OST-98-3419 / 1998 US-Japan Combination / Answer of TWA to Motions for Immediate Action / March 5, 1998

The Dallas/Fort Worth parties, Hawaiian, and Northwest have all requested immediate action on various aspects of this proceeding. Dallas/Fort Worth requests that all applications for frequencies to start service in 1998 should be immediately approved. Hawaiian asks for immediate grant of its application for the fifth U.S. carrier designation, which does not become available until 2000. Northwest proposes immediate approval of Continental's application for all 49 same-country code share frequencies -not only the 21 Frequencies beyond Japan, which are uncontested, but the 28 U.S.-Japan frequencies, despite the competing and superior application for the same Frequencies by TWA and Delta

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TWA hereby answers the motions /1. It agrees in general that the Department should take action on the applications which are uncontested without awaiting a full evidentiary proceeding. However, it opposes Northwest's proposal that Continental should be immediately awarded the 28 U.S.-Japan same-country code share frequencies. In support of its answer, TWA states as follows:

1. The applications for immediate action are fully consistent with TWA's proposal that the Department divide the proceeding into several phases for purposes of decision. As outlined in TWA's Reply, one phase could immediately award TWA the uncontested fourth designation and the seven frequencies it has requested, and Continental the uncontested code share authority beyond Tokyo for use with Northwest. The immediate grant of TWA's application would enable it to start planning and marketing its St. Louis - Tokyo with ample time to achieve a successful startup on June 1, 1999, as well as to inaugurate code share service as soon as possible in 1998.

2. Another phase could consider the applications for 1998 operation for immediate decision without an evidentiary hearing, as suggested by Dallas/Fort Worth. The main

1/ TWA is filing this Answer on the due date for responses to Northwest's motion. To the extent that it is late-filed with respect to the Dallas/Fort Worth and Hawaiian motions, TWA hereby requests that it be authorized to file a late-filed and otherwise unauthorized document. No party will be damaged by grant of this motion, and the Department will benefit because it will allow TWA to respond to all three pleadings in a consolidated document which can consider each motion in the context of each other and the entire proceeding.

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concern about the Dallas/Fort Worth proposal -- that it locks up an unduly large share of total available frequencies -- can be resolved by the usual dormancy clauses. If a carrier does not start service within three months of its proposed startup date, the frequencies can revert to the general pool.

3. TWA agrees with Northwest that the issue of U.S.-Japan code shares can be decided without a full evidentiary proceeding although it, of course, rejects the argument that the TWA/Delta code share application should be thrown out of the case. As TWA has already noted /2, the filing of the amended application one day after the original filing did not prejudice other parties, who have had several opportunities to comment on the TWA/Delta code share proposal. Moreover, dismissal would be contrary to the public interest because it would deprive the Department of the opportunity to enhance competition by strengthening TWA, a new entrant, and Delta, a MOU carrier with limited frequencies to Japan. The Department would be led only with the alternative of awarding the frequencies to Continental for use with Northwest, which is already the largest U.S.-Japan carrier.

4. The key issue raised by the code share applications is the competitive structure of U.S.-Japan service. While Northwest argues that it needs the Continental code share to be competitive with American and United, Northwest is already the largest U.S.-Japan carrier and the fourth largest U.S. airline. As an incumbent carrier, Northwest has the unrestricted

2/ See TWA Answer, dated February 20, 1998, to Motions to Strike.

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opportunity to add service at any time in the U.S.-Japan market, and beyond Japan with full fifth freedom rights. Moreover, Northwest's market power in the U. S.-Japan market will only increase because of its control of Continental.

5. Despite Continental's protestations, it is absolutely clear that it will, indeed, become an appendage of Northwest in transpacific operations. While Continental argues that Northwest will not have control because it will have only 14% of Continental's stock /3, that claim does not accord with the reality of corporate operation. The stock that Northwest is purchasing controls 51.8% of the outstanding voting power of Continental. Northwest's filing with the S.E.C. has been quite frank about its intention to acquire control:

Northwest did enter a Governance Agreement with Continental, effective only for six years, under which Northwest agreed to vote its 51.8% control of Continental as recommended by

3/ Continental Reply, p. 4.

4/ Continental Schedule 13D, dated as of January 25, 1998, filed by Northwest, p 5

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Continental's Board, except when the airline is facing "significant actions." These include acquiring or being acquired by another carrier, selling assets, declaring a dividend or issuing significant debt (see Attachment). Northwest thus achieved its goal of absolute control over major corporate actions of Continental. Northwest will also have a representative on Continental's Board and, after the six years, will have the unfettered right to exercise its voting control. Under these circumstances, it is unlikely that Continental will ever act independently of Northwest. It will certainly never compete with Northwest in U.S.-Japan markets.

6. Thus, in addition to its own nonstop service from Honolulu, Los Angeles, San Francisco, Seattle, Minneapolis/St. Paul, Chicago, Detroit, and New York, Northwest would have the support of Continental's nonstop service from Newark, Houston, Honolulu, and Guam. When Northwest has nonstop access to Tokyo from almost all major U.S. population centers, and a Tokyo hub through which it can serve all of Asia, its claim to need the new code share frequencies for its partner airline rings hollow /5. Moreover, Northwest can achieve online code share service to Continental points by placing its code on Continental flights to its

5/ Northwest argues that the same-country code share provisions were negotiated solely to strengthen it in competition with American and United and their expected alliance partners (NW Reply, pp. 4-5). This was never true -- the government also knew that the code share frequencies would give new entrants a major opportunity to expand their identities in the U.S.-Japan market. In any event, Northwest's control of Continental is a major changed circumstance since the slot provision was negotiated. Northwest's competitive position will be enhanced by Continental's direct services to a far greater extent than any code share service could help it. The same-country code share frequencies can, therefore, be put to far better use supporting the operations of TWA and Delta.

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gateways without any impact on available same-country code share frequencies under the MOC. It seem clear that Northwest's primary purpose in attempting to grab all same-country code share frequencies is to reduce competition by precluding others from using them.

6. In contrast, an award to TWA/Delta will enhance competition. It will strengthen the operation of a MOU carrier by supporting its new service to secondary Japanese points, and will allow TWA, a new entrant, to provide a comprehensive service pattern to Japan. There can be no doubt that the TWA/Delta proposal is superior to Continental/Northwest, and that TWA should be awarded the available U.S.-Japan same-country code share frequencies.

WHEREFORE, TWA respectfully requests that Northwest's motion be denied, that the Department divide this proceeding into phases as outlined above, and that it immediately grant TWA's application for the fourth designation and associated frequencies, and for 28 U.S.-Japan code share frequencies.

Respectfully submitted,

Richard J. Fahy,

Attorney for Trans World Airlines, Inc.

March 5, 1998