OST-98-3863 / 1998 US-Brazil Combination Service Case / Answer of United Air Lines / January 13, 1999

CONSOLIDATED ANSWER OF UNITED AIR LINES, INC.

United Air Lines, Inc. ("United") submits the following consolidated answer to the Objections and Motion of Delta Air Lines, Inc.? both dated January 8, 1999, in the above captioned proceeding: /1

1. In its response to the Department's order to show cause tentatively awarding seven U.S.-Brazil frequencies to Continental Airlines, Inc. ("Continental"), Delta, like United, urges the Department to review Continental's current U.S.-Brazil frequency utilization at Newark. Delta, like United, notes that Continental is underutilizing its 14 Newark-Brazil frequencies and could offer more public benefits within that allocation by using seven of them to implement the Houston-Sao Paulo service it had proposed in this proceeding. An award of the seven new frequencies at issue here to United to enable United immediately to start Los Angeles-Sao Paulo services need not, therefore, necessarily result in a deprivation of service between Houston and Sao Paulo.

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2. Delta also urges in a separate motion that the Department reopen the record and direct Continental to submit evidence regarding its current load factors on its two-daily Newark-Brazil flights. /2 United opposes that motion to the extent that its grant would cause further delay in this already much deferred proceeding unless the Department acts to avoid such delay by extending the interim frequency allocation it tentatively awarded to United. Delta, on the other hand, is willing to accept such delay because it is not able to start new U.S.-Brazil services until next winter at the soonest. United, however, is prepared to start service within 90 days of a final order. Only United, among the applicants in this proceeding, is willing to translate these valuable frequencies into immediate and tangible public benefits.

Reopening the record should be unnecessary, in any event. If Continental's Newark-Brazil loads had improved to economic levels, that carrier could be expected to produce voluntarily evidence of its current load factors in answer to the arguments raised by United and Delta in their objections. If, on the other hand, Continental fails voluntarily to produce data relating to its current Newark-Brazil loads, the Department would be warranted in inferring that Continental is continuing to operate at the uneconomic load factors illustrated in the exhibits of United and Delta.

Delta argues that Continental's low Newark-Brazil loads provide the basis for substituting Delta for Continental as the primary carrier. United objects to any such substitution.

2/ According to Delta, the most recent publicly available evidence relating to Continental's Newark-Brazil load factors is based on INS data for the month ending June 1998. Those data in conjunction with available T-100 data show Continental's load factors for its Newark-Rio flights to be averaging 33 percent on an annual basis.

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Given this unequivocal statement of Delta itself in a contemporaneous proceeding, there is simply no basis on which the Department could find in this proceeding that awarding Delta seven frequencies for New York JFK-Brazil service would enhance network-to-network competition in the U.S.-Brazil market. Moreover, because the New York market already enjoys more nonstop service to Brazil than any of the other gateways at issue, there is also no basis on which the Department could find that adding a fourth U.S.-flag carrier to that market would better promote the public interest than would the initiation of the first nonstop U.S.-flag service between Brazil and Los Angeles, the largest U.S. gateway without nonstop service from a U.S.-flag competitor. /3

3/ According to current schedules, United operates over four times as many services at Los Angeles as Delta does at New York JFK (181 vs. 44 daily departures: GAG, January 1999). If commuter operations were included in the comparison, the discrepancy would be even greater.

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Continental's underutilization of New York/Newark-Brazil frequencies supports selection of United at Los Angeles, not Delta at JFK. United concurs with Delta that this underutilization exists' but opposes reopening the record in order to determine the extent to which it has continued beyond the period covered by the historic record unless, as requested below, the Department is also and at the same time prepared to modify its interim frequency allocation to United.

4. If the Department determines, in response to Delta's motion, to reopen the record to investigate Continental's underutilization of frequencies, the Department should, at the same time, be prepared to grant United's alternative request for a two-year pendente lite frequency allocation to start Los Angeles-Sao Paulo services immediately while the Department continues to consider the issues relating to a longer-term award. United has already stated that it is prepared to start Los Angeles-Sao Paulo service if the Department will extend its interim allocation for a period of two years from the date of a final decision. If the Department were to decide to reopen the record as Delta proposes, the Department should make a two-year pendente lite award to United from the date on which it reopens the record. The interim period would continue for two years or until the date of a final decision, whichever comes later. /4

Such a modification of the interim allocation would enable the Department to review the most recent results of Continental's new service. It would also serve the needs of both Continental and Delta for more time to implement new Brazil services should either of them

4/ New long-term U.S.-Brazil authority under this alternative would become effective at the end of United's two-year interim allocation.

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prevail in the dismal decision. As carriers relatively new to the Brazilian marketplace, their desires to postpone an expansion of their Brazil services are understandable. U.S.-Brazil traffic is predominantly Brazil-origin. With the downturn in Brazil's economy, it is difficult for carriers such as Continental and Delta. which have only recently entered the market, to establish a presence in Brazil. United experienced the same problem during the economic downturn in the early 1 990's, which coincided with United's own introduction of services in Brazil. United is now, however. unlike Continental and Delta, well-established in Brazil and is in a position to start new services quickly under a pendente lite award if the Department will modify it as United has proposed.

Moreover, as both United and Delta have pointed out, and as Continental conceded in its Brief, an extended interim award to United need not come at the expense of Houston. Continental has indicated that it would consider moving seven of its existing underutilized frequencies to Houston (Continental Brief at 6-7) and would be free to do so whenever it wishes during the two-year interim allocation period. /5

United's proposed extension will also give the Department more time to seek an amendment of the U.S.-Brazil bilateral air services agreement regarding frequency limits. Such an amendment may make it possible for all three applicants to implement their new U.S.-Brazil

5/ United has urged the Department, at the very least, to extend its interim award for the 18 months which Continental originally requested as a deferred startup date. United would be prepared to start its Los Angeles service if it had a firm interim allocation of 18 months from an order amending the interim allocation on a pendente lite basis but is not willing to consider doing so under the interim award as proposed in the order to show cause which would limit United's service to about 6 months' duration.

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services at times they deem consistent with their corporate goals. This would enable Continental and Delta to defer new services until they determine that the market is ready for them.

Modification of the interim award, as urged by United, coupled with a reopening of the record, as urged by Delta, would also enable the Department to award United's interim allocation on a true pendente lite basis. Thus, rather than facing the certainty that it would lose its Los Angeles-Sao Paulo service at the end of the interim award, United would have the opportunity to prevail in a final decision which could result in its selection in a reopened proceeding which would focus on the results of services in the New York-Brazil market. As is usual in such proceedings, the Department would not consider the interim award to United in determining the long-term needs of the market.

5. In conclusion, United again urges the Department to select United as the primary carrier or, at tile very least modify the interim allocation to United as described above and in United's Objections. United opposes any reopening of the record to the extent that such action would delay either a final decision awarding the frequencies to United as primary carrier or an order modifying the interim allocation to United as proposed herein. United would have no objection to the reopening of the record, however, as Delta urges, if that action is accompanied

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by an immediate modification of the interim allocation to allow United to operate Los Angeles Sao Paulo service for a two-year period.

Respectfully submitted,

JEFFREY MANLEY

KIRKLAND & ELLIS

655 Fifteenth Street, NW

Washington, DC 20005

(202) 879-5 1 6 1

Counsel for UNITED AIR LINES, INC.

DATED: January 13,1999