OST-99-4963 / Northwest and Continental / Answer of Continental to Petition for Reconsideration / January 14, 1999

In the Matter of the Agreement Between

1. Although 49 U.S.C. § 41105 requires that a "certificate issued under section 41102 of this title may be transferred only when the Secretary of

1/ Common names of carriers are used.

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Transportation approves the transfer as being consistent with the public interest," no routes whatever are being transferred from Continental to Northwest (or vice versa). The Department has concluded in the past that acquisition of 100% of the shares of one airline by another airline or by a holding company owning 100% of both airlines constitutes a de facto route transfer, /2 but American and Delta have cited no orders in which this principle has been applied where less than 50% of the fully-diluted voting ownership was involved, much less where the ownership interest was both far less than 10()% and placed in a long-term voting trust which precluded voting control by the acquiring company.

2. Although American and Delta cite allegations in the original Department of Justice complaint filed in Michigan, the relevant governance and voting trust agreements have been significantly amended and supplemented in an attempt to meet Justice's concerns. For example, Northwest has agreed to an additional four years (beyond the six years for the voting trust) of significant restrictions on its ability to vote its Continental securities or to otherwise influence the competitive actions of Continental.

2/ See, e.g., Orders 85-8-25 (TexasAir-TWA), 86-8-77 (TexasAir-Eastern), 86-10-44 (Delta-Western), 86-12-19 (American-AirCal) and 86-12-34 (Alaska/Horizon). Although the Department has applied this principle in numerous cases, no court has considered whether the Department's interpretation of the statute is correct.

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Similarly' Northwest agreed to eliminate its right to appoint a designee to Continental's board of directors and to eliminate its ability to vote its shares as recommended by Continental's board (i.e., Northwest will vote its shares in the same proportion as other stockholders vote) except for truly extraordinary transactions. /3

3. Continental's independent directors have bargained at arm's length and secured firm, enforceable commitments that Northwest will not control Continental during the 10-year period covered by their governance and supplemental agreements. With fiduciary duties owed to the holders of shares representing 86% of Continental's equity, the Continental directors will maintain Continental's independence. Continental's other stakeholders - including its employees, its customers and the cities it serves - are also counting on Continental to retain its independence. Under these circumstances, any cloud over Continental's routes, such as a proceeding to consider whether Continental's hard won routes are being "transferred" to Northwest because of its restricted ownership

3/ Since the Department has permitted foreign owners of U.S. airlines to exercise vetoes of extraordinary transactions without finding that they control the U.S. carriers over which they have such authority, clearly Northwest's ability to vote on extraordinary transactions cannot constitute "control" of Continental.

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of 46% (fully diluted) of Continental's voting rights, would not serve the public interest. /4

The Department has recognized that when Congress eliminated the Department's jurisdiction over airline acquisitions and mergers it intended for the Department of Justice and the courts to be the primary arbiters of airline acquisitions. In the Federal Express/Flying Tiger Acquisition Case, the Department said,

(Order 89-3-21 at 7, made final by Order 89-5-10)

4/ Because Continental clearly is not now controlled by Northwest, Continental believes no exemption from 49 U.S.C. § 41105 is required. Nonetheless, Continental did not seek reconsideration of the Department's decision awarding an exemption, recognizing that the Department had granted an exemption to retain its jurisdiction to decide whether a de facto transfer has occurred should the Department of Justice not prevail in its litigation to cause Northwest to divest its Continental Stock and out of a desire to retain jurisdiction to consider the issue if Northwest continues to hold its Continental shares and the agreements precluding Northwest's control of Continental expire.

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Although the Department of Justice has indeed filed a suit which now asks the court to require Northwest to divest its share holdings in Continental, Continental and Northwest are vigorously contesting the Department of Justice claims, including the claim that Northwest has "significant . . . influence over Continental" despite the stringent terms of the governance agreement, supplemental agreement and voting trust which assure Continental's continuing independence. The Department of Justice sought neither a temporary restraining order nor a preliminary injunction to preclude the acquisition of shares by Northwest pending completion of the litigation. Under these circumstances, the litigation now pending in Michigan is the appropriate forum to consider Northwest's acquisition of shares in Continental, /5 and, as the Department has noted, that litigation could moot any review by the Department pursuant to 49 U.S.C. § 41105.

5. Although American and Delta argue that the Department "failed to follow required statutory and regulatory requirements, and violated interested persons due process rights," the Department's own rules explicitly permit the issuance of exemption orders sue sponte:

5/ Congress has not only eliminated the Department's jurisdiction over airline acquisitions but also recently required the Department to avoid reviews which duplicate efforts of the Assistant Attorney General under the antitrust laws of the United States. (See 49 U.S.C. § 41716(f)) If Continental enters into an alliance agreement with KLM and Northwest and seeks antitrust immunity for that alliance, the Department will, of course, have jurisdiction to consider that application.

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(14 C.F.R. § 302.409) For the reasons explained above, the Department's decision to exempt Continental and Northwest from 49 U.S.C. § 41105 clearly meets this standard. /6 Moreover, the Department routinely granted exemptions from similar provisions permitting the acquisition of shares pending reviews of proposed acquisitions when it had jurisdiction over airline acquisitions /7 or concluded that such exemptions were unnecessary. /8 Ironically, American itself has just completed an acquisition of Reno Air, which holds U.S.-Mexico and U.S.-Canada international authority, /9 without (so far as Continental has been able to ascertain) acquiring either approval for a route transfer or an exemption from 49 U.S.C. § 41105.

Although American and Delta cite an order refusing to exempt Northwest's acquisition of 100% of the shares of Republic, in that case Northwest clearly controlled Republic because it was buying all of its shares and there would be no

6/ American and Delta claim that because route transfer rules incorporate the provisions of Subpart A of the Department's Procedural Rules, the Department cannot grant an exemption from the transfer provisions sum sponte. Yet the Department regularly grants sea sponte exemptions from the route application provisions, which also incorporate Subpart A. See, eg, Orders 85-10-85, 87-3-43, and 96-12-8.

7/ See e.g., Orders 78-10-100 (Pan American-National), 86-12-19 (American-AirCal), 87-3-58 (USAir-Piedmont) and 87-3-70 (USAir-Piedmont).

8/ See Order 78-12-56, which found no exemption was required for signing a merger agreement and acquiring less than 10% of another carrier's stock.

9/ See Orders 95-9-16, 96-6-36 and 96-9-17.

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agreements restricting Northwest's ability to vote those shares or control the management of Republic. Moreover, the Department distinguished that case from its exemption of the People Express-Frontier acquisition from both § 408 and § 401(h) of the Federal Aviation Act because of the "complex section 408 issues that must be resolved" in the Northwest/Republic case, where two carriers at the same hub were combining. In sharp contrast, Continental is free of Northwest control for years to come and the two carriers serve complementary hubs.

6. Ironically, both American and Delta cite their comments in connection with Continental's applications for Japan authority despite the fact that neither carrier is implementing fully the authority it already holds for Japan routes. /10 The Department of Justice complaint cites no concerns about Japan routes, and it should be evident to the Department that the real American/Delta objective is to prevent Continental and Northwest from bringing the public benefits of their alliance to passengers and shippers who will now have another global network competitive with American and Delta and the ability to compete with other global networks.

10/ The Newark and Houston-Japan authority held by Continental expires May 12, 2003, long before the restrictions precluding Northwest's control of Continental expire.

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For the foregoing reasons, the Department should deny the joint petition for reconsideration submitted by American and Delta.

Respectfully submitted,

CROWELL & MORING LLP

R. Bruce Keiner, Jr.

Counsel for Continental Airlines, Inc.

January 14, 1'399