OST-96-1700 / American and TACA / Answer of Continental in Support of Motion of United Airlines / September 22, 1997

UNITED AIRLINES, INC.

1/ Common names of carriers are used.

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poison is for the Department to just say "no" quickly and firmly. Aviation's black widow spider must be stopped now.

Continental states as follows in support of its position:

1. United is exactly right: American's marketing cooperation agreement with LanChile is just the latest in a long and expanding list of alliances calculated to preempt the major Latin American carriers from entering into marketing agreements with Continental and other U.S. carriers and prevent them from challenging American's dominant position in Central and South America. American has woven a formidable web at Miami, with 77% of the U.S. carrier seats on Miami-South America routes and 100% of the U.S. carrier seats on Miami-Central America routes. /2 Because American's Miami web is impenetrable, American reaps 74% of the U.S.-carrier operating profits on U.S.-Latin America routes and 62% of the U.S.-carrier revenues on those routes. /3 American continues to lure major foreign competitors in Latin America into its Miami web. American began by entrapping its Central America competitors at Miami, Aviateca (Guatemala), COPA (Panama), LACSA (Costa Rica), NICA (Nicaragua), TACA (E1 Salvador), and TACA de Honduras (Honduras). American subsequently ensnared Avianca (Colombia), TAM Mercosur (formerly LAPSA, Paraguay), TAM (Brazil), Aerolineas Argentinas (Argentina), and Iberia (Central

2/ OAG, September 1997.

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America-Spain). American's latest entrapment is LanChile, with which American has announced a "cooperative alliance" and ultimately a de facto merger with antitrust immunity.

While American pretends to be distressed at the length of time this case has been pending, /4 delay suits American just fine. As long as American's Latin American partners are tied up in alliance agreements with American, they cannot form alliances with American's competitors, as United notes. Moreover, American's erstwhile competitors are less likely to compete vigorously with American while their agreements are being considered.

The public interest justification for code-sharing is the extension of a carrier's geographic reach without significant added cost. If that was American's objective, it would have sought an alliance with a domestic Chilean carrier. Instead, American targeted its primary competitor between the U.S. and Chile, LanChile, just as it has targeted its primary competitors throughout South and Central America. American is attempting to weave its web throughout the entire South and Central America region as it has done at Miami. Such a web would create great advantages for American and great harm to the traveling and shipping public.

2. The only sure way to stop the slow destruction of competition from U.S. and foreign carriers alike is for the Department to deny swiftly the American/TACA

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applications. Continental has been urging the Department to do so since July 17, 1996. /5 The Department's failure to deny the pending applications for the past 14 months has forced virtually every foreign carrier into American's Miami web and emboldened American to continue forming these alliances which are anticompetitive on their face. The Department recognized nine months ago that the American/TACA Group code share raised "serious competitive issues", particularly in view of the fact that "American [is] the only U.S. airline with a hub at Miami, the dominant gateway for U.S.-Central America service. /6 Yet the Department has failed to heed the requests of Continental, other carriers, SystemOne/Amadeus and Houston for denial of an alliance between carriers which now control close to 70% of the total U.S.-Central America market share and 96% of the total Miami-Central America seat share. /7

Encouraged by this lack of action on the Department's part, American has constructed a network of interrelated investments in, and alliances with, foreign carriers resulting in alarming levels of concentration throughout Latin America. For example, American's investment in and alliance with Aerolineas Argentinas would give American control over 72% of all Miami-Argentina seats and 70% of all U.S.-Argentina seats; American's alliance and eventual merger with LanChile would give American control over 77% of all Miami-Chile seats and 81% of all U.S.-Chile seats; American's

5/ Consolidated Answer of Continental Airlines, Inc., dated July 17, 1996.

7/ OAG, September 1997.

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proposed alliance with Avianca would give American control of 80% of all Miami-Colombia seats and 73% of all U.S.-Colombia seats. Adding LanChile's Miami-Colombia and U.S.-Colombia seats to the equation increases American's control of those markets to 83% and 75%, respectively. American would also maintain its position as the only U.S.-flag carrier serving Paraguay while additional Paraguay service is offered by its partners Aerolineas Argentinas, LanChile and TAM Mercosur. The Department's inaction has spurred American to dare capturing Iberia in its Miami hub web, giving the American/Aviateca/COPA/Iberia/LACSA/NICA/TACA/TACA de Honduras conglomerate control over 100% of the Miami-Belize/El Salvador/Guatemala/ Honduras/Nicaragua/Panama seats.

The Department must tell American that these alliances are anticompetitive and will not be approved. Without such action, foreign airlines will continue to believe they have no choice but to mate with American or be crushed. Only alliances between Latin American carriers and U.S. carriers other than American can preserve competition.

3. If the Department fails to halt American's anticompetitive actions in Latin America by denying the American and TACA Group applications, the Department must at least require the Joint Applicants to file the information sought by United. Unlike Continental and other U.S. carriers, American has selected for its code-share partners foreign carriers which are American's major competitors in highly restricted, overlapping markets. The interrelationship of American's investments in and alliances with Latin American carriers is manifest: American, the TACA Group and Iberia

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TACA together control 96% of the Miami-Central America seats, and 72% of the U.S.-Central America seats, and a combined American/Aerolineas Argentinas/Austral/LanChile/Iberia/TACA Group behemoth would control the key U.S. gateway for Latin America (Miami) as well as the southern-most point in Latin America and the important Central American intermediate points. American's code-shares with Avianca (Colombia), LanChile, Aero California (Mexico), TAM-Mercosur (Paraguay) and TAM (Brazil) reinforce and multiply the preemptive effect of this dominance and American's increasing ability to disarm, control, dominate and ultimately debilitate its smaller competitors throughout Latin America. American and its Latin American partners all serve the same overlapping markets: Aerolineas Argentina serves Brazil, Chile, Paraguay, and Peru as well as Argentina and the U.S.; Avianca serves Argentina, Brazil, Mexico, and Peru as well as Colombia and the U.S.; LanChile serves Argentina, Brazil, Colombia, and Mexico as well as Chile and the U.S.; the TACA carriers serve markets throughout Central and South America as well as between the U.S. and Central America and Iberia serves the same Miami-Central America markets served by the TACA carriers. Since American has already said it will serve South America via Central America through its TACA Group alliance, the interrelationships among all of American's Central and South America alliances is patently clear.

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The Department should have ended this proceeding with a definitive denial over a year ago. It must do so now while there is time for American's smaller competitors to recover from their entanglement in American's web. If the Department refuses to deny the applications of American and the TACA Group outright, it should order the Joint Applicants to produce the information related to American/LanChile in this proceeding.

Respectfully submitted,

CROWELL & MORING LLP

R. Bruce Keiner, Jr.

Lorraine B. Halloway

Counsel for Continental Airlines, Inc.

September 22, 1997