OST-97-3285 / American and Lan Chile / Joint Application for Antitrust Immunity / December 23, 1997

Joint Application of:

under 49 U.S.C. §§ 41308 and 41309 for approval of and antitrust immunity for alliance agreement

Joint Application of American Airlines, Inc. and Lan Chile

On October 28, 1997, the Governments of the United States and Chile initialed an historic open skies agreement that promises to usher in a new era of competition in the U.S.Chile market and provide substantial benefits to consumers and communities in both countries. Carrier alliances such as the one for which American and Lan Chile seek approval and immunity herein are a critical vehicle for the delivery of these benefits. American and Lan Chile are filing this joint application with the understanding that the immunity they are requesting -and the benefits their alliance will provide -- will not become effective until the U.S.-Chile open skies agreement has been signed, an event that, hopefully, will occur in April 1998, during President Clinton's visit to Santiago for the Summit of the Americas.

The proposed American/Lan Chile alliance is fully consistent with U.S. international aviation policy, which has encouraged global arrangements between U.S. and foreign carriers in order to benefit consumers and enhance competition. Indeed, in the case of a carrier such as Lan Chile, such an arrangement is vital to allow the carrier to realize new opportunities under open skies and provide benefits to consumers. The Department has already approved and immunized five alliances between U.S. and foreign airlines -

Joint Application of American Airlines, Inc. and Lan Chile

United/Lufthansa/SAS, Delta/Swissair/Sabena/Austrian, Northwest/KLM, American/Canadian, and United/Air Canada -- and should likewise approve and immunize the American/Lan Chile alliance to provide consumers with important new price, service, and quality options in the global marketplace.

The proposed American/Lan Chile alliance consists of three main elements:

o Coordination of various functions and activities relating to passenger and cargo services that the two carriers operate between the United States and Chile and beyond, as more fully explained below.

o Reciprocal codesharing. American will place its code on Lan Chile's Chile-U.S. services and flights beyond Lan Chile's gateways in Chile, and Lan Chile will place its code on American's U.S.-Chile services and flights beyond American's gateways in the U.S. The parties may also codeshare on each other's additional services worldwide where permitted by governmental authorities.

o Reciprocity for mileage credit accrual and travel award redemption between the frequent flyer programs of American and Lan Chile.

These alliance arrangements are anticipated to begin promptly following the issuance of regulatory authorizations and antitrust immunity. Notwithstanding the cooperation and

Joint Application of American Airlines, Inc. and Lan Chile

joint operations contemplated by the alliance agreement, both airlines will retain their separate identities, brands, ownership and control. The alliance does not involve any exchange of equity or other forms of cross-ownership.

The American/Lan Chile alliance will offer consumers a myriad of benefits:

o A broad network, comprising some 4,000 potential city-pairs, making the world more accessible to consumers with new and convenient routings, which will compete with the other alliances already immunized by the Department and with codeshare arrangements in the Americas and elsewhere, such as that between United Air Lines and VARIG, the largest carrier in South America, and between Delta Air Lines and Transbrasil.

o A wide choice of routings and schedules.

O Seamless, coordinated connections between alliance flights, including single tickets and through-handling of baggage and cargo.

o Service offered by two airlines known throughout the world for their commitment to high quality service and innovation.

o Coordination between two excellent frequent flyer programs, offering a wide range of opportunities both for earning mileage credit and for enjoying travel awards.

Joint Application of American Airlines, Inc. and Lan Chile

o More value, made possible through the synergies and efficiencies that the alliance will create.

The American/Lan Chile alliance will significantly improve consumer convenience and choice, produce operating efficiencies that will create greater value for passengers and shippers, increase competition in thousands of city-pair markets, and generate economic benefits for communities across the worldwide networks of both airlines. Improved air services will increase tourism and encourage local economic development, generating growth in employment and tax revenues.

The alliance will also benefit the employees and shareholders of each company. American and Lan Chile employees will benefit from growth opportunities at both carriers, and shareholders will enjoy improved returns resulting from synergies and market growth.

The past several years have witnessed a remarkable expansion of airline service to and from the United States. Much of this growth has resulted from the Clinton Administration's initiatives, including the April 1995 Statement of International Air Transportation Policy and a series of open skies aviation agreements with major trading partners such as Canada as well as other important trading nations in Europe, Asia and, in this hemisphere, the Central American nations of

Joint Application of American Airlines, Inc. and Lan Chile

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.

At the time it initialed the U.S.-Chile open skies agreement, the Government of Chile made it clear that the market cannot be fully opened unless Chilean carriers are assured of effective access to U.S. traffic through alliances with other carriers. See Memorandum of Consultations, October 28, 1997. The Government of Chile's position reflects the fact that new service opportunities for Chilean carriers under an open skies agreement are not meaningfully available unless Chilean carriers are able to enter into full cooperative alliances with U.S. carriers of their choosing. Otherwise, the skies would be "open" in name only.

It is clear, on the other hand, that failure to approve the alliance would seriously undermine any prospect for an effective U.S.-Chile open skies agreement for the foreseeable future and would undermine what has been a successful U.S. policy of achieving liberalized agreements with other countries.

An open skies agreement will eliminate the frequency and designation restrictions in the U.S.-Chile market and permit an unlimited number of U.S. and Chilean airlines to operate over an unlimited number of routes with unlimited frequencies. The door will be wide open to new competitive

Joint Application of American Airlines, Inc. and Lan Chile

entry and expansion to U.S. carriers such as Continental Airlines, Delta Air Lines, and United Air Lines, which have shown substantial interest in new and/or expanded services in the U.S.-Chile market.

In order to proceed with the alliance -- and to give meaning to an open skies agreement between the United States and Chile -- American and Lan Chile require antitrust immunity. In addition, American and Lan Chile require exemptions and statements of authorization to implement the codesharing operations contemplated by the alliance agreement. That authority is being sought in separate applications, submitted on October 7, 1997, /2 and should be granted no later than approval and immunization of the alliance agreement.

These and other matters are discussed in further detail below.

The alliance agreement between American and Lan Chile (Exhibit JA-l) establishes the contractual framework for implementation of comprehensive coordinated activities by the two carriers. If the agreement is approved and antitrust

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immunity is granted, the applicants will then proceed to conclude specific coordination undertakings with respect to scheduling, marketing, pricing, planning, joint services, and related matters. The joint applicants have not yet made such agreements in the absence of antitrust immunity.

The alliance agreement contemplates coordination in the following key areas:

1. Codesharing. Each party will codeshare on the U.S.-Chile services operated by the other party. In conjunction with their U.S.-Chile flights, the parties will also codeshare on connecting services they operate in the United States and in Chile. Insofar as permitted by applicable air transport agreements, each party will codeshare on the services of the other party beyond the United States and Chile. The parties may also codeshare on each other's additional services worldwide where permitted by governmental authorities. For codesharing services, the marketing carrier will sell seats from the operating carrier's available inventory.

2. Revenue Allocation. The parties will develop a method for allocating revenues derived from the operation of their alliance services, such as revenue sharing or pooling.

3. Pricing. The parties will cooperate in the establishment of rates and fares and pricing strategies for

Joint Application of American Airlines, Inc. and Lan Chile

services provided under the alliance agreement, in particular, the codeshare flights.

4. Yield management. The parties will cooperate regarding inventory control and yield management as those functions relate to services provided under the alliance agreement, in particular, the codeshare flights. The two carriers will provide each other access to their respective yield management systems and will consult closely in the yield management process.

5. Schedules. The parties will jointly plan their respective schedules for U.S.-Chile service and related connecting services in order to maximize and optimize the service options available to consumers and to minimize connecting times, for the benefit of consumers.

6. Marketing and product. The parties will jointly (as well as individually) market, promote, and advertise the services covered by the alliance agreement. The parties will also seek to harmonize their respective service standards and jointly develop new products, where appropriate. The parties may seek to use an alliance mark to represent their alliance and frequent flyer program linkage.

7. Frequent flyer programs. The parties will offer reciprocal frequent flyer programs, which will allow members of

Joint Application of American Airlines, Inc. and Lan Chile

one party's frequent flyer program to accrue and redeem awards on the services of the other party.

8. Sales and expenses. The parties will jointly determine the most efficient and commercially sensible way to sell alliance services, coordinate their sales forces, and allocate their sales resources.

9. Airports. The parties contemplate sharing facilities at the airports they serve, so far as possible, while maintaining the identity of both brands.

10. Cargo. The parties will cooperate in the transportation of cargo between the United States and Chile and in other markets. It is contemplated that Lan Chile will serve as American's general sales agent for cargo in Chile and American will serve as Lan Chile's general sales agent for cargo in the United States.

11. Cost Reduction. The parties will attempt to coordinate their purchases of goods and services from third parties in order to realize cost savings and eliminate redundancies, where possible. The parties will also coordinate their travel agency commission structures and other incentive arrangements as they relate to the services offered under the alliance agreement, with the objective of reducing costs.

12. Management of the alliance. To coordinate the implementation and management of the alliance, American and Lan

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Chile will form an "Alliance Committee" consisting of two designees from each carrier. The Committee will oversee and manage generally the cooperative activities of the two carriers.

The foregoing areas of coordination will allow the carriers to generate significant efficiencies and provide a broad array of enhanced on-line services, including the provision of broader, more efficient, and more competitive services. It is the parties' belief that none of the benefits and efficiencies can be achieved to the same, or any significant, degree absent antitrust immunity. Such benefits include:

1. Greater Choice and Ease of Connections

By codesharing across each other's networks, American and Lan Chile will offer the traveling public a greater choice of destinations. Passengers and cargo shippers from any of the 225 cities served by American and American Eagle will be able to reach with ease any of the 37 cities served by Lan Chile. Wherever possible, American will place its code on Lan Chile's U.S.-Chile services and flights beyond Lan Chile's gateways in Chile, and Lan Chile will place its code on American's U.S.Chile services and flights beyond American's U.S. gateways. As a result, the American/Lan Chile alliance network will cover approximately 4,000 city pairs, making more of the world readily accessible to travelers.

Joint Application of American Airlines, Inc. and Lan Chile

It has been recognized that codesharing agreements for beyond and behind points offer "seamless service" and provide greater convenience and other benefits to customers than standard interline agreements. See Order 96-5-12 (May 9, lg96) (United/Lufthansa); Order 96-5-26 (May 21, l996) (Delta/Swissair/Sabena/Austrian). For example, customers making a trip involving multiple flights on both American and Lan Chile will have "one stop shopping," using a single ticket, checking through baggage and cargo with ease, and obtaining all required boarding passes at the outset of the journey.

In addition, American and Lan Chile intend to coordinate schedules and, wherever possible, co-locate terminals, to maximize customer convenience and service and improve the connecting process. Similarly, arrival and departure gates will be moved closer together wherever possible, and operations will be transferred from one terminal to another to minimize walking distances between connecting flights. The broader range of flight times and co-location of facilities is clearly in the consumer's interest, not only because this provides greater choice, but also because this reduces the inconvenience to the customer in the event of delay or other disruption resulting from weather conditions, mechanical problems, or other factors.

Joint Application of American Airlines, Inc. and Lan Chile

2. Reciprocal Frequent Flyer Programs

Customers will also benefit from coordination of the two carriers' frequent flyer programs. These programs will become fully reciprocal: mileage accrued on one airline can be used not just for awards on the other but also to achieve a higher tier membership. In addition, members of the alliance partners' club programs will have additional airport lounges available to them and will receive priority bookings on flights across both airlines' networks.

3. Quality of Service

Both American and Lan Chile have long had a commitment to innovative and excellent service. The alliance between the two carriers will facilitate achievement of the highest common level of customer service.

4. Availability of Lower Fares

Coordination and consultation by American and Lan Chile in the yield management process will also result in tangible consumer benefits, chiefly the availability of lower fare seats. By consulting with one another on yield management issues and thereby obtaining an enhanced ability to predict customer preferences, the carriers will no longer need to overprotect higher fare classes, and thus a greater number of lower fare seats will become available sooner. In addition, the consultative yield management process will facilitate more

Joint Application of American Airlines, Inc. and Lan Chile

accurate overbooking practices, increasing the likelihood that passengers will be able to travel on their chosen flights.

It is also the parties' belief that consumers will likely benefit from lower fares due to greater competition resulting from an open skies agreement between the United States and Chile. The entry and/or expansion of additional U.S. and Chilean carriers on U.S.-Chile routes will clearly result in increased competition, and will likely lead to reductions in fares.

5. Cost Benefits and Efficiencies

The parties believe that the proposed alliance will produce a number of cost synergies and efficiencies that will result in more efficient, cost-effective operations, the benefits of which will ultimately reach customers with lower fares and improved services. A recent GAO report noted that "[i]n the long run, consumers could pay lower fares...as airlines in alliances integrate further and achieve cost efficiencies that could be passed on to the consumer." GAO Report to Congressional Requesters, International Aviation, Airline Alliances Produce Benefits, April 1995, at 44-45. Section 3.5 of the DOJ 1992 Merger Guidelines expressly recognizes that cost savings and other efficiencies can increase the competitiveness of firms and "result in lower prices to consumers."

Joint Application of American Airlines, Inc. and Lan Chile

The primary cost benefits achieved by the American/ Lan Chile alliance will result from coordination of sales and airport operations, joint promotions and marketing, and joint purchasing. In addition, the two carriers anticipate significant efficiencies from cooperation in the areas of yield management and fleet optimization.

The Department's study on codesharing and other cooperative arrangements recognized the benefits that can be achieved through antitrust immunity for allied carriers in the international marketplace:

A Study of International Airline Code Sharing, prepared for the Office of the Secretary of Transportation, December 9, 1994, at 9.

The Department should make possible those same benefits in the U.S.-Chile market by granting antitrust immunity to the proposed American/Lan Chile alliance.

Joint Application of American Airlines, IUC. and Lan Chile

A. Grant Of The Joint Application Will Provide Important Public Benefits That Will Not Otherwise Be Possible

Approval of and immunity for the American/Lan Chile alliance will provide substantial public benefits. The new open skies agreement promises to establish a dynamic and intensely competitive U.S.-Chile air transport market. Approval of and immunity for the alliance are necessary to allow American and Lan Chile to provide new benefits in an open skies environment. /3

The American/Lan Chile alliance agreement will allow the joint applicants to create a coordinated network of services between the United States and Chile and beyond. A seamless American/Lan Chile network will promote maximum competition in the U.S.-Chile market and the worldwide marketplace by enabling American and Lan Chile to compete with global alliances that already enjoy antitrust immunity and others, such as United/ VARIG, that dwarf the American/Lan Chile arrangement.

The traveling and shipping public will derive considerable benefits from the alliance. Section II, supra, details

3/ As is reflected in the October 28, 1997 Memorandum of Consultations, U.S. regulatory approval for alliances of Chilean carriers are critical to the vitality of a U.S.-Chilean open skies agreement.

Joint Application of American Airlines, Inc. and Lan Chile

the extensive range of those benefits. Briefly, the alliance will create network synergies by establishing new linkages between cities served by the alliance carriers, providing new on-line service to multiple interior points, producing cost efficiencies and savings through system coordination which can be passed on to consumers in the form of lower fares and improved service, and increasing competition in the U.S.-Chile and beyond markets. /4

Shareholders and employees of American and Lan Chile will derive benefits from the alliance similar to those enjoyed by shareholders of other airlines which are members of immunized alliances. It is not surprising that Northwest's President and Chief Executive Officer, John Dasburg, has stated that antitrust immunity is one of his company's most valuable "strategic assets," benefiting its bottom line by tens of millions of dollars each year. Northwest Says It Has 'Turned The Corner' With Revamped Route System, Aviation Daily, August 9, 1994, at 226. That immunized alliance infused up to $175 million in additional revenues to Northwest in 1994 alone, one-third of Northwest's total transatlantic passenger revenues. GAO Report, at 28. KLM earned $100 million in added revenues,

4/ The GAO Report recognized that system integration and increased competition among airlines generate public benefits in the form of lower fares. GAO Report, at 44-45. 17

Joint Application of American Airlines, Inc. and Lan Chile

equal to 18 percent of its transatlantic passenger revenues. Id. GAO found that "[t]he alliance's success is due to the broad scope of the code-sharing network and the degree of integration the airlines have achieved," which was made possible by antitrust immunity. Id. at 28-29.

In order to realize these benefits, and since legal, economic, and logistical obstacles preclude the formation of transnational integrated route systems either individually or through merger, American and Lan Chile have formed an alliance. Prohibitions against Sabotage prevent Lan Chile from operating service between U.S. points (and, therefore, prevent the economic operation of service to interior U.S. points on a non-codeshare basis), and U.S. and Chilean laws concerning nationality and ownership effectively preclude mergers of airlines of different nations. /5 United, Delta, and Northwest and their partners have received antitrust exemptions in order to operate

5/ The Department has recognized the obstacles U.S. carriers face in developing their own global networks of direct service. These obstacles include (1) lack of "substantial access not only to key hub cities overseas, but also through and beyond to numerous other cities, mostly in third countries"; (2) lack of "access to a large number of gates and takeoff/landing slots, frequently at some of the world's most congested airports"; (3) lack of "considerable financial resources [necessary] to establish and sustain commercially successful overseas hub systems"; and (4) "the [in]ability to obtain infrastructure and establish market presence in a new region quickly." Statement of United States International Air Transportation Policy ("DOT Policy Statement"), 60 Fed. Reg. 21841, 21842 (May 8, l995).

Joint Application of American Airlines, Inc. and Lan Chile

their alliances. American and Lan Chile, wishing to realize a wide range of public benefits, including greater competition with established alliances and codeshare partnerships, request the same exemption for their alliance.

B. Foreign Policy Considerations Support Approval Of And Antitrust Immunity For The Alliance Agreement

The proposed American/Lan Chile alliance agreement is fully consistent with the Department's policy to encourage and facilitate the globalization and cross-networking of air transportation. As Secretary Pena stated when he presented the U.S. International Aviation Policy Statement, "the United States believes that globalization will bring vast benefits for all nations and air carriers that embrace and adapt to it. . . . [We are] firmly behind the movement to . . . increased international traffic and the growth of global networks." Remarks of Secretary Pena at the 50th Anniversary Commemoration of the Chicago Convention, at 3, 6 (November 1, 1994). /6

Secretary Pena correctly observed that globalization necessarily involves the transcontinental linkage of hub networks, and noted the "ability to effectively flow passenger traffic between [U.S. carriers'] own and others' networks . . .

6/ See also Statement of Secretary Pena before the Senate Commerce Committee (July 11, 1995) ("the trend towards globalization of air services through efficiency-enhancing networks and alliances is here to stay, . . . offer[ing] great public benefits for all nations").

Joint Application of American Airlines, Inc. and Lan Chile

Enable[s] carriers to provide much improved, more competitive services to millions more travelers and shippers every year." Remarks of Secretary Pena at 50th Anniversary Commemoration of Chicago Convention, at 4; see also DOT Policy Statement, 60 Fed. Reg. 21841, 21842-43 (May 3, 1995) (recognizing airlines' need for "broad, flexible authority to operate beyond and behind hub points, in addition to the hub-to-hub markets between . . . two countries"). The Department also has recognized the essential role of airline alliances in achieving globalization. See Statement of Secretary Pena (introducing the DOT Policy Statement) (April 25, 1995) ("Airlines are becoming increasingly global. Route networks are now being linked in alliances consisting of carriers from different nations, with international hub-and-spoke networks that offer passengers on-line service to cities around the world"); see also Order 96-5-12 (May 9, 1996), at 17-18; Order 96-5-2 (May 21, 1996), at 2. In approving the Delta/Swissair agreement, the Department stated:

Joint Application of American Airlines, Inc. and Lan Chile

Order 96-5-26 t May 21, 1996), at 27 (emphasis added).

Previously, when the Department approved and immunized the Northwest/KLM combination, it anticipated that the grant of antitrust immunity would encourage, and even necessitate, the development of similar alliances by other carriers. The Department reasoned:

Order 92-11-27 (November 16, 1992), at 14.

It is now beyond question that the Northwest/KLM alliance created competitive pressures that led to the United/ Lufthansa alliance (which grew into the United/Lufthansa/SAS alliance, which begot the global Star Alliance), the historic U.S.-Germany open skies agreement, the multi-faceted Delta/Swissair/Sabena/Austrian alliance, and open skies agreements with Switzerland, Belgium and Austria. The open skies agreement with Chile will be the first U.S. open skies agreement in South America. The marketplace developments that the agreement

Joint Application of American Airlines, Inc. and Lan Chile

will enable, including the Lan Chile/American alliance, new entry, and increased Fifth Freedom operations, will have the same competitive effects throughout the region as the U.S.Netherlands agreement had in Europe.

Thus, U.S. international aviation policy encourages the development and approval of the American/Lan Chile alliance. Approval and immunization of the alliance is the logical next step in the progress of the U.S. open skies policy. Conversely, the denial of antitrust immunity to American and Lan Chile would prevent consummation of their alliance, call into question U.S. commitment to U.S.-Chile open skies, foreclose opportunities to carriers of each country, and deny substantial benefits to the public. This would be a real step backward in attempts to liberalize the U.S.-South America market in general.

C. The Statute And The Department's Consistent Precedents Support Approval Of The Alliance Agreement

In relevant part, the governing statute provides that the Department "shall approve an agreement . . . when the Secretary finds it is not adverse to the public interest and is not in violation of this part." 49 U.S.C. § 41309(b). The Department is required to disapprove an agreement that "substantially reduces or eliminates competition," unless the Department finds that the agreement satisfies a more rigorous

Joint Application of American Airlines, Inc. and Lan Chile

public interest standard, i.e., that the agreement is "necessary to meet a serious transportation need or to achieve important public benefits (including international comity and foreign policy considerations)," and that "the transportation need cannot be met or those benefits cannot be achieved by reasonably available alternatives that are materially less anticompetitive." Id. § 41309(b) (1) (A),(B).

The American/Lan Chile alliance agreement will further U.S. foreign policy objectives and enhance competition. The alliance also fully meets the public interest test of section 41309(b).

1. The Department's Precedents Support Approval of the American/Lan Chile Alliance

The Department has approved five immunity applications: United/Lufthansa/SAS; Delta/Swissair/Sabena/Austrian; Northwest/KLM; American/Canadian; and United/Air Canada. Uniform, consistent, and fair application of regulatory policy now requires the Department to grant the same authorizations to the joint applicants -- i.e., antitrust immunity -- as has been granted to other alliances. Only by doing so will the Department enable American and Lan Chile to compete fairly in the global marketplace, consistent with the DOT Policy Statement's requirement that "competition is fair and the playing field is level." 60 Fed. Reg. 21841, 21844 (May 3, 1995).

Joint Application of American Airlines, Inc. and Lan Chile

In 1993, the Department determined that granting antitrust immunity to the Northwest/KLM integration agreement was consistent the U.S.-Netherlands Air Transport Agreement, even though there was no specific provision in the Netherlands agreement requiring approval. Nonetheless, the Department determined that " denial of antitrust immunity would contravene the spirit of the Accord and be counterproductive to the United States' relations with the Netherlands. . . . [W]e believe that the Netherlands would consider a denial of immunity contrary to the open skies initiative, unless we had a strong basis for a refusal to grant antitrust immunity." Order 93-111 (January 15, 1993), at 12. The GAO Report explained the Department's decision thus:

GAO Report, at 52. The Department's Northwest/KLM approval decision essentially expressed the hope that airline alliances would be the essential means for reaching the end of open skies. More recently, the Department's decision approving and immunizing the Delta/Swissair/Sabena/Austrian combination confirmed the role of alliances as the engine of open skies:

Joint Application of American Airlines, Inc. and Lan Chile

Order 96-5-26 (May 23, 1996), at 2. The Department's approval of and grant of antitrust immunity for the Northwest/KLM, United/Lufthansa/SAS, and Delta/Swissair/Sabena/Austrian alliances provided the backdrop for the recently-initialed and historic open skies agreement between the United States and Chile. Disapproval of the American-Lan Chile alliance, or the prevention of its consummation by withholding immunity, however, would undermine the U.S. Government's commitment to open skies and to free and fair international competition and would be fatal to the Department's promise of "comparable opportunities" in exchange for open skies. DOT precedent and policy mandate the approval and immunization of the American/Lan Chile alliance.

2. The Proposed Alliance Will Not Substantially Reduce Or Eliminate Competition

The Department has in past orders examined competition in global markets, U.S.-foreign region, U.S.-foreign

Joint Application of American Airlines, Inc. and Lan Chile

country, and overlapping city-pairs in determining the effect of a proposed transaction.

a. Global Markets

On a global scale, the American/Lan Chile alliance will have a sweeping, pro-competitive impact by adding an important, vigorous competitor to the growing list of worldwide alliances. In thousands of individual city-pairs served by the alliance, international passengers and cargo shippers will be able to choose between the American/Lan Chile alliance and one or more of the existing global alliances. The impact of this global competition will particularly benefit behind and beyond gateway passengers, who will receive new service, quality, and pricing options driven by competitive forces.

The American/Lan Chile alliance will improve service and competition in the approximately 4,000 city-pairs it can potentially reach, benefiting millions of passengers who travel on the routes the alliance serves The alliance will maintain and potentially improve service to smaller cities that cannot sustain more frequent nonstop service by one of the parties acting alone. The alliance will also be able to start new service in smaller markets where no nonstop service currently exists. With such new service, the alliance will link more cities by convenient connections than were previously available.

Joint Application of American Airlines, Inc. and Lan Chile

American and Lan Chile, moreover, will explore and develop efficiencies to provide better service at lower cost by cooperating on their services with the protections afforded by immunity. Such efficiencies can include: offering a greater range of fares on alliance flights than are possible on an interline basis; better yield management inherent in codesharing versus interline availability; broader and more attractive frequent flyer opportunities; greater aircraft alignment to individual routes; improved aircraft utilization on given routes; cooperation on certain marketing and market research activities to ensure top-quality service; better utilization of ground equipment and assets; and joint purchasing and technology development. The cost savings generated by these efficiencies will inevitably be passed on to customers, as global competition between alliances increases.

b. United States-Latin America

The rapidly expanding market between the United States and Latin America is highly competitive, and the growth of the region along with the advent of open skies agreements between the U.S. and many countries in Latin America is contributing to a surge in traffic and new entries into the market. American currently is the top carrier between the U.S. and Latin America, but faces ever-increasing competition from Continental, United (which is partnered with South America's

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largest airline, VARIG, in the Star Alliance), and Delta, along with numerous Latin American carriers. Furthermore, each of these carriers transports considerably more passengers and is significantly larger than Lan Chile.

An evaluation of the competitive nature of the U.S.-Latin America market and the possible competitive effects of the American/Lan Chile alliance must take into account the swift growth of the market and rapid expansion of American's competitors in the region. The growth and expansion of competition on routes between the United States and Latin America is highlighted by recent announcements and actions of other airlines:

i. Continental has increased its frequencies between the U.S. and Latin America significantly over the last year, including new service to Brazil and a codeshare arrangement with ACES. Continental, of course, will be instituting U.S.Chile service next year.

ii. United has expanded its Latin American service, including new service from Chicago to Guatemala and Sao Paolo, increased service beyond Lima to Santiago, and service to Venezuela. Through its partnership with VARIG, South America's largest airline, United passengers will have on-line service to every major destination in Latin America. As stated in United's press release, "VARIG opens up an entire continent to Star

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Alliance customers." "Global Network Expands to South America As Momentum Builds," United Air Lines Press Release (October 22, 1997).

iii. Delta Airlines began serving Brazil this year and has recently announced plans to cooperate with Aeropostal of Venezuela and, separately, to increase flights to Latin America fivefold in the next four years. "Delta, Aeropostal Sign Agreement to Enhance Relationship in Venezuela," Delta Air Lines Press Release (November 20, 1997). Indeed, Delta has either sought permission or confirmed its plans to institute or increase service to at least 19 Latin American cities in Peru, Chile, Venezuela, Costa Rica, E1 Salvador, Guatemala, Panama, Argentina, Belize, Colombia, Ecuador, Uruguay, Paraguay, and Bolivia. Delta, which has codeshare agreements with Aeromexico and Transbrasil, also has indicated that it intends to increase its presence in Latin America through partnerships with other Latin American carriers. "Delta Air Lines Sets Latin America Strategy," Delta Air Lines Press Release (December 10, 1997) (quoting Delta President and CEO Leo F. Mullin that "the [Latin American] region is ripe for additional competition").

c. United States-Chile

Balancing the pro-competitive effects of the American/Lan Chile alliance against any potential anticompetitive aspects of the alliance weighs heavily in favor of approval

Joint Application of American Airlines, Inc. and Lan Chile

The U.S.-Chile open skies agreement would dramatically improve the competitive situation between the U.S. and Chile, stimulating the entry of new competitors and new traffic, improving the quality of service to points behind Santiago and U.S. gateways, and improving the product offered to U.S.-Chile travelers. Existing market shares and concentration levels must be significantly discounted as they do not reflect (and will cease to exist in) the environment of free competition that will result from the new agreement. Further, as discussed below, the existing competitive environment surrounding this proposed alliance fits squarely within the competitive template applied by the Department when approving other alliances.

The market between the U.S. and Chile is presently served on a nonstop basis from points in the U.S. by American, Lan Chile, United, and, very soon, Continental. In addition, connecting service is available on a number of airlines (including United's Star Alliance partner, VARIG, Aeromexico (a Delta partner), Mexicana (a United partner), Aeroperu and Aerolineas Argentinas). Together, American and Lan Chile would account for approximately 70% of the nonstop frequencies between the U.S. and Chile under existing bilateral conditions. Following approval of the alliance, however, the U.S.-Chile market will enjoy both more service and more competitors.

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Examining current U.S.-Chile market shares in isolation is misleading. Once the open skies agreement is implemented, increase in service both by existing competitors and new entrants can be expected. The interest of other carriers in entering the market is clear. Delta has stated that it will begin service to Santiago as soon as open skies becomes reality, thereby providing "travelers and shippers unparalleled access to the U.S., Canada and Europe." "Delta Air Lines Supports U.S.-Chile Open Skies Agreement," Delta Air Lines Press Release (October 30, 1997).

The American/Lan Chile alliance is a unique opportunity to effect a drastic increase in competition and levels of service in the U.S.-Chile market, both satisfying Lan Chile's need to effectively connect its passengers throughout the United States and opening Chile to any U.S. airline wishing to compete in that market.

d. City-Pair Overlaps

In prior applications for antitrust immunity, the Department has considered the potential loss of competition in city-pairs in which both (or all) alliance carriers operate aircraft. The American/Lan Chile alliance has only one overlapping nonstop U.S.-Chile city-pair: Miami-Santiago. This route is also served nonstop by United. However, it would be inappropriate to evaluate the Miami-Santiago nonstop market

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without accounting for the impact of the resulting open skies accord between the U.S. and Chile.

Indeed, the American/Lan Chile alliance will remain disciplined in the Miami-Santiago market by a number of competitive alternatives. For purely local traffic, United will remain a strong competitor which, with the advent of open skies, will be free to increase its capacity (both in terms of frequency and equipment size) in the market. In addition, open skies is likely to result in the entry of other competitors in the Miami-Santiago market. Further, one-stop service to Santiago from Miami is available on a variety of Latin American carriers.

In addition, more than 56% of American's traffic on Miami-Santiago nonstops is behind-Miami connecting traffic from throughout the United States. The American/Lan Chile alliance will likely face strong new competition for this traffic from other U.S. carriers' hubs such as Delta from Atlanta, Cincinnati, and New York (JFK), Continental from Houston and Newark, and United from Chicago and the West Coast. Indeed, Delta has already indicated its interest in instituting service to Santiago from its planned Latin American gateway in Atlanta. Continental, already a strong competitor in Latin America, will enter the New York-Chile market early next year and will surely use that service as a stepping-stone to expanded U.S.-Chile

Joint Application of American Airlines, Inc. and Lan Chile

service in the future. For behind-Miami connecting traffic, the American/Lan Chile Miami-Santiago service will compete directly with Santiago flights from the gateway hubs of other U.S. competitors, as well as one-stop service provided by other Latin American carriers such as VARIG and Aeromexico.

Importantly, the single overlapping U.S.-Chile route in the American/Lan Chile alliance has a powerful, major competitor: United. This overlap situation, therefore, is much less troubling than overlapping routes that were part of alliances that have already received immunity. For instance, the Department immunized the Northwest/KLM alliance even though the Detroit-Amsterdam and Minneapolis-Amsterdam would be served only by the immunized Northwest/KLM alliance, with no likelihood of entry by another competitor. Order 92-11-27 (November 16, 1992), at 16. The Delta/Swissair/Sabena/Austrian alliance received antitrust immunity with respect to two city-pair routes where there was no competing nonstop service (New York-Geneva and New York-Vienna). Order 96-6-33 (June 17, 1996), at 10.

3. The Joint Application Meets The Department's Standards For Grant Of Antitrust Immunity

The Department has the discretion to grant antitrust immunity to agreements approved under 49 U.S.C. § 41309 if it finds that immunity is required by the public interest. The

Joint Application of American Airlines, Inc. and Lan Chile

Department's established policy is to grant antitrust immunity with respect to agreements that will not substantially reduce or eliminate competition if antitrust immunity is required in the public interest and the parties will not proceed with the transaction absent antitrust immunity. See Order 92-11-27 (November 16, 1992), at 18; Order 93-1-11 (January 15, 1993), at 11; Order 96-5-12 (May 9, 1996), at 15-16; Order 96-5-26 (May 21, 1996), at 17.

a. Grant Of Antitrust Immunity Is Required In The Public Interest

The alliance agreement between American and Lan Chile will allow the carriers to capture the synergies of their respective route networks, establish a seamless air transport system through network coordination, achieve competitive economies of scale, and greatly enhance competition with other alliances. These benefits will result in lower costs, enabling the joint applicants to serve more efficiently thousands of city-pairs, and provide the public with greater service options at a lower cost. The American/Lan Chile alliance also will allow the joint applicants to develop mechanisms to enhance efficiencies, reduce costs, and provide better service to the traveling and shipping public in the following illustrative ways:

Joint Application of American Airlines, Inc. and Lan Chile

1. Increased Frequencies and Enhanced On-Line Service. The coordination Of the schedules of the alliance carriers will generate greater levels of traffic support. By coordinating the flights of the two carriers, the alliance will potentially link American's network serving 225 cities with Lan Chile's network serving 37 cities, with the potential to offer on-line service to about 4,000 city-pairs worldwide. Such service enhancements and expanded on-line service options can only be accomplished on an efficient basis through coordination of schedules, combined network planning, and coordinated yield management.

2. Expanded and Improved Service in Behind-Gateway Markets. The creation of joint services having a common financial objective is essential to the alliance carriers' ability to expand on-line service, particularly in behind and beyond gateway markets. The establishment of service with a common financial bottom line, involving joint or coordinated marketing, sales, pricing, yield management, and the allocation of revenues and earnings, cannot be accomplished without antitrust immunity.

The GAO Report on airline alliances concluded that "[w]ith immunity, Northwest and KLM can develop formulas to set fares in all markets and, according to Northwest and KLM representatives, quickly enact fare reductions to attract

Joint Application of American Airlines, Inc. and Lan Chile

traffic." GAO Report, at 29. The GAO further observed that "[w]ithout immunity, airline's that are significant competitors cannot discuss pricing issues and must develop prorate agreements in 'arm's length' negotiations to divide revenues, a cumbersome process when thousands of city-pairs are involved." Id. Antitrust immunity will permit American and Lan Chile to negotiate prorates, divide revenues, and gain access to each other's behind-gateway city-pairs.

3. Coordinated Networks and Transcontinental Segments. An immunized alliance will be able to offer a greater variety of U.S.-Chile and other services. The alliance will be able to coordinate the respective networks of the applicant carriers to achieve more efficient service and maximize service options. In the absence of immunity, the alliance would not proceed and the carriers would have to schedule their services independently to maximize their own individual positions.

In addition, coordinated scheduling will allow for a greater variety of behind-gateway services. For example, assume that American and Lan Chile each serves a third country and schedules its flights to arrive at that country at about the same highly desirable peak hour. Passengers have a redundant and, therefore, limited choice. By contrast, if the carriers have the (immunized) ability to coordinate their

Joint Application of American Airlines, Inc. and Lan Chile

services, the carriers can revise and add to their schedules to provide different arrival and departure times, thereby giving the passengers a broader choice. In the absence of antitrust immunity, however, such an arrangement would expose the carriers to an unacceptable risk of antitrust challenge.

4. Expansion of Discount Fares. Currently, each carrier offers deep discount on-line fares that are only available for travel on that carrier's system. A common alliance financial strategy will enable American and Lan Chile to expand the availability of such deep-discount fares to cover their entire combined networks.

5. Inventory Control. The coordinated alliance can develop uniform and coordinated control of seat inventory to maximize management of capacity, thereby increasing utilization and efficiency and reducing costs for the benefit of the traveling and shipping public. By having yield management access to a larger part of the overall market, 1.e., by managing yield using information from both carriers' systems, American and Lan Chile hope not only to optimize revenues, but also to provide greater consumer benefits. For example, a greater number of lower fare or discount seats will become available sooner as American and Lan Chile will be able to more accurately predict demand and will no longer need to overprotect higher fare classes. In addition, this consultative

Joint Application of American Airlines, Inc. and Lan Chile

yield management process will facilitate more accurate overbooking practices, reducing the chance that a passenger will be unable to travel on the flight desired.

6. Reduced Sales, Marketing and Reservations Costs. The alliance will permit the carriers to minimize costs and maximize economic efficiencies by coordinating sales, marketing, reservations, and airport services.

7. More Effective Equipment Utilization. The alliance will permit the carriers to maximize utilization of their aircraft. By coordinating their services, the alliance carriers will be able to optimize the use of larger aircraft on routes where demand is higher and utilize smaller aircraft on more thinly traveled routes.

b. The Joint Applicants Will Not Proceed With Their Alliance Without Antitrust Immunity

American and Lan Chile categorically state, and their agreement expressly provides, that they will not and cannot carry out the collaboration and coordination contemplated by their alliance agreement in the absence of antitrust immunity. /7

The joint applicants firmly believe that the cooperative arrangements contemplated by their agreement will create consumer service enhancements and generate efficiencies that

7/ See Ex. JA-1, at 3.

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The Department has acknowledged that, without antitrust immunity, airlines may be prevented from forming alliances which offer significant competitive and efficiency benefits. See Order 96-5-26 (May 21, 1996), at 28 (Delta/ Swissair/Sabena/Austrian) ("the potential antitrust liability for an agreement of this volume may deter the applicants from integrating their services as intended by the Alliance Agreements unless they have antitrust immunity"); Order 96-5-12 (May 9, 1996), at 26 (United/Lufthansa) ("since the applicants will be ending their competitive service in some markets, they could

Joint Application of American Airlines, Inc. and Lan Chile

be exposed to liability under the antitrust laws if we did not grant immunity"); GAO Report, at 30 ("the key benefit of immunity . . . is the protection from legal challenge by other airlines," thereby allowing the participants "to more closely integrate their operations and marketing than they otherwise would for fear of legal reprisal"). In short, the extensive discussions and coordination necessary to achieve the objectives of the alliance agreement will not occur without antitrust immunity. The alliance agreement is expressly predicated on antitrust immunity and, even if it were not, the joint applicants would not risk antitrust attacks by proceeding absent immunity.

The Department has recognized the link between the open skies policy and grants of antitrust immunity for alliance agreements:

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Statement of Secretary Pena before the Senate Committee on Commerce, Science, and Transportation, at 13-14 (July 11, 1995).

Antitrust immunity is a powerful strategic negotiating tool to encourage foreign governments to eliminate restrictions on U.S. airlines. Approval of and antitrust immunity for the American/Lan Chile agreement will accelerate the U.S. Government's ability to achieve liberal open skies agreements with other countries in South America -- including those with currently restrictive aviation policies -- so that "comparable opportunities" may become available to other U.S. carriers in the context of a broadly liberalized international marketplace. See Order 92-11-27 (November 16, 1992), at 14. Indeed, open skies with Chile can serve as the catalyst for open skies throughout South America.

Real competitive pressure in the marketplace is required to expedite reform of restrictive aviation policies. The United States has tentatively achieved an historic open skies agreement with the Chile, following similar achievements with a number of countries in Europe, Central America, and Asia. Approval of the alliance agreement coupled with antitrust immunity will create a further competitive prod, encouraging recalcitrant aviation authorities to open their markets so that their carriers and public also may enjoy the benefits

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of global service networks. As the GAO Report pointed out, "antitrust immunity could by a powerful incentive for governments -- which are often seeking to benefit one national flag carrier -- to eliminate their restrictions on U.S. airlines.' GAO Report, at 54.

Several years ago, the Department predicted that the open skies agreement between the U.S. and the Netherlands would "encourage other . . . countries to agree to liberalize their aviation services so that comparable opportunities may become available to other U.S. carriers." Order 92-11-27 (November 16, 1992), at 14. The success of the Northwest/KLM alliance encouraged other countries, including Germany, Switzerland, and others, to move toward open skies accords with the United States. Approval of the American/Lan Chile alliance will increase the pressure on governments in Latin America to join the U.S.-led impetus toward liberalization of the international air transport marketplace.

A. CRS

Consistent with the Department's decision in Northwest/KLM, the grant of antitrust immunity here should also cover the coordination of (1) the presentation and sale of the carriers' airline services in CRSs, and (2) the operations of

Joint Application of American Airlines, Inc. and Lan Chile

their respective internal reservations systems. In the Northwest/KLM approval, the Department determined that, while the coordination of CRS activities could arguably reduce competition, the competitive concern was not so significant as to outweigh the justification for grant of antitrust immunity. The same conclusion applies with equal force here. Order 93-l-11 (January 15, 1993), at 15; see also Order 96-5-27 (May 21, 1996), at 22; Order 96-6-33 (June 17, 1996), at 22.

B. Duration Of Approval

The Joint Applicants request that the Department grant the requested approval and immunity for a five-year term, consistent with the duration of approvals granted to Northwest/KLM, Order 93-l-ll (January 15, 1993); United/Lufthansa, Order 96-5-27 (May 21, 1996); Delta/Swissair/ Sabena/Austrian, Order 96-6-33 (June 17, 1996); American/ Canadian, Order 96-7-21 (July 16, 1996); and United/Lufthansa/SAS, Order 96-11-1 (November 1, 1996). As the Department concluded in Northwest/KLM, "a shorter term may not allow the full effect of the implementation of the Agreement to become apparent. Furthermore, section 414 [now 49 U.S.C. § 41308] does not require us to review the implementation of the Agreement within a shorter period of time." Order 93-l-11 (January 15, 1996), at 16.

Joint Application of American Airlines, Inc. and Lan Chile

In order to expedite the Department's review of the American/Lan Chile application, we are submitting the following information modeled after the evidence request provided by the Department's staff in the American/British Airways immunity proceeding (Docket OST-97-2058).

(1) Complete conies of all agreements, including marketing and any other cooperative agreements between the parties.

The alliance agreement is submitted as Exhibit JA-1. The American-Lan Chile codeshare agreement was filed and served with the parties' joint application for statements of authorization on October 7, 1997. Other agreements are being submitted under a Rule 39 motion for confidential treatment.

(2) Separate description of each party's strategic objectives in forming the alliance aqreement(s).

American. By extending its network through an alliance agreement with Lan Chile, American seeks to increase its passenger and cargo revenues by capturing additional traffic on (1) U.S.-Chile O&D on-line routes, (2) the U.S. domestic segments of routes between the U.S. and points beyond the Chile served by Lan Chile, (3) U.S.-third country routes served by American.

Joint Application of American Airlines, Inc. and Lan Chile

Lan Chile. Lan Chile has entered into the proposed alliance in order to enhance its ability to compete effectively in U.S. and international markets where global alliances have become a pervasive competitive force.

Even under open skies, Lan Chile could not economically provide service to many more U.S. points than it already serves, as most U.S. domestic points cannot support direct services to Chile. Since non-U.S. carriers are precluded from the domestic market, Lan Chile sought a strong U.S. partner with an extensive domestic network in order to remain competitive for traffic between the U.S. and Chile and between the U.S. and South America. Lan Chile's need for a strong U.S. partner is heightened by the fact that Lan Chile is a relatively small carrier when compared to other major carriers in the U.S.-South America market, such as United, Continental, Delta, VARIG, and others.

Lan Chile needs broad access to a substantial complex of U.S.-carrier flights that connect at Miami, Lan Chile's principal gateway and the critical gateway to the United States from Latin America. American's network of Miami-connecting flights represents the best opportunity for Lan Chile to provide passengers and shippers with new and convenient on-line connecting services to interior U.S. points such as Atlanta, Boston, Chicago, Denver, Philadelphia, Washington, and many

Joint Application of American Airlines, Inc. and Lan Chile

other cities. In addition, American offers a second southern gateway with further connecting opportunities at Dallas/Fort Worth. The combination of Lan Chile and American is a particularly good fit, involving largely complementary end-to-end services, with only one overlapping U.S.-Chile nonstop route. Lan Chile also anticipates that, by combining marketing capabilities and distribution networks, Lan Chile and American will be able to operate new nonstop services on many routes which, until now, could not sustain profitable service. Lan Chile also anticipates that it will accrue substantial efficiency benefits from the alliance. The synergy of Lan Chile's and American's systems will enable both carriers to reduce costs and pass savings on to travelers and shippers. Specifically, the joint applicants intend to:

· make joint decisions on scheduling to match capacity and demand more effectively and use assets more intensively;

· jointly manage inventory to achieve more accurate demand forecasts, thereby increasing efficiency and enabling Lan Chile and American to offer more discount fares;

· engage in joint purchasing to achieve scale economies that may reduce key operational expenses, including aircraft fuel and catering;

Joint Application of American Airlines, Inc. and Lan Chile

· use airport personnel and facilities more efficiently to yield lower unit costs; and

· jointly develop large-scale information systems that will reduce costs and provide travelers and shippers with better quality, more competitively priced service.

(3) All studies, reports, and analyses that discuss route development, internal expansion, service expansion, or marketing plans or strategies, concerning air services between the U.S. and Chile and air services behind and beyond the U.S. and Chile.

The requested documents are being submitted separately by American and Lan Chile, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39.

(4) All corporate documents, dated or produced within the last two years, that address in whole or in part the subject of competition (or lack of competition or any impediments or restrictions on competition) in air travel between the U.S. and Chile and/or any points within those countries, as well as air travel beyond Chile from the U.S. The documents requested include (but are not limited to) all documents reflecting communications between Lan Chile and any U.S. air carrier relating to such competition.

Joint Application of American Airlines, Inc. and Lan Chile

The requested documents are being submitted separately by American, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39. The relevant Lan Chile documents are referenced at items (3), supra, and (7), infra.

(5) All studies, reports, or analyses that were Prepared bY or submitted to either or of the joint applicants' senior corporate officers, staff, or directors, or any financial institution regarding the proposed relationship.

The requested documents are being filed separately by American, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39. The relevant Lan Chile documents are referenced at item (7), infra.

(6) All documents reflecting any consideration (whether or not already acted upon) by either of the Joint Applicants to seek additional immunized international alliances (other than that between the Joint Applicants) contemporaneous or subsequent to the present alliance.

The requested documents are being filed separately by American, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39. Lan Chile has no such documents.

(7) All studies, surveys, analyzes, and reports, dated or produced within the last two years, that were prepared by or for any officer, director, or individual exercising

Joint Application of American Airlines, Inc. and Lan Chile

similar functions which, in whole or in part, address, evaluate, or analyze the Proposed alliance with respect to market shares, competition, competitors, markets, potential for traffic Growth or expansion into geographic markets. (If not contained in the document itself, the date of preparation and the name and title of each individual who prepared each such document should be included).

The requested documents are being submitted separately by American and Lan Chile, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39.

(8) All documents that discuss any service or operational chances anticipated at American's hub airports, stemming from the aqreement(s), including JFK International Airport.

The requested documents are being submitted separately by American and Lan Chile, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39.

(9) A list of all routes that each of the parties is currently serving, and of routes each would serve if the agreement(s) are approved. Additionally, fully identify all of the parties' current code-share/alliance arrangements and their route systems.

Joint Application of American Airlines, Inc. and Lan Chile

(10) List of all "overlap" markets now existing between American and Lan Chile. This list is not limited to markets where American and Lan Chile compete with nonstop services. Rather it should include markets where these carriers compete on a connecting basis, either true on-line connections, or in combination with code-share or marketing partners. For connecting markets, include all markets served with codeshare or marketing partners whether or not the passengers moved under a single code, otherwise shared codes, or on a purely interline basis.

(11) A detailed discussion of the anticipated integration of the Joint Applicants' operations, including domestic, transatlantic, and other international routes. The Joint Applicants should include in this discussion a description of other existing code-share/alliance or marketing arrangements and the markets served by these other arrangements.

See section II, supra, for a discussion of the anticipated coordination of the parties' operations and services.

American has existing codesharing/alliance or marketing arrangements with the following carriers in addition to the proposed alliance with Lan Chile:

Joint Application of American Airlines, Inc. and Lan Chile

1. British Midland

British Midland holds statements of authorization to place the "AA" code on its London-Amsterdam/Brussels/Glasgow flights; on its London-Paris/Nice/Frankfurt flights; on its London-Belfast/Edinburgh/Leeds/Teesside flights; and on its London-Zurich flights. The American/British Midland codesharing program began in 1993. In light of the absence of a bilateral agreement between the United States and France, American has been unable to codeshare with British Midland to Paris and Nice.

2. South African Airways

South African Airways holds a statement of authorization to place the "AA" code on its New York/Miami-Johannesburg/ Cape Town flights. American holds a statement of authorization to place the "SA" code on flights operated by American or American Eagle between Miami and 19 U.S. points, and between New York (JFK) and 13 U.S. points. The American/SAA codesharing program began in 1992.

3. Gulf Air

Gulf Air holds a statement of authorization to place the "AA" code on its service from London to Gulf points. The American/ Gulf Air codesharing program began in 1994.

Joint Application of American Airlines, Inc. and Lan Chile

4. Qantas

Qantas holds a statement of authorization to place the "AA" code on its Los Angeles-Sydney and Los Angeles-Auckland/Melbourne flights. American holds a statement of authorization to place the "QF" code on its flights beyond Los Angeles to New York, Boston, Washington, Chicago, Dallas/Ft. Worth, and Miami. The American/Qantas codesharing program began in 1989.

5. China Airlines

American and China Airlines hold statements of authorization for reciprocal codesharing ("AA" on Los Angeles/San Francisco-Taipei; "CI" on Los Angeles/San Francisco-Dallas/Ft. Worth/New York (JFK)/Miami/Chicago and Los Angeles-Washington (Dulles)). The American/China Airlines passenger codesharing program began in 1997. In addition, China Airlines holds a statement of authorization to place the "AA" code on its U.S.-Taiwan flights for cargo only; that program began in 1994.

6. Kuwait Airways

Kuwait Airways holds a statement of authorization to place the "AA" code on its New York-Kuwait flights (via London and Frankfurt) for cargo only. The American/Kuwait codesharing program began in 1996.

Joint Application of American Airlines, Inc. and Lan Chile

7. LOT Polish Airlines

LOT Polish Airlines holds a statement of authorization to place the "AA" code on its Chicago-Warsaw and New York-Warsaw flights. American holds a statement of authorization to place the "LO" code on its Chicago-Los Angeles and New York-Miami flights. The American/LOT codesharing program began in 1996.

8. Singapore Airlines

Singapore Airlines holds a statement of authorization to place the "AA" code on its Los Angeles-Singapore (via Taipei) and San Francisco-Singapore (via Seoul) flights. American holds a statement of authorization to place the "SQ" code on American's Los Angeles-Chicago and San Francisco-Chicago flights. The American/Singapore codesharing program began in 1996.

9. Canadian Airlines International

American and Canadian Airlines International (and their respective subsidiaries) have an alliance agreement that was approved and granted antitrust immunity by Order 96-7-21 (July 15, 1996). Canadian holds a statement of authorization to place the "AA" on its flights throughout Canada, and American holds a statement of authorization to place the "CP" code on its flights throughout the United States, subject to the phase-in limitations for Vancouver, Montreal, and Toronto under

Joint Application of American Airlines, Inc. and Lan Chile

the United States-Canada Air Transport Agreement. In addition, Canadian holds a statement of authorization to place the "AA" code on its Vancouver-Taipei flights for passengers originating or terminating in the United States, and American holds statements of authorization (for passengers originating or terminating in Canada) to place the "CP" code on its Los Angeles-Guadalajara and Chicago-Birmingham/Manchester (U.K.) flights; on all flights operated by American or American Eagle between points in the United States and Belize City, San Jose, San Salvador, San Pedro Sula, Tegucigalpa, Guatemala City, Managua, Panama City, Santo Domingo, Puerto Plata, La Romana, Aruba, Curacao, St. Maarten, Providenciales, Guayaquil, Quito, Lima, La Paz, and Santa Cruz. The American/Canadian codesharing program began in 1995.

10. TAM (Brazil)

American and TAM hold statements of authorization for reciprocal codesharing ("AA" on flights operated by TAM between Sao Paolo and Miami/Chicago/New York; between Rio de Janeiro and Miami/Chicago/New York; and between Sao Paolo and 18 points in Brazil; i'JJ" on flights operated by American between Dallas/Ft. Worth and Sao Paolo/Rio de Janeiro; between Miami and three U.S. points; between New York (JFK) and two U.S. points; between Dallas/Ft. Worth and 20 U.S. points; and between

Joint Application of American Airlines, Inc. and Lan Chile

Chicago and five U.S. points). The American/TAM codesharing program began in 1997.

11. TAM-Mercosur (Paraguay)

TAM-Mercosur (Paraguay) holds a statement of authorization to display the "AA" designator code on flights operated by TAM-Mercosur between Miami and Asuncion. This program began in 1997.

12. Aero California (Mexico)

American and Aero California (Mexico) hold statements of authorization for reciprocal codesharing ("AA" on Los Angeles/Dallas/Ft. Worth/Tucson/San Francisco-Mexico transborder flights and Mexico City/Guadalajara/San Jose del Cabo, Monterrey, and Hermosillo-Mexican point flights operated by Aero California; "JR" on Dallas/Ft. Worth-Puerto Vallarta and Dallas/Ft. Worth/San Francisco/Los Angeles-U.S. point flights operated by American). The American/Aero California codesharing program began in 1997.

Lan Chile has the following existing codeshare arrangements with other carriers:

1. Air New Zealand

Lan Chile has a codeshare/blocked space arrangement with Air New Zealand, which primarily involves a Santiago-Auckland connecting service. Lan Chile's code is placed on Air

Joint Application of American Airlines, Inc. and Lan Chile

New Zealand flights between Auckland and Papeete. Air New Zealand's code is placed on Lan Chile's Papeete-Easter Island-Santiago flights. This operation began in July 1996 and currently involves one flight per week. Lan Chile and Air New Zealand also have a reciprocal frequent flyer program agreement.

2. Tranportes Aereos del Mercosur of Paraguay

Lan Chile has a codeshare/blocked space arrangement with TAM of Paraguay. Lan Chile's code is placed on TAM's flights between Santiago and Asuncion (four flights per week) and on TAM's flights between Iquique and Asuncion (three flights per week). These operations commenced in August 1997.

(12) A comparison of the parties' current schedules before and after implementation of the arrangement.

The parties have not yet finalized any schedule changes to be made after implementation of the proposed alliance. The parties may adjust their schedules in the future depending on market conditions and opportunities presented by the competitive environment.

(13) Identification of other U.S. and foreign airline services at American's U.S. hub airports and JFK International Airport.

Joint Application of American Airlines, Inc. and Lan Chile

(14) A discussion of the level of service that the parties intend to provide (in-the U.S.-Chile marketplace (including behind- and beyond-gateway markets).

See supra, item (12).

(15) A discussion of significant service and equipment changes that the parties would expect to make within two years of DOT approval of the proposed alliance.

At the present time, American and Lan Chile do not anticipate any significant service or equipment changes as a result of the alliance. The parties may make both service and equipment changes in the future for commercial or economic reasons, or to the extent that regulatory requirements necessitate such changes.

(16) Analysis of how much traffic each alliance partner carries in each "overlap" market (specifically, differentiate between true on-line passengers. code-share passengers interline passengers with code-share or marketing alliance partners and other interline passengers).

(17) Origin-Destination Survey of Airline Passenger Traffic data for 1996 for the top 25 Lan Chile markets that

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involve a U.S. passenger origin, destination, or connecting point.

(18) All current marketing arrangements between the Parties and other airlines and all such arrangements which the Parties are in any way contemplating or considering for the future.

See supra, item (11).

Lan Chile has signed a preliminary memorandum of understanding with Canadian Airlines International that contemplates that the two carriers will enter into agreements for reciprocal codesharing operations and frequent flyer participation. Subject to the negotiation of a definitive agreement and receipt of regulatory approvals, the carriers expect initially to provide connecting codeshare services between Vancouver and Santiago (connecting at Los Angeles) and between Toronto and Santiago (connecting at Buenos Aires or Miami). Lan Chile does not contemplate combining the proposed transaction with American with any other arrangement involving any other carrier.

American has also entered into codesharing arrangements -- submitted to the Department for regulatory approval

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and currently pending -- with El Al, Transaero, the TACA Group, British Airways, Avianca, Philippine Airlines, Asiana, Iberia, and Air Liberte. American does not contemplate combining the proposed transaction with Lan Chile with any other arrangement involving any other carrier.

(19) A discussion of Lan Chile's alliances with other U.S. and non-U.S. airlines. Provide copies of these agreements (with translations where necessary). Describe how these services have been or will be integrated. Describe how operations under the American/Lan Chile alliance will be integrated with other American/Lan Chile code-share/alliance arrangements and partners.

Lan Chile's existing and planned joint operations with other carriers are discussed in items (ll) and (18), supra. Copies of the relevant existing agreements will be submitted separately by Lan Chile, accompanied by a joint motion for confidential treatment under 14 C.F.R. § 302.39.

It is not anticipated that Lan Chile's proposed alliance with American will result in immediate or fundamental changes to Lan Chile's existing codeshare arrangements, and Lan Chile expects these arrangements to continue in existence.

(20) A discussion of whether and how the transaction is consistent with the public interest, and what public benefits are expected to result from the transaction.

Joint Application of American Airlines, Inc. and Lan Chile

See supra, at 16-19, 34-38.

(21) A discussion of how the transaction affects important international aviation policy objectives of the United States.

See supra, at 19-22.

(22) A discussion of the transaction's impact on both U.S. domestic and international airline competition.

First and foremost, the implementation of the alliance presumes the effectiveness of an open skies agreement, an historic development that will dramatically transform the U.S.Chile market into the most competitive market between North and South America. The alliance will enable both American and Lan Chile to achieve new efficiencies that would otherwise be unattainable. By improving the joint applicants' cost structures and stimulating more productive use of their resources, the alliance will enable American and Lan Chile to offer passengers and shippers a wider range of better quality service at a more competitive price. These synergistic benefits will accrue in both domestic and international markets.

Internationally, efficient cooperation will enable American and Lan Chile both to compete more effectively with other alliances and with other large carriers and to establish new on-line service in many city-pairs. The addition of new international service has an exponentially beneficial impact on

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the domestic market because it stimulates demand for new, convenient connecting service linking passengers to new international service. The alliance also will enable American and Lan Chile to transform interline traffic into on-line traffic, offering coordinated, faster, and more convenient connections. Thus, the international and domestic benefits of the alliance are inextricably intertwined.

In addition to increasing demand by offering travelers and shippers more service options, the alliance also will bolster competition by creating a new competitor for the larger, established alliances. In short, the alliance will improve the quality and diversity of service while increasing competition.

(23) Forecast information concerning any traffic diversion anticipated from U.S. flag carriers should the application be approved.

The parties have not previously prepared any forecasts of traffic diversion from U.S.-flag carriers resulting from the alliance. Such forecasts would not be reliable, in any event, because of the absence of historical data on an open skies U.S.-Chile market. We anticipate that the open skies regime in the U.S.-Chile market will result in substantial traffic growth in the market.

Joint Application of American Airlines, Inc. and Lan Chile

(24) All information describing the extent to which airport facilities, including, but not limited to, Hates, counter space, and ground-handling, are or will be made available to any U.S. airlines desiring to be-tin or increase service at Chilean airports.

To the best of the joint applicants" knowledge, airport facilities at Santiago's Arturo Merino Benitez (AMB) Airport are available and sufficient for current and increased use by U.S. and other carriers. There is no shortage of departure and arrival "slots" at AMB. Looking to the future, the Chilean Government recently awarded a concession for significant expansion of the airport terminal, which should be completed by May 2001. The expanded terminal will have 17 boarding bridges as compared with the existing four bridges. This project will result in an increase of terminal capacity to 90,000 square meters (from 40,000) and the ability to handle nine million combined domestic and international passengers per year (an increase from 4.5 million).

(25) A description of the impact that implementation of the proposed alliance agreements(s) would have on American's operating revenue, and on its operating and net profit and loss results.

The American/Lan Chile alliance forms an important part of American's global strategy. Although additional

Joint Application of American Airlines, Inc. and Lan Chile

revenues and profits generated as a result of the alliance agreement cannot be precisely quantified, the alliance is of substantial strategic and financial importance to American in keeping pace with similar global alliances that the Department has approved and immunized.

(26) A discussion of the degree to which a grant of the application would or should affect Lan Chile's participation in IATA, especially price coordination.

Lan Chile plans no changes in its participation in International Air Transport Association (IATA) tariff coordination activities, subject to any requirements imposed by DOT order.

(27) A discussion as to any labor issues that may result from the transaction. and whether, how and to what extent employees of the applicant airlines will be integrated. In particular, state whether the transaction or this type of transaction was the subject of recent collective bargaining between American and any of its unions and the nature of such discussions. Discuss whether American's unionized employees adversely affected by the agreement would be compensated or protected by a collective bargaining agreement and whether adversely affected non-unionized employees would be compensated pursuant to separate arrangement(s).

Joint Application of American Airlines, Inc. and Lan Chile

American believes that the transaction raises no significant labor issues. American and Lan Chile will remain independent, with neither having the ability to control the other. No significant impact on unionized employees is anticipated under the agreement. American and Lan Chile believe that the long-term impact of the transaction will be positive for all existing employees and for new job creation.

(28) Describe any effect of Granting the application on the U.S. applicant's Civil Reserve Air Fleet (CRAF) commitments.

The American/Lan Chile alliance will have no impact on American's CRAF commitments.

For the foregoing reasons, American and Lan Chile urge the Department to approve, on an expedited basis, their alliance agreement under 49 U.S.C. section 41309, and to grant discretionary antitrust immunity to the agreement under 49 U.S.C. section 41308.

Joint Application of American Airlines, Inc. and Lan Chile

Respectfully submitted,

CARL B. NELSON, JR for American

CHARLES J. SIMPSON of Zuckert Scoutt for Lan Chile

December 23, 1997