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Have Gov't Antitrust Actions Made Airlines' Woes Worse
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Have Gov't Antitrust Actions Made Airlines' Woes Worse

BY Joseph Gointo

What hurts consumers more, a merger or a bankruptcy? That's what some are asking after financial woes at US Airways and United Airlines. The two carriers scrapped a merger last summer after the Justice Department threatened to sue. It's hard to imagine now, but at the time Washington frettedthe combined carrier would be too dominant. Dozens of lawmakers complained that deal would hurt constituents. Sen. Charles Schumer, D-N.Y., for one, said it would mean a cutback in flights to New York, especially daily service from Washington's Dulles International to upstate cities. But times have changed. US Airways is bankrupt. It's cut more than 30% of its schedule. United, veering toward Chapter 11, has slashed flights by 20% andlaid off thousands. And flights between Dulles and upstate New York? United has cut daily departures to Albany from nine to four, to Syracuse from nine to three, and to Rochester from 11 to four. More cuts may be coming. Should Have Merged That has some asking if Justice was wrong to block the deal. "While the effects of Sept. 11 on airline travel cannot be underestimated . . . much of (United's and US Airways') financial turmoil could have been averted had the Bush administration allowed the two airlines to merge," said Jason Thomas, economist at Citizens for a Sound Economy. Few dispute that. But there's no consensus the Justice Department erred in opposing the deal. "The merger would have saved US Airways from the bankruptcy courts," said Richard Gritta, an industry expert at the University of Portland. "But it certainly would have done so at a price to the consumer." Experts may disagree whether Justice made the right decision. But they do agree the decision is important, because airlines are talking partnerships again. So President Bush's trustbusters must again decide whether to allow the deals or squelch them. And this time around, the airlines' finances clearly are worse, while the partnerships are more vague. Instead of merging, US Airways recently said it will "code share" with United. That will let passengers book a flight on one airline but connect to a flight on the other, all through one ticket. Northwest, Continental and Delta announced a similar pact last week. Financial Necessity The Transportation Department is reviewing both code-sharing plans. And the Justice Department may conduct its own review. In the meantime, neither agency has much to say on the subject. While the decisions await, some speculate the financial upheaval in the airline industry may mean a smoother ride through the review process than the US Airways-United deal got last year. "It is accepted by all sides, including the Department of Justice, that whena company is in financial trouble, exceptions (to antitrust rules) are made," said Nicholas Economides, an antitrust expert at New York University. The exceptions fall into a couple of categories. Both the "failing firm" and"existing assets" theories of antitrust law let otherwise anti-competitive deals proceed if one of the parties may go out of business. No one is sure whether those theories would apply to the code-sharing deals,though, since none involves actual mergers. Even if they do, the exceptions might not help. To qualify as a "failing firm," a company has to be in real danger of disappearing from the marketplace. And airlines have a long history of surviving after declaring Chapter 11. Continental has done that twice. Plus, some think the Justice Department may not consider concepts like "failing firm." Rather, it may limit a review to specific parts of the code-sharing deals that may be anti-competitive. That might mean looking at where one carrier's flights overlap with another's to see if code sharing on that route will reduce competition and boost prices. "Justice has a very narrow focus," said Luke Froeb, an economist at Vanderbilt University and an antitrust official under President Reagan. "Broader concerns . . . rarely enter into their analysis. They take it one caseat a time." Still, that can mean problems. When the US Airways-United decision was made,well before Sept. 11, the airline industry already was slumping. At the time, some analysts said a United-US Airways merger was the only way out of bankruptcy. But the contraction of the industry was not key for Bush's trustbusters at the time, many say. Creative Destruction Even if it had been, some experts argue, it's better to let firms fail even if that means short-term harm to consumers -- like the service reductions and price spikes that can happen after an airline goes broke. Economists call that "creative destruction." That idea, from Austrian economist Joseph Schumpeter, suggests markets must cycle through failure to achieve "perfect competition." Sick, dying firms are replaced by healthy, vibrant ones. By those terms, Justice arguably made the right choice in nixing the United-US Airways deal. "There are definitely short-run ramifications if an airline fails," Gritta said. "But ultimately the free market works. The airlines wanted deregulation. They got it. In a deregulated market, if you fail, you fail."

09/03/2002
Limited Government on the Anniversary of September 11
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Press Release

Limited Government on the Anniversary of September 11

As the anniversary of September 11 approaches, conservatives will again be presented with the opportunity to explain how their view of the proper role of government squares with the harrowing realities made evident by the heinous terrorist attack. For those who do not understand conservatism, or wish to mischaracterize it for political gain, September 11 was supposed to be a death knell for the ideology: A harsh, yet unmistakable reminder of the primacy of the state in the life of its citizens.

08/28/2002
Rubin Where Art Thou?
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Press Release

Rubin Where Art Thou?

Yesterday, President Bush hosted a forum in Waco, Texas to defend the administration’s economic policies and those responsible for their formulation. Recent data suggest the economy faces significant hurdles: unemployment continues to rise, productivity growth has slowed, and unease continues to grip the financial markets. With Democrats eager to make the economy the centerpiece of this fall’s midterm elections, it is politically imperative for the Administration to find its voice on economic policy.

08/14/2002
Searching for A Legislative Compass
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Press Release

Searching for A Legislative Compass

This Week Since both the House and Senate are enjoying August recess, there is no activity in either house. The White House also is on what the White House describes as a “working vacation” at his ranch in Crawford, Texas.

08/12/2002
The Calm Before the Storm?
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Press Release

The Calm Before the Storm?

The President is working from home this month. Congress has left town until after Labor Day. This August, like most Augusts, will be a slow month in Washington. But watch out for a wild ride this fall.

08/07/2002
Full Investigation of Enron Must Include Citigroup Chairman Robert Rubin
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Press Release

Full Investigation of Enron Must Include Citigroup Chairman Robert Rubin

August 1, 2002 The Honorable Joseph I. Lieberman Chairman, Senate Government Oversight Committee Washington, DC 20002 Dear Senator Liberman,

08/01/2002
Coalition Opposes Wage Hike, Even With Tax Breaks
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Press Release

Coalition Opposes Wage Hike, Even With Tax Breaks

July 31, 2002 United States Senate Washington, DC 20510 Dear Senator: We are writing in opposition to any efforts to couple tax legislation with a $1.50 increase in the minimum wage, including Senator Edward Kennedy’s bill, S. 2538, which would hike the starting wage by $1.50 over 16 months.

07/31/2002
Regulators to the Rescue?
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Press Release

Regulators to the Rescue?

With Congress concerned with little more than how the WorldCom bankruptcy will play during November midterm elections, regulators more insulated from short-term political pressures could play a constructive role in the next few months. While the spotlight is on accounting and the ways WorldCom concealed its poor economic performance, regulators at the Justice Department and Federal Communications Commission (FCC) can rethink the way public policy contributed to the poor business performance WorldCom executives sought to conceal.

07/24/2002
Washington vs. Wall Street: Will New Rules Boost the Market?
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Press Release

Washington vs. Wall Street: Will New Rules Boost the Market?

This week, the Senate passed a bill creating more layers of oversight for corporate accounting while President Bush has announced tough new standards of corporate accountability. Unfortunately, the current rush for more regulation and increased federal oversight of market activity raises a number of questions while offering few solutions. It is not likely that political wrangling will have much effect on stock market jitters. If anything, excessive new regulations could hamper the workings of the equity markets without generating new information that is useful to investors or that boosts confidence in markets. Rather than more legislation or regulatory controls on accounting practices, a better approach would examine the fundamentals of the current market.

07/16/2002
Department of Homeland Security, Meet Government Bureaucracy
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Press Release

Department of Homeland Security, Meet Government Bureaucracy

This Week – Homeland Security continues to dominate the House as nearly a dozen committees submitted their suggestions to a Select Committee that is working to create a bill implementing President Bush’s vision of a new Department. In the meantime the House is also moving through the Appropriations bills. This week they expect to have four on the floor – Interior, Agriculture, Legislative Branch and Treasury, Postal.

07/15/2002

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