Docket No. OST-97-2442 | May 2, 1997

Recognizing that ValuJet qualifies as a New Entrant Air Carrier, /1 the company respectfully submits this application seeking an exemption in the public interest and under the "exceptional circumstances" criterion from the high density airport slot limitations at New York's LaGuardia Airport /2 so as to provide six daily non-stop round trip flights in the AtlantaLaGuardia market.

In view of the fact that airport slot restrictions unduly restrict the ability of new entrant airlines to enter markets so restrained, in 1994 Congress authorized the Secretary of Transportation to grant exemptions from the High Density Rule, /3 to new entrant air carriers to serve New York's La Guardia Airport (and other specified airports subject to the High Density Rule) where the Secretary concludes that such service is in the public interest and exceptional circumstances exist. /4 The "public interest" is statutorily defined to include the following:

1/ 49 U.S.C.41714(c).

2/ 14 CFR 93.1 23.

3/ 14 CFR Part 93, Subparts K & S.

4 49 U.S.C.41714c, Pub. L. 103-305 (Aug. 23, 1994).

In responding to recommendations of the U.S. General Accounting Of flee that Congress should consider revising the legislative standard governing the granting of landing slots to accommodate new entrants, making competition a key criterion, /6 the Department of Transportation took the following position:

ValuJet's strategy is to provide safe, reliable, customer friendly and affordable air transportation which generates its own traffic by stimulating incremental demand from price conscious travelers, most of whom would have otherwise used ground transportation or not have traveled. The company has a simple fare structure consisting of predictable, "everyday low prices," designed to provide customers with substantial savings over competitors walk up, off peak and advanced purchase fares. ValuJet operates a safe, reliable, low cost, limited frequency,

5/ 49 U.S.C. 40101(a)(4), (10), (13).

6/ U.S. General Accounting Office, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, RCED-97-4 (Oct. 1996).

7/ U.S. Department of Transportation, Statement of General Accounting Office (GAO) Report (Jan. 6, 1997).

scheduled airline providing customers with a no frills service that includes baggage handling, inflight beverages, peanuts, pretzels, ticketless service and the ability to make advanced reservations. ValuJet avoids what it believes to be unnecessary and nonproductive costs involved in meals, a frequent flyer program, advanced seat assignment, airport clubs, tickets, or other amenities offered by many of its competitors. Operations are currently conducted with a fleet of DC-9-30 aircraft which will be joined beginning in 1999 by brand new MD-95s. ValuJet is the launch customer for the latter aircraft. The key elements of ValuJet's strategy are a simple fare structure and an efficient cost structure which is achieved through a highly productive and efficient work force, a simple, straight forward operation, a ticketless distribution technology and a fleet of safe, efficient, short haul aircraft.

ValuJet began service on October 26, 1993 from Atlanta to selected Florida destinations with DC-9-30 aircraft. Currently, the FAA has approved 25 of ValuJet's DC-9-30 aircraft for revenue service and the carrier operates 154 flights per peak day between Atlanta and 21 other cities. The company's product is highly reliable with an on time arrival rate (within 15 minutes) significantly above the industry average and a flight completion factor that averages in excess of 99%.

Since its inception in 1993, ValuJet's average airfares have been 60% lower than the average airfares which existed in the marketplace prior to initiation of service by the company. Any time ValuJet enters a market, traffic increases by 100 to 300%, vividly illustrating the enormous pent up demand for affordable airfares.

Since the company's first flight in 1993, ValuJet's low airfares have saved the traveling public over one billion dollars compared to what other airlines would charge without ValuJet in the marketplace. Prior to ValuJet's entry in the Atlanta market the average one-way fare charged by Delta and other high cost carriers was $ 173 in markets in which ValuJet would serve. Between October 1993 and June 1996, ValuJet's average one-way fare was approximately $65 which is a savings of $109 to the consumer. Since ValuJet's resumption of service, its average airfare has been lower than $65.

In addition to the obvious economic benefit to consumers, ValuJet's affordable service offers the traveling public with unprecedented travel flexibility and convenience at low every day prices. ValuJet's fares do not have onerous, inconvenient restrictions such as Saturday night stay requirements. This makes it easy to schedule trips for the convenience of the consumer and not the airline. On ValuJet it is easy and economical to take a companion along on a business trip, make last minute changes to travel plans without large increases in the airfare, enjoy a short getaway vacation, or a visit to friends and relatives that without ValuJet would not be economically practical. ValuJet's low prices enable the consumer to take more trips for the same amount of money or take the same amount of trips and save the money for something else. Either way the consumer wins in a big way.

During 1995, ValuJet made extensive and concerted efforts, to purchase or lease LaGuardia slots in order to provide the consumer with the benefits of affordable airfares in Atlanta's largest monopoly market. ValuJet's efforts included retaining as a consultant, a retired major air carrier veteran who had continuous personal experience in leasing and purchasing slots that dated back to the original implementation of the High Density Rule. In October 1995, ValuJet believed that its extensive endeavors had been appropriately rewarded when it reached a business deal with TWA for a number of LaGuardia slots adequate to launch Atlanta-LaGuardia service. However, TWA subsequently leased these slots to Delta resulting in litigation between ValuJet, Delta and TWA which is currently proceeding in federal court.

ValuJet was able to capitalize on a unique opportunity to acquire a significant number of LaGuardia slots as a result of Continental Airlines embarking upon a major schedule change that resulted in that carrier significantly reducing its service to LaGuardia. Salient information regarding these slots are provided on Attachment 1. In conjunction with the Continental slots, the FAA cooperated regarding ValuJet's request for specific "slides" and for one FAA slot during an off peak time. As a result of this opportunity, along with Continental's and FAA's cooperation, ValuJet brought affordable airfares to the Atlanta-LaGuardia market with five daily round trips beginning May 1, 1996. ValuJet continued this service until the carrier's temporary cessation of revenue service under an FAA consent order on June 17, 1996. Since ValuJet had no assurances as to exactly when the temporary suspension of service would end, the slot lease with Continental was canceled and the FAA slot was no longer utilized.

After ValuJet resumed operations on September 30, 1996 the Continental slots were unavailable (except for a few that did not provide a profitable pattern of service) since they were placed with other airlines. The FAA slots available were not at times that would, either together or separately with Continental's available slots, provide a profitable pattern of scheduled service. In order to establish a profitable pattern of service ValuJet must 1 ) obtain slots at key times throughout the daylight and evening hours when the traveling public wants to fly and 2) obtain slots in a sufficient quantity to provide enough flights to generate enough revenue to offset the high costs associated with advertising in this particular market. The New York area in the vicinity of the LaGuardia market is the highest cost advertising market in the United States. To effectively promote the ValuJet brand in this market, the carrier's planned expenses during a traditional new market entry period (approximately 11 weeks) would have exceeded $500,000. Additionally, sustaining levels of promotional expenditures were budgeted at approximately $340,000 for a twenty week follow up period. Ongoing advertising costs beyond this period would have continued to be substantial. These high advertising expenditures are necessary to inform consumers of the mechanism in which ValuJet seats are purchased. In order to avoid the anticompetitive biases and high costs associated with traditional airline reservations systems such as Sabre, Apollo and Worldspan, ValuJet has developed its own system. Most airlines sell approximately 80% of their seats through one of the traditional airline reservations systems. ValuJet sells approximately 75% of its seats directly to the public rather than through travel agents using traditional distribution systems. The carrier must have enough flights, generating sufficient revenue, to adequately recover the high cost of advertising in this market.

Since ValuJet's resumption of operations, the carrier has repeatedly attempted to lease LGA slots from incumbent carriers without success. Other than Continental, no airline has offered even a single slot at LaGuardia for lease or purchase for any price or term.

Atlanta-LaGuardia is the largest Atlanta market without nonstop competition. AtlantaLaGuardia is also the largest LaGuardia market without nonstop competition. Delta has a monopoly in this nonstop market with an "hourly" pattern of 16 daily round trips. During 1995 more than 500,000 people paid an average of $233.70 one-way for travel between Atlanta and LaGuardia. When ValuJet entered the LaGuardia market, it offered everyday, low airfares from $89 to $149 one way, which on an annualized basis would save the traveling public an estimated $60 million. The details of these airfares are shown in Attachment 2 which is a copy of the company's initial press release announcing LaGuardia service. On April 26, 1996, ValuJet announced a special $99 one way fare initiative from LaGuardia to 22 connecting cities. These details are shown on Attachment 3. During 1996, Delta matched most of ValuJet's AtlantaLaGuardia airfares.

Since ValuJet exited the Atlanta-LaGuardia market the one way walk up fare has increased from ValuJet's $149 in June 1996 to Delta's $523 fare in May of 1997. This is an increase of three and one half times or 251 % meaning that an Atlanta-New York trip, planned at the last minute by the consumer, now costs $748 more than it did at this time last year.

Attachment 4 reveals the actual price and traffic history between Atlanta (ATL) and the New York airports of LaGuardia (LGA), Newark (EWR) and John F. Kennedy International (JFK). Between the first quarter of 1992 and the third quarter of 1996, the average airfares-in the ATL-LGA market was $205 versus $ 130.50 in ATL-EWR and $ 133.90 in ATL-JFK. The ATLLGA fares averaged 57% higher than those in ATL-EWR, and 53% more than ATL-JFK. The ATL-EWR market has experienced substantial low cost competition from Continental and Kiwi. TWA has competed aggressively with Delta in the ATL-JFK market. However, competition which has resulted in affordable airfares at EWR and JFK has had essentially no impact on fares and traffic growth in the ATL-LGA market. Despite low fares to EWR and JFK, Delta has been able to maintain significant traffic growth and monopolistic pricing in the ATL-LGA market. These statistics prove that the ATL-LGA market is separate and distinct from ATL-EWR or ATL-JFK.

Attachment 5 shows the average fares of nonstop versus connecting carriers in the ATLLGA market from the first quarter of 1991 through the third quarter of 1996. Delta's average fare premium versus connecting carriers is 69% indicating that low fare connecting service in the ATL-LGA market has essentially no impact on Delta's high fares in the market. Despite this fare premium Delta garnered 91% of the customers and 94% of the revenues in both the ATLLGA nonstop and connecting markets (see Attachment 6). Consequently the ATL-LGA nonstop market is a separate and distinct market from any connecting service between these two airports.

Attachments 4, 5 and 6 conclusively demonstrate that ATL-LGA nonstop is a relevant market, separate and distinct from ATL-LGA connecting service, or ATL-EWR and ATL-JFK. Since the demise of Eastern, Delta has effectively maintained its monopoly position driving Continental, TWA and Private Jet out of the ATL-LGA market. Delta is clearly the monopoly air carrier in the ATL-LGA nonstop market charging monopoly prices.

The metropolitan New York area has a population base of 18.5 million people. An analysis of population densities and location by zip code reveals that LGA is the most convenient airport for approximately 8 million people, EWR is most convenient for another 8 million and JFK is ideally positioned for approximately 2.5 million. The dramatically higher cab fare from EWR to Manhattan and Long Island (on the order of $35-50) versus the cab fare from LGA to these same areas (approximately $15-20) is yet another reason why LGA and EWR are for all practical purposes, separate and distinct markets. Similarly, JFKs ground transportation costs and times are not competitive with those of LGA for the vast majority of the 8 million population base that LGA best serves.

Delta Air Lines is the dominant air carrier at ATL controlling 78.7% of all enplanements. Together with Atlantic Southeast Airlines (ASA), one of its code sharing partners, Delta's market share in ATL is 83. 1%. The competitor with the next largest market share is ValuJet with a mere 3.7%. The details of the ATL market share analysis are shown on Attachment 7.

Now that ValuJet has been substantially weakened financially during its temporary cessation of operations in 1996, Delta has embarked upon a systematic campaign to match ValuJet's affordable airfares while simultaneously dumping large amounts of capacity into ValuJet's markets in an apparent effort to drive ValuJet's load factor down to below break even and drive the carrier out of the marketplace. Delta is able to financially afford this costly strategy partially because of the subsidy it receives from the monopoly profits it generates in markets that ValuJet does not serve, such as ATL-LGA. ValuJet access to the ATL-LGA market is an important step toward "leveling the playing field" by denying Delta the monopoly profits of this market as a source of funds to subsidize its attack on ValuJet.

This subsidy is made possible because in the markets that ValuJet has never entered and that Delta monopolizes or shares with other high cost carriers, average airfares are not only significantly higher than they are in ValuJet markets, they have and are continuing to increase significantly. During the second quarter of 1993, Delta's average one-way airfares in these markets was $ 184. In the third quarter of 1996 the Delta average one-way fares in these markets was $221 representing a 20% increase. The following illustrate the average Delta one-way fare levels in these markets during the third quarter of 1993 (just prior to ValuJet's initial air carrier certification) versus the third quarter of 1996 (last quarter DOT data is readily available): Atlanta-Cincinnati $ 186 vs. $217, Atlanta-Washington National $180 vs. $232, Atlanta-Houston $ 195 vs. $230, Atlanta-St. Louis $ 144 vs $ 192, and Atlanta-Minneapolis $ 195 vs. $231. Furthermore in the markets in which ValuJet served in May 1996, but subsequently has not returned to service, Delta has increased its lowest prices by 75% on average. Its business prices in these markets has more than tripled (up 227%) from $116 to $380. Delta also subsidizes their attack on ValuJet from substantial revenues generated in international markets, the Delta Shuttle, and their fortress hubs at Cincinnati, Salt Lake City and Los Angeles.

In 1987, Professor Michael Levine, one of the principal architects of deregulation and now executive vice president of Northwest Airlines, made the following observations regarding this type of strategy:

If [a new entrant into a hub market] attempts to cover prices... the incumbent matches, no matter how low the fare. The object is to reduce trial [of the new entrant by passengers] and to subject the new entrant to a prolonged period of operation at low load factors. This strategy saps the entrant's working capital while inhibiting trials that would disseminate favorable information about the new entrant...

If circumstances (including the financial condition of the new entrant) warrant, the incumbent can flood the market with low-priced seats...

An incumbent who uses such tactics a few times quickly develops a reputation for fierce response to entry... Although these tactics are expensive on an individual route, the more routes on which an airline operates - the wider the scope of its operation - the more widely the information created by the predatory investment in deterrence can be spread, and hence the lower unit cost of deterrence.

In effect, the [incumbent carrier] lends itself money out of accounting reserves to fight a war which drains cash. If the new entrant cannot find a source of capital which will accept the information that the temporary losses are a worthwhile investment, it will not be able to sustain losses for as long a time as will the large-scale incumbent. /8

8 Michael E. Levine, "Airline Competition in Deregulated Markets: Theory, Firm Strategy, and Public Policy." 4 Yale Journal on Regulation 393 (1987).

In 1991, Professor Levine indicated that this kind of strategy was actually occurring in the industry:

I believe predation is possible and that it occurs...

[I]t is possible for an incumbent to impose on prospective entrants nonrecoverable costs by pricing in a way that seeks to ensure that they do not attract a significant share of passengers regardless of the incumbent's own costs. /9

Delta hinted that they are executing this strategy in an excerpt from an interview with Paul G. Matsen, vice president of corporate planning for Delta Air Lines (formerly Delta's vice president of advertising and consumer marketing), in the Fall 1996 edition of the magazine Marketing Management:

Marketing Management: The traditional response by major carriers to low-cost airlines has been to match fares, increase service frequency, and generally make life difficult for the new carrier. That was not the case with Delta when ValuJet set up shop in your own back yard in l 993.

Matsen: When ValuJet was launched, Delta initially tried to respond very aggressively, but unfortunately we were not well positioned to compete. The problem was that our costs were the second highest in the industry, while ValuJet was one of the lowest.

The challenge we faced in the Atlanta hub was that we served primarily business travelers, whereas they served people who would have taken their cars to sun destinations if ValuJet hadn't entered the market with very low prices. From a strategic and profitability standpoint matching their fares was not really an option for us in 1993.

In retrospect, we should have been more aggressive in defending our market share against ValuJet. Because of the cost cutting that has been done under Leadership 7.5 we have been able to shift our strategy. In April ValuJet's load factor was down about 10% from the year-earlier level because we had taken back a significant amount of share.

9/ Michael Levine, Airline Deregulation: A Perspective, 60 Antitrust L.J. 687,689 (1991).

Prior to the company's cessation of operations, Delta was matching ValuJet's fares in a controlled manner indicative of the influence of sophisticated yield management systems. After the resumption of operations, Delta has aggressively matched ValuJet exactly, rule for rule and price for price, but with far more seat availability.

While ValuJet was experiencing a suspension of operations, Delta embarked upon a plan to dramatically increase capacity in the markets where ValuJet was most likely to return. Delta is systematically increasing capacity in ValuJet's Atlanta markets, while restrictions on ValuJet's fleet size have limited the affordable carrier's capacity upon its return to service. This, combined with aggressive price matching, has continued to significantly lower ValuJet's load factor compared to the carrier's previous performance. Delta's strategy appears to be to lower ValuJet's load factor below break even to drive the affordable airline out of business.

In markets where ValuJet has returned, Delta's capacity increases have been dramatic. A comparison of the first quarter 1997 estimates over first quarter 1996 actual Delta capacity indicates that in Atlanta-Philadelphia Delta has increased its ASMs by 46%, Washington Dulles 33%, Louisville 33%, Columbus Ohio 28%, Orlando 18%, New Orleans 16%, West Palm Beach 14%, Chicago 13% (Delta is in O'Hare, ValuJet serves Midway), Fort Myers 11%, Jacksonville 10%, and Savannah, Ft. Lauderdale, Memphis, Raleigh/Durham and Mobile have seen increases of between 6 to 9%. Tampa is up 3%.

Atlanta-Orlando and Atlanta-Tampa were among ValuJet's strongest markets. Besides frequency increases in the first quarter 1997, Delta announced increased weekend only service in these markets beginning in June and July of 1997. In particular, on April 16, 1997 a Delta press release quoted Mark A. P. Drusch saying, "With tens of thousands of seats every week to Orlando and Tampa, Delta can offer our passengers more discount fares to these popular Florida destinations than any other airline." Interestingly, Delta is supporting this service with two single class Delta Shuttle 727s (which are supposedly dedicated shuttle aircraft) which leave Boston each Friday night and fly to Atlanta for Saturday/Sunday Florida service, then return to Boston each Sunday night. With Delta's new service, its third quarter 1997 versus third quarter 1996 capacity increase will be 32% to Orlando and 18% to Tampa. Again, capacity dumping is designed to absorb the traffic generation created by ValuJet's affordable airfares and stifle the affordable carrier's success.

In markets where ValuJet has not returned to service the Delta capacity story is quite different. In Dallas the Delta ASMs were down 10% (ValuJet did return to Dallas effective April 10, 1997), Pittsburgh down 3%, Detroit down 2%, Hartford down 1%, Miami and Indianapolis up 3%, Kansas City up 3% and Nashville up 8% (perhaps in order to fill the void left by American's reduction of service in Nashville).

ValuJet proposes the following ATL-LGA-ATL schedule to be operated with 115 seat DC-9-30 aircraft offering "every day affordable fares:"

Additionally, ValuJet would offer one stop connecting service to LaGuardia over Atlanta from other cities in its system, including Akron-Canton, OH; Charlotte, NC; Chicago (Midway), IL; Columbus, OH; Dallas-Ft. Worth, TX; Flint, MI; Fort Lauderdale, FL; Fort Myers, FL; Fort Walton Beach, FL; Jacksonville, FL; Louisville, KY; Memphis, TN; Mobile, AL; Newport News, VA; New Orleans, LA; Orlando, FL; Raleigh-Durham, NC; Savannah, GA; Tampa, FL; and West Palm Beach, FL.

A grant of the exemptions sought by ValuJet in the ATL-LGA market is in the "public interest" because it would:

l. Ensure the availability of low-priced services in a separate and distinct market where such prices are currently unavailable.

2. Lessen unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that tend to allow the incumbent carrier to unreasonably increase prices.

3. Encourage the market entry of a new carrier and strengthen a small carrier to ensure a more effective and competitive airline industry.

A grant of the exemptions sought by ValuJet in the ATL-LGA market is warranted under the "exceptional circumstances" criterion because such an exemption is a means to:

1. Increase competition where it would be most effective in both the largest monopoly market from Atlanta and the largest monopoly market from LaGuardia, and;

2. Immediately reduce the ability of Delta Air Lines to use monopoly profits from a monopoly market to subsidize its price slashing and capacity dumping designed to drive ValuJet's system load factors to unacceptable levels.

3. Facilitate the DOT's strong commitment to enhancing the role of new entrants to discipline large airlines and protect the economic interests of the consumer, particularly where, as here, the route is a monopoly from a concentrated hub dominated by a single high cost air carrier.

Therefore ValuJet respectfully requests the Secretary of the DOT to grant an exemption, in the public interest and under the exceptional circumstances criterion, that will provide ValuJet with sufficient and appropriate LaGuardia slots necessary for the carrier to provide the pattern of service proposed.

Respectfully submitted,

D. Joseph Corr

Prevent & Chief Executive Officer

ValuJet Airlines, Inc.

1800 Phoenix Boulevard, Suite 126

Atlanta, Georgia 30349

Phone: (770) 907-2580

Fax: (770) 907-2586

(Utilized in Scheduled Service May 1, 1996 to June 17, 1996

Notes: *FAA approved slide from a 10:30 arrival slot

**FAA approved slide from a 21:00 departure slot.