OST-97-2857 / US Airways / August 26, 1997

NOTICE: Answers supporting or opposing this application must be fled and served upon US Airways and all parties served with this application on or before September 10, 1997.

Application of

US AIRWAYS, INC.

for an exemption pursuant to 49 U.S.C. § 40109

(Philadelphia - London (Gatwick)

August 26, 1997

Pursuant to 49 U.S.C. § 40109 and Subpart D of the Department's Rules of Practice (14 C.F.R. Part 302), US Airways, Inc. applies for a two-year exemption from 49 U.S.C. § 41101 to engage in scheduled foreign air transportation of persons, property and mail between the terminal point Philadelphia, Pennsylvania and the terminal point London (Gatwick), United Kingdom. US Airways respectfully requests expedited consideration and grant of this application to enable US Airways to apply for operating slots at Gatwick Airport in a timely manner by October 24, 1997.

Application of US Airways

· US Airways is applying to restore its U.S.-London authority and resume its Philadelphia-Gatwick service beginning in the 1998 summer season. As soon as access to Heathrow Airport is available, US Airways will operate exclusively to that primary London airport from its major hubs in the Eastern United States.

· This application requires urgent attention and expedited decision. To prepare for this service starting next March, US Airways must be authorized in time to apply by October 24 for allocation of Gatwick slots at the industry-wide scheduling conference beginning on November 13.

· US Airways' re-entry into the U.S.-London market from its major hub gateways in the Eastern third of the U.S. represents a new competitive alternative to current service and to a BA/American alliance, in whatever form it may take. US Airways will be a new entrant, independently offering U.S. flag services at gateways alternative to traditional gateways, such as New York, and competing for behind-gateway traffic from over 100 cities throughout the U.S.

· Philadelphia-London is a Bermuda II "non-rover" route, which lies dormant today, and one which British Airways forced US Airways to divest in 1993 as a condition of BA's investment in US Airways. BA has now chosen a new partner, American Airlines, which had obtained the Philadelphia route and additional Heathrow slots which the U.S. Government helped secure. After only eight months, American abandoned the route and switched the slots to other gateways, leaving a BA monopoly. US Airways is determined to restore competitive service between Philadelphia and London.

· US Airways applied a year ago to operate Philadelphia-Heathrow service and remains ready to start as soon as access can be obtained. Heathrow access, however, appears increasingly uncertain, with bilateral negotiations stalled and with necessary regulatory decisions by the European Commission and the U.K. and U.S. Governments apparently at least several months away. Even further delay could occur if widespread reports are true that BA and AA are planning a revised alliance agreement.

Application of US Airways

· Further delay would be unfair and harmful to Philadelphia, which has long awaited the resumption of U.S. flag service to London and the expansion of the gateway's transatlantic service pattern that already includes service to Paris, Frankfurt, Munich, Rome and Madrid. Philadelphia-London is a "guaranteed" U.S. route which is dormant. U.S. consumers are being denied the benefit of U.S. flag service and vigorous competition.

· In the event Heathrow access continues to be delayed, alternative service to Gatwick Airport, on an interim basis, would provide re-entry to the London market for US Airways and badly needed U.S. carrier competitive service for Philadelphia, although BA would retain its Heathrow monopoly in the meanwhile. The U.S. Government should take all available steps under the existing bilateral to enable US Airways to begin competing on the Philadelphia Gatwick route by the beginning of the summer 1998 season, including expediting authorization of the service and supporting US Airways' efforts to obtain viable operating slots and facilities at Gatwick.

US Airways seeks exemption authority to serve London through Gatwick Airport on an interim basis unless or until access to Heathrow Airport is available. Thus, this application is supplemental to, not in lieu of, US Airways' application pending in Docket OST-96-1660 for authority to serve London (Heathrow) from Philadelphia, Boston, Charlotte, and Pittsburgh. Heathrow remains the essential goal of US Airways service as well as of United States open skies policy. US Airways must serve Heathrow to offer the optimal level of competition, especially with British Airways already operating twice daily roundtrip service between Philadelphia and Heathrow. Gatwick service presents only an interim alternative, but a necessary one

Application of US Airways

in light of the increasing uncertainty of obtaining access to Heathrow for next summer's peak season. /1 Bilateral negotiations are stalled and it is unclear whether and when the U.K. Government will agree to remove the bilateral restrictions on new access to Heathrow for U.S. carriers and provide the necessary slots and facilities. And decisions by the European Commission and the U.S. and U.K. Governments on the BA/AA alliance appear to be at least several months away.

Time is quickly running out for new competitors to plan, prepare for, and begin advance sales for the spring/summer 1998 traffic season in the U.S.-London market. BA itself has been reported as stating that approval of the proposed alliance in time for the November 1997 airports slot conference is essential for implementation of the BA/AA alliance plans for next year's peak season.

The November slot conference is even more of a deadline for carriers, such as US Airways, that would be instituting new services. Having in hand the underlying route authorization from the Depart talent is a prerequisite to secure an allocation of

1/ Recent and widespread press reports from informed sources in Brussels, London and elsewhere indicate that British Airways and American Airlines are preparing to scale back their alliance plans and abandon, at least temporarily, their request for antitrust immunity and approval of an operational merger rather than accept conditions, such as those proposed by the GAO and being considered by the European Commission, requiring them to divest sufficient slots and facilities at Heathrow to provide meaningful open skies access for competition by other airlines. It is highly questionable, to say the least, whether any such fall-back strategy between the two dominant carriers in the U.S.-Heathrow market, a market that remains effectively closed to new competition, could survive regulatory and antitrust scrutiny.

Application of US Airways

slots at the November conference. Because of the scarcity of available slots at Gatwick as well as at Heathrow, failure to secure slots at the November slot conference would make it even more difficult and uncertain to obtain at a later date commercially viable slots.

In these current circumstances -- with bilateral negotiations on indefinite hold, with BA and American adamantly opposed to divestiture of sufficient slots and facilities to enable meaningful new competitive access to Heathrow, with final decisions by the European Commission, the U.K. Government, and DOT itself unlikely to occur until November at the earliest, and with time to plan for next spring/summer services quickly running out -- it is imperative that US Airways develop its contingency plan. The Department, of course, also must consider ways to improve competition as much as possible within the severe constraints of the bilateral agreement if no liberalization can be obtained soon. A clear first step is to authorize US Airways to serve the dormant Philadelphia-London route via Gatwick Airport on an interim basis with an immediate switch over to Heathrow when the restriction to only two U.S. carriers at Heathrow is eliminated. The Department is urged to act expeditiously to restore competitive U.S.-flag service to Philadelphia and grant US Airways exemption authority to serve Gatwick so that slots and facilities can be

Application of US Airways

obtained and marketing plans completed for US Airways' reentry in the U.K. market in March 1998.

Only four years ago, US Airways offered nonstop service between London's Gatwick Airport and Philadelphia, Baltimore and Charlotte. US Airways had acquired the Philadelphia and Baltimore authorities from TWA for $50 million. British Airways required US Airways to relinquish these routes in 1993 as a condition of BA's investment in US Airways. Because of the investment and proposed marketing alliance between US Airways and BA, the Department of Justice incorporated that obligation in a consent decree. As a result, US Airways was required to relinquish its Philadelphia authority.

In 1996 British Airways switched partners, announcing a new agreement with American which led to termination of BA's relationship with US Airways. Ready, willing and able to compete on an independent basis, US Airways is determined to regain its competitive position in the U.S.- London market. US Airways has not objected to the BA/AA mega-alliance, so long as US Airways obtains the promised opportunity again to serve London with competitive access to Heathrow Airport.

Application of US Airways

Indeed, US Airways has strongly supported open skies to permit new U.S. carrier competition from new, alternative gateways serving behind-gateway traffic to London Heathrow from throughout the U.S. Last August, US Airways applied in Docket OST-96-1660 for London Heathrow authority from Philadelphia, Pittsburgh, Charlotte and Boston. /2

2/ US Airways is filing today to serve Philadelphia-London Gatwick on an interim basis (switching to Heathrow when the two-carrier restriction is eliminated) because there is dormant Philadelphia-London authority under the current bilateral. No other U.S. air carrier is ready, able and willing to compete with BA's twice-daily monopoly service at Philadelphia. It should be noted, however, that BA also provides monopoly service to US Airways' other two major hubs—Pittsburgh and Charlotte -- and that if progress toward Open skies" is not soon apparent, US Airways will take appropriate steps (including the filing of additional applications or amended applications and a request for slots) to prepare to serve London from Pittsburgh and Charlotte.

Unlike Philadelphia, Pittsburgh and Charlotte are not named as gateways under the bilateral and are not currently designated as "rover" gateways by the U.S. Government. It would be possible, however, to accommodate such service by seeking to increase the number of "rover" gateways to eight, or by transferring existing "rover" designations that currently are dormant (i.e., Cleveland -- no service) or underutilized (i.e., Ft. Lauderdale -- twice-weekly flights for which a charter could be substituted). Clearly, fourteen weekly non-stop roundtrips to London from Pittsburgh and Charlotte would better utilize existing bilateral "rover" rights than the two weekly flights currently offered. U.S. competition policy would be even better served, however, if US Airways were able to serve Heathrow from Pittsburgh and Charlotte, as well as Philadelphia. This would be achieved under Open skies," but, in any event, competitive service to Heathrow from these three major U.S. hubs should be an essential pre-condition of any U.S. Government approval of an amended or modified agreement between BA and AA, which otherwise would completely dominate the U.S.-Heathrow market, particularly for travelers in the northeast and Mid-Atlantic regions.

Application of US Airways

Today, after fourteen months of investigations and negotiations, the basic status quo remains, i.e., access to Heathrow is highly restricted. It is imperative that steps be taken to provide relief, even if it is not complete relief, to Philadelphia, which otherwise would continue to suffer from BA's continued monopoly in the London market. The prospect of further delay in restoring Philadelphia-London service is simply untenable, particularly now that US Airways is completely independent of BA and ready, willing and able to provide Philadelphia-London service. Thus, a top U.S. Government priority first step should be expedited grant of this application and all necessary Government support in obtaining viable operating slots and facilities at Gatwick Airport for the Philadelphia service.

US Airways plans to operate two daily nonstop roundtrips between Philadelphia and London Gatwick, expanding US Airways' transatlantic service pattern to include the crucially important London market, in addition to the Paris, Frankfurt, Munich, Rome and Madrid markets that US Airways already successfully serves on a daily basis. At its Philadelphia hub, US Airways operates 376 daily flights to and from 91 other communities. The proposed service to London will offer convenient on-line connections to over 60 behind-gateway points, thus providing consumers with an alternative to the British Airways monopoly on the Philadelphia-London route and

Application of US Airways

offering new on-line competition for behind-gateway traffic from scores of cities throughout the U.S.

US Airways' service will provide intra-gateway competition for British Airways at Philadelphia and inter-gateway competition for London traffic at other U.S. gateways in the Eastern United States, including New York and Washington where two British carriers have strong market positions. Utilizing available dormant authority, the Department can take steps immediately to enhance competition under the existing bilateral.

III. THE DEPARTMENT SHOULD ACT TO IMPROVE COMPETITION AS MUCH AS POSSIBLE WITHIN THE CONSTRAINTS OF THE CURRENT BILATERAL; RESTORING PHILADELPHIA'S SERVICE TO LONDON IS A PARTICULARLY DESERVING STEP.

The prolonged opposition of the U.K. Government and Heathrow incumbent carriers to opening Heathrow has taken its toll on U.S. gateways. Consider the extraordinary situation of Philadelphia.

Service by U.S. carriers between Philadelphia and London has been on again/off again since 1991, this despite the fact that Philadelphia was one of the few gateways grand-fathered for Heathrow service under the 1980 amendment to Bermuda 2.

Application of US Airways

In 1991, TWA transferred its Heathrow authority and slots to American. Although DOT did not permit American to acquire TWA's Philadelphia route, American did acquire the Heathrow slots and used them for service from other U.S. gateways. TWA then moved its Philadelphia service to Gatwick. In 1992, US Airways purchased TWA's Philadelphia-London (Gatwick) authority for $50 million and the service continued. /3 In 1993, US Airways was required to relinquish its U.K. routes as a condition of BA's investment and marketing agreement with U.S. Airways at the time when U.S. Airways was in dire financial condition. American was awarded the Philadelphia gateway on the basis of its promise to restore Heathrow service, but then announced that it could not begin service due to The failure of the United Kingdom to ensure the availability of Heathrow slots. (Reply of American, p. 3, August 24, 1993; Docket 48940). After a full year's delay and with substantial help from the U.S. Government in obtaining Heathrow slots, American started service, only to abandon it after eight months, choosing for the second time to use Philadelphia's Heathrow slots for other gateway services. Since March, 1995, British Airways has been the only carrier in the market. And now that BA has formed its alliance with American and effectively ended its marketing relationship with US Airways, sold its US Airways stock, and removed its representatives from US

3/ The route purchase included TWA's Baltimore-London route also.

Application of US Airways

Airways' Board of Directors, there is no conceivable impediment to US Airways' resumption of its rightful and historical role as BA's competitor in the Philadelphia-London market.

Given its size and prominence, Philadelphia is the most under-served of the twenty-five U.S. gateway airports in the U.K. market. Philadelphia is the only one of the nine largest U.S.-London gateway markets without U.S. carrier service. This is a major market in which this summer BA is flying two daily roundtrips with B-747 and B-777 aircraft, even without the support of the on-line beyond gateway traffic previously provided by the code-share agreement which enabled BA to place its code on US Airways' flights between Philadelphia and numerous U.S. cities. And now that the code-sharing has terminated, travelers from cities on US Airways' network in the U.S. no longer have the benefits of seamless connecting service at Philadelphia that the code-share agreement provided to them.

Philadelphia is already established as a successful gateway as a result of US Airways' commitment and dramatic build-up of transatlantic service to Paris, Frankfurt, Munich, Rome and Madrid. But in this largest of the European markets, London, Philadelphia has been forced to sit and wait. That is not fair to the City of Philadelphia and the consumers of Philadelphia's Tri-State Region who deserve competitive service at Philadelphia. Nor is it fair to US Airways, its employees, and

Application of US Airways

numerous other communities on its network throughout the U.S. which would receive new, convenient service to London via Philadelphia. It is time to do something about it.

IV. GATWICK AUTHORITY IS A CONTINGENCY, BUT AN URGENT ONE, WHICH REQUIRES PROMPT ACTION BY THE DEPARTMENT.

US Airways would emphasize that this is a contingency application for authority to serve Gatwick on an interim basis beginning next summer if access to Heathrow is still barred at that time. At some point, American, British Airways and the U.K. Government will no longer be able to resist U.S. Government insistence on true open skies, providing real access, slots and facilities at Heathrow. At this time, however, willingness on their part to allow effective competition at Heathrow is still not evident and time is quickly running out for carriers that must prepare for operating U.S.-London services beginning next March when the summer 1998 traffic season conferences. Because of the serious uncertainty today as to whether access to Heathrow will be available in time for the 1998 high season, US Airways must prepare for access to Gatwick on an interim basis. US Airways' substantial commitment to the Philadelphia gateway deserves no less.

The practical deadline for this decision is October 24 when carriers will submit schedules and accompanying slot requests in preparation for the worldwide IATA

Application of US Airways

sponsored slot conference to be held in early November. US Airways needs to have the Philadelphia-London Gatwick authority in hand before that date, as well as a commitment from the U.S. Government to support fully its request for the necessary Gatwick slots. Otherwise, due to the severe scarcity of slots at Gatwick, especially during the time periods each day when transatlantic services are commercially viable, all desirable slots will be allocated to other carriers and effective competitive entry will be foreclosed. The U.S. should be prepared to provide all necessary assistance in assuring that commercially viable slots as well as facilities are made available for this new service.

V. GATWICK REMANS SECON~BEST ALTERNATIVE, AND ANY AWARD OF AUTHORITY ON AN INTERIM BASIS SHOULD BE PREMISED ON THAT FACT. THE U.S. RETAINS SUBSTANTIAL LEVERAGE EVEN IF A REVISED ALLIANCE IS PRESENTED, AND IT MUST USE THAT LEVERAGE TO OBTAIN OPEN ACCESS TO HEATHROW.

There is no substitute for service to London's Heathrow Airport. Service to Gatwick is simply a way to mitigate the damage being done to competition, to carriers and to consumers over the short term. In the long term, however, it is essential that open access to Heathrow be obtained for all U.S.-flag carriers.

For the last fourteen months, efforts in that regard have centered on the opportunity to leverage the desire of American and British Airways for antitrust

Application of US Airways

immunity into an open skies agreement. If they lose that desire, those efforts need not be discontinued. As long as American and British Airways want to combine their market power in any form, U.S. and European authorities retain the authority and responsibility to impose whatever conditions they deem appropriate.

Whenever there is access to Heathrow, US Airways intends to commence the service it has applied for in Docket OST-96-1660. As soon as the two-carrier restriction is lifted, US Airways' Gatwick authority and service should be switched over to Heathrow, for which Philadelphia is already a named gateway. US Airways cannot and will not serve both Heathrow and Gatwick. Heathrow is access is critical, and it is a goal not diminished by the necessity of this application.

1. US Airways is a Delaware corporation with its principal office at Crystal Park Four, 2345 Crystal Drive, Arlington, Virginia 22227. US Airways is a citizen of the United States within the meaning of 49 U.S.C. § 40102(a)(15)(C) and is fit, willing and able to serve the U.S.-U.K. market. US Airways holds various certificates of public convenience and exemption authorities. See e.g., Orders 97-7-2 and 96-3-17. Pursuant to Rule 24 of the Department's Rules of Practice, US Airways

Application of US Airways

requests that the Department take official notice of all information previously filed to establish the company's fitness.

2. Route maps illustrating US Airways' proposed service patterns are attached as Exhibit A. Illustrative service schedules are included as Exhibit B. Anticipated annual operating statistics and estimated fuel consumption are detailed in Exhibit C.

3. As detailed in Exhibit C, US Airways' fuel consumption for the proposed new services would exceed the ten million gallon threshold specified in Section 313.4(a)(1) of the Department's regulations. The substantial consumer benefits generated by the new operations, however, provide ample evidence that the grant of US Airways' application will serve the public interest. US Airways anticipates no difficulties in obtaining adequate fuel supplies for this service.

4. The exemption authority requested by US Airways is fully consistent with and is authorized by the U.S - U.K. Air Transport Agreement. Philadelphia is a dormant gateway on U.S. Route 1 in Annex I of the Agreement. Designation of US Airways for Philadelphia will permit it to operate to/from Gatwick.

5. US Airways will accept and abide by all terms, limitations and conditions which the Department normally attaches to exemption authority for foreign air transportation.

Application of US Airways

WHEREFORE, US Airways, Inc. requests that the Department:

(a) consider this application on an expedited basis;

(b) grant an exemption from 49 U.S.C. § 41101, effective for a period of two years, authorizing US Airways to engage in scheduled foreign air transportation of persons, property and mail between the terminal point Philadelphia, Pennsylvania and the terminal point London (Gatwick Airport), United Kingdom; and

(c) designate US Airways for the purpose of operating the Philadelphia-London services under the U.S.-U.K. Air Transport Agreement.

Respectfully submitted,

ZUCKERT, SCOUTT & RASENBERGER, L.L.P.

Richard D. Mathias

Frank J. Costello

Cathleen P. Peterson

888 Seventeenth Street, N.W., Suite 600

Washington, D.C. 20006

(202) 298-8660

Counsel for US Airways, Inc.

August 26, 1997