OST-97-2557 / Application of the People and Businesses of Bloomington-Normal; Moline-Quad Cities; Toledo; and Akron-Canton / November 26, 1997

Notice: Any party may file an answer to this application. Answers must be served upon the persons listed above and on the attached service list. Answers must be filed on or before December 12, 1997

Application of The People and Businesses of Bloomington-Normal, IL; Moline-Quad Cities, IL; Toledo, OH; and Akron-Canton, OH, for an exemption from 14 C.F.R. Part 93, Subpart K and S. 49 U.S.C. §41714 as to allow non-stop service between New York LaGuardia Airport

1/ AirTran Airways has agreed that it would operate flights between these cities and LaGuardia if slots were provided.

2/ The Secretary of Transportation may, under the provisions of 49 U.S.C. §41714(c), provide exemptions from the rules governing high density airports to enable new entrant air carriers to serve these airports when the service is in the public interest and the circumstances are exceptional. Since AirTran Airways

holds fewer than 12 slots at LaGuardia, it falls within the definition of a limited incumbent carrier as defined by 14 C.F.R. §93.213(a)(5), and qualifies as a new entrant under 49 U.S.C. §41714(h)(3). Order 97-10-17 states that "ValuJet and AirTran have announced a proposed merger of the two airlines' holding companies. After the consummation of the proposed merger, we understand that the companies will continue to operate as separate entities for at least the near term, and we are treating their slot exemption application accordingly."

3/ The specific times when slots are required to enable AirTran Airways to provide competitive service are set forth in Exhibits 1 and 2.

Since 1968, the FAA's high density traffic airport rule ("HDR") (14 CFR Section 93.12 et seq.) has restricted the number of aircraft operations at JFK, LaGuardia, Washington National and O'Hare airports. Under the HDR, in order to conduct any IFR operation (arrival or departure) at an HDR airport, the operator must have a slot for the particular time frame during which the operation will be conducted.

1. Bloomington/Normal and Moline/Quad Cities;

2. Toledo and Akron-Canton; and

3. Knoxville.

In order to initiate service from these markets to LaGuardia, AirTran unsuccessfully attempted to obtain slots. Unable to do so, AirTran applied for an exemption under 49 U.S.C. §41714. That section authorizes the Secretary to grant exemptions from the high density rule if the proposed service is in the public interest. The "public interest" is statutorily defined to include the following:

4/ The parties ask that all of the filings made in support of the petition submitted in Docket No. OST-97- 2557, continue to be part of this record.

In responding to recommendations of the U.S. General Accounting Office Congress should consider revising the legislative standard governing the granting of landing slots to accommodate new entrants, making competition a key criterion, /6 the Department of Transportation took the following position:

In Order 97-10-17, the Department partially granted AirTran's proposal by awarding it slots to serve the Knoxville-LaGuardia market, however, it denied slot requests for service to Bloomington/Normal, Moline-Quad Cities, Toledo, and Akron-Canton. /8

In denying slots for service to these cities, the Department stated:

5/ 49 U.S.C. §40101()(4), (10), (13).

6/ U.S, General Accounting Office, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, RCED-97-4 (Oct. 1996).

7/ U.S. Department of Transportation, Statement of General Accounting Office (GAO) Report (Jan. 6, 1997).

Having said that, however, the Department then cited estimates of passengers in those markets and stated, "as we noted above, traffic in the subject markets is relatively small, and we do not find that the service benefits therein would constitute an efficient use of slot exemption to the extent necessary to warrant our approval." (Order 97-10-17 at p. 16).

Low fare airline service to LaGuardia airport from the combined markets of Akron -Canton, Bloomington - Normal, Toledo, and Moline-Quad Cities -- serves approximately 10,000,000 people. It is an enormous market with no low fare option to LaGuardia and few low fare options to other markets throughout the country. As found in other regions of the country, travelers will drive several hours to obtain lower fares. For example, to take advantage of significant cost savings, travelers destined for Boston will fly to Providence, Rhode Island; travelers destined for Memphis, Tennessee will fly to Little Rock. In testimony before the Senate Commerce Committee, Congresswoman Louise Slaughter cited an example of a family that drives from upstate New York to Pittsburgh to obtain a reduced fare.

In Illinois and Ohio, travelers are already driving hours to obtain low fares on AirTran and Frontier. For example, travelers are driving to Bloomington - Normal and Moline - from all over the state to take advantage of Air Trans' fares to Orlando. Moreover, passengers will also travel several hours to obtain direct jet service to a market to avoid having to charge planes in a hub.

These examples demonstrate the true size of the Akron-Canton, Bloomington-Normal, Moline-Quad Cities, and Toledo markets.

As detailed later in this document, the parties believe that the passenger numbers referenced by the Department are significantly below the size of the markets in each of these cities. While the parties applaud Departmental actions to allow service from high density airports to small/medium communities including Knoxville, the Department's action in denying their request was not based upon all available data, and therefore should be reversed.

The grant of this request for slots is consistent with Congressional intent and statements by DOT officials that the Department increase access to high density airports for small-medium sized communities. As noted in Order 97-1-7, January 13, 1997, p. 1, Congress has directed the Secretary "to make the fullest possible use of existing exemption powers under 49 U.S.C. §41714 . . . 'to improve service to nonhub airports where significant improvements can be achieved,"' citing the Conference Report to the DOT FY 1997 Appropriations Bill, Public Law 104-205.

DOT's 1996 Low Cost Airline Service Study emphasized that there were a number of positive developments attributable to low fare new entrant service. That study also emphasized that a number of markets were not enjoying the benefits of a deregulated environment. That study found:

• consumer benefits of low fare service are enormous -- $ó.3 billion annually.

• virtually all domestic traffic growth between 1992 and 1995 is attributable to the influx of low cost service.

• one of every seven domestic passengers is flying because of the increased competition resulting from low fare service.

• the high fares hub dominant carriers have enjoyed at their hub cities clearly provides the incentive for those carriers to discourage competitive entry.

• since deregulation, in the 112 cities served, the number of flight departures since deregulation has decreased in 12 of 49 small communities and 7 of 38 medium-sized communities.

• average fares, adjusted for inflation, have increased in 12 of 49 small communities and 14 of 38 medium-sized communities.

• the number of destinations served by nonstop flights declined in 28 of 49 small communities and 16 of 38 medium-sized communities.

The importance of airline service to small communities has been the subject of a number of forums including the National Air Service Roundtable in Chattanooga, Tennessee in February, 1997, where state, local, and federal officials discussed market-based solutions to local air service problems. The genesis for the meeting was the need to provide focus and clarity to the national understanding about local-air service problems and to finish "the unfinished business of the Airline Deregulation Act of 1978 by bringing a competitive mix of service to all communities," particularly those that lack adequate airline competition or service quality. The Conference recognized the direct linkage between air transportation and job creation, economic growth and quality of life. The significance of airline service to the economic growth of small communities was best summarized by the following Conference statement:

At the end of the conference a number of issues including slot availability were highlighted in "The National Air Service Roundtable: A Consensus Report" written by Joseph P. Schwieterman, Ph.D. While the Conference identified a number of marketing steps that can be taken by communities and carriers, the participants agreed that 'if local efforts to enhance competition are to succeed," the federal government must address barriers to entry including the availability of slots. The report stated that:

One of the recommendations from the conference was:

Service to small and medium markets has also been the focus of a number of Congressional hearings. An Eastman Company representative -- Fielding Rolston, Vice President, Customer Service and Materials Management, elaborated on how critical air service is to business growth When he testified on June 25, 1997 before the House Subcommittee on Aviation that:

The purpose of deregulation was not to freeze certain communities and carriers out of the nation's largest markets. The Airline Deregulation Act provides:

• placing maximum reliance on competitive market forces and on actual and potential competition.

• avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier to unreasonably increase prices, reduce services, or exclude competition in air transportation.

• encouraging, developing, and maintaining an air transportation system relying on actual and potential competition.

• encouraging entry into air transportation markets by new and existing air carriers and the continued strengthening of small air carriers to ensure a more effective and competitive airline industry.

A deregulated environment -- particularly for Akron-Canton, Bloomington-Normal, Moline-Quad Cities, and Toledo -- cannot exist when service to New York and Washington is blocked by federally imposed regulations. True deregulation can only exist when all markets can take part in the national transportation system. These communities have used every option available to them to attract low fare carriers to compete with the "hub" service they currently receive. Their ability to obtain the reward of a deregulated system, however, will not be possible unless they have direct service to one of the nation's primary business airports -- LaGuardia.

In "The Low Cost Airline Service Revolution," April 1996, the Department states:

Today, 98% of the high density slots at LaGuardia are controlled by the large carriers. Those carriers use the slots to serve their primary, hubs. In the Midwest, the hubs sewed from LaGuardia include O'Hare (36 round-trips per day), Cincinnati (6 round-trips per day), Cleveland (6 round-trips per day), St. Louis (7 round-trips per day), Detroit (9 roundtrips per day), Minneapolis-St. Paul (8 roundtrips per day), and Pittsburgh (10 round-trips per day). In addition to this service, Port Columbus International Airport has 5 round-trips per day. The Port Columbus service is provided by America West (2 round-trips) and US Airways (3 round-trips).

For those communities without LaGuardia service -- including Bloomington-Normal, Akron-Canton, and Toledo -- the options are for travelers to drive several hours to those markets with nonstop LaGuardia Service or to board turboprop connecting flights to one of the hubs with service. With the added cost of connecting service and the time involved, many people drive. This extra cost and time is particularly tolling on families and business people who need to take frequent trips. Moreover, these cost and time burdens have a significant impact on those who might consider these cities for conventions or for the location of businesses.

Aviation in the midwest is highly concentrated. Most small and medium communities only receive service through large dominant hubs. While those hub operators provide important service, it leaves those communities with little or no flight options or price competition. As DOT has suggested, the communities of Bloomington-Normal, Akron-Canton, Moline-Quad Cities and Toledo have taken a number of important steps to bring in low fare new entrant service. Civic and corporate officials of Akron-Canton, Bloomington-Normal, Moline-Quad Cities and Toledo have taken numerous actions to promote new services in their communities. They have been moderately successful in those efforts including convincing AirTran that they would join with them in supporting and promoting LaGuardia service. For those communities, it marked the first time after years of trying that an established carrier already sewing these markets agreed to operate to LaGuardia. That effort, however, has been stymied by the Department's decision not to award slots for this important service.

The low cost service that has started in these communities has exceeded all expectations. Service by AirTran (and its new partner -- ValuJet) and Frontier have worked, even in situations where those carriers provide only one flight a day or one-stop service. The residents of these communities want competition and need low fare alternatives. Instead of driving hours to find lower fares, they are using their local airports. Moreover, business people and leisure travelers from other areas are now driving hours to fly AirTran and Frontier out of these airports. According to Aviation Systems Research Corp., the ten fastest growing 'non connecting hub airports' include Bloomington/Normal and Akron-Canton. This growth has occurred because they have successful point to point service by operating new entrant carriers. Unless, these communities are able to add LaGuardia service, it will become harder for them to attract additional service by operating and experienced low fare carriers.

The Department should also consider survival of competition as a factor in granting slot exemptions. As Assistant Secretary Charles Hunnicutt stated before the Senate Commerce, Science and Transportation Subcommittee on Aviation, on May 13, 1997, "New entry, has almost completely stopped. We have received no new low-fare applications this calendar year and we have licensed only one new low-fare competitor" since May of 1996. Allowing Bloomington/Normal, Akron-Canton, Moline-Quad Cities and Toledo to have LaGuardia air service by affordable fare carriers is consistent with these principles. Even limited service to New York would solidify low-fare service in these communities and this part of the country. The large hub carriers have no interest in initiating point-to-point service out of these markets that bypass their hub.

By denying new competitive low-cost service from the growing business markets of Akron-Canton, Bloomington-Normal, Moline-Quad Cities and Toledo, DOT would tighten the dominant hub carriers' grip on all midwest markets and lessen the likelihood that low-fare competition will permanently come to the midwest.

In today's changing aviation markets, small carriers are often pressured to leave certain markets. For a new entrant to become a long-term part of a small or medium community, it needs to be able to operate to business and leisure markets from that community. By having several operations at an airport, a carrier obtains significant operational and marketing savings and some passenger loyalty to offset the enormous frequent flier programs of the large carriers. Even Southwest follows this formula. Because of their locations, New York is an extremely important business market for Akron-Canton, Bloomington-Normal, Moline and Toledo.

Based upon the data depicting available traffic, marketing and potential growth information, there is no doubt that the service proposed in this petition -- combining the four strong markets of Akron-Canton, Bloomington-Normal, Moline-Quad Cities and Toledo --justifies an exemption to allow LaGuardia service. it would open up connecting opportunities to markets to the West-- similar to that enjoyed by America West from Columbus.

The Passenger Numbers Cited in Order 97-10-17 Significantly Underestimate the Size of the Market.

The traffic numbers used by the Department in Order 97-10-17 as a reason to deny AirTran's request are not complete and do not even approach the actual traffic that today is generated to New York from the four regions represented by Akron-Canton, Toledo, Moline/Quad Cities, and Bloomington/Normal. Furthermore, the data does not reflect the traffic stimulation that would manifest with the establishment of direct, low-fare AirTran service to LaGuardia.

The Department states that it would not be an "efficient use" of slot exemptions to grant slots for service to Bloomington-Normal/Moline-Quad Cities, Akron-Canton and Toledo because "traffic in subject markets is relatively small . . .".9 The Department reached this determination on reported O&D data that purports to represent that the combined traffic generated by both Akron-Canton and Toledo to New York is less than 40,000 passengers per year. In the case of the proposed routing that combines Moline/Quad Cities and Bloomington/Normal with New York, the Department claims that less than 21,000 annual passengers exist. These traffic estimates used in Order 97-10-17 do not represent potential area traffic and if left to stand could cause harm to the economy of the region by misleading airlines regarding the ability of the region to generate strong traffic to expansion markets such as New York.

It must by understood that DOT origin and destination traffic data does not reflect demand, per se, but instead reflects traffic as reported within a system that does not fully reflect

9/ Order 97-10-17, p. 16

all the traffic between city pairs. With today's air carrier routings, reporting system can and does often result in data which are neither reflective of the total traffic in the market, nor the total demand that may exist or be developed in a given market. At best, DOT origin and destination data are only reflective of the traffic that my be experienced based on existing airline routines, fares, aircraft used, all of which affect the levels of traffic that may be seen in a given market.

The addition of nonstop service generates substantial new traffic, as well as capturing a portion of the existing traffic that is not reflected in reported origin and destination data.

Analyses conducted by the individual airports, independently of one another, indicate that actual current traffic each generated to New York is several times the number reflected in the Department's origin and destination tables, on which they based their denial of the AirTran request.

Studies accomplished for Moline/Quad Cities Airport indicated that the region it serves generates -- by itself -- over 60,000 enplanements annually to New York City. Analyses accomplished by Toledo Express Airport indicate a traffic generation of over 82,000 annual passengers to New York. The population base within a one-hour drive of Central Illinois Regional Airport today generates approximately 70,000 New York passengers, while Akron/Canton generates -- conservatively -- over 99,000. Combined, these four airports today are neighbors to approximately 310,000 passengers traveling to the New York Market -- five fold more than that indicated by the reported origin and destination data. It must also be understood that the majority of this traffic is either using time-consuming turboprop connections, or is driving to another distant airport that does enjoy direct jet service to New York. Finally, these data do not reflect the stimulation that low-fare jet service would cause. This could be a significant number. As DOT studies demonstrate, passengers will drive long distances to board low-cost carriers serving markets they need to visit.

These estimates of current New York traffic can be shown to be reasonable, and indeed, likely conservative. In the absence of clear nonstop or direct jet service, there are a number of approaches that can be used to generate estimates of the true traffic in markets such as these. One approach is to compare existing traffic in markets that now have nonstop LGA flights. The following data indicate the ratio of LGA passengers to populations, based on reported 1996 data:

Using these data, if we apply the populations of each airport's immediate service area, the result are data that again underscores the importance of the AirTran proposal. Using this ratio of .142, and applying into the immediate service area populations of each airport, the net results are as follows:

It was noted that there are dozens of variables that would affect these estimates. However, it is still clear that the real -- and current -- traffic generation between these cities and LGA is far more than the 60,000 that the DOT data indicates.

We again point out several other examples of where origin and destination data, if relied upon, as the Department has done in this case, would have been fatal to airlines in developing markets that are today highly successful.

Central Illinois Regional Airport at Bloomington/Normal is today producing over 17,000 annual passengers to Denver on Frontier Airlines alone, with a single one-stop flight. There are also three other airlines that serve Denver from the airport as well. Yet DOT origin and destination data would have us believe that there are only about 10,000 passengers in the total market.

The Moline/Quad Cities -- Phoenix market is another example. DOT origin and destination indicated less than 8,000 annual passengers. America West direct jet service enjoyed

10/ Includes only counties of Summit, Portage, Stark, and Carroll Counties.

11/ Includes only counties of Lucas, Fulton, Wood Ottawa, and portions of Monroe and Lenawee. The actual draw area for direct, low-fare jet service to LaGuardia would likely be substantially larger.

12/ Service area now accessing low-fare jet service operated by Frontier and by AirTran.

over 35,000. Again, reliance upon historical O&D data -- even if from year 1996 -- is not a valid methodology of determining demand in a city pair.

While it is understood that no two sets of city pairs are identical, these examples irrefutably make the point that data showing the actual and potential traffic that can be generated by the airports involved should have been utilized to accurately portray market size. Reported origin and destination data should not have been the basis for rejecting the AirTran proposal.

As further evidence of the potential for passenger traffic in these markets, the success of Columbus-New York service need only be examined. Columbus supports five round-trip flights per day in this market. In comparison, the combined Akron-Canton and Toledo markets are only seeking two roundtrips. While the Columbus market is larger than the immediate markets of Toledo and Akron-Canton, it is not 2 1/2 times larger than those markets! If Columbus can support five roundtrips, Akron-Canton and Toledo should be able to support only two shared roundtrips. This is particularly the case with the active support of the airport authority, the cities, and businesses of both communities. Moreover, with low-cost service available to LaGuardia, business travelers would drive to Toledo from Detroit and to Akron-Canton from Cleveland.

As already discussed in this petition and as detailed in various studies, passengers will drive hours to obtain low-cost airline service. Therefore, the typical market for the type of service proposed in this petition is significantly larger than the traditional airline market. The true market for each of these cities for the low cost service proposed is as follows:

A recent study by Cleveland State University (The Future of Northeast Ohio's Airports: Framing the Coming Debate, October 14, 1997 (See Exhibit 3)), states that the Cleveland-Akron Consolidated Metropolitan Area (CMSA), consisting of eight counties, is the 1 6th largest market in North America as measured by population. The CMSA is also the 15th largest market in the U.S. in terms of total metropolitan income -- the region has total income of $72.1 billion. /13 The CMSA has the 1 8th highest per capita income in the U.S. However, the effective market for air services may be about half again as large as the CMSA in terms of population. The report also emphasizes that Akron-Canton Airport should be viewed as a complement to Cleveland-Hopkins. It also emphasized the importance of Akron-Canton in attracting low fare service. A larger "low-fare revolution" market for LaGuardia service out of Akron-Canton -- as demonstrated by cost-concerned travelers from throughout the country -- would include:

[See map in Exhibit 4]

Adding to Toledo's passenger market, is the City of Detroit which is within a one-hour drive. (See Exhibit 5) Since Toledo passengers drive to Detroit for direct flights, low fare service at Toledo will attract a significant number of passengers from Detroit. According to a report prepared by SH&E (See Exhibit 6), Toledo's service area demand is estimated at 1.2

13 The eight counties are: Ashtabula, Cuyahoga, Geauga, lake, Lorain, Medina, Porage, and Summit.

million annual O&D passengers. In addition, Toledo's business development continues to expand. Owens-Corning Fiberglas' New World headquarters will be located in Toledo. Other major corporations -- including Chrysler, Plastic Technologies, Libby Glass, and the Dana Corporation -- are also expanding in the area and generate significant numbers of business trips to the New York area. Even without direct service, Toledo's second largest market is New York.

As can be seen by Exhibit 7, within a one hour drive from Bloomington-Normal Airport is a population base of over 1.2 million people. In addition, there are dozens of major corporations including Archer/Daniels/Midland, Caterpillar, John Deere, GTE, and LTV. These companies generate significant numbers of business trips to the New York area. In addition to the this area, a larger "low-fare revolution" market for LaGuardia service out of Bloomington/Normal and Moline-Quad Cities -- as demonstrated by cost-concerned travelers from throughout the country -- would include:

[See map in Exhibit 8]

If we are going to have airline competition into the next century particularly in small and medium communities, barriers to entry must be opened. Communities such as Akron-Canton, Bloomington-Normal, Moline-Quad Cities, and Toledo should not be told that they will forever be destined to be no more than a "spoke" to a highly concentrated hub airport. These communities must be given opportunities to receive service to high density airports. Approving the minimal slot request in this petition will promote competition and the survivability of new entry, and will result in:

* lower prices and more choices for the traveling public;

* provide business travelers from a several state area with affordable fare options for travel to New York;

* provide leisure travelers with affordable fares that will allow them to visit families and friends, to take family vacations and explore business opportunities;

* stimulate enormous business and economic opportunities in Akron-Canton, Bloomington-Normal, Moline-Quad Cities, Toledo and surrounding communities that do not have non-stop service to New York; and

* stimulate other low fare air carrier service in these markets.

* create an environment for the low fare revolution to become permanently part of the midwest.

In various parts of the country, particularly the west coast, small and medium airports are being revitalized because of new entrant low cost carrier service. Those carriers provide service to leisure and business markets. Few would have predicted that this resurgence would have occurred. According to a variety of studies, this growth has not occurred in the midwest. Now is the time for the Department to take the steps necessary to allow small and medium midwest communities to benefit from low-cost service by established carries. The Department has provided the airports with funding for ATC and ground side expansion. Now is the time to allow low fare carriers to utilize those facilities.

Combined with the success enjoyed by low fare service to leisure markets -- such as Orlando and Denver -- and business markets -- such as Atlanta -- if Akron-Canton, Bloomington-Normal, Moline-Quad Cities and Toledo obtain even limited access to LaGuardia Airport, they will become alternative airports for millions for passengers throughout the entire midwest. Competition will be alive and well in the midwest for the first time since deregulation was enacted. Moreover, economic development in this part of the country will no longer be discouraged because of high cost and non-competitive air service. The true winners from a Department action to grant this limited exemption would be the consumers and business people of the midwest. Agreement of this petition will bring "[t]he low cost airline service revolution" to the midwest.

Respectfully submitted,

Edward P. Faberman

UNGARETTI & HARRIS

1747 Pennsylvania Avenue, N.W.

Suite 900

Washington, D.C. 20006-4604

November 26, 1997