Application of Frontier Airlines for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-97-2230

C( l ) of the Federal Aviation Act of 1996

Application of ValuJet Airlines, Inc. for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-97-2442

C( l ) of the Federal Aviation Act of 1996

Application of Air Tran Airways, Inc. for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-97-2557

C(l ) of the Federal Aviation Act of 1996

Application of Western Pacific, Inc. for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-95-277

C(1) of the Federal Aviation Act of 1996

Application of Reno Air, Inc. for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-97-2771

C( l ) of the Federal Aviation Act of 1996

Application of Spirit Air Lines, Inc. for an

exemption from 14 C.F.R. Part 93,

Subpart K and S. pursuant to Section 206 Docket No. OST-97-2780

C( l ) of the Federal Aviation Act of 1996

Edward P. Faberman

Executive Director

Air Carrier Association of America

1747 Pennsylvania Avenue, N.W.

Suite 900

Washington, D.C. 20006-4604

(202) 778-4462

Submitted: September 4, 1997

Pursuant to Rule 4(f) of the Department's Rules of Practice (14 C.F.R. § 302.4(f)), the Air Carrier Association of America ("ACAA") hereby moves for leave to file this Reply 1/ to respond to the various replies filed by United, US Airways, Delta and TWA regarding the Applications of Frontier Airlines, ValuJet Airlines, Inc., Air Tran Airways, Inc., Western Pacific, Inc., and Reno Air ("affordable fare carriers") to gain access to La Guardia Airport in New York City ("La Guardia") and O'Hare International Airport ("O'Hare").

A number of carriers -- including United Airlines, Inc., Delta Air Lines, Inc., Trans World Airlines, Inc., and U.S. Airways, Inc., objected to ACAA's filing. These carriers made a number of comments criticizing the use of statements made by representatives of various large carriers concerning international airport access including the availability of slots. Apparently, those carriers resent the fact that statements they made on the record have been cited in connection with identical airport access issues in the United States. The statements criticized by the representatives of the large carriers in ACAA's July 9 filing are part of the public record. The record speaks for itself.

Incumbent carriers do, in fact, use every possible tactic to keep new entrants out of restricted airports. A newspaper account of manipulation of "slots" at Westchester Airport perhaps best illustrates large carrier action. The Westchester County Airport serves White Plains, Greenwich and other New York communities north of Manhattan, and is a slot controlled airport whose slots are allocated by

1/ This Reply and the Answer filed on July 9, is submitted on behalf of ACAA members, ValuJet, Reno, AirTran, Frontier and Spirit as well as on behalf of the Business Travel Contractors Corporation, Newport News-Williamsburg International Airport, Toledo Express Airport, Metropolitan Knoxville Airport Authority, Quad City Airport and Central Illinois Regional Airport.

lottery. Skywest Airlines (a Delta connection carrier) is one of the air carriers serving the slot controlled airport. A Skywest Airlines representative made some interesting comments reported by Staff Writer Sally O'Dowd in the April 2, 1997 edition of the Greenwich Times.

With the first pick, a Skywest representative -- who also picked lottery numbers for Delta and Comair said he used Skywest's position to put competitors at a disadvantage. In one round, he chose two evening arrival times and two evening departure times for Skywest but said the airline probably will not use them.

"What we mostly have done is gotten those slots as a blocking technique," he said, adding that the airline was hoping to prevent competitors from gaining market share in the evening hours, "By taking those slots, we're able to keep someone else from getting those slots... It's neat. It's like a board game."

The representative also said that the airport's slot-controlled scheduling system has advantages and disadvantages to airlines. The advantage is "you can do competitive things to limit other airlines' service in and out." 2/

[This entire article is attached as Exhibit 1.]

As to whether slots are fully utilized, slot records leave little doubt that a number of carriers hold more slots than needed. 3/

2/ While Westchester is not a high density airport, it is slot controlled and blocked from new entry. In reference to the comments made in the Greenwich Times article, some of the large carriers have complained that ACAA's original filing cited individual's comments. The comments cited were, of course, cited as statements made by representatives of the carriers for whom the individuals work. Corporate entities cannot speak for themselves; they must speak through representatives. In deference to this, ACAA has deleted the name of the Skywest representative who made the comments cited in the article.

3/ For an insightful commentary by a very knowledgeable industry observer/participant on whether a carrier might attempt to control more slots than needed and whether slots are an impediment to competition, see Michael E. Levine, "Airline Competition in Deregulated Markets: Theory, Firm Strategy, and Public Policy," in Volume 4 of the 1987 Yale Journal on Regulation. Mr. Levine, then a William T. Dalessi Professor of Law, University of Southern California, stated:

Some airline behavior is designed to raise rivals' costs or handicap their ability to generate revenue. Such behavior usually involves some out-of-pocket or opportunity cost to the firm employing the strategy, but sometimes coincides with a need to deal with the problem of "transaction-specific" assets. This behavior at least partially explains the industry preoccupation with tying up (Footnote continued)

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United, in its comments, states that "even to one with a superficial understanding of economics, the issues raised" by the merger of American Airlines/British Airways ("AA/BA") are "utterly inapposite" to access by new entrants to the high density airports. Delta states that ACAA fails "to comprehend the fundamental factual, policy and legal differences between" the high density applications and AA/BA. US Airways states that applications for waiver of DOT's buy-sell rule on slots for domestic U.S. service have nothing to do with Heathrow.

These protestations do not change the obvious. The issues presented concerning access at Heathrow Airport and high density airports are the same -- access, competition and fares and the impact of those issues on all of those traveling in domestic markets.4/ The large carriers emphasized that competition between the U.S. and London cannot exist without access to Heathrow. In the United States, competition cannot exist at the nation's most important markets without access to high density airports.

To most who travel -- including mothers and fathers, children, airport managers, convention managers, economic development officials, and business people from throughout this country -- access to London is no different than access to New York, Washington and Chicago. The issues are not more terminal facilities and slots than necessary to their current or even projected future operations.

Among the most remarked-upon impediments to contestability in the deregulated airline industry has been the "shortage" of terminal facilities, especially gate space, at a number of important airports and the difficulty of obtaining landing slots at the four airports subject to the Federal Aviation Administration's High Density Airport rule. (p. 420 and 421).

4/ In its filing, US Airways states that the resolution of issues that allow carriers to "fix prices, allocate markets, slots and facilities . . . will shape the competitive structure of the industry worldwide into the next century, (p. 5). Although US Airways comments applied to the U.S. - London market, they equally apply to domestic markets.

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"inapposite" but are identical. Although the large carriers can claim disbelief that their own statements would be cited against them, the only difference between the two issues is that the large carriers are "haves" at the high-density airports and "have nots" at Heathrow.

The inconsistent position of the large carriers was noted by the City of Chicago ("City") in its July 30 filing. In a filing supporting Western Pacific's application for slots, the City notes that UA and AA which had suggested a phased repeal of the HDR later "reversed their historic support for repeal of the HDR." (p. 8-9). After stating that large carriers were the recipients of "hundreds of slots at HDR airports worth millions of dollars without costs" the City notes that "it is also difficult for any established air carrier to be describing any new entrant applications as government hand-outs or subsidies." (p. 10)

The City also states that it is "rather incongruous" for established carriers that have benefited by their grandfathered slot status" to object to slots being given to new entrants. As the City notes, United remained quiet on slot requests and allocations to its partners -- Great Lakes Aviation and Trans States Airlines.

In its pleading, after stating that the DOT has "made unwise promises to reexamine existing policy," TWA adds that the DOT should not reduce hub competition "to accommodate the desires of cities with limited traffic volume for nonstop service to La Guardia." Apparently carriers dominating the high density slots believe they should decide which cities receive competitive high density service and cities such as Toledo, Akron, Chattanooga, Asheville, Roanoke, Jackson, Birmingham, Mobile, Bloomington, Melbourne, Tri-Cities and Knoxville do not deserve the opportunity to have service to the high density airports. Not only do the large carriers want to prevent competition, they now want to dictate which cities should receive service.

There are a number of statements made in the large carrier filings that need to be corrected. TWA states that ACAA gave "up on the claim that these carriers are entitled to an exemption from the slot rules." In fact, ACAA's July 9 filing listed exemptions as one option available. TWA also states

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that under the slot regulations, slots "may be withdrawn only for international operations." That statement is incorrect. The regulation cited by TWA does not limit the circumstances under which slots may be withdrawn. The regulation lists some -- but not the exclusive -- reasons for withdrawing slots. As shown in ACAA's July 9 filing, the DOT can withdraw slots to promote competition.

US Airways states that if the slot rules had been fully outlined 'it would have shown that the Department accords fundamentally different treatment to slots for domestic services than it does to international services." US Airways adds that a buy-sell rule is in place for domestic slots while international slots are provided for free. This is contrary to historical DOT actions taken to promote competition at high density airports and Congressional direction to provide exemption slots. Providing slots through the exemption process is one method to ensure the survival of competition.

For communities to realize the economic benefits of airline competition, it is essential that they have access to high density airports. In February of this year, state, local and federal officials joined airline officials at the National Air Service Roundtable, held in Chattanooga, Tennessee to discuss market-based solutions to local air service problems. The genesis for the meeting was the need to finish "the unfinished business of the Airline Deregulation Act of 1978 by bringing a competitive mix of service to all communities," particularly those that, like Chattanooga, lack adequate airline competition or service quality. At the end of the conference a number of issues including slot availability were highlighted in "The National Air Service Roundtable: A Consensus Report" written by Joseph P. Schwieterman, Ph.D. As the report noted, communities throughout the country are experiencing "higher fares and reduced service quality." While the Conference identified a number of marketing steps that can be taken by communities and carriers, the participants agreed that "if local efforts to enhance competition are to succeed," the federal government must address "anti-competitive practices of larger

5

airlines," as well as barriers to entry including "exclusive use" gate leases and the availability of slots. The report also stated that:

The control of airline "slots" is also deleterious to competition. This problem is pervasive at the "big four" airports, Chicago's O'Hare, New York's Kennedy and La Guardia, and Washington's National airports. It can put the expansion of air service in mid-size cities into the hands of a few major carriers, which own the slots, precluding mid-size cities from working effectively with new entrants to establish service to major airports.

One of the recommendations from the conference was:

Departure slots at congested airports should be provided to carriers seeking to serve communities beset with air-service problems. High fares and poor service are so contrary to the public interest that they occasionally justify direct federal intervention as allowed under current law. Appropriate steps might include a more liberal interpretation of the "exceptional circumstances" criterion, which gives DOT the authority to reallocate slots in the public interest.

The purpose of deregulation was not to freeze certain communities and carriers out of the nation's largest markets. A deregulated environment cannot exist when service to Chicago, New York and Washington is blocked by federally imposed regulations. True deregulation can only exist when all markets are opened.

Before they had the slots they needed and before they had access to other controlled airports such as John Wayne Airport in Orange County and Westchester Airport, large carriers sought government assistance to open up closed markets. When these carriers want access and the ability to compete they demand government assistance. When others ask for those same opportunities, the large carriers protest that those seeking competitive opportunities are trying to re-regulate and demand that the government take no action. Their focus is not on the public interest.

If Hamlet's Queen Gertrude were analyzing the performance of the large carriers on this issue she might once again knowingly opine that they "doth protest too much, me thinks. "

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Small and medium communities such as Chattanooga and those who live and work in those communities are entitled to have access to the nation's airports -- even the high density airports. The Secretary should exercise one or all of the following options as needed to meet the requests of the affordable fare carriers for slots:

1. Allocate exemption slots; or

2. Withdraw slots from incumbent carriers and re-allocate them to the affordable fare carriers;

3. Require the U.S. partners of the foreign carriers holding exemption slots at La Guardia and O'Hare to provide those slots to the foreign carriers and reallocate the exemption slots held by the foreign carriers to affordable fare carriers.

Respectfully submitted,

Edward P. Faberman

Executive Director

Air Carrier Association of America

1747 Pennsylvania Avenue, N.W.

Suite 900

Washington, D.C. 20006-4604

Submitted: September 4,1997