OST-97-3092 and Undocketed / Aeroflot and Continental / US-Russia / Answer of United Air Lines / November 21, 1997

Joint Application of

CONTINENTAL AIRLINES, INC.

for exemptions pursuant to 49 U.S.C. §40109 and Statements of Authorization pursuant to 14 CFR Parts 207 and 212

(U.S.-Russia Code Sharing)

United Air Lines, Inc. ("United") submits the following answer in opposition to the above-captioned joint application of Aeroflot Russian International Airlines ("Aeroflot") and Continental Airlines, Inc. ("Continental") for authority to code share on each other's services. In circumstances where Russia has refused to renew United's authority to code share with Lufthansa German Airlines on Lufthansa's flights between Frankfurt and Moscow, even though that service is consistent with the terms of the U.S./Russia bilateral air services agreement, the Department should not approve the joint application of Aeroflot and Continental. Instead, the Department should defer action on this application until such time as Russia has renewed United's authority to code share with Lufthansa or dismiss it without prejudice to its being refiled after such renewal has

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been granted. In support of its position, United submits the following:

2. Aeroflot and Continental take the position that their code-share arrangements should be approved under principles of comity and reciprocity. That position is, in turn, based upon the fact that the code-share provision of the U.S./Russia bilateral air services agreement of May 21, 1993, has expired by its terms. It was the expectation of Aeroflot and Continental that their code-share authority would be "considered" in the U.S./Russia bilateral aviation negotiations held last week in Moscow and that those negotiations would result in "a comprehensive settlement of pending issues."

That expectation has not been realized. The U.S. and Russia failed to settle any of their pending issues. In particular, Russia refused to renew its approval of United's code share on Lufthansa's services between Frankfurt and Moscow. As United has explained in detail elsewhere, Russia approved the

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3. The Russian government and Aeroflot have variously sought to justify that government's action in refusing to renew the United/Lufthansa code share on the basis of agreements between Russia and Germany and, more recently, on the expiration of Annex 1 of the May 21, 1993 U.S./Russia agreement, which contains, inter alia, the provisions on code sharing. United has previously addressed these arguments and demonstrated that they are baseless as a matter of international law.

In brief, the Russia/Germany agreements were concluded after the agreement between the U.S. and Russia which established United's right to code share with a third-country carrier such as Lufthansa and, as such, do not affect United's rights. The expiration of Annex 1 is irrelevant in circumstances where both countries are continuing to grant authority under its terms and carriers of both sides are being allowed to operate services as if its terms continued to apply. In any event, Russia, by approving some U.S. carrier code shares and denying others, has violated United's right to a fair and equal opportunity to

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compete and to non-discriminatory treatment under Article 11 of the U.S./Russia agreement, which remains in effect. /1

When the U.S. brought up this issue at last week's negotiations, Russia adamantly refused to renew United's codeshare authority. Russia has also refused to approve the code share between Delta Air Lines, Inc., and Austrian Airways.

4. In these circumstances, there is no basis to approve the Aeroflot/Continental code share, either under the terms of the U.S./Russia agreement or under principles of comity and reciprocity. Annex 1, Section VI of the U.S./Russia agreement requires both sides to approve code shares between authorized carriers, including third-country carriers such as Lufthansa. United's code share with Lufthansa is fully consistent with Annex 1, Section VI and United had been allocated the necessary frequencies under Annex 1, Section IV to offer code-share services at the level of frequencies it proposed. Notwithstanding the consistency of United's code share with the bilateral agreement, Russia refused to renew its approval.

The Department is fully warranted in withholding approval of the Aeroflot/Continental agreement under the terms of Annex 1, Section VI itself which provides that "if the Party designating the airline would not permit airlines of the other

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party to enter into similar arrangements, the other Party need not permit such service." Indeed, the Department has previously refused to approve a code share between a U.S. and a Russian carrier that was filed pursuant to Annex 1, Section VI in the face of Russia's actions with respect to the United/Lufthansa code share. See Joint Application of American Airlines, Inc. and Transaero Airlines, Docket OST-96-1485 and related pleadings. /2

5. The result is no different even if, as Aeroflot and Continental would have it, the principles of comity and reciprocity rather than the provisions of Annex 1, Section VI were to be applied. Russia is refusing to approve U.S. carrier code shares and the U.S. need not in those circumstances approve code shares involving Russian carriers.

The Department has established a firm policy of refusing to approve so-called "bilateral" code shares such as that between Aeroflot and Continental when the foreign partner's homeland has refused to approve U.S. carrier code shares with third-country carriers under principles of comity and reciprocity. For example, when United and Lufthansa proposed code shares to third countries beyond Germany, the Department withheld approval of those "bilateral" code shares until Germany agreed to allow similar code shares involving U.S. and third

2/ That joint application was filed on June 26, 1996, and the Department has withheld any action on it since that time.

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country carriers. Orders 94-1-19 and 94-4-43. In addition, American Airlines has sought approval of code shares with carriers such as LOT and El Al Israel Airlines, and Continental has sought approval to code share with Air France under bilateral regimes where there is no agreed code-share term. The foreign homeland of the U.S. carriers' partners in each of these situations had refused to authorize U.S. carriers to code share with third-country carriers.

The Department withheld authority of "bilateral" code sharing in these instances until the foreign government agreed to approve U.S./third-country carrier code shares. For example, in the case of the LOT/American code share, approval was granted only after Poland, LOT's homeland, agreed to allow U.S. carriers to code share with their third-country partners. Order 96-3-59. In the cases of the American/E1 Al and the Continental/Air France code shares, on the other hand, the Department has continued to defer action on these "bilateral" code shares in circumstances where Israel and France have continued to refuse to approve U.S./third-country carrier code shares /3

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6. There is no basis under either the U.S./Russia agreement or principles of comity and reciprocity for the Department to approve the Aeroflot/Continental code share. Code shares produce benefits by increasing competitive options for the traveling public. Where code-share alliances are permitted to compete freely with each other, competitive choices are maximized and the traveling public benefits. Where, on the other hand, a government such as Russia seeks to protect its own carriers'

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alliances from the competition offered by other alliances, competitive choices are limited and the public suffers.

According to press reports, Aeroflot has urged its government ''not to allow more competitors in -- even at the risk of jeopardizing its agreement with Continental." A senior Aeroflot official was quoted as saying, "'We are not going to open the sky in the foreseeable future either to American or other airline companies.'" New York Times, June 29, 1997, Business Section at 13. Why Aeroflot has now sought U.S. approval of its deal with Continental notwithstanding its public support for its government's unlawful and protectionist actions is not explained in the joint application.

The U.S. has wisely adopted a policy of insisting upon the ability of carrier alliances to compete with each other. This policy is reflected in the terms of the 1993 U.S./Russia agreement on code sharing as well as the actions of the U.S. government in situations where there is no agreement and principles of comity and reciprocity apply. In the instant case, Russia has intervened, contrary to the terms of the bilateral agreement, to deprive other alliances of the ability to compete with Aeroflot and its partner. Under clear U.S. policy, the request of Aeroflot and Continental to code share to and from the U.S. cannot be granted.

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7. The Aeroflot/Continental application also raises other issues. Aeroflot seeks to gain access to seven new U.S. points beyond its gateways as a result of its code share with Continental: Boston, Cincinnati, Dallas/Ft. Worth, Houston, Kansas City, Minneapolis/ St. Paul and Orlando. Under the bilaterally-agreed Russian carrier route, Aeroflot is limited to serving Dallas/Ft. Worth, Houston, and Orlando from among those named in its application, plus "two points to be mutually agreed by the Parties."

The U.S. has not agreed to any additional points for Aeroflot and, in any event, Aeroflot seeks to code share to four points in excess of those already named on the agreed route, not two. Even if Russia were living up to the terms of the 1993 agreement, which it is not, there would have to be an additional showing of reciprocity for the grant of extrabilateral authority such as Aeroflot requests. No such showing has been made in this proceeding. /4

8. In conclusion, because of Russia's refusal to renew United's code-share services in conjunction with Lufthansa, the Department cannot find that a grant of the Aeroflot/Continental code share would be consistent with the public interest or with

4 In dismissing or deferring the joint application, the Department should clarify that the renewal by Russia of United's bilaterally authorized code-share service would not in itself be sufficient to establish reciprocity for U.S. grant of the extrabilateral authority sought by Aeroflot.

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DOT policy. The Department should defer action on the Aeroflot/Continental application until such time as Russia is prepared to renew United's authority to code share with Lufthansa. In the alternative, the Aeroflot/Continental application should be dismissed without prejudice to its being refiled after Russia has renewed United's authority.

Respectfully submitted,

/s/ Joel Stephen Burton

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: November 21, 1997