OST-97-2965 / OST-97-2966 / Undocketed / American and Iberia / Codesharing, US-Spain / Joint Reply of American and Iberia / October 28, 1997

Applications of:

for exemptions under 49 USC 40109 and statements of authorization under 14 CFR Parts 207 and 212

The authority requested by American and Iberia to implement reciprocal codeshare services, set to begin on December 1, 1997, should be promptly granted. The opposing carriers -- which include the leading players in the U.S.

1/ The Department's procedural rules provide a right of reply to answers to the applicants' docketed applications for exemption (14 CFR 302.407), but not to answers to their undocketed joint application for statements of authorization under 14 CFR Parts 207 and 212. To the extent required, the applicants request leave to file this reply.

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Spain market as well as global alliance giants -- have presented no compelling basis for denying these applications.

Codeshare services are explicitly authorized under the U.S.-Spain Air Transport Agreement, and the extrabilateral aspects of the proposed American/Iberia services are modest. Among the U.S. carriers serving Spain, American has a small presence, operating only seven weekly flights. The American/Iberia codeshare will bring substantial benefits to the public by extending the reach of both carriers in the U.S.-Spain (and beyond) markets and by providing greater price, service, and quality options to consumers, consistent with the Department's policy statement on international air transportation, 60 Fed. Reg. 21841 (May 3, 1995).

In support of this joint reply, American and Iberia respectfully state as follows.

Continental's hyperbolic and repetitive answer can be reduced to two principal contentions. First, Continental asserts that the American/Iberia and American/TACA Group proceedings should be consolidated because Iberia presently operates Fifth Freedom services between Miami and Central America, and may alter its service pattern in the future. Second, Continental asserts that American should be required to submit an extensive and burdensome array of documents based on

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Continental's reckless and untrue assertions that American will "control" Iberia, and that the American/Iberia and American/ British Airways transactions are linked. Each of these contentions is without merit.

A. Miami-Central America

Not being able to construct an argument that the American/Iberia codeshare will diminish competition in Miami-Central America markets based on existing service patterns, Continental speculates that Iberia may reduce or eliminate its Miami-Central America flights in the future. Such speculation provides no basis for denying the American/Iberia applications, or for consolidating these applications into the American/TACA Group proceeding.

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gander the U.S.-Spain Air Transport Agreement, the principal interest of a Spanish-flag airline is in carrying traffic between Spain and the United States. The carriage of Fifth Freedom traffic between Miami and Central America is intended to be complementary to the carriage of Third and Fourth Freedom traffic between Spain and these countries. Although the Spanish side secured certain change-of-gauge rights at Miami and at two other points in the United States, there is obviously no requirement in the Air Transport Agreement that such rights be used, or be used in any particular manner.

American, for its part, is in no position to know whether these operations are economically viable or feasible for Iberia, or what Iberia's future plans might be, just as Iberia, for its part, does not know what American's future plans might be. Iberia has announced new nonstop services between Spain and points in Central America, and for its part is continuing to evaluate whether the carriage of such traffic via Miami remains economically sensible.

American submits that in many other cases, the Department has granted codeshare authority where the two partners made independent changes in their prior service levels. Delta, for example, withdrew its own services in a number of New York-Europe markets (Brussels, Budapest, Lisbon,

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Vienna, and Zurich), and entered into codeshare arrangements with its European carrier partners. The Department not only approved such codeshares, but granted antitrust immunity to Delta/Swissair/Sabena/Austrian by Order 96-6-33, June 14, 1996.

Iberia submits that even if it were to decide to terminate service with its own aircraft in the local market between Miami and Central America, it does not propose or anticipate a continuation of service on that local market through a codeshare arrangement with American. All that is at issue here is the accommodation of Iberia passengers traveling between Spain and Central America via Miami through an arrangement whereby Iberia would place its code on selected Miami-Central America flights of American, connecting with Iberia's or American's Madrid-Miami flights.

In any event, whatever services are operated by American and Iberia in the future, the two carriers will remain competitors, as are all codeshare partners in non-immunized arrangements. See, e.g., Delta/Virgin Atlantic, Order 95-2-28, February 10, 1995, p. 7 ("competition will be preserved and enhanced even in the local U.S.-U.K. markets since each of the two carriers will... price, market, and sell its services independently"). If Iberia independently determines at some later date to reduce or eliminate its Miami-Central America

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Fifth Freedom services, that does not affect the Department's decision on the present application.

Finally, it is inconsistent and self-serving for Continental to argue, as it does now, that American/TACA Group and Iberia would "dominate" U.S.-Central America services. We have not been able to find any reference in Continental's myriad pleadings in the American/TACA proceeding, OST-96-1700, prior to the date that the American/Iberia arrangement was publicly announced on July 18, 1997, contending that Iberia is a significant competitor in U.S.-Central America markets. In fact, Continental had ignored Iberia's presence altogether in arguing against the American/TACA Group codeshare. Speculation about Iberia's future plans in Fifth Freedom markets it now serves from Miami is not relevant to the American/Iberia applications, is not relevant in the American/TACA Group proceeding, and provides no basis for consolidating these unrelated dockets.

B. "Control" of Iberia; American/British Airways

As a further prong of its campaign to thwart the procompetitive American/Iberia codeshare, Continental alleges that American will "control" Iberia, and that American, British Airways, and Iberia plan a tripartite arrangement. Based on such groundless statements, Continental would have the Department engage in a fishing expedition by compelling the produc-

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tion of an extraordinarily burdensome array of documents. That request should be denied in its entirety.

Moreover, there is no three-way agreement involving American, British Airways, and Iberia. This matter had been discussed by the parties but was dropped. Continental's demand for documents on such an arrangement, which does not exist,

2/ See Delta/Swissair/Austrian Codeshare Approval, Order 95-2-14, p. 5 ("nor do we see the limited ownership relationships between Delta and Swissair and between Swissair and Austrian as raising any competitive issues that would warrant withholding the authority the carriers have requested"). At that time, Swissair owned 10 percent of Austrian, and 4.5 of Delta; and Delta owned 4.5 percent of Swissair (id., p. 3 n. 5).

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should be-denied, just as its demand for documents regarding American, Aerolineas Argentinas, and Iberia should be denied. The American/Iberia applications involve a straightforward codeshare proposal, virtually all of which is explicitly authorized under the U.S.-Spain Air Transport Agreement. The Department should not advance Continental's anticompetitive agenda by burdening the applicants with unjustified demands for documents on unrelated issues. II. DELTA

Delta argues that the American/Iberia applications should be denied to the extent they propose extrabilateral services. As the joint applicants showed in their application, their proposed codeshare services are for the most part explic-

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itly authorized under the U.S.-Spain Air Transport Agreement. See Memorandum of Understanding, November 27, 1991, Annex I, paragraph E ("Code Share"). The only respects in which extrabilateral authority is required are (1) Iberia's proposal to serve both Washington (DCA) and Baltimore (BWI) on a codeshare basis, and (2) American's proposal to serve several smaller points in Spain on a codeshare basis in addition to those points specifically named in the agreement.

As one of the largest carriers in the U.S.-Spain market, with 14 weekly frequencies from the New York and

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Atlanta gateways, Delta's anticompetitive motivation in opposing the American/Iberia codeshare is clear. The Department should disregard Delta's opposition.

B. American's "Global Strategy"

Delta holds antitrust immunity (and engages in worldwide codesharing) with three European airlines, Swissair, Sabena, and Austrian (see Order 96-6-33, June 14, 1994), and has separate codeshare arrangements with Aer Lingus, Aeromexico, Finnair, Korean Airlines, Malev, Singapore, Transbrasil, and TAP Air Portugal. Delta also has pending agreements with Air France, Air Jamaica, All Nippon Airways, and China Southern.

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In these circumstances, the Department should recognize that Delta's complaints about the "global strategy" of a competitor seeking to "pool traffic" ring hollow indeed.

C. New Service Benefits

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These are precisely the types of new and expanded service opportunities that the Department encouraged in adopting its international air transportation policy statement in 1995. These are precisely the types of services that Delta itself provides through its own codeshare arrangements with foreign carriers in U.S.-Europe and other markets. American and Iberia will substantially benefit the public by expanding price, service, and quality options, notwithstanding Delta's self-serving and anticompetitive assertions to the contrary.

Like Delta, TWA is a large participant in the U.S.-Spain market, operating 14 weekly frequencies from New York to Madrid and Barcelona. So, like Delta, TWA has an anticompetitive motivation for opposing the American/Iberia codeshare. We will reply here to specific points raised by TWA that do not repeat the arguments made by Continental and Delta.

A. "Triple Alliances"

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For its part, American has separate and independent codeshare agreements with Iberia (at issue here), with Aerolineas Argentinas (publicly announced but not yet submitted for Departmental review), with British Airways (including immunity, pending in OST-97-2058), and with the TACA Group (pending in OST-96-1700). These are independent, bilateral arrangements between American and each of the named carriers. There is no factual support for TWA's assertion of "triple alliances," nor is there any justification for consolidating any of these separate proceedings.

For its part, Iberia has no alliances or marketing arrangements involving markets to/from the U.S. other than the instant codesharing agreement with American. Iberia and British Airways have expressed an intention to enter into cooperative arrangements encompassing codesharing, frequent flyer participation, and coordinated cargo operations, but such arrangements (1) have not yet been entered into, (2) will not involve American, and (3) will not be focused on U.S. markets. They are thus clearly outside the scope of the instant application. This unremarkable codeshare application, lacking any nexus to any other proceeding pending before the Department, must be considered independently. To do otherwise would allow competitors to abuse the Department's processes for their own advantage.

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B. Air Europa

IV. UNITED

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Mexico, South America, Europe, the Middle East, Asia, and the Pacific, including Mexicana, Varig, British Midland, Emirates, Saudi Arabian Airlines, Thai International, Ansett, and Air New Zealand.

Moreover, United's continued complaints about American's position at Miami, and in Miami-Central America markets, should be recognized as mere posturing by a carrier which -- in contrast to American -- chose not to invest in personnel, facilities, and equipment in that region, but to take its resources elsewhere. United cannot expect the Government to block American from improving its service to the public in open-entry markets out of Miami, when there are no barriers to entry preventing United from replicating American's Miami-Central America services.

United's answer is largely a reprise of its opposition to the pending American/TACA Group applications in OST-96-1700. Like other carrier opponents of the American/Iberia proposal, United urges that the applications here should be consolidated with the American/TACA Group proceeding, and that American should be required to provide further information on its possible investment in Iberia. These matters have already been addressed above in reply to Continental, Delta, and TWA. However, we do wish to respond specifically to United's asser-

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tions about the future of Iberia's Miami-Central America services, and to its arguments on third-country codesharing.

1. Miami-Central America

United, like Continental, speculates that Iberia may withdraw its Fifth Freedom services in the Miami-Central America market, As American and Iberia have stated above, whether Iberia independently decides in the future to end such services should have no bearing on the Department's decision. Indeed, in United's answer in American/TACA Group (OST-96-1700), July 23, 1996, United took pains to marginalize Iberia's participation in Miami-Central America markets, going so far as to state that:

In other words, United is arguing opposite propositions: first, that Iberia's Miami-Central America services are so minor as to be irrelevant to the competitive analysis in the American/TACA Group proceeding; second, that the potential elimination of these services presents such significant competitive issues that the two proceedings should be consolidated.

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The Department should reject such a transparent delaying tactic, and approve the American/Iberia codeshare proposal forthwith.

B. Third-Country Codesharing

United's position confuses Third/Fourth Freedom codesharing, which is bilaterally authorized under the U.S.-Spain agreement, and third-country codesharing, which is not. In Order 96-10-15, October 9, 1996, the Department approved a codeshare arrangement between United and Saudi Arabian Airlines, which was authorized by the U.S.-Saudi Arabian Air Transport Agreement, despite objections by Delta that the Saudi Arabian Government refused to approve codesharing between Delta and third-country carriers. The Department stated that "while we recognize Delta's desire to conduct U.S.-Saudi Arabia services under its code-share arrangement with its alliance partners, we also note that this kind of code-share operation

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A similar decision should be reached here. The Department should approve the American/Iberia proposal, despite Spain's position on third-country codeshares, a matter not covered in the U.S.-Spain Air Transport Agreement.

The Government of Puerto Rico has answered in support of the American/Iberia codeshare proposal with respect to service benefits for San Juan. Puerto Rico recognizes the manifest public benefits of the American/Iberia proposal over the San Juan-Madrid sector and in related behind-Madrid markets. The American/Iberia agreement should be approved in its entirety so that the benefits to be provided to Puerto Rico, as well as to the other communities in issue, may be implemented.

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American and Iberia are planning to initiate their reciprocal codeshare arrangement on December 1, 1997. They request expedited approval of their joint application so that advance marketing and sales of the proposed services may commence as soon as possible, and the public may begin to benefit from the enhanced competition that will result.

Respectfully submitted,

WILLIAM KARAS of Steptoe & Johnson, LLP for Iberia

CARL NELSON Of American

October 28, 1997