OST-97-2885 / Pan Am and Carnival / September 5, 1997

Joint Application of

for an exemption from Subparts K & S of 14 C F R. Part 93 slot restrictions at New York JFK International Airport 

Pursuant to 49 U.S C. § 41714(c), Pan American World Airways, Inc ("Pan Am") and Carnival Air Lines, Inc ("Carnival") (collectively, the "Joint Applicants") respectfully request that the Department grant an exemption from the requirements under Subparts K and S of part 93 of Title 14, Code of Federal Regulations (the "High Density Rule" or "HDR") so as to permit either Pan Am or Carnival to operate certain air transportation to and from New York's John F Kennedy International Airport ("JFK") during slot constrained hours. The Joint Applicants are "limited incumbents" within the meaning of 14 C.F.R. § 93.213(a)(~) and thus are eligible for relief under 49 U.S.C. § 41714(c). 1/

1/ The Joint Applicants intend to consummate a transaction in September 1997 that would place them under common control; they would then be considered a single operator for purposes of 14 C.F.R. § 93.213(c). Under that rule, Pan Am today operates a total of six slots (under short term leases averaging only six months) and Carnival one slot (under a lease set to expire in October; Carnival has requested an international slot from the FAA). These figures are well below the 11 slot maximum for limited incumbent status.

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The Joint Applicants propose that, beginning in December 1997, either Pan Am or Carnival operate new, frequent Boston-JFK jet service -- which would provide important service benefits for local and beyond passengers. In order to implement a complementary package of Boston-JFK service and service beyond JFK to points south, the Joint Applicants need six JFK slots -- three arrivals and three departures. See Exhibit 1. Unfortunately, the Joint Applicants have not identified a realistic market opportunity to obtain the JFK slots needed for such a program. Accordingly, the Joint Applicants seek a total of six JFK slots for an initial period of twelve months to commence on or about December 18, 1997. It is anticipated that the service would commence on or about this date. In keeping with Department practice, the Joint Applicants would accept as a condition that the exemption would not confer on the Joint Applicants any ability to own or hold rights granted by exemption for the purpose of selling, transferring, or conveying such rights for consideration. The Joint Applicants would request the right

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to transfer slot rights granted by exemption between themselves or to "slide" or "trade" such slots by agreement with another JFK slot holder, provided that the total number of JFK operations in any relevant time period is not increased.

Both Pan Am and Carnival focus on JFK as a key element of their route structures. Carnival has operated JFK service for several years. JFK also was one of Pan Am's three initial stations when it instituted operations on September 26, 1996, and was selected, in part, to provide meaningful connecting opportunities for international travelers using JFK as a gateway. The Joint Applicants' service to JFK has been successful and has met a previously unsatisfied demand for service. They now believe that the Boston-JFK market can support more consistent jet service oriented toward the local market, which currently is underserved, and provide important support for traffic traveling to points south of JFK.

The overall Boston-New York market is exceptional for several reasons. It is the third-largest New York OLD (origin and destination) market and the fourth largest in

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the United States. See Aviation Daily, June 6, 1997, at 411-412 (4Q 1996 statistics provided by Avitas based on OLD survey data). Despite the size of this market, travelers have few service options at JFK Airport. There is shuttle service, generally at a fare premium, operated to La Guardia by USAir Shuttle and Delta Shuttle to the exclusion of any other Boston-La Guardia service. Continental operates what amounts to a Boston-Newark shuttle. The rest of the service, at Newark and JFK, is predominantly operated by small, turboprop aircraft; there are only a handful of nonshuttle, jet operations. These service options do not come cheaply, since no low-fare airline serves the market today. For the 12 months ended March 31, 1997, the industry average fare for OLD traffic was $103 for Boston-La Guardia and $137 for Boston-Newark service (Source: Back Associates). The June 6, 1997 Aviation Daily market analysis shows that Boston-New York yields are head-and-shoulders above other markets -- averaging 60-cents per mile.

In the Boston-JFK market, all but a handful of current Boston-JFK flights operate with small turboprop aircraft. See GAG Desktop Guide, Aug. 1997 (North American Ed.) From Boston to JFK, there is no jet service before 3:00 p.m. and from JFK to Boston, there is only one jet departure before 3:50 p.m. Exhibit 2. The Joint Applicants believe that 

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there is a substantial base of local traffic that would prefer and would use JFK jet service offered throughout the day. For example, a new service with several daily roundtrips would better support day trips between Boston and Long Island, especially by cost-conscious travelers.

The Joint Applicants would link most of the proposed Boston-JFK flights with new JFK service to existing stations in Ft. Myers, Ft Lauderdale, and Santo Domingo, Dominican Republic. These services would not only reinforce the Boston-JFK schedule, but would offer additional, same-plane service for Boston travelers to and from points south of JFK as well. They would be timed to complement Boston-JFK service and would provide important service and competitive benefits in these markets.

Since April 1997 the Joint Applicants have attempted to secure the needed slots in the marketplace. They have contacted six carriers holding JFK slots -- American, Business Express, Delta, Northwest, TWA, and United -- as to the availability of appropriate slots for the Boston service. The response generally has been discouraging,- with only TWA initially holding out any hope that slots would become available. The Joint Applicants are continuing discussions with some carriers, but even the most plausible opportunities -- still uncertain -- appear to be one-season

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leases that would commence over a month before the Joint Applicants expect to open appropriate Boston facilities and begin service Such slots would subject the proposed service to an uncertain future after the 1997-98 winter season ends and could require relief from the "use-or-lose" provisions of 14 C.F.R. § 93.227. In sum, the Joint Applicants do not presently believe they will be able to acquire from other carriers slot leases of sufficiently long duration and appropriate timing to commence, operate and maintain the desired Boston-JFK service pattern

In 1994 Congress provided specific relief designed to offset the difficulties the High Density Rule creates for new entry at slot-constrained airports. The Federal Aviation Administration Authorization Act of 1994 directed the Department to study the effects of and possible changes to the HDR. Noting the significant problems that the paucity of slots causes for new entry, essential air service and international service, Congress also required the Department to consider exemptions from the HDR for these

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services under specified conditions until the Department had acted on the results of its study. The Department acted favorably on several exemption requests, finding the requisite public interest and exceptional circumstances in requests for slots to serve a few markets without nonstop service .

Many expressed concern that the Department had applied Congressional intent too narrowly. In response, the Department indicated that it intended to be more receptive to considering competition as a factor in granting exemptions to new entrants under the "exceptional circumstances" criterion in the law. e.g., Statement of Charles Hunnicutt before the Senate Aviation Subcommittee, May 13, 1997.

The Department also has recognized that effective market entry by new airlines -- and vigilance against activities that restrict such entry -- is in the public interest. In its publication The Low Cost Airline Service Revolution, the Department reaffirmed its support of new entrant airlines, embodied in a statement by former Secretary Pena that the Department "will do whatever we can to make sure fledgling carriers have a fair shot." Id. at 31. This includes evaluation of and reaction to anticompetitive actions by incumbents, including, among

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other things, "hoarding unneeded gate space or slots." Id. While the Joint Applicants do not accuse JFK incumbents of such behavior, the HDR itself effectively "hoards" airport capacity that the Joint Applicants could use to provide new service at key hours.

As discussed above, the Boston-New York market has exceptional characteristics that justify an exemption from the HDR. The Joint Applicants propose service that will benefit the traveling public as a low-cost alternative to the existing shuttle and turboprop service patterns. Lower fares will make travel in this important market more affordable, will provide needed competition to shuttle services at La Guardia and Newark, and potentially move some morning and early afternoon traffic from La Guardia to JFK, which is far less congested at those times. The proposed service also would provide better service, timed to make one-day Boston-JFK round trips possible on jet aircraft.

These passenger benefits will support significant traffic and justify the Joint Applicants' operating plan. Based on existing Newark and La Guardia passengers and a projected $80 average one-way fare (net of taxes), the Joint

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Applicants forecast sufficient local and through/connecting passengers on the proposed Boston-JFK service to provide a 60% Boston-JFK market share and a 61% average load factor in the first year. (Exhibit 3)

The limited nature of Joint Applicants' proposed service during slot-constrained hours would not have a material, adverse impact: on JFK congestion. The service would not require additional terminal space. To the extent the new B737-400 service diverts local passengers now forced to travel on commuter aircraft, it could actually reduce the total number of aircraft operations at JFK The numerous commuter aircraft providing Boston-JFK service today range in capacity from Jetstream Bus, with a maximum of 19 seats, to ATRs, with a maximum of 74 seats. Carnival's 737-400 jets, by contrast, are configured for 146 seats (8 first class and 138 coach), thereby allowing more efficient service and slot use. Further, the proposed all-day service pattern could even divert modest amounts of traffic from La Guardia during congested periods that run throughout the day.

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The proposed service also would cause no material increase in airport noise at JFK The 737-400 is a Stage 3 aircraft, and if the competitive effect of the proposed service reduces the number of Boston-New York flights at JFK or La Guardia, as discussed above, it could actually reduce noise.

As discussed above, the Joint Applicants have attempted to obtain JFK slots using the methods provided for in the HDR. They have sought diligently to obtain slots through transactions with other slot holders, but without success to date. There is no pending or forecast lottery of withdrawn slots from which the Joint Applicants could draw slots under regulations favoring new entrants. -

Further, service to New York-area airports without slot restrictions -- that is, Newark, Islip, and White Plains -is not a viable substitute for the service the Joint Applicants propose. Based on operational experience, the Joint Applicants view JFK as a distinct, traffic-generating point and have developed their service proposal based on the local Boston-JFK market complemented by beyond-JFK traffic.

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Newark already receives hourly Continental service, albeit at considerably higher fares than the Joint Applicants propose. Islip and White Plains, like Newark, serve different geographic sections of the New York metropolitan area. Finally, the Joint Applicants have developed supporting, single-plane service south of New York around their operations at JFK Pan Am does not operate at any other New York-area airport, and Carnival does not believe it could effectively Link the proposed Boston service with its services at Newark or Islip, which serve other geographic regions of the New York area

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WHEREFORE, Pan American World Airways, Inc. and Carnival Air Lines, Inc. respectfully request that the Department grant the exemption requested herein and such other and different relief as the Department may find in the public interest.

BOROS GAROFALO, Aaron A. Goerlich
Counsel for Carnival Air Lines, Inc.

VERNER LIIPFERT, William C. Evans, John R. Mietus
Counsel for Pan American World Airways, Inc.

September 5, 1997