Docket OST-97-2058 / OST-96-1700 / American and British Airways / American and TACA / Answer of the City of Houston / July 29, 1997

Joint Application of

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

Joint Application of

for exemptions, certificate authority, undocketed foreign air carrier permit authority, and statements of authorization

DATED: July 29, 1997

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plans and (ii) all interested persons have been given an opportunity to comment on those submissions. These procedural issues aside, Houston continues to object to American's emergence as the "chosen instrument" of U.S. aviation policy in Latin America. American is creating precisely the type of competitive stranglehold on this market that Pan American held until two decades of government pressure finally introduced competition. Unless the Department acts quickly and decisively, the U.S. - Latin American market will retrogress to an anti-competitive, anti-consumer monopoly, just as it was prior to the mid-1960's.

In support of this Answer, Houston states as follows:

1. A large U.S.-flag airline is attempting to monopolize service between the U.S. and Latin America by stringing together a series of alliances, joint ventures, and equity investments which will give it conclusive market power. Does that sound familiar? Do the words "chosen instrument" stir any memories? With all respect to American, it is reinventing the Pan American wheel. This is a problem that last was resolved three decades ago. It is unfortunate that it must be resolved again.

2. Pan American's contribution to the leading role of the U.S. in international air transportation was enormous, but it was not done with competition in mind. By 1938, Pan American had built a dominant network of air services throughout Latin America through direct service, service through controlled non-U.S. carriers and through Panagra, a joint venture between Pan American and W.R. Grace Lines. By the end of the Second World

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War, Pan American absolutely dominated the U.S.-Latin America market. It took twenty years to change that situation.

• In 1946, the CAB instituted an investigation intended to formalize the Latin American route structure. Pan American's position was simple: all international air transportation should be conducted by a single company, the "chosen instrument" of U.S. aviation policy, and that company should be Pan American. The CAB rejected that policy and introduced additional U.S.-flag competition in these markets "in the public interest and in the interest of the industry." Additional Service to Latin America, 6 C.A.B. 847, 865 (1946).

• The next target was the network of Pan American's "alliances" with non-U.S. carriers. The CAB took care of these by exercising its section 408 antitrust jurisdiction to prohibit a common holding out of identity and other cooperative activities, prohibitions which eventually led to the independence of those carriers. These "Cubana" conditions /1 still are embodied in the Department's Policy Statements, 14 C.F.R. § 399.82.

• The last and most difficult target was Panagra. Frustrated by years of unsuccessfully trying to break up this joint venture, the CAB asked the

1/ See, Havana - New York Air Carrier Permit Case, 16 C.A.B. 371 (1952).

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3. It now has come full circle. American is attempting to reinvent the chosen instrument policy rejected more than fifty years ago through a network of alliances, joint ventures, and equity investments which would have made Juan Trippe, Pan American's legendary founder, proud. Continental's motion sets forth the naked numbers with respect to American's dominance, but it goes beyond numbers. Houston's future as a major gateway to Latin America depends in large part on the Department's commitment to maintaining competition in these markets. A "chosen instrument" also means "chosen," and therefore highly limited, gateways. Houston's concern is obvious, but it should be of concern to every other major hub airport in the U.S. with the exception of Miami and Dallas/Ft. Worth.

4. These policy issues at the very least need to be addressed. A serious inquiry must begin with the procedures suggested by Continental in its motion. First, require American

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and its putative partners to divulge the real information with respect to their plans and expectations, subject to the appropriate Rule 39 confidentiality protection. Second, give all interested persons ample opportunity to analyze and comment upon that information. Finally, and most importantly, do not let American proceed further until and unless all issues have been resolved in its favor (a result which Houston frankly thinks is unlikely).

5. Pan American built up its monopoly market position in Latin American because of the absence of federal regulation prior to 1938. It would be tragic if American now were permitted to become the "chosen instrument" in the U.S. - Latin America market because of deregulation in 1978. That plainly was not the intent of the Congress, and it should not be the result allowed to happen by indirection and accretion. Continental's motion must be granted in its entirety.

For the foregoing reasons, Houston urges the Department to grant Continental's motion in the above-mentioned dockets.

Respectfully submitted,

Frederick A. Douglas

Rebecca L. Taylor

Leftwich & Douglas, P.L.L.C.

1401 New York Avenue, N.W.

Washington, D.C. 20005

(202) 434-9100

Counsel for the City of Houston and the Greater Houston Partnership

July 29, 1997