OST-97-2771 / 49743 / Reno Air / Reply of United / High Density Rule - Chicago O'Hare / January 28, 1999
Application of
RENO AIR, INC. / Dockets
49743 and OST-97-2771for an exemption from 14 CFR Part 93, Subparts K and S pursuant to Section 206(c)(1) of the Federal Aviation Administration Authorization Act of 1994
(Reno-Chicago O'Hare slots)
CONSOLIDATED REPLY OF UNITED AIR LINES. INC.
AND MOTION FOR LEAVE TO FILE
United Air Lines, Inc. ("United") submits the following Consolidated Reply to the Answers of American Airlines, Inc. ("American"), Reno Air, Inc., and the Reno/Tahoe Parties, all dated January 19, 1999, in the above-captioned proceeding: /1
1. American in its answer makes the hyperbolic and self-serving assertion that United is seeking "to destroy the City of Reno's critically important service link to O'Hare." United strongly objects to American's attempt to drive a wedge between United and the Nevada communities which United serves. United serves Reno nonstop from both Denver and San Francisco and serves Las Vegas nonstop from those two cities as well as Chicago and Los
1/ United requests leave to file this consolidated reply to the extent such leave is required. United is the moving party in this matter and requests leave to file to address new issues raised by American, Reno Air and the Reno Parties in their answers to United's motion. United's reply is timely and its receipt will provide the Department with a more balanced record without prejudicing any party to this proceeding.
Consolidated Reply of United Air Lines, Inc. and Motion for Leave to File
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Angeles. In the last five years, United has increased its weekly departures to these Nevada cities by 47 percent, offering a 49 percent increase in seats operated.
Moreover, United has consistently and repeatedly recognized both that American is able to continue Chicago-Reno nonstop service without the need for slot exemptions and that another qualified "new entrant" carrier would also be free to use the existing exemption slots to do so. The Department's enforcement of the "new entrant" definition in the case of American need not result in the loss of nonstop Reno-Chicago nonstop service, and the Department should not be misled by American's emotionally-charged allegations to the contrary.
2. In their various answers, American, Reno Air and the Reno Parties all urge DOT to accept a situation in which American will be allowed to retain Reno Air's exemption slots notwithstanding American's ineligibility to do so under applicable law. For example, American baldly asserts that "American and/or Reno Air will operate three daily roundtrips between Chicago O'Hare and Reno, using five of the seven exemption slots that the Department awarded for such service." (American Answer at 1-2). In response to United's motion, which demonstrated that neither American nor Reno Air (now that it is owned by American) can lawfully hold those exemption slots, the Reno Parties merely assert that Reno Air was eligible to hold the exemption slots when they -were first awarded, and, therefore, conclude with no further analysis that American may continue to do so after it acquires Reno Air. (Reno Parties Answer at 5-ó) This assertion is both a non sequitur and an ipse dixit for which no legislative or administrative precedent is cited. /2
2/ See also Reno Air Answer at 2-3 ("as long as the slots were properly granted to a
(continued...)
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3. The findings and conclusions relied upon by the Department for issuing O'Hare slot exemptions to Reno Air simply do not apply to American. In issuing the exemption to Reno Air, the Department was motivated by its conclusions that the Reno-Chicago O'Hare market was large enough to merit nonstop service but was not being served because "the economics of operating at a slot controlled airport for [American and United] are such that available capacity is directed toward the higher yield and potentially more profitable markets." Reno-Chicago was a "leisure, low-yield and long distance market" which both United and American had tried to serve on a nonstop basis but each given up, American as recently as June 1993. Such a market would "attract service from a low-cost carrier whose profitability would depend ... upon new traffic stimulated by low fares." That such a carrier, in the form of Reno Air, had not done so up to that time was due to its inability to acquire the necessary slots at prices that would allow it to operate low fare service at a profit. Order 94-9-30 at 4.
American, on the other hand, has sufficient O'Hare slot holdings, which total nearly 900 O'Hare slots, to operate services to Reno and has, in fact, done so as recently as 1993. American does not need the exemption slots to continue Reno-Chicago service. Nor does either American or Reno Air (now that it is owned by American) qualify as a "new entrant" for purposes of holding such exemption slots, as the Department has repeatedly concluded. See. e.g., Orders
2 ( ,, continued)
qualified carrier, such as Reno Air, the acquisition of that carrier by another does not provide sufficient cause to reconsider that decision") and American Answer at 2 (American's ineligibility as a "new entrant" is "not relevant" because "Reno Air was a 'new entrant' at the time of the Reno-O'Hare slot exemption awards in 1994 and 1997.")
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98-9-24, 98-4-21, and 97-10-16. The rationale for not awarding "new entrant" exemption slots to American or one of its subsidiaries, such as Reno Air, is that carriers such as "American and United have the ability to support the proposals of their subsidiaries or affiliates through their very substantial slot holdings at O'Hare." Order 98-9-24 at 4 (emphasis added).
The fact that Reno Air was a bona fide "new entrant" when it was awarded exemption slots is irrelevant. None of those urging American's retention of the slots cites any support for the proposition that Reno Air's former "new entrant" status is conferred upon American because of the latter's acquisition of Reno Air. Indeed, the orders allocating slots to Reno Air make quite clear that the slot exemptions do not confer any "ability to sell, trade, transfer or convey" the slots so awarded. Order 97-10-16 at l 1. See also Order 94-9-30 at 5.
4. Reno Air and the Reno Parties urge that American has not breached the no-transfer condition applicable to the Reno-Chicago slots by its acquisition of Reno Air. American has already acquired a controlling interest in Reno Air, through its wholly-owned subsidiary, Bonanza Acquisitions, Inc.. ("Bonanza"). The next step of the transaction is the acquisition of the remainder of the outstanding shares of Reno Air by Bonanza and the merger of Bonanza with and into Reno Air (the "Merger"), which will be the surviving corporation and a wholly-owned subsidiary of American. Upon consummation of the Merger, American initially plans to continue the business and operations of Reno Air "substantially as they are currently being conducted, except that [American] intends to manage [Reno Air] as part of the Airline Group of AMR Corporation." Subsequently, American "may cause [Reno Air] to be merged with [American]." See Schedule 14C, Information Statement, filed by Reno Air with the Securities and Exchange Commission
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("SEC") on 1/12/99 and Section 11, Exhibit a(1) to Schedule 14D-I, Tender Offer Statement, filed by American with the SEC on 11124/98. /3
Whether or not American merges Reno Air into its operations or continues to operate it as a separate company controlled by American does not matter. /4 When American acquired control of Reno Air, the slots effectively transferred to American in the same way as do certificates of public convenience and necessity under the Department's "de facto" certificate transfer policy. /5 The Department's condition is intended, among other things, to prevent this type of "de facto" transfer to a carrier such as American, which does not need exemption slots to serve Chicago-Reno.
American (Answer at 2-3) cites the transfer of exemption slots between two United Express commuter carriers, Great Lakes Aviation and Atlantic Coast Airlines, as support for its retention of Reno Air's slots. The Great Lakes/ACA slots were also subject to a no-transfer
3/ See also AVIATION DAILY (January 28, 1999) at 150 reporting a statement by American's Chairman and CEO that Reno Air would be "fully integrated" with American.
4/ Indeed, under the FAA's rules, Reno Air and American are already considered to be a single entity for purposes of their O'Hare slot holdings. 14 CFR §93.213(c). In these circumstances, Reno Air itself is no longer a "new entrant" under the statutory definition for exemption purposes. 49 U.S.C. §41714(h)(3).
5/ See American International Airways, Inc. ("AIA',) and Kitty Hawk Aircargo, Inc., Order 98-8-16 at l 5, 16, approving the de fact transfer of the certificate and other economic authorities held by AIA and Kalitta Flying Service, Inc. ("KFS" ) to AIA and KFS, respectively, under the ownership of Kitty Hawk, Inc. ("KHI"), upon the acquisition of the stock of AIA and four other companies by PHI, under the long-standing premise that a stock acquisition resulting in two carriers coming under common control constitutes a de facto transfer of authority under section 41105 of the Statute. See also AMR Eagle, Inc. and Executive Air Charter, Inc., Order 90-2-1.
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condition and the transfer only took place after DOT gave its approval. Order 98-10-28. So far as United is aware, no such approval has ever been publicly sought by American or Reno Air. Moreover, the transfer between the United Express commuters allowed them to upgrade service from turboprop to regional jet equipment at the affected cities. No one has claimed that any such service improvement will result from a transfer of Reno Air's exemption slots, even if it were lawful.
5. Not only does American not qualify as a new entrant, it does not make any commitment to continue the low-fare services which the Department found were necessary to produce the public benefits on which the issuance of slot exemptions for Reno-Chicago service was premised. The Department concluded that, absent low fares, frequent nonstop services could not be sustained in a leisure market such as Reno-Chicago. American itself failed to sustain nonstop Reno-Chicago nonstop service and has provided no basis on which to conclude that it will be able to do so as a result of its acquisition of Reno Air. There is, for example, no demonstration that Reno Air, under American's ownership, can continue to maintain the lower costs that are needed to offer low-fare services and still show a profit. Indeed, American does not even suggest that it intends to maintain Reno Air's existing low cost structure, let alone seek to demonstrate that it could do so under the terms of its various collective bargaining agreements.
6. There is, in fact, a very real risk that American will divert some or all of the Reno-Chicago slots to other uses. Reno Air's exemption slots were issued for O'Hare operations at specific times of day. Some of these slots are assigned to periods which are prime times for O'Hare services in other markets such as Chicago-LaGuardia. If American were allowed to
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acquire Reno Air's slots, it would have an incentive to use these prime time slots for service to higher yield markets such as Chicago O'Hare-LaGuardia by exchanging the prime Reno-Chicago slots for non-prime slots and then using those non-prime slots for Reno-Chicago service. /6 Neither DOT nor FAA should permit American or Reno Air to engage in such an exchange of slots to upgrade service in higher yield O'Hare markets at Reno's expense. Indeed, the temptation to engage in such an exchange is all the more reason for the Department to act quickly to recover the Reno-Chicago slots in order to avoid their being diverted for service in higher yield markets diluting their value to Reno.
7. There is general agreement that the two dormant exemption slots awarded to Reno Air by Order 97-10-16 should be returned to DOT for reallocation. These slots were never used to support Chicago-Reno nonstop service and have effectively been forfeited by Reno Air. These slots could, however, be used to support nonstop service between O'Hare and other points which lack nonstop access to O'Hare. Atlantic Coast Airlines ("ACA") has filed an application in Docket OST-98-3982 seeking exemption slots to operate nonstop regional jet services between O'Hare and Savannah/Hilton Head. That market, like Chicago-Reno before it, is now the largest O'Hare market without nonstop service. For the same reason that the dormant exemption slots were granted to Reno Air in the first place to support Chicago-Reno nonstop service, they should at this
6/ Such an exchange could not be effected without the approval of the FAA and, in the case of Reno Air's slots, an amendment of Order 94-9-30.
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time be awarded to ACA to offer nonstop jet service to what is now the largest Chicago city pair lacking such service. /7
8. In conclusion, the Department should grant United's motion to reopen the record in this proceeding to address the issues raised by American's acquisition of Reno Air's slot exemptions. In the alternative, the Department should open another proceeding to address those issues as well as others relating to this acquisition.
Respectfully submitted,
JEFFREY MANLEY
BRUCE H. RABINOVITZ
KIRKLAND & ELLIS
655 Fifteenth Street, NW
Washington, DC 20005
(202) 879-5161
Counsel for UNITED AIR LINES, INC.
DATED: January 28, 1999