OST-95-277 / OST-97-2771 / Western Pacific / Reno Air / August 22, 1997

Application of

for an exemption from 14 C.F.R. Part 93, Subparts K and S. pursuant to Section 206(c)(1) of the Federal Aviation Administration Authorization Act of 1994.

Application of

to amend exemption (Reno- Chicago O'Hare Service)

The Department should not attempt to expand its statutory

Response of United Air Lines, Inc.

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authority in an effort to introduce the very type of economic regulation that was eliminated with the Airline Deregulation Act of 1978. Providing slots free of charge to all new comers, while other carriers must purchase slots to introduce new service, will result in a significant distortion of the marketplace. Additionally, given the operational restrictions imposed upon Chicago O'Hare by the High Density Rule, expanding the number of slots available under the "extraordinary circumstances" exemption will reduce or eliminate slots that would otherwise be available under the other two statutory exemptions: for essential air service and for international services. The Department must recognize that while the High Density Rule is in effect, additional capacity is a limited commodity and that granting slots to these special pleaders will directly reduce the number of slots that are available for international and essential air service, both of which would provide greater public benefit than the applications currently under consideration.

United requests leave to file the following consolidated response to provide the Department with the evidence necessary to supplement the record.

II. Response of United Air Lines, Inc.

The High Density Rule places a limit on the number of

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operations that can be accommodated at O'Hare. The allocation of the bulk of this capacity is accomplished through the competitive marketplace. The existence of the Buy-Sell rule at O'Hare ensures that slots are allocated to their highest and best economic use, producing the maximum benefits for consumers. Congress has crafted three limited exceptions to the High Density Rule: to provide essential air services to small communities, to provide international services, and when "extraordinary circumstances are found. /2

These exceptions to the High Density Rule result in the government substituting its judgment for that of the marketplace. Without a market mechanism to allocate slots to their highest and best use, the Department is charged with ensuring that exemption slots are likewise allocated to their highest and best use among the competing applicants seeking slots for service to small communities (essential air service), international service, to start service at O'Hare upon a showing of n extraordinary circumstances." The best standards will produce economically rational results that compare to the results of the marketplace allocation mechanism that has been in place at O'Hare since 1985.

The recent series of applicants for slots at High Density Airports have urged the Department to expand its definition of "extraordinary circumstances" to address the particular

2/ 49 U.S.C. § 41714

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commercial and financial desires of the applicants. These carriers are urging the Department to intervene more aggressively in the marketplace to "fix" alleged problems in ensuring competition. /3 WestPac seeks to move its Chicago-Colorado Springs service from Midway Airport to O'Hare, while Reno seeks to expand its service between Reno and Chicago O'Hare from three to four daily flights in an effort to capture more business traffic. Neither wants to purchase slots, as any other carrier, including United, would have to do to inaugurate or increase such service. While subsidizing these carriers' operations at O'Hare certainly will benefit the carriers and their investors, it will provide negligible consumer benefits, and ultimately will be harmful to consumers by reducing other service options.

The government's recent indication that new slots might be available at O'Hare for these special pleaders raises the question of what standards will be applied in allocating these

3/ It is clear that Departmental intervention in the economics of the Chicago transportation market is unnecessary. The Chicago consumer enjoys a level of competition which is the envy of every other U.S. city. In addition to being the only city with two competitive hubs -- operated by United and American -- Chicago enjoys an extensive network of services successfully operated by Southwest at Midway. In fact, a recent report commissioned by the Chicagoland Chamber of Commerce found that fares in the Chicago region declined 12 percent between 1990 and 1995, while the Consumer Price Index rose 17 percent. Chicago does not suffer from the higher fares experienced at some single-carrier hubs, nor does it suffer from the lack of service options experienced by some smaller communities. The Department's intervention in the Chicago market will have no bearing on these latter two categories of competition "problems."

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resources. If the Department's intention is to significantly expand the definition of "extraordinary circumstances," the resulting flood of applications will eliminate any potential use of this incremental capacity to meet essential air service or international operations or other compelling needs at O'Hare. Expanding the statutory exemptions to the High Density Rule in circumstances where applicants fail to demonstrate that "extraordinary circumstances" justify the award will foreclose better and more economically efficient uses for these limited assets. The Department's decision-making process on applications for the scant additional capacity available under the High Density Rule at O'Hare cannot ignore these economic and operational realities.

Due consideration of these factors makes clear that the decisions must reflect the results of an economic analysis that identifies the highest and best use for this scarce resource. The Department has an obligation to the affected communities and consumers to concretely outline an economic rationale if it chooses to suspend a market-based allocation mechanism in a deregulated industry and replace it with a government subsidy program. Failure to do so can only mean that the Department has opted for a policy of protecting individual competitors rather than ensuring fair competition.

Moreover, the Department should ensure that the affected communities are consulted concerning their present and future

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needs for international and essential air service. Focusing on individual applicants without considered regard to the consequences for other needs of the communities will virtually guarantee unintended consequences. /4

Initiating service at any airport involves a significant investment in gates, aircraft, and personnel. Initiating service at an airport restricted by the High Density Rule involves an additional investment in slots. To be exempted from the cost of acquiring slots, an applicant has the burden to demonstrate "extraordinary circumstance." 49 U.S.C. § 41714(c).

As the Department has interpreted this language, an "extraordinary circumstance" exists where a route possesses "possibly unique economics and characteristics " Order 94-9-30 at 4. Rather than expanding this appropriately controlled standard, the Department should be carefully developing the indicia of "uniqueness" based on economic principles that will ensure the highest and best use of the scarce additional capacity under the High Density Rule. Any proposed use must meet the test of what will provide the greatest benefit for the consumer, not the applicant. The applications of Reno Air and WestPac fail to

4/ In its consideration of competing applications, the Department should include an application currently being prepared by United for the allocation of slots at O'Hare.

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meet this market-based standard.

Reno Air was among the first applicants for an exemption from the High Density Rule at O'Hare under 49 U.S.C. § 41714(c). The Department granted Reno Air's original exemption request in part because the Reno-Chicago O'Hare market had demonstrated "possibly unique economics and characteristics." Order 94-9-30 at 4.

Reno Air's circumstances are no longer unique. In fact, they are quite typical. For what it once characterized as a "low yield," "leisure" market, Reno-Reno Air now seeks additional slots to serve "businessmen . . . . " Application at 4 (emphasis added). Reno Air contends that it "should have the opportunity, now that the market has expanded to levels where it can profitably support such service, to increase service by one daily round trip." Id. at 6.

Every carrier that serves O'Hare is in an identical situation. Increasing service on profitable routes comes at a price. Slots must be purchased or, in the case of the network carriers at O'Hare, service to another community must be terminated. To subsidize the efforts of some carriers, such as Reno Air, merely serves to distort the marketplace. There is no economic rationale in favoring such service, particularly at the expense of other competing uses for the slots. If the

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application of Reno Air satisfies the "extraordinary circumstances" standard, then the Department is by fiat declaring very ordinary circumstances to be "extraordinary," thus inviting a flood of applicants. The finite capacity that is available at O'Hare under the High Density Rule will thus be immediately allocated to one category of applicant to the exclusion of the present and future needs for essential air service and new international services.

The Department's denial of WestPac's original application relies specifically on the fact that non-stop service was not only available between Colorado Springs and O'Hare, but that Colorado Springs passengers could also be served by non-stop service from Denver. When the Department denied WestPac's application for new entrant exemption slots, WestPac did precisely what the High Density Rule and Buy-Sell provisions contemplate -- it started service at Midway Airport, the unconstrained alternative to O'Hare. /5 WestPac's service has had all of the desired competitive effects, as WestPac itself demonstrated in its Third Supplemental Response: traffic has

5/ This is precisely the response the FAA predicted in implementing the Buy-Sell mechanism. See 50 Fed. god. 52180, 52185 ("[I]n the case of each airport, there is at least one other airport in the area that can be utilized by all operators including new entrants.")

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been stimulated, competitive fares are available, consumers have a choice of service options and airports. This is the proper answer to the needs of new entrants.

Granting an application like WestPac's for service that is already being successfully offered at Midway would also generate a flood of applicants that will ultimately preclude other services that offer unique consumer benefits -- service to small communities or international destination -- rather than duplicative service that provides benefits only to the carrier itself.

Capacity at O'Hare under the High Density Rule is finite. The market-based mechanism in effect to allocate most of the slots at O'Hare ensures the highest and best economic use of this resource. The exemption process represents an administrative distortion of the market that must be carefully controlled and monitored in the context of what, under the High Density Rule, is ultimately a zero-sum game. If the government, rather than the marketplace, determines that these special pleaders should receive the slots necessary to commence service at O'Hare, other deserving users ultimately will be denied access to O'Hare because of absolute constraints occasioned by the HDR. Granting the requests at issue here essentially demands a sacrifice of those slots which could eventually be put to a better and more

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economically rational use.

Neither Reno Air nor WestPac has demonstrated the existence of circumstances "extraordinary" enough to justify grant of the exceptional relief each seeks. These applications must, therefore, be denied.

Respectfully submitted,

JOEL STEPHEN BURTON

GINSBURG, FELDMAN and BRESS, CHARTERED

1250 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20036

(202) 637-9130

Counsel for

UNITED AIR LINES, INC.

DATED: August 22, 1997