OST-97-2982 / Undocketed / Lan Chile and American / Exemption and Statements of Authorization, US-Chile / Consolidated Answer of Continental / October 22, 1997

Application of :

under 49 U.S.C. § 40109 for an exemption

(U.S.-Chile Service)

Joint Application of:

for Statements of Authorization under 14 C.F.R. Parts 207 and 212

To further extend American's /l domination of its U.S.-Latin America empire and pre-empt alliances between its foreign competitors and U.S. airlines with smaller presences in that region, American seeks authority to code-share with its chief competitor on U.S.-Chile routes, Lan Chile, and has announced that the two carriers will seek antitrust immunity for their anticompetitive alliance. Unless the Department wants to give American control of over 84% of all U.S.-Chile nonstop seats and foreclose the possibility of meaningful competition between the

1/ Common names of carriers are used.

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U.S. and Chile, the Department must deny the American and Lan Chile (collectively the "Joint Applicants") requests for code-share authority. The proposed American/Lan Chile alliance shows that American's drive to assure its perpetual domination of U.S.- Latin America routes is gaining momentum and may soon snuff out all competition. Failure to deny immediately the clearly anticompetitive American/Lan Chile applications will encourage American to continue its destructive pattern, economically disadvantaging U.S. carriers and consumers alike. Inaction by the Department risks convincing the few potential foreign code-share partners left in the region that they have no alternative but to join American's growing U.S.-Latin America juggernaut, pre-empting procompetitive alliances while the applications remain pending. If the Department does not deny the American/Lan Chile applications outright, it should require American to provide full information concerning its relationship with Lan Chile and the interrelationship of the American/Lan Chile alliance with other American alliances before taking any further action.

Continental states as follows in support of its position:

I. THE CODE SHARING PROPOSED BY AMERICAN AND LAN CHILE SHOULD BE DENIED BECAUSE IT WOULD STIFLE COMPETITION AND HURT CONSUMERS

American, the dominant U.S. carrier between the U.S. and Chile by far, already operates 75% of the U.S. carrier nonstop flights between the U.S. and Chile. American proposes to entrench its position further by displaying its

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designator code on all U.S.-Chile flights operated by Lan Chile, the second largest carrier between the U.S. and Chile, and selected domestic Lan Chile flights. American also seeks authority to display Lan Chile's designator code on all of American's U.S.-Chile flights and numerous domestic American flights. The proposed American/Lan Chile code sharing is so clearly anticompetitive and anticonsumer that the Joint Applicants' requests for authority should be denied outright.

American benefits from 21 of the 28 nonstop U.S.-Chile frequencies available for U.S. carriers, and other U.S. carriers cannot increase their services because of bilateral constraints. American and Lan Chile are the two largest carriers between the U.S. and Chile. While American controls 74% of the U.S. carrier nonstop seats between the U.S. and Chile, its sole U.S. competitor in that market, United, controls a mere 26% of those seats. /2 The key Miami gateway accounts for more than 50% of the U.S.-Santiago traffic, /3 and American controls 42% of the Miami-Santiago seats. /4

Continental, which has been trying to commence U.S.-Chile service for years, is seeking the seven additional U.S. frequencies for nonstop U.S.-Chile service which become effective December 15, 1997, but Continental must compete

2/ OAG tapes, September 1997.

4/ OAG tapes, September 1997.

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with Delta and United, which are proposing one-stop service, for those seven frequencies. /5 American's plan to code-share on Lan Chile's U.S.-Chile frequencies is a blatant attempt to increase its domination of the U.S.-Chile market, circumvent the frequency limitations that apply to other U.S. carriers and prevent effective competition.

Combined American/Lan Chile U.S.-Chile operations would control 83% of the frequencies and 81% percent of the seats operated nonstop between the U.S. and Chile. /6 On the all-important Miami-Chile route, the American/Lan Chile combine would operate 79% of the nonstop flights. /7 The combination would allow American, which already operates far more Chile frequencies than any other U.S. carrier, to expand its U.S.-Chile services while its U.S. competitors remain frozen by bilateral capacity limits. Coupling Lan Chile's ability to operate additional flights with American's ability to place its code on Lan Chile flights would enable American to circumvent the frequency limits applicable to other U.S. carriers. American already dominates U.S.-Chile service without a code-share agreement, and allowing American to join forces with its chief competitor between the U.S.

7/ Id.

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and Chile would give American so much control of U.S.-Chile routes that no other carrier would be able to catch up if the current constraints are removed under open skies.

If American and Lan Chile were allowed to join forces, the dominant U.S. carrier and the dominant Chilean carrier would create a formidable barrier to competition just as effective as the barrier currently erected by the U.S.-Chile bilateral agreement. With over 80% of the seats and frequencies between them, American and Lan Chile would exclude competitors by cooperating with one another. With an open skies agreement and antitrust immunity, the two carriers would enter into a virtual merger with market shares which would never be permitted within the United States. Given Lan Chile's dominance in Chile, American's dominance of the Miami hub and the pre-emptive agreements American has struck with carriers throughout South America, commercial barriers would replace bilateral barriers to entry, and no U.S. or foreign carrier would be able to mount an effective competitive assault on the American/Lan Chile dominance over U.S.-Chile routes. With the ability to offer business travelers far more frequencies than other carriers between the U.S. and Chile, comprehensive connections at both ends of the Miami-Santiago and Dallas/Ft. Worth-Santiago routes, higher display priorities and multiple displays of operated and code-share flights in CRS systems, market power over travel agents and expanded feed for each of the partners' flights, a virtual merger would give American and Lan Chile

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a license to exploit U.S.-Chile passengers and shippers without fear of competitive entry.

The Joint Applicants' claim that their alliance is "in the public interest" does not survive the laugh test, and the examples of authority they cite in support of their application are clearly inapposite. For example, the broad code-sharing proposed by the Joint Applicants far exceeds the limited within-Chile code-sharing between National Airlines of Chile and United which was approved by the Department in Order 96-6-27. Since United operates only 25% of the U.S.-flag nonstop U.S.-Chile frequencies and National does not even operate between the U.S. and Chile, that alliance raised no significant competitive issues. Similarly, the Delta/Transbrasil and United/Varig code-shares cited by the Joint Applicants do not involve code-sharing between the top two carriers on U.S.-Brazil routes or a U.S. partner which has numerous interrelated alliances with or investments in, other carriers which are the principal airlines in their Latin American homelands.

The real victims of a strengthened American and Lan Chile presence in the U.S.-Chile market are travellers and shippers because:

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• Further strengthening of American, the already dominant U.S. carrier serving Chile and Latin America, would make it even harder for Continental and other U.S. carriers to compete with American in the restricted U.S.-Chile market and throughout Latin America;

• In the absence of effective competition for American and its allied foreign partners, consumers would pay higher fares and cargo rates on U.S.-Chile and other U.S.-Latin American routes;

• An American/Lan Chile alliance would enhance American's control of U.S.-Latin America traffic via Miami.

By any standard, the American/Lan Chile alliance is contrary to the public interest, even without a request for antitrust immunity and considering American's other Latin American alliances, and the Joint Applicants' requests for code-share authority should be denied outright.

II. THE DEPARTMENT MUST DENY THE AMERICAN-LAN CHILE APPLICATIONS SWIFTLY TO HALT AMERICAN'S PREDATORY ATTACK IN LATIN AMERICA

Time is running out for the Department to preserve possibilities for competition on U.S.-Latin America routes. American is replacing its long-held dominance based on restrictive bilaterals with commercial dominance by combining forces with its major foreign competitors. American has shown that it will not stop its drive until it shuts out all competition in the region. Within a matter of days, American applied for authority to code-share with the sole competitor to the proposed American/TACA Group alliance on Miami-Central America routes (Iberia) and its chief competitor in the highly restricted U.S.-Chile

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market (Lan Chile), where American already operates the lion's share of U.S. frequencies. Unless the Department sends a clear signal to American immediately, by denying its clearly anticompetitive request to code-share with Lan Chile, American will continue its campaign to capture foreign competitors and prevent new entry on U.S.-Latin America routes.

The Department's failure to halt American's drive to stifle competition and prevent new entry on U.S.-Latin American routes is already causing serious damage to competition. Continental and others have repeatedly documented the ever-increasing destruction of competition from U.S. and foreign carriers alike resulting from the Department's failure to deny immediately the American/TACA Group code-share applications. The Department itself has recognized that the application raised "serious competitive issues," because of "the dominant positions held by American and the foreign carriers involved," because they "were the largest carriers in the markets at issue" and because "American was the only U.S. airline with a hub at Miami, the dominant gateway for U.S.-Central America services" (Order 97-1-15 at 6), but the Department has not yet denied the application. Buoyed by the Department's willingness to consider American's clearly anticompetitive alliance with the TACA Group, American has hastened to construct a network of interrelated investments in, and alliances with, other foreign carriers serving Latin America. The existence of those alliances themselves, even without code-share authority, has pre-empted potential alliances

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which could compete with American's already dominant U.S.-Latin America network. In Argentina, Chile, Colombia, and Paraguay, for example, American alone already dominates U.S.-flag service with 50% or more of the U.S.-Flag nonstop seats, and the proposed American alliances would dominate over 70% of total service. If the alliances receive the code-share approvals sought from the Department, they would produce overwhelming levels of concentration throughout Latin America.

The American alliances with Aviateca, COPA, LACSA, NICA, TACA and TACA de Honduras would create a virtual monopoly between Miami and all of Central America, and American's additional proposal to code-share with Iberia on six Miami-Central America routes (Miami-Guatemala City/Managua/Panama City/ San Jose/San Pedro Sula/San Salvador) which are also covered by the American/TACA Group code-share application /9 would give American control of 100% of the seats available between Miami and Guatemala City, Managua, Panama City, San Pedro Sula and San Salvador and 86% of the seats available between Miami and San Jose. American's investment in and alliance with Aerolineas Argentinas would give American control over 72% of all Miami-Argentina seats and 70% of all U.S.-Argentina seats. American's proposed alliance and virtual merger with Lan Chile would give American control over 81%

9/ American and Iberia have also applied for authority to code-share between Miami and Cancun, where American, Iberia and Aerolineas Argentinas offer a majority of the seats.

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of all U.S.-Chile seats. American's proposed alliance with Avianca would give American control of 80% of all Miami-Colombia seats and 73% of all U.S.-Colombia seats. Adding Lan Chile's Miami-Colombia and U.S.-Colombia seats to the equation increases American's control of those routes to 83% and 75%, respectively. American is the sole U.S.-flag carrier serving Paraguay, and additional Paraguay service is offered by American's partners Aerolineas Argentinas, Lan Chile and TAM Mercosur.

The Department has a statutory mandate to "avoid . . . unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one carrier or foreign air carrier unreasonably to increase prices, reduce services or exclude competition." (49 U.S.C. § 40101 (a)(l)) The Department should act now to exercise its statutory mandate and deny approval for the anticompetitive American/Lan Chile alliance. Failure to do so would violate the Department's mandate and further encourage American's anticompetitive march toward total domination of U.S.-Latin America routes.

III. THE DEPARTMENT SHOULD DIRECT THE JOINT APPLICANTS TO PROVIDE FULL INFORMATION CONCERNING AMERICAN'S RELATIONSHIP WITH LAN CHILE AND THE INTERRELATION-SHIP OF THE AMERICAN/LAN CHILE ALLIANCE TO OTHER AMERICAN ALLIANCES

If the Department refuses to send a clear signal to American and the few foreign carriers in Latin America which have not already been co-opted by

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American by denying outright the code-share authority requested by the Joint Applicants, the Department should at least require American to provide full and complete information comparable to the information American was required to submit by the Department's Notice dated August 22, 1997, with respect to American's agreements with Iberia, Aerolineas Argentinas and Austral. Continental and United previously have urged the Department to order American and Lan Chile to file specific information related to their alliance and its interrelationship with the American investments and alliances in the American/TACA proceeding (Docket OST-96-1700). /10 The Department should require the Joint Applicants to file the same information in this proceeding, since it relates specifically to American's alliance and relationship with Lan Chile and is directly relevant to the public interest analysis in this case. In addition, the Joint Applicants should be required to describe how their code-share and potential virtual merger will relate to American's alliances with other South American carriers and with British Airways in terms of corporate strategy, marketing, yield capacity, management, and pricing. Until the additional information is submitted, there is no basis for considering the Joint Applications. After the additional information is submitted, interested parties should have a further opportunity to comment on the applications.

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Continental urges the Department to deny the American/Lan Chile codeshare requests as anticompetitive and contrary to the public interest. If the Department does not do so immediately, it should require the Joint Applicants to submit all of the evidence required to evaluate the substantial competitive issues raised by their applications and the other interrelated investments and alliances American has already announced.

Respectfully submitted,

CROWELL & MORING LLP

R. Bruce Keiner, Jr.

Lorraine B. Halloway

Counsel for Continental Airlines, Inc.

October 22, 1997