OST-97-2982 / Undocketed / American and Lan Chile / Answer of United Air Lines / October 22, 1997
Application of
LINEA AEREA NACIONAL CHILE, S.A.(LAN-CHILE)
under 49 U.S.C. §40109 for an exemption
(U.S.-Chile Service)
Joint Application of
AMERICAN AIRLINES, INC. and LINEA AEREA NACIONAL CHILE, S.A.(LAN-CHILE)
for Statements of Authorization under 14 CFR Parts 207 and 212
ANSWER OF UNITED AIR LINES, INC.
United Air Lines, Inc., ("United") answers in opposition to the above-captioned applications of American Airlines, Inc. ("American") and Linea Aerea Nacional Chile, S.A. ("LAN-Chile"). By their applications, American and LAN-Chile seek authority to offer code-share services on flights they operate between their U.S. and Chilean gateways and beyond those gateways to interior points in the U.S. and Chile. Aside from references to the U.S./Chile bilateral agreement, there is no discussion in the American/LAN-Chile applications of any public benefits that would result from their proposed code-share service. Indeed, there are no such benefits given the anticompetitive impact that would
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result from the proposed cooperation. Most of the nonstop codeshare service would be operated between Santiago and Miami and most of LAN-Chile's connections to U.S. points would operate from that gateway. This code share would serve to limit competition by solidifying American's dominance of the U.S.-Central/South America market via Miami and should not be approved for the reasons set forth below:
1. American's proposal to form an alliance with LAN-Chile must be viewed in the context of American's overall dominance of the U.S.-Central/South America region. American is the largest carrier between the U.S. and Latin America by any measure: profits, revenues, or passengers. Exhibit UA-1. American also operates more services to South America than any other U.S. carrier. Exhibit UA-2
American's control of these markets depends on its dominant position at its Miami hub where American alone operates 74 percent of the total U.S. carrier nonstop seats between Miami and South America. Exhibits UA-3 and UA-4. Miami is the predominant U.S. gateway to Chile, just as it is to the rest of Central/South America. Over half of the total U.S.-Chile O&D traffic moves between Miami and Santiago and 81 percent of total U.S.-Chile passenger traffic flows over the Miami gateway. /1 Cooperation between American and LAN-Chile would contribute to a
l Exhibit UA-6 and INS Statistics, 12 most ended April 30, 1997.
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further reduction of competition in this region and would have no public benefits such as are needed to support approval of codeshare services.
2. American is already the largest carrier between the U.S. and Chile. Under the present capacity regime, American has 53 percent of the total nonstop U.S.-Chile frequencies and operates 75 percent of the U.S. carrier nonstop service. At Miami, American has twice as many nonstop frequencies to Chile as United, the next largest U.S. carrier. LAN-Chile is the largest foreign carrier in the Miami-Santiago market with 12 weekly nonstop flights, which also exceeds United's 7 weekly nonstop services. Together, American and LAN-Chile would be operating 79 percent of the nonstop Miami-Santiago services and 83 percent of the total U.S.-Chile nonstop services. /2
3. With market concentrations of this magnitude, combined with American's stranglehold on the strategically important Miami gateway, the proposed American/LAN-Chile code share raises concerns comparable to those which led the Department to set down investigations of American's U.S.-Central America code shares with the TACA Group of carriers (Docket OST-96-1700) as well as its proposals to code share in U.S.-Caribbean markets with ALM-Antillean Airlines and BWIA (Docket OST-97-2159). The basis for
2/ Source: GAG, October 1997.
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setting down the investigation of the American/TACA Group code share applies with equal weight here:
The American/TACA Group arrangement presents serious competitive issues which we must investigate before we can determine whether the proposed code-sharing operations will be in the public interest. ... The applications raise competitive issues requiring further examination, primarily because of the position currently held by American and the TACA Group carriers in the U.S.-Central America market. The applicants, moreover, plan to create a large-scale alliance and intend to move toward an integration of their services. As a result, even though the applicants have sought neither approval of their agreements nor antitrust immunity under 49 U.S.C. 41308 and 49 U.S.C. 41309, their proposed arrangement resembles the alliances that we closely examined in other recent cases. While the applicants claim that each will independently price its services under the arrangement, the planned cooperative relationship among the applicants may hinder competition between American and the TACA Group carriers.
Order 96-11-12 at 6. Similar concerns underlay the Department's decision to investigate American's code shares with ALM and BWIA where the Department noted "that American is the hub-dominant airline at Miami, the dominant gateway for U.S.-Caribbean service." Order 97-2-29 at 6. American and LAN-Chile are, like American and the TACA Group, the two largest carriers in the markets where they propose to code share. American and LAN-Chile, like American and the TACA Group, have already announced that they intend to move toward an integration of their services. A press release issued when they
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announced their alliance agreement indicated that "the two carriers intend to apply for antitrust immunity when an anticipated open skies agreement between the governments of the United States and Chile is negotiated." /3 Just as Miami serves as the predominant gateway for travel to the Caribbean and Central American, it is also the predominant gateway for travel to Chile. American's and LAN-Chile's U.S.-Chile services are concentrated at the Miami gateway, and American continues to be the hub dominant carrier at that point.
These are exactly the same competitive considerations that led the Department to institute a broad-scale investigation of American's plans to code share with the TACA carriers, ALM and BWIA. The concerns regarding the impact American's proposed code share would have on competition in the U.S.-Chile market are no less than those which gave rise to the investigation of the impact similar code shares would have in the U.S.-Central America and U.S.-Caribbean markets. /4
3/ American Press Release dated September 9, 1997: "American Airlines and LANChile sign cooperative services agreement."
4/ United also has filed a motion in Docket OST-96-1700 requesting that American be directed to submit certain information regarding its arrangements with LAN-Chile in that case. That motion was supported by Delta and Continental, but the Department has not yet acted upon it. Now that American and LAN-Chile have filed their applications in this proceeding, the appropriate remedy is to set down a separate investigation of those applications as the Department did for the American/ALM and American/BWIA applications in Docket OST-97-2159, and to obtain from American and LAN-Chile information comparable to that which the Department required from the TACA Group in Docket OST-96-1700.
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4. There is a further consideration that the Department must address at this juncture. American's conclusion of a marketing cooperation agreement with LAN-Chile must be considered in the context of the other alliances American has proposed in Latin America and the Caribbean. Indeed, the American/LAN-Chile alliance is merely the latest of a series of such agreements. Given the serious competitive concerns that the Department has expressed with regard to these agreements, American's continued collection of Latin American partners appears to be aimed primarily at pre-empting the major carriers in the region from entering into marketing agreements with other U.S. carriers such as United, Continental or Delta which are seeking to challenge American's dominant position. Based on American's experience with similar agreements which it has concluded with carriers such as TACA, AVIATECA, LACSA, COPA, TACA de Honduras, NICA, AVIANCA, ALM, and BWIA, American by now knows that DOT approval of such arrangements is far from a foregone conclusion. Indeed, American has already withdrawn from its marketing arrangements with ALM and BWIA rather than submit them to the scrutiny of a DOT investigation. Order 97-7-5.
It appears increasingly likely that American is not genuinely interested in gaining approval of agreements which by their nature fail to produce the public benefits needed to support
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such approval. Rather, American continues to pile up alliances with major Latin American carriers in order to assure that these carriers do not form alliances with American's U.S.-flag competitors that are struggling to offer a competitive alternative to American's dominant position in Latin America. So long as carriers such as the TACA Group, AVIANCA, Aerolineas Argentinas, Iberia, Austral, and now LAN-Chile are tied up in pending alliance agreements with American, they cannot form alliances with American's competitors. In this game, even if American ultimately loses in the Department's proceedings, it has helped itself by precluding its competitors from strengthening their services through alliances that would enable them more effectively to challenge American's regional dominance.
It is well-established that code shares are beneficial when they allow carriers to add new markets to their systems that cannot feasibly be served with their own aircraft. As the Department explained in its International Air Transportation Policy Statement (April 1995):
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Increased international code-sharing and other cooperative arrangements can benefit consumers by increasing international service options and enhancing competition between carriers, particularly for traffic to or from cities behind major gateways. By stimulating traffic, the increased competition and service options should expand the overall international market and increase overall opportunities for the aviation industry. U.S. airlines should be major beneficiaries of this expansion and the concomitant increased service opportunities, given their competitive advantages.
Policy Statement at 4.
In the U.S.Chile market, however, as in the U.S.-Central America market, American's motivations are not to achieve market extensions but are transparently aimed at precluding other carriers from using code shares to challenge American's regional dominance. The benefit to American of code sharing in the extremely thin markets in Chile beyond Santiago such as Easter Island are minimal compared to the benefits American gains from delaying an alliance between LAN-Chile and another U.S. competitor on long haul routes between the U.S. and Santiago, and on routes behind U.S. gateways. American already has in place a U.S.-Chile route structure that allows it to connect its global route network to Santiago, the only economically significant traffic point in Chile. None of American's U.S. competitors has a similar route structure and LAN-Chile's network is a tiny fraction of the size of American's.
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The situation is the same with respect to code-sharing on the U.S.-Chile gateway-to-gateway sectors. American will display its codes on LAN-Chile's Los Angeles-Santiago and New York-Santiago flights. LAN-Chile's flights in these markets operate on a one-stop basis, either via Miami, Mexico City or Lima. American can already offer one-stop service to Santiago for its Los Angeles and New York customers on its existing connections via Miami or Dallas/Ft. Worth. LAN-Chile, on the other hand, gains access to American's Santiago-Dallas/Ft. Worth nonstop services as well as American's network of U.S. services out of that carrier's major hubs at both DFW and Miami. Thus, American is not using the gateway-to-gateway code shares to achieve market extensions while LAN-Chile is doing so. The major benefit from this type of code sharing, as with beyond gateway code sharing, is enjoyed by LAN-Chile.
American's entering into a code-sharing alliance with LAN-Chile provides no economic benefit to American because it does not provide American meaningful access to new U.S.-Chile markets it does not already serve. On the contrary, to the extent such an alliance improves LAN-Chile's access to the U.S. market, the alliance actually reduces American's revenues. What such an alliance does do for American, however, is to avoid the greater competition American would face (and the even greater reduction of its revenues) if LAN-Chile entered into an alliance with one of American's U.S.-flag competitors.
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5. The Department should be taking decisive action to stop the conclusion of these pre-emptive agreements by American. Unfortunately, the Department's delay in deciding the American/TACA Group proceeding, supra, is aggravating this situation and giving American the opportunity to enter into an ever increasing number of anticompetitive alliances for which it has little or no hope or expectation of gaining U.S. approval. The longer American's various applications remain pending, the longer American can continue to entice carriers such as TACA Group and LAN-Chile into anticompetitive marketing alliances. The opportunity to avoid competition with a carrier having the size and market power of American in Latin America is a powerful inducement to these Latin American carriers to enter into agreements such as those American is continuing to conclude.
It is not in the public interest, however, to allow American to continue to enter into such agreements, which it knows cannot be approved, when they have the effect of precluding the formation of pro-competitive alliances which would enable other carriers to challenge American's regional dominance. A decision denying the American/TACA applications will send a useful message to other Latin American carriers to seek partnerships that are designed to add to competition and consumer choice rather than to protect them from the need to compete with American.
6. There is an additional factor affecting the U.S.-Chile market which was not present in the American/TACA Group case and
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which would dictate disapproval or dismissal of the present applications. The U.S.-Chile market is subject to bilaterally-agreed capacity limits that are restricting U.S. carrier entry. For example, United and Delta each want to extend a daily U.S.-Sao Paulo flight to Santiago, and Continental wants to operate daily Newark-Santiago nonstop services. The U.S.-Chile agreement presently allows only one of these carriers to operate their proposed new U.S.-Chile services and has required the Department to institute a carrier selection case to decide which U.S. carrier may offer additional service. 1997 U.S.-Chile Combination Service Proceeding, Docket OST-97-2586.
American's proposal to code share with LAN-Chile is aimed at circumventing these agreed capacity restraints to allow American, which already operates more frequencies to Chile than any other U.S. carrier, to expand its U.S.-Chile services to include the flights operated by LAN-Chile as well as those of American. Meanwhile, American can be assured that its competitors' services are capped under the agreed capacity limits. /5
The U.S. and Chile are about to meet to discuss amendments to the bilateral agreement. One of the issues to be dismissed will be the present capacity limits. Even if it were agreed to
5/ Even after another carrier is selected in the 1997 U.S.-Chile case, supra, American will continue to have more nonstop U.S.-Chile frequencies than all other U.S. carriers combined.
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eliminate this capacity regime, however, the Department could not approve the American/LAN-Chile code-share arrangement on the basis of the present record for the reasons set forth above. The Department should, therefore, set down an investigation of the American/LAN-Chile code share regardless of the outcome of the upcoming negotiations.
7. In conclusion, there is no basis in the present record to find that the American/LAN-Chile code shares would produce any public benefits that would warrant their approval. The proposed American/LAN-Chile alliance raises the same serious competitive issues stemming from American's dominance of Latin America/Caribbean services at its Miami hub which has caused the Department to investigate other comparable code-share applications. The same type of investigation is required here in order to permit the Department to resolve these competitive issues.
Respectfully submitted,
JOEL STEPHEN BURTON
GINSBURG, FELDMAN and BRESS CHARTERED
1250 Connecticut Avenue, N.W.
Suite 800
Washington, D.C. 20036
(202) 637-9130
Counsel for UNITED AIR LINES, INC.
DATED: October 22, 1997