting flights add distance and expensive stopovers compared to direct (point-to-point) flights. The advantages in consolidating demand though collector (spoke) flights have mostly faded: the cost per passenger mile is higher than ever, and population growth in many cities has made consolidation unnecessary or less cost-effective for the traveler.

 
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