OST-98-3419 / 1998 US-Japan Combination / Objection of Delta Air Lines / March 26, 1998

OBJECTION OF DELTA AIR LINES, INC.

As a result of the Continental stock acquisition by Northwest Airlines, Inc. ("Northwest"), Continental is the alter ego of Northwest. Given Northwest's dominant incumbent position and its ability to serve any U.S.-Japan gateway-to-gateway and beyond market without restrictions, it would be untenable for the Department to award valuable non-incumbent carrier rights that will redound to Northwest's benefit.

Continental should be deemed ineligible for U.S.-Japan route rights and its applications should be dismissed or denied, including its application for same country code-share frequencies. Rejection of Continental's applications is

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warranted on the grounds that the acquisition by Northwest of 57.8 ~ of the common stock voting power of Continental, together with veto rights and representation on Continental's Board of Directors gives Northwest the ability effectively to control and influence Continental and, in essence, to establish Continental as the alter ego of Northwest. Northwest's ownership and control over Continental eliminates any vestige of competition between them and ensures that the two carriers will not act independently of each other, particularly with respect to services between the United States and Japan. The relationship between Continental and Northwest is such that the two will not compete against each other, and, as a result, any award of U.S.-Japan rights to Continental must be considered to be an award to Northwest.

As a matter of public policy, Northwest should be ineligible to receive or benefit from the non-incumbent carrier rights available under the MOU. Northwest is an "incumbent" carrier under the MOU and enjoys the unfettered ability to expand its IJ.S.-Japan gateway-to-gateway and beyond service without limitation. Moreover, Northwest is far and away the largest carrier (U.S. or Japanese) between the United States and Japan. It operates more weekly flights, serves more U.S. gateways, and holds more slots at Japanese airports than any other carrier. In light of Northwest's dominant position between the United

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States and Japan, and its ability to operate without restrictions, Northwest should not be permitted to gain any non-incumbent carrier benefits under the MOU.

In further support of these objections, Delta states the following:

I. Continental should be deemed ineligible for US - Japan frequencies due to Northwest's Acquisition of 57.8% Of The Common Stock Voting Power Of Continental.

Northwest has entered into a number of agreements pursuant to which it will acquire 57.8% of the outstanding common stock voting power of Continental and ultimately merge with Continental.

While Northwest and Continental have persevered in their claim that Northwest will not be in a position to influence Continental's business or policy decisions, the facts belie these claims. Northwest's 57.8% ownership of Continental will result in effective control of Continental by Northwest. As a result, Continental will not be in a position to act independent of, and certainly will not compete with, Northwest. instead, Continental will be Northwest's alter ego. Continental should not be the recipient of valuable non-incumbent carrier authority since the ultimate beneficiary will be Northwest, an unrestricted incumbent.

The non-incumbent carrier opportunities available under the MOU are designed to expand the restricted MOU carriers' access to Japan and enhance

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their ability to compete against the unrestricted incumbent U.S. and Japan carriers. This goal would be substantially undermined if Northwest were allowed to benefit directly or indirectly by an allocation of these limited entry rights to its alter ego.

Northwest and Continental have sought to minimize the significance of their relationships by citing to a Governance Agreement which contains certain limitations on the exercise of Northwest's ability to vote its stock /1. However, the Governance Agreement does not eliminate Northwest's ability to exercise control or influence over important aspects of Continental.

Northwest's plan is to merge with Continental sometime in the next six years. The fact that it proposes to do so in two installments instead of all in one transaction changes neither the intent nor the result. Northwest has agreed to spend over $578 million to acquire 57.8% of the voting power of Continental. Northwest's acquisition is anything but a passive investment. This stock acquisition, with the termination of the Governance Agreement and ability to effect a merger within six years (indeed sooner if both parties agree) gives Northwest the immediate ability to significantly influence the business and direction of Continental.

1/ The Governance Agent agreement precludes Northwest from exercising voting rights over certain corporate decisions for a period of no more than six years.

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Under long-standing and well settled precedent, the Department and the CAB have held that the actual control standard is a "de facto one", which the Department examines on a case-by-case basis to determine the extent to which an investor "will have a substantial ability to influence the carrier's activities". Order 89-9-51. As the CAB stated: "We have found control to embrace every form of control and to include negative as well as positive influence." Order 837-5 at 2-3. The aviation statute defines control to mean "control by any means." 49 U.S.C. §40102(b). /2 Thus, control can be exercised in a myriad of ways, and requires an examination of the entire universe of relationships between the carriers.

The elements of control developed by the CAB and the Department over decades of rulings are essentially the same as those that have been developed under federal securities and state corporate laws. The definition of control under the Securities and Exchange Act of 1934 is:

2/ The foregoing provision rectified, without substantive change, the former Section 413 of the Federal Aviation Act which read: "For the purposes of this title, whenever reference is made to control, it is immaterial whether such control is direct or indirect "

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Similarly, Delaware law (Continental is a Delaware Corporation) defines the term control to mean:

Northwest has the ability to exert substantial control and influence over Continental in a number of significant ways.

First, Northwest's filing with the SEC boldly admits its intention to acquire control over Continental:

Northwest's intent has not changed. Northwest's large and active investment will give it a major and undeniable source of influence and leverage over Continental. Continental's key employees will be beholden to Northwest as their future employer.

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Third, there are a multiplicity of other significant ties between Northwest and Continental giving Northwest the power to influence Continental's business direction.

Pursuant to the Governance Agreement, Northwest retains the right to vote its controlling shares (amounting to almost 60% of the voting power) on a number of significant corporate actions. These include:

3/ The initial Investment Agreement stated that Northwest agreed not to acquire more than 50.1% of Continental's stock. Less than two months later, the deal was changed to increase Northwest's holding to 57.8%.

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Section 1.03 of the Governance Agreement. See Attachment 1, Page 60.

Despite these limitations, Section 1.04 of the Governance Agreement gives Northwest authority, by virtue of its representation on the Board of Directors of Continental, to take action "in connection with the performance of the Alliance Agreement and the subsequent negotiations and agreements contemplated thereby." That same section carves out from the restrictions otherwise applicable to Northwest's ability to vote its shares, when Northwest is "acting as an alliance partner pursuant to the Alliance Agreement. Id., page 61.

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This provision alone demonstrates that the two companies will operate as a single unit. /4

Northwest also has the ability to exercise veto rights over significant corporate decisions. Such "negative control" has been deemed by the Department and the CAB to constitute control. See, Order 90-9-15, Order 91-4-32, Order 87-7-5.

In addition to Northwest's right to vote its shares on significant corporate actions, Northwest will have the right to place a representative on Continental's Board of Directors. The representative on the Board will provide Northwest with the ability to participate at the highest level with respect to sensitive business, policy and competitive matters affecting Continental's domestic and international systems. Northwest's representative will be there to protect Northwest's substantial equity and alliance interests. The fact that Northwest will have only one representative on the Board of Directors does not diminish the influence that its Director will be able to wield. Boards of Directors typically act on a "consensus" basis. It is reasonable to assume that the

4/ In addition, Section 2.05 gives Northwest the authority to approve "to its reasonable satisfaction" a change in the Executive Committee of the Board of Directors' authority to permit the Committee "to approve only ordinary course transactions in which the Company {Continental} engages from time to time, but which nonetheless require approval of the Board of Directors." There is no provision in the Governance Agreement prohibiting Northwest's Board representative from serving on the Executive Committee.

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Continental Board of Directors will consider Northwest's interests based on the totality of Northwest's relationships with Continental, including the size of Northwest's equity stake and Northwest's ultimate power and intent to merge with Continental.

The attempt to characterize the relationship between the companies as inconsequential contradicts the parties' SEC filings and the comments of the Northwest and Continental senior executives. /5 As summarized by Continental's Chief Executive Officer, Gordon Bethune, the transaction with Northwest is "a virtual merger", with Continental "joined-at-the-hip" with Northwest. See, Business Travel News, February 25, 1998, interview with Gordon Bethune; Attachment 3.

In effect, Continental is an operating extension of Northwest, with Northwest having the effective power to influence significant business decisions of Continental. Northwest's ability to influence the business decisions of Continental does not generate from a single source, but results from a multiplicity of relationships including Northwest's large equity holding, Northwest representation on the Board of Directors, Northwest's line-item-veto rights over significant corporate actions, Northwest's voting rights with respect

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to the Continental Alliance, and Northwest's stated intent to merge with Continental.

II. Continental's Japan Applications Should Be Dismissed.

As discussed above, Northwest is the largest carrier serving the U.S.Japan market. It not only operates more flights to more U.S. and Japanese cities than any other carrier, it has the ability to operate without any of the bilateral agreement constraints that are applicable to Delta as a non-incumbent MOU carrier.

One of the principle purposes of the U.S.-Japan MOC was to provide a means by which non-incumbent carriers, such as Delta, could expand service and be more effective competitors against the entrenched unrestricted incumbents. As the alter-ego of Northwest, Continental will not act independently of Northwest. Therefore, any allocation to Continental of the limited opportunities under the MOC available to non-incumbent carriers will serve merely to enhance Northwest's already dominant position and, moreover, preclude competition against the Northwest/Continental combine by other nonincumbent carriers. Thus, the Department should determine as a matter of policy and law that Continental is not eligible for non-incumbent MOU rights in this proceeding.

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III. Conclusion.

Northwest's acquisition of 57.8% of the voting power of Continental gives it control over Continental. The combination of relationships between Continental and Northwest, including Northwest's substantial equity holding, its ability to veto significant corporate decisions, its representation on Continental's Board of Directors, and its ability to vote its equity interests in the context of the Northwest/Continental Alliance Agreement, give Northwest the ability effectively to influence and direct the operations, policies and business of Continental and thereby establish Continental as Northwest's alter-ego.

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As the dominant carrier between the United States and Japan, Northwest should receive no benefit, either directly or indirectly through its alter-ego, from the limited opportunities available to non-incumbent carriers under the MOU. Consequently, Continental's applications for U.S.-Japan authority should be dismissed or denied.

Respectfully submitted,

Robert E. Cohn

SHAW, PITTMAN, POTTS & TROWBRIDGE

2300 N Street, N.W.

Washington, D.C. 20037

(202) 663-8060

Counsel for DELTA AIR LINES, INC.