OST-97-3087 / AccessAir / Exemption, High Density Rule, LaGuardia / Reply of AccessAir to Queens Borough / December 18, 1997

Application of

for an exemption from Subparts K and S of 14 CFR Part 93 (High Density Rule) as applied to New York LaGuardia Airport to provide non-stop service between:

Des Moines, Iowa/Moline-Quad Cities, Illinois and

New York LaGuardia (combination service); and

Des Moines, Iowa/Peoria, Illinois and New York LaGuardia (combination service)

Second, the Borough based its motion to file a late answer upon the fact that it had not been served with applications by various new entrant airlines, including the Applicant, for slots at LaGuardia. The Applicant filed its Application in a public docket, and as the Borough concedes, was under no obligation to serve the Borough. The Applicant believes that its filing fully complied with all applicable requirements.

In substance, the Borough makes three negative claims: (i) the Department's interpretation of the statutory criteria for awarding slots is improper; (ii) the award of slots to new entrant airlines is not in the public interest; and (iii) the circumstances of the Applicant are not sufficiently exceptional to warrant the award of slots in the instant Application. We consider each claim in turn.

Until recently, the Secretary exercised its authority to grant exemptions from the High Density Rule ("the HDR") only in a few, relatively rare, situations. In the years since the inception of the HDR, however, the circumstances surrounding air traffic have changed in fundamental ways. While there is no need to recapitulate the Department's able discussion of the history of the HDR and the problem it was designed to address, /1 two changes are fundamental to understanding the Department's reevaluation of the criteria under which exemptions from the HDR will be granted, and under which the Applicant should receive the slots it has requested.

" See generally DEPARTMENT OF TRANSPORTATION, "Report to the Congress: A Study of the High Density Rule" (May 1995) ("DOT Study").

First, the airline industry was deregulated in 1978, and the creation of a fair and open market for air travel was made a national priority. Despite deregulation, however, major incumbent airlines, which received slots free of charge, have continued to dominate the HDR airports. In general, new entrant airlines have not been able to gain access to these vital airports without paying commercially prohibitive economic rents to the major airlines. The result has been non-competitive, i.e., higher, prices for customers. The HDR thus impedes the national policy in favor of competitive air service.

Second, since the HDR was promulgated in 1968, progress in avionics, communications and computing technology, and particularly scheduling models, have radically improved traffic flow management, and more specifically, have combined to give rise to a centralized Traffic Management System ("TMS") based in Herndon, Virginia. /2 The actual separation of aircraft in time and space is managed by TMS; the HDR functions as an extra regulation, applicable to four airports. Many of the busiest airports in the country, such as Atlanta, Los Angeles, and Miami, are not slot controlled. Management of delays at such airports is handled by individual airlines, within the framework provided by TMS. Thus the HDR is not intrinsically necessary for the smooth operation of a busy airport.

In light of these changes, the Secretary recently decided to exercise his discretion to grant exemptions from the HDR more often than had been done in the past. /3 The Borough contends that the old, restricted, exercise of the Secretary's authority was correct, and the new, more expansive

2/ See DOT Study at 33-35.

practice is wrong. Because the Borough's Answer contains almost no legal authority in support of its contention, it is unclear precisely what the Borough is arguing. At some points, the Borough appears to argue that the Department's new practice is prohibited by the statute. /4 At other points, the Borough appears to be making an administrative law argument, viz., that the Secretary's increased exercise of its discretion to grant exemptions contravenes an administrative rule established by the Agency. /5 In the absence of citation to legal authority, however, the Applicant will consider the Borough's Answer to set forth, in essence, policy arguments, which are considered below. /6

The Borough does not contest the arguments of the Applicant and other new entrants that granting slots, thereby providing increased service between the rest of the nation and New York City, would be in the public interest. Instead, the Borough makes four subsidiary, essentially negative, arguments that increased air service to LaGuardia would have unfortunate results. The Borough maintains that, on balance, these negative results outweigh the benefits of increased competitive air service, and so the Secretary should refrain from granting exemptions to the HDR. The Borough's arguments as to the lack of public benefit of the proposed service, however, are either

4/ See, e.g., Answer at 6 (". . . Department's interpretation . . . should be based only upon the language of the statute and the legislative history behind its enactment.").

5/ See, e.g. id. at 5-6 (discussing whether public mandate is sufficiently strong to warrant reinterpretation of the HDR).

6/ The Applicant would be quite willing to discuss any issues of statutory interpretation or administrative law the Department finds worthwhile.

unsubstantiated or misplaced, and so the Borough's assessment of the merits of the Application is consequently unpersuasive.

First, the Borough asserts, as it did in response to previous applications for LaGuardia slots, that grant of the proposed slots would significantly increase delays. /7 As discussed above, travel delays have no direct relationship to the current application of the HDR. In fact, the slot control regime is a blunt instrument, somewhat obsolete, for achieving the commendable purpose of avoiding delays. The Secretary, in conjunction with the FAA, is well placed to determine whether the minimal increases in proposed operations will, in fact, increase delays at LaGuardia to unacceptable levels. This question need not be speculative: the Department can monitor flights to determine whether new operations cause actual delays. /8 The Secretary is acting well within his discretion in awarding slots.

Second, the Borough argues that the Applicant and other new entrants failed to show that they could not purchase or lease slots from established major carriers. Without legal authority, the Borough simply asserts the existence of an exhaustion requirement, viz., the Secretary may only consider applications for exemption from the HDR upon a showing that no access to the airport was available under the Buy-Sell Rule. This is not the case.

The Borough misconstrues federal policy regarding air service. The Borough seems worried that new entrants will succeed in "capturing free slots," /9 as if air service were a resource to be hoarded by the Department, as opposed to a public good that the Department is charged with

7/ See LaGuardia Order at 14.

8/ See, e.g. id at 16.

9/ Answer at 11.

fostering. Slots are not property; /10 the Government loses nothing by granting slots. Moreover, and more importantly from a competitive standpoint, slots were originally assigned to incumbent air carriers free of charge. /11 There is simply nothing wrong with asking for "free slots."

As discussed above, control of slots is a mechanism that stifles competition, and as a result, consumers pay higher prices at slot controlled airports than they pay at non-slot controlled airports. The provision of slots to new entrants will help foster competition at slot-controlled airports such as LaGuardia. The Department has already rejected the argument made here by the Borough:

Third, the Borough argues that public safety will be compromised by provision of more slots. As the Department recently noted, the HDR is not intended to be a safety regulation. /13 Safety is assured by the FAA's oversight of actual flights through TMS. "It is TMS -- not the High Density Rule -- that ensures the safe operation of the air traffic system. /14

Fourth, the Borough argues that any grant of new slots will "unduly" burden Queens. Two points warrant mention here. First, even considered collectively, the number of operations proposed

10/ 14 C.F.R. § 93.233(a) (1977).

11/ See 14 C.F.R. § 93.215 (allocating slots to incumbent carriers); 14 C.F.R. § 93.221 (providing for the transfer of slots).

12/ LaGuardia Order at 11-12.

13/ Id. at 14.

14/ DOT Study at 37.

at LaGuardia is relatively minor compared to the total traffic through the airport. A handful of additional operations will make no qualitative difference in the neighborhood of the airport. Second, if the foregoing contention is wrong, and the proposed service does impose undue noise or other environmental burden on Queens, the Borough has picked the wrong forum in which to make its case. Applications for exemptions from the HDR are simply not suited to consideration of such environmental burdens. Phrased differently, environmental constraints should be imposed upon incumbent, as well as new, participants in the airline industry. If accepted, the Borough's position would use environmental concerns to further entrench incumbent airlines.

The Borough makes three arguments in an effort to support the proposition that the Applicant does not meet the "exceptional circumstances" criterion as interpreted by the Department. First, the Borough argues that the Applicant has failed to show that it was unable to obtain slots through the purchase or lease. As discussed above, there is no such requirement, and imposition of such a requirement would defeat the Department's stated purpose of encouraging competition.

Third, the Borough argues that the Applicant misconstrues the relationship among airports in the New York metropolitan area. The New York airports, at least LaGuardia, John F. Kennedy International Airport, and Newark International Airport, ought to be deemed to serve a single market, contends the Borough. Indeed, even the Applicant reckoned all the airports together in its calculation of service area. Consequently, maintains the Borough, the Applicant cannot argue that it cannot serve Newark, which is not slot-controlled, in lieu of LaGuardia.

The flaw in the Borough's argument is that it conflates the analysis of "public benefit" with that of "exceptional circumstances." In its analysis of public benefit, which tends to hinge on provision of new service, the Department: has considered the relevant market to be the area reasonably served by an airport. 15/ In its analysis of exceptional circumstances, which tends to hinge on price discipline, the Department has considered LaGuardia, JFK, and Newark to be separate markets. /16

The Department's distinction between an analysis of public benefit (does service exist?) and an analysis of exceptional circumstances (is service offered at a competitive price?) makes sense.

15/ See, e.g. LaGuardia Order at 15 (consideration of proposed AirTran service between Knoxville and New York).

16/ See LaGuardia Order at 10. Contrary to the assertion of the Borough that the Department "merely quoted" Frontier, Answer at 17, the Department said that its review "confirms" that Denver-LaGuardia fares were not disciplined by either Denver-Newark or Denver-JFX service. LaGuardia Order at 1(). "Our [the Department's] own assessment of the service and fare levels in these markets reinforces rather than rebuts the validity of Frontier's position." Id. at 11. See also "There is evidence that Atlanta-LaGuardia is a different market from Atlanta-Newark and Atlanta-JFK (." Id. at 12 (rejecting argument that ValuJet service on Atlanta-Newark can discipline prices charged by Delta on Atlanta-LaGuardia).

Travelers may be able to reach a city, but nonetheless have to pay uncompetitive prices, economic rents, in order to do so. /17 This may be particularly important for business travelers, who are often both inflexible regarding their choice of airport and price insensitive. Consequently, the Department is entirely correct to consider whether, within the context of a service market, price discipline is sufficient.

The Applicant intends to provide direct service between an underserved, populous region, Illinois and Iowa, and the entire New York area, thereby serving a public interest. The Applicant also meets the exceptional circumstances criterion for granting an exemption to the HDR because the Applicant's service will help discipline prices at LaGuardia and other hub airports. /18

As discussed above and in the Application, the service proposed by the Applicant meets every requirement set forth by statute and every criterion established by the Department for the grant of an exemption from the HDR. AccessAir has requested slots in order to conduct three operations at LaGuardia, far less than l percent of the take-off and landing slots available at that airport. With no adverse effect on LaGuardia, the Department's provision of these rights will facilitate convenient non-stop and direct air service between AccessAir's service area and New York, a very large underserved market. In addition, provision of these rights will enhance competition. For these

17/ See, e.g. Scott McCartney, "Ticket Shock: Business Fares Increase Even as Leisure Travel Keeps Getting Cheaper," Wall Street Journal A1 (Mon., Nov. 3, 1997).

18/ As noted in the Application, the Applicant's service may also provide some price discipline in other hubs, notably Chicago and St. Louis. Answer at 8-9.

reasons, AccessAir respectfully requests exemptions from the HDR to enable it to serve Des Moines, Iowa, Moline/Quad Cities, Illinois, and Peoria, Illinois.

Respectfully submitted,

Jeffrey N. Shane

David A. Westbrook

WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, D.C. 20037-1420

Telephone: (202) 663-6000

Facsimile: (202) 663-6363

Counsel to AccessAir Holdings, Inc.

DATED: December 18, 1997