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OST-99-5539

U.S.-China Air Services

1. (a) effective April 1, 1999, designated U.S. airlines may operate a total of eight additional weekly frequencies;
2. (b) effective April 1, 2000, designated U.S. airlines may operate a total of nine additional weekly frequencies; and
3. (c) effective April 1, 2001, the U.S. may designate a fourth U.S. carrier and the designated U. S. carriers may operate a total of ten additional weekly frequencies.

By:  Bradley Mims

U.S.-China Air Services

Counsel:  Northwest and Zuckert Scoutt

Counsel:  Federal Express

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161, jeffrey_manley@kirkland.com

U.S. - China Air Services

Counsel:  Winthrop Stimson, Kenneth Quinn, (202) 775-9898

As set forth below, the Department should proceed immediately to award the eight currently available frequencies to Federal Express so that it can inaugurate daily services to Beijing and Shanghai (with new service to Shenzhen), as set forth in its application. Only Northwest filed a competing application for those frequencies, and it has not shown that its proposal will offer benefits comparable to those that Federal Express would offer. Any delay in the award of the frequencies to Federal Express that became available on April 1, 1999, disadvantages U.S. shippers and the competitive opportunities of U.S. exporters, and costs American businesses 511 million a day.

Counsel:  Federal Express, M. Rush O'Keefe, (901)395-5189

The foregoing analysis establishes that Northwest has the strongest overall proposal for the use of the new frequencies available under the U.S.-China Protocol. Northwest's combination service proposal will provide new nonstop and new daily service via its well positioned Detroit hub, which would significantly strengthen intergateway competition, whereas United's proposal would exacerbate the historic disparity in U.S. carrier service and undermine intergateway competition. Northwest's proposed all-cargo service would provide new entry in the U.S.-China heavy cargo market and create new competition in the express small package market, whereas Federal Express proposes to introduce an extraordinary amount of specialized service that would be dedicated to only 4 percent of the U.S.-China air cargo market.

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

United takes no position as to how the Department allocates the eight frequencies available immediately. As to the nine second-year frequencies, however, United urges that it be allocated seven to support its daily nonstop San Francisco-Shanghai services. These services produce more direct competitive benefits to the U.S. than would those of either Northwest or Federal Express for the reasons set forth above.

Counsel:  United and Kirkland Ellis, Jeffrey Manley, jeffrey_malnely@kirkland.com

U.S.-China Air Services

By:  TJ Devoy, Traffic Analyst

Enclosed please find revised copies of Exhibits 4 and 6 to Northwest's Application filed in this docket on April 21, 1999, correcting inadvertent clerical errors contained in Northwest Is original submission. The enclosed revised exhibits were served on the parties to this proceeding by facsimile last night.

Counsel:  Northwest

Attached is a corrected Page 14 to the Consolidated Answer of United Air Lines, Inc. filed in the above docket on April 26, 1999. This corrected page is being filed to delete the text of footnote l l, which was erroneously included due to a mix-communication. We regret any inconvenience this may have caused.

Counsel:  United and Kirkland Ellis

U.S. - China Service

By:  China Logistic Manager

By:  Christine Shi

By:  Bob Gantner

By:  Jim Sattie, Managing Director

U.S.-China Air Services

U.S.-China Air Services

All US-China Exhibits Added 4/30

Counsel:  Chicago and Winthrop Stimson, Kenneth Quinn, 202-775-9898, quinnk@winstim.com

The Wayne County Parties anticipate that the Department will institute an expedited route proceeding in order to determine the best allocation of the limited frequencies at issue here. The Wayne County Parties strongly support the application of Northwest and intend to file exhibits and a brief in the anticipated proceeding to demonstrate the superiority of the Northwest Detroit gateway application over that of United/San Francisco. As a result of Northwest's application, Detroit will have at least daily service to both Beijing and Shanghai, something that San Francisco already has today. This new Northwest service will provide substantial benefits to the traveling and shipping public in the Eastern and Midwestern U.S. and will provide significant benefits to both the Detroit and Midwest economies.

Counsel:  Simat Helliesen, Jean Oberstar, 202-342-1691

Counsel:  Federal Express, Rush O'Keefe, 901-395-5189

Counsel:  Northwest, Megan Rae Poldy

Counsel:  San francisco and Winthrop Stimson, Kenneth Quinn, 202-775-9898, quinnk@winstim.com

Counsel:  United and Kirkland Ellis, Jeffrey Manley, jeffrey_manley@kirkland.com

U.S. - China Air Services

Counsels:  John Katz, Director of State/Federal Relations and Special Counsel, Office of the Govenor, 202.624.5858 and John Steiner, Asst Attorney General, 907.269.5163, John_Steiner@law.state.ak.us

Not to put too fine a point on the matter, United has tried to sandbag the parties by making a last-minute change to its service proposal. A review of United's Application and Consolidated Answer show a proposal focussed exclusively on service between San Francisco and China. Those pleadings contain lengthy argument about the supposed strengths of San Francisco as a gateway to China and about how United's new service would enhance intergateway competition. United submitted numerous exhibits purporting to show that San Francisco is the superior gateway for much of the population of the United States and that a significant amount of U.S.-.China traffic originates in California (points Northwest has successfully disproved).

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

U.S.-China Air Services

Counsel:  DHL and R. Tenney Johnson, 202-261-3510

Counsel:  Bill Alberger, 703-461-3791

U.S.-China Air Services

Counsel:  Federal Express

Northwest has re-examined Exhibit NW-29 and has realized that the exhibit contains incorrect data about Northwest's own services. These data understated Northwest's actual all-cargo service to Hong Kong. It was these incorrect data that led to Federal Express' assertion that Northwest's service is irregular. Northwest apologizes for this inadvertent error.

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

United has taken the opportunity afforded by the Department's expedited and abbreviated procedures to build a record of overwhelming evidentiary and civic support for United's proposed daily nonstop services between San Francisco and Shanghai. Northwest, in an act of desperation. attacks United for having built such a strong record, and urges the Department to strike United's application and consolidated reply By so doing, Northwest implicitly concedes that it cannot, based on the present record, prevail on the merits, and so must resort to the extraordinary remedy of eliminating information from the record that supports the grant of United's application.

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161, jeffrey_manley@kirkland.com

U.S.-China Air Services

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

U.S. - China Air Services

By:  Transportation Trades Department, AFL-CIO (TTD) Edward Wytkind, Executive Director, 202.628.9262

In conclusion, United urges that the Department put a stop to the attempts by Northwest and the Wayne County Parties to delay this case with late-filed exhibits and pleadings. These late submissions are unfair to other parties that made their filings in accordance with the Department's expedited procedural schedule. To the extent that the Department is prepared to allow the Wayne County Parties to file late, it should also, as a matter of fundamental fairness, accept United's response. As demonstrated in this response, the Wayne County Parties have offered no reason for the Department to favor Northwest over United. The Department should, accordingly, proceed expeditiously to award United the seven second-year nonstop frequencies for which it has applied.

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161, jeffrey_manley@kirkland.com

U.S.-China Air Services

The Department is well aware of the critical dependence to Hawaii of international air transportation. Hawaii is the most geographically isolated state in the United States and is vitally dependent upon air service, which is an essential component of' the State's economic infrastructures In light of the decline in the growth of tourism from the U.S. mainland, Hawaii has placed special importance on increasing the State's direct access to major international markets, particularly in Asia. Northwest's proposal to extend a weekly Honolulu-Tokyo flight to Shanghai will provide a significant improvement to Hawaii's international services. Although Hawaii receives a daily online connection to Shanghai, single-plane service would represent an important service enhancement.

Counsel:  Hawaii and Stephen Lachter, 202-862-4321

In defending its improper attempt to change its service proposal in this case, United has followed the questionable theory that the best defense is a strident offense. Thus, in its May 10 Response, United attacks Northwest's motives. United cannot change the fact, however, that its Application contained a service proposal that was incomplete and misleading (deliberately so, it would appear) and that its Consolidated Reply contained a revised service proposal that is directly at odds with the substance of its Application.

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

Counsel:  Winthrop Stimson, Kenneth Quinn, (202) 775-9898

U.S.-China Air Services

By:  Eswad Wytkind

U.S.-China Air Services

Although purporting to reply to United's May 10, 1999, response, Northwest instead ignores United's explanation based on the clear and unambiguous language of the April 14, 1999 notice. Northwest instead seizes on another case which it asserts supports its request that United's application and reply be stricken. Northwest now cites an order in the U.S.-Lima Combination Service Proceeding (Non-Miami Phase) as supporting its request. Why Northwest was unable to cite this order in its May 6, 1999, "surreply" is not explained. The order was issued in 1995 and was certainly available on the public record at the time Northwest prepared its "surreply." With each successive pleading, Northwest's delaying tactics become more and more transparent.

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161

U.S. - China Air Services

Counsel:  Crowell & Moring LLP, Lorraine Halloway for Emery Air, 202.624.2538

Counsel:  Northwest, Megan Rae Poldy, 202.842.3193

Counsel:  Kirkland Ellis, Jeffrey Manley, 202-879-5000

U.S. - China Air Services

Expeditors is concerned by the request of Federal Express Corporation for 14 of the 17 new frequencies, including all eight of the frequencies that are available in 1999. Expeditors believes that this request, even if granted in part, could have severe consequences for Expeditors and other freight forwarders who rely on the availability of traditional freighter service which Federal Express does not provide or propose to provide to fill their customers’ transportation needs. For this reason, Expeditors supports the application of Northwest Airlines in this proceeding.

By:  Jeffrey King, Senior V.P.-General Counsel and Secretary, 206.674.3412

U.S.-China Air Services

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161, jeffrey_manley@kirkland.com

U.S.-China Air Services

Counsel:  Kirkland Ellis, Jeffrey Manley, 202-879-5000

U.S. - China Air Services

As a result of the creative efforts of Federal Express' competitors, this proceeding has been delayed to the point that route rights that became available to the United States on April I remain unused more than two months later. It now appears that the proceeding will be delayed even further.' Therefore, Federal Express is compelled to move, on a contingent basis, for leave to file this otherwise unauthorized, brief answer to the untimely filings by Emery Air Freight Corporation and Expeditors International of Washington, Inc.

Counsel:  Sarah Prosser, Managing Attorney, Legal & Regulatory Affairs, 901.395.5189

U.S.-China Air Services

Enclosed for filing in the above-referenced docket are letters from Members of Congress, members of state and local governments, businesses and civic associations relating to the service proposals in this case. An index of the letters is enclosed.

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

U.S.-China Air Services

Emery' is supporting Northwest's application in this case for two very simple reasons. First, Northwest's all-cargo proposal is superior to Federal Express' proposal in terms of capacity. Second, Northwest will give Emery's shipments priority and favorable pricing which Emery does not receive as a Federal Express customer. The Department should not permit Federal Express' attempt to discredit Emery for supporting Northwest to divert attention from the merits of Northwest's case.

Counsel:  Crowell Moring, Lorraine Halloway, 202-624-2538

U.S.-China Air Services

Counsel:  Kirkland Ellis, Jeffrey Manley, 202-879-5161

U.S. - China Air Services

We have tentatively decided to award the 17 weekly frequencies at issue as follows: six weekly frequencies to Federal Express (four weekly frequencies that are available now and two weekly frequencies that become available April 1, 2000), six weekly frequencies to Northwest (four weekly frequencies that are available now and two weekly frequencies that become available April 1, 2000). and five weekly frequencies to United (all from the pool of frequencies that become available April 1, 2000). We tentatively find that each of the three applicants has submitted a credible proposal for using its requested frequencies and upgrading its current service in the U.S.-China market. We also tentatively find that each carrier's proposal would provide significant public benefits for the traveling and shipping public, and that no proposal is markedly superior to the others in this critical area. These considerations, coupled with the limited number of frequencies available, support our tentative conclusion that the public interest would be served best by ensuring that all three carriers are provided a significant opportunity to expand their services in the market. In the circumstances in this case that means allocating the available additional frequencies as equally as possible among the three carriers-six to Federal Express, six to Northwest, and five to United. This approach fairly balances the needs of the passenger and all-cargo segments of the market for additional services and also takes into consideration the needs of the three carriers for additional frequencies to expand their operations and to balance the competitive structure of the U.S.-China market.  Since United, on the other hand. requested frequencies only from the pool available next year. our proposed allocation of frequencies to it would be from the pool available next year. We note that under this approach, both Federal Express and Northwest, the carriers with fewer current frequencies than United, would be able to expand their U.S.-China services sooner than United, thus improving each carrier's competitive posture in the market.

By:  Bradley Mims

U.S.-China Air Services

Counsel:  Kirkland Ellis, Jeffrey Manley, 202-879-5000

U.S. - China Air Services

Counsel:  Winthrop Stimson, Kenneth Quinn, 202-775-9898

Counsel:  Federal Express, Rush O'Keefe, 901-395-5189

Counsel:  Megan Rae Poldy for Northwest, 202.842.3193

Counsel:  Winthrop Stimson, Kenneth Quinn, 202-775-9898

Counsel:  Kirkland & Ellis, Jeffrey Manley, 202.879.5161

U.S.-China Air Services

With respect to Northwest’s proposed use of its tentatively awarded sixth frequency, it is highly doubtful whether its use of this valuable, hard-negotiated bilateral right compares favorably with the use proposed by United for this frequency as part of its proposed service between San Francisco and Shanghai. Northwest would likely use this last frequency for one-stop or multi-stop service to China. United, on the other hand, has proposed daily, non-stop service in a substantial U.S.-China market.

Counsel:  Winthrop Stimson, Kenneth Quinn, 202-775-9898, quinnk@winstim.com 

The Department has a simple choice: Should it further its public interest objectives by giving each applicant equal competitive opportunities in this vital market, or should it preserve the imbalance in those opportunities created by historical accident?  Northwest and United try to justify continuing the historical imbalance of competitive opportunities by criticizing the service proposal of Federal Express — the most successful post-deregulation certificated carrier — even though it is no coincidence that Federal Express is the only applicant to offer a comprehensive economic justification for its proposal. Neither combination carrier, however, has offered any probative evidence or analysis to support its criticism. Accordingly, this case confirms the wisdom of adhering to simple decisional criteria, such as relying on parity of competitive opportunity in awarding frequencies in cases where the Department finds the proposals equally compelling — and allowing the marketplace to determine the price, variety, and quality of air services.

Counsel:  Federal Express, Rush O'Keefe, 901-395-5189

SFO continues to urge the Department to re-evaluate its tentative award of frequencies in this proceeding and to allocate to United Air Lines, Inc., two additional frequencies for a total of seven frequencies to enable it to provide daily, nonstop combination service between San Francisco and Shanghai, beginning April 1, 2000. Of all the carrier proposals in this proceeding, only the San Francisco-Shanghai service proposed by United would provide consumers and shippers alike with daily, non-stop combination service between the U.S. and China, inter-gateway and intra-gateway competition, as well as substantial competition with Chinese carriers already operating in the U.S.-China market.

Counsel:  Winthrop Stimson, Kenneth Quinn, 202-775-9898, quinnk@winstim.com 

What is now clear after nearly three months of proceedings is that only United, among the applicants, has a firm plan to use all of the frequencies for which it has applied to maximize public benefits to both passengers and shippers. United has unwaveringly proposed to use the seven frequencies it seeks to operate daily nonstop combination passenger/cargo services between San Francisco and Shanghai.

Counsel:  United and Kirkland Ellis, Jeffrey Manley, 202-879-5161, jeffrey_manley@kirkland.com

U.S.-China Air Services

Upon reviewing the various comments and objections filed by the parties on July 2, 1999, Northwest determined that, since no party had said anything in those pleadings that had not already been considered by the Department, there was little purpose in submitting an answer to those pleadings on July 7. United's Consolidated Answer, however, contains significant allegations that Northwest is compelled to address.  

In its Consolidated Answer, United alleges that Northwest has conceded that it can only use five frequencies for combination service and that Northwest, therefore, has no use for the so-called (by United) "dangling" sixth frequency. United, of course, suggests that this frequency be re-assigned to it. United's allegation is false. Northwest has made no such concession. Northwest intends to use every frequency that it receives in this proceeding. Northwest believes that it has made a compelling case for the use of 11 new frequencies. In the alternative, Northwest has explained its need for nine new frequencies. If Northwest ultimately receives only six frequencies, it will use all six. Only by employing the most distorted and self-serving logic could United conclude that Northwest has use for only five frequencies. Indeed, the public interest would best be served by giving Northwest more frequencies, not fewer, so that Northwest may achieve a level of competitive parity with United in the combination service market and introduce the first U.S. carrier heavy freight service in the all-cargo market.

Counsel:  Northwest, Megan Rae Poldy, 202-842-3193

U.S.-China Air Services / American Airlines, Inc.

The proceeding in Docket OST-99-5539 involves new frequencies available under the U.S. -China bilateral air services agreement during the first two years of a three-year agreement. On June 22, 1999, American filed an application for a certificate of public convenience and necessity and for an allocation of all ten U.S. -China frequencies available to U.S. carriers in the third year of the U. S.-China frequency agreement. Under the Department's rules, answers to American's application (and competing applications) would be due on July 20, 1999. Unless the Department has issued a final order in the U.S. -China case prior to this July 20, 1999, answer date, the parties to that proceeding cannot know how many third-year U.S. -China frequencies they need because they will not know how many first and second year frequencies have been allocated to them in the Department's final order. If the incumbent carriers are required to respond to American's application before the final order in the U.S. -China case, they will, therefore, in order to protect their interests, have to file applications for frequency allocations that they may not, in fact, need. A final order issued after responses to American's application could also force these carriers to amend any responses filed on July 20, 1999, to reflect any allocation changes in the final order in Docket OST-99-5539. Such amendments could unnecessarily delay and complicate any proceeding relating to third-year frequencies.  United and Federal Express request that the date for answering American's application and filing competing applications in response to that application be suspended until after the Department has issued a notice requesting applications for third-year frequencies.

Counsel:  Federal Express, Rush O'Keefe, 901-395-5189 / United and Kirkland Ellis, Jeffrey Manley, 202-879-5161

U.S.-China/American Airlines, Inc.

Counsel:  Jeffrey A. Manley, Kirkland & Ellis

U.S.-China/American Airlines, Inc.

By:  Paul Gretch

U.S.-China Air Services

Order 99-8-9 makes final the Department's tentative decision to allocate the 17 additional weekly frequencies available for the next two years (i.e., until April 1, 2001) for U.S.-China scheduled air services as follows: six weekly frequencies to Federal Express Corporation, six weekly frequencies to Northwest Airlines, Inc., and five weekly frequencies to United Air Lines, Inc. 

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