OST-97-2548 / FedEx, Arrow, FWIA / Answer of Fine / June 18, 1997

Joint Application of

for approval of a transfer of frequency allocations pursuant to 49 U.S.C. §41105 (U.S.-Argentina All-Cargo Frequencies)

Clearly, the only source of statutory authority for the Department's consideration of the Joint Application is 49 U.S.C. §41105. Joint Applicants appear to recognize as much since they repeatedly cite Section 41105 in their application. See, e 9, Joint App. at 1, 9, 10, 16. Section 41105 makes no provision for the transfer of frequencies; it applies only to the transfer of certificates. Joint Applicants argue, however, that this statutory provision should be interpreted also to authorize the transfer of exemption authority and "ancillary authority such as frequency allocation." Id. at 9, n.3.

If the Joint Applicants' argument is correct -- if the statutory provision authorizing certificate transfers can be interpreted broadly to cover frequency transfers -- then surely the procedural regulations governirig certificate transfer applications (i.e., Subpart Q) must also cover frequency transfer applications. Joint Applicants' argument to the contrary -- that the Department should treat a frequency transfer application as a certificate transfer application but yet deny interested parties the benefit of the regulations that govern certificate transfers -- is a brazen, self-serving plea for Departmental inconsistency that must be rejected outright.

Nevertheless, because the Department has not yet opined on the Joint Applicants' peculiar procedural argument, Fine Air respectfully requests, in the event that their proposed 7-day deadline is somehow treated as appropriate, that the instant pleading be treated as incorporating a motion for leave to file out of time. The Joint Application raises fundamental issues relating to the quality of competition in the frequency-constrained all-cargo market between the U.S. and Argentina and therefore warrants the Department's most careful consideration. The record before the Department in a proceeding of such importance clearly should reflect the views of all interested parties. The Department's interest in ensuring that parties have an adequate opportunity to make their views known -- particularly where the procedure advocated by the Joint Applicants must be seen in any event as controversial -- clearly outweighs any possible near-term interest the Joint Applicants may have in obtaining the fastest possible decision.

Department to compel Joint Applicants to produce certain information required to gauge accurately the competitive effects of the proposed frequency transfer, and, as set forth in footnote 1, conditionally moves for leave to file the instant pleading. /2

2/ In its Preliminary Answer, Fine Air also noted that the Joint Application did not include the Attestation stated in an affidavit" required by Rule 1707 of all Subpart Q applications. The Joint Applicants argue in their Consolidated Reply that the attorney's signature on the Joint Application -- a signature required on all pleadings filed pursuant to Rule 4 of the Department's Procedural Regulations -- is equivalent to the required attestation. The argument is patently wrong. Were the attorney's signature found at the end of every pleading filed with the Department treated as equivalent to a Rule 1707 attestation, Rule 1707 would be meaningless.

The Joint Application is antithetical to U.S. international aviation policy, Departmental precedent and the public interest in at least three ways.

First, if approved, the transfer of frequencies would result in the effective monopolization of the severely frequency- and capacity-controlled, highly concentrated U.S.-Argentina market. FedEx would control eight of the twelve available U.S. carrier frequencies in the market. The remaining four frequencies would be divided among two smaller carriers; neither would be able effectively to challenge or restrain FedEx's dominance of the market. Contrary to the Joint Applicants' assertion that transfer of the frequencies will have a ''relatively small impact on the degree of concentration in the U.S.-Argentina market," Joint App. at 15, this transaction, if approved, will result in an overwhelmingly concentrated market dominated by FedEx.

Second, approval of the Joint Application would permit FedEx to ride roughshod over the Department's clearly stated policy against allowing any incumbent carrier to further dominate the U.S.-Argentina market. Approximately two years ago, the Department rejected the applications of all incumbent carriers, including FedEx, for additional U.S.-Argentina all-cargo frequencies that would shortly become available pursuant to an agreement between the U.S. and Argentinian Governments. The Department held that the U.S. Government's "overall goals in the U.S.-Argentina allcargo market would best be served by adding new competitors rather than authorizing incumbent carriers to increase their services." Order 95-3-30. FedEx now seeks to purchase for cash the frequencies -- and with them, the elimination of competition in the market -- that the Department explicitly denied it as a matter of policy in that proceeding.

Third, contrary to Joint Applicants' assertions, it appears that Arrow has not held out scheduled service to Argentina in over a year. Thus, approval of the Application would undermine completely the credibility of the Department's policy, in the U.S.-Argentina and other capacity-controlled markets, of requiring carriers either to use assigned frequencies or to return them to the Department.

I. APPROVAL OF THE JOINT APPLICATION WOULD RESULT IN FEDEX EFFECTIVELY MONOPOLIZING THE U.S.-ARGENTINA ALL-CARGO MARKET.

The bilateral agreement between the United States and Argentina currently authorizes U.S. carriers to operate twelve narrowbody all-cargo frequencies per week. FedEx currently possesses five of these frequencies, which it utilizes to operate service five times per week with B-727-200 aircraft. Joint App. at 6. If the proposed transaction is approved, FedEx will control eight of the twelve frequencies. FedEx proposes to utilize the three additional frequencies to substitute a DC-10-30 freighter aircraft for the B-727-200. Id. The four remaining U.S.-Argentina all-cargo frequencies will be divided equally between Challenge and Polar. /3

A. FedEx's Acquisition of the Three Additional Frequencies Would Considerably Increase Market Concentration.

Joint Applicants' assert that the U.S.-Argentina market is currently "moderately concentrated" and that transfer of the three additional frequencies would have "a relatively small" impact on the degree of concentration. They are wrong.

In defense of their assertion, Joint Applicants proffer certain HHI calculations. Joint App., Exh. JAM. Joint Applicants' HHI calculations are wholly misleading and transparently unhelpful. Among the failings of Joint Applicants' calculations are:

• The calculations assume that all-cargo capacity on flights making intermediate stops in third countries is allocated solely to U.S.-Argentina shipments. Clearly this is not the case /4 This failing alone effectively renders the Joint Applicants' market share/HHI calculations meaningless.

• The calculations are based solely on capacity offered and not on service actually provided. Yet capacity offered clearly does not equate to actual market shares. Rather, when the data is available as it is here, market

4/ For example, the Joint Application indicates that FedEx is currently operating five flights per week to Argentina over the following routes: Memphis-Sao Paulo-Buenos Aires-Santiago (3x per week); and Memphis-Miami-Sao Paulo-Buenos Aires-Santiago (2x per week). Joint App. at JAM, p.2. Surely some of the capacity on these flights is occupied with cargo destined for Sao Paula or Santiago. Yet Joint Applicants attribute all of the capacity to the U.S.-Buenos Aires market.

• The calculations combine belly and freighter capacity. Clearly, these two are not substitutes. Although some portion of total freight transported between Argentina and the United States is transported in the bellies of passenger aircraft, many types of cargo are suited solely for transport on freighter aircraft. As FedEx has urged so passionately for years, all-cargo services constitute a distinct market of their own. The quality of competition in all-cargo markets should be assessed without reference to belly cargo.

• Joint Applicants present, and their calculations are based on, only southbound schedule and capacity information. They present no information about concentration in the market for northbound services. Yet the frequencies FedEx seeks to acquire cover both northbound and southbound services (the former being critically important to U.S. importers).

Recalculating the HHIs, after correcting for just one of these many flaws illustrates that concentration in the U.S.-Argentina market is significantly greater than Joint Applicants suggest. Exhibit FN-1 attached hereto recalculates the HHIs, utilizing the data provided by Joint Applicants, based solely on U.S.-Argentina freighter services. It does not attempt to adjust for other failings of Joint Applicants' HHIs -- the failure to account for northbound services, the erroneous assumption that all capacity offered on these multistop flights is dedicated to the U.S.-Argentina market, and the erroneous assumption that capacity equates with actual market share. Nevertheless, Exhibit FN-1 indicates that the HHI Index of current market concentration is at least 2273.9 -- well into the `'highly concentrated" realm -- and would increase by over 1000 points to 3328.7 if the Joint Application is granted. In markets "[w]here the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase of more than 100 points are likely to create or enhance market power or facilitate its exercise." 1992 DOJ and FTC Merger Guidelines §1.51(c).

In reality, the anticompetitive implications of the proposed transaction may be even greater than suggested by Exhibit FN-1. To enable itself and all interested parties to gauge accurately the full anticompetitive impact of the proposed transaction, the Department should compel Joint Applicants (and any other relevant party, to the extent required) to provide information that will enable the Department to undertake meaningful HHI calculations. HHI calculations should be done for all-cargo transportation performed by dedicated freighter aircraft. The calculations should be done both northbound and southbound. Market shares should be calculated on the basis of (i) revenues and (ii) tons transported.

B. There is No Possibility of New Entry Mitigating the Anticompetitive Effects of the Proposed Frequency Transfer.

The preliminary assessments of market concentration suggest that the proposed transfer of frequencies would provide FedEx with an unacceptable degree of market power even if there were no barriers to entry. Here, exacerbating the anticompetitive implications of the proposed transfer, is the fact that new entry (or expansion by existing carriers operating in the market) is currently impossible. See 1992 DOJ and FTC Horizontal Merger Guidelines, 113.0 (one factor that should be taken into account in considering the likely anticompetitive effects of frequency transfers such as the one proposed here is the possibility of new carrier entry).

The market for all-cargo air transportation between the U.S. and Argentina is governed by a highly restrictive bilateral agreement that limits frequencies, routes and capacity. Participation in the market is determined solely by the U.S. and Argentinian Governments' decisions awarding frequencies and, as in the instant case, considering applications for transfers of frequencies.

C. If FedEx Really Needs Greater Capacity, It Can Use Larger Narrowbody Aircraft.

The hollowness of FedEx's rationale for acquiring the frequencies further belies any contention that the proposed transfer of frequencies would be procompetitive. In fact, FedEx's acquisition of the three frequencies would serve only one purpose: to keep them out of the hands of actual or potential competitors.

The Joint Application states that FedEx seeks to acquire the three additional frequencies to increase the size of the aircraft it uses in the market from a narrowbody B-727 to a widebody DC-10. /5 To support the "necessity for Federal Express to expand the capacity of its service to and from Argentina," Joint App. at 7, Joint Applicants present southbound load factors for March and April 1997. Id. at JA-4.

5/ Under the U.S.-Argentina bilateral agreement, one and one-half narrowbody frequencies may be exchanged for 1 widebody frequency. FedEx's proposed five times per week DC-1 OF service would require 7.5 frequencies; one-half of a frequency would presumably go unused.

As a preliminary matter, the information provided is entirely insufficient to permit the Department and interested parties to determine whether demand year-round is likely to result in FedEx utilizing all eight frequencies year-round. Fine Air believes that U.S.-Argentina northbound and southbound load factors in most months are, in fact, considerably lower than the southbound figures presented for March and April. Consequently, in most months, FedEx might well be expected to reduce capacity or frequency (perhaps reverting back to a B727 aircraft). Competition would be reduced year-round and in all but the peak months frequencies would be wasted. To enable the Department and interested parties to evaluate the validity of FedEx's purported rationale for acquiring the frequencies, FedEx should be required to submit load factors by direction, year-round, for the past five years.

Even assuming that load factors did require an expansion of capacity, it appears that FedEx could significantly increase its aircraft capacity without acquiring any additional frequencies. Joint Applicants state that FedEx is currently utilizing a B-727 aircraft with a payload capacity of 49,000 pounds. Joint App. at 6. It could, however, apparently substitute larger narrowbody aircraft without needing to acquire any additional frequencies. It has already obtained explicit authorization to use an A310 aircraft; why it has chosen not to do so is unexplained. See infra, pages12-13. Alternatively, it could utilize other larger-capacity narrow-body aircraft. Indeed, according to Joint Applicants, a narrowbody frequency will apparently permit use of a DC-8 aircraft with a capacity of up to 102,000 pounds. See Joint App. at Exh. JAM, p.2 (FWIA capacity with one frequency is 102,000 pounds). If correct, this would more than double FedEx's capacity and would likely satisfy whatever need it may have for additional lift, while permitting the Department to reallocate the Arrow and FWIA frequencies to a new carrier.

D. Approving Transfer of the Frequencies to FedEx is Contrary to the Department's Statutory Mandate and Departmental Policy.

A key consideration in evaluating all applications for transfer of route authority are the effects of the proposed transfer on competition. See 49 U.S.C. §41105 (one of the key inquiries which the Department must make into any application to transfer economic authority is the effect of the transfer on competition in the domestic airline industry). While the Department has previously denied route transfer applications on the grounds that the proposed transfer would have unacceptably anticompetitive results, see Joint Application of American Airlines and TWA for Approval of Transfer of Certificates (U.S.-London), Order 91-4-47 (disallowing proposed transfer of certain U.S.-London routes because it would have unacceptable anticompetitive effects), most such applications have not failed this test.

Leaving aside whether there is any situation in which the Department might validly authorize a transfer of frequencies without certificate/exemption authority (i.e., a transfer to an incumbent carrier), it is plainly evident that the Department should decline to do so here, where transfer would occur in a highly concentrated market with no possibility for new entry. The Department's long-standing goal with respect to such distorted markets is to increase competition if possible. To this end, for example, the Department has had a policy of awarding unused or new frequencies to operate in such markets not to incumbent carriers that already enjoy strong positions, but rather to new entrants. See 1995 U.S.-Argentina All-Cargo Proceeding (discussed below); U.S.-Peru All-Cargo Proceeding, Order 96-6-32 (where bilateral limitations permit extremely limited competition, the "need for new entry, price/service options, and competition . . . can best be met by authorizing . . . new-entrant carriers"); U.S.-Brazil Combination Service Proceeding, Order 97-3-8 (maximizing competition among carriers is `'a particularly significant consideration" in allocating frequencies as entry is so limited). The Joint Application is simply irreconcilable with this policy.

II. FEDEX SEEKS EFFECTIVELY TO DISREGARD DEPARTMENTAL POLICY PROMOTING COMPETITION IN THE U.S.-ARGENTINA MARKET.

In August 1994, the Department published a notice announcing that it would accept applications in Docket 49707 for four additional U.S.-Argentina all-cargo frequencies obtained for U.S. carriers through bilateral negotiations that would become effective over the next two years. Ten carriers, including all three incumbents (Florida West, Arrow and FedEx), /6 filed applications in the docket for allocation of some or all of the new frequencies. Arrow applied for two additional frequencies. /7 Florida West applied for allocation of 1 1/2 additional frequencies. /8 FedEx applied for two additional frequencies if Argentina required that it possess such frequencies to substitute A310 aircraft for the B727 aircraft it was operating five times per week. /9

In a show cause order dated January 10, 1995, the Department rejected the applications of all three incumbent carriers for additional frequencies, tentatively awarding the four frequencies to new carriers (two each for Challenge and Polar). In so doing, the Department stated explicitly its policy against further entrenching the

6/ Applications were also filed by seven carriers new to the U.S.-Argentina scheduled all-cargo market: Fine Air, Challenge, Polar, World, Aerial, Millon, and Buffalo.

7/ Application of Arrow Air, Inc. for Renewal of an Exemption, Allocation of Scheduled All-Cargo Frequencies, and Motion to Consolidate, dated August 15, 1994.

8/ Application of Florida West Airlines for Consolidation of Proceedings, for Renewal of Exemption Authority, and for Award of Additional Frequencies dated August 15, 1994.

9/ Application of Federal Express Corporation for Renewal and Enlargement of its Frequency Allocation, dated August 15, 1994.

incumbent carriers in the U.S.-Argentina all-cargo market: "[O]ur overall goals in the U.S.-Argentina market would best be served by adding new competitors rather than authorizing incumbent carriers to increase their services. Order 95-1-9 at 5.

FedEx strongly objected to the order, arguing that the Department should withhold two of the frequencies to ensure that FedEx could substitute A310 aircraft for the B727 it was then using. /10 In the final order, issued on March 20, 1995, the Department reiterated its policy against expanding the authority of incumbent carriers. Order 95-3-30 at 3. It disposed of FedEx s objection in a footnote, noting that the Argentinian Government had advised the Department that it was willing to grant a special authorization to FedEx to substitute the A310 aircraft. /11

Simply stated, incumbent FedEx now seeks to utilize its massive wealth to purchase what the incumbents were expressly denied in the 1995 proceeding: additional U.S.-Argentina frequencies. Approving the transaction would establish several precedents unfair to small carriers of relatively modest means, such as Fine Air, and antithetical to the public interest.

Through the exercise of its wealth, a massive incumbent carrier would purchase control over -- and the elimination of competition in -- an important foreign market. An already concentrated and distorted market -- in an area of the world where the

10/ Objections of Federal Express Corporation to Show Cause Order, dated January 20, 1995.

11/ The Joint Application fails to discuss why FedEx, having apparently obtained the authority to use larger capacity A310 aircraft in 1995, is now again utilizing B727 aircraft. As noted above, this fact belies FedEx s claim that it needs the two frequencies to provide greater capacity.

Department is seeking greater liberalization -- would become more concentrated and distorted. Most serious of all, a wealthy incumbent carrier would, through its purchases, effectively override explicit Departmental policy promulgated just two years ago in favor of promoting greater competition in the U.S.-Argentina market. To Fine Air's knowledge, never before has a carrier proposed -- let alone, been granted -- a route transfer in such flagrant disregard of clearly stated Departmental policy against further market concentration.

Frequencies to operate in restricted markets, such as U.S.-Argentina, are valuable rights for which the United States has granted reciprocal rights to the foreign country's carriers. In the event that a carrier possessing such frequencies determines that it will not use some or all of them, the carrier is obligated to return the unused portion to the Department. See, e.g., U.S.-Germany Third/Fourth/Fifth Freedom Frequency Allocations for the 1995 Summer Season, Order 95-2-26 ("We expect and will require that upon a carrier's determination that all or a portion of its allocation will not be used, that carrier will promptly notify the Department in writing ... of such determination and will return those flights to the Department for reallocation.") Further, it is Departmental policy that it may reclaim and redistribute frequencies that are going unused. See. e.g., U.S.-China Frequency Allocation Proceeding, 95-2-30 ("we have the power to reallocate [unused frequencies] to ensure that they are used effectively and in a manner that best promotes competition and otherwise serves the public interests).

The Joint Application states that the frequencies assigned to Arrow and FWIA are going unused or are not being used to their full potential. Joint App. at 8, 14. In fact, reviewing OAG Air Cargo Guides published during the past year, it appears that Arrow has not held out any scheduled air cargo services between Miami and Buenos Aires for over a year. /12 Nor, for that matter, has Challenge. Yet these carriers have not returned any of these frequencies to the Department for redistribution. /13

Permitting the sale of frequencies not used and not returned would wholly compromise the effectiveness of the Department's important use-or-lose policy in frequency constrained markets. The Department should reclaim all U.S.-Argentina frequencies that have gone unused for a period of ninety days and should redistribute those frequencies to interested carriers in a competitive frequency allocation proceeding.

Pointing to previous Departmental decisions approving transfers of certificate authority in other markets, the Joint Applicants argue that the transfer of

12/ See the last thirteen issues of the OAG Air Cargo Guide published from June 1, 1996 to June 1, 1997.

13/ Lest Joint Applicants contend that these frequencies have supported charter flights, it is abundantly obvious that scarce scheduled frequencies should be used to support scheduled services. Charter flights may be conducted without such frequencies.

U.S.-Argentina frequencies sought here presents "no complex or contested material issues of fact and is governed by a well-established history of precedents." They plead, accordingly, for quick consideration and expedited approval. Joint App. at 21. When Fine Air filed a Preliminary Answer stating that it intended to utilize the time available to it under the regulations to fully examine issues relevant to the proceeding, Joint Applicants' furious response castigated Fine Air for "dilatory" tactics. Joint Applicants seek hasty consideration of their application for good reason: careful examination of the Joint Application reveals that it is replete with serious factual issues, unsupported by Departmental precedent, fundamentally incompatible with Departmental policy and would ill-serve the public interest.

Approval of the Joint Application would vest FedEx with control of two-thirds of the frequencies available to U.S. carriers to operate in the U.S.-Argentina all-cargo market. Contrary to Joint Applicants' transparent arguments to the contrary, that market is highly concentrated, and would become dangerously more so if the proposed transaction is completed. There would be no possibility of new entry sufficient to discipline FedEx's overwhelming market power. Nor have Joint Applicants demonstrated any rationale for the transfer except for precluding new entry.

FedEx's efforts to further entrench itself in the U.S.-Argentina air cargo market fly in the face of the Department's explicit rejection, just over two years ago, of all incumbent carriers' applications for additional frequencies and its conclusion that the U.S.-Argentina market required more, not fewer, competitors.

Finally, permitting any transfer of frequencies, such as those held by Arrow, that have apparently gone unused for an extended period of time is incompatible with effective enforcement of the Department's policy that carriers must utilize scarce international route rights or promptly return them to the Department.

Wherefore, Fine Air urges the Department (i) to compel Joint Applicants, if they seek to further pursue the Joint Application, to produce expanded HHI and load factor data as set forth above; (ii) in the absence of compelling new evidence, reject the Joint Application; and (iii) reclaim and redistribute to interested carriers any and all U.S.-Argentina frequencies that are not being fully utilized.

Jeffrey N, Shane

Karan K. Bhatia

WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, D.C. 20016

Tel. (202) 6634000

Fax (202) 6634363

Counsel to FINE AIRLINES, INC.

Dated: June 18,1997