2008 Los Angeles-San Jose del Cabo Exemption Proceeding

Order 2008-4-20
OST-2008-0056

Issued and Served April 14, 2008

Order to Show Cause

By this order, we tentatively award (1) primary exemption authority to United Air Lines, Inc. and back-up exemption authority to Delta Air Lines, Inc.

United has offered a superior capacity proposal for its Los Angeles-San Jose del Cabo service, with daily year-round flights using 156-seat A320 aircraft, and a second-daily flight during the peak travel months of June, July, and August. Specifically, United will offer approximately 34,000 more annual seats than Virgin America on the route and 9,300 more annual seats than Delta. Virgin America and Delta have questioned United’s ability to maintain the proposed level of service. However, in calendar years 2006 and 2007, America and Alaska each offered at least double-daily, and sometimes more, flights in the subject market, and both of these carriers reported a significant increase in load factors during the months of June, July, and August. Under these circumstances, we tentatively believe that United’s offer of service with the greatest capacity overall, and with capacity that directly responds to the higher demand during the heavily-traveled peak summer season, constitutes a significant factor in its favor.

While Delta’s proposal offers certain public benefits, we have tentatively determined that those benefits are outweighed by those offered by United’s proposal in this proceeding. In this regard, Delta has proposed a year-round daily service on the route with 183-seat B-757 aircraft. Although this larger aircraft would provide 27 more seats daily than United’s proposal (during United’s indicated off-peak season) and 34 more seats daily than Virgin America’s proposal, Delta would offer less overall annual capacity in the market than United. More important is that United’s proposal would respond to the peak traffic demand in the market (offering a second daily flight in the summer months), whereas Delta has offered no seasonal adjustment in its schedule.

Regarding Virgin America, while the Department has often considered new entry as an important carrier selection factor, we weigh this factor, as we do any carrier selection factor, in the context of achieving a result that would best serve the public interest in a given case. Thus, although Virgin America might offer certain advantages because of its new entrant status, we cannot, in evaluating the relative merits of its proposal, overlook that Virgin America would offer the least annual capacity and the fewest connecting opportunities of any of the applicants in this case. Also, based on the record, Virgin America does not yet have the necessary operations specifications from the FAA to operate the proposed service; does not yet have the aircraft to operate the proposed service; and does not yet have a station in San Jose del Cabo. These factors take on greater weight in a case such as this, which we expressly stated is being held on an expedited schedule designed to enable a prompt replacement for a carrier vacating the market.

By: Michael Reynolds