OST-95-277 / Western Pacific / Reply of Chicago / July 30, 1997

Application of

for an exemption from Subparts K and S of Part 93 of the Federal Aviation Regulations

Pursuant to Rule 4(f) of the Department's Rules of Practice (14 C.F.R. § 302.4(f)), Chicago moves for leave to file this Reply. As the owner and operator of the airport that must accommodate any new entrant carrier, Chicago's Reply will make available pertinent information that will assist the Department in reaching a sound resolution of this proceeding; receipt of its Reply will not delay resolution of the issues in this proceeding or unjustly prejudice any interested persons.

On April 20, 1995, the Department issued Order 95-4-33 ("the Order"), denying WestPac's application for a limited number of slots at O'Hare under the newly enacted slot exemption provisions under Section 206 (c)(1) of the Federal Aviation Administration Authorization Act of 1994 ("the Act"). l/ In its Order, the Department without any logical basis cited the presence of an established carrier in the Colorado Springs-O'Hare market, offered Denver International Airport as sufficient market access, questioned WestPac's market growth estimates, and deferred action due to the ongoing nature of the Department's HDR study.

On May 10, 1995, WestPac filed its Petition for Reconsideration of Order 95-4-33. On May 26, 1995, Chicago filed an Answer in support of WestPac's Petition for Reconsideration. In its Answer, Chicago noted, inter alia, that nothing in the language or legislative history of the Act would support so narrowly circum

1. Pub. L. No. 103-305, § 206.

scribing the "public interest" or "exceptional circumstances" criteria to include only the initiation or resumption of service on a route currently unserved. Chicago's 1995 Answer emphasized that:

Answer at 3. Chicago stressed that it is counter-intuitive to suggest that the public interest would not be served by introducing a new entrant airline onto a route currently served by only one carrier. Id.

Chicago also asserted that for the Department to use the pendency of its study -and rulemaking as a basis for denying slot exemptions was "without question flatly at odds with the Act." Id. at 7. Congress enacted the Act's slot exemption provision in 1994 for the express purpose of accommodating demand at the HDR airports until the Department completed its then-ongoing study and any rulemaking to determine "whether the [HDR] should be eliminated or whether an increase in the number of operations should be permitted." H.R. Conf. Rep. No. 103-677, at 1723 (1994).2/

One month after the Department issued its Order denying WestPac slots, the Department released its HDR study. 3/ In its study, the Department found that repealing the HDR at O'Hare would

2. Passage of 206, Pub. L. 103-305 followed the 1993 recommendation of the National Commission to Ensure a Strong Competitive Airline Industry that slot controls be reviewed "with the aim of either removing these artificial limits or raising them to the highest practical level consistent with safety requirements." See A Report to the President: Change. Challenge and Competition (Aug. 1993), at 9.

3. See Report to the Congress: A Study of the High Density Rule (May 1995).

produce "an overall positive net benefit of $205 million per year" 4/ (even after illogically subtracting as a cost, not benefit, a $181 million offset for airline "net loss of fare premiums"). Significantly, the Department also found that O'Hare's balanced airfield capacity (159), sustainable gate capacity per hour (206), and sustainable land-side capacity per hour (190) all substantially exceeded the number of air carrier slots per hour (155) at O'Hare. 5/ Notwithstanding these enormous benefits and demonstrable capacity at O'Hare, the Department to date has not taken any action to repeal, modify or increase slots at O'Hare, except through modest exercise of the Act's exemption process.

No carriers or parties opposed WestPac's original application for new entrant slots, nor did any oppose WestPac's Petition for Reconsideration for over two years. Indeed, WestPac's Petition for Reconsideration has laid dormant now at the Department for almost 28 months.

4. Id. at 61.

5. Id. at 52.

6. Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, GAO/RCED-97-4, (Oct. 18, 1996); Airline Deregulation: Changes in Airfares. Service and Safety at Small. Medium-sized. and Large Communities, GAO/RCED-97-79, (Apr. 19, 1996).

growing concerns over barriers to entry at various hub airports, including O'Hare, where it found that O'Hare's two hub carriers have increased their concentration of slots from 66 percent in 1986 to 87 percent in 1996. GAO warned of a sellers' market for slots with peak-period slots costing over $2.0 million, and found that:

Significantly, GAO agreed with Chicago that no Congressional guidance supports the Department's restrictive reading of the "exceptional circumstance" criterion in the manner set forth in the Department's denial of WestPac's original application. In its January 1997 response to the GAO's report, the Department indicated that it would include competitive benefits as a factor in determining whether to grant slots to new entrants.

7. Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets. GAO/RCED-97-4, (Oct. 18, 1996), at 6.

Id. at 4. United asserted that since Chicago is one of the most competitive aviation markets and the most competitive hub market in the country, no "exceptional circumstances" exist to justify a grant of new entrant slots. 8/

As an initial matter, Chicago respectfully submits that upon resolution of any petitions filed prior to September 1, 1997, the Department ought to revisit with the FAA, Chicago and other interested parties the future processes for considering exemptions to the HDR at O'Hare. Specifically, Chicago is concerned that the present exemption process has no time limits for decision and does not provide an objective, fair and efficient means of allocating limited assets.

Even in contested proceedings, applicants should not have to wait two years for a Departmental decision. Nor should the

Chicago: (i) agrees with these established carriers regarding the inappropriate nature of AACA's filing; (ii) respectfully disagrees on the merits with these established carriers as to the need to construe liberally the Secretary's exemption authority to accommodate new entrants; and (iii) generally takes no position on pending slot applications at La Guardia. Chicago also does not support currently AACA's suggestion to withdraw slots from incumbent carriers for re-allocation to new entrants or to require U.S. partners of foreign air carriers holding exemption slots at O'Hare to provide those slots to new entrants.

grant or denial of applications depend on considerations that are not economic or efficiency based, as where the Department handed out 20 O'Hare slot exemptions this year to one carrier to provide air service between small communities (non hubs) and O'Hare. 9/ Chicago also questioned the Department's April 1, 1997 denial of the application of Pakistan International Airlines for a simple change in slot times, which lead to a temporary cessation of valuable international air service at O'Hare. 10/

So long as the Department keeps the HDR in effect at O'Hare, it simply must ensure timely and non-arbitrary decisions that are in the public interest. Based on the Department's administration of the slot exemption process to date, however, Chicago is very concerned that the Department is not only misconstruing the Act, but has placed a chilling effect on both domestic and foreign air carrier plans to initiate or enhance service at O'Hare. At present, the factors sufficient to justify any slot exemption are highly uncertain, while transaction costs are high. As a result, the Chicago region suffers in terms of lost jobs, trade, and tourism. In the meantime, the Department will continue to be faced with considering applications in isolation, without regard for capacity improvements at O'Hare or the highest and best use of such valuable, government-created assets.

9. See Order 97-1-7 Docket OST-96-1911 (January 13, 1997). Great Lakes Aviation was the only carrier that responded to the Department's request for proposals. The Department's actions followed the Conference Report to the Department's FY '97 Appropriations bill.

Chicago understands the concerns of United and both acknowledges and appreciates the significant investment that United and American have made at O'Hare over the years regarding slot acquisitions and airport development in general. In addition, Chicago has no reason to doubt that, due to the presence of both United and American Airlines, Inc. ("American") at O'Hare, Chicago consumers enjoy greater service and more competition than at any other hub airport in the country.

That is not to say, however, that the antiquated HDR and the increasing slot concentration at O'Hare do not represent potential barriers to entry for new entrant carriers like WestPac. As this proceeding and the studies of the Department and GAO have confirmed, slots at HDR airports are usually either not available at all, or are offered on bundled terms, off-peak times or excessive prices that small carriers simply find uneconomic. As a result, little new entry has occurred at HDR airports over the past decade.

Still, Chicago could not agree more with United's characterization quoted above that the HDR restricts a carrier's ability to expand and enhance the efficiencies of its network. Chicago also agrees with United that the HDR limits a carrier's ability to grow at O'Hare, and constrains a carriers' ability to compete with carriers at other hubs that are free to expand to meet local and connecting needs. That is why Chicago called for a phased repeal of the HDR during the course of the Department's HDR Study two years ago. ll/ Both United and American at that time, however, reversed their historic support for repeal of the HDR and supported the status quo, with a few changes. 12/

Unfortunately, the Department's HDR Study, even though it found that repeal of the HDR at O'Hare would produce an overall benefit of $205 million per year, did not recommend HDR repeal at O'Hare. And the Department, to date, has failed to make any changes whatsoever to this almost 29-year old "temporary" rule.

Thus, in the absence of any Departmental change to the HDR at O'Hare, Chicago welcomes the liberal application of the Act's slot exemption process to accommodate both new entrants and international air service. Chicago and its consumers are placed at a competitive disadvantage by having O'Hare operate under restrictions that are not in place at competitive airports, even those that incur delays per passenger well in excess of those at O'Hare. 13/

11. See Comments of the City of Chicago Docket No. 27664 (May 27, 1994), at 28.

12. Compare Statement of United Air Lines. Inc. (March 13, 1984) ("United asks the FAA to . . .[r]escind the High Density Rule at O'Hare effective April 1, 1984") with Comments of United Air Lines Inc., Docket No. 27664, (May 27, 1994) and Letter of United Air Lines. Inc., February 28, 1994 ("Given O'Hare's importance in the national air transportation system, simply eliminating the rule could create greater inefficiencies at O'Hare with a corresponding effect nationwide."). Compare Petition of American Airlines. Inc., Docket 26788, (February 18, 1992) ("For 23 years, the high density rule has limited the ability of carriers at O'Hare to utilize larger aircraft and to serve additional markets.") with Comments of American Airlines, Inc., Docket 27664, (June 7, 1994) ("Before actions are taken to modify the high density rule, the Agency should continue system adjustments to improve dependability.").

13. For example, based on FAA Data for 1996, the number of delays per 1,000 operations at O'Hare (36.3) were far less than those at San Francisco (56.0) or Newark (62.9)--both non-HDR airports.

In the instant proceeding, WestPac would appear to have presented the Department with just the kind of "exceptional circumstances" that Congress had in mind in passing the Act to get around the archaic restrictions of the HDR. As the procedural posture of this proceeding makes clear, WestPac's two-year old petition has not "jumped on the bandwagon" of competition. WestPac legitimately availed itself of the newly enacted slot exemptions under the Act to attempt to provide competitive services to/from Chicago in a valuable and growing market.

WestPac has presented the Department with evidence demonstrating significant fare impacts of competitive service in both the Colorado Springs-Midway and Colorado Springs-O'Hare markets. As noted by WestPac, total traffic and capacity in the Colorado Springs-Chicago market has tripled in just two years. WestPac suggests that if awarded the slots it requests at O'Hare, similar benefits will be realized in the Colorado Springs-O'Hare market, which could also redound to the benefit of established carriers both in stimulating demand in the O'Hare-Colorado market and in creating a pool of additional passengers for carriage from O'Hare on East-bound traffic -- passengers who might otherwise travel through different, competing hubs.

In addition, given the history of the HDR, it is also difficult for any established air carrier to be describing any new entrant applications as government hand-outs or subsidies. As established carriers are well aware, after the promulgation of the Buy-Sell Rule in 1985, 14/ they were the recipient of hundreds of

14. 50 Fed. Reg. 52180 (December 20, 1985).

slots at HDR airports worth millions of dollars, without cost.

United itself was the recipient of 581 slots and American received 413 slots at O'Hare. Thus, it is rather incongruous for established carriers that have benefitted by their grandfathered-slot status now to object to the modest creation of a limited number of slots for new entrants. 15/

With regard to abuse of slot exemptions, the Department is fully capable of avoiding this abuse, as noted by Chicago in its original answer in support of WestPac, by conditioning any slot award in a manner similar to its grant of new entrant slots for Reno Air. Thus, the Department could condition its approval by providing that the exemptions could be used only to provide nonstop service between Colorado Springs and O'Hare, that the exemptions do not confer on WestPac the ability to own or hold slots for the purpose of selling, trading, transferring or conveying or getting anything else of value for the slots, and that operations under the slots may be carried out only with Stage 3 aircraft. Chicago would support such restrictions.

In summary, the proposed new service by WestPac should benefit consumers by providing additional service, innovative fares and increased competition in the Colorado Springs-O'Hare market. Equally important, passengers using WestPac's Midway service will

15. United did not raise subsidy arguments in connection with the Department's decision to grant 20 slot exemptions to Great Lakes Aviation, Ltd. d/b/a United Express, Order 97-1-7, nor has it raised similar concerns during the pending slot exemption proceeding for Trans States Airlines, OST-97-2368, even though Trans States is requesting slots to accommodate 16 new daily roundtrips at O'Hare. Trans States is a code-sharing partner of United at O'Hare.

continue to benefit by its Colorado-Midway service, as WestPac has committed to retain Midway-Colorado service even if the Department grants its petition to conduct O'Hare-Colorado Springs service.

The Department, in its response to the recent GAO report, has identified "competition" as an additional consideration with respect to future slot exemption applications. In fact, as recently as May 13, 1997, Assistant Secretary Charles Hunnicutt testified before the Senate Aviation Subcommittee that "even without a change in legislation, the Department intends to be more receptive to considering competition as a factor in granting slot exemptions to new entrants under the exceptional circumstances criterion in the law." 16/ And in its latest report on this subject, 17/ the GAO continued to raise slot controls as "continu[ing] to block entry at key airports in the East and Upper Midwest."

Chicago urges the Department, pursuant to its authority under Section 206(c) of the Act, to follow through on its commitment to take competition into account and to grant WestPac's application for four new entrant slots at O'Hare.

16. In the same hearing, the GAO's John Anderson testified:

17. Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation. GAO/RCED-97-120 (May 13, 1997), at 2.

WHEREFORE, the City of Chicago urges the Department to grant forthwith the Petition of Western Pacific Airlines, Inc. for reconsideration of Order 95-4-33 and to grant its request for two daily round-trips between Colorado Springs and O'Hare.

Respectfully submitted,

J Kenneth P. inn

WINTHROP, STIMSON, PUTNAM & ROBERTS

1133 Connecticut Avenue, N.W.

Suite 1200

Washington, D.C. 20036

(202) 775-9800

Counsel for the City of Chicago

July 30, 1997

60098546.3 - 1 3

Certificate of Service

I hereby certify that I have this day served a copy of the foregoing motion for leave to file and answer of the City of Chicago upon all persons named on the attached Service List by first class mail, postage prepaid.

Kenneth P. inn

Washington, D.C.

July 30, 1997